Great Elm Capital Group, Inc. Reports Second Quarter 2020 Financial Results

Great Elm Capital Group, Inc. (NASDAQ: GEC, “Great Elm”) announced its financial results for the quarter ended December 31, 2019. Great Elm will host a conference call and webcast on Monday, February 10, 2020 at 8:00 a.m. Eastern Time to discuss its second quarter 2020 financial results. Please see below for details.

Select highlights from the second quarter 2020 include:

Operating Companies:
- For the three months ended December 31, 2019, $14.4 million of revenue, $0.7 million of net loss and $3.5 million of adjusted EBITDA1
- Invested heavily in people, processes and technology to enhance our scalable infrastructure, capable of supporting multiple acquisitions per year
- Management team has identified a large number of potential acquisition targets with strong product fit
- Outlook for continued growth in fiscal year 2020 underpinned by revenue growth in PAP category
Investment Management:
- For the three months ended December 31, 2019, $0.9 million of revenue, net income of $0.005 million and $0.3 million of adjusted EBITDA
- For the six months ended December 31, 2019, $0.7 million of adjusted EBITDA up 273% vs. $0.2 million during the same period in the prior year
- For the three months ended December 31, 2019, management fees of approximately $0.76 million roughly unchanged, year-over-year
- Outlook for continued free cash flow growth in fiscal year 2020 based on an increase in management fee revenue

“At Great Elm DME, we are pleased with both the sequential and year-over-year revenue growth. Profitability grew meaningfully this quarter, as compared to the prior two quarters during which we began significant infrastructure investments necessary to enhance our scalable platform,” remarked Peter A. Reed, Great Elm’s Chief Executive Officer. “Furthermore, we believe our Investment Management business is poised for continued free cash flow growth.”

Alignment of Interest

The employees of Great Elm and Great Elm Capital Management, Inc. (“GECM”) collectively own approximately 2.0 million shares of GEC stock, representing approximately 8% of its outstanding shares. Additionally, the directors of Great Elm collectively own or manage greater than 11% of Great Elm’s shares. Altogether, insiders collectively own or manage approximately 19% of the company’s outstanding shares, which Great Elm believes fosters a strong alignment of interest between employees, directors and the company’s shareholders.

BUSINESS OVERVIEW

Great Elm is a diversified, publicly-traded holding company that seeks to build long-term shareholder value across three verticals: Operating Companies, Investment Management and Real Estate.

Operating Companies

In the three months ended December 31, 2019, DME generated $3.5 million of adjusted EBITDA. During the quarter, DME experienced meaningful growth in major product categories. Management anticipates continued growth in fiscal year 2020, supported by encouraging key performance indicators, including approximately 8.8% quarter-over-quarter growth in PAP supply orders.

The team continues to pursue M&A opportunities with complementary product profiles that increase market penetration and extend existing geographic markets.

Investment Management

In the three months ended December 31, 2019, Investment Management generated $0.3 million of adjusted EBITDA1, up approximately 53% year over year. In the six months ended December 31, 2019, Investment Management generated $0.7 million of adjusted EBITDA, also up significantly year over year. Adjusted EBITDA growth was driven by a significant reduction in operating expenses, as management continues to focus on operational efficiency.

Great Elm’s management team believes the Investment Management business is scalable, offers attractive margins and, when coupled with growth in assets under management, provides for the potential to generate incremental EBITDA.

Great Elm seeks to grow assets under management through capital raises and M&A. If successful, growth in assets under management should result in increased management fee revenue for GECM. This increase in management fee revenue should drive future free cash flow generation, aided by a reduction of overhead.

Alongside Great Elm Capital Corp., Great Elm Opportunities Fund I, LP and existing separately managed accounts, Great Elm continues to seek avenues for growth, potentially launching additional private funds and pursuing opportunistic acquisitions in the business development company space.

Real Estate

In the three months ended December 31, 2019, Real Estate generated $1.3 million in rental revenue and $1.1 million of adjusted EBITDA.

Great Elm continues to focus on credit tenant lease financings and ground lease structures across a variety of commercial, government and other properties. Great Elm’s substantial tax assets can make it a value-added partner or lessor. While Great Elm selectively pursues compelling real estate opportunities from time to time, it does not currently see an abundance of attractive potential acquisitions in what appears to be a relatively overheated market.

FINANCIAL REVIEW: SEGMENT FINANCIALS

As of December 31, 2019, Great Elm had four operating segments: Durable Medical Equipment, Investment Management, Real Estate and General Corporate.

Durable Medical Equipment

Three Months Ended December 31, 2019:

Revenue:

During the three months ended December 31, 2019, Great Elm recognized $14.4 million in total revenue vs. $13.2 million during the same period in the prior year.

