We have audited the accompanying consolidated balance sheet of Great Elm Capital Group, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of June 30, 2016, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the two years in the period ended June 30, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Great Elm Capital Group, Inc. and subsidiaries as of June 30, 2016, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 2016, in conformity with accounting principles generally accepted in the United States of America.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Great Elm Capital Group, Inc. (referred to as the
Company,
formerly Unwired Planet, Inc.) is a holding company incorporated in Delaware. The Company currently has two operating segments, investment management and corporate. The Company is pursuing other acquisition opportunities, within 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
), entered into an investment management agreement (the
IMA
) with Great Elm Capital Corp., a publicly-traded business development company incorporated in Maryland (
GECC
).
On November 3, 2016, Full Circle Capital Corporation merged with and into GECC (the
Merger
), and GECM hired the employees of MAST Capital Management, LLC, a Delaware limited liability company (
MAST Capital
), to manage the assets of GECC. Certain funds managed by MAST Capital own approximately 8.7% of the Company’s common stock. Through the Company’s 80.1% owned subsidiary, GECC GP Corp. (
GP Corp
), the Company acquired assets and assumed related liabilities (collectively, the Acquisition) associated with the on-going operations of GECM. Approximately 5% of the 19.9% non-controlling interest of GP Corp is owned by MAST Capital, and its affiliates and officers.
As of June 30, 2017, the Company owns approximately 17% of the outstanding shares of GECC with a cost basis of $30 million. The Company agreed with GECC that it would not transfer or dispose of its GECC shares until November 3, 2017.
Prior to the divestiture on June 30, 2016, as described in Note 3, the Company’s wholly-owned subsidiaries, Unwired Planet IP Holdings, Inc. and Unwired Planet IP Manager, LLC, were engaged in patent licensing with a portfolio of mobile technology patents and patent applications.
2.
|
Summary of Significant Accounting Policies
|
Basis of Presentation and 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, GP Corp. All intercompany accounts and transactions have been eliminated in consolidation.
Non-controlling interests
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 and consolidated statements of comprehensive income (loss).
Investment in GECC
On November 1, 2016, the Company deconsolidated its investment in GECC upon the Company no longer having a controlling financial interest in GECC. The Company determined that, by virtue of being GECC’s investment manager, the Company has significant influence over GECC. Upon deconsolidation, the Company elected to account for its approximately 17% investment in GECC at fair value.
In accordance with this election, unrealized gains and losses at each measurement date are recognized as a component of net loss in the accompanying consolidated statements of operations and dividends are recognized if, as and when declared by GECC’s board of directors
.
F-9
Discontinued Operations
On June 30, 2016, the Company completed the Purchase and Sale Agreement (as amended, the
PSA
) with Optis UP Holdings, LLC (
Optis
), pursuant to which Optis acquired all of the outstanding membership interests of the Company’s wholly-owned subsidiary, Unwired Planet, LLC (
UPLLC
), which owns all of the outstanding shares of Unwired Planet International Limited, an Irish company. Together, the disposed subsidiaries owned all of the Company’s patent assets.
As a result of the disposition of the Company’s intellectual property licensing business and underlying patent and patent applications, the Company has presented financial results for these businesses in discontinued operations. The divesture of the intellectual property licensing component consisted of all patent licensing expenses as previously presented in the accompanying consolidated statements of operations; certain general and administrative costs incurred by the disposed subsidiaries; and certain liabilities of the divested subsidiaries.
Use of Estimates
The preparation of consolidated financial statements in conformity with the accounting principles generally accepted in the United States of America (
GAAP
) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Segments
In November 2016, the Company changed its organizational structure in connection with the Acquisition. As a result, information that the Company’s chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance changed. As of June 30, 2017, the Company has two reporting segments: Investment Management; and General Corporate. The Company’s chief operating decision maker did not allocate resources or assess performance on a segmented basis prior to the formation of the investment management business within the fiscal year ended June 30, 2017.
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.
F-10
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% 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 June 30, 2017, approximately $1.7 million 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 consulting; in investment management expenses in the accompanying consolidated statements of operations. The Company has a three-year contractual arrangement with a third party to provide services in exchange for 26% of the fees earned from the management of GECC, excluding incentive fees.
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.
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 by the FDIC or SIPC.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, generally one to five years. Leasehold improvements are amortized over the shorter of the estimated useful lives of the assets or the lease term.
Long-lived Assets
Long-lived assets are recorded at cost and depreciated over their estimated useful lives. For purposes of determining whether there are any impairment losses, management evaluates the carrying value of the Company’s identifiable long-lived assets, including their useful lives, when indicators of impairment are present, considering whether the undiscounted lowest identifiable cash flows are sufficient to recover the carrying amount of the applicable asset or asset
F-11
group. If an impairment is indicated, the Company computes the impairment based on the fair value of the asset, as compared to the carrying value of
the asset, such a loss would be charged to expense in the period the impairment is identified. Furthermore, if the review of the carrying values of the long-lived assets indicates impairment of such assets, the Company may determine that shorter estimated
useful lives are more appropriate.
Stock-based Compensation
Stock-based compensation costs for eligible employees and directors are measured at fair value on the date of grant and are expensed over the requisite service period using a straight-line attribution method for the entire award that are subject to only service vesting conditions. Awards with both performance and service requirements are expensed using a graded attribution method over the requisite service periods.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary in order to reduce deferred tax assets to the amounts expected to be recovered.
The Company has provided a full valuation allowance against its deferred tax assets because the Company is unable to conclude that future utilization of a portion of its net operating loss carryforwards and other tax assets is more likely than not.
The calculation of the Company’s tax positions involves dealing with uncertainties in the application of complex tax regulations in several different state tax jurisdictions. The Company is periodically reviewed by tax authorities regarding the amount of taxes due. These reviews include inquiries regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. The Company records estimated reserves for exposures associated with positions that it takes on its income tax returns that do not meet the more likely than not standards.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss), unrealized gains (losses) on available for sale securities and foreign currency translation adjustments for subsidiaries whose functional currency is not United States dollars. Tax effects of comprehensive loss are not material to periods presented. The Company reports the components of comprehensive income (loss) on its Consolidated Statements of Comprehensive Income (Loss).
Concentration of Risk
The Company has placed substantially all of its cash with a single well established financial institution, 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 fiscal year ended June 30, 2017, were attributable to the management of one investment vehicle, GECC.
The Company has $30 million invested in shares of common stock of GECC.
F-12
Earnings (Loss) Per Share
The following table presents the calculation of basic and diluted earnings (loss) per share (in thousands except per share amounts):
|
|
Fiscal Year Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Loss from continuing operations
|
|
$
|
(17,440
|
)
|
|
$
|
(9,440
|
)
|
|
$
|
(12,196
|
)
|
Income (loss) from discontinued operations, net of tax
|
|
|
2,203
|
|
|
|
18,862
|
|
|
|
(29,563
|
)
|
Net income (loss)
|
|
$
|
(15,237
|
)
|
|
$
|
9,422
|
|
|
$
|
(41,759
|
)
|
Less: net loss attributable to non-controlling
interest
|
|
|
(30
|
)
|
|
|
—
|
|
|
|
—
|
|
Net income (loss) attributable to Great Elm
Capital Group
|
|
$
|
(15,207
|
)
|
|
$
|
9,422
|
|
|
$
|
(41,759
|
)
|
Weighted average shares basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock
outstanding
|
|
|
16,433
|
|
|
|
9,412
|
|
|
|
9,333
|
|
Weighted average shares of restricted stock subject
to repurchase
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
Weighted average shares used in computing
earnings (loss) per share
|
|
|
16,433
|
|
|
|
9,412
|
|
|
|
9,332
|
|
Basic and diluted earnings (loss) per share from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(1.06
|
)
|
|
$
|
(1.00
|
)
|
|
$
|
(1.31
|
)
|
Income (loss) from discontinued operations
|
|
|
0.13
|
|
|
|
2.00
|
|
|
|
(3.17
|
)
|
Net income (loss)
|
|
$
|
(0.93
|
)
|
|
$
|
1.00
|
|
|
$
|
(4.48
|
)
|
As of June 30, 2017, 2016, and 2015, the Company had 1,923,279; 32,638; and 306,000 potential shares of Company common stock, respectively, that are not included in the diluted net income (loss) per share calculation because to do so would be antidilutive.
