Great Elm Group, Inc. 7.25% Notes due 2027 (GEGGL) Q2 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Great Elm Group Q2 2021 Conference Call and Webcast. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] And I would like to hand the conference call over to [indiscernible]. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining us for Great Elm Group's fiscal second quarter 2021 earnings conference call. As a reminder, this conference call is being recorded on Tuesday and you Feburary16, 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, www.greatelmgroup.com. The slide presentation accompanying this morning'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 constitute 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 SEC filings, please visit Great Elm Group's website under Financial Information and select SEC filings. Hosting the call this morning is Peter Reed, Great Elm 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 a general overview and key highlights for the quarter including the corporate structure reorganization and 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. For those who may not be as familiar with Great Elm Group as a whole, 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 three verticals, each of which deploy a distinct strategy. In 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 DME, a distributor of respiratory care equipment and sleep study services. In Investment Management, we seek to increase the 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. In Real Estate, we're managing our existing investment in our Fort Myers property to monetize our substantial tax assets. Turning to our Fiscal 2021 second quarter ended December 31, 2020, this quarter was notable for our DME and investment management businesses. As we've consistently said 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 achieve this objective for both businesses this quarter. Furthermore, with this momentum we drove growth at both segment this quarter and more recently. During second quarter, we established a new fund product at Investment Management and in DME 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 both initiatives later in my commentary, but returning for now, the strategic financing transaction that we announced late last year. On December 21, 2020, we announced a $37.7 million financing transaction from J.P. Morgan broker dealer holdings or JPM and affiliate of J.P. Morgan Chase. Immediately prior to the financing, we also completed a corporate structure 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 named to Forest Investments and became a subsidiary of the new parent holding company that was formed called Great Elm Group. Pursuant to this reorganization, all shares in Great Elm Capital Group were automatically exchanged for an equivalent number of shares in Great Elm Group. Effectively, we have changed our parent holding company name and branding from Great Elm Capital Group to Great Elm Group, which also helps separate and distinguish us, the parent company, from the publicly traded BDC that we manage, Great Elm Capital Corp, which we refer to as GECC. As you may have noticed, we have updated our website to www.greatelmgroup.com to reflect these changes. As I mentioned earlier, we closed an aggregate $37.7 million in financing from JPM, whereby JPM purchased from Forest 35 million in newly issued 9% preferred stock maturing in 2027 and 20% of the equity of Forest for $2.7 million. Accordingly, Forest will be owned 80% by GEG and 20% by JPM. The proceeds from the JPM investment were used to refinance an existing term loan at DME with a balance of approximately $24.8 million, in addition to transaction fees and expenses and cash on the balance sheet to fund the growth. Importantly, DME now has the flexibility to incur senior indebtedness, as well as to utilize excess cash on its balance sheet as it assesses growth opportunities including M&A. In the near term, DME also benefits from a lower cost of capital. As part of the financing transaction and prior to JPM's purchase of its 20% common interest in Forest, Forest distributed to Great Elm Group its common ownership of the DME business, its ownership of the Investment Management business, its GECC shares and cash. Forest will retain ownership of the Real Estate business and a preferred interest in DME. Forest will also retain its U.S. federal NOLs, which were unaffected by the transaction and remain available for usage across the Great Elm platform, as Great Elm will continue to own 80% of Forest. In summary, the transaction accomplishes the following for us. We refinanced the DME business, immediately lowered its cost of capital, and in the longer run, afford the flexibility to incur senior leverage as needed to fund expansion. We also increased excess cash at DME and in our parent holding company, which will provide additional financial support and flexibility as we work to achieve our strategic growth plans. JPM transaction represents a significant step in laying the necessary groundwork to achieve our long-term growth plans. Moreover, we hope to strengthen our relationship with JPM in order to find additional means of enhancing shareholder value in the future. Turning to our Investment Management segment. Prior of the JPM transaction, GECC completed a $30 million rights offering, which should enhance its ability to capitalize on the specialty finance strategy while strengthening its balance sheet. Ultimately, the raised gross proceeds of $31.7 million raised at asset coverage ratio to 176.5% on a pro forma basis. Importantly, it also left GECC with a stronger capital position with which to take advantage of attractive investment opportunities. GECC 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 in our factoring business, Prestige Capital Finance. This has been an exceptional investment for GECC, generating results that have well-exceeded our internal expectations. Our intention is to leverage our experience and presence in this niche segment, not just in factoring, but in the broader specialty finance arena and pursue additional acquisition opportunities in this highly-fragmented space. In the second quarter, our Investment Management segment also began to deploy capital into the special purpose acquisition companies or SPAC, investing $3 million of Great Elm Group's excess cash into a dedicated internal fund with an additional $5 million invested into the fund that's subsequent to quarter end. We believe this asset class can deliver very attractive risk-adjusted and highly asymmetric returns to Great Elm given the cash interest structure of SPAC, provide downside protection, coupled with our prudent investing and underwriting process. Our goal is to provide capital to sponsors where we believe we've met significant value through operator investor teams that offer to target both: one, industry and managerial expertise with a proprietary executive network; and two, sophisticated financial backing [ph] and capital structure advisory. The fund has been in a ramp up period and we are focused on acquiring SPAC units or common shares through IPOs or in 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 only at the modest premium to trust. Before I turn it over to Brent to go through our operational and financial results in