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EX-32.1 - EX-32.1 - Great Elm Capital Group, Inc.gec-ex321_8.htm
EX-31.2 - EX-31.2 - Great Elm Capital Group, Inc.gec-ex312_6.htm
EX-31.1 - EX-31.1 - Great Elm Capital Group, Inc.gec-ex311_7.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2017

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from    to    

 

Commission File Number: 001-16073

 

 

Great Elm Capital Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

94-3219054

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

800 South Street, Suite 230, Waltham MA

02453

(Address of principal executive offices)

(Zip Code)

(617) 375-3006

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ☒     No  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ☒     No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer ☒

 

 

Non-accelerated filer (Do not check if a smaller reporting company)

Smaller reporting company

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No   ☒

 

As of November 1, 2017, there were 25,430,370 shares of the registrant’s common stock outstanding.

 

 

 

 


 

Table of Contents

 

PART I. FINANCIAL INFORMATION

2

 

 

 

 

Item 1.

 

Unaudited Financial Statements

2

 

 

Unaudited condensed consolidated balance sheets as of September 30, 2017 and June 30, 2017

2

 

 

Unaudited condensed consolidated statements of operations for the three months ended September 30, 2017 and 2016

3

 

 

Unaudited condensed consolidated statements of comprehensive loss for the three months ended September 30, 2017 and 2016

4

 

 

Unaudited condensed consolidated cash flow statements for the three months ended September 30, 2017 and 2016

5

 

 

Unaudited notes to condensed consolidated financial statements

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

19

Item 4.

 

Controls and Procedures

20

 

 

 

 

PART II. OTHER INFORMATION

20

 

 

 

 

Item 1.

 

Legal Proceedings

20

Item 1A.

 

Risk Factors

20

Item 2.

 

Unregistered Sales of Securities and Use of Proceeds

20

Item 3.

 

Defaults Upon Senior Securities

20

Item 4.

 

Mine Safety Disclosures

20

Item 5.

 

Other Information

20

Item 6.

 

Exhibits

21

 

 

 

 

SIGNATURES

22

 

 

 

i


 

Cautionary Statement Regarding Forward-Looking Information

This report and certain information incorporated herein by reference, contains forward‑looking statements under the Private Securities Litigation Reform Act of 1995. Such statements often include words such as “may,” “will,” “should,” “believe,” “expect,” “seek,” “anticipate,” “intend,” “estimate,” “plan,” “target,” and other similar phrases. Although we believe the assumptions and expectations reflected in these forward‑looking statements are reasonable, these assumptions and expectations may not prove to be correct and we may not achieve the financial results or benefits anticipated. These forward‑looking statements are not guarantees of actual results. Our actual results may differ materially from those suggested in the forward‑looking statements. These forward‑looking statements involve a number of risks and uncertainties, some of which are beyond our control, including, without limitation:

 

our ability to profitably manage Great Elm Capital Corp. (NASDAQ: GECC);

 

the dividend rate that GECC will pay;

 

our ability to build a real estate business;

 

our ability to grow our investment management business;

 

our ability to raise capital to fund our business plan;

 

our ability to create a merchant banking business;

 

our ability to make acquisitions and manage any businesses we may acquire;

 

conditions in the equity capital markets and debt capital markets as well as the economy generally;

 

our ability to maintain the security of electronic and other confidential information;

 

serious disruptions and catastrophic events;

 

competition, mostly from larger, well financed organizations (both domestic and foreign), including operating companies, global asset managers, investment banks, commercial banks, and private equity funds;

 

outcomes of litigation and proceedings and the availability of insurance, indemnification and other third-party coverage of any losses suffered in connection therewith;

 

our ability to attract, assimilate and retain key personnel;

 

compliance with laws, regulations and orders;

 

changes in laws and regulations; and

 

other factors described in our annual report under “Risk Factors” or as set forth from time to time in our SEC filings.

