Wright Investors Service Holdings, Inc. - Quarter Report: 2018 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

Commission File Number: 000-50587

WRIGHT INVESTORS’ SERVICE HOLDINGS, INC.

(Exact Name of Registrant as Specified in its Charter)

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 every Interactive Data File required to be submitted 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 such files). Yes  ☒      No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 November 1, 2018, there were 19,647,243 shares of the registrant’s common stock, $0.01 par value, outstanding.

WRIGHT INVESTORS’ SERVICE HOLDINGS, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to consolidated financial statements

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed  consolidated financial statements.

WRIGHT INVESTORS’ SERVICE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Three and nine months ended September 30, 2018 and 2017

(unaudited)

  Basis of presentation

 The accompanying interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.  The information and note disclosures normally included in complete financial statements have been condensed or omitted pursuant to such rules and regulations.  The Condensed Consolidated Balance Sheet as of December 31, 2017 has been derived from audited financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2017 as presented in our Annual Report on Form 10-K. In the opinion of management, this interim information includes all material adjustments, which are of a normal and recurring nature, necessary for a fair presentation. The results for the 2018 interim period are not necessarily indicative of results to be expected for the entire year.

On April 11, 2018, Wright Investors’ Service Holdings, Inc. a Delaware corporation (“the Company), Khandwala Capital Management, Inc., a Connecticut corporation (“Purchaser”), and Amit S. Khandwala (“ASK”) entered into a Stock Purchase Agreement (the “Agreement”).  Pursuant to the Agreement, upon the terms and subject to the satisfaction or waiver of the conditions therein, the Company sold (the “Sale”), all of the issued and outstanding stock (the “Stock”) of the Company’s wholly-owned subsidiary, The Winthrop Corporation (“Winthrop”). 

 Winthrop through the completion of the Sale was a wholly- owned subsidiary of the Company, and through its wholly-owned subsidiaries Wright Investors’ Service, Inc. (“Wright”), Wright Investors’ Service Distributors, Inc. (“WISDI”) and Wright’s wholly-owned subsidiary, Wright Private Asset Management, LLC (“WPAM”) (collectively, the “Wright Companies”), offers investment management services,  financial advisory services and investment research to large and small investors, both taxable and tax exempt.  WISDI is a registered broker dealer with the Financial Industry Regulatory Authority, Inc. (“FINRA”) and the Securities and Exchange Commission.

The Company’s board of directors, as well as the stockholders of the Company approved the Agreement and the Sale.  The Agreement provides, among other things, a detailed description of the conditions to the completion of the Sale, termination provisions, representations and warranties and covenants made by the Company, ASK and Purchaser, indemnity provisions, and liquidated damages related to certain termination provisions of the Agreement.

The Sale was approved by the Company’s stockholders on July 16, 2018 at the annual stockholders meeting, and the Sale was completed on July 17, 2018. The Company received $6,000,000 in cash as well as $173,000 from Winthrop for repayment of the intercompany balance between the Company and Winthrop on July 17, 2018. The Company recognized a gain of $1.2 million before transaction expenses in the three and nine months ended September 30, 2018. Included in the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2018, and included in Income from discontinued operation, are $209,000 and $552,000, respectively, of transaction costs related to the Agreement, which are comprised of legal and consulting costs.

Description of the business of the Company after the Sale

 Following the Sale, we will continue to be a public company. We also intend to evaluate and potentially explore all available strategic options. We will continue to work to maximize stockholder value. Such strategic options may include acquisition of an investment advisory business, acquisition of a financial services business, creating partnerships or joint ventures for those or other businesses and investing in other businesses that provide attractive opportunities for growth. The directors will also consider alternatives for distributing some or all of the proceeds of the Sale to stockholders. Until such time as a decision is made as to how the proceeds from the Sale and other liquid assets of the Company are so deployed, we intend to invest the proceeds of the Sale and our other liquid assets in high-grade, short-term investments (such as cash and cash equivalents) consistent with the preservation of principal, maintenance of liquidity and avoidance of speculation.