As of June 30, 2017, the Company had an aggregate of 1,058,694 outstanding shares that are subject to repurchase by the Company at a nominal price if service and performance milestones are not met. The Company does not account for such shares as being outstanding for accounting purposes since they are unvested and subject to forfeiture.
Restrictions on Subsidiary Dividends
In the GP Corp Note Agreement, GP Corp agreed not to declare any dividends until the GP Corp note is satisfied. As of June 30, 2017, GP Corp had an accumulated deficit not legally available for dividend.
Reclassifications
Due to the separate presentation of amortization and depreciation in the accompanying consolidated statements of operations, $0.1 million and $0.1 million of amortization and depreciation expense for the years ended June 30, 2016 and 2015, respectively, was reclassified from general and administrative expenses. These reclassifications did not have an impact on the Company’s previously presented net results of operations, financial position, or cash flows.
Recently Issued Accounting Standards
Financial Instruments.
In January 2016, the Financial Accounting Standards Board (
FASB
) issued ASU 2016-01,
Financial Instruments – Overall
(Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities,
which revised entities’ accounting related to: (1) the classification and measurement of investments in equity securities; and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends disclosure requirements associated with the fair value of financial instruments. The new guidance is effective for the Company’s fiscal year that begins on July 1, 2018 and requires a modified retrospective approach to adoption. Early
F-13
adoption is only permitted for the provision related to instrument-specific credit risk. The Company believes that adoption of ASU 2016-01 will have no material impact on the consolidated fin
ancial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments-Credit Losses
(Topic 326):
Measurement of Credit Losses on Financial Instruments,
which changes the impairment model for most financial assets. The ASU requires the use of an “expected loss” model for instruments measured at amortized cost, in which companies will be required to estimate the lifetime expected credit loss and record an allowance to offset the amortized cost basis, resulting in a net presentation of the amount expected to be collected on the financial asset. The new guidance is effective for the Company’s fiscal year that begins on July 1, 2020 and requires a modified-retrospective approach to adoption. Early adoption is permitted for the fiscal year beginning July 1, 2019. The Company believes that adopting ASU 2016-13 will have no material impact on the consolidated financial statements and related disclosures.
Customer Revenue
.
In August 2015, the FASB issued ASU 2015-14
, Revenue From Contracts with Customers
(Topic 606) Deferral of the Effective Date. The Company is currently evaluating the adoption of ASU 2015-14 and related Topic 606 updates will have on its financial statements. Based on the on-going evaluation, the Company has determined that the recognition of its investment management incentive fees may be deferred upon the implementation of ASU 2015-14 and related guidance. Other than the potential incentive fee impacts, the Company has not determined whether the adoption of ASU 2015-14 and related guidance, will have a material effect on the Company’s results of operations, financial position, cash flows or footnote disclosures. The Company is continuing to evaluate the impact of this new guidance.
Stock-Based Compensation.
In May 2017, the FASB issued ASU 2017-09,
Compensation – Stock Compensation
(Topic 718) to provide clarity and simplification to accounting for a change in the terms or conditions of a stock-based payment award. The ASU defines several changes in the conditions that would not result in the modification of an award including: no changes in the fair value of the original and modified award prior to modification, or changes in the inputs for the valuation technique used; no changes in vesting conditions; and no change amongst equity or liability classification of the modified award. The amendments contained in ASU 2017-09 are effective for annual and interim periods beginning after December 15, 2017 with early adoption permitted. The Company does not expect the adoption of ASU 2017-09 to have a material impact on its consolidated financial statements.
Changes in Accounting Principles
Leases.
In February 2016, the FASB issued Accounting Standards Update (
ASU
) 2016-02
, Leases
(Topic 842), which requires a lessee to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with a lease term of more than twelve months. Leases will continue to be classified as either financing or operating, with classification affecting the recognition, measurement and presentation of expenses and cash flows arising from a lease. The Company adopted ASU 2016-02 effective July 1, 2016. On the adoption date, the Company elected the practical expedient to not reassess whether any expired contracts contained leases. Additionally, the Company has elected to not apply the recognition standards of ASU 2016-02 to operating leases with effective terms of twelve months or less (
Short-Term Leases
). For Short-Term Leases, the Company recognizes lease payments on a straight-line basis over the lease term in the period in which the obligation for those payments is incurred.
On the adoption date, all of the Company’s contracts containing leases were expired or were Short Term Leases. Accordingly, the adoption of ASU 2016-02 required no changes in the accompanying consolidated financial statements for any of the periods presented.
Presentation of Debt Issuance Costs.
On July 1, 2016, the Company implemented ASU 2015-03
Interest – Imputation of Interest
(Topic 830)
– Simplifying the Presentation of Debt Issuance Costs
. ASU 2015-03 requires debt issuance costs to be presented in the nature of debt discounts and its implementation results in reclassification of the prior periods. In the accompanying consolidated balance sheet as of June 30, 2016, the reclassification of debt issuance costs resulted in a reduction of total assets of $0.9 million and a corresponding reduction in total liabilities of $0.9 million. All of the Company’s debt issuance costs recognized prior to the adoption of ASU 2015-03 on July 1, 2016, have been fully amortized and expensed as of June 30, 2017.
Stock-Based Compensation
. In March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payments, including accounting for income taxes, forfeitures and statutory tax withholding requirements, and classification within the statement of cash flows. The new guidance is effective for the Company’s fiscal year that
F-14
begins on July 1, 2017 with early adoption permitted. The Company prospectively adopted ASU 2016-09 on July 1, 2016. Upon adoption, the Company made
an election to account for forfeitures of non-vested equity awards in the periods in which they occur. The other provisions of ASU 2016-09 did not have a material impact on the accompanying consolidated financial statements for any of the periods present
ed.
Income Taxes
. In October 2016, the FASB issued ASU 2016-16,
Income Taxes
(Topic 740), which requires that the Company recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company adopted ASU 2016-16 prospectively on October 1, 2016 with no effect on the accompanying consolidated financial statements.
Goodwill
. In January 2017, the FASB issued ASU 2017-04
Intangibles – Goodwill and Other
(Topic 350), which simplifies the subsequent measurement of goodwill by eliminating the quantitative test (
Step 2
) for impairment for any reporting unit with a zero or negative carrying amount based on a qualitative assessment (
Step 1
). The Company adopted ASU 2017-04 on October 1, 2016 with no effect on the accompanying consolidated financial statements.
Business Combinations
. In January 2017, the FASB issued ASU 2017-01,
Business Combinations
(Topic 805), which clarifies the definition of a business. The Company adopted ASU 2017-01 on July 1, 2016 without material impact on the Company’s accompanying consolidated financial statements.
3.
|
Discontinued Operations
|
On June 30, 2016, the Company sold two of its previously wholly-subsidiaries (the
Divestiture
) engaged in the patent licensing business for an aggregate purchase price of up to $40 million. The purchaser paid the Company $30 million, plus certain adjustments, upon the closing of the Divestiture, and has made claims that it has incurred indemnifiable losses in excess of the remaining $10 million due under the purchase and sale agreement. As a result, the Company has not recognized any portion of the remaining $10 million purchase price.
