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Section 1: DEF 14A (DEF 14A)

 

SCHEDULE 14A INFORMATION

 

Proxy Statement Pursuant to Section 14(a)

of the Securities Exchange Act of 1934

 

Filed by the Registrant     ☒

 

Filed by a Party other than the Registrant     ☐

 

Check the appropriate box:

 

Preliminary Proxy Statement
Confidential, for Use of the Commission Only (as Permitted by Rule 14a-6(e)(2))
Definitive Proxy Statement
Definitive Additional Materials
Solicitation Material Pursuant to Rule 14a-11(c) or rule 14a-12

 

FC GLOBAL REALTY INCOPORATED

(Name of Registrant as Specified in its Charter)

 

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

No fee required.
Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11:
4) Proposed maximum aggregate value of transaction
5) Total fee paid:

 

Fee paid previously with preliminary materials.

 

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:

 

 

 

 

FC GLOBAL REALTY INCORPORATED 

2300 Computer Drive, Building G 

Willow Grove, Pennsylvania 19090

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

To be held on November 29, 2018

 

To the Stockholders of FC Global Realty Incorporated:

 

Notice is hereby given that an annual meeting of the stockholders of FC Global Realty Incorporated (the “Company”) will be held on November 29, 2018 at 9:30 a.m. local time at 2300 Computer Drive, Building G, Willow Grove, Pennsylvania 19090. At the annual meeting you will be asked to consider and vote upon the following proposals:

 

1.To approve the transactions contemplated by that certain remediation agreement, dated September 24, 2018, among the Company, Opportunity Fund I-SS, LLC, Dr. Dolev Rafaeli, Dennis M. McGrath and Yoav Ben-Dror (the “Remediation Agreement), including the issuance of shares of the Company’s common stock upon the conversion of shares of preferred stock that have been issued thereunder.

 

2.To authorize the Company’s Board of Directors, in its discretion, to implement one or more reverse stock splits of the shares of the Company’s common stock at an exchange ratio of not less than 1-for-2 and not more than 1-for-15 at any time prior to the Company’s 2019 annual meeting of stockholders by filing an amendment to the Company’s Amended and Restated Articles of Incorporation.

 

3.To adopt the FC Global Realty Incorporated 2018 Equity Incentive Plan (the “Plan”) to provide for long-term incentives in the form of grants of stock, stock options and other forms of incentive compensation to officers, employees, directors and consultants.

 

4.To elect five (5) director nominees to the Company’s Board of Directors to serve until the next annual meeting of the Company’s stockholders or until their successors are elected and qualify, subject to their prior death, resignation or removal.

 

5.To ratify the appointment of Fahn Kanne & Co. Grant Thornton Israel to serve as the Company’s independent registered public accounting firm for the year ending December 31, 2018.

 

6.To approve the adjournment of the annual meeting for any purpose, including to solicit additional proxies if there are insufficient votes at the time of the annual meeting to approve the proposals described above.

 

The Board unanimously recommends a vote “FOR” approval of the Remediation Agreement, “FOR” approval of the reverse stock split(s), “FOR” adoption of the Plan , “FOR” each of the director nominees, “FOR” the ratification of the Company’s independent registered public accounting firm, and “FOR” the proposal to approve the adjournment of the annual meeting for any purpose, including to solicit additional proxies if there are insufficient votes at the time of the meeting to approve the proposals mentioned above.

 

Stockholders of record of the Company’s common stock at the close of business on October 25, 2018 will be entitled to notice of, and are cordially invited to attend, the annual meeting and to attend any adjournment or postponement thereof. However, to assure your representation at the meeting, please vote your proxy via the internet, by telephone, or by completing, dating, signing and returning the enclosed proxy. Even if you have previously submitted your proxy, you may choose to vote in person at the meeting. Whether or not you expect to attend the annual meeting, please read the proxy statement and then promptly vote your proxy in order to ensure your representation at the annual meeting.

 

You may cast your vote by visiting http://www.proxyvote.com. You may also have access to the materials for the annual meeting by visiting the website: www.fcglobalrealty.com.

 

Each share of common stock entitles the holder thereof to one vote.

 

 

 

 

You are urged to review carefully the information contained in the enclosed proxy statement prior to deciding how to vote your shares.

 

This notice and the attached proxy statement are first being disseminated to stockholders on or about October 31, 2018.

 

  BY ORDER OF THE BOARD OF DIRECTORS,
   
  /s/ Michele Pupach
  Michele Pupach
  Secretary

 

IF YOU RETURN YOUR PROXY CARD WITHOUT AN INDICATION OF HOW YOU WISH TO VOTE, YOUR SHARES WILL BE VOTED IN FAVOR OF EACH PROPOSAL.

 

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting to be Held on November 29, 2018: This Proxy Statement is available at: http://www.fcglobalrealty.com.

 

 

 

 

TABLE OF CONTENTS

 

INTRODUCTION 1
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND THE PROPOSALS 3
When and where will the Meeting take place? 3
What proposals are the stockholders being asked to consider? 3
What are the recommendations of the Board? 3
What is the Record Date for the Meeting? 3
Who can vote at the Meeting? 3
What is the proxy card? 3
What is the difference between holding shares as a stockholder of record and as a beneficial owner? 3
What is the quorum required for the Meeting? 4
Assuming that a quorum is present, what vote is required to approve the proposals to be voted upon at the Meeting? 4
How do I vote? 4
What are the effects of not voting or abstaining? What are the effects of broker non-votes? 5
What does it mean if I received more than one proxy card? 5
What happens if I don’t indicate how to vote my proxy? 5
What happens if I sell my shares after the record date but before the Meeting? 5
What if I change my mind after I return my proxy? 5
Who can help answer my other questions? 6
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 7
DIRECTORS AND EXECUTIVE OFFICERS 8
Directors and Executive Officers 8
Family Relationships 10
Involvement in Certain Legal Proceedings 10
CORPORATE GOVERNANCE 11
Overview 11
Governance Structure 11
The Board’s Role in Risk Oversight 11
Independent Directors 11
Audit Committee 11
Compensation Committee 12
Nominations and Corporate Governance Committee 12
Stockholder Communications with the Board of Directors 13
Code of Ethics 13
REPORT OF THE AUDIT COMMITTEE 14
EXECUTIVE COMPENSATION 15
Summary Compensation Table - Fiscal Years Ended December 31, 2017 and 2016 15
Outstanding Equity Awards Value at Fiscal Year End Table 17
Director Compensation 17
TRANSACTIONS WITH RELATED PERSONS 19

 

 

 

 

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE 19
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20
Overview 20
Contribution Transaction 20
Our Prior Business Operations 21
Going Concern 22
Results of Operations 22
Liquidity and Capital Resources 24
Off-Balance Sheet Arrangements 26
Impact of Inflation 26
Critical Accounting Policies 26
Recent Accounting Pronouncements 29
PROPOSAL NO. 1 – REMEDIATION PROPOSAL 31
Overview 31
Reasons for Stockholder Approval 34
Interests of Certain Persons 34
No Dissenters’ Rights 34
Vote Required 34
PROPOSAL NO. 2 – REVERSE STOCK SPLIT PROPOSAL 35
General 35
Purposes of the Proposed Reverse Stock Split 35
Factors Influencing the Board of Directors’ Discretion in Implementing the Reverse Stock Split 36
Potential Effects of the Proposed Reverse Stock Split 36
Effects on Ownership by Individual Stockholders 37
Vote Required 37
PROPOSAL NO. 4 – PLAN PROPOSAL 38
Overview 38
Significant Features of the Plan 38
New Plan Benefits 42
No Dissenters’ Rights 43
Vote Required 43
PROPOSAL NO. 4 – DIRECTOR PROPOSAL 44
Director Nominees 44
Vote Required 44
PROPOSAL NO. 5 – AUDITOR PROPOSAL 45
General 45
Principal Accountant Fees and Services 45
Vote Required 46
PROPOSAL NO. 6 – ADJOURNMENT PROPOSAL 47
STOCKHOLDER PROPOSALS AND NOMINATIONS 48

 

 

 

 

TRANSACTION OF OTHER BUSINESS 48
HOUSEHOLDING OF PROXY STATEMENT 48
WHERE YOU CAN FIND MORE INFORMATION 48

 

ANNEX A – FINANCIAL STATEMENTS 

ANNEX B – REMEDIATION AGREEMENT 

ANNEX C – FORM OF CERTIFICATE OF AMENDMENT 

ANNEX D – FC GLOBAL REALTY INCORPORATED 2018 EQUITY INCENTIVE PLAN

 

 

 

 

FC GLOBAL REALTY INCORPORATED

2300 Computer Drive, Building G

Willow Grove, Pennsylvania 19090

 

 PROXY STATEMENT

FOR

ANNUAL MEETING OF STOCKHOLDERS

 

 To be held on November 29, 2018

 

INTRODUCTION

 

 This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors (the “Board”) of FC Global Realty Incorporated (“we,” “ us,” “our” or the “Company”) for use at the annual meeting of stockholders of the Company and at all adjournments and postponements thereof (the “Meeting”). The Meeting will be held November 29, 2018 at 9:30 a.m. local time at 2300 Computer Drive, Building G, Willow Grove, Pennsylvania 19090, for the following purposes:

 

1.To approve the transactions contemplated by that certain remediation agreement, dated September 24, 2018, among the Company, Opportunity Fund I-SS, LLC, Dr. Dolev Rafaeli, Dennis M. McGrath and Yoav Ben-Dror (the “Remediation Agreement), including the issuance of shares of our common stock upon the conversion of shares of preferred stock that have been issued thereunder (the “Remediation Proposal”).

 

2.To authorize the Company’s Board of Directors, in its discretion, to implement one or more reverse stock splits of the shares of the Company’s common stock at an exchange ratio of not less than 1-for-2 and not more than 1-for-15 at any time prior to the Company’s 2019 annual meeting of stockholders by filing an amendment to the Company’s Amended and Restated Articles of Incorporation (the “Reverse Stock Split Proposal”).

 

3.To adopt the FC Global Realty Incorporated 2018 Equity Incentive Plan (the “Plan”) to provide for long-term incentives in the form of grants of stock, stock options and other forms of incentive compensation to officers, employees, directors and consultants (the “Plan Proposal”).

 

4.To elect five (5) director nominees to the Board to serve until the next annual meeting of our stockholders or until their successors are elected and qualify, subject to their prior death, resignation or removal (the “Director Proposal”).

 

5.To ratify the appointment of Fahn Kanne & Co. Grant Thornton Israel to serve as the Company’s independent registered public accounting firm for the year ending December 31, 2018 (the “Auditor Proposal”).

 

6.To approve the adjournment of the annual meeting for any purpose, including to solicit additional proxies if there are insufficient votes at the time of the annual meeting to approve the proposals described above (the “Adjournment Proposal”).

 

The Board unanimously recommends a vote “FOR” the Remediation Proposal, the Reverse Stock Split Proposal, the Plan Proposal, each of the director nominees, the Auditor Proposal, and the Adjournment Proposal.

 

Stockholders of record of our common stock at the close of business on October 25, 2018 (the “Record Date”) will be entitled to notice of, and are cordially invited to attend, the Meeting and to attend any adjournment or postponement thereof. However, to assure your representation at the Meeting, please vote your proxy via the internet, by telephone, or by completing, dating, signing and returning the enclosed proxy. Even if you have previously submitted your proxy, you may choose to vote in person at the Meeting. Whether or not you expect to attend the Meeting, please read the proxy statement and then promptly vote your proxy in order to ensure your representation at the Meeting.

 

This proxy solicitation is being made and paid for by the Company on behalf of its Board. In addition, we may retain a third party proxy solicitor for which we may incur fees. Our directors, officers and employees may also solicit proxies by personal interview, mail, e-mail, telephone, facsimile or other means of communication. These persons will not be paid any additional compensation for their efforts. We will also request brokers and other fiduciaries to forward proxy solicitation material to the beneficial owners of shares of our common stock that the brokers and fiduciaries hold of record. Upon request, we will reimburse them for their reasonable out-of-pocket expenses. In addition, we will indemnify our proxy solicitor, if any, against any losses arising out of that firm’s proxy soliciting services on our behalf.

 

 

 

None of the proposals included in this proxy statement has been approved or disapproved by the Securities and Exchange Commission (the “SEC”), and the SEC has not passed upon the fairness or merits of any proposals nor upon the accuracy or adequacy of the information contained in this proxy statement. Any representation to the contrary is unlawful.

 

 

 

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND THE PROPOSALS

 

 The following are some questions that you, as a stockholder of the Company, may have regarding the Meeting and the proposals and brief answers to such questions. We urge you to carefully read this entire proxy statement, the annexes to this proxy statement and the documents referred to or incorporated by reference in this proxy statement because the information in this section does not provide all the information that may be important to you as a stockholder of the Company with respect to the proposals. See “Where You Can Find More Information.”

 

When and where will the Meeting take place?

 

 The Meeting will be held on November 29, 2018 at 9:30 a.m. local time at 2300 Computer Drive, Building G, Willow Grove, Pennsylvania 19090.

 

What proposals are the stockholders being asked to consider?

 

 At the Meeting, you will be asked to vote upon the Remediation Proposal, the Reverse Stock Split Proposal, the Plan Proposal, each of the director nominees, the Auditor Proposal, and the Adjournment Proposal.

 

What are the recommendations of the Board?

 

 The Board has approved the six proposals and unanimously recommends that the stockholders vote “FOR” each proposal, including “FOR” each director nominee.

 

What is the Record Date for the Meeting?

 

 Holders of our common stock as of the close of business on October 25, 2018, the Record Date for the Meeting, are entitled to notice of, and to vote at, the Meeting and any postponements or adjournments of the Meeting.

 

Who can vote at the Meeting?

 

 Stockholders who owned shares of our common stock on the Record Date may attend and vote at the Meeting. There were 5,568,500 shares of common stock, 123,668 shares of the Company’s non-voting Series A Convertible Preferred Stock, 7,485,627 shares of the Company’s non-voting Series C Preferred Stock, and 6,371,336 shares of the Company’s non-voting Series D Preferred Stock outstanding on the Record Date. All shares of common stock have one vote per share and vote together as a single class. No shares of Series A Convertible Preferred Stock, Series C Preferred Stock or Series D Preferred Stock may vote upon any proposal. Information about the stockholdings of our directors and executive officers is contained in the section of this proxy statement entitled “Security Ownership of Certain Beneficial Owners and Management.”

 

What is the proxy card?

 

The proxy card enables you to appoint Michele Pupach, our Corporate Counsel and Secretary, as your representative at the Meeting. By completing and returning the proxy card as described herein, you are authorizing this person to vote your shares at the Meeting in accordance with your instructions on the proxy card. This way, your shares will be voted whether or not you attend the Meeting. Even if you plan to attend the Meeting, we think that it is a good idea to complete and return your proxy card before the Meeting date just in case your plans change. If a proposal comes up for vote at the Meeting that is not on the proxy card, the proxies will vote your shares, under your proxy, according to Ms. Pupach’s best judgment.

 

What is the difference between holding shares as a stockholder of record and as a beneficial owner?

 

Most of our stockholders hold their shares in an account at a brokerage firm, bank or other nominee holder, rather than holding share certificates in their own name. As summarized below, there are some distinctions between shares held of record and those owned beneficially.

 

Stockholder of Record

 

If, on the Record Date, your shares were registered directly in your name with our transfer agent, Broadridge Corporate Issuer Solutions, you are a “stockholder of record” who may vote at the Meeting, and we are sending these proxy materials directly to you. As the stockholder of record, you have the right to direct the voting of your shares by returning the enclosed proxy card to us, by voting online or to vote in person at the Meeting. Whether or not you plan to attend the Meeting, please complete, date and sign the enclosed proxy card or vote online to ensure that your vote is counted.

 

 

 

Beneficial Owner

 

If, on the Record Date, your shares were held in an account at a brokerage firm or at a bank or other nominee holder, you are considered the beneficial owner of shares held “in street name,” and these proxy materials are being forwarded to you by your broker or nominee who is considered the stockholder of record for purposes of voting at the Meeting. As the beneficial owner, you have the right to direct your broker on how to vote your shares and to attend the Meeting. However, since you are not the stockholder of record, you may not vote these shares in person at the Meeting unless you receive a valid proxy from your brokerage firm, bank or other nominee holder. To obtain a valid proxy, you must make a special request of your brokerage firm, bank or other nominee holder. If you do not make this request, you can still vote by using the voting instruction card enclosed with this proxy statement; however, you will not be able to vote in person at the Meeting.

 

What is the quorum required for the Meeting?

 

The representation in person or by proxy of holders of at least a majority of the issued and outstanding shares of our common stock entitled to vote at the Meeting is necessary to constitute a quorum for the transaction of business at the Meeting.

 

Assuming that a quorum is present, what vote is required to approve the proposals to be voted upon at the Meeting?

 

The approval of the Remediation Proposal requires the affirmative vote of a majority of the shares present in person or represented by proxy at the Meeting.

 

The approval of the Reverse Stock Split Proposal requires the affirmative vote of the holders of a majority of the issued and outstanding shares of common stock of the Company.

 

The approval of the Plan Proposal requires the affirmative vote of a majority of the shares present in person or represented by proxy at the Meeting.

 

The election of each director nominee requires the affirmative vote of a plurality of votes of the shares cast at the election.

 

The approval of the Auditor Proposal requires the affirmative vote of a majority of the shares present in person or represented by proxy at the Meeting.

 

The Meeting may be adjourned by the affirmative vote of a majority of the shares present in person or represented by proxy at the Meeting.

 

How do I vote?

 

Stockholders have four voting options. You may vote using one of the following methods:

 

·Internet. You can vote over the Internet by accessing the website at www.proxyvote.com, and following the instructions on the website. Internet voting is available 24 hours a day. If you vote over the Internet, do not return your proxy card.

 

·Telephone. If you hold shares directly in your own name and are the holder of record, you can vote by telephone by calling the toll-free number 1-800-690-6903 in the United States, Canada or Puerto Rico on a touch-tone phone. You will then be prompted to enter the control number printed on your proxy card and to follow the subsequent instructions. Telephone voting is available 24 hours a day. If, however, you hold the shares through a broker and not in your own name, then follow the specific instructions included in your proxy materials, including the specific phone number to use to vote your shares by phone.

 

 

 

·Mail. You can vote by mail by simply completing, signing, dating and mailing your proxy card in the postage-paid envelope included with this proxy statement.

 

·In Person. You may come to the Meeting and cast your vote there. The Board recommends that you vote by proxy even if you plan to attend the Meeting. If your shares of common stock are held in a stock brokerage account or through a bank, broker or other nominee, or, in other words, in “street name”, and you wish to vote in person at the Meeting, you must bring a letter from your bank, broker or nominee identifying you as the beneficial owner of the shares and authorizing you to vote such shares at the Meeting.

 

What are the effects of not voting or abstaining? What are the effects of broker non-votes?

 

 If you do not vote by virtue of not being present in person or by proxy at the Meeting, your shares will not be counted for purposes of determining the existence of a quorum.

 

 Abstentions will be counted for the purpose of determining the existence of a quorum, however, they will not be considered in determining the number of votes cast. Accordingly, an abstention will have no effect on the Remediation Proposal, the Plan Proposal, the Director Proposal, the Auditor Proposal, or the Adjournment Proposal, but will be treated in the same manner as a vote against the Reverse Stock Split Proposal.

 

 Broker non-votes occur on a matter when a broker is not permitted to vote on that matter without instructions from the beneficial owner and instructions are not given. These matters are referred to as “non-routine” matters. Broker non-votes will be counted for the purpose of determining the existence of a quorum, however the Remediation Proposal, the Plan Proposal, the Reverse Stock Split Proposal, and the Director Proposal are “non-routine” matters. Thus, in tabulating the voting result for these proposals, shares that constitute broker non-votes are not considered votes cast on those proposals.

 

What does it mean if I received more than one proxy card?

 

If your shares are registered differently or in more than one account, you will receive more than one proxy card. Sign and return all proxy cards to ensure that all of your shares are voted.

 

What happens if I don’t indicate how to vote my proxy?

 

If you just sign your proxy card without providing further instructions, your shares will be counted as a vote “for” each of the proposals.

 

What happens if I sell my shares after the record date but before the Meeting?

 

The Record Date for the Meeting is earlier than the date of the Meeting. If you transfer your shares after the Record Date but before the date of the Meeting, you will retain your right to vote at the Meeting (provided that such shares remain outstanding on the date of the Meeting).

 

What if I change my mind after I return my proxy?

 

You may revoke your proxy and change your vote at any time before the polls close at the Meeting. You may do this by:

 

·sending a written notice to our corporate Secretary, stating that you would like to revoke your proxy of a particular date;

 

·signing another proxy card with a later date and returning it before the polls close at the Meeting;

 

·voting again at a later time, but prior to the date of the Meeting, via the Internet or telephone;

 

·attending the Meeting and voting in person.

  

 

 

 

Please note, however, that if your shares are held of record by a brokerage firm, bank or other nominee, you must instruct your broker, bank or other nominee that you wish to change your vote by following the procedures on the voting form provided to you by the broker, bank or other nominee. If your shares are held in street name, and you wish to attend and vote at the Meeting, you must bring to the Meeting a legal proxy from the broker, bank or other nominee holding your shares, confirming your beneficial ownership of the shares and giving you the right to vote your shares. Simply attending the Meeting will not constitute a revocation of your proxy.

 

Who can help answer my other questions?

 

If you have more questions about the proposals or how to submit your proxy, or if you need additional copies of this proxy statement or the enclosed proxy card or voting instructions, please contact FC Global Realty Incorporated, Attn: Corporate Secretary, 2300 Computer Drive, Building G, Willow Grove, Pennsylvania 19090, telephone number 215-830-1430.

