Q2 2021 Great Elm Group Inc Earnings Call
Ladies and gentlemen, thank you for standing by.
I'll come to the Great Elm Group Q2, 2021 conference call and webcast.
At this time all participants are in listen only mode. After the speaker's presentation there'll be a question and answer session to ask the question during the session you'll need the press star one on your telephone if you require any further assistance. Please press star zero and I like the hand of Connell Our conference call over to the G. Hailing first please go ahead.
Yeah.
Thank you and good morning, everyone. Thank you for joining us for great Elm groups fiscal second quarter 2021 earnings Conference call. As a reminder of this conference call is being reported on Tuesday February 16th 2021, and she will.
And the added to our distribution list you can email investor relations at Great on Cat Dot Com, where you can sign up for alerts directly on her website www dot great on group and dotcom. The slide presentation accompanying this morning's conference call and webcast can be found on our website under events and presentations of linked to the webcast is also available on our website.
And as well as and the press release that was disseminated to announce the quarterly results I.
And I'd like to call your attention to the customary safe Harbor statement regarding forward looking information also please note that nothing in today's call constitutes an offer to sell or a solicitation of offers to purchase our securities.
Today's conference call includes forward looking statements and projections and we ask that you refer to great on group's filings with the SEC for important factors that could cause actual results to differ materially from these projections right on group does not undertake to update its forward looking statements unless required by law to tank copies of the SEC filings. Please visit the grade on groups.
Site under financial information and select and SEC filings.
Hosting the call. This morning of Peter Reed create on the group's Chief Executive Officer, I will now turn the call over to Peter. Please go ahead.
Thank you.
Welcome everyone and thank you for joining us today.
I am joined this morning by our President and COO, Adam Kleinman, and our CFO Brent Pearson.
I will begin with the general overview and key highlights for the quarter, including the corporate structure of reorganization and the financing transaction that we previously announced and closed in December.
Brent will discuss our financial results in greater detail and then I'll return for closing remarks.
But those who may not be as familiar with great on group as a whole ill take a brief moment to review our general structure and strategy.
Great AUM as of holding company and our objective is to create shareholder value through the collective efforts driving our three verticals each of which deploy a distinct strategy.
And our operating companies, we are focused on acquiring under capitalized companies with significant growth potential both organic and through M&A.
Currently we manage great elm durable medical equipment or D E and distributor of respiratory care of equipment and fleet study surfaces.
And the investment management, we seek to increase the assets under management, both and Great Elm Capital Corp. The publicly traded BDC and and other investment vehicles managed by great on capital management or J E T M.
And real estate, we're managing our existing investment and our Fort Myers property to monetize our substantial tax assets.
Turning to our fiscal 2021 and second quarter ended December 31, and 2020. This quarter was notable for our D and me and investment management businesses.
As we've consistently stated in the past our strategic goals for these businesses have been to support them with the capital necessary for growth, while simultaneously positioning the whole company for future success.
I'm very pleased to report that we achieved this objective for both businesses this quarter.
Furthermore, with this momentum we drove growth at both segments this quarter and more recently, bringing.
During the second quarter, we established a new fund product at investment management and the D. M E. After a period of investment and working on the scalability of our platform, we're able to fully turn our focus to acquisitions and growth.
I will elaborate on will elaborate on both initiatives later in my commentary.
For now the returning for the out of the strategic financing transaction that we announced late last year.
On December 21, and 2020, we announced a $37 7 million financing transaction from J P. Morgan broker dealer holdings or J P M and the affiliate of Jpmorgan Chase.
Immediately prior to the financing we also completed the corporate structure of reorganization I'll provide a brief recap of the reorganization and financing transaction and what this means for our company and shareholders.
On December 29, we completed the reorganization of our corporate structure, whereby great Elm capital group changed its name to force the investments and became a subsidiary of the new parent holding company that was formed called Great Elm group.
Pursuant to this reorganization all shares and great Elm capital group were automatically exchange for an equivalent number of shares and greater on group.
Effectively we have changed our parent holding company name and branding from Great Elm capital group to grade on group, which also help separate and distinct wish us the per.
