NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except share and per share
amounts)
(unaudited)
Note
1
Background:
FC
Global Realty Incorporated (and its subsidiaries) (the “Company”), re-incorporated in Nevada on December 30, 2010,
originally formed in Delaware in 1980, is, since earlier in 2017, a real estate development and asset management company concentrated
primarily on investments in high quality income producing assets, hotel and resort developments, residential developments and
other opportunistic commercial properties.
Until
the recent sale of the Company’s last significant business unit (its consumer products division which was sold to ICTV Brands,
Inc. on January 23, 2017), the Company was a Global Skin Health company providing integrated disease management and aesthetic
solutions to dermatologists, professional aestheticians and consumers. The Company provided proprietary products and services
that addressed skin diseases and conditions including psoriasis, acne, actinic keratosis (a precursor to certain types of skin
cancer), photo damage and unwanted hair.
On
March 31, 2017, the Company entered into an Interest Contribution Agreement with First Capital Real Estate Operating Partnership,
L.P., First Capital Real Estate Trust Incorporated, and FC Global Realty Operating Partnership, LLC, the Company’s wholly-owned
subsidiary. The parties entered into amendments to the Interest Contribution Agreement on August 3, 2017, October 11, 2017 and
December 22, 2017. Pursuant to the Interest Contribution Agreement, as amended (collectively, the “Contribution Agreement”),
the First Capital Real Estate Operating Partnership, L.P. contributed certain real estate assets to FC Global Realty Operating
Partnership, LLC. In exchange, First Capital Real Estate Operating Partnership, L.P. received shares of the Company’s common
stock and newly designated Series A Convertible Preferred Stock. This transaction closed on May 17, 2017. As a result of the Contribution
Agreement, the Company has primarily become a real estate asset management and development company for the purpose of investing
in a diversified portfolio of quality commercial and residential real estate properties and other real estate investments located
in the United States.
Stock
Delisting from Nasdaq and Transfer to OTC
On
February 23, 2018 and March 13, 2018, the Company had received two delisting notices from Nasdaq this year, the first concerning
the Company’s failure to comply with the $1.00 minimum bid price under Nasdaq Marketplace Rule 5550(a)(2), and the second
with regard to the Company’s stockholder equity, which had fallen below the minimum $2.5 million required to be maintained
under Nasdaq Marketplace Rule 5550(b)(1).
On
June 18, 2018, the Company received a delisting determination letter from The Nasdaq Stock Market’s Listing Qualifications
Department (“Nasdaq”) relating to the Company’s Common Stock. In that letter, Nasdaq stated that the Company
is not in compliance with Nasdaq’s Listing Rules 5635(b), 5635(c), 5635(d)(1) and 5635(d)(2) with regard to shareholder
approval of certain transactions involving the sale of shares of Series B Preferred Stock to Opportunity Fund I-SS, LLC (“OFI”),
the conversion of certain promissory notes held by affiliates of the Company and related transactions entered into with such affiliates,
the acquisition of common stock and Series A Preferred Stock by OFI from First Capital Real Estate Operating Partnership, L.P.
and the timing of these transactions and contingencies between them.
As
a result of the violations of the shareholder equity and shareholder approval rules, Nasdaq has determined to delist the Company’s
securities. While the Company has a right of appeal with regard to this most recent notice, the Company’s board of directors,
after evaluating the matter, has determined that it is in the Company’s best interests to remove its secure ties from trading
on Nasdaq while it addresses these issues, and has therefore waived its right of appeal.
The
Company’s common stock ceased to trade on the Nasdaq Capital Market prior to the opening of business on June 20, 2018, and
moved on that date to trading and quotation on the Pink Current Information tier operated by the OTC Markets Group Inc. The Company’s
trading symbol remains FCRE. Trading and quotation information is available at www.otcmarkets.com. The Company intends to apply
for its common stock to be quoted and traded on the OTCQB Market.
The
Company continues to provide annual financial statements audited by a registered Public Company Accounting Oversight Board auditor
and unaudited interim financial reports, prepared in accordance with US GAAP. In addition, the Company’s board of directors
continues to evaluate options to maximize the value of the Company’s assets, including opportunities to invest in or acquire one
or more operating businesses that provide opportunities for appreciation in value (see also Note 7).
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except share and per share
amounts)
(unaudited)
Note
1 (Cont.)
Background:
Liquidity
and Going Concern
As of September 30, 2018, the Company had
an accumulated deficit of $137 million and the Company incurred an operating loss for the nine months ended September 30, 2018
of approximately $2.9 million. Subsequent to the sale of the Company’s last significant business unit, the consumer products
division as described above, and to date, the Company has dedicated most of its financial resources to general and administrative
expenses associated with its ongoing business of real estate development and asset management.
As of September 30, 2018, the Company’s
cash and cash equivalents amounted to $459. While the Company is a party to a remediation agreement, dated September 24, 2018 (the
“Remediation Agreement”) with OFI, and has raised certain funds from OFI in both 2017 and in 2018 through the date
of the financial statements (see also Note 5), and OFI agreed to purchase $100 of shares of Series D Preferred Stock for a purchase
price of $0.65 per share on the last day of each month, commencing on September 30, 2018, until it has purchased an aggregate of
$500 of shares of Series D Preferred Stock, provided that, upon closing of any material business combination involving the Company
that is approved by OFI, OFI agreed to purchase an additional $1,500 of shares of Series D Preferred Stock at a price of $0.65
per share, there is no guarantee that any additional investments will be made. The Company has historically financed its activities
with cash from operations, the private placement of equity and debt securities, borrowings under lines of credit and, in the most
recent periods with sales of certain assets and business units. The Company will be required to obtain additional liquidity resources
in order to support its ongoing operations.
At
this time, there is no guarantee that the Company will be able to obtain an adequate level of financial resources required for
the short and long-term support of its operations or that the Company will be able to obtain additional financing as needed, or
meet the conditions of such financing, or that the costs of such financing may not be prohibitive. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements
do not include any adjustments to reflect the possible future effects on recoverability of assets and classification of liabilities
that may result from the outcome of this uncertainty.
Note
2
Discontinued
Operations:
On
January 23, 2017, the Company sold its last significant business unit (its consumer products division) to ICTV Brands, Inc. This
business was a substantial business unit of the Company and the sale brought a strategic shift in focus of management. The Company
accordingly classified this former business as held for sale and discontinued operations in accordance with ASC 360 “Impairment
or disposal of long-lived assets” during the fourth quarter of the year ended December 31, 2016.
The
accompanying consolidated financial statements as of and for the three and nine months ended September 30, 2017 have been retrospectively
adjusted to reflect the operating results of the consumer business as discontinued operations separately from continuing operations.
The Company recognized a net loss from discontinued operations of $2,235, including the loss on the sale of the discontinued operations
in the nine months ended September 30, 2017, which represents the difference between the adjusted net purchase price and the carrying
value of the disposal group.
The
Company recognized a gain of $286 related to the discontinued operations during the nine months ended September 30, 2018, as a
result of the sale of residual inventory to third parties.
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except share and per share
amounts)
(unaudited)
Note
2 (Cont.)
Discontinued
Operations:
The
following is a summary of income (loss) from discontinued operations for the three and nine months ended September 30, 2018 and
2017:
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,539
|
|
Cost of revenues
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
100
|
|
Gross profit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,439
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and product development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
143
|
|
Selling and marketing
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
620
|
|
General and administrative
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,342
|
|
Other expense (income), net
|
|
|
—
|
|
|
|
183
|
|
|
|
|
|
|
|
(2,467
|
)
|
Loss on disposal of assets
|
|
|
—
|
|
|
|
594
|
|
|
|
—
|
|
|
|
4,845
|
|
Loss from discontinued operations before interest and other financing expense, net
|
|
|
—
|
|
|
|
(777
|
)
|
|
|
—
|
|
|
|
(5,483
|
)
|
Interest and other financing expense, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(77
|
)
|
Loss from discontinued operations before income taxes
|
|
|
—
|
|
|
|
(777
|
)
|
|
|
—
|
|
|
|
(2,121
|
)
|
Income tax expenses allocated to discontinued operations
|
|
|
—
|
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
(114
|
)
|
Loss from discontinued operations
|
|
|
—
|
|
|
|
(797
|
)
|
|
|
—
|
|
|
|
(2,235
|
)
|
Gain from disposal of discontinued operations, net of taxes
|
|
|
66
|
|
|
|
—
|
|
|
|
286
|
|
|
|
—
|
|
Net gain (loss) from discontinued operations
|
|
$
|
66
|
|
|
$
|
(797
|
)
|
|
$
|
286
|
|
|
$
|
(2,235
|
)
|
Note
3
Summary
of Significant Accounting Policies:
Accounting
Principles
The
accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the Company’s
consolidated financial statements and related notes contained in Amendment No. 1 to the Company’s Annual Report on Form
10-K/A for the fiscal year ended December 31, 2017. The unaudited condensed consolidated financial statements have been prepared
in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) related to interim
financial statements. As permitted under those rules, certain information and footnote disclosures normally required or included
in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The financial information contained
herein is unaudited; however, management believes all adjustments have been made that are considered necessary to present fairly
the results of the Company’s financial position and operating results for the interim periods. All such adjustments are
of a normal recurring nature. The accompanying condensed consolidated balance sheet as of December 31, 2017 has been derived from
the consolidated financial statements contained in Amendment No. 1 to the Company’s Annual Report on Form 10-K/A.
The
results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for
the year ending December 31, 2018 or for any other interim period in the future.
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except share and per share
amounts)
(unaudited)
Note
3 (Cont.)
Summary
of Significant Accounting Policies:
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and the wholly and majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Entities
in which the Company directly or indirectly owns more than 50% of the outstanding voting securities, and for which other interest
holders do not possess the right to affect significant management decisions, are generally accounted for under the voting interest
consolidation method of accounting. Participation of other interest holders in the net assets and in the earnings or losses of
a consolidated subsidiary is reflected in the line items “Non-controlling Interest” in the Company’s consolidated
balance sheets and “net income (loss) attributable to the non-controlling interest” in the Company consolidated statements
of comprehensive loss. Non-controlling interest adjusts the Company’s consolidated results of operations to reflect only
the Company’s share of the earnings or losses of the consolidated subsidiary.
Any
changes in the Company’s ownership interest in a consolidated subsidiary, through additional equity issuances by the consolidated
subsidiary or from the Company acquiring the shares from existing shareholders, in which the Company maintains control is recognized
as an equity transaction, with appropriate adjustments to both the Company’s additional paid-in capital and the corresponding
non-controlling interest.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions
that affect amounts reported of assets and liabilities at the date of the financial statements and the reported amount of revenues
and expenses during the reporting periods. Actual results could differ from those estimates and be based on events different from
those assumptions. As part of these financial statements, the more significant estimates include (1) identification of and measurement
of instruments in equity and mezzanine transactions (including cancellation, extinguishment and exchange of such instruments);
(2) impairment of investment properties and investment in other company; (3) evaluation of going concern; and (4) contingencies.
Revenue
recognition
On
April 26, 2018, the Company’s subsidiary, RETPROP I, LLC, completed the acquisition of a 7,738 square-foot medical office
building in Dayton, Ohio for a $326 purchase price, paid in cash consideration. The building’s former owner, and current
tenant, a medical practice, has entered into a lease with the Company to continue its occupancy through April 2022, with the option
to renew that lease for two additional five-year terms. Currently, the Company is accounting for the arrangement as an operating
lease under ASC 840,
Leases
.
The
Company records rental revenues on a straight-line basis under which contractual rent increases are recognized evenly over the
lease term. Certain properties have leases that provide for tenant occupancy during periods where no rent is due or where minimum
rent payments change during the term of the lease. Accordingly, receivables from tenants that the Company expects to collect over
the remaining lease term are recorded on the balance sheet as straight-line rent receivables.
Income
(Loss) per Share
The Company computes net income (loss)
per share in accordance with ASC 260,
“Earnings per share”
. Basic income (loss) per share is computed by
dividing net income (loss) by the weighted-average number of common shares outstanding during the period, net of the weighted average
number of treasury shares (if any). Securities that may participate in dividends with the common stock (such as the convertible
Series A, B, C and D Preferred Stock) are considered in the computation of basic income (loss) per share using the two-class method.
However, in periods of net loss, participating securities are included only if the holders of such securities have a contractual
obligation to share the losses of the Company. Accordingly, the outstanding Series A and Series C preferred shares were included
in the computation, while the Series B and D preferred shares were not.
Diluted income (loss) per common share
is computed similar to basic income (loss) per share, except that the denominator is decreased (increased) to include the number
of additional potential common shares that would have been outstanding if the potential common shares had been issued and if the
additional common shares were dilutive. Potential common shares are excluded from the computation for a period in which a net loss
is reported or if their effect is anti-dilutive. The Company’s potential common shares consist of stock options, stock warrants
and restricted stock awards issued under the Company’s stock incentive plans and their potential dilutive effect is considered
using the treasury method, and of convertible Series A, B, C and D Preferred Stock which their potential dilutive effect is considered
using the “if-converted method”.