Immediately following consummation of the Sale, we have no or nominal operations. As a result, we believe that we are a “shell company”, as defined in Rule 405 of the Securities Act of 1933, as amended, or the Securities Act, and Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act. As a shell company, our stockholders will be unable to utilize Rule 144 of the Securities Act, or Rule 144 to sell “restricted stock” as defined in Rule 144 or otherwise use Rule 144 to sell stock of the Company, and we would be ineligible to utilize registration statements on Form S-3 or Form S-8 for so long as we remain a shell company and for 12 months thereafter. Among other things, as a consequence, the offering, issuance and sale of our securities is likely to be more expensive and time consuming and may make our securities less attractive to investors.

Although the Company is not engaged in the business of investing, reinvesting, or trading in securities, and the Company does not hold itself out as being engaged in those activities, following the closing of the Sale, the Company will likely be an “inadvertent investment company” under section 3(a)(1)(C) of the Investment Company Act. The Company will fall within the scope of section 3(a)(1)(C) if the value of its investment securities (as defined in the Investment Company Act) is proposed to be more than 40% of its total assets (exclusive of government securities and cash and certain cash equivalents) following the closing of the Sale.

The Company does not intend to be regulated as an investment company under the Investment Company Act and, therefore, will rely on certain SEC no-action letters and other SEC guidance, including the “transient investment company” Rule 3a-2 under the Investment Company Act. That rule provides a one-year grace period for companies that might otherwise be required to register as an investment company where the company has, as does the Company currently, a bona fide intent to be primarily engaged as soon as reasonably possible (but in any event, within one year), in a business other than that of investing, reinvesting, owning, holding or trading in securities.

Winthrop’s results of operations through July 16, 2018 are included in the Company’s results of operations for the three and nine months ended September 30, 2018 and have been accounted for as a discontinued operation in the accompanying Condensed Consolidated Statement of Operations. Its results of operations for the three and nine months ended September 30, 2018 have been reclassified as discontinued operations to be consistent with the current periods presentation. Assets and liabilities of Winthrop in the accompanying Condensed Consolidated Balance Sheets as of December 31, 2017 have been reclassified to present the assets and liabilities of Winthrop separately as held for sale.

At December 31, 2017 Winthrop’s assets and liabilities held for sale were as follows (in thousands):

For the three and nine months ended September 30, 2018 and 2017 the components of income from discontinued operation were as follows (in thousands):

 Income from discontinued operation for the three and nine months ended September 30, 2018 is as follows:

The Company reclassed $343,000 of Transaction costs recorded for the six months ended June 30, 2018 to Income (loss) from discontinued operation in the Condensed Consolidated Statement of Operations for nine month period ended September 30, 2018.

In May 2014, the FASB issued ASU 2014-09, Revenues from Contracts with Customers (Topic 606) (“ASU 2014-09”), as subsequently amended, that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most recent revenue recognition guidance, including industry-specific guidance.  The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  This standard is effective for public companies for years ending after December 15, 2017, with early adoption permitted.

The Company adopted the new standard on January 1, 2018, using the modified retrospective method, which provides for a cumulative effect adjustment in the amount of $157,000 to beginning 2018 accumulated deficit and to opening Accounts receivable for the revenue related to the recognition of financial research data and sub advisor fees. The revenue for the three and nine months ended September 30, 2018 if recorded under the previous accounting guidance, was not materially different from the revenue recognized upon the adoption of ASC 606 on January 1, 2018.

Winthrop provided three distinct services for which it recognized revenue:

Investment management services

Winthrop earns revenue primarily by charging fees based upon Assets Under Management (“AUM”). Its offerings include investment management solutions utilizing individual securities or mutual funds.

Winthrop charges a fee for its services based on the Agreement, this is computed on the basis of the cash and market value of property deposited in the account at the time the client's account is established. Revenue is recognized based on the market value of the assets under management at end of the preceding quarter at a pre-established rate, per contract.

Other investment advisory revenue as defined, is generated by fees from services provided to Bank Trust Departments is recognized in the same manner as the Investment management services. Under ASC 606, Winthrop’s revenue recognition for all of its investment management contracts remained materially consistent with historical practice.