The company from the publicly traded BDC that we manage great Elm Capital Corp, which we refer to is G. E C C.
As you may have noticed we have updated our website to www dot great on the group Dot com to reflect these changes.
As I mentioned earlier, we closed and aggregate $37 7 million and financing from J P. M whereby J P. M purchased from forest $35 million and newly issued nine per cent preferred stock maturing in 2027, and 20 per cent of the equity of forest for $2 $7 million.
Accordingly Forest will be owned 80 per cent by G G and 20% by J P M.
The proceeds from the J P. M investment were used to refinance and existing term loan at the Emmy with a balance of approximately $24 8 million and addition to transaction fees and expenses and cash on the balance sheet to fund the growth.
Importantly, the I mean, now has the flexibility to incur senior indebtedness as well as to utilize excess cash on its balance sheet as of assesses growth opportunities, including M&A and the near term <unk> also benefits from a lower cost of capital.
As part of the financing transaction and priority of J P M and purchase of its 20% common interest and forest Forest distributed the great Elm group, it's common ownership of the DNA business. It's the.
Ownership of the investment management business, It's G E C C shares and cash.
Of course, we will retain ownership of the real estate business and they preferred interest and DNA of course.
Of course, we're also retained its U S federal Nols, which were unaffected by the transaction and remain available for usage across the greater on platform is great and we will continue to own 80% of forest.
In summary, the transaction accomplishes the following for US we refinanced the DNA business immediately lowered its cost of capital and and the longer run and afford.
And the flexibility to incur senior leverage as needed to fund expansion.
We also increased excess cash at D&B ended our parent holding company, which will provide additional financial support and flexibility as we work to achieve our strategic growth plans.
J P M transaction represents a significant step and laying the necessary groundwork to achieve our long term growth plans.
Moreover, we hope to strengthen our relationship with J P and in order to find additional means of enhancing shareholder value and the future.
Turning to our investment management segment prior to the J P. M transaction G. E. C. C completed a $30 million rights offering that should enhance its ability to capitalize on the specialty finance strategy, while strengthening its balance sheet.
Ultimately the.
You raised gross proceeds of $31 $7 million.
Raised are at rates that the asset coverage ratio to 176, 5% on a pro forma basis importantly, it also left Chee ECC with the stronger capital position with which to take advantage of the attractive investment opportunities.
<unk> reported a strong third quarter and we have been very pleased with the resiliency of its portfolio throughout the pandemic as well as the potential we are seeing and our factoring business prestige capital finance.
And and exceptional investment for GE ECC generating results that have well exceeded our internal expectations.
Our intention is to leverage our experience and presence in this niche segment, not just and factoring, but and the broader specialty finance arena and pursue additional acquisition opportunities and it's highly fragmented space.
And the second quarter, our investment management segment also began to deploy capital into.
Special purpose acquisition companies or spec investing $3 million of grade on group's excess cash into a dedicated internal fund with an additional $5 million invested into the fund the subsequent to quarter and.
We believe this asset class can deliver very attractive risk adjusted and highly asymmetric returns to gray down given the cash and trust structure of specs provides downside protection, coupled with our prudent investing and underwriting process.
Our goal is to provide capital of the sponsors where we believe we can add significant value through the operator investor teams that offered the target both.
<unk> industry and managerial expertise with our proprietary executive network and to sophisticated financial backing and capital structure Advisory.
The fund has been and a ramp up period and we are focused on acquiring spec units of common shares through ipos or and the secondary market at a slight discount or slight premium to trust value as well as investing in securities of issuers that have announced deals deemed attractive based on fundamental analysis and trade on the amount of premiums.
The trust.
Before I turn it over to Brent to go through our operational and financial results in greater detail and wanted to touch on a couple of high level of detail.
Our fiscal second quarter reflected stable top line performance by both DMV and the investment management, but also continue the impact on both and businesses from the ongoing COVID-19 pandemic the.
And <unk> business generated revenue of $14 5 million and increase of 1% or zero point $1 million year over year.
While sales revenue increased by $1 $1 million year over year. This increase was offset by an increase in revenue reserves of 1.0 of million.