These forward‑looking statements speak only as of the time of filing of this report and we do not undertake to update or revise them as more information becomes available. You are cautioned not to place undue reliance on these forward‑looking statements. We do not undertake any obligation to release publicly any revisions to these forward‑looking statements to reflect future events or circumstances or to reflect the occurrence of unanticipated events.

 

 

1


 

PART I—FINANCIAL INFORMATION

Unless the context otherwise requires, “we” “us” “our” and terms of similar import refer to Great Elm Capital Group, Inc. and/or its subsidiaries. Our corporate website address is www.greatelmcap.com. The information contained in, or accessible through, our corporate website does not constitute part of this report.

Item 1. Financial Statements

 

Great Elm Capital Group, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

Dollar amounts in thousands (except per share and par value data)

 

 

 

September 30,

 

 

June 30,

 

 

 

 

2017

 

 

2017

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

43,931

 

 

$

 

45,894

 

 

Investment management fees receivable - related party

 

 

 

553

 

 

 

 

549

 

 

Related party dividend receivable

 

 

 

163

 

 

 

 

163

 

 

Related party receivable

 

 

 

346

 

 

 

 

348

 

 

Investments, at fair value (cost $30,000)

 

 

 

20,532

 

 

 

 

20,886

 

 

Prepaid and other current assets

 

 

 

582

 

 

 

 

174

 

 

Total current assets

 

 

 

66,107

 

 

 

 

68,014

 

 

Investment management fee receivable, net of current portion

 

 

 

3,647

 

 

 

 

2,757

 

 

Property and equipment, net

 

 

 

47

 

 

 

 

41

 

 

Identifiable intangible assets, net

 

 

 

3,929

 

 

 

 

4,102

 

 

Right to use assets, net

 

 

 

1,647

 

 

 

 

1,688

 

 

Other assets, net

 

 

 

92

 

 

 

 

92

 

 

Total assets

 

$

 

75,469

 

 

$

 

76,694

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

193

 

 

$

 

52

 

 

Accrued liabilities

 

 

 

1,047

 

 

 

 

1,019

 

 

Accrued legal expense

 

 

 

406

 

 

 

 

164

 

 

Accrued compensation

 

 

 

184

 

 

 

 

214

 

 

Lease liability

 

 

 

337

 

 

 

 

421

 

 

Liabilities related to discontinued operations

 

 

 

3,608

 

 

 

 

3,608

 

 

Related party notes payable

 

 

 

76

 

 

 

 

250

 

 

Total current liabilities

 

 

 

5,851

 

 

 

 

5,728

 

 

Lease liability, net of current portion

 

 

 

1,598

 

 

 

 

1,640

 

 

Warrant liability

 

 

 

 

 

 

 

186

 

 

Related party notes payable, net of current portion

 

 

 

3,224

 

 

 

 

2,924

 

 

Total liabilities

 

 

 

10,673

 

 

 

 

10,478

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000 authorized and zero outstanding

 

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 350,000,000 shares authorized; and 24,157,462 shares issued and 23,298,160 shares outstanding at September 30, 2017; and 24,258,847 shares issued and 23,200,153 shares outstanding at June 30, 2017

 

 

 

23

 

 

 

 

23

 

 

Additional paid-in-capital

 

 

 

3,295,647

 

 

 

 

3,293,683

 

 

Accumulated deficit

 

 

 

(3,230,510

)

 

 

 

(3,227,480

)

 

Total Great Elm Capital Group, Inc.'s stockholders' equity

 

 

 

65,160

 

 

 

 

66,226

 

 

Non-controlling interest

 

 

 

(364

)

 

 

 

(10

)

 

Total stockholders' equity

 

 

 

64,796

 

 

 

 

66,216

 

 

Total liabilities and stockholders' equity

 

$

 

75,469

 

 

$

 

76,694

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

2


 

Great Elm Capital Group, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

Dollar amounts in thousands (except per share data)

 

 

 

For the Three Months Ended September 30,

 

 

 

 

2017

 

 

2016

 

 

Investment management and administration fees

 