The following table provides a reconciliation of the Company’s previous operations as reclassified for all of the periods presented:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
8,750
|
|
|
$
|
27,826
|
|
|
$
|
4,505
|
|
Patent licensing expenses (1)
|
|
|
(5,630
|
)
|
|
|
(30,780
|
)
|
|
|
(31,069
|
)
|
General and administrative expenses
|
|
|
—
|
|
|
|
(2,876
|
)
|
|
|
(2,989
|
)
|
Other non-significant expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
(10
|
)
|
Gain (loss) from discontinued operations
|
|
|
3,120
|
|
|
|
(5,830
|
)
|
|
|
(29,563
|
)
|
Gain on sale of discontinued operations
|
|
|
—
|
|
|
|
29,795
|
|
|
|
—
|
|
Total pretax gain (loss) on discontinued
operations
|
|
|
3,120
|
|
|
|
23,965
|
|
|
|
(29,563
|
)
|
Income tax benefit (expense)
|
|
|
(917
|
)
|
|
|
(5,103
|
)
|
|
|
—
|
|
Net gain (loss) from discontinued operations
|
|
$
|
2,203
|
|
|
$
|
18,862
|
|
|
$
|
(29,563
|
)
|
|
(1)
|
Amounts for the fiscal year ended June 30, 2017 primarily consist of non-recurring fee split obligations associated with the Microsoft settlement as further discussed below.
|
During the year ended June 30, 2017, the Company reached a final settlement with Microsoft Corporation for a one-time payment by Microsoft Corporation, related to an infringement judgment in our favor previously under appeal, of $8.8 million. The payment, received in October 2016, included reimbursement of litigation costs incurred by the Company of approximately $1.9 million. The settlement was paid to the Company as part of the Divesture and subject to fee split provisions. During the year ended June 30, 2017, the Company paid $1.7 million with respect to its fee split obligations, all of which are classified as patent licensing expenses in the above table, with the purchaser of the divested subsidiaries. As of June 30, 2017, the Company has recorded estimated remaining fee share obligations associated with the Divesture totaling $3.6 million.
F-15
The Company did not allocate interest expense to discontinued operations and no general corporate overhead expenses have been reclassified to discontinued operations
.
4.
|
Investments, at Fair Value
|
In November 2016, the Company ceased to have a controlling financial interest in its previously wholly-owned subsidiary, GECC. On the cessation date, the Company deconsolidated its investment in GECC and made an election to recognize its remaining ownership position at fair value on a recurring basis. On the date of deconsolidation, and based on the NASDAQ-listed market price of GECC (a Level 1 input in accordance with the US GAAP fair value hierarchy), the Company recorded an unrealized loss of $8.5 million on the value of its investment in GECC. Subsequent to the deconsolidation, and through the year ended June 30, 2017, the Company recognized an additional unrealized loss on its investment in GECC totaling $0.6 million. The total unrealized loss of $9.1 million for the year ended June 30, 2017 is recognized as a component of net loss, classified in other income in the accompanying consolidated statements of operations. Additionally, dividends and interest from the Company’s investment in GECC, totaling $1.3 million for the year ended June 30, 2017, are reported separately in the accompanying consolidated statements of operations.
As of June 30, 2017, the Company owned approximately 17% of the outstanding shares of GECC. The Company did not have any investments for which it made a fair value election as of June 30, 2016 and 2015.
In November 2016, the Company completed a series of transactions culminating in the creation of its investment management segment. The transactions, some of which involved MAST Capital, a related party, and employees of MAST Capital, included: the formation of GECM; the acquisition of an 80.1% in GP Corp.; and GP Corp.’s acquisition of certain assets and liabilities of MAST Capital.
On November 3, 2016, the Company obtained an 80.1% controlling financial interest in GP Corp by purchasing shares of GP Corp common stock for a $0.08 million capital contribution to GP Corp. GP Corp was initially formed and capitalized by MAST Capital and certain of its employees.
On November 3, 2016, subsequent to the Company’s acquisition of its interest in GP Corp, GP Corp. acquired certain assets and liabilities from MAST Capital (the
Acquisition
). In consideration for the acquired assets and liabilities, GP Corp issued a senior secured note payable with a maximum amount due of approximately $10.8 million, and an estimated fair value of $3.4 million, after giving effect to estimated allowable cost off-sets to the maximum contractual balance due. The GP Corp Note is due on November 3, 2026, bears interest at 3% over the 90-day LIBOR rate, requires mandatory repayments of $0.3 million per year, and may be repaid by GP Corp at its option at par plus accrued and unpaid interest and is secured by a first perfected security interest in the net profits generated by GECM related to its management of GECC.
The consideration for the acquisition also included the issuance of a warrant (the
Warrant
) to purchase 54,733 shares of Company common stock with an estimated grant date fair value of $0.2 million to MAST Capital. The Warrant has a $0.01 exercise price per share, and the number of shares issuable thereunder is subject to reduction to the extent GECM’s cumulative revenue collected under the GECC Investment Management Agreement (
IMA
) is less than $40 million through November 3, 2021. Since the shares issuable under the warrant agreement are variable based on the post-acquisition revenue generated by the IMA, the Company concluded the warrants are not indexed to its equity. As a result of this determination, the Company classified the warrants as a liability in the accompanying consolidated balance sheets, and the changes in the fair value of the warrants through the date of settlement is recognized in other income, net in the accompanying consolidated statements of operations. For the year ended June 30, 2017, the Company recognized a gain of $0.03 million on the change in the fair value of the liability included in other income, net in the accompanying consolidated statements of operations.
On the date of the Acquisition, the Company allocated the consideration given to the individual assets acquired and the liabilities assumed based on a preliminary estimate of their fair values. The assessment of fair value previously reported,
F-16
as of and
for the interim periods ended December 31, 2016 and March 31, 2017, were preliminary as the Company had not fin
alized its fair value estimates and primarily reflected the maximum payment that may be due to MAST Capital.
During the quarter ended June 30, 2017, the Company obtained and considered additional information related to the assets acquired and liabilities assumed; including items impacting the fair value of the consideration due in the form of a note payable. Upon consideration of this additional information and further analysis of the assets acquired, the Company determined that the $3.9 million fair value related to the IMA intangible asset represented substantially all the fair value of the assets acquired in the Acquisition. This valuation reflects that the Company acquired the right to manage a single portfolio of assets in exchange for the consideration. As a result, the Company concluded that the Acquisition should be accounted for as an acquisition of assets rather than an acquisition of a business as required by ASU 2017-01,
Business Combinations
(Topic 805)
adopted by the Company on July 1, 2016 which clarifies the definition of a business.
The following table represents the preliminary fair value estimates as previously reported along with the adjustments made to the preliminary valuation in the fourth quarter of the year ended June 30, 2017 (in thousands):
|
|
As of
|
|
|
|
|
|
|
As of
|
|
|
|
November 3,
|
|
|
|
|
|
|
November 3,
|
|
|
|
2016
|
|
|
Adjustment
|
|
|
2016
|
|
|
|
As Previously
Reported
|
|
|
|
|
|
|
As Adjusted
|
|
GP Corp note issued
|
|
$
|
10,824
|
|
|
$
|
(7,400
|
)
|
|
$
|
3,424
|
|
Warrants issued (classified as a liability)
|
|
|
216
|
|
|
|
|
|
|
|
216
|
|
Total consideration
|
|
$
|
11,040
|
|
|
$
|
|
|
|
$
|
3,640
|
|
Furniture and fixtures
|
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
22
|
|
Lease deposit
|
|
|
170
|
|
|
|
(170
|
)
|
|
|
—
|
|
Identifiable intangible assets
|
|
|
11,161
|
|
|
|
(6,735
|
)
|
|
|
4,426
|
|
Lease liability, net
|
|
|
(313
|
)
|
|
|
(495
|
)
|
|
|
(808
|
)
|
Net assets acquired
|
|
$
|
11,040
|
|
|
$
|
|
|
|
$
|
3,640
|
|
In addition to the adjustment to the fair value described above, the Company determined that the estimated useful life of the identifiable intangible assets acquired was fifteen years. In its prior filings on Form 10-Q, as of and for the periods ended December 31, 2016 and March 31, 2017, the Company recognized amortization associated with its identifiable intangible assets based on their preliminary fair values over the contractual life. As a result of the change in the estimated useful life of the identifiable intangible assets, the Company reversed approximately $2.3 million of amortization expense previously recognized through the nine-month period ended March 31, 2017 during the quarter ended June 30, 2017.