As of September 30, 2018, as result of the Sale there were no Accounts receivables attributed to investment advisory contracts with customers. 

Financial research services:

Revenue from the sale of financial research information and related data is derived from the distribution of investment research directly and through several third parties who act as distributors of such research content. The distribution through third parties is Winthrop’s main source of revenue for financial research services. The fees paid by the end client are divided between Winthrop and the distributor, primarily Thomson Reuters.

Upon adoption of ASC 606, Winthrop has changed its revenue recognition policy from estimating fees to be collected from third party distributors to recognizing revenue upon collection of fees from third party distributors when data is known. This change in revenue recognition for financial research and related data resulted in adjustment of $135,000 recorded as an increase to opening Accumulated deficit and a decrease to opening Accounts receivable on January 1, 2018 for the revenue related to the last fiscal quarterly data that was not available as of the reporting date.

Sub-advisor Fee:

Winthrop provides investment services as a sub-advisor from the principal managers (primarily from three entities) and it is paid a quarterly fee by the corresponding principal manager’s. Upon adoption of ASC 606, the revenue recognition policy has been changed from Winthrop accruing revenue for this type of service on a monthly basis as reported by the sub advisor. This change in revenue recognition for sub-advisory fees resulted in Winthrop recording an adjustment to increase opening Accumulated deficit and a decrease to Accounts receivable in the amount of $22,000 on January 1, 2018.

Winthrop, through its subsidiaries, enters into formal, written agreements with its customers that have commercial substance and that meet the criteria to identify the contract based on the new revenue recognition guidance, inclusive of the identification of each party’s rights regarding the services to be transferred and payment terms for such services.

Performance Obligations are identified by determining whether they are:

The performance obligation relates to the investment management of the client’s account (service) which is an obligation capable of being and distinct within the context of the contract. This represents a single performance obligation that is continuously provided over the contract period.

The Company considers that recognizing revenue over time best represents the transfer of control to the customer for management investment activities. Winthrop considers that time elapsed (quarterly increments) to be the method that best represents the transfer of control to the customer for management investment activities.

For revenue related to internet and reselling subscriptions, the distinct performance obligation refers to the distribution of investment research directly and through several third parties who act as distributors of such research content.

Winthrop acts as an agent in this arrangement because it does not control (ASC 606-10-25-25 – ability to direct the use of, and obtain substantially of the remaining benefits from, the service) the specified service before it is transferred to a customer and such customer is a party to the executed service provider agreement and holds the rights to engage and direct the services of the third-party service provider. Per ASC 606-10-55-38, Winthrop would recognize revenue based on the net amount of consideration it expects to be entitled to for providing the service. As mentioned, since Winthrop cannot estimate the amount or the timing of when control is transferred to the customer’s and thus, it is not probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the number of customers that are using the research in a given period and revenue split for the given period is subsequently reported. As such, revenue will be recognized based on the revenue split for the sales activity received from the various entities.

The performance obligation relates to the investment management of the Investment Manager’s client’s account (service) which is an obligation capable of being and distinct within the context of the contract between Winthrop and the Investment Manager. This represents a single performance obligation that is continuously provided over the contract period.

Winthrop acts as an agent in this arrangement because it does not control (ASC 606-10-25-25 – ability to direct the use of, and obtain substantially of the remaining benefits from, the service) the specified service before it is transferred to a customer and such customer is a party to the executed service provider agreement and holds the rights to engage and direct the services of the client. Per ASC 606-10-55-38, Winthrop would recognize revenue based on the net amount of consideration it expects to be entitled to for providing the service. As mentioned, since Winthrop cannot estimate the revenue amount, it is not probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the Investment Manager’s client pays the fee (“IM Fee”) for the given period and such fee is subsequently reported to Winthrop. As such, revenue will be recognized based on the revenue split for the IM Fee reported by the Investment Manager.

Additionally, it should be noted that contracts between Winthrop and its customers do not include performance-based fees, and there were no costs capitalized attributable to obtaining new customer contracts.