Net Income (Loss):

During the three months ended December 31, 2019, Great Elm recognized a net loss of $0.7 million vs. $0.4 million of net income during the same period in the prior year.

Adjusted EBITDA:

During the three months ended December 31, 2019, Great Elm recognized $3.5 million in adjusted EBITDA vs. $3.6 million during the same period in the prior year.

Investment Management

Three Months Ended December 31, 2019:

Revenue:

During the three months ended December 31, 2019, Great Elm recognized total investment management revenue of $0.89 million vs. $0.92 million during the same period in the prior year.
During the three months ended December 31, 2019, Great Elm recognized management fee revenue of $0.76 million, approximately flat year-over-year.

Net Income (Loss):

During the three months ended December 31, 2019, Great Elm recognized no net income vs. no net income during the same period in the prior year.

Adjusted EBITDA1:

During the three months ended December 31, 2019, Great Elm recognized adjusted EBITDA of $0.3 million vs. $0.2 million during the same period in the prior year.

Real Estate

Three Months Ended December 31, 2019:

Revenue:

During the three months ended December 31, 2019, Great Elm recognized $1.3 million in rental revenue vs. $1.5 million during the same period in the prior year.

Net Income (Loss):

During the three months ended December 31, 2019, Great Elm recognized $0.06 million in net income vs. $0.04 million in net income during the same period in the prior year.

Adjusted EBITDA:

During the three months ended December 31, 2019, Great Elm recognized $1.1 million in adjusted EBITDA vs. $1.1 million during the same period in the prior year.

General Corporate

Three Months Ended December 31, 2019:

Revenue:

During the three months ended December 31, 2019, Great Elm recognized $0.06 million in revenue vs. $0.05 million in revenue during the same period in the prior year.

Net Income (Loss):

During the three months ended December 31, 2019, Great Elm recognized $1.4 million in net loss vs. net loss of $4.7 million during the same period in the prior year.

Adjusted EBITDA:

During the three months ended December 31, 2019, Great Elm recognized $(1.6) million in adjusted EBITDA vs. $(1.8) million during the same period in the prior year.

Conference Call & Webcast

Great Elm will host a conference call and webcast on Monday, February 10, 2020 at 8:00 a.m. Eastern Time to discuss its second quarter 2020 financial results.

All interested parties are invited to participate in the conference call by dialing +1 (844) 559-0750; international callers should dial +1 (647) 689-5386. Participants should enter the Conference ID 6463167 when asked. For a copy of the slide presentation that will be referenced during the course of our conference call, please visit: https://www.greatelmcap.com/events-and-presentations/default.aspx.

The conference call will be webcast simultaneously at: https://event.on24.com/wcc/r/2152588/FB6CE9E9B21B84BD3AF43376EB1DC7DB.

About Great Elm Capital Group, Inc.

Great Elm is a publicly-traded holding company that seeks to build a business across three operating verticals: Operating Companies, Investment Management and Real Estate. Great Elm’s website can be found at www.greatelmcap.com.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

Statements in this press release that are “forward-looking” statements, including statements regarding revenue, adjusted EBITDA, expected growth, profitability, free cash flow and outlook involve risks and uncertainties that may individually or collectively impact the matters described herein. Investors are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made and represent Great Elm’s assumptions and expectations in light of currently available information. These statements involve risks, variables and uncertainties, and Great Elm’s actual performance results may differ from those projected, and any such differences may be material. For information on certain factors that could cause actual events or results to differ materially from Great Elm’s expectations, please see Great Elm’s filings with the SEC, including its most recent annual report on Form 10-K and subsequent reports on Forms 10-Q and 8-K. Additional information relating to Great Elm’s financial position and results of operations is also contained in Great Elm’s annual and quarterly reports filed with the SEC and available for download at its website www.greatelmcap.com or at the SEC website www.sec.gov.

Non-GAAP Financial Measures

The SEC has adopted rules to regulate the use in filings with the SEC, and in public disclosures, of financial measures that are not in accordance with US GAAP, such as adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”). Adjusted EBITDA is derived from methodologies other than in accordance with US GAAP. Great Elm believes that Adjusted EBITDA is an important measure for investors to use in evaluating Great Elm’s businesses. In addition, Great Elm’s management reviews Adjusted EBITDA as they evaluate acquisition opportunities.

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it either in isolation from, or as a substitute for, analyzing Great Elm’s results as reported under US GAAP. Non-GAAP financial measures reported by Great Elm may not be comparable to similarly titled amounts reported by other companies.

Set forth below is a reconciliation of Adjusted EBITDA to the most directly comparable US GAAP financial measure, net income. The information in the table below represents Great Elm’s assumptions and expectations in light of currently available information. Great Elm’s actual performance results may differ from those projected in the table below, and any such differences may be material.

