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EX-32.2 - EX-32.2 - Great Elm Capital Group, Inc.gec-ex322_470.htm
EX-32.1 - EX-32.1 - Great Elm Capital Group, Inc.gec-ex321_471.htm
EX-31.2 - EX-31.2 - Great Elm Capital Group, Inc.gec-ex312_473.htm
EX-31.1 - EX-31.1 - Great Elm Capital Group, Inc.gec-ex311_472.htm
EX-23.3 - EX-23.3 - Great Elm Capital Group, Inc.gec-ex233_1074.htm
EX-23.2 - EX-23.2 - Great Elm Capital Group, Inc.gec-ex232_469.htm
EX-23.1 - EX-23.1 - Great Elm Capital Group, Inc.gec-ex231_389.htm
EX-21.1 - EX-21.1 - Great Elm Capital Group, Inc.gec-ex211_580.htm
EX-10.29 - EX-10.29 - Great Elm Capital Group, Inc.gec-ex1029_1501.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

For the fiscal year ended June 30, 2017

or

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

For the transition period from ______ to ________

Commission file number: 001-16073

 

GREAT ELM CAPITAL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

  

94-3219054

State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

800 South Street, Suite 230,

Waltham, MA

 

02453

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code (617) 375-3006

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

  

Name of each exchange on which registered

Common stock, par value $0.001 per share

 

The Nasdaq Stock Market LLC

 

 

(Nasdaq Global Select Market)

Securities registered pursuant to section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes     No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes     No 

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes     No

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

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

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 or Rule 12b-2 of the Securities Exchange Act of 1934.

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

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $70.0 million as of December 31, 2016. Shares of common stock held by persons who are not directors or executive officers, including persons who own more than 5% of the outstanding shares of common stock, are included in that such persons are not deemed to be affiliates for purpose of this calculation.

As of September 1, 2017, there were 24,139,631 outstanding shares of the registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement (the “Proxy Statement”), which will be filed with the SEC within 120 days following June 30, 2017, in connection with the registrant’s 2017 annual meeting of stockholders, to be held on October 17, 2017, are incorporated by reference into Part III of this report.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

PART I

 

 

 

 

 

 

 

 

 

Item 1.

 

Business

 

2

Item 1A.

 

Risk Factors

 

4

Item 1B.

 

Unresolved Staff Comments

 

13

Item 2.

 

Properties

 

13

Item 3.

 

Legal Proceedings

 

13

Item 4.

 

Mine Safety Disclosures

 

13

 

 

 

 

 

PART II

 

 

 

 

 

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

14

Item 6.

 

Selected Financial Data

 

15

Item 7.

 

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

 

17

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

25

Item 8.

 

Financial Statements and Supplementary Data

 

26

Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

26

Item 9A.

 

Controls and Procedures

 

26

Item 9B.

 

Other Information

 

30

 

 

 

 

 

PART III

 

 

 

 

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

30

Item 11.

 

Executive Compensation

 

30

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

30

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

30

Item 14.

 

Principal Accounting Fees and Services

 

30

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

 

 

Item 15.

 

Exhibits, Financial Statement Schedules

 

30

Item 16

 

Form 10-K Summary

 

30

 

 

 

 

 

Exhibit Index

 

31

Signatures

 

34

Index to Financial Statements

 

F-1

 

 

 

 

 

 

i


 

PART I

Unless the context otherwise requires, “we” “us” “our” and terms of similar import refer to Great Elm Capital Group, Inc. and/or its subsidiaries.

Cautionary Statement Regarding Forward-Looking Information

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

 

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

 

the dividend rate that GECC will pay;

 

our ability to grow our investment management business;

 

our ability to build a real estate business;

 

our ability to raise capital to fund our business plan;

 

our ability to create a merchant banking business;

 

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

 

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

 

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

 

serious disruptions and catastrophic events;

 

competition;

 

the transformation of our board and executive leadership;

 

our ability to attract, assimilate and retain key personnel;

 

compliance with laws, regulations and orders;

 

changes in laws and regulations;

 

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

 

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

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

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Item 1.  Business.

Overview

Great Elm has undergone a significant transformation in the last year. We:

 

changed our leadership;

 

closed on our first investment management business opportunity; and

 

explored a number of acquisition and investment opportunities.

Our goal is to build a holding company focused on return on investment and long-term value creation.  We will accomplish this principally through:

 

continuous review of acquisitions of businesses, securities and assets that have the potential for significant long-term value creation;

 

effective use of the skills of our team, our financial resources, including our tax assets, our willingness to create bespoke solutions and our ability to prudently assume risks; and

 

evaluating the retention and disposition of our operations and holdings.

Our first investment for long-term value creation was in the investment management business.  In June 2016, we invested $30 million in GECC. On November 3, 2016, Full Circle Capital Corporation (Full Circle), a business development company (BDC), merged with and into GECC.  In this investment management business, we have the opportunity to:

 

earn management and administrative fees;

 

earn incentive fees if GECC meets financial targets; and

 

hold our GECC shares to generate dividends or sell our GECC shares to redeploy our capital in higher yielding opportunities.

We continue to explore other opportunities in the investment management business including, but not limited to, transactions with other BDCs that trade at a discount to their net asset value, as well as the creation of closed-end investment vehicles.

As of June 30, 2017, we had $1.7 billion of net operating loss (NOL) carryforwards for Federal income tax purposes.

Our corporate headquarters is located at 800 South Street, Suite 230, Waltham, Massachusetts 02453 and our phone number is (617) 375-3006. Our corporate website address is www.greatelmcap.com. The information contained in, or accessible through, our corporate website does not constitute part of this report.  We are a Delaware corporation that was incorporated in 1994 and completed our initial public offering in 1999.

Our Divested Patent Business

On April 6, 2016, we entered into a purchase and sale agreement with Optis providing for the sale of the entities that conducted our patent licensing business (the Divestiture).  The Divestiture was completed on June 30, 2016.

In the Divestiture, we received $34.2 million in gross cash proceeds, inclusive of reimbursement of $4.2 million of agreed upon expenses, and may be entitled to up to an additional $10 million cash payment on June 30, 2018. Optis has claimed that it has losses indemnifiable under the purchase and sale agreement in excess of the $10 million contractual payment due on June 30, 2018.  As a result, we have not recognized any portion of the $10 million in the accompanying consolidated financial statements for the periods presented. Our legacy patent business is reflected in our financial statements as discontinued operations.

Great Elm Capital Corporation ― Our Business Development Company Investment

We decided to invest in the asset management business because of our assessment of its ability to generate recurring free cash flows, its growth prospects and our board of directors’ industry expertise.

2


 

On June 23, 2016, GECC entered into an agreement and plan of merger with Full Circle (the Merger Agreement) and entered into a subscription agreement (the Subscription Agreement) with us and private investment funds (the MAST Funds) managed by MAST Capital Management, LLC (MAST Capital).

We contributed $30 million in cash to GECC.  As of June 30, 2016, GECC was our wholly-owned subsidiary and it is consolidated in our June 30, 2016 financial statements.  On September 27, 2016, the MAST Funds contributed to GECC a portfolio of debt investments that had a November 3, 2016 fair value of approximately $90 million.  Following the MAST Funds contribution, GECC elected to be treated as a BDC under the Investment Company Act of 1940, as amended (the Investment Company Act).

On November 3, 2016:

 

Full Circle merged with and into GECC (the Merger) in exchange for shares of GECC common stock, and GECC’s common stock became listed on the NASDAQ Global Market;

 

Great Elm Capital Management, Inc., our wholly-owned registered investment adviser subsidiary (GECM), is the external investment adviser to GECC; and

 

GECM hired all of the employees of MAST Capital and acquired all of the infrastructure used by our GECM team.

We have two opportunities to generate free cash flow from GECC.

Under the investment management agreement (IMA) with GECC that is an exhibit to this report, GECM will be entitled to:

 

management fees measured by GECC’s gross assets (other than cash and cash equivalents, including investments in money market funds);

 

an incentive fee if GECC’s net investment income exceeds a hurdle rate; and

 

an incentive fee based on GECC’s capital gains.

We also earn an administration fee based on the reimbursement of the portion of GECM’s expenses allocable to GECC.

We own approximately 17% of GECC’s shares that we may hold to generate dividends or sell to redeploy our capital in higher yielding opportunities.  Our GECC shares are registered for re-sale; however, we agreed that we would not sell these shares until November 3, 2017, but we may finance these shares during that holding period to generate liquidity before our contractual holding period expires.

In September 2017, we entered into a Separation Agreement that separated our business from MAST Capital and restructured many of these arrangements.

Acquisition Program

GECM’s team also is developing an active acquisition program for us in the investment management business, in select real estate opportunities and in operating businesses.  In the fiscal year ended June 30, 2017, we evaluated a number of opportunities but were unwilling to pay the significant multiples that the sellers received from third parties.

Competition

We face competition from larger, well financed organizations (both domestic and foreign), including operating companies, global asset managers, investment banks, commercial banks, private equity funds, sovereign wealth funds and state owned enterprises.  Government regulation is a key competitive factor.

Employees

We had sixteen employees as of June 30, 2017; two in our parent company, seven in investment management and seven providing shared services.

3


 

Information about Great Elm on the Internet

The following documents and reports are available on or through our website as soon as reasonably practicable after we electronically file such materials with, or furnish to, the SEC:

 

Code of Ethics;

 

Reportable waivers, if any, from our Code of Ethics by our executive officers;

 

Charter of the audit committee of our board of directors (our Board);

 

Charter of the nominating and corporate governance committee of our Board;

 

Charter of the compensation committee of our Board;

 

Annual reports on Form 10-K;

 

Quarterly reports on Form 10-Q;

 

Current reports on Form 8-K;

 

Proxy or information statements we send to our stockholders; and

 

Any amendments to the above-mentioned documents and reports.

Our stockholders may also obtain a printed copy of any of these documents or reports free of charge by sending a request to Great Elm Capital Group, Inc., 800 South Street, Suite 230, Waltham, MA 02453; Attention: Investor Relations, or by calling (617) 375-3006.

Item 1A. Risk Factors.

Our business is subject to a number of risks. You should carefully consider the following risk factors, together with all of the other information included or incorporated by reference in this report, before you decide whether to invest in our securities. The following risks are not the only risks we face. If any of the following risks occur, our business, financial condition and results of operations could be materially adversely affected. In such case, the trading price of our common shares could decline, and you may lose all or part of your investment.

Risks Related to Our Business

We have a limited track record in the investment management business, and provide no assurance as to our acquisition and investment program. We entered the investment management business during fiscal 2017, so there is limited historical information about our performance in the investment management business on which to base your investment decision.

We have plans to make significant investments but cannot provide specificity as to our future investments or financing plans.