The services provided by Winthrop are satisfied over time because the customer simultaneously receives and consumes the benefits provided by Winthrop as the services are being performed.

In March 2016, the FASB issued ASU 2016-09, “Compensation- Stock Compensation (Topic 718):  Improvements to Employee Share Based Payment Accounting.”  ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classifications in the statement of cash flows.  ASU 2016-09 is effective for the fiscal years beginning after December 15, 2016 and interim periods within those fiscal years.  During 2017, the Company has adopted ASU 2016-09 which did not have any impact in the Company’s financial statements.  In accordance with ASU 2016-09, the Company has made the accounting policy election to continue to estimate forfeitures based upon historical occurrences. The Company has adopted this standard on January 1, 2018, which did not have a material impact on the consolidated financial statements.

 In January 2016, the FASB issued Accounting Standards Update 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.  The ASU generally requires companies to measure investments in equity securities, except those accounted for under the equity method, at fair value and recognize any changes in fair value in net income. The new guidance must be applied using a modified-retrospective approach and is effective for periods beginning after December 15, 2017 and early adoption is not permitted.   The Company has adopted this standard on January 1, 2018, which did not have a material impact on the consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 708) Scope of Modification Accounting” which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Adoption of the Standard is required for annual and interim periods beginning after December 15, 2017 with the amendments in the update applied prospectively to an award modified on or after the adoption date. Early adoption is permitted. The Company has adopted this standard on January 1, 2018, which did not have a material impact on the consolidated financial statements.

 In February 2016, the FASB issued ASU 2016-02, leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840).  ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years.  Early application is permitted for all entities.  ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after the date of initial application, with an option to elect to use certain transaction relief.  The Company is currently assessing the impact that the adaption of ASU 2016-02 will have on its financial statements.

 In January 2017, FASB issued ASU 2017-04, “Intangibles- Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which eliminates the second step of the previous FASB guidance for testing goodwill for impairment and is intended to reduce cost and complexity of goodwill impairment testing.  The standard is effective for periods beginning after December 15, 2019 for both interim and annual periods.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  The Company is currently assessing the impact that the adoption of ASU 2017-04 will have on its financial statements.

Loss per share for the three months ended September 30, 2018 and 2017 respectively, is calculated based on 19,570,000 and 19,258,000 weighted average outstanding shares of common stock. Included in the share number are vested Restricted Stock Units (“RSUs”) of 11,701 and 145,303 for the three months ended September 30, 2018 and 2017, respectively.

Loss per share for the nine months ended September 30, 2018 and 2017 respectively, is calculated based on 19,475,000 and 19,197,000 weighted average outstanding shares of common stock. Included in the share number are vested RSUs of 98,367 and 131,970 for the nine months ended September 30, 2018 and 2017, respectively.

Options for 550,000 shares of common stock, for the three and nine months ended September 30, 2018 and 2017, and nonvested RSUs for 66,666 shares of common stock for the three and nine months ended September 30, 2017 were not included in the diluted computation as their effect would be anti-dilutive since the Company incurred net losses for the three months ended September 30, 2017 and the nine months ended September 30, 2018 and 2017. For the three months ended September 30, 2018, the exercise price of the options would be anti- dilutive since the exercise price was in excess of the average price of the Company’s common stock for the period.

The Company’s Board of Directors, without any vote or action by the holders of common stock, is authorized to issue preferred stock from time to time in one or more series and to determine the number of shares and to fix the powers, designations, preferences and relative, participating, optional or other special rights of any series of preferred stock.

The Board of Directors authorized the Company to repurchase up to 5,000,000 outstanding shares of common stock from time to time either in open market or privately negotiated transactions. At September 30, 2018, the Company had repurchased 2,041,971 shares of its common stock, and a total of 2,958,029 shares, remain available for repurchase at September 30, 2018.

During the nine months ended September 30, 2018, the Company issued 255,135 shares of Company common stock to the independent directors of the Company, in payment of their fourth quarter 2017, and first, second and third quarter 2018 quarterly directors fees.  The aggregate value of the shares of Company common stock issued was $110,000, or $27,500 for each period. The equity compensation awards were issued pursuant to the exemption from the registration requirements of Section 5 of the Securities Act of 1933 (“1933 Act”) provided by Section 4(a)(2) of the 1933 Act. 