$

 

1,769

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Investment management expenses

 

 

 

3,070

 

 

 

 

 

 

Amortization and depreciation

 

 

 

180

 

 

 

 

 

 

General and administrative

 

 

 

1,887

 

 

 

 

2,538

 

 

Total operating costs and expenses

 

 

 

5,137

 

 

 

 

2,538

 

 

Operating loss

 

 

 

(3,368

)

 

 

 

(2,538

)

 

Dividends and interest income

 

 

 

491

 

 

 

 

 

 

Unrealized loss on investment in GECC

 

 

 

(354

)

 

 

 

 

 

Interest expense

 

 

 

(98

)

 

 

 

(3,453

)

 

Other expense, net

 

 

 

(55

)

 

 

 

 

 

Loss from continuing operations, before income taxes

 

 

 

(3,384

)

 

 

 

(5,991

)

 

Benefit from income taxes

 

 

 

 

 

 

 

(478

)

 

Loss from continuing operations

 

 

 

(3,384

)

 

 

 

(5,513

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations, net of tax

 

 

 

 

 

 

 

2,098

 

 

Income from discontinued operations, net of tax

 

 

 

 

 

 

 

2,098

 

 

Net loss

 

$

 

(3,384

)

 

$

 

(3,415

)

 

Less:  Net loss attributable to non-controlling interest

 

 

 

(354

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Great Elm Capital Group, Inc.

 

$

 

(3,030

)

 

$

 

(3,415

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings loss per share from:

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

 

(0.13

)

 

$

 

(0.58

)

 

Discontinued operations

 

 

 

 

 

 

 

0.22

 

 

Net loss

 

$

 

(0.13

)

 

$

 

(0.36

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

 

23,233

 

 

 

 

9,467

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


 

Great Elm Capital Group, Inc.

Condensed Consolidated Statement of Comprehensive Loss (Unaudited)

Dollar amounts in thousands

 

 

 

For the Three Months Ended September 30,

 

 

 

 

2017

 

 

2016

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

 

(3,384

)

 

$

 

(3,415

)

 

Loss on foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

Total comprehensive loss

 

 

 

(3,384

)

 

 

 

(3,415

)

 

Comprehensive loss attributable to non-controlling interest

 

 

 

(354

)

 

 

 

 

 

Total comprehensive loss attributable to Great Elm Capital Group

 

$

 

(3,030

)

 

$

 

(3,415

)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


 

Great Elm Capital Group, Inc.

Condensed Consolidated Statements of Cash Flow (Unaudited)

Dollar amounts in thousands

 

 

For the Three Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

Net loss

$

 

(3,384

)

 

$

 

(3,415

)

 

(Income) from discontinued operations

 

 

 

 

 

 

(2,098

)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

180

 

 

 

 

 

 

Stock-based compensation

 

 

1,757

 

 

 

 

182

 

 

Unrealized loss on investments at fair value

 

 

354

 

 

 

 

 

 

Other non-cash expense, net

 

 

55

 

 

 

 

 

 

Amortization of debt discount and issuance costs

 

 

 

 

 

 

2,232

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

Related party receivables, net

 

 

(894

)

 

 

 

 

 

Prepaid assets, deposits, and other assets

 

 

(407

)

 

 

 

(348

)

 

Accounts payable and accrued liabilities

 

 

389

 

 

 

 

737

 

 

Net cash used in operating activities - continuing operations

 

 

(1,950

)

 

 

 

(2,710

)

 

Net cash used in operating activities - discontinued operations

 

 

 

 

 

 

(7,716

)

 

Net cash used in operating activities

 

 

(1,950

)

 

 

 

(10,426

)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(13

)

 

 

 

 

 

Net cash used in investing activities

 

 

(13

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

Principal payment on related party note payable

 

 

 

 

 

 

(7,871

)

 

Net cash used in financing activities

 

 

 

 

 

 

(7,871

)

 

 

 

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(1,963

)

 

 

 

(18,297

)

 