 

 

  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth information regarding beneficial ownership of our common stock as of the Record Date (i) by each person who is known by us to beneficially own more than 5% of our common stock; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group. Unless otherwise specified, the address of each of the persons set forth below is in care of the Company, 2300 Computer Drive, Building G, Willow Grove, PA 19090.

 

Name and Address of Beneficial Owner Title of Class Amount and
Nature of
Beneficial
Ownership(1)
Percent
of Class(2)
Michael R. Stewart, CEO, CFO and Director Common Stock 0 *
Richard J. Leider, Director Common Stock 0 *
Dennis M. McGrath, Director (3) Common Stock 70,065 1.25%
Kristen E. Pigman (4) Common Stock 879,234 15.79%
Dolev Rafaeli, Director (5) Common Stock 221,024 3.94%
All directors and officers as a group (5 persons named above) Common Stock 1,190,426 20.73%
Shlomo Ben-Haim (6) Common Stock 361,253 6.49%
Lewis C. Pell (7) Common Stock 354,064 6.36%
Yoav Ben-Dror Common Stock 299,184 5.37%

 

(1)Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Except as described below, each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to the shares of our common stock.

 

(2)A total of 5,568,500 shares of our common stock are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1) as of the Record Date. For each beneficial owner above, any options exercisable within 60 days have been included in the denominator.

 

(3)Includes 31,175 shares of common stock and vested options to purchase 38,890 shares of common stock.

 

(4)Represents shares held by Opportunity Fund I-SS, LLC. Kristen Pigman is the Director of OP Fund I Manager, LLC, which is the member and manager of Opportunity Fund I-SS, LLC, and has voting and dispositive power over the securities held by it. Mr. Pigman disclaims beneficial ownership of such securities.

 

(5)Includes 183,524 shares of common stock and vested options to purchase 37,500 shares of common stock.

 

(6)Includes 230,772 shares held by Eastnet Investment Limited.

 

(7)Includes 234,064 shares of common stock, 120,000 shares held by trusts with respect to which Mr. Pell may be deemed to have beneficial ownership.

 

Except as contemplated by the Remediation Agreement, we do not currently have any arrangements which if consummated may result in a change of control of the Company.

 

 

 

DIRECTORS AND EXECUTIVE OFFICERS

 

Directors and Executive Officers

 

Following is information about our directors and executive officers as of the date of this proxy statement.

 

NAME   AGE   POSITION
Michael R. Stewart   61   Chairman, Chief Executive Officer and Chief Financial Officer
Richard J. Leider   57   Director
Dennis M. McGrath   61   Director
Kristen E. Pigman   63   Director
Dr. Dolev Rafaeli   53   Director

 

Michael R. Stewart has served as our Chief Executive Officer and Chief Financial Officer since June 2018 and as a member of our Board of Directors since May 2017. Mr. Stewart is a seasoned executive with over 25 years of experience in C-level positions and 36 total years’ experience in executive management, operations and finance. He brings a wealth of expertise with particular strength in operations, financial management, strategy, M&A, capital raise, FDA matters, medical reimbursement as well as sales, marketing, product development and product launch. He has extensive U.S. and International market expertise and has significant experience with public company board and SEC matters. Currently, Mr. Stewart operates as a private consultant to multiple companies which he started in late 2016. He is working with companies from private start-up to mid-size public companies assisting them with major negotiations, new product and company launches, merger and acquisitions and capital raises. From 2014 through 2016, Mr. Stewart served as President, Chief Executive Officer and Director of publicly traded STRATA Skin Sciences, Inc. From 1990 to 2014, Mr. Stewart held the positions of CEO, COO and CFO at two publicly traded companies. In addition to his executive career and his non-independent board positions, Mr. Stewart has served as an independent public company director and as an advisor to the board of several private companies. Mr. Stewart obtained both his MBA in Finance and his BS in Accounting from LaSalle University in Philadelphia. Mr. Stewart was selected to serve on our Board because of his 36 years’ experience in executive management, operations and finance.

 

Richard J. Leider has served as a member of our Board of Directors since May 2017. Mr. Leider has more than 25 years of experience in the commercial real estate industry with active involvement in its sub-specialties of office, hospitality, investment, development, construction and strategic management. A hospitality veteran, Mr. Leider directed the repositioning, renovation and execution of the successful conversion of the Resort at Squaw Creek into a condominium hotel facility. Since March 2003, he has served as president of Paramount Hotels Inc. a California hotel management company. A principal and cofounder of Anvil Builders Inc., Mr. Leider has directed business development for that company since July 2010. From June 2005 to December 2008, he led the global real estate platform at Tano Capital, LLC and formerly directed the investment platform in Northern California on behalf of Buchanan Street. He was a managing director of global operations at Citadon, Inc., of San Francisco, a provider of Internet solutions for the real estate and construction industries, from June 2000 to December 2001. From 1996 to 2000, he was an executive director at DTZ Staubach Tie Leung in Hong Kong. While in Asia, Mr. Leider’s responsibilities included all aspects of the real estate life cycle, from advisory services to opportunistic institutional direct investment. Prior to his tenure with DTZ Staubach Tie Leung, Mr. Leider was a senior vice president at CBRE in San Francisco. Mr. Leider graduated from the University of California at Berkeley in 1981, earning a B.A. in Political Economies of Industrial Societies, and later studied at Worchester College at Oxford University. Mr. Leider serves on the Boards of Mercy Housing, American Cancer Society, Union Square Business Improvement District and its Public Policy Committee. He is a member of the Urban Land Institute, and CCIM Institute (Certified Commercial Investment Manager). Mr. Leider also serves as an independent board member of First Capital Real Estate Trust Incorporated. Mr. Leider was selected to serve on our Board because of his twenty-five years’ background in the commercial real estate industry.

 

Dennis M. McGrath has served as a member of our Board of Directors since July 2009. He currently serves as the Executive Vice President and Chief Financial Officer of PAVmed, Inc. (Nasdaq: PAVM, PAVMW) since March 2017. Previously, from 2000 to 2017, Mr. McGrath served in several senior level positions of the Company, including from 2011 to 2017 as director, President, and Chief Financial Officer. Prior to our reverse merger with Radiancy, Inc. in December 2011, he also served as Chief Executive Officer from 2009 to 2011 and served as Vice President of Finance and Chief Financial Officer from 2000 to 2009. He received honors as a P.A.C.T. (Philadelphia Alliance for Capital and Technology) finalist for the 2011 Investment Deal of the Year, award winner for the SmartCEO Magazine 2012 CEO of the Year for Turnaround Company, and finalist for the Ernst & Young 2013 Entrepreneur of the Year. He has extensive experience in mergers and acquisitions, both domestically and internationally, and particularly involving public company acquisitions, including Surgical Laser Technologies, Inc., (formerly, Nasdaq: SLTI), ProCyte Corporation (formerly, Nasdaq: PRCY), LCA Vision, Inc. (formerly, Nasdaq: LCAV) and Think New Ideas, Inc. (formerly, Nasdaq: THNK). Prior to joining the Company, he served in several senior level positions of AnswerThink Consulting Group, Inc. (then, Nasdaq: ANSR, now, The Hackett Group, Nasdaq: HCKT), a business consulting and technology integration company, including from 1999 to 2000 as Chief Operating Officer of the Internet Practice, the largest division of AnswerThink Consulting Group, Inc., while concurrently during the merger of the companies, serving as the acting Chief Financial Officer of Think New Ideas, Inc. (then, Nasdaq: THNK, now, Nasdaq: HCKT), an interactive marketing services and business solutions company. Mr. McGrath also served from 1996 until 1999 as Chief Financial Officer, Executive Vice President and director of TriSpan, Inc., an internet commerce solutions and technology consulting company, which was acquired by AnswerThink Consulting Group, Inc. in 1999. During his tenure at Arthur Andersen & Co., where he began his career, he became a Certified Public Accountant in 1981, holds inactive licenses in Pennsylvania and New Jersey, and has a B.S., maxima cum laude, in accounting from LaSalle University. In addition to continuing as a director of PhotoMedex, he serves as the audit chair and a director of several medical device companies, including DarioHealth Corp. (Nasdaq: DRIO), Noninvasive Medical Technologies, Inc. and Cagent Vascular, LLC, and as an advisor to the board of an orphan drug company, Palvella Therapeutics, LLC. Formerly from 2007 to 2009, Mr. McGrath served as a director of Embrella Cardiovascular, Inc. (sold to Edwards Lifesciences Corporation, NYSE: EW). He also serves on the Board of Trustees for Manor College and the Board of Visitors for Taylor University. Mr. McGrath was selected to serve on our Board because of his 30 years’ experience in the development and implementation of innovative business and marketing practices.

 

 

 

Kristen E. Pigman has served as a member of our Board of Directors since June 2018. As President of The Pigman Companies, LLC (“TPC”), Mr. Pigman coordinates acquisition, planning, financing, development, construction, and disposition of commercial real estate projects for TPC, its partners, and institutional and corporate clients. Before the creation of TPC in 1994, Mr. Pigman was a titled officer and partner of The Koll Company of Newport Beach, CA. Prior to joining Koll in 1989, Mr. Pigman was President of The Sandpiper Companies, a real estate development firm headquartered in Scottsdale, Arizona; and an executive with Coldwell Banker Commercial Real Estate Group. He served as President for five years of the Sacramento Valley Chapter of National Association of Industrial and Office Properties (“NAIOP”) and was a member of the National Board of Directors of NAIOP and Vice Chairman for the NAIOP National Office Development Forum. He also was Vice President of Development and a member of Board of Directors for the Sacramento Area Commerce and Trade Organization, Chairman of the Building Industry Association Commercial Developer’s Council, and a member of numerous other trade organizations and Chambers of Commerce. Mr. Pigman has been and continues to be involved in a number of charitable organizations, including The Comstock Club, Easter Seals, the American Lung Association, the Police Athletic League, the Leukemia Society, The Heart Foundation, the Principal for a Day Program, and the Boy Scouts of America, having attained the rank of Eagle Scout in that organization. Mr. Pigman graduated with honors from The Mercersburg Academy in Mercersburg, PA, accepted an English Speaking Union “Jr. Rhodes” Scholarship and took his ‘A’ levels at The Truro School, Truro, Cornwall, UK, attended Rollins College in Winter Park, FL on a baseball scholarship, and earned a B.S. in Economics cum laude from The University of Maryland. Mr. Pigman was selected to serve on our Board because of his extensive real estate development experience.

 

Dr. Dolev Rafaeli has served as a member of our Board of Directors since December 2011. He previously served as our Chief Executive Officer from December 2011 until May 2017. Dr. Rafaeli joined our subsidiary Radiancy in February 2006 as president and CEO. He has over 29 years of experience managing international operations. Prior to joining Radiancy, Dr. Rafaeli served from 2004 to 2006 as president and CEO of the USR Group, a consumer electronics products manufacturer, managing operations in Israel, China, Hong Kong and the U.S. Between 2000 and 2004, Dr. Rafaeli founded and served as general manager of Orbotech Ltd. (ORBK-NASDAQ), an automated optical inspection capital equipment manufacturer for the electronics industry in China and Hong Kong, where he was instrumental in building these operations into a $100 million a year business. Between 1997 and 2000, Dr. Rafaeli served as CEO of USR Ltd., a global electronics contract manufacturing company providing design, supply chain and manufacturing services to dozens of clients in the communications, consumer and medical device fields. USR Ltd. employed approximately 1,000 individuals. Dr. Rafaeli previously served as director of operations and manager of the Arad manufacturing facility for Motorola in its Land Mobile Product Solutions division, manufacturing and distributing communications, consumer and other infrastructure electronics products in excess of $400 million annually. Dr. Rafaeli graduated with a B.Sc. in industrial engineering and management cum laude and a M.Sc. in operations management from the Technion-Israel Institute of Technology, and holds a Ph.D. in business management from Century University and an MBA (with distinction) from Cornell University. Dr. Rafaeli was selected to serve on our Board because of his over twenty five years of senior executive and board of directors’ experience with private and public multi-national companies and his vast mergers and acquisitions successful track record.

 

 

 

Our directors currently have terms which will end at our next annual meeting of the stockholders or until their successors are elected and qualify, subject to their prior death, resignation or removal. Officers serve at the discretion of the Board of Directors. Members of our Board of Directors are encouraged to attend meetings of the Board of Directors and the Annual Meeting of Stockholders. The Board of Directors held ten meetings and executed ten unanimous written consents in lieu of a meeting in 2017.

 

Family Relationships

 

There are no family relationships among any of our officers or directors.

 

Involvement in Certain Legal Proceedings

 

To the best of our knowledge, none of our directors or executive officers has, during the past ten years:

 

·been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences);

 

·had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;

 

·been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;

 

·been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;

 

·been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

 

·been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

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CORPORATE GOVERNANCE

 

Overview

 

Our Board of Directors maintains charters for select committees. In addition, our Board of Directors has adopted a written set of corporate governance guidelines and a code of business conduct and ethics and a code of conduct for our chief executive and senior financial officers that generally formalize practices that we already had in place. To view the charters of our Audit, Compensation and Nominations and Corporate Governance Committees, code of ethics, corporate governance guidelines, and other documents, please visit our website at www.fcglobalrealty.com under the Corporate Governance section of the Investor Relations page.

 

Governance Structure

 

Currently, our Chief Executive Officer is also our Chairman. Our Board believes that, at this time, having a combined Chief Executive Officer and Chairman is the appropriate leadership structure for the Company. In making this determination, the board considered, among other matters, Mr. Stewart executive management experience and believed that Mr. Stewart is highly qualified to act as both Chairman and Chief Executive Officer due to his experience, knowledge, and personality. Among the benefits of a combined Chief Executive Officer/Chairman considered by the Board is that such structure promotes clearer leadership and direction for the Company and allows for a single, focused chain of command to execute our strategic initiatives and business plans.

 

The Board’s Role in Risk Oversight

 

Our Board administers its risk oversight function as a whole by making risk oversight a matter of collective consideration. While management is responsible for identifying risks, our Board has charged the Audit Committee with evaluating financial and accounting risk and the Compensation Committee with evaluating risks associated with employees and compensation. Investor-related risks are usually addressed by the Board as a whole. We believe an independent Chairman of the Board adds an additional layer of insight to our Board’s risk oversight process.

 

Independent Directors

 

In considering and making decisions as to the independence of each of the directors of the Company, the Board considered transactions and relationships between the Company (and its subsidiaries) and each director (and each member of such director’s immediate family and any entity with which the director or family member has an affiliation such that the director or family member may have a material indirect interest in a transaction or relationship with such entity). Our Board has determined that the following directors are independent as defined in the applicable rules of the Nasdaq Stock Market: Richard J. Leider and Kristen E. Pigman.

 

Audit Committee

 

Our Board of Directors has established an Audit Committee to assist it in fulfilling its responsibilities for general oversight of the integrity of our consolidated financial statements, compliance with legal and regulatory requirements, the independent auditors’ qualifications and independence, the performance of our independent auditors and an internal audit function and risk assessment and risk management. The duties of our Audit Committee include: reviewing and approving the scope of the annual audit, the audit fee and the financial statements; appointing, evaluating and determining the compensation of our independent auditors; reviewing disclosure controls and procedures, internal control over financial reporting, any internal audit function and corporate policies with respect to financial information; reviewing other risks that may have a significant impact on our financial statements; preparing the Audit Committee report for inclusion in the annual proxy statement; establishing procedures for the receipt, retention and treatment of complaints regarding accounting and auditing matters; approving all related party transactions, as defined by applicable Nasdaq Rules, to which the Company is a party; and evaluating the Audit Committee charter annually.

 

The Audit Committee works closely with management as well as our independent auditors. The Audit Committee has the authority to obtain advice and assistance from, and receive appropriate funding from us for, outside legal, accounting or other advisors as the Audit Committee deems necessary to carry out its duties.

 

Our Board has adopted a written charter for the Audit Committee. The members of the Audit Committee are Richard J. Leider and Kristen E. Pigman. The Audit Committee held seven meetings in 2017.

 

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The Board determined that each member of the Audit Committee satisfies the independence and other composition requirements of the SEC. Due to recent changes to our Board composition, we temporarily at this time do not have an independent director who also meets the qualifications for “audit committee financial expert” as defined under Item 407(d)(5) of Regulation S-K. We anticipate that we will appoint a new independent director who meets these qualifications within in the next six months. 

 

Compensation Committee

 

Our Compensation Committee discharges the Board’s responsibilities relating to compensation of our Chief Executive Officer and other executive officers, produces an annual report on executive compensation for inclusion in our annual proxy statement and provides general oversight of compensation structure. Other specific duties and responsibilities of the Compensation Committee include: reviewing and approving objectives relevant to executive officer compensation; evaluating performance and recommending to the Board the compensation, including any incentive compensation, of our Chief Executive Officer and other executive officers in accordance with such objectives; reviewing employment agreements for executive officers; recommending to the Board the compensation for our directors; administering our equity compensation plans and other employee benefit plans; evaluating human resources and compensation strategies, as needed; and evaluating the Compensation Committee charter periodically.

 

Our Board has adopted a written charter for the Compensation Committee. The members of the Compensation Committee are Richard J. Leider and Kristen E. Pigman. The Compensation Committee held one meeting and executed no unanimous written consents in lieu of a meeting in 2017.

 

The Compensation Committee reviews executive compensation from time to time and reports to the Board, which makes all final decisions with respect to executive compensation. The Compensation Committee adheres to several guidelines in carrying out its responsibilities, including performance by the employees, our performance, enhancement of stockholder value, growth of new businesses and new markets and competitive levels of fixed and variable compensation.

 

Nominations and Corporate Governance Committee

 

Our Board of Directors has established a Nominations and Corporate Governance Committee for the purpose of reviewing all Board-recommended and stockholder-recommended nominees, determining each nominee’s qualifications and making a recommendation to the full Board as to which persons should be our Board’s nominees. The duties and responsibilities of the Nominations and Corporate Governance Committee include: identifying and recommending to our Board individuals qualified to become members of our Board; recommending to our Board the director nominees for the next annual meeting of stockholders; recommending to our Board director committee assignments; reviewing and evaluating succession planning for our Chief Executive Officer and other executive officers; monitoring the independence of our directors; developing and overseeing the corporate governance principles applicable to members of our Board, officers and employees; monitoring the continuing education for our directors; and evaluating the Nominations and Corporate Governance Committee charter annually.

 

Our Board has adopted a written charter for the Nominations and Corporate Governance Committee. The members of the Nominations and Corporate Governance Committee are Richard J. Leider and Kristen E. Pigman. The Nominations and Corporate Governance Committee held one meeting in 2017.

 

Our Nominations and Corporate Governance Committee utilizes a variety of methods for identifying and evaluating nominees for our directors. Our Nominations and Corporate Governance Committee will regularly assess the appropriate size of our Board and whether any vacancies on the Board are expected due to retirement or other circumstances. When considering potential director nominees, the Nominations and Corporate Governance Committee also considers the candidate’s character, judgment, diversity, age, skills, including financial literacy and experience in the context of the needs of the Company and of our existing directors. The Nominations and Corporate Governance Committee also seeks director nominees who are from diverse backgrounds and who possess a range of experiences as well as a reputation for integrity. The Nominations and Corporate Governance Committee considers all of these factors to ensure that our Board as a whole possesses a broad range of skills, knowledge and experience useful to the effective oversight and leadership of the Company.

 

Our Nominations and Corporate Governance Committee does not have a specific policy with regard to the consideration of candidates recommended by stockholders, however any nominees proposed by our stockholders will be considered on the same basis as nominees proposed by the Board. If you or another stockholder want to submit a candidate for consideration to the Board, you may submit your proposal to our Corporate Counsel in accordance with the stockholder communication procedures set forth below.

 

12 

 

  

All director nominees included in this proxy statement were approved by the Nominations and Corporate Governance Committee.

 

Stockholder Communications with the Board of Directors

 

Our Board has established a process for stockholders to communicate with the Board or with individual directors. Stockholders who wish to communicate with our Board or with individual directors should direct written correspondence to Michele Pupach, Corporate Counsel at [email protected] or to the following address (our principal executive offices): Board of Directors, c/o Corporate Secretary, 2300 Computer Drive, Building G, Willow Grove, Pennsylvania 19090. Any such communication must contain:

 

·a representation that the stockholder is a holder of record of our capital stock;

 

·the name and address, as they appear on our books, of the stockholder sending such communication; and

 

·the class and number of shares of our capital stock that are beneficially owned by such stockholder.

 

Ms. Pupach or the Corporate Secretary, as the case may be, will forward such communications to our Board or the specified individual director to whom the communication is directed unless such communication is unduly hostile, threatening, illegal or similarly inappropriate, in which case Ms. Pupach or the Corporate Secretary, as the case may be, has the authority to discard the communication or to take appropriate legal action regarding such communication.

 

Code of Ethics

 

We have adopted a Code of Ethics that applies to all of our employees, officers and directors.  The Code of Ethics is available on our web site at www.fcglobalrealty.com under the Corporate Governance section of the Investor Relations page. We intend to provide disclosure of any amendments or waivers of our Code of Ethics on our website within four business days following the date of the amendment or waiver.