These and other factors, including the other risk factors described in this document, make it difficult for you and other market participants to value our company and our prospects. We are unaware of any comparable company that securities analysts can use to benchmark our performance and valuation. We cannot give any assurance that any of the uncertainties or risk factors in this document will be favorably resolved.

Our investment management agreement may be terminated by GECC in its discretion.  Our IMA may be cancelled by GECC on sixty days-notice for any reason or no reason.  We do not control the board of directors of GECC, and they may cancel our IMA at their discretion without making any termination payment to us.  GECM’s team investment performance is a key element of retaining this business.  We have recorded an intangible asset attributable to the IMA that is being amortized over a fifteen-year economic life even though the IMA is cancellable by GECC without penalty or termination fee and is renewable annually through a process mandated under the Investment Company Act.

Our growth strategy may not be successful. The process to identify potential investment opportunities and acquisition targets, to investigate and evaluate the future returns therefrom and business prospects thereof and to negotiate definitive agreements with respect to such transactions on mutually acceptable terms can be time consuming

4


 

and costly. We are likely to encounter intense competition from other companies with similar business objectives to ours, including private equity and venture capital funds, sovereign wealth funds, special purpose acquisition companies, investment firms with significantly greater financial and other resources and operating businesses competing for acquisitions. Many of these companies are well established, well financed and have extensive experience in identifying and effecting business combinations.

Because we will consider investments in different industries, you have no basis at this time to ascertain the merits or risks of any business that we may ultimately invest in. Our business strategy contemplates investment in one or more operating businesses. We are not limited to acquisitions and/or investments in any particular industry or type of business. Accordingly, there is no current basis for you to evaluate the possible merits or risks of the particular industry in which we may ultimately invest or the target businesses with which we may ultimately invest. We may not properly assess all of the significant risks present in that opportunity. Even if we properly assess those risks, some of them may be outside of our control or ability to affect. Except as required under Nasdaq rules and applicable law, we will not seek stockholder approval of any investment that we may pursue, so you will most likely not be provided with an opportunity to evaluate the specific merits or risks of such a transaction before we become committed to the transaction.

We may not correctly assess the management teams of the businesses we invest in. The value of the businesses we invest in is driven by the quality of the leaders of those businesses. When evaluating the desirability of a prospective target business, our ability to assess the target business’ management may be limited due to a lack of time, resources or information. Our assessment of the capabilities of the target’s management, therefore, may prove to be incorrect and such management may lack the skills, qualifications or abilities we expected. Should the target’s management not possess the necessary skills, qualifications or abilities, the operations and profitability of that business will be negatively impacted.

Subsequent to an investment, we may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial condition, results of operations and our share price, which could cause you to lose some or all of your investment. Even if we conduct extensive due diligence on a target business that we invest in, we cannot assure you that this diligence will identify all material issues that may be present inside a particular target business, that it would be possible to uncover all material issues through a customary amount of due diligence, or that factors outside of the target business or outside of our control will not later arise. As a result of these factors, we may be forced to later write-down or write-off assets, restructure our operations, or incur impairment or other charges that could result in us reporting losses. Even if our due diligence successfully identifies certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent with our preliminary risk analysis. Even though these charges may be non-cash items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us or our securities. In addition, charges of this nature may cause us to violate net worth or other covenants under our debt agreements. Accordingly, you could suffer a significant reduction in the value of your shares.

Changing conditions in financial markets and the economy could impact us through decreased revenues, losses or other adverse consequences. Global or regional changes in the financial markets or economic conditions could adversely affect our business in many ways, including the following:

 

Adverse changes in the market could also lead to a reduction in investment management fees and investment income from managed funds and losses on our own capital invested in managed funds. Even in the absence of a market downturn, below-market investment performance by our funds and portfolio managers could reduce asset management revenues and assets under management and result in withdrawal of fee-generating assets under management and reputational damage that might make it more difficult to attract new investors.

 

Limitations on the availability of credit, such as occurred during 2008, can affect our ability to borrow on a secured or unsecured basis, which may adversely affect our liquidity and results of operations. Global market and economic conditions have been disrupted and volatile in the last several years and may be in the future. Our cost and availability of funding could be affected by illiquid credit markets and wider credit spreads.

 

New or increased taxes on compensation payments or financial transactions may adversely affect our profits, if earned. Should one of our customers, debtors or competitors fail, our business prospects and revenue could be negatively impacted due to negative market sentiment causing customers to cease doing business with us and our lenders to cease extending credit to us, which could adversely affect our business, funding and liquidity.

5


 

Our common stock price may be volatile. The trading price of our common stock may fluctuate substantially, depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include, but are not limited to, the following:

 

price and volume fluctuations in the overall stock market from time to time;

 

significant volatility in the market price and trading volume of securities of our competitors;

 

actual or anticipated changes in our earnings or fluctuations in our operating results or changes in the expectations or recommendations of securities analysts;

 

material announcements by us or our competitors regarding business performance, financings, mergers and acquisitions or other transactions;

 

general economic conditions and trends;

 

legislative or regulatory changes affecting the businesses we invest in; or

 

departures of key personnel.

Our business, financial condition and results of operations are dependent upon those of our individual businesses, and our aggregate investment in particular industries. We are a holding company that will make investments in businesses and assets in a number of industries. Our business, financial condition and results of operations are dependent upon our investments. Any material adverse change in one of our investments or in a particular industry in which we invest may cause material adverse changes to our business, financial condition and results of operations. Concentration of capital we devote to a particular investment or industry may increase the risk that such investment could significantly impact our financial condition and results of operations, possibly in a material adverse way. Our portfolio of investments will change from time to time.

Our ability to successfully grow our new business and to be successful thereafter will be totally dependent upon the efforts of our key personnel. The loss of key personnel could negatively impact the operations and profitability of our business. Our ability to successfully effect our growth strategy is dependent upon the efforts of our key personnel. Peter. A. Reed is Chief Executive Officer of GECC and in September 2017 became our Chief Executive Officer. Our key personnel realize their importance to our business and may demand increased compensation as a result. The loss of our key personnel could severely negatively impact the operations and profitability of our business. We compete with many other entities for skilled management and staff employees, including entities that operate in different market sectors than us. Delays in recruiting and costs to recruit and retain adequate personnel could materially adversely affect results of operations.

Difficult market conditions can adversely affect our asset management business in many ways, by reducing the value or performance of our funds (including our invested funds and funds invested by third parties) or by reducing the ability of our funds to raise or deploy capital, each of which could negatively impact our income and cash flow and adversely affect our financial condition. The build-out of our asset management business is affected by conditions in the financial markets and economic conditions and events throughout the world, such as interest rates, availability of credit, inflation rates, economic uncertainty, changes in laws and regulations, market perceptions and other factors. In addition, we made a substantial investment in GECC that has resulted in an unrealized loss as of June 30, 2017 of approximately 30% of our investment. Adverse changes could lead to a reduction in investment income, losses on our own capital invested and lower revenues from asset management fees. Such adverse changes may also lead to a decrease in new capital raised and may cause investors to withdraw their investments and commitments. Even in the absence of a market downturn, below market investment performance by our funds and portfolio managers could reduce asset management revenues and assets under management and result in reputational damage that may make it more difficult to attract new investors or retain existing investors.

6


 

We may issue additional shares of common stock or shares of our preferred stock to obtain additional financial resources, as acquisition currency or under employee incentive plans. Any such issuances would dilute the interest of our stockholders and likely present other risks. Our certificate of incorporation authorizes our board of directors to issue shares of our common stock or preferred stock from time to time in their business judgement up to the amount of our then authorized capitalization. We may issue a substantial number of additional shares of our common stock and may issue shares of our preferred stock. These issuances:

 

may significantly dilute your equity interests;

 

may require you to make an additional investment in us or suffer dilution of your equity interest;

 

may subordinate the rights of holders of shares of our common stock if shares of preferred stock are issued with rights senior to those afforded to our common stock;

 

could cause a change in control if a substantial number of shares of our common stock are issued;

 

may affect, among other things, our ability to use our net operating loss carry forwards and could result in the resignation or removal of our present officers and directors; and

 

may adversely affect prevailing market prices for our common stock.

We may issue notes or other debt securities, or otherwise incur substantial debt, which may adversely affect our leverage and financial condition and thus negatively impact the value of our stockholders’ investment in us. We may choose to incur substantial debt to finance our growth plans. The incurrence of debt could have a variety of negative effects, including:

 

default and foreclosure on our assets if our operating cash flows are insufficient to repay our debt obligations;

 

acceleration of our obligations to repay the indebtedness even if we make all principal and interest payments when due if we breach covenants that require the maintenance of financial ratios or reserves without a waiver or renegotiation of that covenant;

 

our immediate payment of all principal and accrued interest, if any, if the debt is payable on demand;

 

our inability to pay dividends on our common stock;

 

using a substantial portion of our cash flow to pay principal and interest on our debt, which will reduce the funds available for dividends on our common stock (if declared), expenses, capital expenditures, acquisitions and other general corporate purposes;

 

limitations on our flexibility in planning for and reacting to changes in our business and in the industry in which we operate;

 

increased vulnerability to adverse changes in general economic, industry and competitive conditions and adverse changes in government regulation; and

 

limitation on our ability to borrow additional amounts for expenses, capital expenditures, acquisitions, debt service requirements, execution of our strategy and other purposes and other disadvantages compared to our competitors who have less debt.

If we are deemed to be an investment company under the Investment Company Act of 1940 (the Investment Company Act), we may be required to institute burdensome compliance requirements and our activities may be restricted, which may make it difficult for us to execute our growth plans. Under the Investment Company Act, our activities may be restricted, including:

 

restrictions on the nature of our investments, and

 

restrictions on the issuance of securities,

each of which may make it difficult for us to run our business. In addition, the law may impose upon us burdensome requirements, including:

 

registration as an investment company;

7


 

 

adoption of a specific form of corporate structure; and

 

reporting, record keeping, voting, proxy and disclosure requirements and other rules and regulations.

There are conflicts of interest involving MAST Capital and its affiliates, that own approximately 8.7% of the Company’s outstanding stock, and are participants in material transactions. These conflicts of interest, include, among others:

 

Funds managed by MAST Capital are our largest stockholder and appointed two members of our board of directors, in addition to the prior appointment of Peter A. Reed, during the fiscal year ended June 30, 2017;

 

Funds managed by MAST Capital owned all of our previously outstanding Senior Secured Notes which we settled in October 2016 for total cash payments of approximately $39.8 million;

 

Peter A. Reed, was a partner in MAST Capital, became our Chief Executive Officer in September 2017, is a member of our board of directors, Chief Executive Officer of GECC and Chief Investment Officer of GECM;

 

In connection with hiring the MAST Capital team, we took over a substantial portion of the operating expenses of MAST Capital and those transactions were restructured in September 2017;

 

We assumed MAST Capital’s commercial contracts, leases and other obligations; and

 

MAST Capital, its partners and employees will receive compensation in connection with GECC’s business, directly and through their equity ownership of GECC GP Corp (GP Corp) subsidiary and a note payable of GP Corp.