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except share and per share
amounts)
(unaudited)
Note
3 (Cont.)
Income
(Loss) per Share (Cont.)
The
net income (loss) from continuing operations and the weighted average number of shares used in computing basic net income (loss)
per share from continuing operations for the three and nine months ended September 30, 2018 and 2017, is as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
694
|
|
|
$
|
(3,156
|
)
|
|
$
|
793
|
|
|
|
(3,866
|
)
|
Net loss (gain) from discontinued operations attributable to common stockholders
|
|
|
(66
|
)
|
|
|
797
|
|
|
|
(286
|
)
|
|
|
2,235
|
|
Accretion of Series B Preferred Stock to redemption value (*)
|
|
|
(33
|
)
|
|
|
—
|
|
|
|
(2,001
|
)
|
|
|
—
|
|
Preferred dividend on Series B Preferred Stock (**)
|
|
|
(36
|
)
|
|
|
—
|
|
|
|
(177
|
)
|
|
|
—
|
|
Deemed dividend related to redemption agreement
|
|
|
(446
|
)
|
|
|
—
|
|
|
|
(446
|
)
|
|
|
—
|
|
Participation of stockholders of Series A and
Series C Preferred Stock in the net loss from continuing operations
|
|
|
—
|
|
|
|
1,171
|
|
|
|
423
|
|
|
|
455
|
|
Participation of stockholders of Series A, B, C and D Preferred Stock in the net income from continuing operations
|
|
|
(35
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net basic income (loss) from continuing operations attributable to common stockholders
|
|
$
|
78
|
|
|
$
|
(1,188
|
)
|
|
$
|
(1,694
|
)
|
|
$
|
(1,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock used in computing basic net income (loss) per share
|
|
|
14,423,697
|
|
|
|
5,240,328
|
|
|
|
13,055,528
|
|
|
|
5,021,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share of common stock from continuing operations, basic
|
|
$
|
0.01
|
|
|
$
|
(0.23
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.23
|
)
|
|
(*)
|
Based
on the rights and privileges of Series B Preferred Stock, since the Company did not obtain shareholder approval at March 31, 2018,
the then outstanding Series B Preferred Stock became redeemable at the option of OFI. Consequently, in each reporting period commencing
March 31, 2018, the outstanding Series B Preferred Stock is recorded at its maximum redemption value until occurrence of redemption
or conversion. These shares were cancelled as a result of the entry into the Remediation Agreement on September 24,
2018 as described below (see also Note 5).
|
|
(**)
|
The
net loss used for the computation of basic and diluted net loss per share for three and nine months ended September 30, 2018,
includes the preferred dividend requirement of 8% per share per annum for the Series B Preferred Stock, compounded annually which
shall be distributed to stockholders in case of distributable assets determined in the Company’s certificate of designation
under the liquidation preference right (see also Note 5).
|
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except share and per share
amounts)
(unaudited)
Note
3 (Cont.)
Income
(Loss) per Share (Cont.)
The
net income (loss) from continuing operations and the weighted average number of shares used in computing diluted net income (loss)
per share from continuing operations for the three and nine months ended September 30, 2018 and 2017, is as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net basic income (loss) from continuing operations attributable to common stockholders
|
|
$
|
78
|
|
|
$
|
(1,188
|
)
|
|
$
|
(1,694
|
)
|
|
$
|
(1,176
|
)
|
Participation of stockholders of Series A, B, C and D Preferred Stock in net income from continuing operations
|
|
|
35
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
Adjustment related to revaluation of asset contribution related financial instruments, net securities
|
|
|
—
|
|
|
|
(326
|
)
|
|
|
—
|
|
|
|
(2,948
|
)
|
Participation of stockholders of Series A Preferred Stock in the adjustment related to revaluation of asset contribution related financial instruments, net securities
|
|
|
—
|
|
|
|
121
|
|
|
|
—
|
|
|
|
529
|
|
Net basic income (loss) from continuing operations attributable to common stockholders and participating securities
|
|
$
|
113
|
|
|
$
|
(1,393
|
)
|
|
$
|
(1,694
|
)
|
|
$
|
(3,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock used in computing basic net income (loss) per share
|
|
|
14,423,697
|
|
|
|
5,240,328
|
|
|
|
13,055,528
|
|
|
|
5,021,734
|
|
Incremental shares related to assumed conversion of Series A, B C and D Preferred Stock into common stock
|
|
|
6,684,300
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Incremental shares related to assumed exercise of asset contribution financial instruments
|
|
|
—
|
|
|
|
64,939,538
|
|
|
|
—
|
|
|
|
48,794,349
|
|
Diluted number of common and common stock equivalent shares outstanding
|
|
|
21,083,997
|
|
|
|
70,179,866
|
|
|
|
13,055,528
|
|
|
|
53,816,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share of common stock from continuing operations, diluted
|
|
$
|
0.01
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.07
|
)
|
For the three months ended September 30,
2018, diluted income per share excludes stock options and common stock to be issued upon written call option, as the effect of
their inclusion would be anti-dilutive. For the nine months ended September 30, 2018, diluted loss per share excludes stock options,
restricted stock and Series A, B, C and D Preferred Stock, as the effect of their inclusion would be anti-dilutive. For the three
and nine months ended September 30, 2017, diluted loss per share excludes stock options and Series A Preferred Stock, as the effect
of their inclusion would be anti-dilutive due to the net loss attributable to common stockholders for the period.
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except share and per share
amounts)
(unaudited)
Note
3 (Cont.)
Summary
of Significant Accounting Policies:
Modifications
or exchanges
Modifications
to, or exchanges of, financial instruments such as preferred shares, are accounted for as a modification or an extinguishment.
Such an assessment is done by management either qualitatively or quantitatively based on the facts and circumstances of each transaction.
When
a preferred share has well-defined periodic contractual cash flows, a quantitative assessment is done using the cash flow model
in accordance with the provisions of ASC 470-50, “Debt- Modification and Extinguishments”. Under ASC 470-50, modifications
or exchanges are generally considered extinguishments with gains or losses recognized in current earnings if the terms of the
new instrument and the original instrument are substantially different. The instruments are considered “substantially different”
when the present value of the cash flows under the terms of the new instrument is at least 10% different from the present value
of the remaining cash flows under the terms of the original instrument. If the terms of an instrument are changed or modified
and the present value of the cash flows under the terms of the new instrument is less than 10%, the debt instruments are not considered
to be substantially different, except in limited certain circumstances.
If
a preferred share has characteristics that cannot be reliably assessed using the cash flow model in ASC 470-50, it is evaluated
using another quantitative model, such as the fair value model or based on an analysis of the significance of any contractual
terms added, contractual terms removed, and changes to existing contractual terms. In such analysis the Company considers, among
other critical terms such as a change in the liquidation preference order/priority (including the determination whether the classification
of the instrument has changed from mezzanine to equity or to liability, or vice versa), voting rights, or conversion ratio. In
addition, the Company considers the business purpose for the changes and how the changes may influence the economic decisions
of the investor, if any.
Under
the fair value model, the Company compares the fair value of the preferred shares immediately before and after the modification
or exchange. If the fair value before and after the modification or exchange are substantially different (10% or more), the modification
or exchange should be accounted for as an extinguishment; if the fair value before and after the modification or exchange are
not substantially different, it should be accounted for as a modification.
If
the assessment results in an extinguishment, then the difference between the consideration paid (i.e., the fair value of the new
or modified preferred shares, or, when applicable, such fair value that was allocated to the original preferred shares) and the
carrying value of the original preferred shares is recognized as a reduction of, or increase to, retained earnings as a deemed
dividend. Such amount is also recognized as an adjustment to earnings available to common shareholders for purposes of calculating
earnings per share.
If
it is determined that an exchange or modification of preferred stock should be accounted for as a modification, the Company evaluates
whether the original preferred shareholders paid or received a dividend through the new (or modified) terms. Such amount is computed
as the difference between the fair value of the preferred shares before and after the modification or exchange, measured on the
modification or exchange date and it is recorded as a reduction of, or increase to, retained earnings as a deemed dividend.
Recent
Accounting Pronouncements
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1.
|
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update No. 2016-02 (Topic 842) “Leases”. Topic 842 supersedes the
lease requirements in ASC Topic 840, “Leases”. Under Topic 842, lessees are
required to recognize assets and liabilities on the balance sheet for most leases and
provide enhanced disclosures. ASU No. 2016-02 is effective for interim and annual reporting
periods beginning after December 15, 2018. In July 2018, the FASB issued amendments in
ASU 2018-11, which provide a transition election to not restate comparative periods for
the effects of applying the new standard. This transition election permits entities to
change the date of initial application to the beginning of the earliest comparative period
presented, or retrospectively at the beginning of the period of adoption through a cumulative-effect
adjustment.
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The
Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its financial statements and related
disclosures.
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except share and per share
amounts)
(unaudited)
Note
3 (Cont.)
Summary
of Significant Accounting Policies:
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2.
|
Commencing
January 1, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230):
“Restricted Cash”, which requires companies to include amounts generally
described as restricted cash and restricted cash equivalents in cash and cash equivalents
when reconciling beginning-of-period and end-of-period total amounts shown on the statement
of cash flows. The amendments in this update are effective for public business entities
for fiscal years beginning after December 15, 2017, and interim periods within those
fiscal years.
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This
guidance had no material impact on the Company’s consolidated financial statements.
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3.
|
In
May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation”.
The amendment provides guidance about which changes to terms or conditions of a share-based
payment award require an entity to apply modification accounting. The guidance became
effective for the fiscal year beginning on January 1, 2018, including interim periods
within that year.
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This
guidance had no material impact on the Company’s consolidated financial statements.
Note
4
Commitments
and Contingencies:
Litigation
Avalon
On January 12, 2018, the Company received a copy
of a complaint, dated November 17, 2017, that was filed by Alpha Alpha, LLC in the Thirteenth Judicial District Court in the County
of Valencia in the State of New Mexico against Avalon Jubilee, LLC, the holding company that owns the property in Los Lunas, New
Mexico, HiTex, LLC, MCBB, LLC, Land Strategies, LLC, Ronald R. Cobb and John Does 1-5. The suit asked the court to, among other
things, determine whether there have been unauthorized transfers of interest in Avalon Jubilee LLC; and declare who are the holders
of interests in Avalon Jubilee LLC. Although the complaint did not name the Company or any of its subsidiaries or specifically
question the Company’s interest in Avalon Jubilee LLC, it raised questions about whether the transfers of interest leading
to the Company’s acquisition of its interest in Avalon Jubilee LLC were properly made in accordance with the Avalon Jubilee
operating agreement.
On April 27, 2018, the Company, and certain of
its subsidiaries, entered into an agreement with Alpha Alpha LLC and Presidential Realty Corporation and certain of its subsidiaries,
under which the Company’s subsidiary, First Capital Avalon Jubilee LLC, was recognized as a 17.9133% member in Avalon Jubilee,
LLC, and the operating agreement and other documents were so amended to reflect that acknowledgement. In 2017, the Company recognized
an impairment expense of $1,439 to account for our estimate of the impact that the described litigation may have on the operations
and fair value of the underlying asset. The settlement and recognition of the Company’s ownership interest was viewed
as a favorable outcome.
JFURTI
The
Company is a party to JFURTI, LLC, et al v. Suneet Singal, et al, filed in the United States District Court for the Southern District
of New York. The suit names as defendants Suneet Singal, an officer of various First Capital companies as well as the Company’s
former Chief Executive Officer and former member of the Company’s board of directors, Frank Grant and Richard Leider, board
members of First Capital Real Estate Investments, LLC, First Capital Real Estate Advisors, LP, Presidential Realty Corporation,
Presidential Realty Operating Partnership, Downey Brand LLP and now the Company (under its previous name, PhotoMedex Inc.), as
well as nominal derivative defendants First Capital Real Estate Trust Incorporated and First Capital Real Estate Operating Partnership,
L.P. Mr. Leider is also on the board of directors of the Company.
A
Motion to Dismiss this action was filed with the court on behalf of all defendants. On April 12, 2018, plaintiffs filed an Amended
Complaint in this matter. Plaintiffs also filed a response to the defendants’ Motion. Defendants filed a Memorandum in support
of their Motion to Dismiss as well as a response to the plaintiffs’ response to the Motion, addressing both the original
and the Amended Complaint in those filings. The Motion is now pending before the Court and there is no time frame known in which
the Court may rule on the Motion.
The
Company intends to defend itself vigorously against this suit. At this time, the amount of any loss, or range of loss, cannot
be reasonably estimated as the case has only been initiated and no discovery has been conducted to determine the validity of any
claim or claims made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability related to these
particular legal matters. However, in the future, as the cases progress, the Company may be required to record a contingent liability
or reserve for these matters. More information is available from the Company’s prior filings in its Annual Reports on Form
10-K/A for the year ended December 31, 2018 and in its Quarterly Report for the quarter ended June 30, 2018 on Form 10-Q.
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except share and per share
amounts)
(unaudited)
Note
4 (Cont.)