 

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REPORT OF THE AUDIT COMMITTEE

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017

 

The Audit Committee of the Board is comprised of two non-employee directors, both of whom has been determined by the Board to be “independent” meeting the independence requirements of the listing rules of the SEC. The Audit Committee assists the Board’s oversight of the integrity of our financial reports, compliance with legal and regulatory requirements, the qualifications and independence of our independent registered public accounting firm, the audit process, and internal controls. The Audit Committee operates pursuant to a written charter adopted by the Board. The Audit Committee is responsible for appointing, evaluating and determining the compensation of our independent auditors; reviewing and approving the scope of the annual audit, the audit fee and the financial statements; reviewing disclosure controls and procedures, internal control over financial reporting, any internal audit function and corporate policies with respect to financial information; reviewing other risks that may have a significant impact on our financial statements; establishing procedures for the receipt, retention and treatment of complaints regarding accounting and auditing matters; and approving all related party transactions, as defined by applicable rules, to which the Company is a party. The Audit Committee also reviews and recommends to the Board that the audited financial statements be included in our Annual Report on Form 10-K.

 

Following the end of the fiscal year ended December 31, 2017, the Audit Committee as constituted at such time (1) reviewed and discussed the audited financial statements for the fiscal year ended December 31, 2017 with Company management; (2) discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU section 380), as adopted by the PCAOB in Rule 3200T; and (3) received the written disclosures and the letters from the independent accountants required by applicable requirements of the PCAOB regarding the independent accountants’ communications with the Audit Committee concerning independence, and has discussed with the independent accountants their independence.

 

Based on the review and discussions referred to above, the Audit Committee had recommended to the Board that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 for filing with the SEC.

 

/s/ The Audit Committee  
Richard J. Leider  
Kristen E. Pigman  

 

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EXECUTIVE COMPENSATION

 

Summary Compensation Table - Fiscal Years Ended December 31, 2017 and 2016

 

The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons for services rendered in all capacities during the noted periods.  No other executive officers received total annual salary and bonus compensation in excess of $100,000.

 

Name and Principal Position Year

Salary

($)

Stock Awards

($) (1)

Non-Equity Incentive Plan Compensation
($) (2)
All Other Compensation
($) (3)

Total

($)

Suneet Singal,

Former Chief Executive Officer(4)

2017 67,500 0 910,000 0 977,500
2016 0 0 0 0 0

Stephen Johnson,

Former Chief Financial Officer(5)

2017 182,308 0 0 0 182,308
2016 0 0 0 0 0

Dolev Rafaeli,

Former Chief Executive Officer(6)

2017 3,260,307 0 0 111,758 3,372,065
2016 495,000 71,719 1,200,000 46,347 1,813,066

Dennis M. McGrath,

Former Chief Financial Officer(7)

2017 970,284 0 0 58,698 1,028,983
2016 395,000 52,594 316,000 45,156 808,750

 

(1)The amounts shown for restricted stock awards relate to shares granted under our Amended and Restated 2005 Equity Compensation Plan. These amounts are equal to the aggregate grant-date fair value with respect to the awards made in 2016, computed in accordance with the Financial Accounting Standards Board (“FASB”) ASC Topic 718 (formerly SFAS 123R), before amortization and without giving effect to estimated forfeitures.

 

(2)The amounts shown for Dr. Rafaeli and Mr. McGrath relate to the bonus earned in 2016, even though such bonus may have been paid in a subsequent period. Dr. Rafaeli’s bonus of $1,200,000 and Mr. McGrath’s bonus of $316,000 remained accrued but unpaid for 2016. The amount shown for Suneet Singal represents the grant of restricted stock pursuant to a separation agreement, dated December 22, 2017, between the Company and Mr. Singal. This amount is equal to the aggregate grant-date fair value with respect to the award made in 2017, computed in accordance with FASB ASC Topic 718 (formerly SFAS 123R).

 

(3)Includes car allowances, premiums for supplementary life and/or disability insurance, matching 401(k) plan contributions, interest payments on payout notes issued to Dr. Rafeali and Mr. McGrath, and director fees paid or earned to Dr. Rafaeli and Mr. McGrath after such persons resigned as executive officers of the Company.

 

(4)Mr. Singal served as our Chief Executive Officer from May 17, 2017 until January 2, 2018. Under Mr. Singal’s employment agreement, he was entitled to an annual base salary of $250,000, as well as bonuses and other equity compensation as determined by our Compensation Committee. On October 11, 2017, we entered into an amended a restated employment agreement with Mr. Singal. Under this agreement, Mr. Singal was entitled to a base salary of $250,000 per annum, payable in accordance with our normal payroll practices, provided however, that the base salary would accrue, and not be paid, until (i) the 20% Unsecured Convertible Promissory Note issued to the First Capital Real Estate Operating Partnership, L.P. by the Company on July 25, 2017 had been repaid in full and (ii) Mr. Singal began working for the Company on a full-time basis. In connection with Mr. Singal’s resignation, on December 22, 2017, we entered into a separation agreement with Mr. Singal, pursuant to which Mr. Singal agreed to resign and we agreed to issue to Mr. Singal 1,000,000 shares of our common stock, 333,333 shares of which vested immediately, 333,333 shares of which will vest upon the first anniversary of the separation agreement, and 333,334 shares of which will vest upon the second anniversary of the separation agreement. The parties agreed that the issuance of such shares is in lieu of any other payment that Mr. Singal may already be entitled to receive under his employment agreement. By unanimous consent of the board of directors these shares were subsequently cancelled.

 

(5)Mr. Johnson served as our Chief Financial Officer from May 17, 2017 until January 2, 2018. Under Mr. Johnson’s employment agreement, he was entitled to an annual base salary of $300,000, as well as bonuses and other equity compensation as determined by our Compensation Committee. In connection with Mr. Johnson resignation, on December 22, 2017, we entered into a separation agreement with Mr. Johnson, pursuant to which Mr. Johnson agreed to resign and we agreed to pay to Mr. Johnson $405,432.70 in twelve (12) installments. We also agreed to pay for the health (medical, dental and/or vision) insurance policies for Mr. Johnson and his family for a period of twelve (12) months. We made the initial payment for Mr. Johnson’s separation and health benefits on January 8, 2017. On February 12, 2018, we entered into an amended and restated separation agreement with Mr. Johnson, pursuant to which we agreed to pay Mr. Johnson $122,500.64 in eleven installments as follows: the first six installments of $10,000, the following four installments of $12,500, and a final installment of $12,500.64. The first payment was made on February 15, 2018 and subsequent payments are to be made on or before the 15th day of each succeeding month, with the final installment to be paid on or before December 15, 2018. We also agreed to provide a health (medical, dental and/or vision) insurance reimbursement payment for Mr. Johnson and his family, for a period of eleven (11) months, in the agreed upon amount of $3,025 per month. In addition, we agreed to issue to Mr. Johnson 271,000 shares of common stock, which will be issued six months after the date of the amended and restated separation agreement. The foregoing amounts are in lieu of any other payment that Mr. Johnson may already be entitled to receive under his employment agreement.

 

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(6)Dr. Rafaeli resigned as our Chief Executive Officer on Mary 17, 2017. Under Dr. Rafaeli’s employment agreement, he was entitled to an annual base salary of $495,000, certain bonuses based on success in sales, as well other equity compensation as determined by our Compensation Committee. In connection with Dr. Rafaeli’s resignation, we and Dr. Rafaeli agreed to convert all compensation due under his employment agreement into a secured convertible payout note to be issued following stockholder approval. On October 12, 2017, we issued the payout note in the principal amount of $3,133,934 to Dr. Rafaeli. The payout note was due on October 12, 2018, carried a ten percent (10%) interest rate, payable monthly in arrears commencing on December 1, 2017, and was secured by a security interest in all of our assets. On December 22, 2017, we entered into a stock grant agreement with Dr. Rafaeli and certain other note holders to (i) cause the early conversion of the payout note into 3,134,876 shares of our common stock, (ii) effectuate the release of all security interests associated with the payout note, (iii) provide for the issuance of 1,034,509 additional shares of common stock as consideration for the various agreements of Dr. Rafaeli contained in the stock grant agreement, (iv) provide for twelve (12) monthly payments of $21,328.16 on the first of each month commencing on January 1, 2018, which amounts are equal to the interest payments that would have been made absent the conversion of the payout note, (v) obtain the agreement of the Dr. Rafaeli to provide certain support services to the Company, and (vi) obtain the conditional resignation of Dr. Rafaeli from our Board. Accordingly, all of our obligations under the payout note were satisfied upon entering into the stock grant agreement and the simultaneous conversion of the payout note. The stock grant agreement was subsequently terminated pursuant to the Remediation Agreement. See “Remediation Proposal” below for more information.

 

(7)Mr. McGrath resigned as our Chief Financial Officer on Mary 17, 2017. Under Mr. McGrath’s employment agreement, he was entitled to an annual base salary of $395,000, an annual bonus in an amount not less than $316,000, as well other equity compensation as determined by our Compensation Committee. In connection with Mr. McGrath’s resignation, we and Mr. McGrath agreed to convert all compensation due under his employment agreement into a secured convertible payout note to be issued following stockholder approval. On October 12, 2017, we issued the payout note in the principal amount of $977,666 to Mr. McGrath. The payout note was due on October 12, 2018, carried a ten percent (10%) interest rate, payable monthly in arrears commencing on December 1, 2017, and was secured by a security interest in all of our assets. On December 22, 2017, we entered into a stock grant agreement with Mr. McGrath and certain other note holders to (i) cause the early conversion of the payout note into 977,960 shares of our common stock, (ii) effectuate the release of all security interests associated with the payout note, (iii) provide for the issuance of 322,727 additional shares of common stock as consideration for the various agreements of Mr. McGrath contained in the stock grant agreement, (iv) provide for twelve (12) monthly payments of $6,653.56 on the first of each month commencing on January 1, 2018, which amounts are equal to the interest payments that would have been made absent the conversion of the payout note, (v) obtain the agreement of the Mr. McGrath to provide certain support services to the Company, and (vi) obtain the conditional resignation of Mr. McGrath from our Board. Accordingly, all of our obligations under the payout note were satisfied upon entering into the stock grant agreement and the simultaneous conversion of the payout note. The stock grant agreement was subsequently terminated pursuant to the Remediation Agreement. See “Remediation Proposal” below for more information.

 

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Outstanding Equity Awards Value at Fiscal Year End Table

 

The following table includes certain information with respect to the value of all unexercised options and unvested shares of restricted stock previously awarded to the executive officers named above at the fiscal year ended December 31, 2017.

 

  Option Awards(1) Stock Awards(2)
Name Number of
Securities
Underlying Unexercised
Options (#) Exercisable
Number of
Securities
Underlying Unexercised
Options (#) Un-
exercisable
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying Unexercised
Unearned
Options (#)
Option Exercise Price ($) Option
Expiration
Date
Number of
shares or
units of stock
that have not
vested

(#)
Market
value of
shares of
units of
stock that
have not
vested

($)
Equity
incentive
plan
awards:
Number of
unearned
shares,
units or
other rights
that have
not vested

(#)
Equity
incentive
plan awards:
Market or
payout value
of unearned
shares, units
or other
rights that
have not
vested

($)
Suneet Singal 0 0 0 N/A N/A 666,667 576,667 0 N/A
Stephen Johnson 0 0 0 N/A N/A 0 N/A 0 N/A
Dolev Rafaeli 28,000 0 0 100.00 3/18/2022 0 N/A 0 N/A
9,500 0 0 100.00 2/28/2023 0 N/A 0 N/A
Dennis M. McGrath 1,750 0 0 31.20 6/15/19 0 N/A 0 N/A
2,120 0 0 100.00 12/13/21 0 N/A 0 N/A
10,020 0 0 78.00 12/13/21 0 N/A 0 N/A
18,000 0 0 100.00 3/18/22 0 N/A 0 N/A
7,0000 0 0 100.00 2/28/23 0 N/A 0 N/A

 

(1)All options grants were under the Amended and Restated 2005 Equity Compensation Plan.

 

(2)The amount shown represents the grant of restricted stock. This amount is equal to the aggregate grant-date fair value with respect to the award made, computed in accordance with FASB ASC Topic 718 (formerly SFAS 123R).

 

Director Compensation

 

Directors who are also our executive officers receive no separate compensation for serving as directors or as members of committees of our Board. Each other director receives an annual cash retainer of $40,000, payable quarterly and the chairman of each committee receives an additional annual fee of $10,000 for audit, $5,000 for each of compensation and nominations. The table below sets forth our non-executive officer directors’ compensation for the year ended December 31, 2017.  

 

 

Name

Fees earned
or paid in
cash ($)

All other
compensation

($)

Total ($)

Robert Froehlich(1) 28,125 0 28,125
Richard J. Leider(1) 28,125 0 28,125
Darrell C. Menthe(1) 25,000 0 25,000
Michael R. Stewart(1) 31,250 0 31,250
Lewis Pell(2) 17,100 0 17,100
Yoav Ben-Dror(2)(3) 15,200 960,134 975,334
Stephen P. Connelly(2) 17,100 0 17,100
Dennis McGrath(4) 25,000 1,003,983 1,028,983
Dolev Rafaeli(4) 25,000 3,347,065 3,372,065

 

(1)New Directors compensated for the period of May 17, 2017 through December 31, 2017.

 

(2)Lewis C. Pell, Yoav Ben-Dror and Stephen P. Connelly resigned from the Board effective May 17, 2017.

 

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(3)We and Dr. Ben-Dror agreed to convert all compensation due under his previous agreements into a secured convertible payout note to be issued following stockholder approval. On October 12, 2017, we issued the payout note in the principal amount of $1,515,000 to Dr. Ben-Dror. The payout note was due on October 12, 2018, carried a ten percent (10%) interest rate, payable monthly in arrears commencing on December 1, 2017, and was secured by a security interest in all of our assets. On December 22, 2017, we entered into a stock grant agreement with Dr. Ben-Dror and certain other note holders to (i) cause the early conversion of the payout note into 1,515,455 shares of our common stock, (ii) effectuate the release of all security interests associated with the payout note, (iii) provide for the issuance of 500,100 additional shares of common stock as consideration for the various agreements of Dr. Ben-Dror contained in the stock grant Agreement, (iv) provide for twelve (12) monthly payments of $10,310.42 on the first of each month commencing on January 1, 2018, which amounts are equal to the interest payments that would have been made absent the conversion of the payout note, and (v) obtain the agreement of the Dr. Ben-Dror to provide certain support services to the Company. Accordingly, all of our obligations under the payout note were satisfied upon entering into the stock grant agreement and the simultaneous conversion of the payout note. The stock grant agreement was subsequently terminated pursuant to the Remediation Agreement. See “Remediation Proposal” below for more information.

 

(4)See Summary Compensation Table – Fiscal Years Ended December 31, 2017 and 2016.

 

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TRANSACTIONS WITH RELATED PERSONS

 

None of our directors, director nominees, executive officers, 5% stockholders, or immediate family member of such persons has been involved in any transactions with us which are required to be disclosed pursuant to Item 404 of Regulation S-K.

 

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires our directors and executive officers and beneficial holders of more than 10% of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership of our equity securities. We believe, based solely on a review of the copies of such reports furnished to us and representations of these persons that all reports needed to be filed have been filed for the year ended December 31, 2017.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following management’s discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this proxy statement.

 

Overview

 

The Company, founded in 1980, is transitioning from its former business as a skin health company to a company focused on real estate development and asset management, concentrating primarily on investments in and the management and development of income producing real estate assets. Our objective is to generate current income and long-term net asset value growth using institutional best practices in evaluating our investments.

 

Until the recent sale of our consumer products division, we were a global skin health company providing integrated disease management and aesthetic solutions to dermatologists, professional aestheticians and consumers. Starting in 2014, we began to sell off certain business units and product lines and on January 23, 2017, we sold the last remaining major product line. Following this transaction, we had only minimal operations and assets remaining, of immaterial value to our company. We are in the process of liquidating the remaining legacy inventory and assets of this business line, after which time we will no longer operate within the skin health business.

 

Following the Contribution Transaction described below, our focus is to build the Company into a leading real estate, asset management and development company concentrating primarily on investments in high yield income producing assets and other opportunistic commercial properties via direct property ownership and asset management. Our objective is to generate long-term net asset value growth while adhering to institutional best practices and a deep research process for all investments.

 

For income producing properties, we intend to acquire assets that provide recurring income with the potential for income growth over the long-term. We believe there can be an attractive risk/reward profile to such properties based on the location and the underlying creditworthiness of the tenants. We intend to use such income generation to fund additional acquisitions and development opportunities and for general corporate purposes. In addition, we intend to invest in land assets that can be developed into income generating properties or properties for sale. We believe that our size and scale provide an opportunity to take advantage of smaller-tier assets that most traditional investors do not focus on due to size limitations, thus creating unique investment opportunities. In particular, we intend to target assets in secondary and tertiary markets that require minimal capital expenditures but generate initial unlevered cash flow yields that are higher than those in primary markets.

 

A second component of our investment strategy will revolve around sourcing asset management opportunities for which we would operate as an asset manager of real estate properties. We are not structured as a Real Estate Investment Trust, thus we have the ability to retain earnings and to operate in real estate asset management, development and peripheral real estate activities, items that may be limited by Real Estate Investment Trust requirements. We will look to utilize our existing infrastructure to provide economies of scale to owners of real estate assets as we grow our portfolio over time.

 

Contribution Transaction

 

On March 31, 2017, we entered into an Interest Contribution Agreement with First Capital Real Estate Operating Partnership, L.P. (the “Contributor”), First Capital Real Estate Trust Incorporated (the “Contributor Parent”), and FC Global Realty Operating Partnership, LLC, our wholly-owned subsidiary (the “Acquiror”). The parties entered into amendments to the Interest Contribution Agreement on August 3, 2017, October 11, 2017 and December 22, 2017. Pursuant to the Interest Contribution Agreement, as amended (which we collectively refer to as the “Contribution Agreement”), the Contributor contributed certain real estate assets to the Acquiror. In exchange, the Contributor received shares of our common stock and newly designated Series A Convertible Preferred Stock as described below. This transaction, which we refer to as the Contribution Transaction, closed on May 17, 2017.

 

On the closing date, the Contributor transferred assets totaling $10 million to the Acquiror, consisting of the following:

 

·three vacant land sites intended for development as gas stations located in northern California,

 

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·a 75% interest in a limited liability company that owns a vacant land site intended for development as a gas station, located in northern California; and

 

·a 100% interest in a limited liability company which owns a 17.9133% interest in a limited liability company called Avalon Jubilee LLC that owns property located in Los Lunas, New Mexico being developed as a single family residential development.

 

In exchange for these assets, we issued to the Contributor 879,234 shares of our common stock, which represented approximately 19.9% of our issued and outstanding common stock immediately prior to the closing date, at a per share value of $2.5183, or $2,214,175 in the aggregate. We issued the remaining $7,785,825 of the approximately $10 million agreed upon consideration to the Contributor in the form of 123,668 shares of our newly designated non-voting Series A Convertible Preferred Stock. Each share of the Series A Convertible Preferred Stock is convertible into 25 shares of our common stock, subject to the satisfaction of certain conditions, including stockholder approval of such conversion, which was obtained on October 12, 2017.

 

 The Contribution Agreement contemplated that additional contributions would be made prior to December 31, 2017; however, the Contributor failed to satisfy the conditions precedent to those additional contributions before the December 31, 2017 deadline such that only the closing described above was completed.

 

We elected to early adopt ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. Accordingly, the determination of whether the transaction represents a business combination was evaluated by applying ASU 2017-01 guidance. We have determined that the group of assets assumed do not include (and also, none of them on a stand-alone basis) include, an input and a substantive process that together significantly contribute to the ability to create output and thus it was determined that the contribution represents an acquisition of assets rather than a business combination. Accordingly, the total sum of the fair value of consideration given (i.e. the fair value of the equity interests issued) together with the transaction costs, was allocated to the individual assets acquired and liabilities assumed based on their relative fair values at the date of acquisition. Such allocation did not give rise to goodwill.

 

Our Prior Business Operations

 

Until the recent sale of the last significant business unit (its consumer products division which was sold to ICTV Brands, Inc. on January 23, 2017), the Company was a Global Skin Health company providing integrated disease management and aesthetic solutions to dermatologists, professional aestheticians and consumers. The Company provided proprietary products and services that addressed skin diseases and conditions including psoriasis, acne, actinic keratosis (a precursor to certain types of skin cancer), photo damage and unwanted hair.

 

Before the Company commenced its current real estate business, it organized the business into three operating segments based upon the management structure, products and services offered, markets served and types of customers, as follows: The Consumer segment (sold to ICTV Brands, Inc. on January 23, 2017) derived its revenues from the design, development, manufacturing and selling of long-term hair reduction and acne consumer products. The Physician Recurring segment derived its revenues from the XTRAC (sold to MELA Sciences on June 22, 2015) procedures performed by dermatologists, the sales of skincare products (sold to Pharma Cosmetics on September 15, 2016), the sales of surgical disposables and accessories to hospitals and surgery centers (sold to Dalian JiKang Medical Systems September 1, 2015) and on the repair, maintenance and replacement parts on various products. The Professional segment generated revenues from the sale of equipment, such as lasers, medical and esthetic light and heat based products and LED products. 

 

The proprietary LHE® brand technology combines the benefits of direct heat and a full-spectrum light source for a variety of clinical applications, including psoriasis care, acne treatment, skin tightening, skin rejuvenation, wrinkle reduction, collagen renewal, vascular and pigmented lesion treatments and hair removal. This technology was originally used primarily in our professional products, including capital equipment sold to physicians and skin care specialists worldwide. The technology was then adapted to our hand-held consumer line of products like no!no! Skin, a medical device for acne. Except for the liquidation of remaining inventory, the carrying amount of which is insignificant as of June 30, 2018, this business segment effectively ceased operations with the sale to NEOVA on September 23, 2016.

 

21 

 

 

Going Concern

 

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

 

As of June 30, 2018, we had an accumulated deficit of approximately $137 million and stockholders’ deficit of approximately $2.9 million. Cash and cash equivalents as of June 30, 2018 were approximately $892. To date, and subsequent to the recent sale of our last significant business unit, we have dedicated most of our financial resources to general and administrative expenses.