greater detail, I wanted to touch on a couple of high-level details. Our fiscal second quarter reflected stable topline performance by both DME and Investment Management, but also continued to impact on both businesses from the ongoing COVID-19 pandemic. DME business generated revenue of $14.5 million, an increase of 1% or $0.1 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 million. DME adjusted EBITDA was $1.9 million versus $3.5 million last year after taking into account $0.3 million in reallocation of operating expenses from GEG corporate personnel to DME, and $0.2 million of increase in operating expenses related to COVID-19. We experienced strong growth in medical equipment sales this quarter, both year-over-year and sequentially, which was driven in large part by CPAP supply sales. This is a testament to the performance of our sales team and their ability to transition to a largely virtual environment. We experienced a slowdown in 2020 from fewer sleep studies, which 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 set ups tend to be driven by in-house or external sleep study. However, through our sales efforts on supplies and equipment, we believe the DME business is in 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 JPM financing transaction and believe we now have ample runway to grow the DME business. Our hope is to complete several new transactions each year, given the current landscape and supported by our enhanced infrastructure and resources. On the general corporate front, we remained very focused on maintaining costs. I'm pleased to report that over the past couple of quarters, we've produced a [indiscernible] in G&A, as it relates to public company expense which directly benefits shareholders. This quarter, we gained further improvement in part to the reallocation of certain compensation as related to resources dedicated to the management of the DME business. Rest assured, we continue to examine all aspects of our overhead and continually seek ways to reduce costs and leverage our resources where we are able to. The return potential of our entire organization is maximized and we maintain a lean cost structure without compromising operations. 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?

Brent thanks, Peter. 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. During the fiscal 2021 quarter ended December 31, 2020, we reported consolidated revenue of $16.6 million and net loss of $0.9 million and adjusted EBITDA of $2.1 million. For the same period last year, we reported consolidated revenue of $16.6 million and net loss of $2.0 million and adjusted EBITDA of $3.4 million. Great Elm reports our three operating segments including Durable Medical Equipment, 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, DME generated $14.5 million in revenue compared to $14.4 million last year. Medical equipment sales revenue experienced robust growth year-over-year, which was partially offset by lower revenues generated by sleep studies and lower rental revenues due to softened 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 a change in estimate related to the integration of acquisitions. In addition, collection experience during the pandemic and the resulting composition of receivables at December 31, 2020 also impacted the increase in the revenue reserves adjustment during the current quarter. The combined effects of these items, resulted in nominal overall net revenue growth at DME for the quarter as it compared to the prior year. The net loss of $2.9 million at DME compares to a net loss of $0.7 million last year and includes a $1.9 million non-recurring charge related to the paydown of DME's term loan with Corbel. Adjusted EBITDA DME for the quarter was $1.9 million compared to $3.5 million last year. Adjusted EBITDA was lower due primarily to increased revenue reserve adjustments of $1.0 million and a higher percentage of lower margin medical equipment sales as a percentage of total DME revenue. As Peter noted earlier, we feel confident in 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 Great Elm Group to DME. In addition, DME recognize 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 $0.8 million in revenue compared to $0.9 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 at the Investment Management segment was $0.3 million and compared to net income of $5,000 in the segment last year. Adjusted EBITDA was $41,000 this quarter, compared to $0.3 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 in two Class A office building properties located in Fort Myers, Florida. The key components of the financial results in this segment are rental revenues, depreciation on rental properties and interest expense on the related debt and mortgage of our property. Our real estate investment required a limited amount of upfront capital to be deployed, benefits from a significant amount of non-recourse leverage and receive stable, consistent taxable income to help monetize our NOLs. For the fiscal second quarter, we generated $1.3 million in rental income, $71,000 in net income and $1.1 million of adjusted EBITDA. During the fiscal second quarter last year, we generated $1.3 million in rental income, $60,000 in 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 $45,000 compared to $57,000 for the same period last year. 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 GECC stock, which compares to a net unrealized loss is $0.8 million on GECC stock for the second fiscal quarter of 2020. In addition, our corporate segment also recognized increased dividend income from GECC, compared to the same quarter last year as our investment in GECC increased through our participation in the rights offering in October and through stock distributions received. General Corporate adjusted EBITDA for the current quarter was negative $0.9 million, compared to negative $1.6 million last year. Great Elm's efforts in 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 DME. 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 $5.4 million shares of GECC common stock equal to approximately 23.6% of the total shares outstanding and with an estimated fair value of $19.5 million as of December 31, 2020. In addition, we hold $3.4 million in staff investments, which are held in 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 a very important one for Great Elm with our DME and Investment Management businesses being recapitalized and repositioned to pursue and deliver growth in 2021. We believe we are off to a strong start with increased momentum at DME and also our new fund in Investment Management. As many of you who have been following us know, 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 date, our team at Great Elm collectively own 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. This dynamic clearly fosters a 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 DME staff who 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 well-being of our patients. I'm incredibly proud of the entire team and how each and every team member stepped up to help those in need throughout the COVID-19 crisis. I'm 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'll turn the call over to the operator to open for questions.

[Operator Instructions] I am 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.