Unwired Planet Inc (UPIP) SEC Quarterly Report (10-Q) for Q1 2018

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March, 31, 2018

or

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)

(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.

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 May 14, 2018, there were 25,467,732 shares of the registrant's common stock outstanding.

Table of Contents

Unless the context otherwise requires, "we", "us", "our", "GEC", the "Company" 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.

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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," "could", "continue", 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 risks and uncertainties, some of which are beyond our control, including, without limitation:

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.

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PART I-FINANCI AL INFORMATION

Item 1. Financial Statements.

Great Elm Capital Group, Inc.

C ondensed Consolidated Balance Sheets (Unaudited)

Dollar amounts in thousands (except per share data)

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

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Great Elm Capital Group, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

Dollar amounts in thousands (except per share data)

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

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Great Elm Capital Group, Inc.

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

Dollar amounts in thousands

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

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Great Elm Capital Group, Inc.

Condensed Consolidated Statements of Cash Flow (Unaudited)

Dollar amounts in thousands

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

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Great Elm Capital Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2018

1. Nature of Operations

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

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.

Use of Estimates

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, and the ability to realize deferred tax assets. 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 in which we hold a controlling financial interest as of the financial statement date. In most cases, a controlling financial interest reflects ownership of a majority of the voting interests. We consolidate a variable interest entity ( VIE ) when we possess both the power to direct the activities of the VIE that most significantly impact its economic performance and we are either obligated to absorb the losses that could potentially be significant to the VIE or we hold the right to receive benefits from the VIE that could potentially be significant to the VIE.  The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Great Elm Capital Management, Inc. ( GECM ) and Great Elm FM Acquisition Inc.; and its majority-owned subsidiaries, Great Elm FM Holdings, Inc., GECC GP Corp. ( GP Corp .), and CRIC IT Fort Myers LLC.  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 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 three segments: investment management, real estate, and general corporate.  The Company regularly reviews each segment for purposes of allocating resources and assessing performance.

C ash, Cash Equivalents, and Restricted Cash

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 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.

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The Company's restricted cash consists of rental income received in advance and a portion of prior period rental income that is reserved for capital and certain operating expenses in connection with the Company's real estate assets.

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.

Investment Management Revenue

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

Under GECC's investment management agreement with GECM, the base management fee from GECC is calculated at an annual rate of 1.50% of GECC's average adjusted gross assets. 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.

Incentive Fees  

Incentive fees earned from GECC and the separate accounts managed by GECM are recognized based on investment performance during the period, subject to the achievement of minimum return levels or high-water marks, in accordance with the terms of the respective investment management agreements.  Incentive fees range from 5.0% to 20.0%.

Incentive fees are recorded based upon an assumed liquidation of net assets on the reporting date and the distribution of the net proceeds in accordance with the respective investment management agreements.   Incentive fees recorded may be subject to reversal to the extent the amount recorded exceeds the amount due to GECM based on negative investment performance after the reporting date.   Accrued but unpaid incentive fees and deferred incentive fees due from GECC 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 March 31, 2018 and June 30, 2017, approximately $2.0 million and $1.7 million, respectively, of incentive fees recognized in revenue were subject to reversal.  In March 2018, the Company reversed approximately $2.1 million of incentive fees earned by GECM under the investment management agreement and recognized in revenue in prior periods. Generally speaking, GECM earns 20% of GECC's pre incentive fee net investment income ( NII ) in excess of a 7% hurdle under its investment management agreement with GECC.  Payment of this fee is also subject to a total return hurdle as set forth in the investment management agreement.  To the extent that any of such NII is composed of non-cash income, then payment of the incentive fees owed to GECM in respect of such NII is deferred until received by GECC in cash.   GECC's largest investment, Avanti Communications Group plc (Avanti), has generated significant non-cash income in the form of payment-in-kind (PIK) interest.  In connection with the recent restructuring of Avanti completed on April 26, 2018, GECC's investment in Avanti's third lien notes was converted into Avanti common equity.  As a result of this debt-for-equity conversion, we have determined that the accrued incentives fees associated with the portion of such PIK interest generated by the third lien notes cannot at this time be recognized in revenue and must be reversed for prior periods.  Notwithstanding this reversal, such incentives fees remain payable under the investment management agreement (subject to achievement of return hurdles) and will be recognized in revenue to the extent a hypothetical sale of the new common  equity at the market price would result in gross proceeds to GECC in excess of its initial cost basis in the third lien notes.  We can make no assurances that such incentive fees will ultimately be recognized in revenue or as to the timing of any such recognition.