Common stock options

The Company had initially adopted a stock-based compensation plan for employees and non-employee members of its Board of Directors in November 2003 (the “2003 Plan”), which was subsequently amended in March 2007 (the “2003 Plan Amendment”).  In December 2007, the Company adopted the National Patent Development Corporation 2007 Incentive Stock Plan (the “2007 NPDC Plan”).  The plans provided for up to 3,500,000 and 7,500,000 awards for shares under the 2003 Plan Amendment and 2007 NPDC Plan, respectively, in the form of discretionary grants of stock options, restricted stock shares, restricted stock units (RSUs) and other stock-based awards to employees, directors and outside service providers. The periods during which additional awards may be granted under the plans have expired and no further awards may be granted under any of these plans after December 20, 2017. As a consequence any equity compensation awards issued after that time will be on terms determined by the Board of Directors or the Compensation Committee of the Board of Directors and pursuant to exemptions from the registration requirements of the securities laws.

The Company recorded compensation expense of $100 and $300, respectively, for the three and nine months ended September 30, 2018 and 2017.

The Company issued 100,000 options to a consultant on March 28, 2016 under the 2007 NPDC Plan. The options issued on March 28, 2016 vest equally over 3 years and are subject to post vesting restrictions for sale for three years. The options were issued at an exercise price of $1.29 per share for the options issued on March 28, 2016, which price was equal to the market value at the date of the grant.   The grant-date fair value of the options was $0.50, which was estimated on the date of grant using the Black-Scholes option pricing model using the following assumptions:

The fair value of the options granted on March 28, 2016 were reduced by an 8% discount for post vesting restrictions.

As of September 30, 2018, the unrecognized compensation expense related to non-vested options was $200. 

The value of the options granted to the consultant are re-measured at each balance sheet date until performance is complete with the final measurement of fair value of the options made on the vesting dates.  The revised fair value is amortized over the remaining term of the option. 

As of September 30, 2018, there were outstanding options to acquire 550,000 common shares, 516,666 of which were vested and exercisable, having a weighted average exercise price of $1.35 per share, a weighted average contractual term of 2.25 years and zero aggregate intrinsic value. 

Restricted stock units

 Wright acts as an investment advisor, its subsidiary acts as a principal underwriter and one officer of Winthrop is also an officer for a family of mutual funds from which investment management and distribution fees are earned based on the net asset values of the respective funds.   Such fees, which are included in Income from discontinued operation in the Condensed Consolidated Statements of Operations (see Note 3), amounted to $0 and $81,000 for the three and nine months ended September 30, 2018, respectively, and $88,000 and $329,000 for the three and nine months ended September 30, 2017, respectively.

On April 2, 2018, the Boards of Trustees of The Wright Managed Equity Trust and The Wright Managed Income Trust (the “Trusts”) issued a press release announcing that they had voted to liquidate and terminate each of the Wright Selected Blue Chip Equities Fund (WSBEX), the Wright Major Blue Chip Equities Fund (WQCEX), the Wright International Blue Chip Equities Fund (WIBCX) and the Wright Current Income Fund (WCIFX) (the “Funds”) effective on or about April 30, 2018 (the “Liquidation Date”). Based upon a recommendation of the Funds’ investment adviser, Wright, the Boards approved the liquidation of the Funds. The Company does not believe the liquidation of the Funds will have a material adverse impact on its business operations, financial condition, or results of operations.

For the three and nine months ended September 30, 2018, the Company recorded income tax expense from continuing operations of $3,000 and $39,000, respectively. For the three and nine months ended September 30, 2017, the Company recorded income tax expense of $3,000 and $33,000, respectively.

Income tax expense represents minimum state taxes. No tax benefit has been recorded in relation to the pre-tax loss for the three and nine months ended September 30, 2018 and 2017, due to a full valuation allowance to offset any deferred tax asset related to net operating loss carry forwards attributable to the loss.