Cash and cash equivalents at beginning of period

 

 

45,894

 

 

 

 

80,711

 

 

Cash and cash equivalents at end of period

$

 

43,931

 

 

$

 

62,414

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for income taxes

$

 

 

 

$

 

 

 

Cash paid for interest

$

 

 

 

$

 

1,222

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

Warrant liability settled with common stock issuance

$

 

194

 

 

$

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


5


 

Great Elm Capital Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2017

Dollar amounts in thousands

1. Nature of Operations

Great Elm Capital Group, Inc. (the Company) is a holding company incorporated in Delaware.  The Company currently has two operating segments, investment management and corporate.  The Company is pursuing other business development opportunities, investment management and other industries.

On September 27, 2016, the Company’s wholly-owned SEC-registered investment advisor subsidiary Great Elm Capital Management, Inc., a Delaware corporation (GECM), became the investment manager of Great Elm Capital Corp., a publicly-traded business development company incorporated in Maryland (GECC).

 

2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes which are normally included in the Company’s Form 10-K. These financial statements reflect all adjustments (consisting of normal recurring items or items discussed herein) that management believes are necessary to fairly state results for the interim periods presented. Results of operations for interim periods are not necessarily indicative of annual results of operations.

The preparation of these financial statements in accordance with accounting principles generally accepted in the United States of America (US GAAP) requires the Company to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingent assets and liabilities.  On an on-going basis, the Company evaluates all of these estimates and assumptions. The most important of these estimates and assumptions relate to fair value measurements, compensation and benefits, asset impairment, the ability to realize deferred tax assets, the recognition and measurement of uncertain tax positions, allowance for doubtful accounts and contingencies. Although these and other estimates and assumptions are based on the best available information, actual results could be different from these estimates.

Principles of Consolidation

The Company consolidates the assets, liabilities, and operating results of its wholly-owned subsidiaries; majority-owned subsidiaries; and subsidiaries that it has control over.  The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, GECM; and its majority-owned subsidiary, GECC GP Corp. (GP Corp.).  All intercompany accounts and transactions have been eliminated in consolidation.

Non-controlling interests in the Company’s subsidiaries are reported as a component of equity, separate from the parent company’s equity. Results of operations attributable to the non-controlling interests are included in the Company’s consolidated statements of operations.

Segments

The Company has two segments, investment management and general corporate.  The Company’s chief operating decision maker regularly reviews each segment for purposes of allocating resources and assessing performance. 

Cash and Cash Equivalents

Cash and cash equivalents are comprised of cash and highly liquid investments with original maturities of 90 days or less at the date of purchase. Cash equivalents consist primarily of exchange traded money market funds. The Company is exposed to credit risk in the event of default by the financial institutions or the issuers of these investments to the extent the amounts on deposit or invested are in excess of amounts that are insured.

6


 

Revenue Recognition

The Company recognizes revenue on services at the time when services are performed, and the following conditions are met: persuasive evidence of an arrangement exists, the service is complete, the price is fixed and determinable, and collection of the proceeds is reasonably assured. If the conditions for revenue recognition are not met, the Company defers the revenue until all conditions are met.

The Company recognizes revenue from its investment management business at amounts that reflect the consideration to which it expects to be entitled in exchange for providing services to its customer.  Investment management revenue primarily consists of fees based on a percentage of assets under management; fees based on the performance of managed assets; and administrative fees; as follows:

Management Fees

The base management fee from GECC is calculated at an annual rate of 1.50% of GECC’s average adjusted gross assets, including assets purchased with borrowed funds. The base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of GECC’s gross assets, excluding cash and cash equivalents, at the end of the two most recently completed calendar quarters, and appropriately adjusted for any share issuances or repurchases during the then current calendar quarter. Base management fees for any partial quarter are prorated.