The following tables provide additional detail related to the Company’s acquired identifiable intangible assets (in thousands):
|
|
As of June 30, 2017
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
Weighted
Average
Useful Life
(in years)
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment management agreement
|
|
$
|
|
3,900
|
|
|
$
|
|
(280
|
)
|
|
$
|
|
3,620
|
|
|
|
|
15
|
|
Assembled workforce
|
|
|
|
526
|
|
|
|
|
(44
|
)
|
|
|
|
482
|
|
|
|
|
15
|
|
Total
|
|
$
|
|
4,426
|
|
|
$
|
|
(324
|
)
|
|
$
|
|
4,102
|
|
|
|
|
|
|
F-17
Aggregate Amortization Expense:
|
|
Amount
|
|
|
|
|
|
|
|
For the year ended June 30, 2017
|
|
$
|
|
324
|
|
|
|
|
|
|
|
Estimated Amortization Expense:
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended June 30, 2018
|
|
$
|
|
527
|
|
For the year ended June 30, 2019
|
|
|
|
621
|
|
For the year ended June 30, 2020
|
|
|
|
599
|
|
For the year ended June 30, 2021
|
|
|
|
456
|
|
For the year ended June 30, 2022
|
|
|
|
382
|
|
In September 2017, the Company entered into a Separation Agreement with MAST Capital and related entities. As part of the Separation Agreement, the principal balance of the note was revised to be $3.3 million; the 54,733 warrants were cancelled and replaced with shares of common stock of the Company; and the cost-sharing agreement between the parties was cancelled.
6.
|
Related Party Transactions
|
The Company has entered into several transactions, as further discussed below and in Note 5, with MAST Capital, entities controlled by MAST Capital, and its employees. MAST Capital and its affiliates currently own approximately 8.7% of the Company’s outstanding common stock.
In conjunction with the acquisition of GP Corp, on November 3, 2016, GECM entered into a profit sharing agreement with GP Corp. (
Profit Sharing Agreement
). Under the Profit Sharing Agreement, the profit from GECC is paid from GECM to GP Corp. Since its inception in November 2016, GECM operated at a cumulative loss through June 30, 2017; correspondingly, no profits were available to GP Corp. under the Profit Sharing Agreement.
In conjunction with the commencement of GECC, GECM entered into two agreements with GECC, the IMA providing for GECM to manage GECC’s investment portfolio, and the Administrative Agreement, under which GECM provides administrative services to GECC. Under these agreements, GECM receives an administrative fee, a management fee based on GECC’s assets (other than cash and cash equivalents), and incentive management fees if GECC has net capital gains, or if its net investment income exceeds a specified hurdle rate. Fees under the agreements began to accrue on November 4, 2016.
Certain MAST Capital employees are employees of GECM. In accordance with the terms of a cost-sharing agreement, employee and other operating costs incurred with the Company’s investment management business are based on direct management of each Company’s investment portfolio, or correlated to the percentages of assets under management as a total MAST’s and GECC’s asset portfolio. If GECM’s annual costs under the cost sharing agreement exceed $1.4 million, the excess for such year over $1.4 million may be set off dollar for dollar against the principal balance of the GP Corp Note.
F-18
The following table illustrates the activity related to the operations of the acquisitions for the periods presented. The Company did not engage in the operation
s and transactions noted below for the fiscal years June 30, 2016 and 2015, correspondingly, those periods have been omitted:
|
|
As
of and for
the Year ended
June 30, 2017
|
|
Investment in GECC
|
|
|
|
|
|
Unrealized loss on investment in GECC
|
|
$
|
|
(9,114
|
)
|
GECC dividends and interest recognized for the
period
|
|
$
|
|
1,306
|
|
Managing GECC
|
|
|
|
|
|
Reimbursement of GECC formation expenses for the
period (1)
|
|
$
|
|
2,989
|
|
Investment management fees for the period
|
|
$
|
|
4,287
|
|
GECC administrative fees during the period
|
|
$
|
|
640
|
|
Net receivable due from GECC at the end of the
period
|
|
$
|
|
3,654
|
|
Cost Sharing with MAST
|
|
|
|
|
|
GECM costs charged to MAST Capital (2)
|
|
$
|
|
1,809
|
|
Net receivable due from MAST at the end of the
period
|
|
$
|
|
—
|
|
Profit Sharing with GP Corp
|
|
|
|
|
|
GP Corp Note balance at the end of the period
|
|
$
|
|
3,174
|
|
Interest accrued and paid on GP Corp Note during
the period
|
|
$
|
|
285
|
|
Principal payments made on GP Corp Note during
the period
|
|
$
|
|
250
|
|
GECM net profit paid to GP Corp (3)
|
|
$
|
|
—
|
|
|
(1)
|
Recognized in general and administrative expenses in the accompanying consolidated statements of operations.
|
|
(2)
|
Recognized in investment management expenses in the accompanying consolidated statements of operations.
|
|
(3)
|
GECM did not generate a net profit as defined by the Profit Sharing Agreement with GP Corp.
|
Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based upon the Company’s principal or, in the absence of a principal, most advantageous market for the specific asset or liability.
GAAP provides a framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:
|
▪
|
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
▪
|
Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
▪
|
Level 3: Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
|
F-19
All financial assets
or liabilities that are measured at fair value on a recurring and non-recurring basis have been segregated into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. The ass
ets and liabilities measured at fair value on a recurring and non-recurring basis are summarized in the tables below (in thousands):
|
|
Fair Value as of June 30, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in GECC
|
|
$
|
|
20,886
|
|
|
$
|
|
—
|
|
|
$
|
|
—
|
|
|
$
|
|
20,886
|
|
The Company’s investment in GECC is classified within Level 1 of the fair value hierarchy using quoted market prices on a recurring basis. The Company did not have any financial assets measured at fair value on a recurring basis as of June 30, 2016.
|
|
Fair Value as of June 30, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
186
|
|
|
|
|
186
|
|
The Company values its warrant liability using a Black-Scholes-Merton option pricing model with assumptions classified as unobservable inputs within Level 3 of the fair value hierarchy. The assumptions used to value the warrant on a recurring basis consisted of: expected volatilities between 65.7 to 66.6%; no expected dividend yields; a risk-free rate of 1.5%; and an expected term equal to the contractual term. The warrant has an exercise price of $0.01 per share and a contractual term of ten (10) years from the date of issuance on November 3, 2016.
The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis (in thousands):
|
|
As of June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Beginning of year
|
|
$
|
|
—
|
|
|
$
|
|
—
|
|
Aggregate fair value of warrant issued
|
|
|
|
216
|
|
|
|
|
—
|
|
Re-measurement of warrant liability (gain)
|
|
|
|
(30
|
)
|
|
|
|
—
|
|
End of year
|
|
$
|
|
186
|
|
|
$
|
|
—
|
|
The Company recognizes transfers between levels of the hierarchy based on the fair values of the respective financial instruments at the end of the reporting period in which the transfer occurred. There were no transfers between levels of the fair value hierarchy during the fiscal year ended June 30, 2017, 2016 or 2015.
The Company estimated the fair value of the related party notes payable outstanding as of June 30, 2017 and 2016, on a non-recurring basis, using Level 3 inputs. The Level 3 inputs consisted of a discounted cash flow analysis, which incorporated spread and discount rate assumptions considering the Company’s financial status and risk, as well as indications from comparable publicly traded debt instruments. As of June 30, 2017 and 2016, the carrying value of the notes approximated the fair value. The fair value of the related party notes payable outstanding as of June 30, 2016 is presented net of unamortized discounts and debt issuance costs.
The carrying value of all other financial assets and liabilities approximate their fair values.