	For the three months ended December 31, 2019
$ in thousands	Durable Medical Equipment			Investment Management 1			Real Estate		General Corporate			Consolidated
EBITDA:
Net income (loss) - GAAP	$	(676	)	$	5		$	60	$	(1,416	)	$	(2,027	)
Interest expense		937			41			655		-			1,633
Depreciation & amortization		2,483			179			430		1			3,093
Income tax expense (benefit)		-			-			-		(99	)		(99	)
EBITDA	$	2,744		$	225		$	1,145	$	(1,514	)	$	2,600
Adjusted EBITDA:
Stock based compensation		-			98			-		110			208
Change in contingent consideration 2		-			-			-		(940	)		(940	)
GECC Unrealized (gains) / losses		-			-			-		826			826
Dividend income from GECC		-			-			-		(588	)		(588	)
Transaction and integration costs 2		586			-			-		515			1,101
Pharmacy buildout		120			-			-		-			120
DME management and Monitoring fees		82			-			-		(57	)		25
Adjusted EBITDA	$	3,532		$	323		$	1,145	$	(1,648	)	$	3,352




	For the six months ended December 31, 2019
$ in thousands	Durable Medical Equipment			Investment Management 1			Real Estate		General Corporate			Consolidated
EBITDA:
Net income (loss) - GAAP	$	(1,495	)	$	(40	)	$	120	$	(3,890	)	$	(5,305	)
Interest expense		1,933			83			1,313		-			3,329
Depreciation & amortization		4,991			358			862		1			6,212
Income tax expense (benefit)		-			-			-		143			143
EBITDA	$	5,429		$	401		$	2,295	$	(3,746	)	$	4,379
Adjusted EBITDA:
Stock based compensation		-			274			-		228			502
Change in contingent consideration 2		-			-			-		(1,135	)		(1,135	)
GECC Unrealized (gains) / losses		-			-			-		1,809			1,809
Dividend income from GECC		-			-			-		(1,078	)		(1,078	)
Other (income) expense		(3	)		-			-		-			(3	)
Transaction and integration costs 2		736			-			-		635			1,371
Pharmacy buildout		254			-			-		-			254
DME management and Monitoring fees		130			-			-		(80	)		50
Adjusted EBITDA	$	6,546		$	674		$	2,295	$	(3,367	)	$	6,149




	For the three months ended December 31, 2018
$ in thousands	Durable Medical Equipment			Investment Management 1			Real Estate		General Corporate 4			Consolidated
EBITDA:
Net income (loss) - GAAP	$	399		$	(7	)	$	38	$	(4,706	)	$	(4,276	)
Interest expense		1,081			44			663		-			1,788
Depreciation & amortization		2,142			137			431		-			2,710
Income tax expense (benefit)		-			-			-		-			-
EBITDA	$	3,622		$	174		$	1,132	$	(4,706	)	$	222
Adjusted EBITDA:
Stock based compensation		-			37			-		132			169
GECC Unrealized (gains) / losses		331			-			-		3,308			3,639
Dividend income from GECC		(375	)		-			-		(586	)		(961	)
Transaction and integration costs 2		2			-			-		135			137
DME management and monitoring fees		52			-			-		(52	)		-
Adjusted EBITDA	$	3,632		$	211		$	1,132	$	(1,769	)	$	3,206




	For the six months ended December 31, 2018
$ in thousands	Durable Medical Equipment 3			Investment Management 1			Real Estate		General Corporate 4			Consolidated
EBITDA:
Net income (loss) - GAAP	$	426		$	(696	)	$	89	$	(6,104	)	$	(6,285	)
Interest expense		1,367			88			1,328		-			2,783
Depreciation & amortization		2,565			273			862		-			3,700
Income tax expense (benefit)		-			-			-		-			-
EBITDA	$	4,358		$	(335	)	$	2,279	$	(6,104	)	$	198
Adjusted EBITDA:
Stock based compensation		-			582			-		260			842
GECC Unrealized (gains) / losses		411			-			-		2,323			2,734
Dividend income from GECC		(431	)		-			-		(1,020	)		(1,451	)
Transaction and integration costs 2		544			-			-		1,459			2,003
DME management and Monitoring fees		70			-			-		(70	)		-
Adjusted EBITDA	$	4,952		$	247		$	2,279	$	(3,152	)	$	4,326

(1)	Prior year non-GAAP adjustments have been updated to conform to current year presentation by removing adjustments associated with the adoption of ASC 606 Contracts with Customers.
(2)	Acquisition and integration related costs include transaction costs, costs to integrate acquired businesses and changes in the fair value of the contingent consideration liability since the initial valuation at the acquisition date.
(3)	Our durable medical equipment business began in September 2018 and there was no related activity prior to that date.
(4)	General Corporate net loss includes net loss attributable to discontinued operations.