Incentive Fees

The incentive fee from GECC consists of two components, an investment income component and a capital gains component. Under the investment income component, on a quarterly basis, GECC will pay the Company 20% of the amount by which GECC’s pre-incentive fee net investment income (the Pre-Incentive Fee Net Investment Income) for the quarter exceeds a hurdle rate of 1.75%, subject to catch-up provision, of GECC’s net assets at the end of the immediately preceding calendar quarter. This calculation will be appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the then current quarter.

Under the capital gains component of the incentive fee, GECC is obligated to pay the Company, at the end of each calendar year, 20% of the aggregate cumulative realized capital gains from November 4, 2016 through the end of the of such calendar year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized depreciation through the end of such calendar year, less the aggregate amount of any previously paid capital gains incentive fees.

Incentive fees are recorded based upon an assumed liquidation of GECC’s net assets on the reporting date and the distribution of the net proceeds in accordance with GECC’s income allocation provisions.   Incentive fees recorded may be subject to reversal to the extent the amount recorded exceeds the amount due to the Company based on negative investment performance after the reporting date.   Accrued but unpaid incentive fees and deferred incentive fees as of the reporting date are recorded in related party investment management fees receivable in the accompanying consolidated balance sheet. Incentive fees realized and collected are not subject to reversal.  As of September 30, 2017 and June 30, 2017, approximately $2.9 million and $1.7 million, respectively, of incentive fees recognized in revenue were subject to reversal.  

Investment Management Expenses

The Company classifies all direct expenses of its investment management segment including: payroll, stock-compensation, and related taxes and benefits; facilities costs; and professional fees; in investment management expenses in the accompanying consolidated statements of operations.  The Company has a three-year contractual consulting arrangement with a third party to provide services in exchange for 26% of the base management fee paid by GECC.

7


 

Use of Estimates

In preparing financial statements in conformity with generally accepted accounting principles, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenditures during the reported periods. Actual results could differ materially from those estimates. Estimates may include those pertaining to valuation of identifiable intangible assets inclusive of estimated useful lives, debt discounts, lease liabilities, investment management incentive fees, and contingent assets and liabilities.

Concentration of Risk and Related Parties

The Company has placed substantially all of its cash with two well established financial institutions, and its cash equivalents consist primarily of an exchange traded money market fund with the same institution. The Company is exposed to credit risk related to the potential inability to access liquidity in the financial institution where its cash and cash equivalents are concentrated.

The Company’s net revenue and receivables from continuing operations for the periods presented were attributable to the management of one investment vehicle, GECC.  GECC is a related party based on the Company owning approximately 18% of the outstanding common stock of GECC with a cost basis of $30 million.

 

The Company’s outstanding debt, the GP Corp. Note, is held by MAST Capital Management LLC (MAST Capital).  Funds affiliated with MAST currently report ownership of approximately 8.1% of the outstanding shares of the Company.

Identifiable Intangible Assets

The Company amortizes its identifiable intangible assets over their estimated useful lives using a discounted cash flow attribution method.  The Company currently amortizes its identifiable intangible assets over a period of fifteen years.  The Company’s identifiable intangible assets relate to the investment management assets acquired during the year ended June 30, 2017.

Recently Issued Accounting Standards.

In May 2014, the FASB issued a new revenue recognition standard. The objective of the revenue standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The new revenue standard contains principles that an entity will apply to determine the measurement of revenue and the timing of revenue recognition. The core principles include:

 

1.

Identifying the contract(s) with a customer.

 

2.

Identifying the performance obligations in the contract.

 

3.

Determining the transaction price.

 

4.

Allocate the transaction price to the performance obligations in the contract.

 

5.

Recognize revenue when (or as) the entity satisfies a performance obligation.

 

The new standard permits for two alternative implementation methods, the use of either (1) full retrospective application to each prior reporting period presented or (2) modified retrospective application in which the cumulative effect of initially applying the revenue standard is recognized as an adjustment to the opening balance of retained earnings in the period of adoption. The Company plans to adopt the new standard in the first quarter of its 2019 fiscal year using the modified retrospective transition method.