F-20
8.
|
Related Party Note Payable
|
The Company’s related party notes (
Notes
) are summarized below (in thousands):
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Balance beginning of year
|
|
$
|
|
33,786
|
|
|
$
|
|
29,020
|
|
Issuance of GP Corp Note, at fair value
|
|
|
|
3,424
|
|
|
|
|
—
|
|
Issuance of in-kind notes
|
|
|
|
—
|
|
|
|
|
4,355
|
|
Amortization of discount issuance costs
|
|
|
|
2,802
|
|
|
|
|
411
|
|
Principal and interest payments
|
|
|
|
(36,838
|
)
|
|
|
|
—
|
|
Balance end of year
|
|
$
|
|
3,174
|
|
|
$
|
|
33,786
|
|
Current portion, end of year
|
|
$
|
|
250
|
|
|
$
|
|
33,786
|
|
Balance, net of current portion, end of year
|
|
$
|
|
2,924
|
|
|
$
|
|
—
|
|
For the years ended June 30, 2017, 2016, and 2015, the Company recognized interest expense of approximately $6.3,
$4.9 million, and $4.3 million, respectively. In May of 2015, the Company’ previously outstanding Senior Secured Notes payable were purchased by MAST Capital Management, LLC as part of a private transaction. MAST Capital Management, LLC is and was a significant stockholder of the Company. The sale of the Notes did not have any impact on the Company’s obligations under the original terms of the Notes. In October 2016, the Company called and retired the previously outstanding Senior Secured Notes. As part of the retirement, the Company made cash payments totaling $39.8 million; consisting of interest payments of $1.2 million; call premiums totaling $2.0 million classified as interest expense in the accompanying consolidated statements of operations; and principal payments of $36.6 million.
On November 3, 2016, GP Corp issued the GP Corp Note. The note calls for variable interest payments based on the ninety-day LIBOR plus 3%. For the year ended June 30, 2017, the Company incurred interest expense totaling $0.3 million, based on an average interest rate of approximately 4.0% during the period.
The GP Corp Note is held by MAST Capital and is secured by the profits generated by GECM’s management of GECC. The GP Corp Note requires quarterly interest only payments and annual principal payments of at least $0.3 million, based on the Company’s fiscal year ending June 30.
The GP Corp Note does not have any recourse to any of the Company’s operations or net assets not related to GECM’s management of the investments assets held by GECC. The GP Corp Note may be prepaid at any time with prior written notice to the holders of the GP Corp Note. Additionally, GP Corp is required to prepay the GP Corp Note upon certain material liquidation transactions.
The following table summarizes the Company’s maximum obligations, and estimated cumulative off-sets allowed by the cost-sharing agreement, under the GP Corp Note as of June 30, 2017 (in thousands):
Year
|
|
Principal
|
|
2018
|
|
$
|
|
250
|
|
2019
|
|
|
|
250
|
|
2020
|
|
|
|
250
|
|
2021
|
|
|
|
250
|
|
2022
|
|
|
|
250
|
|
Thereafter
|
|
|
|
9,324
|
|
Total, maximum obligation
|
|
$
|
|
10,574
|
|
Estimated reduction from cost sharing agreement
|
|
|
|
(7,400
|
)
|
Estimated GP Corp Note, net
|
|
$
|
|
3,174
|
|
F-21
9.
|
Commitments and Contingencies
|
In conjunction with the Divesture of its patent licensing business on June 30, 2016, the Company may receive additional proceeds of up to $10 million, subject to adjustment for indemnification or claims breach of representations, and warranties. The purchaser has claimed that it has losses indemnifiable in excess of the $10 million contractual payment due on June 30, 2018. As such, and as of June 30, 2017, the Company has determined the Holdback was not realizable or estimable. The Company expects to recognize the known or estimable portion of the Holdback consideration in the period it becomes realizable, not later than June 30, 2018.
The Company has been named in two related complaints, captioned
Daniel Saunders, on behalf of himself and all others similarly situated, v. Full Circle Capital Corporation, et al.
, filed on September 23, 2016 (the
Saunders Action
), and
William L. Russell, Jr., individually and on behalf of all others similarly situated, v. Biderman, et al.
filed on September 12, 2016 and amended on September 22, 2016 (the
Russell Action
), were filed in the United States District Court for the District of Maryland and in the Circuit Court for Baltimore City, (the
Circuit Court
), respectively. On October 7, 2016, a complaint captioned
David Speiser, individually and on behalf of all others similarly situated v. Felton, et al
., was filed in the Circuit Court (the
Speiser Action
, and together with the Saunders Action and the Russell Action, the
Actions
).
On October 24, 2016, the Company, along with Full Circle, GECC, MAST Capital, certain directors of Full Circle and plaintiffs in the Actions reached an agreement in principle providing for the settlement of the Actions on the terms and conditions set forth in a memorandum of understanding (the
MOU
). Pursuant to the terms of the MOU, without agreeing that any of the claims in the Actions have merit or that any supplemental disclosure was required under any applicable statute, rule, regulation or law, Full Circle and GECC agreed to and did make the supplemental disclosures with respect to the merger. The MOU further provides that, among other things, (a) the parties to the MOU will enter into a definitive stipulation of settlement (the
Stipulation
) and will submit the Stipulation to the Circuit Court for review and approval; (b) the Stipulation will provide for dismissal of the Actions on the merits; (c) the Stipulation will include a general release of defendants of claims relating to the transactions contemplated by the Merger Agreement; and (d) the proposed settlement is conditioned on final approval by the Circuit Court after notice to Full Circle's stockholders. There can be no assurance that the settlement will be finalized or that the Circuit Court will approve the settlement. The Company has determined there is a remote possibility the outcome of these complaints will have a material effect on its financial position, results of operations, or cash flows.
From time to time, the Company is involved in lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. The Company maintains insurance to mitigate losses related to certain risks. The Company is not a named party in any other pending or threatened litigation that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows.
The Company has obtained the right of use for two separate office space assets under operating lease agreements as follows:
Hancock Lease
The Company obtained the right of use of office space located in Boston, MA on November 3, 2016 in conjunction with the Acquisition transaction with MAST Capital that terminates on
December 31, 2017.
As of June 30, 2017, the remaining obligation under the Hancock lease was $0.7 million, inclusive of the remaining early termination payment, classified as current in the accompanying consolidated balance sheets.
Watermill Lease
On December 23, 2016, the commencement date, the Company obtained the right of use of office space located in Waltham, MA. On the commencement date of the lease, the non-cancellable term was for eighty-eight (88) months from the occupancy date of June 1, 2017 and contains an option to extend for an additional sixty (60) month period.
F-22
The Company determined the expected term of
the right of use of the office to be 8
8
months on the commencement and recognized the lease liability and corresponding right of use asset totaling $1.7 million using a discount rate of 10%. The lease payments commence on October 1, 2017, four months aft
er 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 June 30, 2017, the Company had a remaining right of use asset and lease liability of $1.7 million related to the Watermill lease in Waltham.
The following table summarizes the Company’s undiscounted cash payment obligations for its operating lease liabilities as of June 30 (in thousands):
Year
|
|
Amount
|
|
2018
|
|
$
|
|
920
|
|
2019
|
|
|
|
337
|
|
2020
|
|
|
|
345
|
|
2021
|
|
|
|
353
|
|
2022
|
|
|
|
362
|
|
Thereafter
|
|
|
|
843
|
|
Total
|
|
$
|
|
3,160
|
|
The Company recognized rent expense totaling $0.7 million, $0.3 million, and $0.2 million for the fiscal years ended June 2017, 2016, and 2015, respectively.
Rights Offering
In September 2016, the Company entered into a backstop investment agreement with a consortium of investors led by Gracie Investing LLC. Members of the Company’s board of directors and a number of the Company’s employees were backstop investors. On October 2016, the Company and the backstop providers amended and restated the backstop investment agreement which contemplated up to a $36.6 million investment in shares of the Company’s common stock. In November 2016, the Company commenced a $45 million rights offering to its existing stockholders at a price of $3.285 per share. The Company sold an aggregate of 12,755,200 shares of its common stock for gross proceeds of $41.9 million, which after deducting expenses, totaling approximately $2.4 million, resulted in net proceeds of $39.5 million in the rights offering; and 945,333 shares of its common stock for gross proceeds of $3.1 million from the backstop providers. The Company intends to use the proceeds of the offerings to make acquisitions of new businesses and working capital.
Tax Benefits Preservation Agreement
On January 20, 2015, the Board of Directors of the Company adopted a Tax Benefits Preservation Agreement, between the Company and Computershare Trust Company, N.A., as Rights Agent (the
Rights Plan
) to replace the Company’s existing Tax Benefits Preservation Agreement, which expired on January 29, 2015, (the
Expired Agreement
). The Agreement is substantially the same as the Expired Agreement. In December 2015, the Rights Plan was approved by the Company’s stockholders.