These conflicts of interest may result in arrangements that are not as favorable to us as those available on an arms-length basis. The significant ownership stake held by the MAST Funds may result in MAST Capital and its partners having undue influence over our affairs. These conflicts of interests may adversely affect the perception of our company, the value of our common stock or the willingness of new investors to invest in us.

Our officers and directors may become aware of business opportunities which may be appropriate for presentation to us and the other entities to which they owe certain fiduciary or contractual duties. Accordingly, they may have conflicts of interest in determining to which entity a particular business opportunity should be presented. These conflicts may not be resolved in our favor and a potential target business may be presented to another entity prior to its presentation to us, subject to their fiduciary duties under applicable law.

We may engage in a business combination with one or more target businesses that have relationships with the MAST Funds, our executive officers, directors or existing holders which may raise potential conflicts of interest. In light of the involvement of our executive officers and directors with other entities in the investment management business and otherwise, we may decide to acquire or do business with one or more businesses affiliated with the MAST Funds or our executive officers and directors.

Our directors also serve as officers and board members for other entities. Such entities may compete with us. We could pursue an affiliate transaction if we determined that such affiliated entity met our criteria for a business combination and such transaction was approved by a majority of our disinterested directors. Potential conflicts of interest may exist, and, as a result, the terms of the business combination may not be as advantageous to our public stockholders as they would be absent any conflicts of interest.

We may not be able to generate sufficient taxable income to fully realize our deferred tax asset, which would also have to be reduced if U.S. federal income tax rates are lowered. At June 30, 2017, we had net operating loss carryforwards of approximately $1.7 billion. If we are unable to generate sufficient taxable income, we will not be able to fully realize the full amount of the net deferred tax asset. If we are unable to generate sufficient taxable income prior to the expiration of our U.S. federal net operating loss carryforwards, the net operating loss carryforwards would expire unused. Our projections of future taxable income required to fully realize the recorded amount of the gross deferred tax asset reflect numerous assumptions about our operating businesses and investments, and are subject to change as conditions change specific to our business units, investments or general economic conditions. Changes that are adverse to us could result in the need to increase the deferred tax asset valuation allowance resulting in a charge to results of operations and a decrease to stockholders’ equity. In addition, if U.S. federal income tax rates are lowered, we would be required to reduce our net deferred tax asset with a corresponding reduction to earnings during the period.

8


 

If our tax filing positions were to be challenged by federal, state and local or foreign tax jurisdictions, we may not be wholly successful in defending our tax filing positions. We record reserves for unrecognized tax benefits based on our assessment of the probability of successfully sustaining tax filing positions. Management exercises significant judgment when assessing the probability of successfully sustaining tax filing positions, and in determining whether a contingent tax liability should be recorded and, if so, estimating the amount. If our tax filing positions are successfully challenged, payments could be required that are in excess of reserved amounts or we may be required to reduce the carrying amount of our net deferred tax asset, either of which result could be significant to our financial position, cash balances and results of operations.

Catastrophic events (or combination of events), such as terrorism/sabotage, or fire, as well as deliberate cyber terrorism, could adversely impact our financial performance. Our assets under management could be exposed to effects of catastrophic events, such as severe weather conditions, natural disasters, major accidents, acts of malicious destruction, sabotage or terrorism, which could adversely impact our operations.

Additionally, the perceived threat of a terrorist attack could negatively impact us. Any damage or business interruption costs as a result of uninsured or underinsured acts of terrorism could result in a material cost to us and could adversely affect our business, financial condition or results of operation. Adequate terrorism insurance may not be available at rates we believe are reasonable in the future. All of the risks indicated in this paragraph could be heightened by foreign policy decisions of the U.S. and other influential countries or general geopolitical conditions.

Losses not covered by insurance may be large, which could adversely impact our financial performance. We carry various insurance policies on our assets. These policies contain policy specifications, limits and deductibles that may mean that such policies do not provide coverage or sufficient coverage against all potential material losses.  There are certain types of risk (generally of a catastrophic nature such as war or environmental contamination) which are either uninsurable or not economically insurable. Further, there are certain types of risk for which insurance coverage is not equal to the full replacement cost of the insured assets. Should any uninsured or underinsured loss occur, we could lose our investment in, and anticipated profits and cash flows from, one or more of our assets or operations.

We also carry directors and officers liability insurance (D&O insurance) for losses or advancement of defense costs in the event a legal action is brought against the company’s directors, officers or employees for alleged wrongful acts in their capacity as directors, officers or employees. Our D&O insurance contains certain customary exclusions that may make it unavailable for the company in the event it is needed; and in any case our D&O insurance may not be adequate to fully protect the company against liability for the conduct of its directors, officers or employees.

We may invest in real estate. We may invest in commercial properties and are therefore exposed to certain risks inherent in the commercial property business. Commercial property investments are subject to varying degrees of risk depending on the nature of the property. These risks include changes in general economic conditions (such as the availability and cost of mortgage capital), local conditions (such as an oversupply of space or a reduction in demand for real estate in the markets in which we operate), the attractiveness of the properties to tenants, competition from other landlords and our ability to provide adequate maintenance at an economical cost.

Certain expenditures, including property taxes, maintenance costs, mortgage payments, insurance costs and related charges, must be made whether or not a property is producing sufficient income to service these expenses. Commercial properties are typically subject to mortgages which require debt service payments. If we become unable or unwilling to meet mortgage payments on any property, losses could be sustained as a result of the mortgagee’s exercise of its rights of foreclosure or of sale.

Continuation of rental income is dependent on favorable leasing markets to ensure expiring leases are renewed and new tenants are found promptly to fill vacancies. It is possible that we may face a disproportionate amount of space expiring in any one year. Additionally, rental rates could decline, tenant bankruptcies could increase and tenant renewals may not be achieved, particularly in the event of an economic slowdown.

9


 

Retail property operations are susceptible to any economic factors that have a negative impact on consumer spending. Lower consumer spending would have an unfavorable effect on the sales of our retail tenants, which could result in their inability or unwillingness to make all payments owing to us, and on our ability to keep existing tenants and attract new tenants. Significant expenditures associated with each equity investment in real estate assets, such as mortgage payments, property taxes and maintenance costs, are generally not reduced when there is a reduction in income from the investment, so our income and cash flow would be adversely affected by a decline in income from retail properties. In addition, low occupancy or sales at retail properties, as a result of competition or otherwise, could result in termination of or reduced rent payable under retail leases, which could adversely affect retail property revenues.

Hospitality and multifamily business are subject to a range of operating risks common to these industries. The profitability of our investments in these industries may be adversely affected by a number of factors, many of which are outside our control. Such factors could limit or reduce the demand for or the prices hospitality properties are able to obtain for their accommodations, or could increase costs and therefore reduce the profitability of hospitality businesses. There are numerous housing alternatives which compete with multifamily properties, including other multifamily properties as well as condominiums and single-family homes. This competitive environment could have a material adverse effect on our ability to lease our properties, as well as on the rents realized

Increased competition may adversely affect our revenues, profitability and staffing. All aspects of our business are intensely competitive. We will compete directly with a number of business development companies, private equity funds, other financial institutions and special purpose acquisition companies. There has been increasing competition from others offering financial services, including services based on technological innovations. Increased competition or an adverse change in our competitive position could lead to a reduction of business and therefore a reduction of revenues and profits.

Competition also extends to the hiring and retention of highly skilled employees. A competitor may be successful in hiring away employees, which may result in us losing business formerly serviced by such employees. Competition can also increase our costs of hiring and retaining the employees we need to effectively operate our business. The financial services industry is subject to extensive laws, rules and regulations. Firms that engage in securities and derivatives trading, wealth and asset management and investment banking must comply with the laws, rules and regulations imposed by national and state governments and regulatory and self-regulatory bodies with jurisdiction over such activities. Such laws, rules and regulations cover all aspects of the financial services business, including, but not limited to, sales and trading methods, trade practices, use and safekeeping of customers’ funds and securities, capital structure, anti-money laundering and anti-bribery and corruption efforts, recordkeeping and the conduct of directors, officers and employees. Regulators will supervise our business activities to monitor compliance with laws, rules and regulations of the relevant jurisdiction. In addition, if there are instances in which our regulators question our compliance with laws, rules, and regulations, they may investigate the facts and circumstances to determine whether we have complied.

At any moment in time, we may be subject to one or more such investigation or similar reviews. There can be no assurance that our operations will not violate such laws, rules, or regulations and such investigations and similar reviews will not result in adverse regulatory requirements, regulatory enforcement actions and/or fines.

We may incur losses if our risk management is not effective. We seek to monitor and control our risk exposure. Our risk management processes and procedures are designed to limit our exposure to acceptable levels as we conduct our business. We intend to develop and apply a comprehensive framework of limits on a variety of key metrics to constrain the risk profile of our business activities. The size of the limit reflects our risk tolerance for a certain activity. The framework is expected to include investment position and exposure limits on a gross and net basis, scenario analysis and stress tests, value-at-risk, sensitivities, exposure concentrations, aged inventory, amount of Level 3 assets, counterparty exposure, leverage, cash capital, and performance analysis. While we intend to employ various risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application, including risk tolerance determinations, cannot anticipate every economic and financial outcome or the specifics and timing of such outcomes. As a result, we may incur losses notwithstanding our risk management processes and procedures.

10


 

Operational risks may disrupt our business, result in regulatory action against us or limit our growth. Our businesses will be highly dependent on our ability to process, on a daily basis, transactions across numerous and diverse markets, and the transactions we process have become increasingly complex. If any of our financial, accounting or other data processing systems do not operate properly or are disabled or if there are other shortcomings or failures in our internal processes, people or systems, we could suffer an impairment to our liquidity, a financial loss, a disruption of our businesses, liability to clients, regulatory intervention or reputational damage. These systems may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, including a disruption of electrical or communications services or our inability to occupy one or more of our buildings. The inability of our systems to accommodate an increasing volume of transactions could also constrain our ability to expand our businesses.

Our financial and other data processing systems will rely on access to and the functionality of operating systems maintained by third parties. If the accounting, trading or other data processing systems on which we are dependent are unable to meet increasingly demanding standards for processing and security or if they fail or have other significant shortcomings, we could be adversely affected. Such consequences may include our inability to effect transactions and manage our exposure to risk.

