Great Elm Group, Inc. (GEG) Q2 2022 Earnings Report, Transcript and Summary

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Great Elm Group Second Quarter 2022 Financial Results. All lines have been placed on mute to prevent any background noise. After the speakers presentation there will be a question and answer session. [Operator Instructions] Adam Yates, Managing Director. You may begin.

Thank you, and good morning, everyone. Thank you for joining us for Great Elm Group's fiscal second quarter 2022 earnings conference call. As a reminder, this conference call is being recorded on Friday, February 11, 2022. If you would like to be added to our distribution list, you can e-mail investorrelations at greatelmcap.com where you can sign up for alerts directly on our website, www.greatelmgroup.com. The slide presentation accompanying today's conference call and webcast can be found on our website under Events and Presentations. A link to the webcast is also available on our website as well as in the press release that was disseminated to announce the quarterly results. I would 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 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 attain copies of SEC filings, please visit Great Elm Group's website under Financial Information and select SEC filings. For those who may not be familiar with Great Elm Group, I'll take a brief 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 two verticals: operating companies and investment management; each of which employs a distinct strategy. In operating companies, we manage Great Elm Durable Medical Equipment, or DME, a distributor of respiratory care equipment and fleet study services. In Investment Management, we seek to increase assets under management, both in Great Elm Capital Corp., the publicly traded BDC and in other investment vehicles managed by -- Great Elm Capital Management, or GECM. Hosting the call today is Peter Reed, Great Elm Group's Chief Executive Officer. I will now turn the call over to Peter.

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 of 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 achieved growth in sales and reported profits within our operating company business at DME. And in our Investment Management business, we continue to make progress on building a specialty finance continuum of lending at GECC. In addition, we continue to work on a number of strategic initiatives. After the successful integration of recent acquisitions, AMPM and MedOne, we reported strong quarterly results for our DME business despite challenges in the supply chain. We continue to observe increasing demand across our product and service offerings following the prolonged pandemic conditions in the prior fiscal year, and we are focused on growing revenue and profitability at DME. On the investment management side, revenue for the quarter was slightly higher due to an increase in the average assets on which such fees are calculated. One of our key areas of focus at GEG is to increase the fee generating AUM. As you may be aware, GEG's fiscal year does not match GECC's. As such, GECC, whose fiscal year ended December 31, has not completed its audit process, which limits the information we have to disclose about GECC as compared to other quarters in the year. One of the most important ways to grow assets at GECC is through the build-out of its specialty finance platform. GECC has made good progress on this initiative as evidenced by its recent acquisition of Sterling Commercial Credit, which is a leading provider of asset-based loans to middle market companies across the United States. Sterling has been providing working capital solutions to small and medium-sized businesses in a wide variety of industry since 2004. Coupled with the acquisitions of Prestige Capital and more recently, Lenders Funding, the GECC family of specialty finance businesses has an increasingly broad array of capital solutions to offer small- and medium-sized businesses. Collectively, we believe that this platform will offer attractive and uncorrelated risk-adjusted returns to GECC's shareholders. 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, Peter. I'll provide a brief overview, and of course, welcome all of you to review our filings in greater detail or to reach out to our team with questions you may have. During the quarter ended December 31, 2021, we reported consolidated revenue of $16.7 million, a net loss of $4.2 million and adjusted EBITDA of $1.4 million. For the same period last year, we reported consolidated revenue of $15.3 million, a net loss from continuing operations of $0.9 million and adjusted EBITDA of $0.9 million. Great Elm reports the results of each of our two operating segments, including Durable Medical Equipment and Investment Management as well as unallocated general corporate activity. We'll begin with a review of Durable Medical Equipment. For the fiscal second quarter, DME generated $15.7 million in revenue compared to; $14.5 million for the same period last year. The increase in revenues was driven by a record gross resupply sales as well as from contributions from recent acquisitions, AMPM and MedOne. In addition, our previous investments into the business has significantly improved the intake and collections process, resulting in a sustainable reduction in revenue reserves of $0.7 million as compared to the prior year period. We improved our gross margins at DME, increasing to 61.6% as compared to 56.5% in the prior year period. In addition to the efficiencies, reducing revenue reserves, the improved margins are also driven by improved vendor pricing as compared to the prior period. Great Elm's DME operations reported net income of $0.9 million in comparison to a net loss of $2.9 million in the prior year period. The prior year period includes a nonrecurring loss on the extinguishment of the Corbel note of $1.9 million. The net income comparison of the DME segment is also impacted by the recurring valuation adjustment of the embedded derivative, which is eliminated in consolidation and added back for EBITDA purposes. Adjusted EBITDA, a non-GAAP measure, was $2.6 million compared to $1.9 million in the same period in the prior year, an increase of nearly 40%. Next, turning to Investment Management. For the fiscal second 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 higher due to increases in the average assets on which such fees are calculated. Adjusted EBITDA was negative $47,000 in the fiscal second quarter compared to positive $33,000 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 second quarter, Great Elm's General Corporate segment recognized $172,000 in revenue compared to $45,000 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 put into place in December 2020. General corporate adjusted EBITDA for the current quarter was negative $1.2 million compared to negative $1.0 million during the same period in the prior year. Great Elm continues to focus on rationalizing our corporate overhead and put us in the best position to execute our strategy. We ended the quarter with a healthy liquidity position of $25 million in cash, exclusive of liquid investments. This concludes my financial review of the quarter, and I'll turn it back to Peter for closing remarks.