Commitments
and Contingencies:
Suneet
Singal
On September 21, 2018, the Company received
notice that a suit had been filed against it in the Supreme Court of New York for the County of New York by Suneet Singal, its
former Chief Executive Officer. The suit also names the Company’s transfer agent, Broadridge Corporate Issuer Solutions Inc.
(“Broadridge”). The suit alleges breach of contract, breach of good faith and, with regard to Broadridge, a violation
of UCC Article 8-401, and demands the issuance and release to Mr. Singal of 1,000,000 shares of the Company’s common stock,
as well as other unspecified damages. (See Note 7 for further discussion).
The
Company issued Mr. Singal 1,000,000 shares of its common stock in connection with his resignation from the Chief Executive Officer
position, under a Separation Agreement dated December 22, 2017. The Company’s board of directors later unanimously determined
to rescind the grant of that stock, in part because of discoveries made in 2018 regarding the valuation and/or transfer of assets
under the Contribution Agreement by First Capital Real Estate Operating Partnership, L.P., in which Mr. Singal is Chief Executive
Officer of First Capital Real Estate Trust Incorporated, the Partnership’s General Partner. Those discoveries included an
alleged misleading valuation of one property resulting in that property’s value being lowered by approximately $1 million,
and an alleged incorrect transfer of interests in another property, Avalon Jubilee, to the Company despite the interests being
subject to a right of first refusal.
The
Company intends to defend itself vigorously against this suit. At this time, the amount of any loss, or range of loss, cannot
be reasonably estimated as the case has only been initiated and no discovery has been conducted to determine the validity of any
claim or claims made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability related to these
particular legal matters. However, in the future, as the cases progress, the Company may be required to record a contingent liability
or reserve for these matters.
Employee
Misappropriation of Funds
In
January 2018, as a result of new control procedures instituted by the management team, the Company discovered that a former employee
had charged personal expenses to a company credit card, making unauthorized payments to herself in the form of bonuses and car
allowances and theft of Company inventory over several years as mentioned below. Upon discovery, the Company took immediate steps
to remove such employee’s access to Company assets, placed her on paid leave, and launched an internal investigation. Based
on the results of the preliminary internal investigation, the employee was terminated on January 26, 2018.
The
Company engaged an accounting firm to conduct a forensic accounting investigation, which concluded that the employee misappropriated
corporate funds for her personal benefit by charging personal items to a company credit card, making unauthorized payments to
herself in the form of bonuses and car allowances and theft of Company inventory between May 2011 through January 2018, resulting
in an aggregate misappropriation of Company funds in the amount of approximately $484.
After
considering the qualitative and quantitative aspects in accordance with Staff Accounting Bulletin No. 99, the Company has concluded
that this misappropriation of Company funds did not lead to a material misstatement on any of the previous financial statements
covering the aforementioned period of time that would require restatement of those financial statements. Such determination was
based, among others, on the following: (i) the magnitude of the theft, as a percentage, was low relative to revenue, pretax income
and asset balance, (ii) the theft would not create any changes to the financial reporting line items, and (iii) most of the journal
entries created by the employee, if revised today, would cause zero change to net income or assets and liabilities as those entries
related to the Company’s former business operations which were sold to a third parties.
The
Company is currently evaluating its options on how best to proceed with recovering these assets.
Other
litigation
The
Company and certain subsidiaries are, and have been, involved in other miscellaneous litigation and legal actions, including product
liability, consumer, commercial, tax and governmental matters, which can arise from time to time in the ordinary course of the
Company’s business. The Company believes that these other litigations and claims will likely be resolved without a material
effect on the Company’s consolidated financial position, results of operations or liquidity. However, litigation and legal
actions are inherently unpredictable, and excessive verdicts can result in such situations. Although the Company believes it has
or will have substantial defenses in these matters, it may, in the future, incur judgments or enter into settlements of claims
that could have a material adverse effect on results of operations in a particular period.
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except share and per share
amounts)
(unaudited)
Note
4 (Cont.)
Commitments
and Contingencies:
Registration
Rights Agreement under Remediation Plan
On
September 24, 2018, in connection with the Remediation Agreement (as described in Note 5), the Company entered into a
Registration Rights Agreement (the “Registration Rights Agreement”) with OFI and Dr. Dolev Rafaeli, Dennis M.
McGrath and Dr. Yoav Ben-Dror (the “Note Holders”), pursuant to which the Company agreed to register all shares
of common stock that may be issued upon conversion of the Series C Preferred Stock and Series D Preferred Stock, as well as
all other shares of the Company’s capital stock held by OFI (the “Registrable securities”) under the
Securities Act of 1933, as amended (the “Securities Act”). The Company agreed to file a registration statement
covering the resale of such Registrable Securities within 30 days of the date of the Registration Rights Agreement and cause
such registration statement to be declared effective under the Securities Act as soon as possible but, in any event, no later
than 120 days following the filing date if such registration statement is filed on Form S-3 or 150 days if such registration
statement is filed on Form S-1. If such registration statement is not filed or declared effective by the SEC on or prior to
such dates, or if after such registration statement is declared effective, without regard for the reason thereunder or
efforts therefor, such registration statement ceases for any reason to be effective for more than an aggregate of 30 trading
days during any 12-month period, which need not be consecutive, then in addition to any other rights the holders of
Registrable Securities may have under the Registration Rights Agreement or under applicable law, the Company shall pay to
each holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 1.0% of the product obtained by
multiplying (x) $1.00 by (y) the number of shares of Registrable Securities held by the holder (the “Investment
Amount”), provided that, in no event will the Company be liable for liquidated damages in excess of 1.0% of the
Investment Amount in any single month and that the maximum aggregate liquidated damages payable to the holders under the
Registration Rights Agreement shall be 10% of the Investment Amount. Notwithstanding the foregoing, the filing and effective
date deadlines above shall be extended during such time as the Company is actively pursuing a business combination involving
the Company that is approved by each of OFI and the Note Holders. As result of the potential merger transaction (as described
in Note 7) under which, inter alia, the Company intends to register all Registrable Securities through a registration
statement on a Form S-4, the filing and effective date deadlines above are currently under extension. As the accounting for
any obligations due under the registration payment agreement falls under ASC 450 “Contingencies”, the Company
will make provisions for any liabilities and record related expense, at which time the amount to be paid is probable and
reasonably estimable. As of September 30, 2018, the amount to be paid is not probable and reasonably estimable.
The
new Registration Rights Agreement replaced previous Registration Rights Agreements with OFI and the Note Holders. Consequently,
OFI and the Note Holders waived their rights to liquidated damages in connection with the late filing and in connection with the
effectiveness deadline for previous registration statements.
Services
Agreement
On
September 24, 2018, in connection with the Remediation Agreement, the Company entered into a services agreement (the “Services
Agreement”) with the Note Holders, pursuant to which each of the Note Holders agreed to provide certain services to the
Company and/or its subsidiaries in exchange for certain cash payments set forth in the Services Agreement. Under the Services
Agreement, the Company agreed to make payments to Dr. Dolev Rafaeli, Dennis M. McGrath and Yoav Ben-Dror in the amount of approximately
$21, $7, and $10, respectively, per month (collectively, the “Cash Payments”) until December 31, 2018, provided that
Cash Payments to Dr. Rafaeli and Mr. McGrath shall be made bi-monthly in accordance with the Company’s payroll practices.
The Company may, at its option, prepay the Cash Payments at any time without any penalty or premium. The Company and the Note
Holders agreed that if the Company instructs the Note Holders to cease providing the services or otherwise attempts to or does
terminate the Note Holders as service providers for any reason, such cessation of services or termination will not affect the
Company’s obligation to make the Cash Payments.
In
addition to the Cash Payments, the Services Agreement provides that Dr. Dolev Rafaeli and Dennis M. McGrath will continue to receive
the employee benefits that they are currently receiving through December 31, 2018, including existing health and disability benefits,
and for so long after December 31, 2018 as they continue to provide the services described in the Services Agreement. After December
31, 2018 and once Dr. Dolev Rafaeli and Dennis M. McGrath no longer provide such services, as previously agreed in their employment
agreements with the Company, they will receive COBRA coverage for a period of 18 months, to be fully paid for, or reimbursed to
Messrs. Rafaeli and McGrath, by the Company.
Amended
and Restated Separation Agreement
On
February 12, 2018, the Company entered into an Amended and Restated Separation Agreement with Mr. Stephen Johnson, its former
Chief Finance Officer, pursuant to which the Company has agreed to pay Mr. Johnson an amount of $123 in 11 installments as follows:
the first six installments of $10 each, and the following five installments of $12.5 each. The first payment was made on February
15, 2018, and subsequent payments are to be made on or before the 15th day of each succeeding month, with the final installment
to be paid on or before December 15, 2018. The Company will also provide a health (medical, dental and/or vision) insurance reimbursement
payment for Mr. Johnson and his family, for a period of 11 months, in the agreed upon amount of $3 per month.
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except share and per share
amounts)
(unaudited)
Note
4 (Cont.)
Commitments
and Contingencies:
In
addition, the Company has agreed to issue to Mr. Johnson 271,000 shares of the Company’s common stock, subject to appropriate
adjustment for any stock splits, stock or business combinations, recapitalizations or similar events occurring after the date
of the agreement. Those shares will be issued on any business day during the period commencing on the date that is six months
after the date of the agreement and ending on the date that is three business days after such six-month anniversary. In August
2018, the aforesaid shares were issued to Mr. Johnson with a stated value of $86 (see also Note 5). In addition, as of September
30, 2018, the balance payable amounted to $78 to Mr. Johnson is included in accrued compensation and related expenses.
Resignation
of Officers and Director
The former Chief Executive Officer
and Chief Finance Officer of the Company resigned on June 16, 2018 asserting resignations for “good reason” as
that term is used in their employment agreements, to which the Company disagrees. To the Company’s knowledge, no
complaints against the Company have been filed to date. The Company and its legal counsel believe that a potential claim, if
any, would be without merit and intends to vigorously defend against such a claim should one arise. At this stage, the amount
of any loss, or range of loss, is highly uncertain and cannot be reasonably estimated. Therefore, the Company has not
recorded any contingent liability or reserve related to this particular potential legal matter. However, if it is determined
that Mr. Bedi and Mr. Stolzar have resigned for Good Reason as defined in their Employment Agreements, they may be entitled
to some or all of the remaining compensation and benefits outlined in those agreements. If, in the future, the likelihood
that the Company could have a loss becomes probable and estimable, the Company may be required to record a contingent
liability or reserve for this matter.
Note
5
Redeemable
Convertible Preferred Stock and Stockholders’ Equity (Deficit):
Common
Stock
The
Company’s common stock confers upon their holders the following rights:
|
▪
|
The
right to participate and vote in the Company’s stockholder meetings, whether annual or special. Each share will entitle
its holder, when attending and participating in the voting in person or via agent or letter, to one vote;
|
|
▪
|
The
right to a share in the distribution of dividends, whether in cash or in the form of bonus shares, the distribution of assets
or any other distribution pro rata to the par value of the shares held by them; and
|
|
▪
|
The
right to a share in the distribution of the Company’s excess assets upon liquidation pro rata to the par value of the shares
held by them.
|
Convertible
Series A Preferred Stock
The
terms of the Convertible Series A Preferred Stock are governed by a certificate of designation (the “Series A Certificate
of Designation”) filed by the Company with the Nevada Secretary of State on May 15, 2017. Pursuant to the Series A Certificate
of Designation, the Company designated 3,000,000 shares of the Company’s preferred stock as “Series A Convertible
Preferred Stock.” The Company issued 123,668 shares of Convertible Series A Preferred Stock in connection with the Contribution
Agreement. These shares remain outstanding as of September 30, 2018. Following is a summary of the material terms of the Series
A Convertible Preferred Stock:
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■
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Dividends.
Except for stock dividends or distributions for which adjustments are to be made, holders shall be entitled to receive,
and the Company shall pay, dividends on shares of Convertible Series A Preferred Stock equal (on an
as-if-converted-to-common-stock basis) to and in the same form as dividends actually paid on shares of the common stock when,
as and if such dividends are paid on shares of the common stock. No other dividends shall be paid on shares of Convertible
Series A Preferred Stock.
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■
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Liquidation.
Upon any liquidation, dissolution or winding-up of the Company, whether voluntary
or involuntary, the holders shall be entitled to receive out of the assets, whether capital
or surplus, of the Company, after the Redeemable Convertible Series B, C and D Preferred
Stockholder’s liquidation preference, the same amount that a holder of common stock
would receive if the Convertible Series A Preferred Stock were fully converted (disregarding
for such purposes any conversion limitations) to common stock which amounts shall be
paid pari passu with all holders of common stock.
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FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except share and per share
amounts)
(unaudited)
Note
5 (Cont.)
Redeemable
Convertible Preferred Stock and Stockholders’ Equity (Deficit) (Cont.):
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■
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Voting.
Except as otherwise provided in the Series A Certificate of Designation or as otherwise
required by law, the Convertible Series A Preferred Stock shall have no voting rights.