In addition, our ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in which they are located. This may include a disruption involving electrical, communications, transportation or other services used by us or third parties with which we conduct business. Our operations will rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code, and other events that could have a security impact. Additionally, if a customer’s computer system, network or other technology is compromised by unauthorized access, we may face losses or other adverse consequences by unknowingly entering into unauthorized transactions. If one or more of such events occur, this potentially could jeopardize our, our customers’ or counterparties’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks. Furthermore, such events may cause interruptions or malfunctions in our, our customers’, our counterparties’ or third parties’ operations, including the transmission and execution of unauthorized transactions.

We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. The increased use of smartphones, tablets and other mobile devices as well as cloud computing may also heighten these and other operational risks. We and our third-party providers are the subject of attempted unauthorized access, computer viruses and malware, and cyber attacks designed to disrupt or degrade service or cause other damage and denial of service. Additional challenges are posed by external parties, including foreign state actors. There can be no assurance that such unauthorized access or cyber incidents will not occur in the future, and they could occur more frequently and on a larger scale. Legal liability arising from such risks may harm our business. Many aspects of our business involve substantial risks of liability.

Recent legislation and new or pending regulation may significantly affect our business. In recent years, there has been significant legislation and increased regulation affecting the financial services industry. These legislative and regulatory initiatives affect us, our competitors, our managed investment products and our customers. These changes could have an effect on our revenue and profitability, limit our ability to pursue business opportunities, impact the value of assets that we hold, require us to change certain business practices, impose additional costs on us, and otherwise adversely affect its business. Significant tax reform is currently proposed and changes in the law could adversely affect the value of our NOLs and our ability to realize such value. Accordingly, we cannot provide assurance that legislation and regulation will not eventually have an adverse effect on our business, results of operations, cash flows and financial condition.

Our financial and operational controls may not be adequate. As we expand our business, there can be no assurance that financial controls, the level and knowledge of personnel, operational abilities, legal and compliance controls and other corporate support systems will be adequate to manage our business and growth. The ineffectiveness of any of these controls or systems could adversely affect our business and prospects. In addition, if we acquire new businesses and introduce new products, we face numerous risks and uncertainties integrating their controls and systems, including financial controls, accounting and data processing systems, management controls and other operations. A failure to integrate these systems and controls, and even an inefficient integration of these systems and controls, could adversely affect our business and prospects.

11


 

We have identified multiple material weaknesses in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements. Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act.  As disclosed elsewhere in this report, as of June 30, 2017, we identified material weaknesses in our internal control over financial reporting primarily as a result of our finance staffing, the design and effectiveness of certain controls, and testing of the operation of our internal controls. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of these material weaknesses, our management concluded that our internal control over financial reporting was not effective based on criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission in Internal Control—An Integrated Framework (2013). We are actively engaged in developing a remediation plan designed to address these material weaknesses. If our remedial measures are insufficient to address the material weakness, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results.

Risks Relating to Our Common Stock

Our common stock is subject to transfer restrictions. We have significant net operating loss carryforwards and other tax attributes, the amount and availability of which are subject to certain qualifications, limitations and uncertainties. In order to reduce the possibility that certain changes in ownership could result in limitations on the use of the tax attributes, our certificate of incorporation contains provisions that generally restrict the ability of a person or entity from acquiring ownership (including through attribution under the tax law) of 4.99% or more of our common stock and the ability of persons or entities now owning 5% or more of our common shares from acquiring additional common shares. The restriction will remain until the earliest of (1) the repeal of Section 382 of the Internal Revenue Code of 1986, as amended (the Code) or any successor statute if our board of directors determines that the restriction on transfer is no longer necessary or desirable for the preservation of tax benefits, (2) the close of business on the first day of a taxable year as to which our board of directors determines that no tax benefits may be carried forward, (3) such date as our board of directors may fix for expiration of transfer restrictions and (4) January 29, 2018. The restriction may be waived by our board of directors on a case by case basis. You are advised to carefully monitor your ownership of our common shares and consult your own legal advisors to determine whether your ownership of our common shares approaches the proscribed level.

We also have a Tax Rights Plan that would be triggered if any person acquires 4.99% or more of our common stock without prior approval by our board of directors. Holders of more than 4.99% of our common stock on the day the rights plan was adopted were exempted from this limitation as to the number shares they held at the time of adoption of the rights plan.

Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt. Our certificate of incorporation, bylaws and Delaware law contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:

 

authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock;

 

limiting the liability of, and providing indemnification to, our directors and officers;

 

limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;

 

requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;

 

controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings;

 

limiting the ability for persons to acquire 4.99% or more of our common stock;

 

providing our board of directors with the express power to postpone previously scheduled annual meetings and to cancel previously scheduled special meetings;

12


 

 

limiting the determination of the number of directors on our board of directors and the filling of vacancies or newly created seats on the board to our board of directors then in office; and

 

providing that directors may be removed by stockholders only for cause.

These provisions, alone or together, could delay hostile takeovers and changes in control of our company or changes in our management.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock. Any provision of our amended and restated certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

We currently lease office space in Boston and Waltham, Massachusetts.  In December 2016, we terminated our Boston lease with an effective date of December 2017.  Our Waltham lease is non-cancellable through September 2024.

Item 3. Legal Proceedings.

We have been named in two related complaints, captioned Daniel Saunders, on behalf of himself and all others similarly situated, v. Full Circle Capital Corporation, et al., filed on September 23, 2016 (the Saunders Action), and William L. Russell, Jr., individually and on behalf of all others similarly situated, v. Biderman, et al. filed on September 12, 2016 and amended on September 22, 2016 (the Russell Action), were filed in the United States District Court for the District of Maryland and in the Circuit Court for Baltimore City, (the Circuit Court), respectively. On October 7, 2016, a complaint captioned David Speiser, individually and on behalf of all others similarly situated v. Felton, et al., was filed in the Circuit Court (the Speiser Action, and together with the Saunders Action and the Russell Action, the Actions).  

On October 24, 2016, we, along with Full Circle, GECC, MAST Capital, certain directors of Full Circle and the plaintiffs in the Actions reached an agreement in principle providing for the settlement of the Actions on the terms and conditions set forth in a memorandum of understanding (the MOU). Pursuant to the terms of the MOU, without agreeing that any of the claims in the Actions have merit or that any supplemental disclosure was required under any applicable statute, rule, regulation or law, Full Circle and GECC agreed to and did make the supplemental disclosures with respect to the merger. The MOU further provides that, among other things, (a) the parties to the MOU will enter into a definitive stipulation of settlement (the Stipulation) and will submit the Stipulation to the Circuit Court for review and approval; (b) the Stipulation will provide for dismissal of the Actions on the merits; (c) the Stipulation will include a general release of defendants of claims relating to the transactions contemplated by the Merger Agreement; and (d) the proposed settlement is conditioned on final approval by the Circuit Court after notice to Full Circle's stockholders. There can be no assurance that the settlement will be finalized or that the Circuit Court will approve the settlement. We have determined there is a remote possibility the outcome of these complaints will have a material effect on our financial position, results of operations, or cash flows.

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

 

13


 

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Record Holders

As of September 1, 2017, there were 169 record holders of our common stock.

Dividends

We did not pay dividends during the fiscal years ended June 30, 2017, 2016, or 2015. We do not currently intend to pay dividends.  The payment of dividends in the future is subject to the discretion of our board of directors and will depend upon general business conditions, legal and contractual restrictions on the payment of dividends and other factors that our board of directors may deem to be relevant.

Restrictions on Ownership

We have significant NOL carryforwards and other tax attributes, the amount and availability of which are subject to qualifications, limitations and uncertainties. In order to reduce the possibility that certain changes in ownership could result in limitations on the use of our tax attributes, our certificate of incorporation contains provisions which generally restrict the ability of a person or entity from acquiring ownership (including through attribution under the tax law) of five percent or more of the common shares and the ability of persons or entities now owning five percent or more of the common shares from acquiring additional common shares. We also have a tax benefits preservation rights plan that restricts ownership of 4.99% or more of our outstanding shares of common stock.  Our board of directors has granted a waiver for the MAST Funds to own up to 19.9% of our common stock (as of the date of this report, MAST Funds and affiliates own approximately 8.7% of outstanding shares of common stock). Persons that owned more than 4.99% of our common stock when the rights plan was adopted were grandfathered as to their then-current holdings of our common stock.

Trading Prices

Our common stock is traded on the Nasdaq Global Select Market.  Our common stock traded under the symbol “UPIP” until June 17, 2016 when it began trading under the symbol “GEC.” On January 5, 2016, we effected a one for twelve reverse stock split.  All share numbers in this report have been retroactively restated to give effect to the 1:12 reverse stock split.  The following table shows the high and low trading price during the applicable period as reported by Bloomberg LP.

 

Fiscal Period

 

Low

 

 

High

 

2017

 

 

 

 

 

 

 

 

Fourth quarter

 

$

3.10

 

 

$

3.70

 

Third quarter

 

$

2.95

 

 

$

3.85

 

Second quarter

 

$

3.45

 

 

$

4.79

 

First quarter

 

$

4.10

 

 

$

6.97

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

Fourth quarter

 

$

5.45

 

 

$

10.10

 

Third quarter

 

$

8.44

 

 

$

11.31

 

Second quarter

 

$

8.11

 

 

$

12.96

 

First quarter

 

$

7.20

 

 

$

10.32

 

 

14


 

Performance Graph

Based on $100 invested on June 30, 2012 in stock or index, including reinvestment of dividends through fiscal the fiscal year ended June 30, 2017.

Stock Purchases

None

Item 6. Selected Financial Data.

The following selected financial data should be read in conjunction with our consolidated financial statements and related notes thereto and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.

