Item 1. Business
Item 1. Business.
Overview
We are a holding company seeking to acquire assets and businesses, where our people and other assets provide a competitive advantage. We currently have two business operating segments: durable medical equipment and investment management with general corporate representing unallocated costs and activity to arrive at consolidated operations.
Our goal is to build a diversified holding company focused on generating attractive, risk-adjusted returns on investment and long-term value creation. We intend to accomplish this principally through:
▪
continuous review of acquisitions of businesses, securities and assets that generate attractive risk-adjusted returns and exhibit the potential for significant long-term value creation;
▪
effective use of the skills of our team and our financial resources, including our tax assets, our willingness to create bespoke solutions and our ability to prudently assume risks; and
▪
constant evaluation of the retention and disposition of our operations and holdings.
In recent years, we have made a number of changes in our business:
▪
During the year ended June 30, 2020, we:
▪
raised $30 million through the issuance of convertible notes to be used for future acquisitions and general corporate purposes, bolstering the Company’s overall financial health and providing the means to pursue strategic acquisitions; and
▪
invested in the employees, systems and processes of the durable medical equipment business to enhance scalability and remediate previously identified material weaknesses in internal controls over financial reporting.
▪
During the year ended June 30, 2021, we:
▪
completed a financing transaction with J.P. Morgan Broker-Dealer Holdings Inc. ( JPM );
▪
launched GESOF, a privately-held fund with a focus on investments in special purpose acquisition companies;
▪
Re-acquired the $3.1 million note previously held by MAST Capital, LLC (the GP Corp. Note ) and repurchased previously outstanding non-controlling interests in GECC GP Corp. ( GP Corp .)
▪
continued to expand the durable medical equipment business with additional acquisitions; and
▪
took significant steps towards simplifying our corporate structure through the sale of our real estate business, the MAST Transactions (as defined below), the Holding Company Reorganization (as defined below) and the Subsidiary Reorganization (as defined below).
As of June 30, 2021, we had approximately $952 million of net operating loss ( NOL ) carryforwards for Federal income tax purposes.
2
Our Durable Medical Equipment Business
We launched our durable medical equipment segment in September 2018 by acquiring two durable medical equipment businesses that specialize in the distribution of respiratory care equipment, including positive air pressure equipment and supplies, ventilators and oxygen equipment, and provide sleep study services. Since then, we have grown the business organically through investments in scalability as well as inorganically through tuck-in acquisitions.
Our Investment Management Business
We decided to invest in the asset management business because of our assessment of its ability to generate recurring free cash flows, its growth prospects and our Board of Directors’ (our Board ) and employees’ industry expertise. GECM, our wholly-owned registered investment adviser subsidiary, is an investment adviser providing investment management services to GECC, our largest investment vehicle, as well as private funds, including GESOF, and separate accounts for an institutional investor. The combined assets under management for these entities as of June 30, 2021 was approximately $294.7 million.
GECC was established in 2016. At this time, GECC elected to be treated as a BDC under the Investment Company Act of 1940, as amended (the Investment Company Act ). We own approximately 23.6% of GECC’s shares that we may hold to generate dividends or sell to redeploy our capital in higher yielding opportunities.
GECM earns revenue through investment management agreements with each investment vehicle which provide for management fees, incentive fees and/or administrative fees. These fees are generally based on assets under management, investment performance and allocable expenses incurred in the administration of these investment vehicles.
Discontinued Operations
We launched our real estate business in March 2018 with an investment in a majority-interest in two Class A office buildings totaling 257,000 square feet situated on 17 acres of land in Fort Myers, Florida (collectively, the Property). The Property was fully-leased, on a triple-net basis, to a single tenant through March 31, 2030. In June 2021, we sold the real estate business.
For additional information see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
MAST Transactions
On March 10, 2021, we entered into a transaction agreement with MAST Capital Management, LLC ( MAST ) and David Steinberg pursuant to which MAST and Mr. Steinberg agreed to sell to GEG:
•
all of the obligations and other amounts (currently approximately $3.1 million) owing to MAST under the Amended and Restated Senior Secured Note, dated as of September 18, 2017, by and between MAST and GECC GP Corp. ( GP Corp. ), a majority-owned subsidiary of GEG;
•
all common stock in GP Corp. held by MAST and its affiliates and Steinberg; and
•
board appointment rights with respect to Forest Investments, Inc. (f/k/a Great Elm Capital Group, Inc.), our majority-owned subsidiary, and certain other rights held by MAST and its affiliates and Steinberg.
In consideration for the foregoing, we agreed to issue to MAST $2.25 million in aggregate principal amount of newly issued Convertible Notes (as defined below). Following this transaction, MAST will no longer have any right to appoint directors to the board of directors of any GEG entity. We refer to these transactions as the MAST Transactions.
3
Holding Company Reorganization
On December 21, 2020, GEC announced plans to create a new public holding company, Great Elm Group, Inc. by implementing a non-taxable holding company reorganization (the Holding Company Reorganization ). Following the Holding Company Reorganization, the Company became the successor issuer to GEC.
On December 29, 2020, we completed a reorganization of our corporate structure, where Great Elm Capital Group, Inc. changed its name to Forest Investments, Inc. (Forest) and became a wholly owned subsidiary of GEG. Outstanding shares of Forest under the ticker symbol “GEC” were automatically converted into shares of our common stock, ticker symbol “GEG”. Forest common stock was then delisted from the NASDAQ Global Select Market and subsequently deregistered under Section 12(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act ). The Holding Company Reorganization was a tax-free transaction for U.S. federal income tax purposes for our shareholders.