<unk> adjusted EBITDA was $1 9 million versus $3 $5 million last year after taking into account zero point of $3 million and reallocation of operating expenses from GE and corporate personnel to Dnb and zero point $2 million of the increase in operating expenses related to COVID-19.
We experienced strong growth and medical equipment sales this quarter, both year over year and sequentially. It was driven in large part by CPAP supplies sales.
This is a testament to the performance of our sales team and their ability to transition to a largely virtual environment.
We experienced the slowdown in 2020 from fewer sleep studies.
Experienced softened demand during the pandemic due to the in person nature of the service rental revenue was also lower as referrals for new equipment and setups tend to be driven by in house or external sleep studies.
Through our sales efforts on supplies and equipment, we believe the <unk> businesses and an excellent position for recovery as we emerge from pandemic conditions.
And as I touched on earlier, we are very excited to meaningfully increase our M&A activity. Following the J P. M financing transaction and believe we now have ample runway to grow the <unk> business.
Our hope is to complete several new transactions each year of given the current landscape and supported by our enhanced the infrastructure and resources.
On the general corporate front, we remain very focused on maintaining costs I'm pleased to report that over the past couple of quarters, we produce the market and reduction in G&A as it relates to public company expense, which directly benefits shareholders. This quarter. We gained further improvement and part two of the reallocation of certain compensation is.
Related to resources dedicated to the management of the <unk> business.
The assured we continue to examine all aspects of our overhead and continually seek ways to reduce costs and leverage our resources, where we were able to.
And the return potential of our entire organization is maximized when we maintain a lean cost structure without compromising operations with that ill turn it over to Brent to discuss our financial results for the quarter and more detail and then I'll return for a few closing remarks Brent.
Thanks Peter.
I'll provide a brief overview and of course welcome all of you to review, our filings and greater detail or reach out to our team with questions you may have.
During the fiscal 2021 quarter ended December 31, 2020, we reported consolidated revenue of $16 6 million.
The net loss per zero point of $9 million and adjusted EBITDA of $2 $1 million.
For the same period last year, we reported consolidated revenue of $16 6 million of net loss of 2.0 million and adjusted EBITDA of $3 4 million.
Great on reports, our three operating segments, including durable medical equipment, and investment management and real estate as well as unallocated general corporate results.
Turning our attention to durable medical equipment first.
For the fiscal second quarter, CME generated $14 $5 million and revenue compared to $14 $4 million last year medic.
The medical equipment sales revenue experienced robust growth year over year, which was partially offset by lower revenues generated by the sleep studies and lower rental revenues due to soften the referral pipelines during the pandemic.
In addition revenue reserve adjustments during the quarter increased $1.0 million as compared to last year.
Last year's revenue reserve adjustments were favorably impacted by the change in estimate related to the integration of acquisitions.
In addition collection experienced during the pandemic and the result and composition of receivables at December 31, 2020 also impacted the increase and the revenue reserves adjustment during the current quarter the.
The combined effects of these items resulted in a nominal over overall net revenue growth of <unk> for the quarter as compared to the prior year.
The net loss of $2 $9 million of DMV compares to a net loss of <unk> 7 million last year and includes the one 9 million.
Nonrecurring charge related to the pay down of <unk> term loan with core Bell.
Adjusted EBITDA and <unk> for the quarter was $1 9 million compared to $3 $5 million last year adjusted.
Adjusted EBITDA was lower due primarily to increased revenue reserve adjustments of one point of zero million and a higher percentage of lower margin medical equipment sales as the percentage of total <unk> revenue.
As Peter noted earlier, we feel confident and our ability to begin regaining the higher margin service oriented side of this business as we recover from pandemic conditions.
Operating expenses also increased by 0.3 million due to allocations of employee compensation from our parent and create AUM group to day.
In addition, <unk> recognized higher operating expenses during the quarter of approximately 0.2 million directly attributable to the increased cost of operating during the pandemic.
Next turning to investment management.
For the fiscal second quarter investment management generated zero point $8 million and revenue compared to zero point $9 million last year.