15


 

The following table sets forth selected consolidated statement of operations and consolidated balance sheet data, revised to reflect discontinued operations as of, and for the following fiscal years:

 

 

 

Fiscal Year ended June 30,

 

Amounts in thousands (except per share data)

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Selected Consolidated Statements of Operations

   Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

4,927

 

 

$

 

 

$

 

 

$

 

 

$

 

Operating expenses

 

 

9,532

 

 

 

9,835

 

 

 

8,040

 

 

 

5,709

 

 

 

14,965

 

Operating income (loss) from continuing operations

 

 

(4,605

)

 

 

(9,835

)

 

 

(8,040

)

 

 

(5,709

)

 

 

(14,965

)

Interest expense

 

 

(6,321

)

 

 

(4,947

)

 

 

(4,332

)

 

 

(3,697

)

 

 

(34

)

Unrealized gain (loss) on investments

 

 

(9,114

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

 

(17,440

)

 

 

(9,440

)

 

 

(12,196

)

 

 

(5,592

)

 

 

(15,153

)

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net

   of tax

 

 

2,203

 

 

 

(5,830

)

 

 

(29,563

)

 

 

6,025

 

 

 

(24,676

)

Gain (loss) on sale of discontinued operations

 

 

 

 

 

24,692

 

 

 

 

 

 

 

 

 

(7,784

)

Total income (loss) from discontinued operations

 

 

2,203

 

 

 

18,862

 

 

 

(29,563

)

 

 

6,025

 

 

 

(32,460

)

Net income (loss)

 

$

(15,237

)

 

$

9,422

 

 

$

(41,759

)

 

$

433

 

 

$

(47,613

)

Less: net loss attributable to non-controlling interest

 

 

(30

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Great Elm Capital Group

 

$

(15,207

)

 

$

9,422

 

 

$

(41,759

)

 

$

433

 

 

$

(47,613

)

Basic and diluted earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(1.06

)

 

$

(1.00

)

 

$

(1.31

)

 

$

(0.62

)

 

$

(2.00

)

Discontinued operations

 

$

0.13

 

 

$

2.00

 

 

$

(3.17

)

 

$

0.67

 

 

$

(4.29

)

Net income (loss) per share

 

$

(0.93

)

 

$

1.00

 

 

$

(4.48

)

 

$

0.05

 

 

$

(6.29

)

Shares used in computing basic and diluted

   earnings (loss) per share:

 

 

16,433

 

 

 

9,412

 

 

 

9,332

 

 

 

8,999

 

 

 

7,570

 

 

 

 

As of June 30,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Selected Consolidated Balance Sheets Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

45,894

 

 

$

80,711

 

 

$

73,755

 

 

$

93,877

 

 

$

47,613

 

Investment management fees receivable - related party

 

$

3,306

 

 

$

 

 

$

 

 

$

 

 

$

 

Investments (1)

 

$

20,886

 

 

$

 

 

$

11,713

 

 

$

51,813

 

 

$

10,793

 

Identifiable intangible assets, net

 

$

4,102

 

 

$

 

 

$

 

 

$

 

 

$

 

Total assets

 

$

76,694

 

 

$

80,897

 

 

$

88,884

 

 

$

150,441

 

 

$

78,238

 

Liabilities related to discontinued operations

 

$

3,608

 

 

$

7,354

 

 

$

30,067

 

 

$

53,603

 

 

$

 

Lease liabilities (2)

 

$

2,061

 

 

$

 

 

$

 

 

$

 

 

$

 

Related party note payable

 

$

3,174

 

 

$

33,786

 

 

$

29,874

 

 

$

25,693

 

 

$

22,096

 

Stockholders' equity

 

$

66,216

 

 

$

36,821

 

 

$

23,504

 

 

$

63,071

 

 

$

43,927

 

 

 

(1)

Includes short and long-term investments.

 

(2)

Includes short and long-term liabilities.  For US GAAP reporting purposes, we implemented the new lease standard utilizing practical expedients related to contracts containing leases in the periods prior June 30, 2017.  As a result, we were not required to retroactively adjust our balance sheet as of June 30, 2016.  Further, no adjustment has been made to the balance sheet data as presented as of June 30, 2015, 2014, and 2013 not presented in the accompanying consolidated financial statements.

 

16


 

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with, and is qualified entirely by, our consolidated financial statements (including Notes to the Consolidated Financial Statements) and the other consolidated financial information appearing elsewhere in this report. Some of the information in this discussion and analysis includes forward-looking statements that involve risk and uncertainties. Actual results and timing of events could differ from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

Until the fourth quarter of the fiscal year ended June 30, 2016, we conducted an intellectual property licensing business drawing upon a portfolio of approximately 2,500 patent assets with a goal of generating revenue by selling and licensing our patents. In 2013, we combined our legacy intellectual property assets together with over 2,000 patent assets acquired from Telefonaktiebolaget LM Ericsson and one of its subsidiaries (collectively, Ericsson).  Our patent licensing operations and holding of the underlying patents were conducted through our wholly-owned subsidiaries.

In April 2016, we entered into an agreement to divest our patent licensing operations. That transaction closed on June 30, 2016. We have presented our financial statements to account for the patent licensing component of our operations as discontinued operations.

Our goal is to build a diversified holding company focused on return on investment and long-term value creation. Our first investment in furtherance of this goal is our investment management business. We invested $30 million in GECC, which was our wholly owned subsidiary as of June 30, 2016 and was deconsolidated on November 1, 2016. Our GECM subsidiary is GECC's external investment advisor.

During the fiscal year ended June 30, 2017, our business significantly changed and we made a number of changes in financial reporting:

 

On November 1, 2016, we deconsolidated GECC and thereafter accounted for our remaining 17% equity interest at fair value;

 

Since September 27, 2016, we have been GECC’s investment manager through our wholly-owned subsidiary GECM, and on November 4, 2016 we began earning fees for providing services to GECC;

 

On November 3, 2016, we hired, through GECM, all of the employees of MAST Capital and entered into a series of transactions with MAST Capital and its employees, including the issuance of a note payable;

 

On November 3, 2016, we determined that our investment management business is a separate reportable segment;

 

On October 18, 2016, we retired our 12.875% related party Senior Secured Notes;

 

On December 30, 2016, we substantially completed a backstopped rights offering for approximately $45.0 million of proceeds, before deducting offering costs;

 

We adopted new accounting standards with respect to leases, acquisitions and stock-based compensation.

In September 2017, we separated our business from MAST Capital, which restructured a number of the arrangements we entered into in November 2016.

Critical Accounting Policies

Deferred Tax Assets.

We have fully reserved our $1.7 billion of net operating loss carryforwards. As a result, the related deferred tax asset nets to zero in our financial statements.

17


 

Investment in GECC.

We own approximately 17% of the outstanding shares of GECC, and our GECM subsidiary is GECC’s investment manager. As GECC’s investment manager, GECM has significant influence over GECC.  As permitted by GAAP, we have elected to mark-to-market our investment in GECC rather than using the equity method of accounting to record a pro-rata portion of GECC’s financial position, results of operations and cash flows.

Investment Management Assets Acquired.

On November 3, 2016, our GP Corp subsidiary issued a promissory note payable up to a maximum principal amount of $10.8 million (the GP Corp Note), that had an estimated fair value of approximately $3.4 million.  We also issued a warrant to purchase up to 54,733 shares of our common stock to acquire certain assets from MAST Capital.  The assets acquired and liabilities assumed include, among others, an investment management contract; immaterial office equipment; and the assumption of a lease and other liabilities necessary for our investment management operations.  As part of the acquisition, we have preliminarily allocated substantially all of the fair value of the consideration paid, as estimated through the utilization of discounted cash flow attribution, of approximately $3.9 million, to a single identifiable intangible asset with an estimated useful life on the date of acquisition of 15 years.  See “Risk Factors — Our investment management agreement may be terminated by GECC in its discretion.”

In September 2017, we entered into the Separation Agreement, which is an exhibit to this report, that significantly restructured many of these arrangements.

Contingent Asset.

In connection with the divestiture of our patent business, Optis, the purchaser of our patent business is obligated to make a deferred purchase price payment to us of up to $10 million.  Optis has claimed that it has indemnifiable losses in excess of $10 million as stated in the purchase and sale agreement.  We are currently unable to estimate how much, if any, of the deferred purchase price will be collected.  Accordingly, we have not reflected a contingent asset in respect of the deferred purchase price on our financial statements.

Revenue Recognition

Revenues from the investment management segment primarily consist of management fees, incentive fees and administrative fees.

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

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

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

Incentive fees are recorded on an accrual basis to the extent such amounts are contractually due. Accrued but unpaid incentive fees and deferred incentive fees as of the reporting date are recorded in related party investment management fees receivable in the accompanying consolidated balance sheets. Incentive fees are recognized at the end of a measurement period. Once realized, such fees are not subject to reversal.

18


 

We have not provided any allowance for un-collectability of deferred management fees attributable to accrued but unpaid interest.

Intangible Assets

We have recognized separately identifiable intangible assets as part of the Acquisition.  We estimated the acquisition date fair value of our identifiable intangibles based on the expected future cash flows of the acquired assets.  The fair value of our identifiable intangible assets was determined using the income approach, utilizing the discounted cash flows over a twenty-five year period.

Our identifiable intangible assets are being amortized over 15 years based on the discounted cash flows, the period in which we expect to recover substantially all of our initial capital investment.  Various factors within, and beyond, our control could result in significant differences from our acquisition date estimates.

Performance Shares

We granted an aggregate of 1,058,694 shares (net of forfeitures through June 30, 2017) of restricted stock with both performance and services requirements in connection with the formation of our investment management business. The vesting of these awards is subject to a five-year service requirement and an IMA cumulative revenue collection target of $40 million.  In order to recognize compensation expense over the vesting period, we are required to estimate the probability of the performance target being met on an on-going basis.  Additionally, we have elected to recognize the financial impacts of award forfeitures in the period in which they incur.  In the period of forfeiture, all previously recognized compensation expense associated with unvested awards is reversed.  

Although these shares are considered outstanding and entitled to vote for legal purposes, they are not accounted for as issued and outstanding for financial reporting purposes since they do not vest, and are subject to forfeiture, until the performance and service requirements are met.

Operational Results

The following discussion is reflective of the reclassification of our divested patent business on June 30, 2016.  The results of our divested patent business have been reclassified to discontinued operations for all periods presented.  Additionally, the operations of our investment management segment commenced in November 2016.

Due to the strategic shifts in our business through June 30, 2017, the results of operations for the year ended June 30, 2017 are not comparative for the same periods ended June 30, 2016 and 2015.

Investment Management Business

The key metrics of our investment management business include:

 

Assets under management ― which provides the basis on which our management fees and performance milestones for vesting of certain equity awards are based

 

Investment Performance ― on which our incentive fees (if any) are based and on which we are measured against our competition

 

EBITDA and adjusted EBITDA – which are (non-GAAP) measurements of our investment management operations

 

Dividends and GECC share price ― which determine the return on our investment in GECC shares

 

90-day LIBOR ― which impacts the investment performance of GECC and determines the cost of GP Corp’s debt

19


 

The following table provides the results of our investment management business since its commencement in November 2016:

 

Dollar amounts in thousands

 

November 3,

2016 to

June 30,

2017

 

Revenue:

 

 

 

 

Investment management advisory fees

 

$

4,927

 

Operating costs and expenses:

 

 

 

 

General and administrative

 

 

(3,345

)

Stock based compensation

 

 

(1,434

)

Depreciation and amortization

 

 

(340

)

Total investment management operating expenses

 

 

(5,119

)

 

Investment Management Revenue.  For the period from November 3, 2016 through June 30, 2017, we recognized $1.5 million of investment management fees; and $2.8 million of incentive fees based on GECC’s results of operations, additionally, we recognized $0.6 million in administrative fees. Our quarterly management fees fluctuate based on the fair value of the non-cash and cash equivalent assets of GECC.  In order to receive incentive fees that are based on net investment income, GECC’s net investment income must exceed the 1.75% quarterly hurdle rate.  We also earn an incentive fee based on GECC’s net capital gains.  Our recognized incentive fees are not expected to be collected within the next twelve months.