However, as long as any shares of Convertible Series A Preferred Stock are outstanding,
the Company shall not, without the affirmative vote of the holders of a majority of the
then outstanding shares of the Convertible Series A Preferred Stock, (a) alter or change
adversely the powers, preferences or rights given to the Convertible Series A Preferred
Stock or alter or amend the Series A Certificate of Designation, (b) amend the Company’s
articles of incorporation or other charter documents in any manner that adversely affects
any rights of the holders, (c) increase the number of authorized shares of Convertible
Series A Preferred Stock, or (d) enter into any agreement with respect to any of the
foregoing.
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■
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Conversion.
Each share of Convertible Series A Preferred Stock shall be convertible, at any time
and from time to time from at the option of the holder thereof, into that number of shares
of common stock determined by dividing $62.9575 by the Conversion Price. The Conversion
Price for the Series A Convertible Preferred Stock is equal to $2.5183, subject to adjustment
as described in the Series A Certificate of Designation.
|
Redeemable
Convertible Series B Preferred Stock
The
terms of the Redeemable Convertible Series B Preferred Stock were governed by a certificate of designation (the “Series
B Certificate of Designation”) filed by the Company with the Nevada Secretary of State on December 22, 2017, as supplemented
by that certain supplemental agreement, dated April 20, 2018, between the Company and OFI (the “Supplemental Agreement”),
which clarified certain voting and conversion limitations with respect to the Series B Preferred Stock in response to comments
from the staff of NASDAQ. Pursuant to the Series B Certificate of Designation, the Company designated 15,000,000 shares of the
Company’s preferred stock as “Series B Preferred Stock”. As more fully described below, the Company has issued
total of 3,825,000 shares of Redeemable Convertible Series B Preferred Stock in connection with a securities purchase agreement,
dated December 22, 2017, between the Company and OFI (the “OFI Purchase Agreement”) during 2017 and 2018. On September
24, 2018, all shares of Series B Preferred Stock were cancelled in conjunction with the entry into the Remediation Agreement described
below. All such shares have been converted into another series of our Preferred Stock as of September 30, 2018. On September 25,
2018, the Series B Certificate of Designation was withdrawn.
Following
is a summary of the material terms of the Redeemable Convertible Series B Preferred Stock:
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■
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Dividends.
Holders of shares of Redeemable Convertible Series B Preferred Stock were entitled receive cumulative dividends, pro
rata among such holders, prior to and in preference to any dividend on the Company’s outstanding common stock at the
per annum rate of 8% of the Series B Original Issue Price (as defined below). Dividends on each share of Series B Preferred
Stock were to accrue daily and be cumulative from December 22, 2017 (the “Series B Original Issue Date”) and were
to be payable upon the occurrence of any voluntary or involuntary liquidation, dissolution or winding up of the Company (a
“Liquidation Event”), a conversion or a redemption. The “Series B Original Issue Price” was equal to
$1.00 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other
similar recapitalization with respect to the Redeemable Convertible Series B Preferred Stock. Holders were also entitled to
receive dividends on shares of Redeemable Convertible Series B Preferred Stock equal (on an as-if-converted-to-common-stock
basis regardless of whether the Redeemable Convertible Series B Preferred Stock is then convertible or otherwise subject to
conversion limitations) to and in the same form as dividends actually paid on shares of common stock when, as and if such
dividends are paid on shares of the common stock.
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FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except share and per share
amounts)
(unaudited)
Note
5 (Cont.)
Redeemable
Convertible Preferred Stock and Stockholders’ Equity (Deficit) (Cont.):
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■
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Liquidation.
In the event of (i) a Liquidation Event or (ii) a merger or consolidation (other
than one in which the Company’s stockholders own a majority by voting power of
the outstanding shares of the surviving or acquiring corporation) or a sale, lease, transfer,
exclusive license or other disposition of all or substantially all of the Company’s
assets (a “Deemed Liquidation Event”), the holders of shares of Redeemable
Convertible Series B Preferred Stock then outstanding were entitled to be paid out of
the Company’s assets available for distribution to stockholders before any payment
shall be made to the holders of common stock, Series A Convertible Preferred Stock or
any other class of securities authorized that is specifically designated as junior to
the Redeemable Convertible Series B Preferred Stock (the “Junior Securities”)
by reason of their ownership thereof, but
- pari passu
- with the holders of shares
of any class of securities authorized that is specifically designated as
- pari passu
-
with the Redeemable Convertible Series B Preferred Stock (the “Parity Securities”)
on a pro rata basis, an amount per share equal to the Series B Original Issue Price,
plus any accrued dividends thereon. If upon any such Liquidation Event or Deemed Liquidation
Event, the Company’s assets available for distribution to stockholders shall be
insufficient to pay the holders of shares of Redeemable Convertible Series B Preferred
Stock the full amount to which they shall be entitled and the holders of Parity Securities
the full amount to which they shall be entitled, the holders of shares of Redeemable
Convertible Series B Preferred Stock and the holders of shares of Parity Securities shall
share ratably in any distribution of the assets available for distribution in proportion
to the respective amounts which would otherwise be payable in respect of the shares held
by them upon such distribution if all amounts payable on or with respect to such shares
were paid in full. Upon a Liquidation Event or a Deemed Liquidation Event, in the event
that following the payment of such liquidation preference the Company shall have additional
cash and other assets of available for distribution to stockholders, then the holders
of shares of Redeemable Convertible Series B Preferred Stock shall participate
pari
passu
with the holders of shares of Parity Securities and Junior Securities based
on the then current conversion rate (disregarding for such purposes any conversion limitations)
with respect to all remaining distributions, dividends or other payments of cash, shares
or other assets and property of the Company, if any.
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Voting
Rights.
On any matter presented to the Company’s stockholders for their action
or consideration, each holder of Redeemable Convertible Series B Preferred Stock was
entitled to cast the number of votes equal to the quotient of the aggregate investment
amount invested to purchase Series B Preferred Stock divided by $1.12, the market value
of the Company’s common stock on December 21, 2017, or approximately 0.893 votes
per share (subject to certain conversion limitations described below). Except as provided
by law or by the other provisions of the Series B Certificate of Designation, the holders
were entitled to vote together with the holders of shares of common stock as a single
class. However, as long as any shares of Redeemable Convertible Series B Preferred Stock
are outstanding, the Company could not, without the affirmative vote of the holders of
a majority of the outstanding shares of Redeemable Convertible Series B Preferred Stock
(the “Requisite Holders”), (i) issue any class of equity securities that
is senior in rights to the Redeemable Convertible Series B Preferred Stock, (ii) issue
any Parity Securities, (iii) alter or change adversely the powers, preferences or rights
given to the Redeemable Convertible Series B Preferred Stock or alter or amend the Series
B Certificate of Designation, (iv) amend its articles of incorporation or other charter
documents in any manner that adversely affects any rights of the holders of Redeemable
Convertible Series B Preferred Stock, (v) except pursuant to the redemption provisions
of Parity Securities, redeem any shares of preferred stock or common stock (other than
pursuant to employee or consultant agreements giving the Company the right to repurchase
shares at the original cost thereof upon the termination of services and provided that
such repurchase is approved by the board of directors), or (vi) enter into any agreement
with respect to any of the foregoing.
|
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except share and per share
amounts)
(unaudited)
Note
5 (Cont.)
Redeemable
Convertible Preferred Stock and Stockholders’ Equity (Deficit) (Cont.):
Redeemable
Convertible Series B Preferred Stock (Cont.)
|
■
|
Conversion.
Each share of Redeemable Convertible Series B Preferred Stock plus accrued, but unpaid,
dividends thereon (the “Aggregate Preference Amount”), was convertible, at
any time and from time to time at the option of the holder thereof, into that number
of shares of common stock determined by a formula (computed on the date of conversion),
(i) the numerator of which is equal to the Aggregate Preference Amount and (ii) the denominator
of which is equal to the quotient of the Conversion Price divided by $1.33. The “Conversion
Price” for the Redeemable Convertible Series B Preferred Stock was adjusted to
$0.8684 starting in February 2018, subject to adjustment as described in the Series B
Certificate of Designation. In addition, upon the earlier to occur of: (i) a Deemed Liquidation
Event or (ii) if there has not been a breach or default by the Company under the OFI
Purchase Agreement that has occurred and is continuing, May 31, 2018, each share of Redeemable
Convertible Series B Preferred Stock plus accrued, but unpaid, dividends thereon were
automatically converted into that number of shares of common stock determined by dividing
$1.33 by the Conversion Price. Notwithstanding the forgoing, if the Company had not obtained
stockholder approval with respect to the issuance of shares upon conversion in excess
of 19.99% of the issued and outstanding common stock on the applicable conversion date
(the “Stockholder Approval”), then the Company could not issue, upon conversion
of the Redeemable Convertible Series B Preferred Stock, a number of shares of common
stock which, when aggregated with any shares of common stock issued on or after the Series
B Original Issue Date and prior to such conversion date, would exceed 19.99% of the issued
and outstanding shares of common stock (subject to adjustment for forward and reverse
stock splits, recapitalizations and the like) (the “Issuable Maximum”). Each
holder was entitled to a portion of the Issuable Maximum equal to the quotient obtained
by dividing (i) the Series B Original Issue Price of such holder’s Redeemable Convertible
Series B Preferred Stock by (ii) the aggregate Series B Original Issue Price of all Redeemable
Convertible Series B Preferred Stock issued to all holders.
|
In
the light of the above, on May 31, 2018, 1,869,663 shares of the Series B Preferred Stock along with pro-rata accrued dividends
of were considered under accounting rules to be automatically converted into 2,965,301 shares of common stock. As a result of
this conversion, an amount of $2,553 was transferred from Redeemable Convertible Preferred Stock Series B account into common
stock and additional paid-in capital.
|
■
|
Redemption.
If (i) there was a breach by the Company of any of its representations and warranties
contained in Sections 3.1(a) (Subsidiaries), 3.1(b) (Organization and Qualification),
3.1(c) (Authorization; Enforcement), 3.1(d) (No Conflicts), 3.1(f) (Issuance of the Shares),
3.1(g) (Capitalization), or 3.1(n) (Taxes) of the OFI Purchase Agreement that had not
been cured within 30 days after the date of such breach or (ii) Stockholder Approval
had not been obtained by March 31, 2018 (each, a “Redemption Event”), then
each holder of Redeemable Convertible Series B Preferred Stock could, at its option,
require the Company to redeem any or all of the shares of Redeemable Convertible Series
B Preferred Stock held by such holder at a price per share equal to $1.33, plus accrued,
but unpaid, dividends through and including the date of such redemption. The Company
was required to provide a notice (as “Event Notice”) to each holder of the
occurrence of a Redemption Event of the kind described in (i) above (a “Breach
Event”) as soon as practicable after becoming aware of such Breach Event, but in
any event, not later than 15 days after such Breach Event and such notice was required
to provide a reasonable description of such Breach Event. A holder was required to send
written notice of redemption (a “Redemption Notice”) to the Company within
90 days after (i) the Company provides such holder an Event Notice with respect to a
Breach Event or (ii) the occurrence of a Redemption Event of the kind described in (ii)
above. For the avoidance of doubt, if the Company did not timely provide an Event Notice,
the holder nevertheless had the right to deliver a Redemption Notice in connection with
any Redemption Event. If a holder failed to send a Redemption Notice on prior to the
90th day after the occurrence of any Redemption Event, then such holder would lose such
holder’s right to redemption with respect to the particular Redemption Event, but
not any other Redemption Event. As of March 31, 2018, the Company did not obtain shareholder
approval and therefore, the then outstanding Series B Preferred Stock became redeemable
at the option of OFI. Consequently, in each reporting period commencing March 31, 2018,
the outstanding Series B Preferred Stock was recorded on its maximum redemption value
until the earlier of an occurrence of redemption or conversion.
|
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except share and per share
amounts)
(unaudited)
Note
5 (Cont.)
Redeemable
Convertible Preferred Stock and Stockholders’ Equity (Deficit) (Cont.):
Convertible
Series C Preferred Stock
The terms of the Series C Preferred Stock
are governed by a certificate of designation (the “Series C Certificate of Designation”) filed by the Company with
the Nevada Secretary of State on September 24, 2018. Pursuant to the Series C Certificate of Designation, the Company designated
7,485,627 shares of its preferred stock as Series C Preferred Stock. The Company issued 7,485,627 shares of Convertible Series
C Preferred Stock in connection with the Remediations Agreement. Following is a summary of the material terms of the Series C Preferred
Stock:
|
■
|
Dividends
.
Except for stock dividends or distributions for which adjustments are to be made pursuant
to the Series C Certificate of Designation, holders of Series C Preferred Stock shall
be entitled to receive, and the Company shall pay, dividends on shares of Series C Preferred
Stock equal (on an as-if-converted-to-common-stock basis) to and in the same form as
dividends actually paid on shares of common stock when, as and if such dividends are
paid on shares of common stock. No other dividends shall be paid on shares of Series
C Preferred Stock.
|
|
■
|
Liquidation
.
Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or
involuntary (a “Liquidation”), holders of Series C Preferred Stock shall
be entitled to receive out of the assets, whether capital or surplus, of the Company
the same amount that a holder of common stock would receive if the Series C Preferred
Stock were fully converted to common stock immediately prior to such Liquidation, which
amount shall be paid to the holders of Series C Preferred Stock
pari passu
with
all holders of Series D Preferred Stock and in preference to the holders of common stock.
|
|
■
|
Voting
Rights
. Except as provided by law or by the other provisions of the Series C Certificate
of Designation, the holders of Series C Preferred Stock have no voting rights.
|
|
■
|
Conversion
.
On the date on which stockholder approval with respect to the Remediation Agreement and
the transactions contemplated thereby has been obtained (the “Conversion Date”),
each share of Series C Preferred Stock shall be automatically converted into such number
of fully paid and non-assessable shares of common stock as is determined by dividing
$1.00 by the conversion price in effect on the Conversion Date. The conversion price
is initially equal to $1.00, subject to adjustment as described in the Series C Certificate
of Designation.
|
|
■
|
Redemption
.
The Series C Preferred Stock is not redeemable.
|
Convertible
Series D Preferred Stock
The terms of the Series D Preferred Stock
are governed by a certificate of designation (the “Series D Certificate of Designation”) filed by the Company with
the Nevada Secretary of State on September 24, 2018. Pursuant to the Series D Certificate of Designation, the Company designated
9,294,414 shares of its preferred stock as Series D Preferred Stock. The Company issued 6,371,336 shares of Convertible Series
D Preferred Stock in connection with the Remediation Agreement. Following is a summary of the material terms of the Series D Preferred
Stock:
|
■
|
Dividends
.
Holders of shares of Series D Preferred Stock shall receive cumulative dividends, pro
rata among such holders, prior to and in preference to any dividend on outstanding common
stock at the per annum rate of 8% of the Stated Value (as defined below). Dividends on
each share of Series D Preferred Stock will accrue daily and be cumulative from and including
the date of issuance thereof and shall be payable upon the occurrence of a Liquidation
or a conversion. The “Stated Value” shall mean $1.00 per share, subject to
appropriate adjustment in the event of any stock dividend, stock split, combination or
other similar recapitalization with respect to the Series D Preferred Stock. Holders
shall also be entitled to receive dividends on shares of Series D Preferred Stock equal
(on an as-if-converted-to-common-stock then convertible) to and in the same form as dividends
actually paid on shares of common stock when, as and if such dividends are paid on shares
of the common stock.
|
|
■
|
Liquidation
.
Upon a Liquidation, holders of Series D Preferred Stock shall be entitled to receive
out of the assets, whether capital or surplus, of the Company the same amount that a
holder of common stock would receive if the Series D Preferred Stock were fully converted
to common stock immediately prior to such Liquidation, which amount shall be paid to
the holders of Series D Preferred Stock
pari passu
with all holders
of Series C Preferred Stock and in preference to the holders of common stock.
|
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except share and per share
amounts)
(unaudited)
Note
5 (Cont.)
Redeemable
Convertible Preferred Stock and Stockholders’ Equity (Deficit):
Convertible
Series D Preferred Stock (Cont.)
|
■
|
Voting
Rights
. Except as provided by law or by the other provisions of the Series D Certificate
of Designation, the holders of Series D Preferred Stock have no voting rights. However,
as long as any shares of Series D Preferred Stock are outstanding, the holders of Series
D Preferred Stock shall have the right to prohibit or veto the Company from entering
into any agreement or taking any action with respect to (i) a Change in Control Transaction
(as defined below) or (ii) the issuance any equity securities or equity-linked securities
at a price per share below $0.6505, subject to appropriate adjustment in the event of
any stock dividend, stock split, combination or other similar recapitalization with respect
to the common stock. The Company must notify the holders of Series D Preferred Stock
at least 20 days in advance of the events described above and the holder shall exercise
its veto right by notifying the Company in writing within 15 days after the receipt of
such notice that it is exercising its veto right to prohibit such agreement from being
entered into or action from being taken. A “Change in Control Transaction”
means the acquisition by any person of beneficial ownership of more than 50% (on a fully
diluted basis) of either (i) the then outstanding shares of common stock, taking into
account as outstanding for this purpose such common stock issuable upon the exercise
of options or warrants, the conversion of convertible stock or debt, and the exercise
of any similar right to acquire such common stock or (ii) the combined voting power of
the then outstanding voting securities of the Company entitled to vote generally in the
election of directors.
|
|
■
|
Conversion.
On the Conversion Date, each share of Series D Preferred Stock, plus accrued, but
unpaid, dividends thereon (the “Aggregate Preference Amount”), shall be automatically
converted into such number of fully paid and non-assessable shares of common stock as
is determined by a formula (computed on the Conversion Date) (i) the numerator of which
is equal to the Aggregate Preference Amount and (ii) the denominator of which is equal
to the conversion price. The conversion price is initially equal to $1.00, subject to
adjustment as described in the Series D Certificate of Designation.
|
|
■
|
Redemption.
The Series D Preferred Stock is not redeemable.
|
Securities
Purchase Agreement
On
December 22, 2017, the Company had entered into the OFI Purchase Agreement with OFI, under which OFI could, but was not obligated
to, invest up to $15,000 in the Company in a series of closings over a period prior to December 31, 2018, in exchange for which
OFI would receive shares of the Company’s Redeemable Convertible Series B Preferred Stock (“Series B Shares”)
at a purchase price of $1.00 per share (the “Option”).
On
December 22, 2017 (the “Initial Date”), the Company and OFI completed the first closing under the OFI Purchase Agreement,
pursuant to which OFI exercised a portion of the Option and provided $1,500 to the Company in exchange for 1,500,000 Series B
Shares. On January 24, 2018 (the “Second Date”), the Company and OFI completed a second closing under the OFI Purchase
Agreement, pursuant to which OFI provided $2,225 to the Company in exchange for 2,225,000 Series B Shares. On August 24, 2018
(the “Third Date”), the Company and OFI completed a third closing under the OFI Purchase Agreement, pursuant to which
the OFI provided $100 to the Company in exchange for 100,000 Series B Shares.
Under
the OFI Purchase Agreement, the proceeds from the first closing were to be used for working capital and general corporate purposes,
the proceeds from the second closing were to be used to perform due diligence and invest in Income Generating Properties (as defined
in the OFI Purchase Agreement) that have been approved by the Company’s board of directors, and proceeds from subsequent closings
were be used to invest in Income Generating Properties (as defined in the OFI Purchase Agreement) that have been approved by the
Company’s board of directors or as otherwise agreed to between the Company and OFI in writing prior to such subsequent closings.
On March 16, 2018, the Company and OFI entered into a letter agreement, pursuant to which OFI agreed that the Company may use
all proceeds for the purposes and uses described in a budget agreed to between the Company and OFI at the time the letter agreement
was signed. In connection with such letter agreement, the Company agreed to provide OFI, on a quarterly basis, on or prior to
15 days after the end of each quarter, a report that describes, in reasonable detail, the actual expenses incurred and payments
made during such period compared to the expenses and payments specified in the budget for such period, certified by the Company’s
Chief Financial Officer.
Under
ASC 480, “Distinguishing Liabilities from Equity”, since the Series B Shares had conditional redemption provisions
which are outside of the control of the Company and also contained a deemed liquidation preference, the Series B Shares were classified
as mezzanine financing at the Initial Date at the residual amount, which was the difference between the total proceeds received
and the fair value of the Option. Subsequently, accrete changes in the redemption value over the period from the date of issuance
(or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date
of the instrument using an appropriate methodology, usually the interest method. Changes in the redemption value were considered
to be changes in accounting estimates.
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except share and per share
amounts)
(unaudited)
Note
5 (Cont.)
Redeemable
Convertible Preferred Stock and Stockholders’ Equity (Deficit):
Securities
Purchase Agreement (Cont.)
Under
ASC 480, the aforementioned right granted to OFI to further invest in the Company represent written call Option which was considered
freestanding, as the Company believed it was legally detachable and separately exercisable. As the option was exercisable for
shares subject to possible redemption at the option of the holder, as of the Initial Date, the Option was measured at fair value
and recorded as a non-current financial liability on the consolidated balance sheet. Excess of the initial value of the option
liability over the proceeds received was charged immediately into the consolidated statement of comprehensive loss as financing
expenses in the fourth quarter of 2017. The Option was marked to market in each reporting period until it was exercised or expired,
as earlier, when changes in the fair value of the Option charged into statement of comprehensive income or loss. For the three
and nine months ended September 30, 2018, the Company recorded income in the total amount of $993 and $3,288, respectively, due
to revaluation of Option to purchase Series B Shares.
In
addition, at the Initial Date, the Company incurred de minimis direct and incremental issuance costs which were charged immediately
into the consolidated statement of comprehensive loss as finance expenses, as the written call Option was presented at fair value.
At
the Initial Date, each Series B Share was convertible into 1.24789 shares of common stock valued at $1.00 per share. As a result,
Beneficial Conversion Feature (the “BCF”) amounting to approximately $372 was measured assuming full conversion. However,
the conversion of the Preferred Stock is subject to certain contingencies, which impact the timing and amount of the BCF. At the
Initial Date which is also the commitment date, the Company should record a BCF for the Preferred Stock for any shares convertible
at that time without requiring stockholder approval through the planned proxy statement. However, as no residual proceeds were
allocable to the Series B Shares at the Initial Date, no BCF was recognized with respect to the first closing.
In
conjunction with the Second Date, OFI partially exercised the written call option present in the OFI Purchase Agreement and therefore
upon exercise, the pro-rata share of this liability amounting to $677 was reclassified in the condensed consolidated balance sheet
from Option to purchase Series B Shares into Series B Shares, during the three months ended March 31, 2018. On the Second Date,
each Series B Share (exclusive of dividends) was convertible into 1.24789 shares of common stock valued at $1.00 per share. Because
of reclassification of the exercised written call option, there was no additional BCF measured.
In
conjunction with the Third Date, OFI partially exercised the written call option present in the OFI Purchase Agreement and therefore
upon exercise, the pro-rata share of this liability amounting to $4 was reclassified in the condensed consolidated balance sheet
from Option to purchase Series B Shares into Series B Shares, during the three months ended September 30, 2018. On the Third Date,
each Series B Share (exclusive of dividends) was convertible into 1.24789 shares of common stock valued at $1.00 per share. Because
of reclassification of the exercised written call option, there was no additional BCF measured.
The
fair value of the Option was based on management estimates and values derived from a calculation to provide an approximate indication
of value. The fair value of Option was estimated at each reporting and exercise date, including, December 31, 2017, January 24,
2018, August 30, 2018 and September 24, 2018 (the date of cancellation of the option as described below) by using hybrid method
that includes scenario of conversion and scenario liquidation and the Black-Scholes option pricing model. In the first scenario,
the Series B Preferred Stock price applied in the model was assumed based on the as-converted price on the date of estimation.
Expected volatility was estimated by using a group of peers in the real estate development, homebuilding and income-producing
properties sectors, and applying a 75% percentile ranking based on the total capitalization of the Company. In the second scenario,
the Option was estimated based on the value of the Option in a proposed liquidation scenario. A probability weighting was applied
to determine the expected value of the Option. The Company measured the fair value of the Option on a recurring basis in
accordance with ASC 820, “Fair Value Measurement and Disclosures” (primary inputs classified at level 3).
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except share and per share
amounts)
(unaudited)
Note
5 (Cont.)
Redeemable
Convertible Preferred Stock and Stockholders’ Equity (Deficit):
Securities
Purchase Agreement (Cont.)
The
following are the key underlying assumptions that were used:
|
|
December 31,
2017
|
|
|
January 24,
2018
|
|
|
August 30,
2018
|
|
|
September 24,
2018
|
|
Dividend yield (%)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Expected volatility (%)
|
|
|
36.9
|
|
|
|
37.9
|
|
|
|
37.3
|
|
|
|
36.4
|
|
Risk free interest rate (%)
|
|
|
1.74
|
|
|
|
1.75
|
|
|
|
2.15
|
|
|
|
2.21
|
|
Strike price
|
|
|
1.00
|
|
|
|
1.00
|
|
|
|
1.00
|
|
|
|
1.00
|
|
Series B Preferred Stock price
|
|
|
1.13
|
|
|
|
1.10
|
|
|
|
0.44
|
|
|
|
0.38
|
|
Probability of if-converted scenario (%)
|
|
|
90
|
|
|
|
90
|
|
|
|
90
|
|
|
|
90
|
|
Probability assumed liquidation scenario (%)
|
|
|
10
|
|
|
|
10
|
|
|
|
10
|
|
|
|
10
|
|
Expected term of Option (years)
|
|
|
1.0
|
|
|
|
0.9
|
|
|
|
0.33
|
|
|
|
0.25
|
|
Option’s fair value per share
|
|
$
|
0.33
|
|
|
$
|
0.30
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
The
following tabular presentation reflects the activity in the Option to purchase Series B Shares during the nine months ended September
30, 2018 -
|
|
Fair value of Option to
purchase Series B Shares
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Opening balance, January 1, 2018
|
|
$
|
4,390
|
|
Partial exercise of Series B Shares written call option
|
|
|
(681
|
)
|
Revaluation of option to purchase Series B Shares
|
|
|
(3,288
|
)
|
Extinguishment of option to purchase Series B Shares (*)
|
|
|
(421
|
)
|
|
|
|
|
|
Closing balance, September 30, 2018
|
|
$
|
—
|
|
|
(*)
|
On
September 24, 2018, the OFI Purchase Agreement was superseded by the Remediation Agreement
entered into with OFI and Note Holders. Consequently, the option to purchase Series B
Shares has been extinguished, as described below in more details.
|
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except share and per share
amounts)
(unaudited)
Note
5 (Cont.)