 

On March 31, 2017, we entered into the Contribution Agreement, under which certain real estate investment properties were contributed to the Company in exchange for the issuance of our capital stock. Closing of the Contribution Agreement occurred on May 17, 2017. However, the assets assumed in such contribution do not represent a business and are not producing cash flows and/or revenues at present.

 

On December 22, 2017, we entered into a securities purchase agreement with Opportunity Fund I-SS, LLC, a Delaware limited liability company (“OFI”), under which OFI could invest up to $15 million in the Company in a series of closings, in exchange for which OFI would receive shares of our Series B Preferred Stock at a purchase price of $1.00 per share. On December 22, 2017, we completed the first closing, pursuant to which OFI provided $1.5 million to us in exchange for 1,500,000 shares of Series B Preferred Stock. On January 24, 2018, we completed a second closing, pursuant to which OFI provided approximately $2.2 million to us in exchange for 2,225,000 shares of Series B Preferred Stock. On August 24, 2018, 2018, we completed a third closing, pursuant to which OFI provided $100,000 to us in exchange for 100,000 shares of Series B Preferred Stock. Under the purchase agreement, OFI could, but was not obligated to, make additional investments in one or more subsequent closings until an aggregate amount of $15 million was invested or the purchase agreement was terminated in accordance with its terms. OFI had no obligation to continue to invest in the Company, and there are restrictions placed by OFI on the use of these funds. The securities purchase agreement was subsequently terminated pursuant to the Remediation Agreement.  

 

These conditions as of June 30, 2018 raised substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on recoverability and classification of liabilities that may result from the outcome of this uncertainty.

 

Results of Operations

 

Comparison of Six Months Ended June 30, 2018 and 2017

 

The following table sets forth key components of our results of operations during the six months ended June 30, 2018 and 2017.

 

(All dollar amounts in thousands)

 

    Six Months Ended June 30,  
    2018     2017  
Rental income   $ 11     $  
Depreciation expense     (1 )      
Operating expenses:                
General and administrative     2,144       1,848  
Operating loss   $ (2,134 )   $ (1,364 )
Revaluation of option to purchase redeemable convertible preferred stock     2,295        
Revaluation of asset contribution related financial instruments           2,622  
Interest and other financing expense, net     (72 )     (46 )
Income tax provision     (209 )      
Income (loss) from continuing operations     (120 )     728  
Income (loss) from discontinued operations     219       (1,438 )
Net income (loss) including portion attributable to non-controlling interest     99       (710 )
Loss attributable to non-controlling interest     2        
Net Income (loss)     101       (710 )
Dividend on redeemable convertible preferred stock     (141 )      
Accretion of redeemable convertible preferred stock to redemption value     (1,968 )      
Net loss attributable to common stockholders   $ (2,008 )   $ (710 )

 

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General and administrative expenses. For the six months ended June 30, 2018, general and administrative expenses were approximately $2.14 million and are mainly comprised of payroll and related expenses, professional service, rent and other operating expenses. For the six months ended June 30, 2017, general and administrative expenses were approximately $1.85 million.

 

Revaluation of option to purchase redeemable convertible preferred stock. For the six months ended June 30, 2018, the revaluation of the option to purchase redeemable convertible preferred stock decreased by approximately $2.30 million due to the decrease in the conversion rate of the underlying redeemable convertible preferred stock, which caused the fair value of the instrument to decrease. The carrying amount of this instrument included in the accompanying condensed consolidated balance sheet decreased by $677 thousand during the six months ended June 30, 2018 due to the partial exercise of the written call option.

 

Interest and other financing expense, net. Net interest and other financing expense related to our notes payable for the six months ended June 30, 2018 was approximately $72 thousand.

 

Net loss. The factors discussed above resulted in a net loss, including discontinued operations, of approximately $2 million during the six months ended June 30, 2018, as compared to net loss of approximately $710 thousand, of which approximately $1.4 million was attributable to discontinued operations during the six months ended June 30, 2017, with the Company primarily becoming a real estate asset management and development company.

 

Comparison of Years Ended December 31, 2017 and 2016

 

The following table sets forth key components of our results of operations during the years ended December 31, 2017 and 2016.

 

(All dollar amounts in thousands)

 

   Year Ended December 31, 
  

2017

(As Restated)

   2016 
Revenues  $   $ 
Cost of revenues        
Gross profit        
Operating expenses:          
General and administrative expenses   10,817     
Impairment of investment in other company   1,439      
Loss from continuing operations before interest and other financing expense, net   (12,256)    
Revaluation of asset contribution related financial instruments, net   (1,392)    
Revaluation of Option to purchase redeemable convertible B preferred stock   (3,018)    
Interest and other financing expense, net   (267)    
Loss from continuing operations   (16,933)    
Discontinued operations:          
Loss from discontinued operations, net of taxes   (2,459)   (13,264)
Net loss  $(19,392)  $(13,264)

 

General and administrative Expenses. For the year ended December 31, 2017, general and administrative expenses were approximately $10.82 million. For the year ended December 31, 2016 general and administrative expenses were included in the loss from discontinued operations, (see Note 2 Discontinued Operations, to our consolidated financial statements).

 

23 

 

 

Impairment of investment in other company. We evaluate investments in other company for impairment whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recoverable in accordance with ASC 320 “Investments - Debt and Equity Securities”. The judgments regarding declines in value are based on operating performance, market conditions and our ability and intent to hold as well as its ability to influence significant decisions of the venture. During the year ended December 31, 2017, based on managements’ most recent analyses, impairment losses have been identified related to our investment in other company amounting to $1,439 thousand (As Restated).

 

Revaluation of asset contribution. For the year ended December 31, 2017, the revaluation of asset contribution increased to approximately $1.39 million due to the re-measurement of the asset contribution that resulted in a loss due to the reduced fair value of the asset.

 

Revaluation of option to purchase redeemable convertible B preferred stock. For the year ended December 31, 2017, the revaluation of the option to purchase redeemable convertible B preferred stock increased to approximately $3.0 million due to excess of the initial value of the option liability over the proceeds received, net with the changes in the fair value of the Option at December 31, 2017.

 

Interest and other financing expense, net. Net interest and other financing expense for the year ended December 31, 2017 was approximately $0.26 million. The functional currency of all U.S. members of the group, as well as Radiancy Ltd. (Israel), is the U.S. Dollar. The other foreign subsidiaries’ functional currency is each subsidiaries’ respective local currency. 

 

Net Loss. The factors discussed above resulted in a net loss, including discontinued operations, of approximately $19.4 million (As Restated) during the year ended December 31, 2017, as compared to net loss of approximately $13.26 million during the year ended December 31, 2016.

 

Liquidity and Capital Resources

 

As of June 30, 2018, we had an accumulated deficit of approximately $137 million and stockholders’ deficit of approximately $2.9 million. Cash and cash equivalents as of June 30, 2018 were approximately $892. To date, and subsequent to the recent sale of our last significant business unit, we have dedicated most of our financial resources to general and administrative expenses.

 

We have historically financed our activities with cash from operations, the private placement of equity and debt securities, borrowings under lines of credit and, in the most recent periods with sale of certain assets and business units.

 

We will be required to obtain additional liquidity resources in order to support our operations. At this time, there is no guarantee that we will be able to obtain an adequate level of financial resources required for the short and long-term support of our operations or that we will be able to obtain additional financing as needed, or meet the conditions of such financing, or that the costs of such financing may not be prohibitive.

 

Summary of Cash Flows

 

The following table provides detailed information about our net cash flow for the periods indicated:

 

Cash Flow

(In thousands)

 

   Six Months Ended June 30,   Year Ended December 31, 
   2018   2017   2017   2016 
Net cash provided by (used in) operating activities  $(1,679)  $(5,359)  $(9,298)  $358 
Net cash provided by (used in) investing activities   (326)   4,824    6,797    2,148 
Net cash provided by (used in) financing activities   1,932        906    (684)
Effect of exchange rate changes on cash   17    279    208    (2,789)
Net decrease in cash and cash equivalents   (56)   (256)   (1,387)   (967)
Cash and cash equivalents at beginning of period   948    2,335    2,335    3,302 
Cash and cash equivalent at end of period  $892   $2,079   $948   $2,335 

 

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Net cash used in operating activities was approximately $1.7 million for the six months ended June 30, 2018, compared to approximately $5.4 million net cash used in operating activities for the six months ended June 30, 2017. The primary reason for the change is the continual wind-down of the former business operations ahead of the acquisition of income-producing real estate properties.

 

Net cash and used in operating activities was approximately $9.3 million for the year ended December 31, 2017 compared to approximately $0.36 million net cash provided by operating activities for the year ended December 31, 2016. The primary reason for the change was loss on asset sale to ICTV Brands, Inc. and the significant reductions in accounts payable and accrued liabilities settled during the year ended December 31, 2017.

 

Net cash used in investing activities was $326 thousand for the six months ended June 30, 2018, compared to approximately $4.8 million provided by for the six months ended June 30, 2017. 

 

Net cash provided by investing activities was approximately $6.8 million for the year ended December 31, 2017 compared to approximately $2.15 million for the year ended December 31, 2015. The primary reason for the change was the cash received from the sale of the consumer division to ICTV Brands, Inc. for the year ended December 31, 2017.

 

Net cash provided by financing activities was approximately $1.9 million for the six months ended June 30, 2018, compared to $0 net cash provided by financing activities for the six months ended June 30, 2017. 

 

Net cash provided by (used in) financing activities was approximately $0.9 million for the year ended December 31, 2017 compared to approximately $0.68 million net cash used in financing activities for the year ended December 31, 2016. The increase was due to the funding received from OFI in December 2017.

 

Private Placement

 

On December 22, 2017, we entered into a securities purchase agreement with OFI, under which OFI could invest up to $15 million in the Company in a series of closings, in exchange for which OFI would receive shares of our Series B Preferred Stock at a purchase price of $1.00 per share. See Note 5 to our condensed consolidated financial statements for the terms of the Series B Preferred Stock.

 

On December 22, 2017, we completed the first closing, pursuant to which OFI provided $1.5 million to us in exchange for 1,500,000 shares of Series B Preferred Stock. On January 24, 2018, we completed a second closing, pursuant to which OFI provided $2.2 million to us in exchange for 2,225,000 shares of Series B Preferred Stock. OFI could, but was not obligated to, make additional investments in one or more subsequent closings until an aggregate amount of $15 million was invested or the securities purchase agreement was terminated in accordance with its terms.

 

The securities purchase agreement was terminated pursuant to the Remediation Agreement. See “Remediation Proposal” for more information.

 

Payout Notes and Stock Grant Agreement

 

Under the Contribution Agreement, amounts due to Dr. Dolev Rafaeli and Dennis M. McGrath under their employment agreements, as well as amounts due to Dr. Yoav Ben-Dror for his services as a board member and officer of our foreign subsidiaries, were converted to convertible secured notes in the principal amounts of $3,133,934, $977,666 and $1,515,000, respectively, following approval from our stockholders on October 12, 2017. These notes were due on October 12, 2018, carried a ten percent (10%) interest rate, payable monthly in arrears commencing on December 1, 2017, and were secured by a security interest in all of our assets pursuant to a security agreement that we entered into with the holders on October 12, 2017. These notes were convertible into shares of our common stock and we agreed to register the shares underlying the these notes within thirty (30) days of issuance with best efforts to cause the registration statement covering such shares to become effective within one-hundred twenty (120) days of issuance.  

 

On December 22, 2017, we entered into a stock grant agreement with Dr. Dolev Rafaeli, Dennis M. McGrath and Dr. Yoav Ben-Dror to (i) cause the early conversion of the notes into an aggregate of 5,628,291 shares of our common stock, (ii) effectuate the release of all security interests associated with the notes, (iii) provide for the issuance of an aggregate of 1,857,336 additional shares of common stock, (iv) provide for certain cash payments in amounts equal to the interest payments that would have been made to the holders absent the conversion of the notes, (v) obtain the agreement of the note holders to provide certain support services to the Company, and (vi) obtain the conditional resignation of certain of the note holders from our Board. Accordingly, the notes were paid in full.

 

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 Pursuant to the stock grant agreement, we agreed to make twelve (12) monthly payments on the first of each month commencing on January 1, 2018 in the amounts of $21,328.16, $6,653.56 and $10,310.42 to Messrs. Rafaeli, McGrath, and Ben-Dror, respectively. These cash payments are consideration for certain consulting services provided by the note holders specified in the stock grant agreement.

 

The stock grant agreement was terminated pursuant to the Remediation Agreement. See “Remediation Proposal” for more information.

 

Note Payable

 

In connection with the initial closing under the Contribution Agreement on May 17, 2017, we assumed an installment note, dated April 7, 2015, made by the Contributor in favor of George Zambelli in the original principal amount of $470 thousand and a Long Form Deed of Trust and Assignment of Rents, dated April 7, 2015, between First Capital Real Estate Investments, LLC, as trustor, Fidelity National Title Company, as trustee, and George Zambelli, as beneficiary, which secures the note. The note carries a per annum interest rate of 8% which is payable on a monthly basis from the initial closing date. As of June 30, 2018, the note amounted to $457 thousand ($452 thousand out of which is classified as non-current note payable) and has a maturity date of April 10, 2020.

 

Off-Balance Sheet Arrangements

 

At June 30, 2018, we had no off-balance sheet arrangements.

 

Impact of Inflation

 

We have not operated in a highly inflationary period, and do not believe that inflation has had a material effect on revenues or expenses. 

 

Critical Accounting Policies

 

The discussion and analysis of our financial condition and results of operations in this proxy statement are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures at the date of the financial statements. On an on-going basis, we evaluate our estimates. We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates. Management believes that the following critical accounting policies affect our more significant judgments and estimates in the preparation of our consolidated financial statements. These critical accounting policies and the significant estimates made in accordance with these policies have been discussed with our Audit Committee.

 

Acquisition of Investment Properties. The Company allocates the purchase price of real estate to identifiable tangible assets such as land, building, land improvements and tenant improvements acquired based on their fair value. In estimating the fair value of each component management considers appraisals, replacement cost, its own analysis of recently acquired and existing comparable properties, market rental data and other related information. The Company’s investment properties as of December 31, 2017 were acquired on May 17, 2017, and included four vacant land sites set for development into gas stations. The Company determined that the fair value of these investment properties on the acquisition date was $2,055 (As Restated).

 

Impairment of Investment Properties. Our long-lived assets include mainly these investment properties. The Company periodically evaluates its long-lived assets, including investment properties, for indicators of impairment in accordance with ASC 360, “Property, Plant, and Equipment”, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The judgments regarding the existence of indicators of impairment are based on the operating performance, market conditions, as well as the Company’s ability to hold and its intent with regard to each property. The judgments regarding whether the carrying amounts of these assets may not be recoverable are based on estimates of future undiscounted cash flows from properties which include estimates of future operating performance and market conditions.

 

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Impairment of Investment in Other Company. The Company evaluates investments in other company for impairment whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recoverable in accordance with ASC 320 “Investments - Debt and Equity Securities”. The judgments regarding declines in value are based on operating performance, market conditions and the Company’s ability and intent to hold as well as its ability to influence significant decisions of the venture.

 

Option to Purchase Redeemable Convertible B Preferred Stock. The fair value of the option to purchase redeemable convertible B preferred stock that was issued to an investor in connection with a securities purchase agreement in December 2017 (the “Initial Date”) was estimated using the Black-Scholes-Merton option-pricing model. We accounted for the aforesaid option according to the provisions of ASC 480, “Distinguishing Liabilities from Equity” since the option is considered freestanding, as the Company believes it is legally detachable and separately exercisable. In addition, the option is exercisable for Convertible B Preferred Stock which are subject to possible redemption at the option of the holder. We classified the option as non-current liability, remeasured at fair value each reporting period until the option will be exercised or expired, with changes in the fair values being recognized in our statement of comprehensive loss as financial income or expense. The fair value of the option was estimated at the Initial Date and December 31, 2017 by using hybrid method that includes scenario of conversion and scenario liquidation and the Black-Scholes option pricing model. In the first scenario, the Series B Preferred Stock price applied in the model was assumed based on the as-converted price on the date of estimation. Expected volatility was estimated by using a group of peers in the real estate development, homebuilding and income-producing properties sectors, and applying a 75% percentile ranking based on the total capitalization of the Company. In the second scenario, the option was estimated based on the value of the option in a proposed liquidation scenario. A probability weighting was applied to determine the expected value of the option.

 

Revenue Recognition. We recognized revenues from the product sales when the following four criteria were met: (i) the product had been shipped and we had no significant remaining obligations; (ii) persuasive evidence of an arrangement existed; (iii) the price to the buyer was fixed or determinable; and (iv) collection was probable. Revenues from product sales were recorded net of provisions for estimated chargebacks, rebates, expected returns and cash discounts. We shipped most of our products FOB shipping point, although from time to time certain customers, for example governmental customers, will insist upon FOB destination. Among the factors we took into account when determining the proper time at which to recognize revenue was when title to the goods transferred and when the risk of loss transferred. Shipments to distributors or physicians that did not fully satisfy the collection criterion were recognized when invoiced amounts were fully paid or fully assured. With respect to sales arrangements under which the buyer had a right to return the related product, revenue was recognized only if all the following were met: the price was fixed or determinable at the date of sale; the buyer had paid, or was obligated to pay and the obligation was not contingent on resale of the product; the buyer’s obligation would not be changed in the event of theft or physical destruction or damage of the product; the buyer had economic substance; we did not have significant obligations for future performance to directly bring about resale of the product by the buyer; and the amount of future returns could be reasonably estimated.  We provided a provision for product returns based on the experience with historical sales returns, in accordance with ASC Topic 605-15 with respect to sales of product when right of return exists.

 

Inventories. We carried inventories at the lower of cost or market. Cost was determined to be purchased cost for raw materials and the production cost (materials, labor and indirect manufacturing cost) for work-in-process and finished goods. For our consumer and LHE products, cost was determined on the weighted-average method. For the Physician market products, cost was determined on the first-in, first-out method. Reserves for slow-moving, excess and obsolete inventories reduce the historical carrying value of our inventories and were provided based on historical experience and product demand. Management evaluated the adequacy of these reserves periodically based on forecasted sales and market trends. There is no value to the remaining inventory as of December 31, 2017. The inventories as of December 31, 2016 were classified as assets held for sale.

 

Allowance for Doubtful Accounts. Accounts receivable were reduced by an allowance for amounts that may become uncollectible in the future. From time to time, our customers disputed the amounts due to us, and, in other cases, our customers experienced financial difficulties and could not pay on a timely basis. In certain instances, these factors ultimately result in uncollectible accounts. The determination of the appropriate reserve needed for uncollectible accounts involves significant judgment. Such factors include changes in the financial condition of our customers as a result of industry, economic or customer-specific factors. A change in the factors used to evaluate collectability could result in a significant change in the allowance needed.

 

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Goodwill and Intangibles Assets. As part of the purchase price allocation for the 2011 reverse acquisition, we recorded goodwill in the amount of $24,005 and definite-lived intangibles in the amount of $12,000. Goodwill reflected the value or premium of the acquisition price in excess of the fair values assigned to specific tangible and intangible assets. Goodwill had an indefinite useful life and therefore was not amortized as an expense but was reviewed annually for impairment of its fair value to the Company. During the third quarter of 2016, we recorded goodwill and other intangible asset impairment charges of approximately $3.52 million, as we determined that a portion of the value of our goodwill and other intangible assets was impaired in connection with the then pending transaction with ICTV Brands, Inc. We recorded an impairment of the entire remaining balance of Consumer segment goodwill in the amount of approximately $2.26 million and recorded the impairment of the Consumer segment of the intangibles for its licensed technology in the amount of approximately $1.26 million (see Note 2 Discontinued Operations, to our consolidated financial statements). We derecognized an amount of approximately $1.04 million of goodwill related to the Physician Recurring segment in connection with the asset sale of the Neova product line.

 

Stock-based compensation. We account for stock based compensation to employees in accordance with the “Share-Based Payment” accounting standard. The standard requires estimating the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in our consolidated statement of operations. The fair value of employee stock options is estimated using a Black-Scholes valuation model. The fair value of restricted shares is based on the quoted market price of our common stock on the date of issuance. Compensation costs for share-based payment awards are recorded using the graded vesting attribution method over the vesting period, net of estimated forfeitures.

 

Income taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process requires us to estimate our actual current tax exposure and make an assessment of temporary differences resulting from differing treatment of items, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is more likely than not, we establish a valuation allowance. At year end December 31, 2016, material amounts of valuation allowances were recorded representing: 100% of the net deferred tax assets in the US and in the UK. Our assessment for the year ended December 31, 2017, is that a 100% valuation allowance is still required. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statement of operations. Significant management judgment is required in determining our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In the event that we generate taxable income in the jurisdictions in which we operate and in which we have net operating loss carry-forwards that we can utilize to offset all or part of this taxable income, we may be required to adjust our valuation allowance.

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; eliminating the corporate alternative minimum tax and changing how existing alternative minimum tax credits can be realized; creating a new limitation on deductible interest expense; changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; limitations on the deductibility of certain executive compensation.

 

In December 2017, the SEC issued Staff Accounting Bulletin No. 118, or SAB 118, which addresses situations where the accounting is incomplete for the income tax effects of the Act. SAB 118 directs taxpayers to consider the impact of the Act as “provisional” when a company does not have the necessary information available, prepared or analyzed (including computations) to finalize the accounting for the change in tax law. Companies are provided a measurement period of up to one year to obtain, prepare, and analyze information necessary to finalize the accounting for provisional amounts or amounts that cannot be estimated as of December 31, 2017.