Investment Management Costs and Expenses.  During the period for November 3, 2016 through June 30, 2017, our investment management business’ costs primarily consisted of payroll and related costs of $3.5 million (inclusive of stock based compensation); facilities and other administrative costs of $1.3 million; and the amortization of intangible assets acquired totaling $0.3 million.  We will continue to amortize the intangible assets associated with our investment management business over the remaining useful life of 14.3 years as of June 30, 2017.  As a result of the Separation Agreement, we did not record any receivable in the quarter ended June 30, 2017 for amounts that would have been payable by MAST Capital under the Cost Sharing Agreement.

General Corporate Expenses

The following table represents operating expenses for the 2017, 2016 and 2015 fiscal years, respectively (dollars in thousands):

 

 

 

Year Ended June 30,

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

2017

 

 

Change

 

 

2016

 

 

Change

 

 

2015

 

Operating costs and expenses - general

   corporate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

$

4,413

 

 

 

-55

%

 

$

9,772

 

 

 

23

%

 

$

7,933

 

Other income (loss) - general corporate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(6,321

)

 

 

28

%

 

 

(4,947

)

 

 

14

%

 

 

(4,332

)

Other income, net

 

 

84

 

 

 

-64

%

 

233

 

 

 

-13

%

 

 

268

 

 

General and Administrative Expenses. General and administrative expenses consisted primarily of (1) salary and benefit expenses and travel expenses for employees, including our Chief Executive and Chief Financial Officer and (2) facility costs for our finance, legal, and information services functions. General and administrative expenses also include outside accounting and legal fees and public company costs.

$3.0 million of the reduction in general and administrative expenses for fiscal 2017 was the result of a one-time reimbursement of professional and other fees, that were recognized and expensed in fiscal 2016 and reimbursed in fiscal 2017, associated with the formation of GECC; and reductions in general corporate overhead undertaken by our interim management team. The increase in general and administrative expense during 2016 compared with the 2015 fiscal year is attributable to increases related to additional consulting expenses associated with our divestiture, additional legal fees, and consultant engagements.

20


 

Dividends.  For the period November 3, 2016 to June 30, 2017, we earned $1.3 million of dividends on our investment in GECC.  In order to maintain its regulated investment company status for tax purposes and avoid excise taxes, GECC is required to distribute a significant portion of its net income to its stockholders. We record our pro rata share of such distributions if, as and when declared by GECC’s board of directors.

Unrealized Loss. We mark-to-market our investment in GECC by reference to the closing price of GECC common stock on Nasdaq (an observable Level 1 valuation input). For the period from November 1, 2016 (when we deconsolidated GECC) to June 30, 2017, we recognized $9.1 million of unrealized loss.  We may be required to record further losses related to our investment in GECC in the future.

Interest Expense, net. Net interest expense totaled $6.3 million, $4.9 million, and $4.3 million for the 2017, 2016, and 2015 fiscal years, respectively.

Total interest expense incurred during fiscal 2017 was $6.3 million; of which $0.3 million was incurred from the GP Corp note.  Interest expense related to the previously outstanding related party Senior Notes, totaling $6.0 million represents:  $2.0 million of premium paid on retirement of our Senior Notes; $2.8 million of non-cash write off of original issue discount and deferred issuance costs; and $1.2 million of interest on the Senior Notes from July 1, 2016 to the October 18, 2016 payoff date.

Interest expense for the fiscal years ended June 30, 2016 and 2015 was attributable to interest on our related party Senior Notes issued on June 28, 2013 and paid off on October 18, 2016. Interest expense on the Senior Notes during fiscal 2016 and 2015 consisted of in-kind payments and amortization of a discount and deferred issuance costs.  

Other Income, net. We did not recognize any individually significant transactions resulting in the recognition of other income for the fiscal years ended June 30, 2017, 2016, and 2015.  

Income Taxes

Although in the aggregate we expect to owe no Federal taxes for the year ended June 30, 2017, we are required to provide intra period taxes allocated between continuing operations and discontinued operations.  State and local taxes are immaterial for the fiscal year.

Summary of Discontinued Operations for the Fiscal Years ended June 30, 2017; 2016; and 2015

As a result of divestiture of the patent licensing component of our business, the results related to these activities have been reclassified to discontinued operations, inclusive of the recognized gain on the disposal, for all periods presented in the accompanying consolidated statements of operations.  The following table illustrates (in thousands) the material items of discontinued operations as reclassified in each fiscal year ended June 30:

 

 

2017

 

 

2016

 

 

2015

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

8,750

 

 

$

27,826

 

 

$

4,505

 

Patent licensing expenses (1)

 

 

(5,630

)

 

 

(30,780

)

 

 

(31,069

)

General and administrative expenses

 

 

 

 

 

(2,876

)

 

 

(2,989

)

Other non-significant expenses

 

 

 

 

 

 

 

 

(10

)

Gain (loss) from discontinued operations

 

 

3,120

 

 

 

(5,830

)

 

 

(29,563

)

Gain on sale of discontinued operations

 

 

 

 

 

29,795

 

 

 

 

Total pretax gain (loss) on discontinued

   operations

 

 

3,120

 

 

 

23,965

 

 

 

(29,563

)

Income tax benefit (expense)

 

 

(917

)

 

 

(5,103

)

 

 

 

Net gain (loss) from discontinued

   operations

 

$

2,203

 

 

$

18,862

 

 

$

(29,563

)

 

 

(1)

Amount related to the fiscal year ended June 30, 2017 primarily consists of non-recurring fee split obligations associated with the Microsoft settlement as further discussed below.

21


 

Net Revenues, Discontinued Operations

On June 30, 2016, we sold our patent licensing business.  During the year ended June 30, 2017, we reached a final settlement with Microsoft Corporation, related to an infringement judgment in our favor previously under appeal, for a one-time payment by Microsoft Corporation of $8.8 million.  The payment, received in October 2016, included reimbursement of litigation costs incurred of approximately $1.9 million.  Net of fee split obligations and additional professional fees incurred with the settlement, we recognized a gain from the Microsoft settlement in discontinued operations’ of approximately $3.1 million.

Our recognized revenues for the years ended June 30, 2016 and 2015, respectively, were substantially derived from licensing and selling of our intellectual property in two significant transactions with Lenovo that closed in April 2014. The fluctuations in net revenue year over year were the result of timing differences related to recognizing the individual accounting components associated with the Lenovo transaction.  During the fiscal year ended June 30, 2016, we recognized net revenue of $27.8 million, representing non-cash revenue equal to all of the remaining deferred revenue of the Lenovo contract, as a result of the divestiture of our intellectual property portfolio and corresponding performance obligations.

Patent Licensing Expense, Discontinued Operations

Patent licensing expenses included legal and consulting costs related to technical and economic evaluation, licensing, maintaining, and defending or asserting our patents, as well as salary and benefit expenses and travel expenses for our employees that were engaged in the activities on a full-time basis.  From mid calendar 2013 through the fourth quarter of our 2016 fiscal year, we incurred significant expenses associated with our patent licensing efforts, the majority of which related to enforcement litigation.

Throughout fiscal 2016 we experienced limited successes abroad resulting in the recognition of litigation fee reimbursements totaling approximately $3.0 million, which were immediately offset by rulings in favor of the defendants in trials in the United Kingdom totaling approximately $3.1 million.

General and Administrative Expenses, Discontinued Operations

General and administrative expenses of our discontinued operations consisted primarily of labor incurred by the divested subsidiary employees; facilities costs associated with the direct operations of the divested subsidiaries; other costs incurred by the divested subsidiaries not attributable to patent licensing; historical allocations of corporate employees directly related to the affairs of the divested subsidiaries; and other corporate costs associated with the operations of the divested subsidiaries.

General and administrative expenses associated with our discontinued operations during the year ended June 30, 2016 were relatively consistent compared to 2015, as a result of very little change in our activities attributable to our subsidiaries that conducted our patent licensing business.  

Liquidity and Capital Resources

The following table presents selected financial information and statistics as of June 30, 2017, 2016 and 2015, respectively (in thousands):

 

 

 

As of June 30,

 

 

 

2017

 

 

2016

 

 

2015

 

Current Assets

 

$

68,014

 

 

$

80,821

 

 

$

86,127

 

Current Liabilities

 

 

5,728

 

 

 

44,060

 

 

 

10,738

 

Working Capital

 

$

62,286

 

 

$

36,761

 

 

$

75,389

 

Long Term Liabilities

 

$

4,750

 

 

$

16

 

 

$

54,642

 

22


 

 

 

Fiscal Year end June 30,

 

 

 

2017

 

 

2016

 

 

2015

 

Cash provided by (used in) operating activities

 

$

(10,491

)

 

$

(34,577

)

 

$

(59,973

)

Cash provided by (used in) investing activities

 

 

(30,135

)

 

 

41,675

 

 

 

39,970

 

Cash provided by (used in) financing activities

 

 

5,809

 

 

 

(142

)

 

 

(119

)

Net increase (decrease) in cash and cash equivalents

 

$

(34,817

)

 

$

6,956

 

 

$

(20,122

)

Working Capital and Cash Flows

As of June 30, 2017, we had a cash balance of $45.9 million.  We also own 1,966,667 shares of GECC common stock that we may not transfer to a person other than our subsidiaries or an affiliate of MAST Capital until November 3, 2017 with an estimated fair value of $20.9 million as of June 30, 2017.

We have a related party GP Corp Note due to MAST initially requiring maximum cash payments, without giving effect to certain incurred cost off-sets, of $10.8 million that accrues interest at a variable rate of LIBOR plus 3 percent, as adjusted for each 90-day period (at June 30, 2017 the effective rate was 4.26%) through maturity on November 3, 2026.  The GP Corp Note requires minimum annual principal payments of $0.3 million and quarterly interest only payments.  The note is secured by the profits generated by our management of GECC, with non-recourse to any of our other assets, entities, or operations.  The principal amount of this note, along with the minimum annual payment, was reduced to $3.3 million in September 2017.

We intend to make acquisitions that will likely result in our investment of all of our liquid financial resources, issuance of equity securities and incurring indebtedness.  If we are unsuccessful at raising additional capital resources, through either debt or equity, it is unlikely we will be able execute our strategic growth plan.   See “Risk Factors.”

Cash Provided by (Used in) Operating Activities. Cash provided by (used in) operating activities totaled ($10.5) million, ($34.6) million and ($60.0) million for the 2017, 2016 and, 2015 fiscal years, respectively.

