Great Elm Group, Inc. (NASDAQ:GEG) Q2 2023 Earnings Conference Call February 14, 2023 9:00 AM ET
Company Participants
Adam Yates – Managing Director
Jason Reese – Executive Chairman
Peter Reed – Chief Executive Officer
Brent Pearson – Chief Financial Officer
Operator
Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Great Elm Group, Incorporated Fiscal 2023 Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]
I would now like to turn the conference over to Adam Yates, Managing Director. Please go ahead.
Adam Yates
Good morning, everyone. Thank you for joining us for Great Elm Group’s fiscal second quarter 2023 earnings conference call. As a reminder, this conference call is being recorded on Tuesday, February 14, 2023. If you would like to be added to our distribution list, you can e-mail geginvestorrelations@greatelmcap or 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 & 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.
Today’s conference call includes forward-looking statements, 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 statements. Great Elm Group does not undertake to update its forward-looking statements unless required by law.
In addition, during today’s call, management will refer to certain non-GAAP financial measures. Reconciliations to the most comparable financial measures are included in our earnings release. To obtain copies of our SEC filings, please visit Great Elm Group’s website under Financial Information and select SEC filings.
On the call today, we have Jason Reese, Executive Chairman of the company’s Board of Directors; Peter Reed, CEO; Adam Kleinman, President; Nichole Milz, COO; and Brent Pearson, CFO.
I will now turn the call over to Jason Reese, Executive Chairman.
Jason Reese
Welcome, everyone, and thank you for joining us today. In January, Great Elm announced and completed two transformative transactions, selling our Forest subsidiaries and our Durable Medical Equipment business. The transaction has allowed us to simplify our business structure, add significant cash to our balance sheet and enter the year in a position of strength to deploy capital into attractive alternative asset management opportunities.
On today’s call, we will focus on the transactions and our second quarter results. As for our future, we expect to host an Investor Day later this year, where we look forward to walking you through our strategic growth plans.
I will now turn the call over to Peter Reed, CEO, to walk you through the transactions.
Peter Reed
Thank you, Jason. I’m pleased to share more details on the two transformative deals that we completed over the past few weeks. First, I want to touch on Forest Investments. On December 30, we sold 61% of our majority ownership interest in Forest to an affiliate of JPMorgan for over $18 million. In addition to the sale, we received a right to put our remaining 19% interest in Forest for nearly $27 million. We exercised a put right on January 17, bringing our aggregate cash proceeds to approximately $45 million.
Next, on January 3, we sold our majority interest in the Durable Medical Equipment business to a subsidiary of Quipt for a total purchase price of $80 million. After repayment of obligations, we received approximately $26 million in cash as well as just over 346,000 shares of Quipt common stock.
Please refer to Slide 6 of the investor presentation to view the bridge from the purchase price to our net cash proceeds. As a result of these transactions, we realized material gains on those investments, generated significant value for Great Elm’s shareholders and added over $70 million of cash for the holding company’s balance sheet. This enables us to focus all of our resources towards scaling our alternative asset management business currently anchored by our publicly traded BDC Great Elm Capital Corp. and our private industrial link, Monomoy Properties.
We are very pleased at the successful outcome, and we have been hard at work to source and evaluate organic and inorganic growth opportunities. Along with the transactions and streamline structure, we also continue to generate solid performance with our current operations.
In the second quarter of fiscal 2023, revenues were up 84% year-over-year, driven by higher AUM and management fees related to GECC and Monomoy. Assets under management of $619 million as of December 31, 2022 was relatively comparable with the prior quarter-end and up 2% year-to-date, while fee-paying AUM grew to $437 million, up over 2% quarter-to-date and over 7% year-to-date.
At Monomoy, we maintain a strong backlog of transactions that have the potential to provide further growth. At GECC, we are focused on prudently deploying capital, including through the new Great Elm healthcare finance partnership with Berkadia. Growth in both vehicles is expected to lead to increased AUM and related fees.
As our business continues to scale, growth in AUM will drive increasing management fees and profit, reflecting high incremental margins. Our initiatives to reposition the GECC portfolio and reset the incentive fee bodes well for future performance fee growth.
Stepping back, we remain focused on our long-term strategy and we’ll continue to invest in the business to drive sustainable growth. We are well positioned to deploy capital into attractive alternative asset management investment in dislocated markets, thanks to our strong and liquid balance sheet, which holds approximately $90 million in cash on a pro forma basis for the Forest and DME transactions.
Beyond our strong fundamentals and constructive growth outlook, we still maintain one important differentiating factor, strong shareholder alignment. Great Elm employees and directors, including funds under their management, collectively own or manage approximately 44% of GEG’s outstanding shares, which reinforces the strong alignment of the interest between management and shareholders.
With that, I’ll turn it over to Brent to discuss our financial results for the quarter.
Brent Pearson
Thanks, Pete. 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. Please note that due to the Forest and DME transactions, we have recast our historically reported segment information to reflect our ongoing business as a single reportable segment and to remove the activity associated with discontinued operations.
During the quarter ended December 31, 2022, we reported revenue of $1.9 million, an 84% increase compared to $1.0 million in the prior year period. The increase was primarily related to the acquired management agreement with Monomoy in May 2022.
For the quarter, Great Elm Group generated net income of $29.7 million compared to a net loss of $4.2 million in the prior year period. Net income was primarily driven by $22.2 million in net realized and unrealized gains on investments and a gain on the sale of our controlling interest in a subsidiary of $10.5 million. These were primarily one-time gains driven by the Forest and DME transactions. Adjusted EBITDA loss for the quarter was $1.2 million, which was consistent with the prior year period.
As previously noted, we completed two transformative transactions at the end of the quarter and at the beginning of January 2023, which has considerably simplified our organization and strengthened our balance sheets. As a result, on a pro forma basis for these transactions, Great Elm Group had approximately $90 million in cash on our balance sheet to deploy across our growing alternative asset management platforms.
Please refer to Slide 5 on our investor presentation that provides an overview of our pro forma financial position and highlights our resulting pro forma book value per share of approximately $2.30. In addition, we retained approximately $154 million of NOL carryforwards for our federal income tax purposes. Approximately $131 million of these NOLs are expected to be available to offset certain taxable income in fiscal year 2023, but expire on June 30 of this year.
This concludes my financial review of the quarter. With that, we’ll return the call over to the operator to open up for questions.
Question-and-Answer Session
Q –
Operator
[Operator Instructions] With that, I’d now like to turn the conference back to management for any closing remarks.
Peter Reed
Thank you, again, for joining us today, and we look forward to speaking with you.
Operator
Ladies and gentlemen, that will conclude today’s meeting. We thank you all for joining, and you may now disconnect.
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