Great Elm (GEG) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements Strategic divestitures resulted in a $29.7 million net income, driven by asset sales and investment gains, with DME reclassified as discontinued operations Unaudited Condensed Consolidated Balance Sheets Total assets remained stable at $169.7 million, driven by reclassification of $76.6 million in DME assets held for sale, increasing equity to $59.1 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2022 | June 30, 2022 | | :--- | :--- | :--- | | Total Assets | $169,690 | $168,087 | | Current assets held for sale | $76,629 | $8,464 | | Non-current assets held for sale | $0 | $69,561 | | Total Liabilities | $107,591 | $125,833 | | Current liabilities held for sale | $18,047 | $15,003 | | Total Stockholders' Equity | $59,122 | $40,029 | Unaudited Condensed Consolidated Statements of Operations Net income reached $29.7 million, a significant improvement from prior-year loss, driven by a $10.5 million gain on subsidiary sale and $22.2 million investment gains Statement of Operations Highlights (in thousands, except per share data) | Metric | Q4 2022 | Q4 2021 | Six Months 2022 | Six Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $1,879 | $1,021 | $3,739 | $2,004 | | Operating Loss | $(2,788) | $(2,567) | $(4,744) | $(4,505) | | Gain on sale of controlling interest in subsidiary | $10,524 | $0 | $10,524 | $0 | | Net realized and unrealized gain (loss) on investments | $22,242 | $(1,821) | $15,445 | $(1,835) | | Net Income (Loss) from Continuing Operations | $29,693 | $(4,790) | $20,190 | $(7,539) | | Net Income from Discontinued Operations | $35 | $631 | $999 | $3,486 | | Net Income (Loss) Attributable to GEG | $29,530 | $(4,238) | $21,239 | $(4,438) | | Diluted EPS | $0.74 | $(0.16) | $0.55 | $(0.17) | Unaudited Condensed Consolidated Statements of Cash Flows Operating activities provided $1.3 million cash, investing activities provided $10.7 million from asset sales, and financing used $18.4 million for debt repayment Cash Flow Summary (in thousands) | Activity | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,344 | $3,110 | | Net cash provided by (used in) investing activities | $10,654 | $(3,124) | | Net cash (used in) provided by financing activities | $(18,402) | $588 | | Net decrease in cash and cash equivalents | $(3,310) | $(1,980) | | Cash and cash equivalents at end of period | $18,971 | $16,765 | - Investing activities were significantly impacted by the receipt of $17.7 million from the sale of a controlling interest in a subsidiary[20] - Financing activities were dominated by an $18.4 million principal payment on a related party note payable[22] Unaudited Notes to Condensed Consolidated Financial Statements Notes detail the $18.4 million Forest sale (61% interest) yielding a $10.5 million gain, DME reclassification as held for sale, and subsequent sales of remaining Forest interest for $26.5 million and DME for $80.0 million - The company's business is focused on investment management, growing a portfolio of permanent capital vehicles[24] - On December 30, 2022, GEG sold a 61% controlling interest in Forest to J.P. Morgan for $18.4 million in cash, recognizing a gain of $10.5 million[41] - The Durable Medical Equipment (DME) business (HC LLC) was classified as held for sale and discontinued operations as of December 31, 2022[27][45] - Subsequent to the quarter end, on January 3, 2023, the company sold HC LLC to Quipt for $80.0 million[104] - On January 17, 2023, the company exercised a put option to sell its remaining 19% interest in Forest for $26.5 million in cash[105] - Following the sale of Forest, the company's available federal Net Operating Loss (NOL) carryforwards were reduced from approximately $821 million to $154 million[99] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's transition to investment management with $619.0 million AUM, enhanced liquidity from $70.9 million cash post-quarter-end, and reduced NOLs to $154 million after divestitures - GEG is now focused on being an investment management company with approximately $619.0 million in assets under management as of December 31, 2022[106] - The company completed two major strategic transactions: the sale of its controlling interest in Forest in December 2022 and the sale of its DME business (HC LLC) in January 2023[107][108] - Subsequent to quarter end, the company received an additional $70.9 million in unrestricted cash from the completion of the HC LLC sale and the exercise of the Forest put option[126] Results of Operations Summary (in thousands) | Metric | Q4 2022 | Q4 2021 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $1,879 | $1,021 | 84% | | Operating Loss | $(2,788) | $(2,567) | 9% | | Other income (expense), net | $32,250 | $(2,276) | NM | | Income (loss) before income taxes | $29,462 | $(4,843) | NM | - The company's federal NOL carryforwards were reduced from $821 million to approximately $154 million following the sale of its interest in Forest[110][119] Results of Operations Revenues increased 84% to $1.9 million due to the Monomoy UpREIT management agreement, while operating costs rose by $1.1 million, and other income of $34.2 million significantly boosted pre-tax income - Revenue increased by $0.9 million for the quarter and $1.7 million for the six months ended Dec 31, 2022, primarily due to the Monomoy UpREIT management agreement acquired in May 2022[115] - Operating costs increased by $1.1 million for the quarter, mainly due to costs associated with servicing the new Monomoy UpREIT management agreement[116] - Other income for Q4 2022 was $34.2 million, comprised of a $10.5 million gain on the Sale of Controlling Interest in Forest, a $24.4 million unrealized gain on the remaining investment in Forest, and $1.4 million in dividends and interest, offset by investment losses[118] Liquidity and Capital Resources The company held $19.0 million in unrestricted cash, with an additional $70.9 million received post-quarter-end, and details outstanding debt including $26.9 million GEGGL Notes and $37.0 million convertible notes - The company held $19.0 million in unrestricted cash and 1,569,787 shares of GECC common stock valued at $13.0 million as of December 31, 2022[126] - Transactions completed in January 2023 provided an additional $70.9 million in unrestricted cash available for deployment[126] Outstanding Borrowings as of Dec 31, 2022 (Principal) | Debt Instrument | Principal Outstanding | | :--- | :--- | | GEGGL Notes (7.25% due 2027) | $26.9 million | | Convertible Notes (5.0% due 2030) | $37.0 million | | Seller Note (6.5% due 2023) | $3.7 million | | Forest Note (9.0% due 2023) | $19.7 million | - The $19.7 million Forest Note was repaid in full on January 3, 2023[130] Quantitative and Qualitative Disclosures About Market Risk No material changes in market risks have occurred since the fiscal year ended June 30, 2022 - There have been no material changes in market risks since the fiscal year ended June 30, 2022[132] Controls and Procedures Management concluded disclosure controls and procedures were effective as of December 31, 2022, with no material changes to internal control over financial reporting - The CEO and CFO concluded that as of December 31, 2022, the company's disclosure controls and procedures were effective[133] - No material changes were made to the company's internal control over financial reporting during the quarter ended December 31, 2022[134] PART II. OTHER INFORMATION Legal Proceedings No changes were required to be disclosed regarding legal proceedings - No changes to legal proceedings were required to be disclosed[136] Risk Factors No material changes have occurred to the risk factors previously disclosed in the Annual Report on Form 10-K - No material changes have occurred to the risk factors disclosed in the last Annual Report on Form 10-K[137] Exhibits This section provides an index of exhibits filed with the report, including agreements related to recent transactions and required certifications - The exhibit index lists key documents filed with the SEC, including the Stock Purchase Agreement with J.P. Morgan and the Purchase Agreement with QHM Holdings Inc[140]