Great Elm Group, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter ended March 31, 2023, Great Elm Group’s fiscal third quarter of 2023, and the nine months then ended. Although the request metadata says “2022 Q3,” the filing itself reports fiscal Q3 2023. Financial statements are unaudited; amounts below are in U.S. dollars.
Business context
Great Elm is an alternative asset manager focused on permanent-capital vehicles in corporate credit, specialty finance, real estate and other asset classes. It manages GECC and Monomoy UpREIT, among other investments; reported combined assets under management were approximately $630.7 million at March 31, 2023. Following the sale of its durable medical equipment business and its controlling interest in Forest Investments, the company reports one continuing operating segment.
Financial performance
| Metric | Three months ended March 31, 2023 | Prior-year quarter | Nine months ended March 31, 2023 | Prior-year period |
|---|---|---|---|---|
| Revenue | $1.9 million | $1.0 million | $5.6 million | $3.0 million |
| Operating loss | $2.9 million | $2.3 million | $7.6 million | $6.8 million |
| Income (loss) from continuing operations | $(0.5) million | $(6.5) million | $19.7 million | $(14.1) million |
| Net income (loss), including discontinued operations | $11.7 million | $(6.1) million | $32.9 million | $(10.2) million |
| Basic net income (loss) per share | $0.40 | $(0.22) | $1.15 | $(0.38) |
- Quarterly revenue increased 92%; nine-month revenue increased 88%. Management attributed the increase primarily to the Monomoy UpREIT management agreement acquired in May 2022. Operating costs also rose, mainly due to servicing that agreement.
- Quarterly net income was driven by $12.2 million of discontinued-operations income, including a $13.6 million gain on the HC LLC sale, partly offset by transaction costs and other items. Continuing operations recorded a $0.5 million loss.
- Nine-month continuing income included a $10.5 million gain on the sale of control of Forest and a $24.4 million gain recognized on the retained Forest investment. Investment gains, dividends and interest materially affect reported results; these amounts should not be assumed to recur.
- No gross-margin measure is presented. Operating loss was $2.9 million for the quarter and $7.6 million for the nine-month period.
Cash flow, balance sheet and debt
- Cash and cash equivalents were $84.1 million at March 31, 2023, up from $22.3 million at June 30, 2022. Total assets were $137.4 million and stockholders’ equity was $68.5 million.
- For the nine months, net cash used in operating activities was $2.8 million overall: $3.6 million used by continuing operations and $0.8 million provided by discontinued operations. Net cash provided by investing activities was $108.4 million, including proceeds from the Forest and HC LLC transactions. Net cash used in financing activities was $47.6 million, including repayment of related-party notes.
- Outstanding principal debt included $26.9 million of unsecured 7.25% notes due June 2027 and $37.0 million of 5.0% convertible notes due February 2030. The company had no outstanding related-party borrowings at quarter-end. Convertible-note interest has been paid in kind to date. The company reported a net consolidated debt-to-equity ratio of negative 0.29:1.00, below the notes’ 2:1 covenant threshold.
- Management said it believed available liquidity was sufficient to meet obligations for at least the next 12 months. The filing does not provide a separate committed credit facility amount.
Material transactions, outlook and risks
- In January 2023, the company sold HC LLC, its durable medical equipment business, for stated consideration of $80.0 million, including cash, assumed debt and Quipt shares. After transaction costs, non-controlling-interest distributions and escrow, cash proceeds to Great Elm and subsidiaries were $64.1 million. The business is presented as discontinued operations.
- Great Elm sold 61% of Forest to JPM for approximately $18.4 million in December 2022, then exercised an option in January 2023 to sell its remaining 19% interest for approximately $26.5 million.
- The company acquired land in Canton, Mississippi, and Midway, Florida, and began build-to-suit development projects. Leases were expected to commence by the first calendar quarter of 2024; management intended to sell the developed properties at or near lease commencement.
- No specific financial guidance or earnings forecast is provided. The filing identifies market conditions, interest rates and inflation, investment performance, fundraising, competition, business execution and other general risks. Management reported no material change in previously disclosed risk factors and no material change in market-risk disclosures.
- After quarter-end, on May 4, 2023, CEO Peter A. Reed resigned effective after the filing; Executive Chairman Jason Reese was appointed Chairman and CEO. Reed entered a 12-month transition consulting agreement.
- Management concluded disclosure controls and procedures were effective as of March 31, 2023. It reported no material change in internal control over financial reporting and no litigation change requiring disclosure.
Most important facts for investors to verify
- Whether the $84.1 million quarter-end cash balance and management’s 12-month liquidity assessment remain current, including the use of transaction proceeds.
- How much future earnings and cash generation depend on recurring management fees versus investment marks, dividends, transaction gains and discontinued-operation items.
- The performance and fee-generating assets of GECC and Monomoy UpREIT, and the status and economics of the two real estate development projects.
- The outstanding principal, conversion terms, interest paid in kind and potential dilution from the convertible notes, alongside the 2027 notes’ covenants.
- The treatment and potential expiration of tax attributes: the company retained approximately $154 million of federal carryforwards as of June 30, 2022, including about $131 million of NOLs scheduled to expire June 30, 2023.
- The transition following the CEO change and any subsequent developments involving the HC LLC sale, escrow or indemnity obligations.