Real Estate Revenue

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Rental income from operating leases is recognized on a straight-line basis, based on contractual lease terms with fixed and determinable increases over the non-cancellable term of the related lease when collectability is reasonably assured.  Under the terms of the lease, the Company may recover from the tenant certain expenses, including: real estate taxes, insur ance and other operating expenses.  The recovery of these expenses is recognized in rental income in the accompanying consolidated statements of operations, in the same periods as the expenses are incurred. These expenses recognized in both revenue and ex pense may fluctuate from period to period based on actual expense amounts.

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.  GECM 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.

Real Estate Expenses

The Company classifies all direct expenses of its real estate segment, including: real estate taxes, insurance, property management fees and other operating expenses in real estate expenses in the accompanying consolidated statements of operations.  Under the terms of the lease, the Company may recover from the tenant certain expenses including; real estate taxes, insurance and other operating expenses; the recovery of these expenses is recognized in rental income in the accompanying consolidated statements of operations, in the same periods as the expense are incurred.

Property, Equipment, and Real Estate Assets

The Company records property and equipment at historical cost and its real estate assets at the estimated fair value on the date of acquisition.  The Company recognizes depreciation in amounts sufficient to match the cost of depreciable assets to operations over their estimated service lives, lease length, or productive value.  The Company capitalizes expenditures for improvements that significantly extend the useful life of an asset.  The Company charges expenditures for maintenance and repairs to operations in the periods incurred. Depreciation is recognized using the straight-line method over their estimated useful lives as follows:

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 money market funds with the same institutions. 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 investment 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.

The Company's rental revenue from continuing operations is derived from one tenant.

A portion of the Company's outstanding debt, the GP Corp. Note, is held by MAST Capital Management LLC (MAST Capital ).  Funds affiliated with MAST Capital reported ownership of approximately 7.9% of the outstanding shares of the Company as of March 31, 2018.

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Identifiable Intangible Assets

The Company amortizes its identifiable intangible assets over their estimated useful lives using applicable discounted cash flow attribution and straight-line methods.  The Company currently amortizes its identifiable intangible assets over periods ranging from twelve to fifteen years.

Reclassifications

The Company reclassified the prior period presentation by increasing its administrative fee income and expense by $0.4 million and $0.4 million, respectively, for the three and nine months ended March 31, 2017, to conform to the current period presentation adopted for the consolidated statement of operations for the year ended June 30, 2017 and the current periods. These reclassifications did not have an impact on the Company's previously presented net results of operations.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board ( FASB ) issued a new revenue recognition standard. In August 2015, the FASB issued new guidance deferring the effective date of the new revenue recognition standard by one year. The new guidance should be applied for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. 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:

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 are to be deferred upon implementation.  As of March 31, 2018, the Company preliminarily estimated approximately $0.4 million of the total incentive fees receivable that if not collected prior to the first quarter of its 2019 fiscal year, will be retroactively adjusted upon adoption of the new revenue standard.  The Company is continuing to evaluate the new guidance for any other impacts adoption may have on the Company's consolidated financial position, results of operations, and cash flows.

In January 2016, the FASB issued amended guidance on the classification and measurement of financial instruments. The new guidance will impact the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified the need for a valuation allowance on deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new guidance should be applied for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period using a modified retrospective application to all outstanding instruments, with a cumulative effect adjustment recorded to opening retained earnings as of the beginning of the first period in which the guidance becomes effective. However, changes to the accounting for equity securities without a readily determinable fair value will be applied prospectively. Early application is permitted. This amended guidance is not expected to have a material impact on the Company's financial statements.

In November 2016, the FASB issued amended guidance on classification and presentation of restricted cash on the statement of cash flows. Under the new guidance, reporting entities are required to explain the changes in the combined total of restricted and unrestricted balances in the statement of cash flows. Therefore, amounts generally described as

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restricted cash or restricted cash equivalents (hereinafter referred to as "restricted cash") should be combined with unrestricted cash and cash equivalents whe n reconciling the beginning and end of period balances on the statement of cash flows. Reporting entities will also be required to disclose how the statement of cash flows reconciles to the balance sheet in any situation in which the balance sheet includes more than one line item of cash, cash equivalents, and restricted cash. The new guidance should be applied for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period using a retrospective transit ion method to each period presented. Early application is permitted. The Company began to apply this guidance in March 2018.