The Rights Plan is designed to reduce the possibility that certain changes in ownership could result in limitations on the use of the tax attributes, by restricting the ability of a person or entity from acquiring ownership (including through attribution under the tax law) of 4.99% or more of the Company’s common stock and the ability of persons or entities now owning 5% or more of the outstanding common shares from acquiring additional common shares.
Pursuant to the terms of the Rights Plan, the Company’s Board of Directors declared a dividend distribution of one Preferred Stock Purchase Right (a
Tax Right
) for each outstanding share of common stock, par value $0.001 per share of the Company (the
Common Stock
), to stockholders of record as of the close of business on January 29, 2015 (the
Record Date
). In addition, one Tax Right will automatically attach to each share of Common Stock issued between the
F-23
Record Date and the Distribution Date (as defined in the Rights Plan). Each Tax Right entitles the registered holder thereof to purchase from
the Company a unit consisting of one ten-thousandth of a share (a
Unit
) of Series A Junior Participating Cumulative Preferred Stock, par value $0.001 per share, of the Company at a cash exercise price of $15.00 per Unit (the
Exercise Price
), subject to ad
justment, under the conditions specified in the Rights Plan.
The Tax Rights are not exercisable until the Distribution Date and will expire at the earlier of (a) January 29, 2018; (b) the time when the Tax Rights are redeemed as provided therein; (c) the time when the Rights are exchanged as provided therein; (d) the repeal of Section 382 of the Code if the Independent Directors (as defined in the Rights Plan) determine that the Rights Plan is no longer necessary for the preservation of Tax Benefits (as defined in the Rights Planet); (e) the beginning of the taxable year of the Company to which the Company’s Board of Directors determines that no Tax Benefits may be carried forward, unless previously redeemed or exchanged by the Company.
Stock Plans
In November 2013, the Company’s stockholders approved the Amended and Restated 1999 Directors’ Equity Compensation Plan (the
Directors’ Plan
). Options and awards granted to new or existing Outside Directors (as defined in the Directors’ Plan) under the Directors’ Plan vest ratably over a period of three years. The Directors’ Plan also provides for the acceleration of options upon the dismissal of an Outside Director from the Board of Directors of the Company upon or within 24 months following a change in control of the Company. The exercise price of options granted under the Directors’ Plan is equal to the fair market value of the Company’s common stock on the date of grant. Under the Directors’ Plan, stock option grants have a term of ten years. As of June 30, 2017, the Company had a total of 109,058 shares outstanding under the Directors’ Plan.
In November 2013, the Company’s stockholders approved the Amended and Restated 2006 Stock Incentive Plan (the
2006 Plan
) to provide incentive stock options, non-statutory stock options, restricted stock purchase rights and stock appreciation rights to employees and consultants of the Company and its affiliates. The plan also provides restricted stock bonus, phantom stock units, restricted stock units, performance shares bonus and performance share units. Each share of Company common stock issued pursuant to a stock award issued under this Plan shall reduce the Share Reserve by one share; provided, however that for each Full-Value Stock Award, the share reserve shall be reduced by one and one-half shares. The exercise price of options granted under the 2006 Plan approximates the fair market value of the Company’s common stock on the date of grant. Options issued under the 2006 Plan generally expire ten years from the date of grant. Vesting periods are determined by the plan administrator and generally provide for shares to vest ratably over a period of three to four years, with options for new employees generally including a one-year cliff period. As of June 30, 2017, the Company had a total of 438,981 shares outstanding under the 2006 Stock Plan.
In June 2016, the Company’s stockholders approved the Great Elm Capital Group, Inc. 2016 Long-Term Incentive Plan and the Great Elm Capital Group, Inc. 2016 Employee Stock Purchase Plan. As of June 30, 2017, the Company had a total of 897,714 shares outstanding under the 2016 Long-Term Incentive Plan.
The following table summarizes the number of common shares reserved for issuance under the plans discussed above as of June 30, 2017:
Shares of Common Stock Reserved for Issuance
|
|
|
|
|
Director's Plan
|
|
|
—
|
|
2006 Plan
|
|
|
131,797
|
|
2016 Long-Term Incentive Plan
|
|
|
1,652,286
|
|
2016 Employee Stock Purchase Plan
|
|
|
944,000
|
|
Total
|
|
|
2,728,083
|
|
Stock-Based Compensation
The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model and assumptions noted in the following table. The Company estimates the expected term for new grants based upon actual historical experience. The Company’s expected volatility for the expected term of the option is based upon the historical volatility experienced in the Company’s stock price. The risk-free rate for the expected term of the option
F-24
is based on the U.S. Treasury yield curv
e in effect at the time of grant. The Company determines the fair value of non-vested shares based on the Nasdaq closing stock price on the date of grant.
The ranges of assumptions used to value options granted were as follows:
|
|
Fiscal Year Ended June 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Expected volatility
|
|
64.7 - 66.6
|
%
|
|
64.9 - 69.1
|
%
|
|
67.7
|
|
%
|
Expected dividends
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
Expected term (years)
|
|
6.25-7.25
|
|
|
5.88 - 9.88
|
|
|
|
6.18
|
|
|
Risk-free rate
|
|
1.5 - 2.00
|
%
|
|
1.73 - 2.05
|
%
|
|
1.77
|
|
%
|
A summary of option activity through June 30, 2017 is presented below (in thousands except per share and year amounts):
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
Options
|
|
Shares
|
|
|
Exercise Price
|
|
|
Term (years)
|
|
|
Intrinsic Value
|
|
Outstanding at June 30, 2016
|
|
|
610
|
|
|
$
|
9.60
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
170
|
|
|
|
3.27
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited, cancelled or expired
|
|
|
(58
|
)
|
|
|
17.57
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
722
|
|
|
$
|
7.46
|
|
|
|
7.29
|
|
|
$
|
22
|
|
Exercisable at June 30, 2017
|
|
|
604
|
|
|
$
|
8.28
|
|
|
|
6.91
|
|
|
$
|
6
|
|
Vested and expected to vest as of June 30, 2017
|
|
|
722
|
|
|
$
|
7.46
|
|
|
|
7.29
|
|
|
$
|
22
|
|
The weighted average grant date fair value of options, per share, granted during the 2017, 2016, and 2015 fiscal years was $3.68, $5.62, and $5.04, respectively. During the year ended June 30, 2017, and 2016 there were no options exercised, and options exercised during the year ended June 30, 2015 had intrinsic value of approximately $0.02 million.
A summary of the activity of the Company’s restricted stock units through June 30, 2017 is presented below (in thousands except per share amounts):
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
Restricted
|
|
|
Grant Date
|
|
Restricted Stock Units
|
|
Stock Units
|
|
|
Fair Value
|
|
Outstanding at June 30, 2016
|
|
|
32
|
|
|
$
|
13.30
|
|
Granted
|
|
|
1,168
|
|
|
|
3.92
|
|
Vested
|
|
|
(32
|
)
|
|
|
13.30
|
|
Forfeited
|
|
|
(21
|
)
|
|
|
3.95
|
|
Outstanding at June 30, 2017
|
|
|
1,147
|
|
|
$
|
3.88
|
|
During the year ended June 30, 2017, the Company granted an aggregate of 1,058,694 shares of restricted stock (net of forfeitures), included in the above table, with both performance and service requirements in connection with the formation of its investment management business. The vesting of these awards is subject to a five-year service requirement and an investment management cumulative revenue collection target of $40 million. In order to recognize compensation expense over the vesting period, the Company estimated the probability of the entire performance target being met on an on-going basis.
The aggregate grant date fair value of RSUs granted during the 2017, 2016, and 2015 fiscal years was $4.5 million, $0.7 million and $1.9 million, respectively.
