Great Elm Group, Inc. (Nasdaq: GEG) — Form 10-Q
Reporting period: Quarter and six months ended December 31, 2021. This is the company’s fiscal second quarter of fiscal 2022; the filing’s comparative periods ended December 31, 2020. Unless noted, amounts below are in millions of dollars.
Business context and reporting period
Great Elm operates durable medical equipment (DME) and investment management businesses, with general corporate activities. DME distributes respiratory equipment and supplies and provides related services; investment management oversees GECC and private funds. Assets under management were approximately $239.2 million at December 31, 2021. The company sold its real estate business in June 2021 and reports it as discontinued operations.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2021 | Three months ended Dec. 31, 2020 | Six months ended Dec. 31, 2021 | Six months ended Dec. 31, 2020 |
|---|---|---|---|---|
| Revenue | $16.7 | $15.3 | $33.3 | $30.7 |
| Operating loss | $(1.9) | $(1.9) | $(0.9) | $(3.1) |
| Net loss attributable to GEG | $(4.2) | $(0.2) | $(4.4) | $(3.8) |
| Basic and diluted loss per share | $(0.16) | $(0.01) | $(0.17) | $(0.15) |
- Quarterly revenue increased 9%; six-month revenue increased 8%. DME supplied most revenue: $15.7 million in the quarter and $31.3 million for six months.
- Operating margin was approximately negative 11.1% for the quarter and negative 2.6% for six months. Operating losses improved from the prior-year six-month period.
- Quarterly loss attributable to GEG widened, mainly reflecting a $1.8 million investment loss versus a $2.6 million gain in the prior-year quarter, alongside higher interest expense. For the six-month comparison, investment results also weakened, partly offset by a lower operating loss and $2.4 million in Employee Retention Credits.
- Operating cash flow was positive $3.1 million for six months, compared with negative $1.7 million a year earlier. Cash flow included substantial non-cash adjustments and activity in consolidated funds; it should not be read as equivalent to recurring earnings. Investing used $3.1 million and financing provided $0.6 million. Cash increased $0.6 million to $25.0 million.
- At December 31, current assets were $82.9 million and current liabilities $30.2 million. The company also held 5.5 million GECC shares valued at $16.9 million. Total assets were $156.1 million and total liabilities $103.5 million.
- Borrowings included $35.2 million face value of convertible notes, carrying value $34.2 million, and $2.6 million of equipment financing. The $10 million DME revolving facility was undrawn. The company also had 9% subsidiary preferred stock obligations, including $35.0 million face value issued by Forest and approximately $2.0 million face value of externally held HC LLC Series A-1 shares. The balance-sheet preferred-stock amount is $35.6 million; subsidiary instruments and consolidation affect how the reported balance relates to external obligations.
Material changes versus the prior comparable period
- DME revenue rose 8% in the quarter and 7% for six months, supported by the AMPM and MedOne acquisitions and improved revenue reserves. The acquired businesses added costs and integration activity.
- Investment management revenue rose 34% in the quarter and 31% for six months, reflecting higher average fee-bearing assets, including growth in GESOF. The segment recorded investment losses in the current periods versus gains in the prior-year periods.
- Interest expense increased 24% in the quarter and 21% for six months, primarily due to interest on preferred stock issued in December 2020. The prior-year quarter included a $1.9 million loss on extinguishment of the Corbel loan.
- GEG acquired MedOne’s power mobility assets in August 2021 for $2.0 million of stated consideration, including contingent payments; preliminary purchase accounting recorded $1.9 million of goodwill.
- GEG adopted ASU 2020-06 for convertible instruments using retrospective application. The adoption increased the reported carrying amount of convertible notes and altered prior-period interest expense presentation.
Outlook, risks, contingencies and unusual items
- Management reported ongoing COVID-19 effects and semiconductor-related supply constraints, particularly reduced availability of positive airway pressure devices. Supplier allocations were insufficient to meet recovering demand, causing missed revenue opportunities; management expects some disruption to continue in the near term, but gave no numerical forecast.
- The company says it intends to pursue acquisitions and investments and may issue equity or incur debt. It cautions that without additional capital it may be unable to execute its growth plan. No binding commitments for additional acquisitions or investments were reported.
- Key risks include dependence on GECC and related fee and dividend income, investment-value volatility, third-party payor reimbursement and estimates, supply-chain disruption, acquisition execution, access to capital, and COVID-19 impacts. Government payors accounted for 37% of revenue in both current-year periods; third-party payors accounted for 14%.
- GEG reported compliance with material DME Revolver covenants at quarter-end. The DME facility matures November 29, 2022 and is secured by DME assets. No off-balance-sheet arrangements were reported.
- Contingent consideration from acquisitions was a Level 3 liability of $0.3 million at December 31, 2021. Certain acquired-business earn-outs can require additional payments if revenue targets are achieved.
- The filing reports no pending or threatened litigation expected to have a material adverse effect and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective.
- The company reported approximately $952 million of federal and $198 million of state NOL carryforwards as of June 30, 2021, but maintains a valuation allowance against deferred tax assets due to its cumulative loss history.
Important facts for investors to verify
- Whether supply constraints ease and DME can convert demand into sales and rentals without further missed revenue.
- How much revenue and operating performance came from acquisitions versus organic growth, and whether expected integration synergies materialize.
- Whether operating cash generation is sustainable apart from consolidated-fund investment transactions, non-cash adjustments, and temporary tax credits.
- The market value and income contribution of GECC holdings, the concentration of investment-management revenue, and the potential dilution from convertible notes and equity awards.
- The full cash cost, maturity terms, dividends, redemption features, and sale-participation rights attached to subsidiary preferred stock, as well as covenant headroom and refinancing needs.
- The collectability of DME receivables and the assumptions behind payor-related revenue reserves and acquisition earn-outs.