3. Investments, at Fair Value

The Company owns approximately 18% (or 1,966,667 shares) 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 three and nine months ended March 31, 2018, the Company recorded an unrealized loss of $1.2 million and $2.8 million, respectively, on the fair value of its investment in GECC. For the three and nine months ended March 31, 2017, the Company recognized a net unrealized loss on its investment in GECC of $0.6 million and $7.6 million, respectively.

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 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 an original maximum amount due of approximately $10.8 million.  The note allowed for offsets equal to the amount of the annual investment management expenses in excess of $1.4 million, after applying cost allocations under GECM's cost sharing agreement with MAST Capital ( Cost Sharing Agreement ). In addition, the Company issued MAST Capital a warrant ( MAST Warrant ) to purchase 54,733 shares of Company common stock with an exercise price of $0.01 per share and an estimated grant date fair value of $0.2 million.

In September 2017, the Company entered into a Separation Agreement with MAST Capital.  The Separation Agreement, contemplated, among other things, an amendment of the GP Corp. Note to be in an aggregate principal amount of $3.3 million, the issuance of a warrant to MAST Capital to purchase 420,000 shares of common stock with an exercise price based on the average of the quoted market prices for the ten days preceding notice of exercise, the termination of the Cost Sharing Agreement, and the exchange of the MAST Warrant for 54,733 shares of common stock of the Company.

5. Real Estate Asset Acquisition

In March 2018, through its majority-owned subsidiary, Great Elm FM Holdings, the Company acquired an 80.1% interest in CRIC IT Fort Myers LLC ( Property Owner ) and a 19.9% interest was issued to the prior owner.  The Property Owner owns a fee simple interest in two Class A office buildings, Gartner I and Gartner II, situated on 17 acres of land in Fort Myers, FL (collectively, Property ).  The Property Owner's business activities are limited to the leases associated with the Property and under the terms of its borrowing arrangements the Property Owner has significant limitations on its business operations that essentially limit its activities to holding and leasing the Property.  

To acquire its interest in the Property Owner, the Company paid a cash purchase price of approximately $2.7 million, incurred transaction costs of approximately $0.3 million, and issued a 19.9% non-controlling interest in the Property Owner valued at $0.7 million.  The transaction was an asset acquisition as substantially all of the value of the acquired assets related to the Property.  The Property Owner had two notes issued with a fair value of approximately $58 million.  See Note 11 – Borrowings.

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The following table summarizes the acquisition cost and the allocation to the assets acquired and liabilities assumed based on the relative fair values on the date of acquisition (in thousands):

The assigned values were based on the relative fair value of the net acquired assets. The valuation of the Property considered both an income and cost approach to determine the fair value of the buildings, leasehold improvements, land, and site improvements. The value of the in-place lease intangible was based on an income approach that considered the value of the lease to the Company. These valuations included significant non observable inputs to the valuation model and therefore were level 3 fair value measurement in the fair value hierarchy.  The assumed debt obligations were valued using an income method considering market interest rates for similar instruments, which is a level 2 fair value measurement.  

In connection with the acquisition, the acquired tax basis differed from the assigned book basis and the simultaneous equation method was used to assign the value of the asset and the related deferred tax liability. The reduction of the valuation allowance of the Company of $0.2 million directly attributable to the transaction was recognized as a benefit to the income tax provision in the three months ended March 31, 2018.    

Lease Information

The Property is fully leased, on a triple net basis, to Gartner, Inc. ( Gartner ) until March 31, 2030, which may be extended in accordance with the terms of the lease.  The Gartner I lease contains two five-year extensions and the Gartner II lease contains three five-year extensions (the Leases ).  Under the terms of the Leases, the renewal rates are equal to 95% of the then fair market rent, and the tenant does not have a purchase option at the end of the lease term.  The lease requires Gartner to make a base monthly lease payment of approximately $0.4 million as calculated on a straight line basis over the remaining expected lease term plus additional rent payments for additional costs.  The Property is subject to mortgage, security agreement, and assignment of leases and rents with the senior and subordinated lenders, which is further described in Note 11. The Property Owner has assigned all rights, title, and interest in and to the Property and the Leases to the senior and subordinated lenders and all amounts received are paid to a trust which funds the operating costs associated with the Property. The Company does not have rights to these rent payments while the borrowings remain outstanding.