F-25
Stock-based compensation expense totaled $2.0 million, $4.4 million, a
nd $2.1 million for the 2017, 2016, and 2015 fiscal years, respectively. Stock-based compensation expense for the year ended June 30, 2016 included approximately $2.3 million related to modifications of awards primarily held by our former officers and dir
ectors. The award modifications were the result of accelerated vesting of previously unvested awards upon termination, and the extension of the post termination exercise term from ninety days to one year. In addition, approximately $2.3 million and $1.3
million of stock based compensation was included in discontinued operations for the fiscal years ended June 30, 2016 and 2015, respectively.
As of June 30, 2017, the Company had unrecognized compensation cost related to all unvested share awards and options totaling $3.4 million expected to be recognized as the shares vest over the next 3.8 years.
Income (loss) from continuing operations before provision for income taxes is comprised of the following (in thousands):
|
|
Fiscal Year ended June 30,
|
|
|
|
2017
|
|
|
|
2016
|
|
|
2015
|
|
Domestic
|
|
$
|
(18,650
|
)
|
|
$
|
(14,543
|
)
|
|
$
|
(12,032
|
)
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
(18,650
|
)
|
|
$
|
(14,543
|
)
|
|
$
|
(12,032
|
)
|
The provision (benefit) for income taxes includes the following (in thousands):
|
|
Fiscal Year ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Income Tax
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign Income Tax
|
|
|
—
|
|
|
|
—
|
|
|
|
164
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
164
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Income Tax
|
|
$
|
(1,210
|
)
|
|
$
|
(5,103
|
)
|
|
$
|
—
|
|
Foreign Income Tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
(1,210
|
)
|
|
$
|
(5,103
|
)
|
|
$
|
—
|
|
Total
|
|
$
|
(1,210
|
)
|
|
$
|
(5,103
|
)
|
|
$
|
164
|
|
The Company recognized an income tax (benefit) from continuing operations of $(1.2) million and $(5.1) million, respectively, for the years ended June 30, 2017 and 2016. For the year ended June 30, 2015, the Company recognized income tax expense of $0.2 million from continuing operations.
During 2017 and 2016, the Company provided for income tax with respect to discontinued operations of $1.2 million and $5.1 million, respectively, related to intraperiod allocations. During 2017, income tax expense from discontinued operations totaled $0.9 million, net of the release of $0.3 million of accrued taxes for divested foreign subsidiaries and other for taxes previously accrued by the subsidiaries. No intraperiod allocations were made in 2015.
F-26
The following table reconciles the expected corporate federal income tax expense (benefit), computed by multiplying the Company's income (loss) before income taxes by the statutory income tax rate of 35% (in thousands):
|
|
Fiscal Year End June 30th,
|
|
|
|
2017
|
|
|
|
2016
|
|
|
2015
|
|
Federal Benefit at Statutory Rate
|
|
$
|
(6,523
|
)
|
|
$
|
(5,090
|
)
|
|
$
|
(4,211
|
)
|
State taxes
|
|
|
(794
|
)
|
|
|
(12
|
)
|
|
|
(211
|
)
|
Effect of foreign corporations
|
|
|
—
|
|
|
|
(607
|
)
|
|
|
(139
|
)
|
Permanent adjustments
|
|
|
22
|
|
|
|
(208
|
)
|
|
|
3
|
|
Change in valuation allowance
|
|
|
6,244
|
|
|
|
(164
|
)
|
|
|
(3,320
|
)
|
Abandonment of state net operating losses
|
|
|
—
|
|
|
|
—
|
|
|
|
7,544
|
|
Stock compensation adjustment
|
|
|
—
|
|
|
|
924
|
|
|
|
794
|
|
Other
|
|
|
(159
|
)
|
|
|
54
|
|
|
|
(296
|
)
|
Total Tax Expense/(Benefit)
|
|
$
|
(1,210
|
)
|
|
$
|
(5,103
|
)
|
|
$
|
164
|
|
The tax effect of temporary differences that give rise to significant portions of the Company's deferred tax assets and liabilities are as follows (in thousands):
|
|
Fiscal Year End June 30
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2015
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
612,378
|
|
|
$
|
623,221
|
|
|
$
|
617,331
|
|
Accruals and allowances not deductible for tax
purposes
|
|
|
141
|
|
|
|
278
|
|
|
|
(574
|
)
|
Research and development credit and other carry
-forwards
|
|
|
39,112
|
|
|
|
38,371
|
|
|
|
38,371
|
|
Stock based compensation
|
|
|
604
|
|
|
|
184
|
|
|
|
806
|
|
Unrealized loss on investment
|
|
|
3,575
|
|
|
|
—
|
|
|
|
—
|
|
Investment in Partnership
|
|
|
—
|
|
|
|
—
|
|
|
|
11,942
|
|
Total Deferred tax assets, gross
|
|
$
|
655,810
|
|
|
$
|
662,054
|
|
|
$
|
667,876
|
|
Less: valuation allowance
|
|
$
|
(655,810
|
)
|
|
$
|
(662,054
|
)
|
|
$
|
(667,876
|
)
|
Total deferred tax assets, net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
In light of the Company's history of cumulative operating losses, the Company recorded a valuation allowance for all of its federal and state deferred tax assets, as it is presently unable to conclude that it is more likely than not that the federal and state deferred tax assets in excess of deferred tax liabilities will be realized. The state deferred amounts reflected in the above table were calculated using the enacted tax rates. As a result of the sale of the product business, the Company does not have any foreign deferred tax assets as of June 30, 2017, 2016, and 2015.
F-27
As of June 30, 2017, the Company has net operating loss (
NOL
) carryforwards for federal and state income tax purposes of approximately $1.7 billion and $21
7 million, respectively. During the 2017 fiscal year, approximately $58 million of California net operating loss carryforwards expired. The Company has gross federal, California, and Massachusetts research and development credit carryforwards of approximat
ely $30.0 million, $20.9 million, and $0.9 million, respectively. The federal NOL carryforwards and research and development credit carryforwards will expire from 2018 through 2036. The California research and development credits may be carried forward ind
efinitely. The Massachusetts research and development credit expires in 2025. The federal NOLs can be carried forward for 20 years; California net operating loss carryforwards will expire from 2018 through 2037; and the Massachusetts net operating loss ca
rryforwards will expire from 2031 to 2037.
The following table reflects federal NOL carryforwards that will expire beginning in 2018 (in thousands):
Fiscal Year of Expiration
|
|
Federal NOL
carryforwards
|
|
2018
|
|
$
|
15,511
|
|
2019
|
|
|
59,062
|
|
2020
|
|
|
488,814
|
|
2021
|
|
|
190,624
|
|
2022
|
|
|
143,137
|
|
2023 through 2037
|
|
|
797,851
|
|
Total
|
|
$
|
1,694,999
|
|
Under Code Section 382, the utilization of a corporation's NOL carryforwards is limited following a change in ownership (as defined by the Code) of greater than 50% within a rolling three-year period.
During the 2015, 2016 and 2017 fiscal years, the total amount of gross unrecognized tax benefit activity was as follows (in thousands):
Balance as of June 30, 2014
|
|
$
|
13,290
|
|
Reductions for tax positions of prior years
|
|
|
—
|
|
Lapse of statute of limitations
|
|
|
(152
|
)
|
Balance as of June 30, 2015
|
|
|
13,138
|
|
Addition for tax positions of prior years
|
|
|
—
|
|
Reductions for tax positions of prior years
|
|
|
—
|
|
Lapse of statute of limitations
|
|
|
(172
|
)
|
Balance as of June 30, 2016
|
|
|
12,966
|
|
Addition for tax positions of prior years
|
|
|
—
|
|
Reductions for tax positions of prior years
|
|
|
(54
|
)
|
Lapse of statute of limitations
|
|
|
(176
|
)
|
Balance as of June 30, 2017
|
|
$
|
12,736
|
|
During the fiscal year ended June 30, 2017, the Company’s unrecognized tax benefits decreased by $0.2 million due to the expiration of certain statutes of limitations reflected in discontinued operations.
