Great Elm Group, Inc. (GEG) Q1 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Great Elm Group Fiscal 2022 First Quarter Financial Results Conference Call. [Operator Instructions] At this time, I will turn the call over to the company's representative, Adam Prior. Sir, you may begin.

Thank you. Good morning, everyone. Thank you for joining us for the Great Elm Group's Fiscal First Quarter 2022 Earnings Conference Call. As a reminder, this conference call is being recorded on Friday, November 12, 2021. If you would like to be added to our distribution list, you can email investorrelations@greatelmcap.com or you can sign up for alerts directly on our website at www.greatelmgroup.com. The following presentation accompanying today's conference call and webcast can be found on our website under Events & Presentations. A link to the webcast is also available on our website, as is the press release that was disseminated to announce the quarterly results. I'd like to call your attention to the customary safe harbor language regarding forward-looking information. Also, please note that nothing in today's call constitutes an offer to sell or 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 Elm Group's filings with the SEC for important factors that could cause actual results to differ materially from these projections. Great Elm Group does not undertake to update its forward-looking statements unless required by law. To obtain copies of the filings, please visit Great Elm Group's website under Financial Information and select SEC Filings. For those of you who might not be familiar with Great Elm Group, I'd like to take a moment to review our general structure and strategy. Great Elm is a holding company, and our objective is to create shareholder value through the collective efforts driving our 2 verticals, operating companies and investment management, each of which employ a different -- a distinct strategy. In operating companies, we currently manage Great Elm Durable Medical Equipment, or DME, a distributor of respiratory care equipment and supplies. In investment management, we seek to increase the assets under management both in Greal Elm Capital Corp., a publicly traded BDC, and in other investment vehicles managed by Great Elm Capital Management or GECM. Hosting this call today is Peter Reed, Great Elm Group's Chief Executive Officer. And with that, I'd like to turn the call over to Pete. Please go ahead, Pete.

Welcome, everyone, and thank you for joining us today. I'm joined this morning by our President and COO, Adam Kleinman; and our CFO, Brent Pearson. I will begin with a general overview and key highlights for the quarter, and Brent will discuss our financial results in greater detail. And then I'll return for closing remarks. This was a solid quarter for Great Elm Group. We increased sales and reported profits within our operating company business at DME, grew assets under management in the investment management business and continued to make progress on building a specialty finance continuum of lending at GECC. After a period of investment into the DME platform, we were pleased to announce the AMPM acquisition in March. In addition, we completed the acquisition of MedOne in August and reported strong quarterly results for our DME business despite the challenges of a relatively slow return to normal for our operations following the pandemic conditions over the past year. On the investment management side, revenue for the quarter was slightly higher due to increases in the average assets on which such fees are calculated. At quarter end, GECC had total invested assets of $246.7 million with $99.4 million of net asset value or $3.70 per share. GECC declared a quarterly cash dividend of $0.10 per share for its first quarter ending March 31, 2022, which represents a yield of 10.8% on September 30 NAV. GECC deployed over $179 million in new investments in the first 9 months of 2021, with an increasingly diversified investment mix as we seek to rotate the portfolio into what we believe to be higher-quality credits primarily comprised of secured loans, bonds and preferred equity as well as investments in specialty finance businesses uncorrelated to the corporate credit portfolio. Importantly, the strategy of building a continuum of lending continued during the quarter with the acquisition of Lenders Funding, which purchases participations in factoring and asset-based lending transactions. Lenders Funding has over 20 years of experience providing capital to lenders in the specialty finance space, increasing our visibility into the broader specialty finance market as well as providing proprietary overflow opportunities for GECC. We are constantly analyzing the most effective methods to grow our specialty finance platform further, given the results produced by our specialty finance investments to date. For the first time since GECM took over management of the BDC, specialty finance represented the largest percentage of the overall portfolio. Our overall goal is to create an ecosystem where we can provide solutions to small businesses at varying stages in their development. Finally, we made a strategic minority investment in Sharp Alpha, which is a private fund seeking to address a large addressable market for sports betting companies seeking to buy and license technology. We feel this was an excellent opportunity to benefit from a dynamic and growing sector. With that, I'll turn it over to Brent to discuss our financial results for the quarter in more detail, and then I'll return for a few closing remarks. Brent?