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The following table summarizes the base monthly rents for the remaining lease term (in thousands):

6. Fixed Assets

The Company's fixed assets consist of its revenue-producing real estate assets and furniture, fixtures, and leasehold improvements used in its corporate operations.  The following table details the Company's fixed assets (in thousands, except useful lives):

The Company recognized total depreciation expense of $0.08 million and $0.09 million for the three and nine months ended March 31, 2018, respectively.  The Company incurred immaterial depreciation expense for the three and nine months ended March 31, 2017.

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7. 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 chairman of the board of GECC.  The Company's President and Chief Operating Officer is also the Chief Operating Officer, Chief Compliance Officer and General Counsel of GECM and the Chief Compliance Officer of 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.

For the nine months ended March 31, 2018, the Company received cash proceeds totaling $4.6 million from the exercise of 1,266,000 warrants by a designee of Northern Right Capital.  Matthew A. Drapkin, a member of the Company's board of directors, is the Chief Executive Officer of Northern Right Capital.

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8. Stockholders' Equity

Stock Compensation

Performance Shares (Restricted Stock Awards)

During the nine months ended March 31, 2018, 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 March 31, 2018, the Company had 761,617 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 quarterly 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 GECC investment management agreement 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 nine months ended March 31, 2018, 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 all of the outstanding restricted stock awards to include a change in control acceleration event.  This modification did not result in the recognition of an additional compensation cost.

For the three and nine months ended March 31, 2018, the Company recognized compensation cost totaling $0.4 million and $0.8 million, respectively, associated with the performance-based awards.  For the three and nine-month periods ended March 31, 2017, the Company recognized compensation cost totaling $0.5 million and $0.8 million, respectively.

The following table summarizes the Company's restricted stock award activity as of and through March 31, 2018 (in thousands, except per share amounts):

Stock Options

During the nine months ended March 31, 2018, the Company issued 2,082,736 stock options with an estimated grant date fair value of $4.1 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 nine-months ended March 31, 2018 consisted of:  expected volatilities between 60.8 to 63.4%; no expected dividend yields; risk-free rates between 1.5 and 2.5%; and expected terms between 3 and 6.5 years.  

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The following table summarizes the Company's option award activity as of and through March 31, 2018 (in thousands, except per share amounts):

During the three months and nine months ended March 31, 2018, the Company recognized total stock-based compensation associated with all restricted stock and stock options of $0.9 million and $3.6 million, respectively. During the three months and nine months ended March 31, 2017, the Company recognized total stock based compensation associated with all restricted stock and stock options of $0.6 million and $1.3 million, respectively.

As of March 31, 2018, unrecognized compensation costs associated with outstanding stock and stock-linked awards totaled approximately $4.5 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, the Company recognized stock-based compensation expense of $1.5 million for the nine months ended March 31, 2018, equal to the estimated fair value of the non-controlling interest held by our employees in GP Corp.

Other Equity Transactions

Warrants

During the nine months ended March 31, 2018, the Company issued warrants to purchase 1,686,000 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 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.    

The following table illustrates the Company's warrant activity as of and through March 31, 2018 (in thousands, except per share amounts):

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During the nine months ended March 31, 2018, the Company received cash proceeds totaling $4.6 million from the exercise of 1,266,000 warrants by a designee of Northern Right Capital.  Matthew A. Drapkin, a member of the Company's board of directors, is the Chief Executive Officer of Northern Right Capital.

The Company had classified the MAST Warrant 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 exchanged the MAST Warrant 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):

9. Lessee 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 commenced 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 March 31, 2018, the Company had a remaining right lease liability of approximately $1.7 million related to its current office space.

10. Segment Information

The Company allocates resources based on three operating segments: investment management, real estate and general corporate.  Prior to the acquisition of the investment management business in November 2016, the Company viewed all of its operations as a single integrated business.

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