The sale of Winthrop on July 17, 2018, which resulted in a gain of approximately $1.2 million, had no impact on income tax expense. Due to differences in basis for tax purposes and financial reporting purposes, the sale is expected to result in a tax loss of approximately $2 million.

The Company maintains a 401(k) Savings Plan (the “Plan”), for full time employees who have completed at least one hour of service coincident with the first day of each month.  The Plan permits pre-tax contributions by participants and does not match the participant’s contributions.

Cautionary Statement Regarding Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward looking statements. Forward-looking statements are not statements of historical facts, but rather reflect our current expectations concerning future events and results. The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “could,” “project,” “predict,” “expect,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements.

Factors that may cause actual results to differ from those results expressed or implied, include, but are not limited to, those listed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 filed by the Company with the Securities and Exchange Commission (the “SEC”) on March 26, 2018 as well as the Company’s strategic options following the Sale and that the Company will become a ‘shell company” after the Sale, as defined in Rule 405 of the Securities Act of 1933, as amended, or the Securities Act and Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act..

These forward-looking statements generally relate to our plans, objectives and expectations for future events and include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts.  These statements are based upon our opinions and estimates as of the date they are made.  Although we believe that the expectations reflected in these forward-looking statements are reasonable, such forward-looking statements are subject to known and unknown risks and uncertainties that may be beyond our control, which could cause actual results, performance and achievements to differ materially from results, performance and achievements projected, expected, expressed or implied by the forward-looking statements.  While we cannot assess the future impact that any of these differences could have on our business, financial condition, results of operations and cash flows or the market price of shares of our common stock, the differences could be significant. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report and you are urged to consider all such risks and uncertainties. In light of the uncertainty inherent in such forward-looking statements, you should not consider their inclusion to be a representation that such forward-looking matters will be achieved.

Sale of The Winthrop Corporation

On April 11, 2018, the Board of Directors of the Company voted to enter into an Agreement providing for the Sale of Winthrop, to Khandwala Capital Management, Inc., a company principally owned and controlled by Amit S. Khandwala, the Co-Chief Executive Officer and Chief Investment Officer of Winthrop, prior to the Sale, for $6,000,000, subject to certain adjustments for intercompany accounts at closing. 

The Sale was approved by the Company’s stockholders on July 16, 2018 at the annual stockholders meeting, and the Sale was completed on July 17, 2018. The Company received $6,000,000 in cash as well as $173,000 from Winthrop for repayment of the intercompany balance between the Company and Winthrop on July 17, 2018. The Company will recognize a gain of $1.2 million before transaction expenses in the nine months ended September 30, 2018. Included in the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2018, and included in Income from discontinued operation, are $209,000 and $552,000, respectively, of transaction costs related to the Agreement, which are comprised of legal and consulting costs.

Winthrop through the completion of the Sale was a wholly- owned subsidiary of the Company and through its wholly-owned subsidiaries Wright Investors’ Service, Inc. (“Wright”), Wright Investors’ Service Distributors, Inc. (“WISDI”) and Wright’s wholly-owned subsidiary, Wright Private Asset Management, LLC (“WPAM”) (collectively, the “Wright Companies”), offers investment management services,  financial advisory services and investment research to large and small investors, both taxable and tax exempt.  WISDI is a registered broker dealer with the Financial Industry Regulatory Authority, Inc. (“FINRA”) and the Securities and Exchange Commission.

Winthrop’s results of operations through July 16, 2018 have been accounted for as a discontinued operation in the accompanying Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2018 and its results of operations for the three and nine months ended September 30, 2017 have been reclassified as discontinued operations to be consistent with the current periods presentation. Assets and liabilities of Winthrop have been reclassified as held for sale in the December 31, 2017 Condensed Consolidated Balance Sheet. See Note 3 to the Condensed Consolidated Financial Statements.