Thanks, Pete. I'll provide a brief overview and, of course, welcome all of you to review our filings in greater detail or reach out to our team with questions you may have. Before I get started, I wanted to highlight the adoption of recent accounting guidance, which we believe enhances the usefulness of our financial reporting. We adopted ASU 2020-06 on July 1, 2021. Among other changes, this ASU simplifies the accounting for convertible instruments by eliminating the separation of the cash conversion feature on our convertible notes that were issued in February 2020. Under the full retrospective method of adoption, we have recast our previously reported financial information in accordance with the new standard, which eliminated approximately $700,000 in annual noncash interest expense and improves the usefulness of our financial statements. The footnotes in our recently filed Form 10-Q provide additional information on this accounting change. Moving on to our results. During the quarter ended September 30, 2021, we reported consolidated revenue of $16.5 million, net income from continuing operations of $0.1 million and adjusted EBITDA of $4.3 million. For the same period last year, we reported consolidated revenue of $15.4 million, net loss from continuing operations of $3.8 million and adjusted EBITDA of $1.9 million. Great Elm reports the results of each of our 2 operating segments, including operating companies and investment management as well as unallocated General Corporate activity. We'll begin the review with operating companies. For the fiscal first quarter, DME generated $15.6 million in revenue compared to $14.6 million for the same period last year. The increase in revenues was driven by strong and continued organic growth in resupply sales as well as some contributions from recent acquisitions AMPM and MedOne. Great Elm's DME operations reported net income of $2.1 million in comparison to a net loss of $0.5 million in the prior year period. This comparison is impacted by $2.3 million in employee retention credits claimed under the CARES Act during the current quarter, whereas no CARES Act stimulus was received in the prior comparable quarter. In addition, gross margins increased due to favorable sales mix, vendor pricing and efficiency initiatives. Adjusted EBITDA was $5.1 million compared to $2.8 million in the same period last year. Next, turning to investment management. For the fiscal first quarter, investment management reported total revenue of $1.0 million compared to $0.8 million during the same period in the prior year. Revenue for the quarter was slightly higher due to increases in the average assets on which such fees are calculated. Adjusted EBITDA was $0.1 million in the fiscal 2022 first quarter compared to $0.2 million during the same period in the prior year. Adjusted EBITDA for the quarter was impacted primarily by increased employee-related costs and professional fees related to investment management growth initiatives. Moving on to our General Corporate segment. For the fiscal first quarter, Great Elm's General Corporate segment recognized $0.2 million in revenue compared to $0.1 million in revenue during the same period in the prior year. Revenue increased as a result of increased management fees earned from DME, along with management fees earned from GEG's majority-owned subsidiary, Forest Investments, Inc. under a management agreement that was put into place in connection with the JPMorgan financing transactions in December 2020. General Corporate adjusted EBITDA for the current quarter was negative $1.0 million compared to negative $1.1 million during the same period in the prior year. Great Elm continues to focus on rationalizing our corporate overhead to put us in the best position to execute our strategy. We ended the quarter with a healthy liquidity position, including $21.8 million in cash. This concludes my financial review of the quarter, and I'll turn it back to Pete for closing remarks.

Thanks, Brent. Overall, our first quarter has been a positive start for the fiscal year for Great Elm. We believe that the solid performance of our operating companies and investment management businesses, together with our corporate simplification efforts, leave us well positioned for future growth. In closing, I will comment on a topic that many of you who have been following us know well, and that is the extent to which our team is aligned with our shareholders and their ownership of Great Elm. Employees and directors, including funds under their management, collectively own or manage 8.1 million shares or approximately 30% of Great Elm's outstanding shares. With that, we will turn the call over to the operator to open for questions.

[Operator Instructions] And the first question will come from the line of Brian Alexitch of Greenwich Investments.

Just a quick question on how we should think about what GEG is going to be doing going forward, right? Your call is always focused on everything that has already happened, which, I guess, is great. But I think shareholders, certainly me, are curious about just what strategy or what to expect going forward. And I think if you look at the stock price, right, the market is kind of reflecting that nobody knows what to expect. Is there anything you can share with us today about what you're doing differently since you've exited the real estate segment, kind of where you're going to focus your capital allocation, et cetera?

Sure. We're pretty restricted as to what we can say there, but I'll do my best. So I think if you look at the 2 -- we had 3 segments when we started the calendar year. Now we have 2. Of those 2 segments, our DME business, after a long period of investment to build out a platform, has resumed acquisitions and is growing organically post coming out of the pandemic. We believe we've significantly increased the value of our business, and we are keenly aware that, that does not seem to be reflected in the share price. We are focused on maximizing the value of that business, and that could include more organic growth. It could include, we expect that it will, could include more attractive add-on acquisitions, but we believe we've built something there that's very valuable, and we're focused on maximizing that. In the investment management business, similar concept. We're focused on growing GECC and adding other vehicles that have long-duration capital into our management to increase the scale, revenue and profits of that business. That's probably close to what we can say but slightly different approaches, but looking to maximize value of both of those segments, albeit potentially in different ways.

So as we think about profit -- or, sorry, about maximizing value, right, for something like DME, I mean, is it going to be the sort of thing where you just kind of keep rolling up related businesses until someone comes along and scoops up your business? Or, I mean, do you expect that business will IPO at some point once it gets to a certain size?

It's a -- it's tough to say in the future. I don't think that we would anticipate standing that up as a separate publicly owned company. I think our team has done a good job of increasing value there. And I think that at some point, someone will recognize that value.

Okay. Then if I can ask one more on your investment management segment. You say that you're looking at long-duration capital opportunities. I mean is that -- does that mean you guys are looking at starting new sources of funds? Or is that you're looking at acquiring management rights to either BDCs or closed-end funds or other existing investment managers?

Yes to both of those. We're focused on doing both of those.

Okay. Are you...

We think that's a really attractive business and certainly enhanced by our tax attributes as we can get that through a certain point of scale.

Are you able to comment on what your sort of pipeline looks like quarter-to-quarter? Nothing specific, but how many deals you guys are looking at, how many you may be -- how many of those get kind of tossed down right away, what your criteria might be, and then how much you guys actually do a significant amount of due diligence on.

I probably can't go into all of the specifics there, but we are very busy right now looking at transaction opportunities.

[Operator Instructions] And at this time, sir, there are no further questions in the queue. Would you like to proceed with closing remarks?

Thank you again for joining us today. We look forward to speaking to you again next quarter.

This concludes today's conference call. Thank you for your participation. You may now disconnect.