Operating cash flows used in continuing operations (net of cash used in discontinued operations) for the year ended June 30, 2017, totaled $9.1 million.  The cash used in our continuing operations were primarily the result of settling significant portions of operating expenses as incurred; increases in receivables from our investment management fees and dividends due on our investment in GECC totaling $3.5 million; and the pay down our accounts payable and other accrued expenses by $1.5 million.  

Cash Provided by (Used in) Investing Activities.  Investing activities for the year ended June 30, 2017 consisted of $30.0 million that was classified as cash held in a wholly-owned subsidiary at June 30, 2016 and was reclassified as the cost basis of our investment in shares of GECC as a result of our deconsolidation of GECC and $0.1 million of cash used in the acquisition of GP Corp.

Cash Provided by Financing Activities.  Financing activities for the fiscal year ended June 30, 2017 primarily consisted of our rights offering that generated net cash proceeds of $42.6 million and the pay down of previously and currently outstanding debt totaling $36.8 million.

Related Party Notes Payable.  In October 2016, we called and retired the previously outstanding Senior Notes.  As part of the retirement, we made cash payments totaling approximately $39.8 million; consisting of interest payments of $1.2 million; call premiums totaling $2.0 million; and principal payments of $36.6 million.

In November 2016, we issued MAST Capital a note with an initial principal balance payable up to $10.8 million as part of the consideration for the assets acquired. The Note is secured by the profits generated by GECM’s management of GECC.   The GP Corp Note requires quarterly interest only payments and annual principal payments of at least $0.3 million, based on the Company’s fiscal year ending June 30.  Further, the GP Corp note does not have any recourse to any of our operations or net assets not related to GECM’s management of the investments assets held by GECC.  The GP Corp Note may be prepaid at any time with prior written notice to the Holders.  Additionally, GP Corp is required to prepay the GP Corp Note upon certain material liquidation transactions. In September 2017, the principal balance of the note was reduced to $3.3 million as part of the Separation Agreement.

23


 

Contractual Obligations

Our contractual obligations as of June 30, 2017 are presented in the table below (dollars in thousands):

 

 

Payments due by period

 

 

 

 

 

 

 

Less than 1

 

 

 

 

 

 

 

 

 

 

More than 5

 

 

 

Total

 

 

Year

 

 

1-3 years

 

 

3-5 years

 

 

years

 

GP Corp. Note (1)

 

$

15,393

 

 

$

721

 

 

$

1,473

 

 

$

1,513

 

 

$

11,686

 

Operating Lease Obligations

 

 

3,160

 

 

 

920

 

 

 

681

 

 

 

716

 

 

 

843

 

Total Contractual Obligations

 

$

18,553

 

 

$

1,641

 

 

$

2,154

 

 

$

2,229

 

 

$

12,529

 

 

 

(1)

Includes estimated interest based on an interest rate of 4.26%, the average 90-day LIBOR rate plus 3%, as of June 30, 2017.  The payment amounts reflected do not give effect to certain cost offsets allowable under the applicable agreements and are therefore stated at the maximum contractual amounts.  The above table does not give effect to the September 2017 reduction of the principal amount of the GP Corp note to $3.3 million.

Non-GAAP Measurements

The SEC has adopted rules to regulate the use in filings with the SEC, and in public disclosures of financial measures, that are not in accordance with US GAAP, such as EBITDA and adjusted EBITDA, omission of non-recurring or infrequent items, and other omissions of non-cash items whether recurring or non-recurring. These measures are derived from methodologies other than in accordance with US GAAP.

We believe that earnings before taxes, depreciation, amortization and stock-based compensation (EBITDA), the non-cash adjustments listed below and adjusted EBITDA, are important measures in addition to US GAAP segment results to be used in evaluating our businesses. In addition, our management reviews EBITDA and adjusted EBITDA as they evaluate acquisition opportunities.

These Non-GAAP measurements have limitations as an analytical tool, and you should not consider these omissions either in isolation or as a substitute for analyzing our results as reported under US GAAP. Some of these limitations are:

 

this measure does not reflect changes in, or cash requirements for, our working capital needs;

 

this measure does not reflect the further issuance of equity and equity-linked instruments based on grant date fair values with continuing performance and service requirements;

 

this measure does not reflect historical cash expenditures or future requirements for expenditures or contractual commitments.

 

the recognition of impairment and similar non-cash charges.

Since we did not have material recurring revenue generating operations from our discontinued intellectual property business for the years ended June 30, 2016 and 2015, our management did not utilize EBITDA or adjusted EBITDA in evaluating the results or for planning purposes; correspondingly, those periods have not been presented.

24


 

The following table reconciles US GAAP results to EBITDA, and adjusted EBITDA from our results of operations for the period ended June 30, 2017:

 

 

 

For the Year Ended June 30, 2017

 

Dollar amounts in thousands

 

Investment

Management

 

 

General

Corporate

 

 

Total

 

Net loss - GAAP

 

$

(503

)

 

$

(14,734

)

 

$

(15,237

)

EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss - GAAP

 

$

(503

)

 

$

(14,734

)

 

$

(15,237

)

Interest

 

 

285

 

 

 

6,036

 

 

 

6,321

 

Taxes (1)

 

 

14

 

 

 

 

 

 

14

 

Depreciation and amortization

 

 

340

 

 

 

 

 

 

340

 

EBITDA:

 

$

136

 

 

$

(8,698

)

 

$

(8,562

)

Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA

 

$

136

 

 

$

(8,698

)

 

$

(8,562

)

Stock based compensation

 

 

1,434

 

 

 

529

 

 

 

1,963

 

Unrealized loss on investment in GECC

 

 

 

 

 

9,114

 

 

 

9,114

 

Re-measurement of warrant liability

 

 

(30

)

 

 

 

 

 

(30

)

Adjusted EBITDA

 

$

1,540

 

 

$

945

 

 

$

2,485

 

 

 

(1)

For the fiscal year ended June 30, 2017, the Company incurred approximately $1.2 million of tax benefit from its loss on continuing operations, off-set by $1.2 million of tax expense from discontinued operations.

Off Balance Sheet Obligations

As of June 30, 2017, we did not invest in any off-balance sheet vehicles that provide financing, liquidity, market or credit risk support or engage in any leasing activities that expose us to any liability that is not reflected in our consolidated financial statements.

New Accounting Pronouncements

See Note 2 in the accompanying Notes to Consolidated Financial Statements.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Our discontinued operations paid certain expenses in Euros and British Pounds. Any translation adjustments associated with those foreign currency transactions are reflected as discontinued operations. We no longer have any foreign currency exposures.

In the normal course of business, our financial position is subject to different types of risk, including market risk. Market risk is the risk that we will incur losses due to adverse changes in equity and bond prices, interest rates, credit events or currency exchange rates. Management is responsible for identifying, assessing and managing market and other risks.

In evaluating market risk, it is important to note that most of our revenue is based on the market value of assets under management. As noted in “Risk Factors,” declines in financial market values negatively impact our revenue and net income.

Our primary direct exposure to equity price risk arises from our investment in GECC shares. Equity price risk as it relates to this investment represents the potential future loss of value that would result from a decline in the net asset value of GECC or the fair value of the equity securities.

  

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Item 8. Financial Statements and Supplementary Data.

The information required by this Item appears beginning on page F-1 of this Annual Report on Form 10-K and is incorporated in this Item 8 by reference.

Per Rule 3-09 of Regulation S-X, the audited financial statements of GECC for the year ended December 31, 2016 included in GECC’s registration statement on Form N-2 (File No. 333-217222), as amended, filed with the SEC on June 30, 2017, are incorporated herein by reference.  We include the financial statements of GECC because our investment in GECC meets the test of significance under Rule 3-09 in Regulation S-X.  The management of GECC is responsible for the form and content of GECC’s financial statements.  Certain officers of GECC are also officers of GECM and Mr. Reed is Chief Executive Officer of GECC and GEC.  GECM serves as the investment advisor to GECC.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Our Audit Committee approved the appointment of Deloitte & Touche LLP (Deloitte) as our independent registered public accounting firm, effective May 30, 2017, as described further below. Accordingly, and in connection therewith, the we dismissed Grant Thornton LLP (Grant Thornton) as our independent registered public accounting firm effective as of that same date.

Grant Thornton’s audit reports for the fiscal years ended June 30, 2016 and 2015 on our consolidated financial statements did not contain an adverse opinion or a disclaimer of opinion, nor was any such report qualified or modified as to uncertainty, audit scope or accounting principles. However, as further described below, Grant Thornton’s audit report on the effectiveness of our internal control over financial reporting as of June 30, 2016 contained an adverse opinion. At no point during the fiscal years ended June 30, 2016 and 2015 and the subsequent interim period through May 30, 2017 were there any “disagreements” (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) between us and Grant Thornton on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Grant Thornton, would have caused it to make reference to the subject matter of the disagreements in connection with its reports. The adverse opinion on our internal control over financial reporting described further below constituted the only “reportable events” (as defined in Item 304(a)(1)(v) of Regulation S-K) that occurred during the fiscal years ended June 30, 2016 and 2015 and the subsequent interim period through May 30, 2017.

Our controls over the preparation and review of our income tax provision did not operate effectively such that we did not timely identify material errors in the provision for income taxes applicable to continuing operations and discontinued operations and the presentation thereof in the financial statements as of June 30, 2016 and for the year then ended. Accordingly, Grant Thornton’s audit report on the effectiveness of our internal control over financial reporting as of June 30, 2016 contained an adverse opinion on the internal control over financial reporting, which are described in Item 9A. Controls and Procedures of our Form 10-K for the fiscal year ended June 30, 2016.

Our Audit Committee engaged Deloitte as our new independent registered public accounting firm effective May 30, 2017 to perform independent audit services for the fiscal year ending June 30, 2017.  During the fiscal years ended June 30, 2016 and 2015 and the subsequent interim period through May 30, 2017, we did not consult Deloitte regarding either:

 

the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered with respect to our consolidated financial statements in connection with which either a written report or oral advice was provided to us that Deloitte concluded was an important factor considered in reaching a decision as to the accounting, auditing or financial reporting issue; or

 

any matter that was either the subject of a “disagreement” (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) or a “reportable event” (as defined in Item 304(a)(1)(v) of Regulation S-K). 

Item 9A. Controls and Procedures.

Disclosure Controls and Procedures.

The Company’s management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and

26


 

reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective.

Management’s Report on Internal Control Over Financial Reporting.

 

Our management is responsible for preparation of the accompanying financial statements in accordance with GAAP.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13(a)-15(f) under the Exchange Act.  Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Our internal control over financial reporting is supported by written policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2017 as required by Exchange Act. In making this assessment, we used the criteria set forth in the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

As of June 30, 2017, we identified the following material weaknesses in its internal control over financial reporting:

 

We had an insufficient number of personnel with an appropriate level of GAAP knowledge and experience commensurate with our financial reporting requirements.