 

The Company has evaluated the potential impacts of the new revenue recognition standard and has determined that the recognition of a portion of its investment management incentive fees may be deferred upon implementation.  The Company is continuing to evaluate the impact of this new guidance.

 

8


 

3. Investments, at Fair Value

The Company owns approximately 18% of the outstanding shares of GECC and values its ownership based on the NASDAQ-listed market price of GECC common stock (a Level 1 input in accordance with the US GAAP fair value hierarchy).

During the quarter ended September 30, 2017, the Company recorded an unrealized loss of $0.4 million on the value of its investment in GECC.  The Company did not have any investments for which it made a fair value election as of September 30, 2016 and GECC was a wholly-owned subsidiary of the Company until November 1, 2016.

4. Separation Agreement

As part of the entry into the investment management business in November 2016, the Company acquired assets, assumed liabilities; and entered into cost and profit sharing agreements and certain employment agreements with MAST Capital, a related party.  In consideration for the assets acquired, the Company’s majority-owned subsidiary, GP Corp. issued a senior secured note payable (GP Corp. Note) with a maximum amount due of approximately $10.8 million.  The amounts due under the secured note allowed for principal reductions in the event annual investment management expenses exceeded $1.4 million, after effect for cost allocations under the Cost Sharing Agreement. In addition, the Company issued MAST Capital a warrant to purchase 54,733 shares of common stock with an exercise price of $0.01 per share and estimated grant date fair value of $0.2 million.

In September 2017, the Company entered into a Separation Agreement with MAST Capital.  In accordance with the terms of the Separation Agreement, the GP Corp. Note was amended and restated in an aggregate principal amount of $3.3 million.  As consideration for the principal reduction of the GP Corp. Note, accumulated allowable cost off-sets under the GP Corp. Note were forgiven and the Company issued MAST Capital a warrant to purchase 420,000 shares of common stock with an exercise price based on the simple average of quoted market prices for the ten days preceding notice of exercise.  In conjunction with the reduction in the principal amount of the GP Corp. Note, the cost sharing agreement between MCM and GECM was cancelled.  Additionally, the warrant to purchase 54,733 shares of common stock was exchanged for 54,733 shares of common stock of the Company.

9


 

5. Related Party Transactions (not disclosed elsewhere)

 

The Company’s wholly-owned subsidiary, GECM, manages GECC’s investment portfolio.  The Company owns approximately 18% of the outstanding shares of GECC, and the Company’s Chief Executive Officer is also the Chief Executive Officer of GECC and Chief Investment Officer of GECM, in addition to being a member of the board of directors of the Company and GECC.  All of the Company’s investment management and administrative fee revenue for the periods presented was generated from the management and administration of GECC.

 

 

 

 

As of and for the three

 

 

 

 

months ended September 30,

 

 

 

 

2017

 

 

 

2016

 

Investment in GECC

 

 

 

 

 

 

 

 

 

 

Unrealized loss on investment in GECC

 

$

 

(354

)

 

$

 

 

GECC dividends and interest recorded for the period

 

$

 

491

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost Sharing with MAST

 

 

 

 

 

 

 

 

 

 

Non-reimbursable expenses paid

 

$

 

(278

)

 

$

 

 

Forfeiture of non-vested stock-based compensation

 

$

 

450

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Managing GECC

 

 

 

 

 

 

 

 

 

 

Investment management fees earned in the period

 

$

 

1,442

 

 

$

 

 

GECC administration expenses earned in the period

 

$

 

327

 

 

$

 

 

GECC administration expenses incurred in the period

 

$

 

(327

)

 

 

 

 

 

Net receivable due from GECC at the end of the period

 

$

 

4,709

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit Sharing with GP Corp.