Description of the business of the Company after the Sale

 Following the sale of Winthrop, we will continue to be a public company. We also intend to evaluate and potentially explore all available strategic options. We will continue to work to maximize stockholder value. Such strategic options may include acquisition of an investment advisory business, acquisition of a financial services business, creating partnerships or joint ventures for those or other businesses and investing in other businesses that provide attractive opportunities for growth. The directors will also consider alternatives for distributing some or all of the proceeds to stockholders. Until such time as a decision is made as to how the proceeds from the Sale and other liquid assets of the Company are so deployed, we intend to invest the proceeds and our other liquid assets in high-grade, short-term investments (such as cash and cash equivalents) consistent with the preservation of principal, maintenance of liquidity and avoidance of speculation.

Immediately following consummation of the Sale, we will have no or nominal operations. As a result, we believe that at such time we will be a “shell company”, as defined in Rule 405 of the Securities Act of 1933, as amended, or the Securities Act, and Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act. If we become a shell company, our stockholders will be unable to utilize Rule 144 of the Securities Act, or Rule 144 to sell “restricted stock” as defined in Rule 144 or otherwise use Rule 144 to sell stock of the Company, and we would be ineligible to utilize registration statements on Form S-3 or Form S-8 for so long as we remain a shell company and for 12 months thereafter. Among other things, as a consequence, the offering, issuance and sale of our securities is likely to be more expensive and time consuming and may make our securities less attractive to investors.

Although the Company is not engaged in the business of investing, reinvesting, or trading in securities, and the Company does not hold itself out as being engaged in those activities, following the closing of the Sale, the Company will likely be an “inadvertent investment company” under section 3(a)(1)(C) of the Investment Company Act. The Company will fall within the scope of section 3(a)(1)(C) if the value of its investment securities (as defined in the Investment Company Act) is proposed to be more than 40% of its total assets (exclusive of government securities and cash and certain cash equivalents) following the closing of the sale.

The Company does not intend to be regulated as an investment company under the Investment Company Act and, therefore, will rely on certain SEC no-action letters and other SEC guidance, including the “transient investment company” Rule 3a-2 under the Investment Company Act. That rule provides a one year grace period for companies that might otherwise be required to register as an investment company where the company has, as does the Company currently, a bona fide intent to be primarily engaged as soon as reasonably possible (but in any event, within one year), in a business other than that of investing, reinvesting, owning, holding or trading in securities.

Results of Operations

Three months ended September 30, 2018 compared to the three months ended September 30, 2017

For the three months ended September 30, 2018, the Company had a loss from continuing operations before income taxes and discontinued operation of $484,000 compared to a loss from continuing operations before income taxes and discontinued operation of $387,000 for the three months ended September 30, 2017.   The increased loss of $97,000 was primarily the result of increased Compensation and benefits of $83,000, increased Other operating expenses of $28,000, partially offset by increased Investment and other income of $14,000.

Compensation and benefits

For the three months ended September 30, 2018, Compensation and benefits were $184,000 as compared to $101,000 for the three months ended September 30, 2017. The increased Compensation and benefits of $83,000 in 2018 was the result of increased compensation earned by the Company’s Chairman and Chief Executive Officer.  

Other operating expenses

For the three months ended September 30, 2018, Other operating expenses were $317,000 as compared to $289,000 for the three months ended September 30, 2017. The increased operating expenses of $28,000 were primarily the result of increased facility costs and increased professional fees related to the Company’s interests in land and flowage rights in undeveloped property in Killingly, Connecticut, partially offset by decreased travel and entertainment expenses and reduced professional fees.

Nine months ended September 30, 2018 compared to the nine months ended September 30, 2017

For the nine months ended September 30, 2018, the Company had a loss from continuing operations before income taxes and discontinued operation of $1,476,000 compared to a loss from continuing operations before income taxes and discontinued operation of $1,275,000 for the nine months ended September 30, 2017.   The increased loss of $201,000 was primarily the result of increased Compensation and benefits of $212,000, and increased Other operating expenses of $7,000, partially offset by increased Investment and other income, net of $18,000.

 Compensation and benefits

For the nine months ended September 30, 2018, Compensation and benefits were $556,000 as compared to $344,000 for the nine months ended September 30, 2017. The increased Compensation and benefits of $212,000 in 2018 was the result of increased compensation earned by the Company’s Chairman and Chief Executive Officer.  