As of June 30, 2017 and June 30, 2016, the Company had approximately $12.7 million and $13.0 million, respectively of unrecognized tax benefits. All of the tax benefit realized during the 2017, 2016, and 2015 fiscal years were recorded as net income or expense from discontinued operations. The unrecognized tax benefits, if recognized, would impact the effective tax rate by $12.7 million and $13.0 million without considering the impact of the valuation allowance. The unrecognized tax benefit at June 30, 2017 of $12.7 million, is offset against the deferred tax asset for federal and state research and development tax credits.
F-28
The Company’s policy is to incl
ude interest and penalties related to unrecognized tax benefits in tax expense on the Company’s consolidated statements of operations. As of June 30, 2017, no amount is accrued for interest associated with tax liabilities.
Although timing of the resolution and/or closure on the Company's unrecognized tax benefits is highly uncertain, the Company does not believe it is reasonably possible that the unrecognized tax benefits would materially change in the next 12 months.
The Company files U.S. federal, U.S. state and foreign tax returns. Because of NOL carryforwards, substantially all of the Company's tax years, from the 1995 through 2016 fiscal years, remain open to IRS examinations with the exception of the 2010 and 2009 fiscal years for which IRS examinations have been completed. Substantially all of the Company’s tax years, from the 1995 through 2016 fiscal years, remain open to state tax examination with the exception of Alabama, Massachusetts, and Texas. Most of the Company's remaining foreign jurisdictions have three or four open tax years at any point in time.
Effective upon the closing of a series of transactions, as discussed in Note 5, culminating in the creation of the Company’s investment management business, the Company’s chief operating decision maker began to view where resources would be allocated to the investment management business based on performance of the investment management business relative to acquisition opportunities in other industries. Prior to the Divestiture of the Company’s patent licensing business on June 30, 2016, the Company viewed all of its operations as a single integrated business. The following table provides detail of each of the Company’s operating segments (in thousands):
|
|
For the Years Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
Investment management
|
|
$
|
|
4,927
|
|
|
$
|
|
—
|
|
General corporate
|
|
|
|
—
|
|
|
|
|
—
|
|
Total revenue
|
|
|
|
4,927
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
Investment management
|
|
$
|
|
5,119
|
|
|
$
|
|
—
|
|
General corporate
|
|
|
|
4,413
|
|
|
|
|
9,835
|
|
Total operating costs and expenses
|
|
|
|
9,532
|
|
|
|
|
9,835
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
Investment management
|
|
$
|
|
(489
|
)
|
|
$
|
|
—
|
|
General corporate
|
|
|
|
(18,161
|
)
|
|
|
|
(14,543
|
)
|
Total pre-tax income (loss) from continuing operations
|
|
|
|
(18,650
|
)
|
|
|
|
(14,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) income tax
|
|
$
|
|
(1,210
|
)
|
|
$
|
|
(5,103
|
)
|
Income (loss) from discontinued operations, net
|
|
|
|
2,203
|
|
|
|
|
18,862
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
|
(15,237
|
)
|
|
$
|
|
9,422
|
|
Less: net loss attributable to non-controlling interest
|
|
|
|
(30
|
)
|
|
|
|
—
|
|
Net loss attributable to Great Elm Capital Group
|
|
$
|
|
(15,207
|
)
|
|
$
|
|
9,422
|
|
|
|
As of June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Investment management
|
|
$
|
|
9,619
|
|
|
$
|
|
—
|
|
General corporate
|
|
|
|
67,075
|
|
|
|
|
80,897
|
|
Total assets
|
|
$
|
|
76,694
|
|
|
$
|
|
80,897
|
|
F-29
14.
|
Quarterly Financial Results (Unaudited)
|
The following table sets forth a summary of the Company’s unaudited quarterly operating results for each of the eight quarters in the period ended June 30, 2017. All quarters have been revised as necessary to reflect discontinued operations. The information has been derived from the Company’s unaudited consolidated financial statements that, in management’s opinion, have been prepared on a basis consistent with the accompanying consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation.
|
|
Fiscal Year Ended June 30, 2017
|
|
|
Fiscal Year Ended June 30, 2016
|
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
Net revenues
|
|
$
|
2,065
|
|
|
$
|
1,582
|
|
|
$
|
1,280
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Operating costs and expenses
|
|
|
1,880
|
|
|
|
4,256
|
|
|
|
858
|
|
|
|
2,538
|
|
|
|
4,890
|
|
|
|
2,006
|
|
|
|
1,396
|
|
|
|
1,651
|
|
Operating loss from continuing operations
|
|
$
|
185
|
|
|
$
|
(2,674
|
)
|
|
$
|
422
|
|
|
$
|
(2,538
|
)
|
|
$
|
(4,890
|
)
|
|
$
|
(2,006
|
)
|
|
$
|
(1,396
|
)
|
|
$
|
(1,651
|
)
|
Loss from continuing operations
|
|
$
|
(786
|
)
|
|
$
|
(2,797
|
)
|
|
$
|
(8,344
|
)
|
|
$
|
(5,513
|
)
|
|
$
|
(902
|
)
|
|
$
|
(3,165
|
)
|
|
$
|
(2,537
|
)
|
|
$
|
(2,836
|
)
|
Income (loss) from discontinued operations
|
|
|
(105
|
)
|
|
|
—
|
|
|
|
210
|
|
|
|
2,098
|
|
|
|
43,003
|
|
|
|
(6,621
|
)
|
|
|
(10,139
|
)
|
|
|
(7,381
|
)
|
Net income (loss) attributable to Great Elm Capital
Group, Inc.
|
|
$
|
(1,305
|
)
|
|
$
|
(2,519
|
)
|
|
$
|
(7,968
|
)
|
|
$
|
(3,415
|
)
|
|
$
|
42,101
|
|
|
$
|
(9,786
|
)
|
|
$
|
(12,676
|
)
|
|
$
|
(10,217
|
)
|
Basic and diluted earnings (loss) per share from
continuing operations per share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.81
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.30
|
)
|
Basic and diluted earnings (loss) from discontinued
operations per share
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.02
|
|
|
$
|
0.22
|
|
|
$
|
4.57
|
|
|
$
|
(0.70
|
)
|
|
$
|
(1.08
|
)
|
|
$
|
(0.79
|
)
|
Basic and diluted earnings (loss) per share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
4.47
|
|
|
$
|
(1.04
|
)
|
|
$
|
(1.35
|
)
|
|
$
|
(1.09
|
)
|
Shares used in computing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per share
|
|
|
23,200
|
|
|
|
23,187
|
|
|
|
10,073
|
|
|
|
9,467
|
|
|
|
9,412
|
|
|
|
9,432
|
|
|
|
9,408
|
|
|
|
9,366
|
|
|
(1)
|
Net revenues for the second and third quarters of fiscal 2017 include the reclassification of $0.3 million and $0.5 million of dividends and interest income from net revenues to other operating income, respectively. The reclassifications did not have an impact on the previously reporting losses from continuing operations or net loss for the applicable periods ended December 31, 2016 and March 31, 2017.
|
In September 2017, the Company and its subsidiaries, entered into a Separation Agreement with MAST Capital Management, LLC (
MCM
), certain funds and other entities controlled by MCM, David J. Steinberg (
Steinberg
), Peter A. Reed (
Reed
), our newly appointed Chief Executive Officer, and Adam M. Kleinman (
Kleinman
). As part of the Separation Agreement, the GP Corp Note, with a maximum principal amount of $10.8 million on November 3, 2016, was amended and restated in an aggregate principal amount of $3.3 million. In conjunction with the reduction in the principal amount of the GP Corp Note, the cost sharing agreement between MCM and GECM was cancelled upon payment of all amounts between the parties as of the effective date of the Separation Agreement.
As further part of the Separation Agreement, the Company cancelled the warrant to purchase 54,733 shares of common stock issued as part of the Acquisition consideration and replaced the warrant with 54,733 fully vested shares of common stock. Additionally, Steinberg voluntarily agreed to resign from employment with GECM; correspondingly, Steinberg’s previously issued restricted stock award, totaling 220,923 shares, was forfeited. The Company granted MCM a two-year warrant to purchase up to 420,000 shares of common stock at a price equal to the simple weighted average trading price for the ten (10) preceding the date notice of exercise is provided.
F-30