 

 

 

 

 

 

 

 

 

 

GP Corp. Note balance at the end of the period

 

$

 

3,300

 

 

$

 

 

Interest expense incurred in the period

 

$

 

(98

)

 

$

 

 

Principal payments made on GP Corp. Note in the period

 

$

 

 

 

$

 

 

GECM net income contributed to GP Corp. in the period

 

$

 

 

 

$

 

 

    

6. Stockholders’ Equity 

Stock Compensation

Performance Shares (Restricted Stock Awards)

During the three months ended September 30, 2017, the Company granted 57,416 restricted stock awards that carry both performance and service conditions to vest with an estimated grant date fair value of approximately $0.2 million.  As of September 30, 2017, the Company has 859,302 restricted stock awards that carry both performance and service conditions to vest.  The awards vest over a five-year service period, with the first twenty percent of the award vesting on the first anniversary of the grant, and the remaining award vesting at a rate of five percent per quarter during the four-year period from November 3, 2017 through November 3, 2021.  In addition, the restricted stock awards are subject to pro-rated forfeiture based on the collection of cumulative fees under the Investment Management Agreement (the IMA) of at least $40 million for the five-year period ended November 3, 2021.

The Company estimates the performance condition is probable of being achieved.  The Company accounts for forfeitures of the restricted stock awards in the period incurred.  During the three months ended September 30, 2017, 256,808 restricted stock awards were forfeited.  All previously recognized compensation cost associated with the forfeiture during the period, totaling $0.5 million, was reversed.

Additionally, in September 2017, the Company modified the restricted stock awards to include a provision for changes in control.  This modification did not result in the recognition of an additional compensation cost.

For the three months ended September 30, 2017, the Company recognized compensation cost totaling $0.1 million associated with the performance based awards.  The Company did not have any awards outstanding as of September 30, 2016.

10


 

The following table illustrates the Company’s restricted stock award activity as of and through September 30, 2017 (in thousands, except per share amounts):

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

Restricted

 

 

Grant Date

 

 

Restricted Stock Awards and Units

 

 

Stock

 

 

Fair Value

 

 

Outstanding at June 30, 2017

 

 

 

1,147

 

 

$

 

3.88

 

 

Granted

 

 

 

57

 

 

 

 

3.55

 

 

Vested

 

 

 

(43

)

 

 

 

3.46

 

 

Forfeited

 

 

 

(257

)

 

 

 

3.95

 

 

Outstanding at September 30, 2017

 

 

 

904

 

 

$

 

3.86

 

 

 

 

Stock Options

During the three months ended September 30, 2017, the Company issued 2,023,187 stock options with an estimated grant date fair value of $3.9 million.  The Company utilizes a Black-Scholes option pricing model to estimate the fair value of its option awards.  The assumptions used to value the stock options granted during the quarter ended September 30, 2017 consisted of:  expected volatilities between 63.0 to 63.8%; no expected dividend yields; risk-free rates between 1.5 and 1.95%; and expected terms between 3 and 6.5 years.  

The following table illustrates the Company’s option award activity as of and through September 30, 2017 (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Remaining

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

Contractual

 

 

 

Aggregate

 

 

Options

 

 

Options

 

 

Exercise Price

 

 

 

Term (years)

 

 

 

Intrinsic Value

 

 

Outstanding at June 30, 2017

 

 

 

722

 

 

$

 

7.46

 

 

 

 

 

 

 

 

 

 

 

 

Options granted

 

 

 

2,023

 

 

 

 

3.59

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited, cancelled or expired

 

 

 

(87

)

 

 

 

10.40

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2017

 

 

 

2,658

 

 

$

 

4.42

 

 

 

 

8.02

 

 

$

 

60

 

 

Exercisable at September 30, 2017

 

 

 

535

 

 

 

 

7.77

 

 

 

 

7.24

 

 

 

 

19

 

 

Vested and expected to vest as of September 30, 2017

 

 

 

2,658

 

 

$

 

4.42

 

 

 

 

8.02

 

 

$

 

60

 

 

 

 

During the three months ended September 30, 2017 and 2016, the Company recognized total stock based compensation associated with all restricted stock and stock options of $1.8 million and $0.2 million, respectively.  As of September 30, 2017, unrecognized compensation costs associated with outstanding stock and stock-linked awards totaled approximately $6.1 million.