Redeemable
Convertible Preferred Stock and Stockholders’ Equity (Deficit):
Securities
Purchase Agreement (Cont.)
In
the absence of voluntary conversion and assuming no breaches as described above under “
Redemption,”
the Series
B Shares would have automatically converted on May 31, 2018. As such, accretion adjustments to the carrying amount of the Series
B Shares to the automatic conversion date of May 31, 2018 was recorded as deemed dividends. However, at March 31, 2018, the Company
did not obtain shareholder approval and therefore, the then outstanding Series B Shares became redeemable at the option of OFI.
That Agreement has been superseded by the Remediation Agreement entered into with OFI on September 24, 2018. As a result, the
Series B Convertible Preferred Stock has been withdrawn, and shares of Series D Convertible Preferred Stock was issued as a replacement.
Activity in the account redeemable convertible preferred stock Series B for the nine months ended September 30, 2018, is outlined
in the below table -
|
|
September 30, 2018
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Opening balance, January 1, 2018
|
|
$
|
87
|
|
Proceeds from issuance of Series B Shares at the Second Date and Third Date
|
|
|
2,325
|
|
Accretion of Series B Shares to redemption value
|
|
|
2,001
|
|
Partial exercise of Series B Shares written call option at the Second Date and Third Date
|
|
|
681
|
|
Conversion of Series B Shares into Common Stock (*)
|
|
|
(2,553
|
)
|
Dividend on Series B Shares
|
|
|
177
|
|
Cancellation of Series B Shares in exchange for Series D Preferred Stock (**)
|
|
|
(2,718
|
)
|
|
|
|
|
|
Closing balance, September 30, 2018
|
|
$
|
—
|
|
|
(*)
|
Under
the OFI Purchase Agreement, the Series B Preferred Stock, up to the stated limits, would
automatically convert to the Company’s common stock on May 31, 2018. Consequently,
1,869,663 shares of Series B Preferred Stock held by OFI would have been converted into
2,965,301 shares, or 19.99% of the then 11,868,619 outstanding shares of common stock
as of May 31, 2018, which is the applicable conversion date under the OFI Purchase Agreement.
The then remaining 1,855,337 unconverted shares of the Series B Preferred Stock remained
as mezzanine and accrued a preferred dividend until September 24, 2018, when the Series
B shares were withdrawn and Series D preferred shares were issued in replacement, as
described below in more details.
|
|
(**)
|
On
September 24, 2018, the OFI Purchase Agreement was superseded by the Remediation Agreement
entered into with OFI and Note Holders. Consequently, the Series B Shares have been withdrawn
and Series D Shares were issued in replacement, as described below in more details.
|
Cancellation
and Exchange Agreement
On
April 20, 2018, the Company and OFI entered into a Cancellation and Exchange Agreement (the “Exchange Agreement”),
pursuant to which OFI agreed to provide an additional $2,000 to the Company in exchange for 2,000,000 shares of the Company’s
Series B Preferred Stock, subject to certain conditions set forth in the Exchange Agreement, including, among other things, the
cancellation of 95,770 shares of the Company’s Series A Preferred Stock held by OFI in exchange for 5,382,274 shares of
the Company’s common stock (the “OFI Shares”). Under the Exchange Agreement, closing of this additional investment,
including cancellation discussed above, would occur promptly following the filing of the Information Statement (as defined below)
with the SEC and mailing of the Information Statement to the stockholders of the Company, and in any event within 3 days thereafter.
In
accordance with the Exchange Agreement, the Company obtained the irrevocable written consent of at least a majority of the stockholders
of the Company (excluding OFI) that is final and binding (the “Stockholder Consent”) approving the issuance of the
OFI Shares and the issuance of common stock upon conversion of all of the Series B Preferred Stock held by OFI or issuable under
the OFI Purchase Agreement. The Stockholder Consent was to become effective on the 20th day following the filing and mailing of
a definitive information statement on Schedule 14C (the “Information Statement”), at which time stockholder approval
of such issuances would have become effective (“Stockholder Approval”). Pursuant to the Exchange Agreement, the Company
agreed to issue the OFI Shares as soon as practicable after obtaining Stockholder Approval and in any event within 3 business
days of obtaining Stockholder Approval.
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except share and per share
amounts)
(unaudited)
Note
5 (Cont.)
Redeemable
Convertible Preferred Stock and Stockholders’ Equity (Deficit):
Cancellation
and Exchange Agreement (Cont.)
Pursuant
to the Exchange Agreement, the Company agreed that the OFI Shares would constitute “Registrable Securities” under
the registration rights agreement between the Company and OFI, dated December 22, 2017, and the Company would use commercially
reasonable efforts to promptly amend the registration statement filed by the Company on January 23, 2018 to include the OFI Shares
and any other shares of common stock of the Company that are issuable to OFI upon conversion of Series B Preferred Convertible
Stock held by OFI that are not already included in such registration statement. On September 24, 2018, the Exchange Agreement
was superseded by the Remediation Agreement entered into between the Company and OFI and the Note Holders.
Payout
Notes and Stock Grant Agreement
Under
the Contribution Agreement dated March 31, 2017 among the Company, its subsidiary FC Global Realty Operating Partnership, LLC,
First Capital Real Estate Operating Partnership, L.P., and First Capital Real Estate Trust Incorporated (the "Contribution
Agreement"), amounts due to Dr. Dolev Rafaeli and Dennis M. McGrath under their employment agreements, as well as amounts
due to Dr. Yoav Ben-Dror for his services as a board member and officer of the Company’s foreign subsidiaries, were converted
to convertible secured notes in the principal amounts of approximately $3.1 million, $1 million and $1.5 million, respectively,
following approval from the Company’s stockholders on October 12, 2017 (the “Payout Notes”). The Payout Notes
were due on October 12, 2018, carried a ten percent (10%) interest rate, payable monthly in arrears commencing on December 1,
2017, were secured by a security interest in all of the Company’s assets pursuant to a security agreement that the Company
entered into with the Note Holders, and were convertible into shares of common stock.
On
December 22, 2017, the Company entered into a stock grant agreement (the “Stock Grant Agreement”) with the Note Holders
to (i) cause the early conversion of the Payout Notes into an aggregate of 5,628,291 shares of common stock (the “Payout
Shares”), (ii) effectuate the release of all security interests associated with the Payout Notes, (iii) provide for the
issuance of an aggregate of 1,857,336 additional shares of common stock to the Note Holders as consideration for the various agreements
of the Note Holders contained in the Stock Grant Agreement (the “Additional Shares”), (iv) provide for certain cash
payments to the Note Holders in amounts equal to the interest payments that would have been made to the Note Holders absent the
conversion of the Payout Notes, (v) obtain the agreement of the Note Holders to provide certain support services to the Company,
and (vi) obtain the conditional resignation of certain of the Note Holders from the board of directors. Accordingly, the Payout
Notes were paid in full.
Pursuant
to the Stock Grant Agreement, the Company agreed to make twelve (12) monthly payments on the first of each month commencing on
January 1, 2018 in the amounts of approximately $21, $7 and $10 to Messrs. Rafaeli, McGrath, and Ben-Dror, respectively. Such
cash payments were consideration for certain consulting services provided by the Note Holders specified in the Stock Grant Agreement.
The Company was required to issue the Additional Shares promptly, but in any event within ten (10) days after the Company obtained
stockholder approval of such issuance. Such stockholder approval was not obtained.
Remediation
Agreement
On
September 24, 2018 (the “Exchange Date”), the Company entered into the Remediation Agreement with OFI and the Note
Holders, pursuant to which inter alia the following have been determined -
|
1.
|
The
Stock Grant Agreement was terminated, the Payout Shares were cancelled, and the Company
issued to the Note Holders an aggregate of 7,485,627 shares of newly-designated Series
C Preferred Stock in exchange for 5,628,291 shares of common stock.
|
|
2.
|
In
addition, the OFI Purchase Agreement (subject to the survival of certain provisions identified
in the Remediation Agreement), the Supplemental Agreement and the Exchange Agreement
were terminated and 1,955,357 shares of the Series B Stock (and 2,965,301 shares of common stock that have been granted upon automatic conversion of 1,869,663 shares of Series B Preferred Stock at May 31, 2018) issued to OFI were cancelled and the Company
issued to OFI 6,217,490 shares of newly-designated Series D Preferred Stock. In addition,
in conjunction with the exchange of OFI’s existing Series B Preferred Stock for
Series D Preferred Stock, the option for OFI to purchase future Series B Preferred Stock
up to aggregate amount of $15 million has been cancelled but OFI agreed to purchase $100
of shares of Series D Preferred Stock for a purchase price of $0.65 per share on the
last day of each month, commencing on September 30, 2018, until it has purchased an aggregate
of $500 of shares of Series D Preferred Stock, provided that, upon closing of any material
business combination involving the Company that is approved by OFI, OFI agreed to purchase
an additional $1,500 of shares of Series D Preferred Stock at a price of $0.65 per share.
Notwithstanding the foregoing, from and after the date that stockholder approval of the
conversion of shares issued under Remediation Agreement has been obtained, instead of
purchasing shares of Series D Preferred Stock, OFI agreed to purchase shares of common
stock at a price of $0.65 per share. On September 28, 2018, a first closing under the
Remediation Agreement was completed, pursuant to which OFI provided $100 to the Company
in exchange for 153,846 shares of the Company’s Series D Preferred Stock.
|
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(unaudited)
Note
5 (Cont.)
Redeemable
Convertible Preferred Stock and Stockholders’ Equity (Deficit):
Remediation
Agreement (Cont.)
|
3.
|
As
promptly as possible following the date of the Remediation Agreement (and in no event
later than 30 days thereafter), the Company is required to prepare and file a preliminary
proxy statement relating to stockholder approval of the issuance of common stock upon
conversion of all shares of Series C Preferred Stock and Series D Preferred Stock issued
under the Remediation Agreement. The Company is required to call, give notice of and
hold a stockholders meeting relating to such stockholder approval reasonably promptly
after the date that any comments from the SEC on the proxy statement have been resolved
or the final proxy statement is otherwise ready for dispatch. The preliminary proxy statement
was filed on September 27, 2018. The final proxy statement was filed on October 25, 2018
and mailed to the Company’s stockholders on or about October 31, 2018. A stockholder
meeting to approve this matter is scheduled for November 29, 2018 (the “2018 Annual
Meeting”).
|
|
4.
|
In
addition, on September 24, 2018, in connection with the Remediation Agreement, the Company
entered into the Registration Rights Agreement with OFI and the Note Holders (see Note
4).
|
In accordance with ASC 480-10-S99, since
the Series C Preferred Shares and Series D Preferred Shares have no conditional (outside of the control of the Company) or mandatory
redemption provisions, the Series C Preferred Stock and Series D Preferred Stock were classified as part of the stockholders’
equity on the Company’s Consolidated Balance Sheet. Based on such determination and due to the economic characteristics and
risks of the Preferred Stock, based on their stated or implied substantive terms and features, Series C and Series D Preferred
Stock are considered as more akin to equity than debt.
Accordingly,
it was determined that the economic characteristics and the risks of the embedded conversion option to Common Stock and those
of the Series B, Series C and Series D Preferred Stock themselves (the ‘host contract’) are clearly and closely related. As a
result, the embedded conversion feature was not required to be bifurcated.
Also,
as the Series C Preferred Stock and Series D Preferred Stock are valued in excess of the common stock and since each share of
Series C Preferred Stock and Series D Preferred Stock was contingently convertible into one share of Common Stock, it was determined
that at the exchange date, the effective exercise price of the conversion feature (based on the effective conversion rate of the
Series C Preferred Stock and the Series D Preferred Stock into Common Stock) was higher than the estimated fair value of the Company’s
Common Stock (which was valued at $0.24 per share). Thus, it was determined that the conversion feature was not beneficial.
In
addition, the Remediation Agreement with OFI constitutes a firm forward purchase contract for an amount of $500 at $0.65 per share
($400 out of which is remaining at September 30, 2018) and an additional contingent purchase commitment of $1,500 in the event
of a material business combination. The forward contract meets the scope exception requirements and derivative treatment under
ASC 815 and therefore it is classified as equity.
At the Exchange Date, in conjunction with
the Remediation Agreement, the Note Holders’ existing common stock has been exchanged in consideration for issuance of Series
C Preferred Stock, the OFI’s existing Series B Preferred Stock (including shares of common stock that have been granted upon
automatic conversion of portion of shares of Series B Preferred Stock at May 31, 2018) has been exchanged in consideration for
issuance of Series D Preferred Stock and the Option for OFI to purchase future Series B Preferred Stock up to aggregate amount
of $15 million has been cancelled for the future commitment of OFI to invest up to aggregate amount of $2,000.