 

With regards to the Tax Cuts and Jobs Act impact on the tax provision as it relates to the Company for period year-ending December 31, 2017, we have recognized the provisional impact of tax reform related to the revaluation of deferred tax assets and liabilities from 35% to 21% of $17.2 million tax expense, which is offset by a reduction in the valuation allowance.

 

In the years ended December 31, 2017 and 2016, we reported financial results for both operations and discontinued operations. ASC 740-20-45 sets down the general rule for allocating income tax expense or benefit between operations and discontinued operations. The general rule requires the computation of tax expense or benefit by entity taking into consideration all items of income, expense, and tax credits. Next, a computation is made taking into consideration only those items related to continuing operations. Any difference is allocated to items other than continuing operations e.g. discontinued operations. Under these general rules, no tax expense or benefit would be allocated to discontinued operations.

 

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 An exception to these rules apply under ASC 740-20-45-7 where an entity has 1) a loss from continuing operations and income related to other items such as discontinued operations and 2) the entity would not otherwise recognize a benefit for the loss from continuing operations under the approach described in ASC 740-20-45. This fact pattern applies for the years ended December 31, 2016 for entities in the US and the UK. Application of this rule exception results in the allocation of tax expense to discontinued operations with an offsetting amount of tax benefit reported by the US and UK companies.

 

 We follow ASC Topic 740-10, “Income Taxes” which clarifies the accounting for uncertainty in tax positions. ASC Topic 740-10 requires that we recognize in our financial statements the impact of a tax position, if that position will more likely than not be sustained upon examination, based on the technical merits of the position, without regard the likelihood that the tax position may be challenged. If an uncertain tax position meets the “more-likely-than-not” threshold, the largest amount of tax benefit that is greater than 50% likely to be recognized upon ultimate settlement with the taxing authority is recorded.

 

Recent Accounting Pronouncements

 

In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). In April 2016, FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. ASU 2016-10 covers two specific topics: performance obligations and licensing. This amendment includes guidance on immaterial promised goods or services, shipping or handling activities, separately identifiable performance obligations, functional or symbolic intellectual property licenses, sales-based and usage-based royalties, license restrictions (time, use, geographical) and licensing renewals. In addition, in May 2016, FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which is intended to not change the core principle of the guidance in Topic 606, but rather affect only the narrow aspects of Topic 606 by reducing the potential for diversity in practice at initial application and by reducing the cost and complexity of applying Topic 606 both at transition and on an ongoing basis. The Company has adopted this standard effective January 1, 2018. This new standard did not have a material impact on the Company’s consolidated financial statements.

 

In February 2016, FASB issued ASU 2016-02, “Leases”. This guidance will require that lease arrangements longer than 12 months result in an entity recognizing an asset and liability equal to the present value of the lease payments in the statement of financial position. This guidance is effective for annual periods beginning after December 15, 2018, and interim periods therein. This standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its financial statements and related disclosures.

 

In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): “Restricted Cash” (ASU 2016-18), which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this guidance effective January 1, 2018. This new guidance did not have a material impact on the Company’s consolidated financial statements.

 

In May 2017, FASB issued ASU 2017-09 “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting”, which includes guidance on changes to terms and conditions of share-based payment awards. The amendment provides guidance about which changes to terms or conditions of a share-based payment award require an entity to apply modification accounting. The guidance became effective for the fiscal year beginning on January 1, 2018, including interim periods within that year. The Company adopted this guidance effective January 1, 2018. This new guidance did not have a material impact on the Company’s consolidated financial statements.  

 

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In June 2018, FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting”, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The changes take effect for public companies for fiscal years starting after Dec. 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company is currently evaluating the impact of adopting this standard on its financial statements and related disclosures, but does not expect it to have a material impact.

 

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 PROPOSAL NO. 1 – REMEDIATION PROPOSAL

 

Overview

 

Background Information

 

On October 12, 2017, we issued to Dr. Dolev Rafaeli, Dennis M. McGrath and Yoav Ben-Dror (the “Note Holders”) Secured Convertible Promissory Notes in the principal amounts of $3,133,934, $977,666 and $1,515,000, respectively (the “Notes”). Pursuant to the terms of the Notes, the principal was to convert to shares of our common stock at maturity at the lower of (i) $2.5183 or (ii) the volume-weighted average price with respect to on-exchange transactions in the Company’s common stock executed on The Nasdaq Stock Market (“Nasdaq”) (or such other market on which our stock may then trade) during the thirty (30) trading days prior to the maturity date, as reported by Bloomberg L.P.; provided, however, that there was a conversion floor of $1.75 per share (the “Floor Price”).

 

On December 22, 2017, we and the Note Holders entered into a stock grant agreement (the “Stock Grant Agreement”) to, among other things, cause the early conversion of the Notes into an aggregate of 5,628,291 shares of our common stock (the “Payout Shares”), resulting in a conversion price of $0.9997, which is less than the Floor Price. In addition, pursuant to the Stock Grant Agreement, we agreed to (i) issue an additional 1,857,336 shares of common stock to the Note Holders as consideration for the various agreements of the Note Holders contained in the Stock Grant Agreement, including the Note Holders’ agreement to give up their first priority security interest and convert the Notes to equity and (ii) provide the Note Holders with certain cash payments in consideration for services to be provided by the Note Holders, in an amount equal to the amount of interest foregone by the Note Holders as a result of the conversion of the Notes.

 

On December 22, 2017, we and OFI entered into a securities purchase agreement (the “Purchase Agreement”), pursuant to which OFI could invest up to $11,000,000 in the Company in a series of closings, in exchange for which OFI will receive shares of our Series B Preferred Stock at a purchase price of $1.00 per share. To date, the Company and OFI completed the three closing under the Purchase Agreement, pursuant to which OFI provided, in the aggregate, $3,825,000 to us in exchange for an aggregate of 3,825,000 shares of Series B Preferred Stock.

 

On April 20, 2018, we and OFI entered into a cancellation and exchange agreement (the “Exchange Agreement”), pursuant to which OFI agreed to provide an additional $2,000,000 to us in exchange for 2,000,000 shares of Series B Preferred Stock, subject to certain conditions set forth in the Exchange Agreement, including, among other things, the cancellation of 95,770 shares of our Series A Preferred Stock held by OFI in exchange for 5,382,274 shares of our common stock. Under the Exchange Agreement, closing of this additional investment was to occur following stockholder approval, which was not obtained.

 

Pursuant to the terms of the Certificate of Designation for the Series B Preferred Stock, the Series B Preferred Stock, which votes on an as-converted basis, was issued to OFI with a conversion price that constitutes a discount to the market price of the common stock at the date of issuance of the Series B Preferred Stock, resulting in the Series B Preferred Stock having a greater voting rights than the existing shares of common stock, which violates the Nasdaq’s voting rights rule. On April 20, 2018, the Company and OFI entered into a supplemental agreement (the “Supplemental Agreement”), pursuant to which (i) OFI agreed to limit the voting power of the Series B Preferred Stock to address this violation and (ii) the parties thereto corrected a violation of Nasdaq’s Listing Rules that require approval from our stockholders prior to the issuance of common stock upon conversion of the Series B Preferred Stock issued under the Purchase Agreement that are in excess of 19.99% of our issued and outstanding common stock on the date of initial issuance of the Series B Preferred Stock to OFI, which resulted from a provision in the Purchase Agreement that incorrectly stated that such percentage is to be calculated as of the applicable conversion date of the Series B Preferred Stock instead of the date of initial issuance thereof.

 

We were also notified by letter from Nasdaq on April 10, 2018 that the Company is not in compliance with Nasdaq’s Listing Rule 5550(b)(1), which requires the Company to maintain a minimum of $2.5 million in stockholders’ equity.

 

Remediation Agreement

 

In order to comply with Listing Rule 5550(b)(1) and address the concerns of the staff of Nasdaq regarding the stockholder approval violations described above, on September 24, 2018, we entered into a remediation agreement with OFI and the Note Holders (the “Remediation Agreement”). A copy of the Remediation Agreement is attached hereto as Annex B.

 

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Pursuant to the Remediation Agreement, the Stock Grant Agreement was terminated, the Payout Shares were cancelled, and we issued to the Note Holders an aggregate of 7,485,627 shares of newly-designated Series C Preferred Stock. In addition, the resignations of Dr. Rafaeli and Mr. McGrath from our Board, which were previously effective upon certain events set forth in the Stock Grant Agreement, will now become effective upon the last to occur of (i) receipt of all of the shares of common stock underlying the Series C Preferred Stock and (ii) the date that the shares of common stock underlying the Series C Preferred Stock are registered for re-sale in accordance with the Registration Rights Agreement (as defined below).

 

In addition, the Purchase Agreement (subject to the survival of certain provisions identified in the Remediation Agreement), the Supplemental Agreement and the Exchange Agreement were terminated, the Series B Preferred Stock issued to OFI was cancelled and we issued to OFI 6,217,490 shares of newly-designated Series D Preferred Stock. In addition, OFI agreed to purchase $100,000 of shares of Series D Preferred Stock for a purchase price of $0.65 per share on the last day of each month, commencing on September 30, 2018, until it has purchased an aggregate of $500,000 of shares of Series D Preferred Stock; provided that, upon closing of any material business combination involving the Company that is approved by OFI, OFI agreed to purchase an additional $1,500,000 of shares of Series D Preferred Stock at a price of $0.65 per share. Notwithstanding the foregoing, from and after the date that stockholder approval of the Remediation Agreement has been obtained, instead of purchasing shares of Series D Preferred Stock, OFI agreed to purchase shares of common stock at a price of $0.65 per share.

 

The Remediation Agreement also terminated two voting agreements, dated December 22, 2017, among OFI, the Note Holders and certain other security holders, the registration rights agreement, dated December 22, 2017, between the Company and OFI, and the registration rights agreement, dated December 22, 2017, between the Company and the Note Holders.

 

On September 24, 2018, in connection with the Remediation Agreement, we entered into a registration rights agreement (the “Registration Rights Agreement”) with OFI and the Note Holders, pursuant to which we agreed to register all shares of common stock that may be issued upon conversion of the Series C Preferred Stock and Series D Preferred Stock, as well as all other shares of our capital stock held by OFI (the “Registrable Securities”), under the Securities Act. We agreed to file a registration statement covering the resale of such Registrable Securities within 30 days of the date of the Registration Rights Agreement and cause such registration statement to be declared effective under the Securities Act as soon as possible but, in any event, no later than 120 days following the filing date if such registration statement is filed on Form S-3 or 150 days if such registration statement is filed on Form S-1. If such registration statement is not filed or declared effective by the SEC on or prior to such dates, or if after such registration statement is declared effective, without regard for the reason thereunder or efforts therefor, such registration statement ceases for any reason to be effective for more than an aggregate of 30 trading days during any 12-month period, which need not be consecutive, then in addition to any other rights the holders of Registrable Securities may have under the Registration Rights Agreement or under applicable law, we shall pay to each holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 1.0% of the product obtained by multiplying (x) $1.00 by (y) the number of shares of Registrable Securities held by the holder (the “Investment Amount”); provided that, in no event will we be liable for liquidated damages in excess of 1.0% of the Investment Amount in any single month and that the maximum aggregate liquidated damages payable to the holders under the Registration Rights Agreement shall be ten percent (10%) of the Investment Amount. Notwithstanding the foregoing, the filing and effective date deadlines above shall be tolled (i.e., extended), during such time as the Company is actively pursuing a business combination involving the Company that is approved by each of OFI and the Note Holders.

 

Series C Preferred Stock

 

The terms of the Series C Preferred Stock are governed by a certificate of designation (the “Series C Certificate of Designation”) filed by us with the Nevada Secretary of State on September 24, 2018. Pursuant to the Series C Certificate of Designation, we designated 7,485,627 shares of our preferred stock as Series C Preferred Stock. Following is a summary of the material terms of the Series C Preferred Stock:

 

·Dividends. Except for stock dividends or distributions for which adjustments are to be made pursuant to the Series C Certificate of Designation, holders of Series C Preferred Stock shall be entitled to receive, and the Company shall pay, dividends on shares of Series C Preferred Stock equal (on an as-if-converted-to-common-stock basis) to and in the same form as dividends actually paid on shares of common stock when, as and if such dividends are paid on shares of common stock. No other dividends shall be paid on shares of Series C Preferred Stock.

 

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·Liquidation. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (a “Liquidation”), holders of Series C Preferred Stock shall be entitled to receive out of the assets, whether capital or surplus, of the Company the same amount that a holder of common stock would receive if the Series C Preferred Stock were fully converted to common stock immediately prior to such Liquidation, which amount shall be paid to the holders of Series C Preferred Stock pari passu with all holders of Series D Preferred Stock and in preference to the holders of common stock.

 

·Voting Rights. Except as provided by law or by the other provisions of the Series C Certificate of Designation, the holders of Series C Preferred Stock have no voting rights.

 

·Conversion. On the date on which stockholder approval with respect to the Remediation Agreement and the transactions contemplated thereby has been obtained (the “Conversion Date”), each share of Series C Preferred Stock shall be automatically converted into such number of fully paid and non-assessable shares of common stock as is determined by dividing $1.00 by the conversion price in effect on the Conversion Date. The conversion price is initially equal to $1.00, subject to adjustment as described in the Series C Certificate of Designation.

 

·Redemption. The Series C Preferred Stock is not redeemable.

 

Series D Preferred Stock

 

The terms of the Series D Preferred Stock are governed by a certificate of designation (the “Series D Certificate of Designation”) filed by us with the Nevada Secretary of State on September 24, 2018. Pursuant to the Series D Certificate of Designation, we designated 9,294,414 shares of our preferred stock as Series D Preferred Stock. Following is a summary of the material terms of the Series D Preferred Stock:

 

·Dividends. Holders of shares of Series D Preferred Stock shall receive cumulative dividends, pro rata among such holders, prior to and in preference to any dividend on our outstanding common stock at the per annum rate of 8% of the Stated Value (as defined below). Dividends on each share of Series D Preferred Stock will accrue daily and be cumulative from and including the date of issuance thereof and shall be payable upon the occurrence of a Liquidation or a conversion. The “Stated Value” shall mean $1.00 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series D Preferred Stock. Holders shall also be entitled to receive dividends on shares of Series D Preferred Stock equal (on an as-if-converted-to-common-stock then convertible) to and in the same form as dividends actually paid on shares of our common stock when, as and if such dividends are paid on shares of the common stock.

 

·Liquidation. Upon a Liquidation, holders of Series D Preferred Stock shall be entitled to receive out of the assets, whether capital or surplus, of the Company the same amount that a holder of common stock would receive if the Series D Preferred Stock were fully converted to common stock immediately prior to such Liquidation, which amount shall be paid to the holders of Series D Preferred Stock pari passu with all holders of Series C Preferred Stock and in preference to the holders of common stock.

 

·Voting Rights. Except as provided by law or by the other provisions of the Series D Certificate of Designation, the holders of Series D Preferred Stock have no voting rights. However, as long as any shares of Series D Preferred Stock are outstanding, the holders of Series D Preferred Stock shall have the right to prohibit or veto the Company from entering into any agreement or taking any action with respect to (i) a Change in Control Transaction (as defined below) or (ii) the issuance any equity securities or equity-linked securities at a price per share below $0.6505, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the common stock. The Company must notify the holders of Series D Preferred Stock at least twenty (20) days in advance of the events described above and the holder shall exercise its veto right by notifying the Company in writing within fifteen (15) days after the receipt of such notice that it is exercising its veto right to prohibit such agreement from being entered into or action from being taken. A “Change in Control Transactionmeans the acquisition by any person of beneficial ownership of more than 50% (on a fully diluted basis) of either (i) the then outstanding shares of common stock, taking into account as outstanding for this purpose such common stock issuable upon the exercise of options or warrants, the conversion of convertible stock or debt, and the exercise of any similar right to acquire such common stock or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors.

 

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·Conversion. On the Conversion Date, each share of Series D Preferred Stock, plus accrued, but unpaid, dividends thereon (the “Aggregate Preference Amount”), shall be automatically converted into such number of fully paid and non-assessable shares of common stock as is determined by a formula (computed on the Conversion Date) (i) the numerator of which is equal to the Aggregate Preference Amount and (ii) the denominator of which is equal to the conversion price. The conversion price is initially equal to $1.00, subject to adjustment as described in the Series D Certificate of Designation.

 

·Redemption. The Series D Preferred Stock is not redeemable.

 

Reasons for Stockholder Approval

 

At the time that we entered into the Stock Grant Agreement and Purchase Agreement, our common stock was traded on the Nasdaq Capital Market, so we were subject to Nasdaq’s Listing Rules. The issuance of securities under the Stock Grant Agreement and the Purchase Agreement implicated certain of Nasdaq’s Listing Rules requiring prior stockholder approval in order to maintain our listing on the Nasdaq Capital Market, including:

 

·Nasdaq Listing Rule 5635(d), which requires stockholder approval prior to the issuance of securities in connection with a transaction other than a public offering involving: (1) the sale, issuance or potential issuance of common stock (or securities convertible into or exercisable for common stock) at a price less than the greater of book or market value which together with sales by officers, directors or substantial shareholders of the company equals 20% or more of common stock or 20% or more of the voting power outstanding before the issuance; or (2) the sale, issuance or potential issuance of common stock (or securities convertible into or exercisable common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock; and

 

·Nasdaq Listing Rule 5635(b), which requires stockholder approval when any issuance or potential issuance will result in a “change of control” of the issuer.

 

As noted above, we entered into the Remediation Agreement to address concerns of the staff of Nasdaq regarding our violation of these rules. Pursuant to the Remediation Agreement, we agreed to seek stockholder approval of the Remediation Agreement and the issuance of shares of common stock upon conversion of the shares of Series C Preferred Stock and Series D Preferred Stock issued thereunder.

 

Interests of Certain Persons

 

Certain of the Note Holders, Dr. Dolev Rafaeli and Dennis M. McGrath, are members of our Board of Directors. In addition, Kristen E. Pigman, a member of our Board, is also the Director of OP Fund I Manager, LLC, which is the member and manager of OFI. Accordingly, the Remediation Agreement was considered an interested party transaction and was approved by a majority of our non-interested directors.

 

No Dissenters’ Rights

 

Under Nevada law, holders of our common stock are not entitled to dissenter’s rights of appraisal with respect to the approval of the Remediation Proposal.

 

Vote Required

 

 The approval of the Remediation Proposal requires the affirmative vote of a majority of the shares present in person or represented by proxy at the Meeting. An abstention will have no effect on the Remediation Proposal. Since the Remediation Proposal is considered to be a “non-routine” matter, shares that constitute broker non-votes are not considered votes cast on the Remediation Proposal.

 

Our Board of Directors unanimously recommends a vote “FOR” approval of the Remediation Proposal.

 

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PROPOSAL NO. 2 – REVERSE STOCK SPLIT PROPOSAL

 

General

 

On October 22, 2018, our Board approved an amendment to our Amended and Restated Articles of Incorporation, subject to approval by our stockholders, to effect one or more reverse stock splits of the shares of our common stock at an exchange ratio of not less than 1-for-2 and not more than 1-for-15, to be selected at the discretion of our Board. Stockholder approval of this Reverse Stock Split Proposal will authorize our Board, in its discretion, to effect one or more reverse stock splits, at a specific exchange ratio within the approved range as they deem appropriate, at any time prior to our 2019 annual meeting of stockholders. Our Board believes that approval of this Reverse Stock Split Proposal to effect one or more reverse stock splits and to determine the exchange ratio as opposed to approval of an immediate single reverse stock split at a specific ratio, and to effect such reverse stock splits at any time prior to our 2019 annual meeting of stockholders, will provide our Board with maximum flexibility to react to current market conditions and therefore to achieve the purposes of a reverse stock splits, if implemented, and to act in the best interests of our stockholders.

 

To effect a reverse stock split, we would file an amendment to our Amended and Restated Articles of Incorporation with the Secretary of State of the State of Nevada. The form of amendment to effect a proposed reverse stock split is attached to this proxy statement as Annex C. If our Board elects to implement one or more reverse stock splits as approved by our stockholders, then the number of shares of our common stock will be reduced in accordance with the selected exchange ratio for the reverse stock split. Any fractional share resulting from the selected exchange ratio for a single reverse stock split will be rounded up to the nearest whole share. The par value of our common stock would remain unchanged at $0.01 per share. Any reverse stock split would become effective upon the filing of an amendment with the Secretary of State of the State of Nevada. Our Board may elect not to implement a reverse stock split, in its discretion, even if the proposal to grant our Board the discretion to effect a reverse stock split is approved by our stockholders.

 

Purposes of the Proposed Reverse Stock Split

 

Our Board believes that we should provide for the right to implement one or more reverse stock splits for the following reasons:

 

·to enhance the acceptability and marketability of our common stock; and

 

·to enable us to use a reverse stock split as may be required to regain the listing of our common stock on the Nasdaq Capital Market or another national securities exchange.

 

Our Board believes that one or more reverse stock splits will enhance the acceptability and marketability of our common stock to the financial community and the investing public and may mitigate any reluctance on the part of certain brokers and investors to trade in our common stock. Many institutional investors have policies prohibiting them from holding stocks in their own portfolios which trade at prices below certain levels. These policies reduce the number of potential investors in our common stock at its current market price. In addition, analysts at many leading brokerage firms are reluctant to recommend stocks to their clients, or monitor the activity of stocks, that trade at a price per share below certain levels. A variety of brokerage house policies and practices also tend to discourage individual brokers within those firms from dealing in stocks that trade at a price per share below certain levels. Some of those policies and practices pertain to the payment of brokers’ commissions and to time-consuming procedures that function to make the handling of such stocks unattractive to brokers from an economic standpoint. Additionally, because brokers’ commissions on such stocks generally represent a higher percentage of the stock price than commissions on higher-priced stocks, the current share price of our common stock can result in an individual stockholder paying transaction costs that represent a higher percentage of total share value than would be the case if our share price were higher. This factor may also limit the willingness of institutions to purchase our stock.