 

We did not have control activities that were designed and operating effectively.  Control activities did not adequately (i) address relevant risks, (ii) provide evidence of performance, (iii) provide appropriate segregation of duties, or (iv) operate at a level of precision to identify all potentially material errors.

 

We did not maintain effective monitoring controls to ascertain whether the components of internal control are present and functioning.

Based on our evaluation under the framework in Internal Control-Integrated Framework (2013) issued by COSO, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was not effective as of June 30, 2017, based on the material weaknesses described above.

 

27


 

Remediation of Material Weaknesses

We have hired accounting personnel, are changing our controls and procedures and have engaged consultants to assist with the design and testing of our controls and procedures.

Changes in Internal Control Over Financial Reporting.

During the quarter ended June 30, 2017, we did not make material changes in or internal control over financial reporting.  Our business significantly changed during the fiscal year ended June 30, 2017, and we made a number of changes in financial reporting. During the implementation of our new business processes, we identified the material weaknesses as described above.  Our management is in the process of assessing, integrating, and improving internal controls over financial reporting for our new business. Additionally, in the ordinary course of business, we may routinely modify, upgrade and enhance our internal controls and procedures for financial reporting.

The effectiveness of our internal control over financial reporting as of June 30, 2017 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm.

28


 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of

Great Elm Capital Group, Inc.

Waltham, Massachusetts

 

We have audited Great Elm Capital Group, Inc. and subsidiaries' (the "Company's") internal control over financial reporting as of June 30, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on that risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management's assessment: (i) insufficient accounting resources, (ii) inadequate and ineffective control activities; including controls over significant transactions and the tax provision, and (iii) ineffective monitoring control activities. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended June 30, 2017, of the Company and this report does not affect our report on such financial statements.

 

In our opinion, because of the effect of the material weaknesses identified above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of June 30, 2017, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended June 30, 2017, of the Company and our report dated September 18, 2017 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP

 

Boston, Massachusetts

September 18, 2017

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Item 9B. Other Information.

None

PART III

Item 10. Directors, Executive Officers of the Registrant and Corporate Governance.

The information required by Items 401, 405, 406, and 407(c)(3), 407(d)(4) and 407(d)(5) of Regulation S-K will be contained in our Proxy Statement and is hereby incorporated by reference thereto.

 

Item 11. Executive Compensation.

 

The information required by Item 402 of Regulation S-K will be contained in our Proxy Statement and is hereby incorporated by reference thereto.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.

 

The information required by Item 201(d) of Regulation S-K will be contained in our Proxy Statement and is hereby incorporated by reference thereto.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required by Item 404 and Item 407(a) of Regulation S-K will be contained in our Proxy Statement and is hereby incorporated by reference thereto.

 

Item 14. Principal Accountant Fees and Services.

 

The information required by Item 9(e) of Schedule 14A will be contained in our Proxy Statement and is hereby incorporated by reference thereto.

PART IV

Item 15. Exhibits, Financial Statement Schedules.

Financial Statements

The information required by this Item appears beginning on page F-1 of this Annual Report on Form 10-K and is incorporated in this Item 8 by reference.

Financial Statement Schedules

Schedules are omitted because they are not required or are not applicable or the required information is shown in the financial statements or notes thereto.

Exhibits

The exhibit index attached hereto is incorporated by reference. We will furnish any exhibit upon request made to our Corporate Secretary, 800 South Street, Suite 235, Waltham, MA 02453. We charge $0.50 per page to cover expenses of copying and mailing.

Item 16. Form 10-K Summary

We have elected not to provide a Form 10-K summary.

 

30


 

EXHIBIT INDEX

Unless otherwise indicated, all references are to filings by Great Elm Capital Group, Inc., formerly known as Unwired Planet, Inc. (the Registrant) with the Securities and Exchange Commission under File No. 001-16073)

 

Exhibit
No.

    

Description

    2.1

 

Purchase and Sale Agreement, dated as of April 6, 2016, by and between the Registrant and Optis UP Holdings, LLC (incorporated by reference to Exhibit 2.1 to the Form 8-K filed on April 7, 2016)

 

 

 

    2.2

 

First Amendment to the Purchase and Sale Agreement, dated as of April 6, 2016, by and between the Registrant and Optis UP Holdings, LLC (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on May 25, 2016)

 

 

 

    2.3

 

Asset Purchase Agreement, dated as of November 3, 2016, by and between GECC GP Corp. and MAST Capital Management LLC (incorporated by reference to Exhibit 10.4 to the Form 8-K filed on November 9, 2016)

 

 

 

    3.1

 

Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Form 8-K filed on November 15, 2013)

 

 

 

    3.2

 

Certificate of Ownership and Merger merging Unwired Planet, Inc. with and into Openwave Systems Inc. (incorporated by reference to Exhibit 3.3 to the Form 10-Q filed on May 10, 2012)

 

 

 

    3.3

 

Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Form 8-K filed on January 5, 2016)

 

 

 

    3.4

 

Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Form 8-K filed on June 16, 2016)

 

 

 

    3.5

 

Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Form 8-K filed on November 15, 2015)

 

 

 

    4.1

 

Form of the Registrant’s common stock certificate (incorporated by reference to Exhibit 4.1 to the Form 10-K filed on September 14, 2016)

 

 

 

    4.2

 

Tax Benefits Preservation Agreement, dated as of January 20, 2015, between the Registrant and Computershare Trust Company, N.A., as Rights Agent (incorporated by reference to Exhibit 4.1 to the Form 8-A filed on January 21, 2015)

 

 

 

    4.3

 

Securities Purchase Agreement by and between the Registrant and Indaba Capital Fund, L.P., dated June 28, 2013 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on July 2, 2013)

 

 

 

  10.1

 

Investment Management Agreement, dated as of September 27, 2016, by and between Great Elm Capital Corp. and Great Elm Capital Management, Inc. (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on November 7, 2016 by Great Elm Capital Corp (File No. 814-01211))

 

 

 

  10.2

 

Administration Agreement, dated as of September 27, 2016, by and between Great Elm Capital Corp. and Great Elm Capital Management, Inc. (incorporated by reference to Exhibit 10.2 to the Form 8-K filed on November 7, 2016 by Great Elm Capital Corp (File No. 814-01211))

 

 

 

  10.3

 

Cost Sharing Agreement, dated as of November 3, 2016, by and between Great Elm Capital Management, Inc. and MAST Capital Management, LLC (incorporated by reference to Exhibit 10.5 to the Form 8-K filed on November 9, 2016)

 

 

 

  10.4

 

Profit Sharing Agreement, dated as of November 3, 2016, by and between Great Elm Capital Management, Inc. and GECC GP Corp. (incorporated by reference to Exhibit 10.6 to the Form 8-K filed on November 9, 2016)

 

 

 

  10.5

 

Senior Secured Note, dated November 3, 2016, by GECC GP Corp. in favor of MAST Capital Management LLC (incorporated by reference to Exhibit 10.7 to the Form 8-K filed on November 9, 2016)

 

 

 

  10.6

 

Form of Performance Stock Award (incorporated by reference to Exhibit 10.8 to the Form 8-K filed on November 9, 2016) (1)

31


 

Exhibit
No.

    

Description

 

 

 

  10.7

 

Subscription Agreement, dated as of June 23, 2016, by and among Great Elm Capital Corp., the Registrant, the investment funds signatory thereto, and MAST Capital Management LLC (incorporated by reference to the Pre-Commencement Solicitation filed on June 27, 2016 by Great Elm Capital Corp. (File No. 814-01211))

 

 

 

  10.8

 

Amended and Restated Registration Rights Agreement, dated as of November 4, 2016, by and among Great Elm Capital Corp., the registrant, and the MAST Funds named therein (incorporated by reference to Exhibit 10.3 to the Form 8-K filed on November 7, 2016 by Great Elm Capital Corp (File No. 814-01211))

 

 

 

  10.9

 

Agreement and Plan of Merger, dated as of June 23, 2016 by and between Great Elm Capital Corp. and Full Circle Capital Corporation (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on June 26, 2016)

 

 

 

  10.10

 

Form of Indemnity Agreement for Officers and Directors (incorporated by reference to Exhibit 10.16 to Form 10-K filed on September 28, 2001) (1)

 

 

 

  10.11

 

Form of US Stock Option Agreement (incorporated by reference to Exhibit 10.3 to the Form 10-Q filed on May 12, 2004) (1)

 

 

 

  10.12

 

Second Amended and Restated 2006 Stock Incentive Plan, amended and restated effective November 12, 2013 (incorporated by reference to Exhibit 10.1 to the Form 10-Q filed on February 7, 2014) (1)

 

 

 

  10.13

 

Form of 2006 Stock Incentive Plan Restricted Stock Unit Grant Notice 2011 (incorporated by reference to Exhibit 10.9 to the Form 10-Q filed on February 8, 2012) (1)

 

 

 

  10.14

 

Second Amended and Restated 1999 Directors’ Equity Compensation Plan, amended and restated effective November 12, 2013 (incorporated by reference to Exhibit 10.2 to the Form 10-Q filed on February 7, 2014) (1)

 

 

 

  10.15

 

Form of Notice of Stock Option Grant and Form of Stock Option Agreement under the Registrant’s Amended and Restated 1999 Directors’ Equity Compensation Plan (incorporated by reference to Exhibit 99.2 to the Form S-8 filed on December 4, 2009 (File No. 333-163480) (1)

 

 

 

  10.16

 

Form of Notice of Restricted Stock Bonus Grant and Form of Restricted Stock Bonus Agreement under the Registrant’s Amended and Restated 1999 Directors’ Equity Compensation Plan (incorporated by reference to Exhibit 99.3 to the Form S-8 filed on December 4, 2009 (File No. 333-163480) (1)

 

 

 

  10.17

 

2016 Long-Term Incentive Plan (incorporated by reference to Annex D to the Proxy Statement filed on May 25, 2016) (1)

 

 

 

  10.18

 

2016 Employee Stock Purchase Plan (incorporated by reference to Annex E to the Proxy Statement filed on May 25, 2016) (1)

 

 

 

  10.19

 

Employment Offer Letter dated October 30, 2015 between the Registrant and James D. Wheat (incorporated by reference to Exhibit 10.1 to the Form 10-Q filed on November 9, 2015) (1)

 

 

 

  10.20

 

Amended Notice of Option Award to Boris Teksler (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on June 16, 2016) (1)

 

 

 

  10.21

 

Letter agreement, dated July 5, 2016 between the Registrant and Boris Teksler (incorporated by reference to the Form 8-K filed on July 6, 2016) (1)