If
a preferred share has characteristics that cannot be reliably assessed using the cash flow model in ASC 470-50, it is evaluated
using another quantitative model, such as the fair value model or based on an analysis of the significance of any contractual
terms added, contractual terms removed, and changes to existing contractual terms. In such analysis the company consider, among
others critical terms such as a change in the liquidation preference order/priority (including the determination wheatear the
classification of the instrument has changed from mezzanine to equity or to liability vice versa), voting rights, or conversion
ratio. In addition, the company considers the business purpose for the changes and how the changes may influence the economic
decisions of the investor, if any.
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(unaudited)
Note
5 (Cont.)
Redeemable
Convertible Preferred Stock and Stockholders’ Equity (Deficit):
Remediation
Agreement (Cont.)
Based on an analysis of the significance of the contractual terms added, contractual terms removed, and
changes to existing contractual terms of the preferred stock, which considered, among others the change in the liquidation preference
order/priority (mostly the classification change from mezzanine to equity) and the removal of voting rights, it was determined
that the exchange should be accounted for as an extinguishment of the original financial instruments involved and an issuance of
new instruments. At the Exchange Date, the fair value of the 7,485,627 shares of Series C Preferred Stock was $1,797. Such amount
relates to the 5,628,291 shares of
common stock that was exchanged,
which the fair value was $1,351 and the difference of $446 was accounted for as a deemed dividend. Also, at the Exchange Date,
the total fair value of consideration which was paid by the Company (i.e. the 6,217,490 shares of Series D Preferred Stock less
the fair value of the firm forward purchase contract which was determined to be favorable for the Company) amounted to an aggregate
amount of $325 which was allocated to the instruments that have been cancelled/exchanged based on their relative fair values as
determined by the Company’s management. The fair value of the instruments that have been cancelled/exchanged amounted to
$3,911 as follows: 1) the 1,955,357 shares of Series B Preferred Stock (including 2,965,301 shares of common stock that have been
granted upon automatic conversion of 1,869,663 shares of Series B Preferred Stock at May 31, 2018) was $3,431; 2) the option to
purchase Series B Preferred Stock has been marked to market at the total amount of $421 and 3) the registration rights liability
was $59. Therefore, an amount of $285 out of the above consideration was allocated to the Series B Preferred Stock (including shares
of common stock that have been granted upon automatic conversion of portion of shares of Series B Preferred Stock at May 31, 2018)
and accordingly, the difference between such amount and the carrying amount of the Series B Preferred Stock at the exchange date
was accounted for as an additional deemed dividend in the Statement of Changes in Shareholders’ Equity (Deficit). The remaining
amount of $40 was allocated to the financial liability in connection with the option to purchase Series B Preferred Stock and the
registration rights liability and accordingly, the difference between such amount and the carrying amount of the option to purchase
Series B Preferred Stock and the registration rights liability at the exchange date of $440 was recorded as separate line in the
consolidated statement of comprehensive loss.
Restricted
stock
On
June 20, 2018, the Company’s board of directors approved the employment agreement with the Chief Executive Officer, pursuant to
which the Company agreed to issue 400,000 shares of common stock that will be vest over a 3-years period. One-third of the shares
shall be issued to the Chief Executive Officer and the Chief Executive Officer shall vest in such shares on each of the first
anniversary and the two ensuing anniversaries of the date of execution of the employment agreement. The foregoing notwithstanding,
the Chief Executive Officer shall fully vest in all of the shares if the Chief Executive Officer’s employment with the Company
shall terminate upon the occurrence of a Change in Control as defined in the employment agreement. The closing price of the Company’s
share at June 20, 2018 is $0.47 and therefore the overall expenses to be recorded amounted to $188. For the period commencing
June 20, 2018 and ended September 30, 2018, the Company recorded an expense of $16 as part of the general and administrative expenses
in the Company’s Consolidated Statements of Comprehensive Loss. Issuance of these shares is subject to stockholder approval of
the Company’s 2018 Equity Incentive Plan at the 2018 Annual Meeting.
Issuance
of common stock
As discussed in Note 4, the Company has
agreed to issue to Mr. Johnson (the former Chief Finance Executive of the Company) 271,000 shares of the Company’s common
stock, subject to appropriate adjustment for any stock splits, stock or business combinations, recapitalizations or similar events
occurring after the date of the agreement. Those shares were be issued on any business day during the period commencing on the
date that is six months after the date of the agreement and ending on the date that is three business days after such six-month
anniversary. On August 12 2018, the aforesaid shares were issued to Mr. Johnson with a stated value of $86, representing a price
per share of $0.32.
Common
Stock Warrants
On August 30, 2018, the Company granted
to one service provider a warrant to purchase 446,429 shares of common stock of the Company over a period of 5-years at an exercise
price of $0.28 subject to certain standard adjustments. The warrant is fully vested and was granted in consideration for legal
services that were rendered by the service provider. The fair value of the granted warrants was determined by using the Black-Scholes
pricing model in total amount of $98 and was recorded as part of the general and administrative expenses in the Company’s
Consolidated Statements of Comprehensive Income (Loss).
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(unaudited)
Note
5 (Cont.)
Redeemable
Convertible Preferred Stock and Stockholders’ Equity (Deficit):
Common
Stock Options
The
Company’s Amended and Restated 2000 Non-Employee Director Stock Option Plan authorized 1,250,000 shares. As of September
30, 2018, the number of shares available for future issuance pursuant to this plan is 71,865. All other shares had either been
issued or reserved for issuance upon exercise of stock options.
The
Company’s Amended and Restated 2005 Equity Compensation Plan authorized 3,500,000 shares. As of September 30, 2018, there
were no shares available for future issuance pursuant from this plan due to the lapsing of previously issued options. All other
shares had either been issued or reserved for issuance upon exercise of stock options.
On
April 18, 2018, the board of directors adopted the FC Global Realty Incorporated 2018 Equity Incentive Plan (the “2018 Plan”),
which provides for grants of restricted stock, stock options and other forms of incentive compensation to officers, employees,
directors and consultants. The Company is authorized to issue up to 5,000,000 shares of common stock under the 2018 Plan. The
2018 Plan became effective upon approval by the board on April 18, 2018, but no award may be exercised (or, in the case of a stock
award, may be granted) unless and until the 2018 Plan has been approved by the stockholders of the Company, which approval shall
be within twelve (12) months after the date the 2018 Plan was adopted by the board. Approval of the 2018 Plan will be included
in the 2018 Annual Meeting.
A
summary of stock option transactions under these plans during the nine months ended September 30, 2018 are as follows (unaudited):
|
|
|
Number of
Stock
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Term
(in years)
|
|
|
Aggregate
Intrinsic
Value (*)
|
|
Outstanding at January 1, 2018
|
|
|
|
79,890
|
|
|
$
|
94.51
|
|
|
|
3.6
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
147,088
|
|
|
$
|
0.98
|
|
|
|
9.5
|
|
|
$
|
—
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired/cancelled
|
|
|
|
(149,588
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at September 30, 2018
|
|
|
|
77,390
|
|
|
$
|
95.27
|
|
|
|
3.6
|
|
|
$
|
—
|
|
Exercisable at September 30, 2018
|
|
|
|
77,390
|
|
|
$
|
95.27
|
|
|
|
3.6
|
|
|
$
|
—
|
|
(*)
|
The
aggregate intrinsic value represents the total intrinsic value (the difference between the deemed fair value of the Company’s
Ordinary Shares on the last day of the third quarter of 2018 and the exercise price, multiplied by the number of in-the-money
options) that would have been received by the option holders had all option holders exercised their options on September 30,
2018. This amount is impacted by the changes in the fair value of the Company’s shares.
|
The
total equity-based compensation expense related to the Company’s equity-based awards, recognized during the nine months
ended September 30, 2018 and 2017, total the amounts of $21 ($16 out of which related to restricted shares to be granted to the
Company’s Chief Executive Officer in June 2018) and $935 ($811 out of which related to the nine months ended September 30, 2017
is included in discontinued operations), respectively.
As
of September 30, 2018, there was $172 of total unrecognized compensation cost related to non-vested stock awards that based on
their original vesting terms was expected to be recognized.
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(unaudited)
Note
6
Income
Taxes:
On
December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act
of 2017 (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited
to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; eliminating the corporate Alternative Minimum
Tax (“AMT”) and changing how existing AMT credits can be realized; creating a new limitation on deductible interest
expense; changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after
December 31, 2017; and changing limitations on the deductibility of certain executive compensation.
In
December 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which addresses situations where the
accounting is incomplete for the income tax effects of the Act. SAB 118 directs taxpayers to consider the impact of the act as
“provisional” when the Company does not have the necessary information available, prepared or analyzed (including
computations) to finalize the accounting for the change in tax law. Companies are provided a measurement period of up to one year
to obtain, prepare, and analyze information necessary to finalize the accounting for provisional amounts or amounts that cannot
be estimated.
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 amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit carryforwards. 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 operations
in the period that includes the enactment date.
A
valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of
deferred tax liabilities during the period in which the related temporary difference becomes deductible. The benefit of tax positions
taken or expected to be taken in the Company’s income tax returns are recognized in the consolidated financial statements
if such positions are more likely than not of being sustained. As of September 30, 2018, an amount of $1.6 million related to
corporate international unrecognized tax benefits is included in other accrued liabilities.
Taxes,
which may apply in the event of a disposal of investments in subsidiaries, have not been included in computing the deferred taxes,
as the Company anticipates it would liquidate those subsidiaries that can be closed on a tax free basis.
The
Company files corporate income tax returns in the United States, both in the Federal jurisdiction and in various State jurisdictions.
The Company is subject to Federal income tax examination for calendar years 2014 through 2017 and is also generally subject to
various State income tax examinations for calendar years 2014 through 2017. Photo Therapeutics Limited files in the United Kingdom.
Radiancy (Israel) Limited files in Israel. The Israeli subsidiary is subject to tax examination for calendar years 2013 through
2017.
During
the three and nine month periods ended September 30, 2018, the Company recognized an income tax provision of $12 and $221, respectively,
relating to adjustments of accruals and prepaid tax assets.
Note
7
Subsequent
Events
:
Second
Closing under the Remediation Agreement
As
discussed in Note 5, on October 31, 2018, the Company and OFI completed its second closing under the Remediation Agreement, pursuant
to which OFI provided $100 to the Company in exchange for 153,846 shares of the Company’s Series D Preferred Stock.
Plan
of Conversion
On
November 8, 2018, the Company adopted a plan of conversion (the “Plan of Conversion”) to change the Company’s
state of incorporation from Nevada to Maryland by way of a conversion of the Company into a Maryland corporation to be named Gadsden
Properties, Inc. (“GPI”), pursuant to Section 92A.105 of the Nevada Revised Statutes and Section 3-901 of the Maryland
General Corporation Law (the “Conversion”). Pursuant to the Plan of Conversion, the issued and outstanding shares
of the Company’s common stock will automatically be converted into the same number of shares of GPI’s common stock.
In addition, all options, rights or warrants to purchase shares of the Company’s common stock outstanding immediately
prior to the Conversion will thereafter entitle the holder to purchase a like number of shares of GPI’s common stock on
the same terms without any action on the part of the holder. The Company’s business, directors and management will continue
to be the same as immediately before the Conversion.
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(unaudited)
Note
7 (Cont.)
Subsequent
Events
:
Plan
of Conversion (Cont.)
Completion
of the Conversion is subject to a number of conditions, including (i) approval of the Plan of Conversion by the affirmative vote
of holders of at least a majority of the issued and outstanding shares of the Company’s voting stock and (ii) the filing
and effectiveness of a registration statement on Form S-4 with the SEC in connection with the offer and issuance of GPI’s
securities to be issued pursuant to the Conversion. The Company plans to complete the Conversion immediately prior to the Merger
described below.
Merger
Agreement
On
November 8, 2018, the Company entered into an agreement and plan of merger (the “Merger Agreement”) with FC Merger
Sub, Inc., a Maryland corporation and wholly owned subsidiary of the Company established on October 11, 2018 (“FC Merger
Sub”), Gadsden Growth Properties, Inc., a Maryland corporation (“Gadsden”) and Gadsden Growth Properties, L.P.,
a Delaware limited partnership (the “Operating Partnership”), pursuant to which, subject to the terms and conditions
of the Merger Agreement, FC Merger Sub will merge with and into Gadsden, with Gadsden surviving the merger as a wholly owned subsidiary
of the Company, which shall have been converted into GPI (the “Merger”).