 

Our Board also believes that, after effecting a reverse stock split, the enhanced acceptability and marketability of our common stock will facilitate our ability to regain the listing of our common stock on the Nasdaq Capital Market or another national securities exchange. Our common stock is currently listed on the OTC Pink Sheets.

 

Our Board believes that listing on a national securities exchange, either the Nasdaq Capital Market or the NYSE American, is the preferred listing market for our common stock. As of the date of the filing of this proxy statement, we believe that we will meet all qualitative and quantitative standards for initial listing of our common stock on these national securities exchanges, except for the minimum bid requirement of Four Dollars ($4.00) per share and certain of the corporate governance requirements that we expect to resolve within the next six months. Thus, if the reverse stock split is approved by our stockholders and implemented by our Board, we expect to satisfy the $4.00 per share minimum bid price requirement for listing on this market. Our Board believes that the implementation of the reverse stock split is in the best interests of the Company and our stockholders.

 

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Factors Influencing the Board of Directors’ Discretion in Implementing the Reverse Stock Split

 

Our Board intends to implement a reverse stock split if it believes that such an action is in the best interests of the Company and our stockholders. Such determination, as well as the determination of the specific ratio to be utilized, will be based on factors such as existing and expected marketability and liquidity of our common stock, prevailing market conditions and the likely effect on the market price of our common stock. Our Board will also consider factors such as the historical and projected performance of our common stock, our projected performance, prevailing market and industry conditions and general economic trends, and will place emphasis on the expected closing price of our common stock over the short and longer period following the effectiveness of the reverse stock split.

 

No further action on the part of our stockholders would be required to either effect or abandon the reverse stock split. Notwithstanding approval of the reverse stock split proposal by the stockholders, our Board may, in its discretion, determine to delay the effectiveness of the reverse stock split up until our 2019 annual meeting of stockholders or choose not to implement the reverse stock split at all.

 

Potential Effects of the Proposed Reverse Stock Split

 

The immediate effect of a reverse stock split would be to reduce the number of shares of our common stock and to increase the trading price of our common stock. However, we cannot predict the specific effect of any reverse stock split upon the market price of our common stock. Based on the data we have reviewed leading up to this Reverse Stock Split Proposal, it appears that in some cases a reverse stock split improves stock performance while in other cases it does not, and in some cases a reverse stock split improves overall market capitalization while in other cases it does not. There is no assurance that the trading price of our common stock after the reverse stock split will rise in proportion to the reduction in the number of shares of our common stock outstanding as a result of the reverse stock split. Also, there is no assurance that a reverse stock split will lead to a sustained increase in the trading price of our common stock. The trading price of our common stock may change due to a variety of factors, such as our operating results and other factors related to our business and general market conditions.

 

As a summary and for illustrative purposes only, the following table reflects the approximate number of shares of our common stock that would be outstanding as a result of the potential reverse stock split ratios within the range of this Reverse Stock Split Proposal based on 5,568,500 shares of our common stock outstanding as of the Record Date, without accounting for fractional shares, which will be rounded up to the nearest whole share:

 

Proposed Reverse Stock Split  Percentage Reduction   Shares to Be Outstanding 
1-for-2   50.0%   2,784,250 
1-for-3   67.7%   1,856,167 
1-for-4   75.0%   1,392,125 
1-for-5   80.0%   1,113,700 
1-for-6   83.3%   928,084 
1-for-7   85.7%   795,500 
1-for-8   87.5%   696,063 
1-for-9   88.9%   618,723 
1-for-10   90.0%   556,850 
1-for-11   90.9%   506,228 
1-for-12   91.7%   464,042 
1-for-13   92.3%   428,347 
1-for-14   92.9%   397,750 
1-for-15   93.3%   371,234 

 

The resulting decrease in the number of shares of our common stock outstanding could potentially impact the liquidity of our common stock, especially in the case of larger block trades.

 

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Effects on Ownership by Individual Stockholders

 

Our stockholders should recognize that if a reverse stock split is effected, they will own a smaller number of shares than they currently own (approximately equal to the number of shares owned immediately prior to the reverse stock split divided by the selected block factor (i.e. two, three, four, etc.) and after giving effect to the rounding up of fractional shares to the nearest whole share, as described below). The reverse stock split would not affect any stockholder’s percentage ownership interests in the Company or such stockholder’s proportionate voting power, except to the extent that interests in fractional shares would be rounded up to the nearest whole share.

 

Vote Required

 

The approval of the Reverse Stock Split Proposal requires the affirmative vote of the holders of a majority of the issued and outstanding shares of our common stock. An Abstention will be treated in the same manner as a vote against the Reverse Stock Split Proposal. Since the Reverse Stock Split Proposal is considered to be a “non-routine” matter, shares that constitute broker non-votes are not considered votes cast on the Reverse Stock Split Proposal.

 

Our Board of Directors unanimously recommends a vote “FOR” approval of the Reverse Stock Split Proposal.

 

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 PROPOSAL NO. 4 – PLAN PROPOSAL

 

Overview

 

On April 18, 2018, our Board adopted the FC Global Realty Incorporated 2018 Equity Incentive Plan (the “Plan”). Long-term incentives have been a critical component of our compensation programs and are intended to reward our employees for long-term sustained performance that is aligned with stockholder interests. Our Board approved the Plan for grants of restricted stock, stock options and other forms of incentive compensation to our officers, employees, directors and consultants.

 

Adoption of the Plan was needed to replenish the pool of shares available for the grant of stock-based compensation. As of the Record Date, no shares remained available for grant under our Amended and Restated 2005 Equity Compensation Plan and only 71,865 shares remained available for grant under our Amended and Restated 2000 Non-Employee Director Stock Option Plan.

 

The Plan incorporates key corporate governance practices, including the following:

 

·limits the number of shares available to 5,000,000, which represents approximately 22% of our issued and outstanding common stock on a fully-diluted basis (assuming conversion of all outstanding preferred stock and all other securities that are exercisable or exchangeable for, or convertible into, our common stock) as of the Record Date;

 

·all shares granted in connection with awards other than options and stock appreciation rights count as two (2) shares against the share limit;

 

·the price of any option may not be altered or repriced without stockholder approval;

 

·discounted stock options and stock appreciation rights are prohibited;

 

·reload options are not permitted;

 

·performance goals may be imposed on grants;

 

·no ability of participants to receive dividend payments with respect to restricted stock until the shares are vested;

 

·liberal share counting is not permitted; and

 

·payment of the exercise price or applicable taxes made by delivery of shares, or withholding of shares, in satisfaction of a participant’s obligation, will not result in additional shares becoming available for subsequent awards under the Plan.

 

The Plan was submitted to stockholders for approval in order to qualify certain awards made to certain officers as deductible for federal income tax purposes under the federal income tax rules applicable to incentive stock options.

 

Our Board believes equity compensation is an important component of our compensation programs. Our ability to attract, retain and motivate top quality employees is material to our success, and we believe we can better achieve these objectives with grants made under the Plan. In addition, our Board believes that the interests of both our and our stockholders are advanced by affording our employees, officers and directors the opportunity to acquire or increase their proprietary interests in the Company.

 

Significant Features of the Plan

 

The following is a summary of certain significant features of the Plan. The information which follows is subject to, and qualified in its entirety by reference to, the Plan document, which is attached to this proxy statement as Annex D. We urge you to read the Plan in its entirety.

 

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Awards that may be granted include: (a) Incentive Stock Options, (b) Non-qualified Stock Options, (c) Stock Appreciation Rights, (d) Restricted Awards, (e) Performance Share Awards, and (f) Performance Compensation Awards. These awards offer our officers, employees, consultants and directors the possibility of future value, depending on the long-term price appreciation of our common stock and the award holder’s continuing service with the Company.

 

Stock options give the option holder the right to acquire from us a designated number of shares of common stock at a purchase price that is fixed upon the grant of the option. The exercise price will not be less than the market price of the common stock on the date of grant. Stock options granted may be either tax-qualified stock options (so-called “incentive stock options”) or non-qualified stock options.

 

Stock appreciation rights (“SARs”), which may be granted alone or in tandem with options, have an economic value similar to that of options. When a SAR for a particular number of shares is exercised, the holder receives a payment equal to the difference between the market price of the shares on the date of exercise and the exercise price of the shares under the SAR. Again, the exercise price for SARs normally is the market price of the shares on the date the SAR is granted. Under the Plan, holders of SARs may receive this payment – the appreciation value – either in cash or shares of common stock valued at the fair market value on the date of exercise. The form of payment will be determined by us.

 

Restricted shares are shares of common stock awarded to participants at no cost. Restricted shares can take the form of awards of restricted stock, which represent issued and outstanding shares of our common stock subject to vesting criteria, or restricted stock units, which represent the right to receive shares of our common stock subject to satisfaction of the vesting criteria. Restricted shares are forfeitable and non-transferable until the shares vest. The vesting date or dates and other conditions for vesting are established when the shares are awarded.

 

The Plan also provides for performance compensation awards, representing the right to receive a payment, which may be in the form of cash, shares of common stock, or a combination, based on the attainment of pre-established goals.

 

All of the permissible types of awards under the Plan are described in more detail as follows:

 

Purposes of Plan: The purposes of the Plan are to: attract and retain officers, employees and directors for the Company and its subsidiaries; motivate them by means of appropriate incentives to achieve long-range goals; provide incentive compensation opportunities; and further align their interests with those of our stockholders through compensation that is based on our common stock.

 

Administration of the Plan: Administration of the Plan is entrusted to the Compensation Committee of the Board of Directors (the “Committee”). Among other things, the Committee has the authority to select persons who will receive awards, determine the types of awards and the number of shares to be covered by awards, and to establish the terms, conditions, performance criteria, restrictions and other provisions of awards. The Committee has authority to establish, amend and rescind rules and regulations relating to the Plan.

 

Eligible Recipients: Persons eligible to receive awards under the Plan will be those officers, employees, consultants, and directors of the Company and its subsidiaries who are selected by the Committee administering the Plan.

 

Shares Available Under the Plan: The maximum number of shares of our common stock that may be delivered to participants under the Plan is 5,000,000, subject to adjustment for certain corporate changes affecting the shares, such as stock splits. Shares subject to an award under the Plan for which the award is canceled, forfeited or expires again become available for grants under the Plan. Shares subject to an award that is settled in cash will not again be made available for grants under the Plan.

 

Stock Options:

 

General. Subject to the provisions of the Plan, the Committee has the authority to determine all grants of stock options. That determination will include: (i) the number of shares subject to any option; (ii) the exercise price per share; (iii) the expiration date of the option; (iv) the manner, time and date of permitted exercise; (v) other restrictions, if any, on the option or the shares underlying the option; and (vi) any other terms and conditions as the Committee may determine.

 

Option Price. The exercise price for stock options will be determined at the time of grant. Normally, the exercise price will not be less than the fair market value on the date of grant. As a matter of tax law, the exercise price for any incentive stock option awarded may not be less than the fair market value of the shares on the date of grant. However, incentive stock option grants to any person owning more than 10% of our voting stock must have an exercise price of not less than 110% of the fair market value on the grant date.

 

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Exercise of Options. An option may be exercised only in accordance with the terms and conditions for the option agreement as established by the Committee at the time of the grant. The option must be exercised by notice to us, accompanied by payment of the exercise price. Payments may be made in cash or, at the option of the Committee, by actual or constructive delivery of shares of common stock to the holder of the option based upon the fair market value of the shares on the date of exercise.

 

Expiration or Termination. Options, if not previously exercised, will expire on the expiration date established by the Committee at the time of grant. In the case of incentive stock options, such term cannot exceed ten years provided that in the case of holders of more than 10% of our voting stock, such term cannot exceed five years. Options will terminate before their expiration date if the holder’s service with the Company or a subsidiary terminates before the expiration date. The option may remain exercisable for specified periods after certain terminations of employment, including terminations as a result of death, disability or retirement, with the precise period during which the option may be exercised to be established by the Committee and reflected in the grant evidencing the award.

 

Incentive and Non-Qualified Options. As described elsewhere in this summary, an incentive stock option is an option that is intended to qualify under certain provisions of the Internal Revenue Code of 1986, as amended (the “Code”), for more favorable tax treatment than applies to non-qualified stock options. Any option that does not qualify as an incentive stock option will be a non-qualified stock option. Under the Code, certain restrictions apply to incentive stock options. For example, the exercise price for incentive stock options may not be less than the fair market value of the shares on the grant date and the term of the option may not exceed ten years. In addition, an incentive stock option may not be transferred, other than by will or the laws of descent and distribution, and is exercisable during the holder’s lifetime only by the holder. In addition, no incentive stock options may be granted to a holder that is first exercisable in a single year if that option, together with all incentive stock options previously granted to the holder that also first become exercisable in that year, relate to shares having an aggregate market value in excess of $100,000, measured at the grant date.

 

Stock Appreciation Rights: Awards of SARs may be granted alone or in tandem with stock options. SARs provide the holder with the right, upon exercise, to receive a payment, in cash or shares of stock, having a value equal to the excess of the fair market value on the exercise date of the shares covered by the award over the exercise price of those shares. Essentially, a holder of a SAR benefits when the market price of the common stock increases, to the same extent that the holder of an option does, but, unlike an option holder, the SAR holder need not pay an exercise price upon exercise of the award.

 

Stock Awards: Stock awards can also be granted under the Plan. A stock award is a grant of shares of common stock or of a right to receive shares in the future. These awards will be subject to such conditions, restrictions and contingencies as the Committee shall determine at the date of grant. Those may include requirements for continuous service and/or the achievement of specified performance goals.

 

Cash Awards: A cash award is an award that may be in the form of cash or shares of common stock or a combination, based on the attainment of pre-established performance goals and other conditions, restrictions and contingencies identified by the Committee.

 

Section 162(m) of the Code: Section 162(m) of the Code limits publicly-held companies to an annual deduction for U.S. federal income tax purposes of $1.0 million for compensation paid to each of their chief executive officer and their three highest compensated executive officers (other than the chief executive officer) determined at the end of each year, referred to as covered employees.

 

Performance Criteria: Under the Plan, one or more of the following performance criteria will be used by the Committee in establishing performance goals:

 

·net earnings or net income (before or after taxes);

·basic or diluted earnings per share (before or after taxes);

·net revenue or net revenue growth;

·gross revenue;

·gross profit or gross profit growth;

 

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·net operating profit (before or after taxes);

·return on assets, capital, invested capital, equity, or sales;

·cash flow (including, but not limited to, operating cash flow, free cash flow, and cash flow return on capital);

·earnings before or after taxes, interest, depreciation and/or amortization;

·gross or operating margins;

·improvements in capital structure;

·budget and expense management;

·productivity ratios;

·economic value added or other value added measurements;

·share price (including, but not limited to, growth measures and total shareholder return);

·expense targets;

·margins;

·operating efficiency;

·working capital targets;

·enterprise value;

·safety record;

·completion of acquisitions or business expansion;

·achieving research and development goals and milestones;

·achieving product commercialization goals; and

·other criteria as may be set by the Committee from time to time.

 

Any one or more of the performance criteria may be used on an absolute or relative basis to measure the performance of the Company, as the Committee may deem appropriate, or as compared to the performance of a group of comparable companies, or published or special index that the Committee deems appropriate.

 

In determining the actual size of an individual performance compensation award, the Committee may reduce or eliminate the amount of the award through the use of negative discretion if, in its sole judgment, such reduction or elimination is appropriate. The Committee shall not have the discretion to (i) grant or provide payment in respect of performance compensation awards if the performance goals have not been attained or (ii) increase a performance compensation award above the maximum amount payable under the Plan.

 

Other Material Provisions: Awards will be evidenced by a written agreement, in such form as may be approved by the Committee. In the event of various changes to the capitalization of the Company, such as stock splits, stock dividends and similar re-capitalizations, an appropriate adjustment will be made by the Committee to the number of shares covered by outstanding awards or to the exercise price of such awards. The Committee is also permitted to include in the written agreement provisions that provide for certain changes in the award in the event of a change of control of the Company, including acceleration of vesting. Except as otherwise determined by the Committee at the date of grant, awards will not be transferable, other than by will or the laws of descent and distribution. Prior to any award distribution, we are permitted to deduct or withhold amounts sufficient to satisfy any employee withholding tax requirements. Our Board also has the authority, at any time, to discontinue the granting of awards. The Board also has the authority to alter or amend the Plan or any outstanding award or may terminate the Plan as to further grants, provided that no amendment will, without the approval of our stockholders, to the extent that such approval is required by law or the rules of an applicable exchange, increase the number of shares available under the Plan, change the persons eligible for awards under the Plan, extend the time within which awards may be made, or amend the provisions of the Plan related to amendments. No amendment that would adversely affect any outstanding award made under the Plan can be made without the consent of the holder of such award.

 

Federal Income Tax Consequences of Awards: The following is based on current laws, regulations and interpretations, all of which are subject to change. It does not purport to be complete and does not describe the state, local or foreign tax considerations or the consequences for any particular individual.

 

Stock Options. In general, the grant of a stock option will not be a taxable event to the recipient and will not result in a tax deduction to us. The tax consequences resulting from an exercise of a stock option and the subsequent disposition of the shares acquired upon the exercise depends, in part, on whether the option is an incentive stock option or a non-qualified stock option. Upon the exercise of a non-qualified stock option, the holder will recognize ordinary compensation income in an amount equal to the excess of the fair market value of the shares received upon exercise over the exercise price (the “spread”). We will be able to claim a tax deduction for this spread, provided we satisfy compensation reporting requirements under the Code and are not otherwise precluded from taking a deduction because of Section 162(m) deduction limitations described below. Any gain or loss upon the subsequent sale or exchange of the shares by the holder will be capital gain or loss, long term or short term, depending upon the holding period for the shares. Upon the exercise of an incentive stock option, a holder will generally not recognize taxable income and no tax deduction will be available to us, provided the option is exercised when the holder is an employee or, in certain circumstances, within a limited time thereafter. The difference between the exercise price and the fair market value of the shares on the date of exercise is treated by the holder as an item of adjustment for purposes of the alternative minimum tax. If the shares acquired upon an exercise of an incentive stock option are subsequently sold by the holder and such sale takes place after the statutory “holding period” (which is the later of two years from the date of grant or one year after the date of exercise), the gain or loss realized will be the difference between the sales price and the exercise price and will be treated as a long term capital gain or loss. If the sale takes place prior to expiration of the holding period, the holder of the shares will recognize ordinary income at the time of sale equal to the spread and we will be entitled to a tax deduction in equal amount. The remaining gain to the holder, if any, will be capital gain, either long term or short term.

 

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Stock Appreciation Rights. No taxable income will be realized by a recipient in connection with the grant of a SAR. Generally, when the holder of a SAR exercises the SAR, the amount of cash or the fair market value of the shares received upon exercise will be ordinary compensation income to the holder and we will be entitled to a corresponding tax deduction, subject to Section 162(m).

 

Restricted Shares. An award of restricted shares, like the grant of an option, is not taxable to the recipient. The holder of restricted shares generally will recognize ordinary compensation income at the time the restrictions on the shares lapse, which is the vesting date thereof, based on the fair market value of our shares on that date. Subject to the Section 162(m) limitations, this amount is deductible for federal income tax purposes by us. Dividends paid with respect to restricted shares prior to vesting will be taxable as ordinary compensation income to the holder (not as “qualifying dividends”) and will be deductible by us. A holder of restricted shares may elect under Section 83(b) of the Code, in lieu of the treatment described above, to take immediate recognition of income at the time the shares are received. In that event, the holder will recognize ordinary compensation income equal to the fair market value of the shares at the date of grant, which amount will be deductible by us, and dividends subsequently paid to the holder with respect to the shares will be taxable to the holder as “qualifying dividends” and will not be deductible by us.

 

Other Awards. Cash awards are generally taxable as ordinary compensation income in the year of receipt and will be deductible as such by us. Restricted stock units, deferred cash awards and other types of deferred awards are subject to Section 409A of the Code regarding non-qualified deferred compensation plans. We intend to use reasonable efforts to design any such awards in a manner that avoids Section 409A of the Code or that complies with Section 409A of the Code.

 

Potential Limitation on Company Deductions. We will generally be entitled to a tax deduction in connection with awards in an amount equal to the ordinary income recognized by a recipient at the time the recipient realizes such income, subject to Section 162(m) limitations of the Code, as discussed elsewhere in this proxy statement.

 

Recognition of Compensation Expense. In accordance with Statement of Financial Accounting Standards No.123R, “Share-Based Payment,” we are required to recognize compensation expense in our income statement for the grant-date fair value of stock options and other equity-based compensation issued to our employees and directors, the amount of which can only be determined at the time of grant.

 

New Plan Benefits

 

On June 20, 2018, we entered into an employment agreement with Michael R. Stewart, our new Chief Executive Officer, pursuant to which we agreed to grant to Mr. Stewart 400,000 shares of our common stock upon approval of the Plan by our stockholders. The following table sets forth the benefits or amounts that will be received by Mr. Stewart under the Plan.

 

 FC Global Realty Incorporated 2018 Equity Incentive Plan
Name and Position Dollar Value ($)(1) Number of Shares
Michael R. Stewart, Chief Executive Officer N/A 400,000

 

(1)The value of the stock will be equal to the fair market value of the shares on the date of grant.