Financing Transaction
Following the consummation of the Holding Company Reorganization, JPM, a Delaware corporation and affiliate of JPMorgan Chase & Co., Forest and the Company agreed to effect certain transactions pursuant to which JPM provided financing in an aggregate amount of $37.7 million.
In connection with such financing, among other things:
•
Forest issued to JPM 35,010 newly issued shares of 9.0% preferred stock (the Forest Preferred Stock ) with a maturity date of December 29, 2027 for $1,000.00 per share;
•
HC LLC issued 10,090 newly issued shares of 9.0% Series A-1 preferred stock (the Series A-1 Preferred Stock ) with a maturity date of December 29, 2027 and face value of $1,000.00 per share to the owners of DME Inc., which in turn distributed such preferred stock pro rata to the holders of its common stock such that 80.1% of such preferred stock is held by Forest, 9.95% is held by Corbel Capital Partners SBIC, L.P. ( Corbel ), and 9.95% is held by Valley Healthcare Group, LLC ( VHG ). Upon a sale of the durable medical equipment business, such holders of Series A-1 Preferred Stock are only entitled to their liquidation preference;
•
HC LLC, a wholly-owned subsidiary of DME Inc., and sole owner of the durable medical equipment operating subsidiaries, issued to Forest 34,010 newly issued shares of 9.0% Series A-2 preferred stock (the Series A-2 Preferred Stock ) with a maturity date of December 29, 2027 for $1,000.00 per share. Upon a sale of the durable medical equipment business, such holders of Series A-2 Preferred Stock are entitled to the greater of their liquidation preference or 33% of proceeds arising from such sale;
•
HC LLC distributed to the owners of DME Inc. cash of $1.9 million and reimbursed GEG $1.3 million to cover deal costs;
•
Forest distributed to the Company, its sole stockholder, all of the assets and liabilities of Forest other than certain excluded assets and related liabilities, including Forest’s real estate business, and a preferred investment in the Company’s durable medical equipment business; and
•
JPM acquired 20% of Forest’s common stock for a purchase price of $2.7 million. The Company’s wholly-owned subsidiary, DME Manager, concurrently entered into an agreement with Forest to provide advisory services in exchange for annual consulting fees of $0.45 million.
(each collectively noted above, the JPM Transactions ).
Using proceeds from the JPM Transactions, DME Inc. paid off the term loan with Corbel (the Corbel Facility ).
4
Subsidiary Reorganization
On May 31, 2021, our wholly-owned subsidiary DME Holdings exchanged their 80.1% interests in DME Inc. for an identical 80.1% direct interest in DME Inc.’s subsidiary HC LLC, which is the sole owner of the durable medical equipment operating subsidiaries. Following the consummation of the reorganization, we no longer have an interest in DME Inc.
On June 29, 2021, GP Corp assigned the rights to a profit sharing agreement with GECM, their intercompany obligation under the GP Corp. Note and other assets and liabilities to their wholly-owned subsidiary Great Elm Capital GP, LLC ( GEC GP ). Subsequent to the assignment, we exchanged our 98.2% interests in GP Corp. for an identical 98.2% direct interest in GP Corp.’s wholly-owned subsidiary GEC GP. Following the consummation of the reorganization, the Company no longer has an interest in GP Corp.
CARES Act Stimulus
During the years ended June 30, 2021 and 2020, the Company recognized benefits related to stimulus received under the Coronavirus Aid, Relief, and Economic Security Act initially passed into law on March 27,2020 and subsequently expanded ( CARES Act ) of $4.8 million and $5.1 million, respectively. Stimulus received in 2021 consists of employee retention payroll tax credits, while stimulus received in 2020 consists of a forgivable Paycheck Protection Program Loan of $3.6 million ( PPP Loan ) and grants from the U.S. Department of Health and Human Services of $1.4 million. During the year ended June 30, 2021, we submitted a forgiveness application seeking full forgiveness of the PPP Loan and such forgiveness was approved.
Acquisition Program
Great Elm’s team continues to monitor and identify opportunities in the durable medical equipment, investment management and other sectors through the acquisition of operating businesses. In the fiscal year ended June 30, 2021, we evaluated a number of opportunities in these areas.
Competition
We face competition from larger, well financed organizations (both domestic and foreign), including operating companies, global asset managers, investment banks, commercial banks, private equity funds, sovereign wealth funds and state-owned enterprises. Government regulation is a key competitive factor for certain industries.
Employees
We had 369 employees as of June 30, 2021, including the 357 employees of our durable medical equipment subsidiaries.
5
Information about Great Elm on the Internet
The following documents and reports are available on or through our website as soon as reasonably practicable after we electronically file such materials with, or furnish to, the SEC:
▪
Code of Conduct;
▪
Reportable waivers, if any, from our Code of Conduct by our executive officers;
▪
Charter of the audit committee of our Board;
▪
Charter of the nominating and corporate governance committee of our Board;
▪
Charter of the compensation committee of our Board;
▪
Annual reports on Form 10-K;
▪
Quarterly reports on Form 10-Q;
▪
Current reports on Form 8-K;
▪
Proxy or information statements we send to our stockholders; and
▪
Any amendments to the above-mentioned documents and reports.
The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov . Our stockholders may also obtain a printed copy of any of the above documents or reports free of charge by sending a request to Great Elm Group, Inc., 800 South Street, Suite 230, Waltham, MA 02453; Attention: Investor Relations, or by calling (617) 375-3006. We charge $0.50 per page to cover expenses of copying and mailing.
Our corporate headquarters is located at 800 South Street, Suite 230, Waltham, Massachusetts 02453. Our corporate website address is www.greatelmgroup.com.
The contents of the websites referred to above are not incorporated into this filing.