Other operating expenses

For the nine months ended September 30, 2018, Other operating expenses were $944,000 as compared to $937,000 for the nine months ended September 30, 2017.  The increased operating expenses of $7,000 were primarily the result of by increased facility costs and increased professional fees related to the Company’s interests in land and flowage rights in undeveloped property in Killingly, Connecticut, partially offset by decreased travel and entertainment expenses and reduced professional fees.

Income taxes

 For the three and nine months ended September 30, 2018, the Company recorded income tax expense from continuing operations of $3,000 and $39,000, respectively. For the three and nine months ended September 30, 2017, the Company recorded income tax expense of $3,000 and $33,000, respectively. Such amounts represent minimum state taxes. No tax benefit has been recorded in relation to the pre-tax loss for the three and nine months ended September 30, 2018 and 2017, due to a full valuation allowance to offset any deferred tax asset related to net operating loss carry forwards attributable to the loss.

The sale of Winthrop on July 17, 2018, which resulted in a gain of approximately $1.2 million, had no impact on income tax expense. Due to differences in basis for tax purposes and financial reporting purposes, the sale is expected to result in a tax loss of approximately $2 million. 

 Other Assets

The Company owns certain non-strategic assets, including interests in land and flowage rights in undeveloped property in Killingly, Connecticut.

The Company monitors these investments for impairment by considering current factors, including the economic environment, market conditions, and other specific factors and records impairments in carrying values when necessary.

Financial condition

Liquidity and Capital Resources

At September 30, 2018, the Company had cash and cash equivalents totaling $9,840,000. The Company received $6,000,000 from Winthrop in cash as well as $173,000 for repayment of the intercompany balance between the Company and Winthrop on July 17, 2018 as a result of the Sale (see Note 2 to the Condensed Consolidated Financial Statements).

The increase in cash and cash equivalents from continuing operations of $4,239,000 for the nine months ended September 30, 2018 was the result of $5,448,000 provided by investing activities offset by $1,209,000 used in operations.

Not required.

The Company’s principal executive officer and principal financial officer, with the assistance of other members of the Company’s management, have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon such evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.

The Company’s principal executive officer and principal financial officer have also concluded that there was no change in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Issuances of Equity Securities

On July 30, 2018, the Company issued without registration under the Securities Act of 1933, as amended (the “Securities Act”), shares of Company common stock to Lawrence G. Schafran, Marshall S. Geller, and Richard C. Pfenniger Jr. directors of the Company, in payment of their second quarter 2018 and third quarter 2018 quarterly directors’ fees. Mr. Schafran, Mr. Geller and Mr. Pfenniger received 46,131, 43,247 and 36,482 shares of Company common stock, respectively.  The aggregate value of the shares of Company common stock issued to Mr. Schafran Mr. Geller and Mr. Pfenniger was approximately $20,000, $18,750 and $16,250, respectively, on the date of issuance.  These shares were issued pursuant to exemptions from registration set forth in Section 4(2) of the Securities Act and Regulation D promulgated thereunder.

This issuance qualified for exemption from registration under the Securities Act because (i) Mr. Schafran, Mr. Geller and Mr. Pfenniger are each an accredited investor, (ii) the Company did not engage in any general solicitation or advertising in connection with the issuance, and (iii) Mr. Schafran, Mr. Geller and Mr. Pfenniger received restricted securities.

Purchases of Equity Securities

On December 15, 2006, the Board of Directors authorized the Company to repurchase up to 2,000,000 shares, or approximately 11%, of its outstanding shares of common stock from time to time either in open market or privately negotiated transactions. On August 13, 2008, the Company’s Board of Directors authorized an increase of 2,000,000 common shares to be repurchased, and on March 29, 2011 the Company’s Board of Directors authorized an increase of an additional 1,000,000 shares to be repurchased. At September 30, 2018, the Company had repurchased 2,041,971 shares of its common stock and, a total of 2,958,029 shares remain available for repurchase.   The Company has not repurchased any shares of its common stock during the quarter ended September 30, 2018.

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 *Filed herewith

**Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized.

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