 

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Additional future awards, if any, that will be made to eligible persons under the Plan are subject to the discretion of the Committee and, therefore, we cannot currently determine the benefits or number of shares subject to awards that may be granted in the future to our employees, consultants and non-employee directors under the Plan.

 

No Dissenters’ Rights

 

Under Nevada law, holders of our common stock are not entitled to dissenter’s rights of appraisal with respect to the approval of the Plan.

 

Vote Required

 

 The approval of the Plan Proposal requires the affirmative vote of a majority of the shares present in person or represented by proxy at the Meeting. An abstention will have no effect on the Plan Proposal. Since the Plan Proposal is considered to be a “non-routine” matter, shares that constitute broker non-votes are not considered votes cast on the Plan Proposal.

 

Our Board of Directors unanimously recommends a vote “FOR” approval of the Plan Proposal. 

 

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 PROPOSAL NO. 4 – DIRECTOR PROPOSAL

 

Director Nominees

 

Our Nominations and Corporate Governance Committee has recommended the election of the five (5) director nominees listed below.

 

Richard J. Leider

Dennis M. McGrath

Kristen E. Pigman

Dr. Dolev Rafaeli

Michael R. Stewart

 

For biographical information regarding these nominees, see “Directors and Executive Officers” above. If elected at the Meeting, these nominees will hold office until the next annual meeting or until their successors are qualified, subject to their prior death, resignation or removal.

 

The slate of nominees to the Board is favored by the Board. The present Board believes that the slate reflects a broad range of experience with regard to financial, investment and regulatory matters and to the various product lines and interests of the Company. Finally, the present Board believes that the slate of directors contains individuals who will be able to assist in the further development of the Company.

 

Vote Required

 

The affirmative vote of a plurality of votes of the shares of our common stock present in person or represented by proxy at the Meeting and entitled to vote is required to elect the directors nominated above. That means the five (5) nominees will be elected if they receive more affirmative votes than any other nominees. In the absence of instructions to the contrary, shares of common stock represented by properly executed proxies will be voted for the five (5) nominees listed herein below, all of whom are recommended by our Board and who have consented to be named and to serve if elected.

 

In the event that any nominee recommended by the Nominations and Corporate Governance Committee is unable or declines to serve as a director at the time of the Meeting, the proxies will be voted for any nominee who is designated by the present Board to fill the vacancy. It is not expected that any nominee will be unable or will decline to serve as a director. Our Board knows of no reason why any of the nominees will be unavailable or decline to serve as a director.

 

Our Board of Directors unanimously recommends a vote “FOR” each director nominee.

 

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PROPOSAL NO. 5 – AUDITOR PROPOSAL

 

General

 

We first engaged Fahn Kanne & Co. Grant Thornton Israel (“Grant Thornton Israel”) to serve as our independent registered public accounting firm for the year ended December 31, 2011. The Audit Committee of our Board has selected Grant Thornton Israel to serve as our independent registered public accounting firm for the year to be ended December 31, 2018 and has set its compensation for that year. As such, Grant Thornton Israel will, among other things, audit our financial statements and opine on our system of internal controls for the fiscal year ending December 31, 2018. Representatives of Grant Thornton Israel are expected to be present at the Meeting and will have an opportunity to make a statement if they desire to do so, and are expected to be available to respond to appropriate questions.

 

Stockholder ratification of the selection of Grant Thornton Israel as our independent registered public accounting firm, and ratification of the authority of the Audit Committee to set the auditors’ compensation, is not required by our Bylaws or otherwise. However, our Board is submitting the selection of Grant Thornton Israel to the stockholders for ratification as a matter of corporate practice. If the stockholders fail to ratify the selection, the Audit Committee will reconsider whether or not to retain that firm. Even if the selection is ratified, the Audit Committee in its discretion may direct the appointment of a different independent accounting firm at any time during the year if the Audit Committee determines that such a change would be in the best interests of us and our stockholders.

 

We present the following information concerning our relationship with Grant Thornton Israel as background to this proposal.

 

Principal Accountant Fees and Services

 

The following table shows the fees paid or accrued by us for the audit and other services provided by Grant Thornton Israel for 2017 and 2016:

 

(in thousands)

 

   2017   2016 
Audit Fees (1)  $200   $200 
Audit-Related Fees (2)        
Tax Fees (3)   105    433 
All Other Fees        
Total  $305   $633 

 

(1)Consists of fees billed for the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by the auditors in connection with statutory and regulatory filings or engagements.

 

(2)Consists of assurance and related services that are reasonably related to the performance of the audit and reviews of our financial statements and are not included in “audit fees” in this table, principally related to the limited scope audit of the 401(K) plan and due diligence services.

 

(3)Consists of all tax related services.

 

Engagement of the Independent Auditor. The Audit Committee is responsible for approving every engagement of Grant Thornton Israel to perform audit or non-audit services for us before Grant Thornton Israel is engaged to provide those services. Under applicable SEC rules, the Audit Committee is required to pre-approve the audit and non-audit services performed by the independent auditors in order to ensure that they do not impair the auditors’ independence. The SEC’s rules specify the types of non-audit services that an independent auditor may not provide to its audit client and establish the Audit Committee’s responsibility for administration of the engagement of the independent auditors.

 

Consistent with the SEC’s rules, our Audit Committee Charter requires that the Audit Committee review and pre-approve all audit services and permitted non-audit services provided by the independent auditors to us or any of our subsidiaries. The Audit Committee may delegate pre-approval authority to a member of the Audit Committee and if it does, the decisions of that member must be presented to the full Audit Committee at its next scheduled meeting.

 

45 

 

 

The Audit Committee’s pre-approval policy provides as follows:

 

·First, once a year when the base audit engagement is reviewed and approved, management will identify all other services (including fee ranges) for which management knows it will engage Grant Thornton Israel for the next 12 months. Those services typically include quarterly reviews, specified tax matters, certifications to the lenders as required by financing documents, consultation on new accounting and disclosure standards and, in future years, reporting on management’s internal controls assessment.

 

·Second, if any new “unlisted” proposed engagement arises during the year, the engagement will require approval of the Audit Committee.

 

All fees to our independent accounting firms were approved by the Audit Committee.

 

Auditor Selection for Fiscal 2018. The Audit Committee selected Grant Thornton Israel to serve as our independent auditors for the year ending December 31, 2018. The Audit Committee’s selection is now being submitted to our stockholders for ratification at the Meeting.

 

Vote Required

 

The affirmative vote of a majority of the outstanding shares of our common stock present in person or represented by proxy at the Meeting and entitled to vote is required to ratify the selection of Grant Thornton Israel.

 

Our Board of Directors unanimously recommends a vote “FOR” approval of the Auditor Proposal.

 

 

46 

 

 

PROPOSAL NO. 6 – ADJOURNMENT PROPOSAL

 

 The Board has determined that the adjournment of the Meeting for any purpose, including to solicit additional proxies if there are insufficient votes at the time of the Meeting to approve the proposals described herein, is advisable and in the best interests of the Company and its stockholders and has approved the adjournment of the Meeting for any purpose, including to solicit additional proxies if there are insufficient votes at the time of the Meeting to approve the proposals described herein.

 

 The Meeting may be adjourned by the affirmative vote of a majority of the shares present in person or represented by proxy at the Meeting.

 

Our Board of Directors unanimously recommends a vote “FOR” approval of the Adjournment Proposal.

 

47 

 

  

STOCKHOLDER PROPOSALS AND NOMINATIONS

 

Proposals of our stockholders that are intended to be presented by such stockholders at our next annual meeting of stockholders must be received by us no later than 120 days before November 29, 2019 in order to be considered for inclusion in the proxy statement relating to that meeting. In the event, however, that we change the meeting date for the next annual stockholders meeting by more than 30 days from November 29, 2019 we will notify stockholders and allow a reasonable time for stockholder proposals to be included in the notice of annual meeting. A stockholder proposal will need to comply with the SEC regulations under Rule 14a-8 of the Exchange Act, regarding the inclusion of stockholder proposals in company-sponsored proxy materials. Although our Board will consider stockholder proposals, we reserve the right to omit from our proxy statement, or to vote against, stockholder proposals that we are not required to include under the Exchange Act, including Rule 14a-8.

 

 Proposals of our stockholders submitted outside the processes of Rule 14a-8 must have been received by us no later than September 29, 2019. If a stockholder gives notice of such a proposal after this deadline, our proxy agents will be allowed to use their discretionary voting authority to vote against the stockholder proposal when and if the proposal is raised at our 2019 annual meeting.

 

 You may write to Michele Pupach, Corporate Counsel, at our principal executive office, 2300 Computer Drive, Building G, Willow Grove, Pennsylvania 19090, to deliver the materials and notices discussed above regarding the requirements for making stockholder proposals.

 

 TRANSACTION OF OTHER BUSINESS

 

 At the date of this proxy statement, the only business which the Board intends to present at the Meeting is as set forth above. If any other matter or matters are properly brought before the Meeting, or an adjournment or postponement thereof, it is the intention of the persons named in the accompanying form of proxy to vote the proxy on such matters in accordance with their best judgment.

 

HOUSEHOLDING OF PROXY STATEMENT

 

The rules promulgated by the SEC permit companies, brokers, banks or other intermediaries to deliver a single copy of our proxy materials to households at which two or more stockholders reside (“Householding”). Stockholders sharing an address who have been previously notified by their broker, bank or other intermediary and have consented to Householding, either affirmatively or implicitly by not objecting to Householding, received only one copy of our proxy materials. A stockholder who wishes to participate in Householding in the future must contact his or her broker, bank or other intermediary directly to make such request. Alternatively, a stockholder who wishes to revoke his or her consent to Householding and receive separate proxy materials for each stockholder sharing the same address must contact his or her broker, bank or other intermediary to revoke such consent. Stockholders may also obtain a separate proxy statement or may receive a printed or an e-mail copy of this proxy statement without charge by sending a written request to FC Global Realty Incorporated, Inc., Attn: Corporate Secretary, 2300 Computer Drive, Building G, Willow Grove, Pennsylvania 19090, or by calling us at 215-830-1430. We will promptly deliver a copy of this proxy statement upon request. Householding does not apply to stockholders with shares registered directly in their name.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We file annual, quarterly and current reports, proxy statements and other information with the SEC under the Exchange Act. You may read and copy this information at, or obtain copies of this information by mail from, the SEC’s Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Please call the SEC at (800) SEC-0330 for further information about the public reference room. Our filings with the SEC are also available to the public from commercial document retrieval services and at the web site maintained by the SEC at http://www.sec.gov.

 

 Any person, including any beneficial owner, to whom this proxy statement is delivered may request copies of proxy statements or other information concerning us, without charge, by written request directed to FC Global Realty Incorporated, Attn: Corporate Secretary, 2300 Computer Drive, Building G, Willow Grove, Pennsylvania 19090, or by calling us at 215-830-1430.

 

48 

 

 

 THIS PROXY STATEMENT DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH PROXY SOLICITATION IN THAT JURISDICTION. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY STATEMENT TO VOTE YOUR SHARES AT THE MEETING. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED OCTOBER 25, 2018. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE, AND THE MAILING OF THIS PROXY STATEMENT TO STOCKHOLDERS DOES NOT CREATE ANY IMPLICATION TO THE CONTRARY.

 

49 

 

 

ANNEX A

 

FINANCIAL STATEMENTS

 

    Page No.
Condensed Consolidated Financial Statements for the Three and Six Months Ended June 30, 2018 and 2017   A-2
Condensed Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017   A-3
Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended June 30, 2018 and 2017 (unaudited)   A-4
Condensed Consolidated Statements of Comprehensive Loss for the Six Months Ended June 30, 2018 and 2017 (unaudited)   A-5
Condensed Consolidated Statement of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Deficit for the Six Months Ended June 30, 2018 (unaudited)   A-6
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (unaudited)   A-7
Notes to Condensed Consolidated Financial Statements (unaudited)   A-8
     
Consolidated Financial Statements for the Years Ended December 31, 2017 and 2016   A-29
Report of Independent Registered Public Accounting Firm   A-30
Consolidated Balance Sheets, December 31, 2017 (Restated) and 2016   A-31
Consolidated Statements of Comprehensive Loss, Years ended December 31, 2017 (Restated) and 2016   A-32
Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Deficit, Years ended December 31, 2017 (Restated) and 2016   A-33
Consolidated Statements of Cash Flows, Years ended December 31, 2017 (Restated) and 2016   A-34
Notes to Restated Consolidated Financial Statements   A-35

  

A-1 

 

  

FC GLOBAL REALTY INCORPORATED

 

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017 

  

A-2 

 

 

FC GLOBAL REALTY INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 (In thousands, except share and per share amounts)

  

   June 30 2018   December 31, 2017 
   (unaudited)     
ASSETS        
Current assets:          
Cash and cash equivalents  $892   $948 
Prepaid expenses and other current assets   507    646 
Total current assets   1,399    1,594 
Non-current assets:          
Investment properties   2,380    2,055 
Investment in other company, net   1,806    1,806 
Property and equipment, net   4    5 
Other assets, net   302    334 
Total non-current assets   4,492    4,200 
Total assets  $5,891   $5,794 
           
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT          
Current liabilities:          
Notes payable  $516   $778 
Accounts payable   705    612 
Accrued compensation and related expenses   389    467 
Other accrued liabilities   2,745    2,450 
Total current liabilities   4,355    4,307 
Non-current liabilities:          
Option to purchase Redeemable Convertible Preferred Stock (Note 5)   1,418    4,390 
Note payable, net of current portion   452    454 
Total non-current liabilities   1,870    4,844 
Total liabilities   6,225    9,151 
Commitments and contingencies (Note 4)          
  Redeemable Convertible Preferred Stock Series B, $.01 par value; 15,000,000 shares authorized at June 30, 2018 (unaudited) and December 31, 2017; 1,855,337 and 1,500,000 issued and outstanding at June 30, 2018 (unaudited) and December 31, 2017, respectively, net of amount allocated to option to purchase additional shares; Aggregate liquidation preference $1,948 and $1,503 at June 30, 2018 (unaudited) and December 31, 2017, respectively (Note 5)   2,545    87 
Stockholders’ deficit (Note 5):          
  Common Stock, $.01 par value, 500,000,000 shares authorized at June 30, 2018 (unaudited) and December 31, 2017; 14,833,920 shares issued and outstanding at June 30, 2018 (unaudited) and 11,868,619 shares issued and outstanding at December 31, 2017   149    119 
  Preferred A Stock $.01 par value, 3,000,000 shares authorized at June 30, 2018 (unaudited) and December 31, 2017; 123,668 issued and outstanding at June 30, 2018 (unaudited) and December 31, 2017;   1    1 
Additional paid-in capital   134,974    132,446 
Accumulated deficit   (137,030)   (135,022)
Accumulated other comprehensive loss   (1,145)   (1,162)
       Total stockholders’ deficit attributable to FC Global Realty Incorporated   (3,051)   (3,618)
Noncontrolling interest   172    174 
Total stockholders’ deficit   (2,879)   (3,444)
Total liabilities, redeemable convertible preferred stock and stockholders’ deficit  $5,891   $5,794 

 

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

 

A-3 

 

 

FC GLOBAL REALTY INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

  (In thousands, except share and per share amounts)

(unaudited)

 

   For the Three Months Ended June 30, 
   2018   2017 
         
Rental income  $11   $ 
Rental expense   1     
Gross income   10     
           
General and administrative   934    1,848 
Operating loss   (924)   (1,848)
Revaluation of option to purchase redeemable convertible preferred stock (Note 5)   2,568     
Revaluation of asset contribution related financial instruments       2,622 
Interest and other financing expense, net   (38)   (46)
Income from continuing operations, before taxes on income   1,606    728 
Taxes on income (income tax provision)   3     
Income from continuing operations   1,609    728 
           
Discontinued operations:          
Gain from discontinued operations (Note 2)   140    411 
           
Net income including portion attributable to non-controlling interest   1,749    1,139 
Loss attributable to non-controlling interest   1     
Net income   1,750    1,139 
Dividend on redeemable convertible preferred stock   (62)    
Net income attributable to common stockholders and participating securities  $1,688   $1,139 
           
Basic net income per share (Note 3):          
Continuing operations  $0.08   $0.12 
Discontinued operations   0.01    0.07 
   $0.09   $0.19 
           
Diluted net income (loss) per share (Note 3):          
Continuing operations  $0.08   $(0.04)
Discontinued operations   0.01    0.07 
   $0.09   $0.03 
           
Shares used in computing basic net loss per share   12,846,190    4,786,218 
Shares used in computing diluted net loss per share   19,716,419    36,185,555 
           
Other comprehensive income:          
Foreign currency translation adjustments   (4)   176 
Comprehensive income  $1,746   $1,315 

 

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

 

A-4 

 

 

FC GLOBAL REALTY INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

  (In thousands, except share and per share amounts)

(unaudited)

 

   For the Six Months Ended June 30, 
   2018   2017 
Rental income  $11   $ 
Rental expense   1     
Gross income   10     
           
General and administrative   2,144    1,848 
Operating loss   (2,134)   (1,848)
Revaluation of option to purchase redeemable convertible preferred stock (Note 5)   2,295     
Revaluation of asset contribution related financial instruments       2,622 
Interest and other financing expense, net   (72)   (46)
Income from continuing operations, before taxes on income   89    728 
Taxes on income (Note 6)   (209)    
Income (loss) from continuing operations   (120)   728 
Discontinued operations:          
Income (loss) from discontinued operations (Note 2)   219    (1,438)
Net income (loss) including portion attributable to non-controlling interest   99    (710)
Loss attributable to non-controlling interest   2     
Net income (loss)   101    (710)
Dividend on redeemable convertible preferred stock   (141)    
Accretion of redeemable convertible preferred stock to redemption value   (1,968)    
Net loss attributable to common stockholders and participating securities  $(2,008)  $(710)
           
Basic net income (loss) per share (Note 3):          
           
Continuing operations  $(0.15)  $0.14 
Discontinued operations   0.01    (0.07)
   $(0.14)  $(0.07)
           
Diluted net income (loss) per share (Note 3):          
Continuing operations  $(0.15)  $(0.29)
Discontinued operations   0.01    (0.06)
   $(0.14)  $(0.35)
           
Shares used in computing basic net loss per share   12,360,105    4,574,830 
Shares used in computing diluted net loss per share   12,360,105    20,361,237 
           
Other comprehensive income (loss):          
Reclassification of cumulative translation adjustment to statement of operations  $   $3,021 
Foreign currency translation adjustments   17    278 
Total other comprehensive income   17    3,299 
Comprehensive income (loss)  $118   $2,589 

 

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

 

A-5 

 

 

FC GLOBAL REATLY INCORPORATED AND SUBSIDIARIES

  CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE

PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2018

  (In thousands, except share and per share amounts)

(unaudited)

 

        Stockholders’ deficit  
   

 Redeemable

Convertible Preferred

Stock

Series B

  Common Stock  

Series A Preferred

Stock

 

Additional Paid-In

Capital

 

Accumulated

Deficit

 

 Accumulated Other Comprehensive

Loss

 

Noncontrolling

Interest

       
    Shares   Amount   Shares   Amount   Shares   Amount                     Total  
BALANCE, JANUARY 1, 2018     1,500,000   $ 87     11,868,619   $ 119     123,668   $ 1   $ 132,446   $ (135,022 ) $ (1,162 ) $ 174   $ (3,444 )
Stock based compensation                        —         5                 5  
Issuance of Series B redeemable convertible preferred stock and embedded option     2,225,000     2,225                                      
Partial exercise of series B redeemable convertible preferred stock written call option (Note 5)         677                                      
Dividend on Series B redeemable convertible preferred stock (Note 5)         141                         (141 )           (141 )
Accretion of Series B redeemable convertible preferred stock to redemption value (Note 5)         1,968                         (1,968 )           (1,968 )
Conversion of series B redeemable convertible preferred stock into common stock     (1,869,663 )   (2,553 )   2,965,301     30             2,523                 2,553  
Foreign currency translation adjustment                                     17         17  
Net Income (Loss)                                 101         (2)     99  
BALANCE, JUNE 30     1,855,337   $ 2,545     14,833,920   $ 149     123,668   $ 1   $ 134,974   $ (137,030 ) $ (1,145 ) $ 172   $ (2,879 )

 

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

 

 

 

A-6 

 

 

FC GLOBAL REALTY INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (In thousands)

(Unaudited)

 

   For the Six Months Ended June 30, 
   2018   2017 
Cash Flows From Operating Activities:          
Net Income  $(120)  $728 
Adjustments to reconcile loss to net cash used in operating activities related to continuing operations:          
Stock-based compensation   5    124 
Revaluation of asset contribution related financial instruments, net       (2,622)
Revaluation of option to purchase redeemable convertible preferred stock (Note 5)   (2,295)    
Depreciation and amortization   2    296 
Changes in operating assets and liabilities:          
Prepaid expenses and other current assets   171    1,388 
Accounts payable   93    (1,396)
Accrued compensation and related expenses   (78)   (1,452)
Other accrued liabilities   324    (4,113)
Adjustments related to continuing operations   (1,898)   (7,047)
Adjustments related to discontinued operations   219    1,688 
Net cash used in operating activities   (1,679)   (5,359)
Cash Flows From Investing Activities:          
Direct expenses related to asset acquisition       (283)
Purchases of  investment properties   (326)    
Net cash used in investing activities - continuing operation   (326)   (283)
Net cash provided by investing activities - discontinued operations       5,107 
Net cash (used in) provided by investing activities   (326)   4,824 
Cash Flows From Financing Activities:          
Proceeds from issuance of redeemable convertible preferred stock and embedded option (Note 5)   2,225     
Payment of notes payable   (293)    
Net cash provided by financing activities -continuing operation   1,932     
Net cash provided by financing activities   1,932     
Effect of exchange rate changes on cash and cash equivalents   17    279 
Change in cash and cash equivalents   (56)   (256)
Cash and cash equivalents at the beginning of period   948    2,335 
Cash and cash equivalents at the end of period  $892   $2,079 
Supplemental disclosure of non-cash activities:          
Cash paid for income taxes  $   $73 
Cash paid for interest  $72   $ 
Receivable from acquirer of group of assets  $   $2,000 
Partial exercise of written call option on redeemable convertible preferred stock (Note 5)  $677   $ 
Dividend on redeemable convertible preferred stock (Note 5)  $141   $ 
Accretion of redeemable convertible preferred stock to redemption value (Note 5)  $1,968   $ 
Conversion of Series B redeemable convertible preferred stock into common stock  $2,553   $ 
Contribution of investment property and investment in other company against stock issue, financial assets related to future mandatory asset contribution and financial liabilities for optional asset acquisition  $   $4,836 

 

 

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

 

 

A-7 

 

 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

 

Note 1

Background:

 

FC Global Realty Incorporated (and its subsidiaries) (the “Company”), re-incorporated in Nevada on December 30, 2010, originally formed in Delaware in 1980, is, since earlier in 2017, a real estate development and asset management company concentrated primarily on investments in high quality income producing assets, hotel and resort developments, residential developments and other opportunistic commercial properties.