Pursuant
to the Merger Agreement, and upon the terms and subject to the conditions described therein, at the effective time of the Merger
(the “Effective Time”), except as otherwise set forth in the Merger Agreement, shares of each class of Gadsden stock
issued and outstanding immediately prior to the Effective Time will be automatically converted into the equivalent class of GPI
stock. Each share of Gadsden common stock will be automatically converted into 21.529 shares of GPI common stock, each share of
Gadsden 7% Series A Cumulative Convertible Perpetual Preferred Stock will be automatically converted into 1 share of GPI 7% Series
A Cumulative Convertible Perpetual Preferred Stock (with rights of equal tenor to the Gadsden 7% Series A Cumulative Convertible
Perpetual Preferred Stock), each share of Gadsden Series B Non-Voting Convertible Preferred Stock will be automatically converted
into 1 share of GPI Series B Non-Voting Convertible Preferred Stock (with rights of equal tenor to the Gadsden Series B Non-Voting
Convertible Preferred Stock), and each share of Gadsden Series C Participating Convertible Preferred Stock will be automatically
converted into 1 share of GPI Series C Participating Convertible Preferred Stock (with rights of equal tenor to the Gadsden Series
C Participating Convertible Preferred Stock), each subject to certain adjustments to be made at the Effective Time as more fully
described in the Merger Agreement (the shares of GPI stock issuable in connection with the Merger is referred to as the “Merger
Consideration”). Following the Merger, all shares of GPI Series B Non-Voting Convertible Preferred Stock issued in the Merger
will be automatically converted into shares of GPI common stock in accordance with the automatic conversion provision of the GPI
Series B Non-Voting Convertible Preferred Stock. It is expected that, immediately after completion of the Merger, the former stockholders
of Gadsden will own up to approximately 94% of the outstanding GPI common stock (on a fully-diluted basis), subject to adjustment
as provided for in the Merger Agreement.
The
Merger Agreement contains customary representations and warranties of the Company, FC Merger Sub, Gadsden and the Operating Partnership
relating to their respective businesses, in each case generally subject to materiality and “Material Adverse Effect”
qualifiers. Additionally, the Merger Agreement provides for customary pre-closing covenants of the parties, including a covenant
to conduct their respective businesses in the usual, regular and ordinary course substantially consistent with past practice and
to refrain from taking certain actions without the other parties’ consent. The parties have also agreed not to solicit proposals
relating to specified “Competing Transactions” (as defined in the Merger Agreement) or, subject to certain exceptions
relating to the receipt of unsolicited offers that may be deemed to be “Superior Competing Transaction” (as defined
in the Merger Agreement), enter into discussions concerning or provide information in connection with Competing Transactions.
Consummation
of the Merger is subject to various conditions, including, among others, customary conditions relating to: adoption of the Merger
Agreement by the vote of Gadsden’s stockholders holding two-thirds of the outstanding shares of Gadsden common stock and
Gadsden 7% Series A Cumulative Convertible Perpetual Preferred Stock entitled to vote thereon (on an as-converted basis) (the
“Gadsden Stockholder Approval”) and the approval of the issuance of GPI stock in connection with the Merger (the “Stock
Issuance”) by a majority of votes cast by the Company’s stockholders (the “Company Stockholder Approval”);
effectiveness of a registration statement on Form S-4 that will include a joint proxy statement of the Company and Gadsden and
that will also constitute a prospectus of GPI (the “Joint Proxy Statement/Prospectus”); absence of injunction by any
court or other tribunal of competent jurisdiction and absence of law that prevents, enjoins, prohibits or makes illegal the consummation
of the Merger; receipt of all consents, approvals and authorizations legally required to be obtained to consummate the Merger;
and receipt of customary legal opinions from counsel to the Company and Gadsden. In addition, the Company must have completed
all actions required the Remediation Agreement. The obligation of each party to consummate the Merger is also conditioned upon
the other party’s representations and warranties being true and correct (subject to certain materiality exceptions), the
other party having performed in all material respects its obligations under the Merger Agreement, and the absence of a material
adverse effect on each party.
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(unaudited)
Note
7 (Cont.)
Subsequent
Events
:
Merger
Agreement (Cont.)
In
addition, the obligation of Gadsden and the Operating Partnership to complete the Merger is subject to the satisfaction (or waiver,
to the extent permitted by applicable law) of the following conditions: Gadsden shall have agreed with the Company regarding the
calculation of Closing NAV (as defined in the Merger Agreement) and Closing NAV of the Company shall not be less than $7.5 million;
Gadsden shall be satisfied with the results of its due diligence investigation of the Company and its subsidiaries; the stockholders
of the Company that constitute at least 70% of the total voting power of the Company shall have approved the Conversion and the
Stock Issuance; the Company shall have, on a consolidated basis, not less than $1.5 million of unrestricted cash; and the Company
shall have received a letter of resignation from each member of its board of directors, other than the directors who are to be
members of the board after the Merger. The obligation of the Company to complete the Merger is also subject to the satisfaction
(or waiver, to the extent permitted by applicable law) of the following condition: the Company shall have agreed with Gadsden
regarding the calculation of Closing NAV and Closing NAV of Gadsden shall not be less than $80 million.
The
Merger Agreement may be terminated at any time prior to the completion of the Merger, whether before or after Company Stockholder
Approval or Gadsden Stockholder Approval, in any of the following ways: (i) by mutual written consent of the Company and Gadsden;
(ii) by either Gadsden or the Company if the Merger shall not have occurred on or prior to March 31, 2019; provided, that a party
that has materially failed to comply with any obligation of such party set forth the Merger Agreement shall not be entitled to
exercise its right to terminate; (iii) by Gadsden upon a breach of any representation, warranty, covenant or agreement on the
part of the Company or FC Merger Sub set forth in the Merger Agreement, or if there shall have been a Gadsden material adverse
effect or if the Joint Proxy Statement/Prospectus is not declared effective by the SEC on or prior to December 28, 2018; (iv)
by the Company upon a breach of any representation, warranty, covenant or agreement on the part of Gadsden or the Operating Partnership
set forth in the Merger Agreement, or if there shall have been a Company material adverse effect; (v) by either Gadsden or the
Company if any order by any governmental entity of competent authority preventing the consummation of the Merger shall have become
final and non-appealable; (vi) by either Gadsden or the Company if either the Company Stockholder Approval or the Gadsden Stockholder
approval shall not have been obtained; (vii) by either Gadsden or the Company prior to obtaining the Gadsden Stockholder Approval
or the Company Stockholder Approval if Gadsden or the Company has delivered a notice of a Superior Competing Transaction (provided
that for the termination to be effective, such party shall have paid the applicable termination fee); (viii) by Gadsden if (a)
the Company’s board of directors shall have withdrawn, qualified or modified in a manner adverse to Gadsden its recommendation
to approve the Stock Issuance, or shall recommend that the Company’s stockholders approve or accept a Competing Transaction,
or if the Company shall have delivered a notice of a Superior Competing Transaction or shall have publicly announced a decision
to take any such action, or (b) the Company shall have knowingly and materially breached its obligation under the Merger Agreement
to call or hold its stockholder meeting or to cause the Joint Proxy Statement/Prospectus to be mailed to its stockholders in advance
of the meeting (it being agreed that Gadsden shall not have any right to terminate unless Gadsden shall have satisfied its obligations
in connection with the Joint Proxy Statement/Prospectus and shall have provided all information and other materials required in
connection therewith, and further agreed that Gadsden shall not have any right to terminate as a result of the Company’s
failure to act as soon as practicable (or to satisfy similar obligations), as a result of any delay as a result of the SEC review
process, or as a result of the need to take actions to comply with the federal securities laws); or (ix) By the Company if (a)
Gadsden’s board of directors shall have withdrawn, qualified or modified in a manner adverse to the Company its recommendation
to approve the Merger Agreement, or shall recommend that Gadsden’s stockholders approve or accept a Competing Transaction,
or if Gadsden shall have delivered a notice of a Superior Competing Transaction or shall have publicly announced a decision to
take any such action, or (b) Gadsden shall have knowingly and materially breached its obligation under the Merger Agreement to
call or hold its stockholder meeting or to cause the Joint Proxy Statement/Prospectus to be mailed to its stockholders in advance
of the meeting (it being agreed that the Company shall not have any right to terminate unless the Company shall have satisfied
its obligations in connection with the Joint Proxy Statement/Prospectus and shall have provided all information and other materials
required in connection therewith, and further agreed the Company shall not have any right to terminate as a result of Gadsden’s
failure to act as soon as practicable (or to satisfy similar obligations), as a result of any delay as a result of the SEC review
process, or as a result of the need to take actions to comply with the federal securities laws).
Gadsden
is required to pay a termination fee of $200 if the Merger Agreement is terminated: by Gadsden at any time prior to the receipt
of Gadsden Stockholder Approval upon delivery of a notice of a Superior Competing Transaction; by the Company upon any of the
events described in subsection (ix) of the preceding paragraph; or by the Company if Gadsden Stockholder Approval shall not have
been obtained and (i) prior to such termination, a person has made any bona fide written proposal relating to a Competing Transaction
which has been publicly announced prior to the Gadsden’s stockholder meeting and (ii) within twelve months of any such termination,
Gadsden or any subsidiary of Gadsden shall consummate a Competing Transaction, or enter into a written agreement with respect
to a Competing Transaction that is ultimately consummated with any person.
FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(unaudited)
Note
7 (Cont.)
Subsequent
Events
:
Merger
Agreement (Cont.)
The
Company is required to pay a termination fee of $250 if the Merger Agreement is terminated: by the Company at any time prior to
the receipt of the Company Stockholder Approval upon delivery of a notice of a Superior Competing Transaction; by Gadsden upon
any of the events described in subsection (viii) of the paragraph above regarding termination; by Gadsden, upon a breach of certain
representations, warranties, covenants or agreements on the part of the Company or FC Merger Sub set forth in Merger Agreement;
or by Gadsden if the Company Stockholder Approval shall not have been obtained and (i) prior to such termination, a person has
made any bona fide written proposal relating to a Competing Transaction which has been publicly announced prior to the Company’s
stockholder meeting and (ii) within twelve months of any such termination, the Company or any subsidiary of the Company shall
consummate a Competing Transaction, or enter into a written agreement with respect to a Competing Transaction that is ultimately
consummated with any person.
If
the Merger Agreement is validly terminated, the Merger Agreement will terminate (except that the confidentiality agreement
between Gadsden and the Company, and the provisions described Section 5.2 (Access to Information; Confidentiality and Confidentiality
Agreement), Section 7.1 (Termination), Section 7.2 (Break-Up Fees and Expenses), Section 7.3 (Effect of Termination) and Article
VIII (Survival of Representations and Warranties, Indemnification) and Article IX (General Provisions) of the Merger Agreement,
which provisions shall survive such termination), and there will be no other liability on the part of either party to the other
except for the termination fees and expenses described above; provided, that no party will be relieved from liability for
fraud or a willful breach, or the Company’s failure to pay the Merger Consideration upon satisfaction of the conditions
to closing set forth in the Merger Agreement, in which case the aggrieved party will be entitled to all rights and remedies
available at law or in equity.
Due
to the fact that Gadsden will acquire control of the Company as a result of the Merger, the Merger will be accounted for as a
“reverse acquisition” pursuant to which Gadsden will be considered the acquiring entity for accounting purposes in
accordance with U.S. GAAP, and the Company’s assets and liabilities will be recorded at fair value. Gadsden’s historical
results of operations will replace the Company’s historical results of operations for all periods prior to the Merger.
The
Company filed a preliminary Joint Proxy Statement/Prospectus related to the Merger on November 9, 2018.
Cancellation
of Common Stock
The Company had entered
into a Severance Agreement with Suneet Singal, its former Chief Executive Officer, on December 22, 2017, under which it agreed
to issue Mr. Singal 1,000,000 shares of the Company's common stock. On October 22, 2018, the Company completed the cancellation
of those shares, having reached a decision to do so after the discovery of transfer and valuation issues with certain assets transferred
to the Company from Mr. Singal's First Capital Real Estate Investment Trust. On September 21, 2018, Mr. Singal filed a Complaint
against the Company in the Supreme Court of the State of New York, County of New York (the “Complaint”), alleging breach
of the Severance Agreement and breach of the covenant of good faith and fair dealing for an unspecified amount of damages. On October
24, 2018, the Company filed a Notice of Removal removing the action from the Supreme Court of the State of New York, County of
New York to the United States District Court for the Southern District of New York. On November 5, 2018, the Company filed a Pre-Motion
Letter seeking leave from the Court to file a motion to dismiss the Complaint. The Company intends to vigorously defend this matter
and is exploring all of its legal options against Mr. Singal.
Lawsuit Dismissal
As reported above in Note 4, Commitments
and Contingencies, the Company is a party to a lawsuit, JFURTI, LLC, et al v. Suneet Singal, et al, filed in the United States
District Court for the Southern District of New York. The suit named as defendants Suneet Singal, an officer of various First Capital
companies as well as the Company’s former Chief Executive Officer and former member of the Company’s board of directors,
Frank Grant and Richard Leider, board members of First Capital Real Estate Investments, LLC, First Capital Real Estate Advisors,
LP, Presidential Realty Corporation, Presidential Realty Operating Partnership, Downey Brand LLP and now the Company (under its
previous name, PhotoMedex Inc.), as well as nominal derivative defendants First Capital Real Estate Trust Incorporated and First
Capital Real Estate Operating Partnership, L.P. Mr. Leider is also on the board of directors of the Company. A Motion to
Dismiss this action was filed earlier this year with the Court on behalf of all defendants.
On November 12, 2018, the Court granted
defendants’ Motion to Dismiss this case in its entirety.