 

GP Corp. Stock - Non-Controlling Interest

In September 2017, the Company eliminated the vesting provisions and removed the call rights for the GP Corp. stock owned by employees of the Company.  As a result of the elimination, we recognized stock-based compensation expense of $1.5 million in the quarter ended September 30, 2017, equal to the estimated fair value of the non-controlling interest held by our employees in GP Corp.

 

Other Equity Transactions

Warrants

 

During the three months ended September 30, 2017, the Company issued 1,686,000 warrants to purchase shares of common stock with an estimated grant date fair value of $0.05 million.  The exercise price of the warrants is variable and based on the simple average of quoted market prices for the ten days preceding notice of exercise.  The Company utilized a Monte-Carlo simulation model to estimate the fair value of its equity-classified warrant issuances during the three months ended September 30, 2017.    

11


 

The following table illustrates the Company’s warrant activity as of and through September 30, 2017 (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Remaining

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

Contractual

 

 

 

Aggregate

 

 

Warrants

 

 

Shares

 

 

Exercise Price

 

 

 

Term (years)

 

 

 

Intrinsic Value

 

 

Outstanding at June 30, 2017

 

 

 

55

 

 

$

 

0.01

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

 

1,686

 

 

 

 

3.60

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited, cancelled or expired

 

 

 

(55

)

 

 

 

0.01

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2017

 

 

 

1,686

 

 

$

 

3.60

 

 

 

 

1.21

 

 

$

 

54

 

 

Exercisable and vested at September 30, 2017

 

 

 

1,686

 

 

$

 

3.60

 

 

 

 

1.21

 

 

$

 

54

 

 

 

 

 

The Company had 54,733 warrants classified as a liability and valued, on a recurring basis, using a Black-Scholes-Merton option pricing model and Level 3 inputs within the fair value hierarchy.  In September 2017, the Company cancelled 54,733 liability-classified warrants in exchange for 54,733 shares of common stock.  The following table sets forth a summary of the changes in the fair value of the Company’s warrant liability that was measured at fair value on a recurring basis (in thousands):

 

 

 

September 30, 2017

 

 

June 30, 2017

 

Beginning of period

 

$

 

186

 

 

$

 

 

Aggregate fair value of warrant issued

 

 

 

 

 

 

 

216

 

Re-measurement of warrant liability loss (gain)

 

 

 

8

 

 

 

 

(30

)

Settlement

 

 

 

(194

)

 

 

 

 

End of period

 

$

 

 

 

$

 

186

 

 

7. Operating Leases

The Company entered into a lease for office space located in Waltham, MA. On the commencement date of the lease, the non-cancellable term was for eighty-eight months from the occupancy date of June 1, 2017 and contains an option to extend for an additional sixty-month period. 

The lease payments commence on October 1, 2017, four months after the Company began to occupy the space.  On an annual basis, the lease payments increase at an average rate of approximately 2.4% from $28 to $32 thousand per month.

As of September 30, 2017, the Company had a remaining right of use asset and lease liability of approximately $1.7 million related to its current office space.

As of September 30, 2017, the Company has remaining obligations under an operating lease for its former office totaling $0.5 million, payable not later than December 31, 2017.

8. Segment Information

The Company’s chief operating decision maker allocates resources based on two operating segments: investment management and general corporate.  

The Company’s investment management business is based on the management of GECC, a related party.  Prior to the acquisition of the investment management business in November 2016, the Company viewed all of its operations as a single integrated business.

12


 

The following table illustrates the segment information (in thousands):

 

 

 

For the Three Months Ended September 30, 2017

 

 

For the Three Months Ended September 30, 2016

 

 

 

Investment Management

 

 

General Corporate

 

 

Total

 

 

Investment Management

 

 

General Corporate

 

 

Total

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

 

1,769

 

 

$

 

 

 

$

 

1,769

 

 

$

 

 

 

$

 

 

 

$