The slightly lower revenue was due to the ongoing impact of COVID-19 on the portfolio managed by this segment.
Net loss of the investment management segment was zero point $3 million and compares to net income of $5000 and the segment last year.
Adjusted EBITDA was $41000 this quarter compared to zero point $3 million last year.
Next our real estate segment.
As those of you following great Elm know our real estate segment is composed of our investment and two class a office building properties located in Fort Myers, Florida the.
The components of the financial results from this segment, our rental revenues depreciation on rental properties and interest expense on the related debt and mortgage of our property.
Our real estate and investment required of a limited amount of upfront capital to be deployed Benny.
Benefits from a significant amount of nonrecourse leverage and receive stable consistent taxable income to help monetize our Nols.
For the fiscal second quarter, we generated $1 $3 million and rental income $71000 and net income and $1 1 million of adjusted EBITDA.
During the fiscal second quarter last year, we generated $1 3 million and rental income $60000 and net income and $1 1 million of adjusted EBITDA.
Our financial results for this segment has been generally consistent year over year.
Moving on to our general corporate segment.
For the fiscal second quarter revenue for general corporate was $45000 compared to $57000 for the same period last year net.
Net income for the current quarter was $2 1 million compared to a net loss of $1 4 million last year.
Net income for this quarter included net unrealized gains of $2 6 million on <unk> stock, which compares to a net unrealized loss of zero point $8 million on <unk> stock for the second fiscal quarter of 2020.
In addition, our corporate segment also recognized increased dividend income from GE ECC compared to the same quarter last year as our investment and <unk> increased through our participation and the rights offering in October and through stock distributions received.
General corporate adjusted EBITDA for the current quarter was negative <unk> 9 million compared to negative $1 $6 million last year great.
<unk> efforts and reducing overhead, namely audit and public company expenses continue to flow through on a comparative basis.
Great Elm also benefited from the allocation of certain corporate compensation expenses to day.
We continue to look for further measures and streamlining our corporate overhead.
Turning to our financial position at quarter end.
At December 31, 2020, we had unrestricted cash of $32 $9 million. We also hold five 4 million shares of <unk> common stock equal to approximately 23, 6% of the total shares outstanding and with an estimated fair value of $19 five.
Millions of dollars as of December 31, 2020.
In addition, we hold $3 4 million and <unk> investments, which are held on our internal fund.
This concludes my financial review of the quarter and I'll turn it back to Peter for closing remarks.
Thanks Brent.
The fiscal second quarter was the very important one for great Elm with our DNA and investment management businesses, being recapitalized and reposition to pursue and deliver growth and 2021.
We believe we are off to a strong start with increased momentum at <unk> and also our new fund and investment management.
As many of you who have been following the snow our team and insiders are very strongly aligned with our shareholders and this alignment underscores our relentless effort to create long term shareholder value to.
To date, our team at Great Elm collectively on almost 2 million shares or 7% of the company.
Including our board of directors and their funds under management insiders collectively own or manage approximately 27% of the shares outstanding the.
Dynamic clearly fosters the significant and long term alignment of interest among the employees directors and other shareholders of great Elm.
Before I open it up for questions I'd like to acknowledge the tremendous efforts of our DNV staff, who have played such an important role in serving our patients health needs during a truly unique year.
We remain focused on building sales relationships by thinking about our customers first along with the wellbeing of our patients.
I'm incredibly proud of the entire team and how each and every team member of stepped up to help those and need throughout the COVID-19 crisis I am convinced that these efforts will both help our patients as well as benefit great Elm group as a whole in the coming quarters.
With that we will turn the call over to the operator to open for questions.
And if you'd like to ask a question at this time. Please press Star then the number one on your telephone keypad. If he would like to withdraw your question press the pound key on pause for just a moment to compile the Q&A roster.
And once again Thats star one if you'd like to ask a question.
I'm seeing no telephone questions at this time I will turn the call over to the presenters.
Thank you for joining us. This morning, we look forward to speaking to you again next quarter.
And this concludes today's conference call you may now disconnect.
Yes.
And we do.
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Good day.
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