Thanks, Brent. Overall, we believe that the solid performance of our operating company 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 with which many of you are familiar, the extent to which our team is aligned with other shareholders at Great Elm, employees and directors, including funds under their management collectively own or manage 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] Our first question is from Brian Alexitch with Greenwich Investment Management. Your line is open.

I have two questions for you, actually. I follow both GEG and GECC since they're obviously -- that there faith is intertwined. One of the questions I had for you is the businesses Sterling, Prestige, your specialty financing businesses, why not acquire those at the GEG level? It seems like they are acquiring or they're generating pretty solid returns on equity. And is that the sort of business that would not utilize the NOLs or would it utilize NOLs? It seems -- I mean, they seem like attractive compelling investments. So I just wonder why put it the BDC versus the corporation?

Brian, I think it's an excellent question and they do earn very attractive ROE. So we're very happy with that. And they, otherwise, probably would utilize NOLs for Great Elm Group. So you raised a good point there. On the other hand, the attractive earnings that they generate and their ability to pay out a lot of those earnings as dividends up to GECC, which also doesn't pay any income tax and then can distribute those as yield out to its investors, we think does make a -- make for an attractive proposition for GECC shareholders. As you point out, those dividends -- or chunk of those dividends end up flowing through the GEG where the NOLs are able to be utilized again the income stream. So the GEG definitely does benefit as a large shareholder from GECC from those businesses, which I agree with you, they are very attractive.

Got it. Okay. Interesting. I didn't realize that the dividends allow you to utilize the NOLs. Maybe that's a piece -- sorry, an important piece of the story that the people in investment in either business are missing. The second question I had for you is, I noticed through the U.K. filing system that you're representative from Great Elm management. Of course, the manager of the GECC resigned from the Board of Avanti last month, does that pave the way for taking liquidity in the investment since you guys are not insiders. Of course, there's probably a period of time where you're still considered an insider. But at some point, do you stop the being insiders and then [indiscernible] are free to do as you wish with the investment?

Sure. So I appreciate your question. It's a difficult time for us to talk about a lot of specifics with GECC because it still hasn't filed its annual financial statement. So it's a lot easier for us, and I'm happy to have a broad-ranging GECC discussion with you or with anyone after it files its results in March, but it's -- but that's about all I can say at the moment.

Okay. I suppose I will hang on until you guys file the BDC information. It looks like you guys are building some momentum. Obviously, the pandemic set you guys back, but it looks like you've got 4 quarters of growth now and good things are coming.

We agree. We're going to keep pushing.

[Operator Instructions] And it appears that we have no further questions. I'll turn the call back over to Mr. Reed for any closing remarks.

Thank you again for joining us today, and we look forward to speaking with you in follow-up.

Ladies and gentlemen, this concludes today's conference call webcast. Thank you for participating. You may now disconnect.