Great Elm Group, Inc. quarterly report, Q2 FY2023

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Great Elm Group, Inc. — Form 10-Q summary

Reporting period: Quarter and six months ended December 31, 2022 (Great Elm’s fiscal second quarter). Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.

Business context

Great Elm is an investment management holding company focused on permanent-capital vehicles. At quarter-end it managed Great Elm Capital Corp. and Monomoy Properties UpREIT, among other investments, with combined assets under management of approximately $619 million. Following the planned divestiture of its durable medical equipment (DME) business, the company reported its continuing operations as one investment-management segment.

Financial performance and liquidity

  • Revenue: Q2 revenue was $1.879 million, up 84% from $1.021 million a year earlier. Six-month revenue was $3.739 million, up 87% from $2.004 million. Growth primarily reflected the Monomoy UpREIT management agreement acquired in May 2022.
  • Operating results: Q2 operating loss was $2.788 million versus $2.567 million; six-month operating loss was $4.744 million versus $4.505 million. Operating costs rose as the company serviced the acquired management agreement.
  • Net income and EPS: Q2 net income attributable to Great Elm was $29.530 million ($1.02 basic and $0.74 diluted per share), compared with a $4.238 million loss ($0.16 loss per share) a year earlier. Six-month attributable net income was $21.239 million ($0.74 basic and $0.55 diluted per share), versus a $4.438 million loss ($0.17 loss per share).
  • One-time and investment effects: Q2 continuing-operations income included a $10.524 million gain on the sale of control of Forest and a $24.4 million unrealized gain on the retained Forest interest, partly offset by a $22.242 million net realized and unrealized investment gain line that includes the Forest revaluation. The filing also reports $1.439 million of Q2 dividends and interest income. These items materially affect reported profit and are not a measure of recurring management-fee earnings.
  • Cash flow: For the six months, continuing operations used $1.572 million of operating cash; discontinued operations provided $2.916 million, resulting in $1.344 million of total operating cash provided. Investing activities provided $10.654 million overall, including Forest sale proceeds; financing activities used $18.402 million, including $18.409 million of principal payments on related-party notes. Cash declined $3.310 million to $18.971 million.
  • Liquidity: Management reported $19.0 million of unrestricted cash and $13.0 million fair value of GECC shares at December 31. January 2023 transactions subsequently provided a net additional $70.9 million of unrestricted cash available for deployment, after repayment of the remaining Forest Note.
  • Debt: At December 31, outstanding borrowings included $26.945 million principal on 7.25% notes due 2027, $36.987 million principal on convertible notes due 2030, and $23.361 million of related-party notes, including the $19.7 million Forest Note and $3.7 million Seller Note. The Forest Note was repaid January 3, 2023. The company reported a 1.22:1 consolidated debt-to-equity ratio against a 2:1 covenant threshold for the 7.25% notes.
  • Margins: The filing does not provide a clear recurring operating-margin measure; reported operating results include substantial costs relative to the investment-management revenue base.

Material changes and subsequent events

  • On December 30, 2022, Great Elm sold a 61% controlling interest in Forest to JPM for approximately $18.4 million and recognized a $10.5 million gain. It retained a 19% interest at quarter-end, then exercised its put option and sold that interest for approximately $26.5 million on January 17, 2023.
  • On January 3, 2023, Great Elm completed the sale of its DME subsidiary, HC LLC, to a Quipt subsidiary for $80.0 million of total consideration: approximately $72.8 million cash, $5.2 million of debt assumed, and $2.0 million in Quipt shares. Net cash proceeds to Great Elm and subsidiaries were $64.1 million before repayment of the Forest Note. DME results are presented as discontinued operations.
  • Q2 discontinued operations generated $16.729 million of revenue and $35,000 of net income; for the six months, they generated $33.448 million of revenue and $999,000 of net income. Six-month discontinued-operations income was below the prior-year $3.486 million, partly reflecting higher operating and transaction costs.
  • Six-month interest expense increased to $3.929 million from $2.586 million, primarily due to the 7.25% notes and Seller Note issued in 2022.

Outlook, risks and contingencies

  • The filing gives no quantified earnings or revenue guidance. Management said it continues to explore investment-management opportunities and other investments, but had no binding commitments for additional acquisitions or investments as of the report date.
  • Management cited risks including performance and distributions of managed vehicles, ability to raise capital and execute acquisitions, market and economic conditions (including rising rates and inflation), competition, personnel retention, cybersecurity, regulation, litigation and ongoing COVID-19 effects. The company said it could not estimate COVID-19’s long-term impact.
  • The company retained approximately $154 million of federal NOL carryforwards after the Forest sale; approximately $139 million were expected to expire from 2023 through 2025. It recorded a valuation allowance against federal and state deferred tax assets due to its cumulative loss history.
  • Management reported no material change in previously disclosed risk factors, no material litigation expected to adversely affect the company, no off-balance-sheet arrangements, and effective disclosure controls as of December 31, 2022.

Important facts for investors to verify

  • How much of reported earnings reflects recurring management fees versus Forest-related gains and investment valuation changes.
  • Actual cash received and retained from the HC LLC and Forest transactions, including transaction costs, distributions to minority owners, and the use of proceeds.
  • Current debt balances, related-party obligations, convertible-note dilution potential, and ongoing compliance with debt covenants.
  • Remaining federal NOL availability and expiration timing after the Forest divestiture.
  • Future fee growth, assets under management, and profitability of the Monomoy and GECC management relationships; the filing provides no quantified forward guidance.