 

Until the recent sale of the Company’s last significant business unit (its consumer products division which was sold to ICTV Brands, Inc. on January 23, 2017), the Company was a Global Skin Health company providing integrated disease management and aesthetic solutions to dermatologists, professional aestheticians and consumers. The Company provided proprietary products and services that addressed skin diseases and conditions including psoriasis, acne, actinic keratosis (a precursor to certain types of skin cancer), photo damage and unwanted hair.

 

On March 31, 2017, the Company entered into an Interest Contribution Agreement with First Capital Real Estate Operating Partnership, L.P. (the “Contributor”), First Capital Real Estate Trust Incorporated (the “Contributor Parent”), and FC Global Realty Operating Partnership, LLC, the Company’s wholly-owned subsidiary (the “Acquiror”). The parties entered into amendments to the Interest Contribution Agreement on August 3, 2017, October 11, 2017 and December 22, 2017. Pursuant to the Interest Contribution Agreement, as amended (collectively, the “Contribution Agreement”), the Contributor contributed certain real estate assets to the Acquiror. In exchange, the Contributor received shares of the Company’s common stock and newly designated Series A Convertible Preferred Stock. This transaction closed on May 17, 2017. As a result of the Contribution Agreement, the Company has primarily become a real estate asset management and development company for the purpose of investing in a diversified portfolio of quality commercial and residential real estate properties and other real estate investments located in the United States.

 

Stock Delisting from Nasdaq and Transfer to OTC

On February 23, 2018 and March 13, 2018, the Company had received two delisting notices from Nasdaq this year, the first concerning the Company’s failure to comply with the $1.00 minimum bid price under Nasdaq Marketplace Rule 5550(a)(2), and the second with regard to the Company’s stockholder equity, which had fallen below the minimum $2.5 million required to be maintained under Nasdaq Marketplace Rule 5550(b)(1).

 

On June 18, 2018, the Company received a delisting determination letter from The Nasdaq Stock Market’s Listing Qualifications Department (“Nasdaq”) relating to the Company’s Common Stock. In that letter, Nasdaq stated that the Company is not in compliance with Nasdaq’s Listing Rules 5635(b), 5635(c), 5635(d)(1) and 5635(d)(2) with regard to shareholder approval of certain transactions involving the sale of shares of Series B Preferred Stock to Opportunity Fund I-SS, LLC (“OFI”), the conversion of certain promissory notes held by affiliates of the Company and related transactions entered into with such affiliates, the acquisition of common stock and Series A Preferred Stock by OFI from First Capital Real Estate Operating Partnership, L.P. and the timing of these transactions and contingencies between them.

 

As a result of the violations of the shareholder equity and shareholder approval rules, Nasdaq has determined to delist the Company’s securities. While the Company has a right of appeal with regard to this most recent notice, the Company’s Board of Directors, after evaluating the matter, has determined that it is in the Company’s best interests to remove its securities from trading on Nasdaq while it addresses these issues, and has therefore waived its right of appeal.

 

The Company’s common stock ceased to trade on the Nasdaq Capital Market prior to the opening of business on June 20, 2018, and moved on that date to trading and quotation on the Pink Current Information tier operated by the OTC Markets Group Inc. The Company’s trading symbol remains FCRE. Trading and quotation information is available at www.otcmarkets.com. The Company intends to apply for its common stock to be quoted and traded on the OTCQB Market.

 

The Company plans to continue to maintain an independent Board of Directors with an independent Audit Committee and provide annual financial statements audited by a registered Public Company Accounting Oversight Board auditor and unaudited interim financial reports, prepared in accordance with US GAAP. In addition, the Company’s Board of Directors will continue to evaluate options to maximize the value of the Company’s assets, including opportunities to invest in or acquire one or more operating businesses that provide opportunities for appreciation in value.

 

A-8 

 

 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

 

Note 1 (Cont.)

 

Liquidity and Going Concern

As of June 30, 2018, the Company had an accumulated deficit of $137 million and the Company incurred an operating loss for the six months ended June 30, 2018 of approximately $2 million. Subsequent to the sale of the Company’s last significant business unit, the consumer products division as described above, and to date, the Company has dedicated most of its financial resources to general and administrative expenses associated with its ongoing business of real estate development and asset management.

 

As of June 30, 2018, the Company’s cash and cash equivalents amounted to $892. While the Company is a party to a Securities Purchase Agreement (the “OFI Purchase Agreement”) with OFI, and has raised certain funds under that agreement in both 2017 and in 2018 through the date of the financial statements (see also Note 5), OFI has no obligation to continue to invest in the Company, and there are restrictions placed by OFI on the use of these funds. The Company has historically financed its activities with cash from operations, the private placement of equity and debt securities, borrowings under lines of credit and, in the most recent periods with sales of certain assets and business units. The Company will be required to obtain additional liquidity resources in order to support its ongoing operations.

 

At this time, there is no guarantee that the Company will be able to obtain an adequate level of financial resources required for the short and long-term support of its operations or that the Company will be able to obtain additional financing as needed, or meet the conditions of such financing, or that the costs of such financing may not be prohibitive. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on recoverability of assets and classification of liabilities that may result from the outcome of this uncertainty. 

 

Resignation of Officers and Director

 

Effective June 16, 2018, Vineet P. Bedi resigned his position as Chief Executive Officer and President of the Company, as well as President of the Company’s subsidiaries.

 

Also effective June 16, 2018, Matthew Stolzar resigned his position as Chief Financial Officer and Chief Investment Officer of the Company and of the Company’s subsidiaries.

 

Effective June 18, 2018, Robert Froehlich resigned as Chairman and a member of the Company’s Board of Directors as well as from his membership in the Board’s Audit, Compensation and Nominations and Corporate Governance Committees.

 

Appointment of Officers

 

On June 20, 2018, the Company’s Board of Directors appointed Michael R. Stewart to fill the positions of both Chief Executive Officer and Chief Financial Officer of the Company.

 

Appointment of Directors

 

Effective June 18, 2018, Kristen E. Pigman was appointed by the Board. Effective June 20, 2018, Michael E. Singer was appointed by the Board. Effective August 15, 2018, Michael Singer resigned from his position (see also Note 7).

 

A-9 

 

 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

 

Note 2

Discontinued Operations:

 

On January 23, 2017, the Company sold its last significant business unit (its consumer products division) to ICTV Brands, Inc. This business was a substantial business unit of the Company and the sale brought a strategic shift in focus of management. The Company accordingly classified this former business as held for sale and discontinued operations in accordance with ASC 360 “Impairment or disposal of long-lived assets” during the fourth quarter of the year ended December 31, 2016.

 

The accompanying consolidated financial statements as of and for the three and six months ended June 30, 2017 have been retrospectively adjusted to reflect the operating results of the consumer business as discontinued operations separately from continuing operations. The Company recognized a net loss from discontinued operations of $1,438, including the loss on the sale of the discontinued operations in the six months ended June 30, 2017, which represents the difference between the adjusted net purchase price and the carrying value of the disposal group.

 

The Company recognized a gain of $219 related to the discontinued operations during the six months ended June 30, 2018, as a result of the sale of residual inventory to third parties.

 

The following is a summary of income (loss) from discontinued operations for the three and six months ended June 30, 2018 and 2017:

 

    For the Three Months Ended June 30,     For the Six Months Ended June 30,  
    2018     2017     2018     2017  
                         
Revenues:   $     $     $     $ 3,539  
Cost of revenues                       100  
Gross profit                       3,439  
Operating expenses:                                
Engineering and product development                       143  
Selling and marketing                       620  
General and administrative                       2,342  
Other income, net           (2,650 )             (2,650 )
Loss on disposal of assets           2,166             4,251  
Income (loss) from discontinued operations before interest and other financing expense, net           484             (1,267 )
Interest and other financing expense, net                       (77 )
Income (loss) from discontinued operations before income taxes           484             (1,344 )
Income tax expenses allocated to discontinued operations           (73 )           (94 )
Income (loss) from discontinued operations           411             (1,438 )
Gain from disposal of discontinued operations, net of taxes     140             219        
Net gain (loss) from discontinued operations   $ 140     $ 411     $ 219     $ (1,438 )

 

A-10 

 

 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

 

Note 3

Summary of Significant Accounting Policies:

 

Accounting Principles

The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with our consolidated financial statements and related notes contained in Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2017. The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) related to interim financial statements. As permitted under those rules, certain information and footnote disclosures normally required or included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The financial information contained herein is unaudited; however, management believes all adjustments have been made that are considered necessary to present fairly the results of the Company’s financial position and operating results for the interim periods. All such adjustments are of a normal recurring nature. The accompanying condensed consolidated balance sheet as of December 31, 2017 has been derived from the consolidated financial statements contained in Amendment No. 1 to our Annual Report on Form 10-K/A.

 

The results for the three and six months ended June 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any other interim period in the future.

 

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and the wholly and majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Entities in which the Company directly or indirectly owns more than 50% of the outstanding voting securities, and for which other interest holders do not possess the right to affect significant management decisions, are generally accounted for under the voting interest consolidation method of accounting. Participation of other interest holders in the net assets and in the earnings or losses of a consolidated subsidiary is reflected in the line items “Non-controlling Interest” in the Company’s consolidated balance sheets and “net income (loss) attributable to the non-controlling interest” in the Company consolidated statements of comprehensive loss. Non-controlling interest adjusts the Company’s consolidated results of operations to reflect only the Company’s share of the earnings or losses of the consolidated subsidiary.

 

Any changes in the Company’s ownership interest in a consolidated subsidiary, through additional equity issuances by the consolidated subsidiary or from the Company acquiring the shares from existing shareholders, in which the Company maintains control is recognized as an equity transaction, with appropriate adjustments to both the Company’s additional paid-in capital and the corresponding non-controlling interest.

 

Use of Estimates

The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect amounts reported of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates and be based on events different from those assumptions. As part of these financial statements, the more significant estimates include (1) identification of and measurement of instruments in equity and mezzanine transactions; (2) impairment of investment properties and investment in other company; (3) evaluation of going concern; and (4) contingencies.

 

Revenue recognition

On April 26, 2018, the Company’s subsidiary, RETPROP I, LLC, completed the acquisition of a 7,738 square-foot medical office building in Dayton, Ohio for a $326 purchase price, paid in cash consideration. The building’s former owner, and current tenant, a medical practice, has entered into a lease with the Company to continue its occupancy through April 2022, with the option to renew that lease for two additional five-year terms. The Company is accounting for the arrangement as an operating lease under ASC 840, Leases.

 

The Company records rental revenues on a straight-line basis under which contractual rent increases are recognized evenly over the lease term. Certain properties have leases that provide for tenant occupancy during periods where no rent is due or where minimum rent payments change during the term of the lease. Accordingly, receivables from tenants that we expect to collect over the remaining lease term are recorded on the balance sheet as straight-line rent receivables.

Note 3 (Cont.)

 

A-11 

 

 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

 

Summary of Significant Accounting Policies:

 

Income (Loss) per Share

The Company computes net income (loss) per share in accordance with ASC 260, “Earnings per share”. Basic income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period, net of the weighted average number of treasury shares (if any). Securities that may participate in dividends with the common stock (such as the convertible Series A Preferred Stock and Series B Preferred Stock) are considered in the computation of basic income (loss) per share using the two-class method. However, in periods of net loss, participating securities are included only if the holders of such securities have a contractual obligation to share the losses of the Company. Accordingly, the outstanding Series A preferred shares were included in the computation, while the Series B preferred shares were not.

 

Diluted income (loss) per common share is computed similar to basic income per share, except that the denominator is decreased (increased) to include the number of additional potential common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Potential common shares are excluded from the computation for a period in which a net income (loss) is reported or if their effect is anti-dilutive. The Company’s potential common shares consist of stock options, stock warrants and restricted stock awards issued under the Company’s stock incentive plans and their potential dilutive effect is considered using the treasury method, and of convertible Series A Preferred Stock and Series B Preferred Stock which their potential dilutive effect is considered using the “if-converted method”.

 

The net income (loss) from continuing operations and the weighted average number of shares used in computing basic net income (loss) per share from continuing operations for the three and six months ended June 30, 2018 and 2017, is as follows: 

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2018     2017     2018     2017  
                         
Numerator:                                
Net income (loss)   $  1,750     $ 1,139     $ 101       (710 )
Net loss (gain) from discontinued operations attributable to common stockholders     (140 )     (411 )     (219 )     1,438  
Accretion of Series B Preferred Stock to redemption value (*)                 (1,968 )      
Preferred dividend on Series B Preferred Stock (**)     (62 )           (141 )      
Participation of stockholders of Series A Preferred Stock in the net loss from continuing operations                 384        
Participation of stockholders of Series A and B Preferred Stock in the net income from continuing operations     (512 )     (131 )           (66 )
Net basic income (loss) from continuing operations attributable to common stockholders   $ (1,036 )   $ 597     $ (1,843 )   $ 662  
                                 
Denominator:                                
Shares of common stock used in computing basic net income (loss) per share     12,846,190       4,786,218       12,360,105       4,574,830  
                                 
Net income (loss) per share of common stock from continuing operations, basic   $ 0.08     $ 0.12     $ (0.15 )   $ 0.14  

 

A-12 

 

 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

 

Note 3 (Cont.)

Summary of Significant Accounting Policies:

 

Loss per Share (Cont.)

 

(*) Based on the rights and privileges of Series B Preferred Stock, since the Company did not obtain shareholder approval at March 31, 2018, the then outstanding Series B Preferred Stock became redeemable at the option of OFI. Consequently, in each reporting period commencing March 31, 2018, the outstanding Series B Preferred Stock is recorded at its maximum redemption value until the occurrance of redemption or a conversion as prior.

 

(**) The net loss used for the computation of basic and diluted net loss per share for three and six months ended June 30, 2018, includes the preferred dividend requirement of 8% per share per annum for the Series B Preferred Stock, compounded annually which shall be distributed to stockholders in case of distributable assets determined in the Company’s certificate of designation under the liquidation preference right (see also Note 5).

 

The net income (loss) from continuing operations and the weighted average number of shares used in computing diluted net income (loss) per share from continuing operations for the three and six months ended June 30, 2018 and 2017, is as follows:

                         
    Three Months Ended June 30,     Six Months Ended June 30,  
    2018     2017     2018     2017  
                         
Numerator:                        
Net basic income (loss) from continuing operations attributable to common stockholders   $ 1,036     $ 597     $ (1,843 )   $ 662  
Participation of stockholders of Series A and B Preferred Stock in net income from continuing operations     512                          
Adjustment related to revaluation of asset contribution related financial instruments, net securities           (2,622 )           (2,622 )
Participation of stockholders of Series A Preferred Stock in the adjustment related to revaluation of asset contribution related financial instruments, net securities           470             470  
Net basic income (loss) from continuing operations attributable to common stockholders   $ 1,548     $ (1,555 )   $ (1,843 )   $ (1,490 )
                                 
Denominator:                                
Shares of common stock used in computing basic net income (loss) per share     12,846,190       4,786,218       12,360,105       4,574,830  
Incremental shares related to assumed conversion of Series A and B Preferred Stock into Common Stock     6,870,229                          
Incremental shares related to assumed exercise of asset contribution financial instruments           31,399,337             15,786,407  
Diluted number of common and common stock equivalent shares outstanding     19,716,419       36,185,555       12,360,105       20,361,237  
                                 
Net income (loss) per share of common stock from continuing operations, diluted   $ 0.08     $ (0.04 )   $ (0.15 )   $ (0.07 )

 

A-13 

 

 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

 

For the three months ended June 30, 2018, diluted income per share excludes stock options and common stock to be issued upon written call option, as the effect of their inclusion would be anti-dilutive. For the six months ended June 30, 2018, diluted loss per share excludes stock options, Series A and B Preferred Stock and common stock to be issued upon written call option, as the effect of their inclusion would be anti-dilutive. For the three and six months ended June 30, 2017, diluted loss per share excludes stock options and Series A Preferred Stock, as the effect of their inclusion would be anti-dilutive due to the net loss attributable to common stockholders for the period.

 

A-14 

 

 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

 

Note 4

Commitments and Contingencies:

 

Litigation

JFURTI 

The Company is a party to JFURTI, LLC, et al v. Suneet Singal, et al, filed in the United States District Court for the Southern District of New York. The suit names as defendants Suneet Singal, an officer of various First Capital companies as well as the Company’s former Chief Executive Officer and former member of the Company’s Board of Directors, Frank Grant and Richard Leider, board members of First Capital Real Estate Investments, LLC, First Capital Real Estate Advisors, LP, Presidential Realty Corporation, Presidential Realty Operating Partnership, Downey Brand LLP and now the Company (under its previous name, PhotoMedex Inc.), as well as nominal derivative defendants First Capital Real Estate Trust Incorporated and First Capital Real Estate Operating Partnership, L.P. Mr. Leider is also on the Board of Directors of the Company.

 

A Motion to Dismiss this action was filed with the court on behalf of all defendants. On April 12, 2018, plaintiffs filed an Amended Complaint in this matter. Plaintiffs also filed a response to the defendants’ Motion. Defendants filed a Memorandum in support of their Motion to Dismiss as well as a response to the plaintiffs’ response to the Motion, addressing both the original and the Amended Complaint in those filings. The Motion is now pending before the Court and there is no time frame known in which the Court may rule on the Motion.

 

The Company intends to defend itself vigorously against this suit. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the case has only been initiated and no discovery has been conducted to determine the validity of any claim or claims made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability related to these particular legal matters. However, in the future, as the cases progress, the Company may be required to record a contingent liability or reserve for these matters. More information is available from the Company’s prior filings in its Annual Reports on Form 10-K/A for the year ended December 31, 2018; and in its Quarterly Report for the quarter ended March 31, 2018 on Form 10-Q.

 

Avalon

On January 12, 2018, the Company received a copy of a complaint, dated November 17, 2017, that was filed by Alpha Alpha, LLC in the Thirteenth Judicial District Court in the County of Valencia in the State of New Mexico against Avalon Jubilee, LLC, the holding company that owns the property in Los Lunas, New Mexico, HiTex, LLC, MCBB, LLC, Land Strategies, LLC, Ronald R. Cobb and John Does 1-5. The suit asked the court to, among other things, determine whether there have been unauthorized transfers of interest in Avalon Jubilee LLC; and declare who are the holders of interests in Avalon Jubilee LLC. Although the complaint did not name the Company or any of its subsidiaries or specifically question the Company’s interest in Avalon Jubilee LLC, it raised questions about whether the transfers of interest leading to the Company’s acquisition of its interest in Avalon Jubilee LLC were properly made in accordance with the Avalon Jubilee operating agreement.

 

On April 27, 2018, the Company, and certain of its subsidiaries, entered into an agreement with Alpha Alpha LLC and Presidential Realty Corporation and certain of its subsidiaries, under which the Company’s subsidiary, First Capital Avalon Jubilee LLC, was recognized as a 17.9133% member in Avalon Jubilee, LLC, and the operating agreement and other documents were so amended to reflect that acknowledgement. In 2017, the Company recognized an impairment expense of $1,439 to account for our estimate of the impact that the described litigation may have on the operations and fair value of the underlying asset.  The settlement and recognition of the Company’s ownership interest was viewed as a favorable outcome.

 

Employee Misappropriation of Funds

In January 2018, as a result of new control procedures instituted by the management team, the Company discovered that a former employee had charged personal expenses to a company credit card, making unauthorized payments to herself in the form of bonuses and car allowances and theft of Company inventory over several years as mentioned below. Upon discovery, the Company took immediate steps to remove such employee’s access to Company assets, placed her on paid leave, and launched an internal investigation. Based on the results of the preliminary internal investigation, the employee was terminated on January 26, 2018.

 

A-15 

 

 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

 

Note 4 (Cont.)

Commitments and Contingencies:

 

The Company engaged an accounting firm to conduct a forensic accounting investigation, which concluded that the employee misappropriated corporate funds for her personal benefit by charging personal items to a company credit card, making unauthorized payments to herself in the form of bonuses and car allowances and theft of Company inventory between May 2011 through January 2018, resulting in an aggregate misappropriation of Company funds in the amount of approximately $484.

 

After considering the qualitative and quantitative aspects in accordance with Staff Accounting Bulletin No. 99, the Company has concluded that this misappropriation of Company funds did not lead to a material misstatement on any of the previous financial statements covering the aforementioned period of time that would require restatement of those financial statements. Such determination was based, among others, on the following: (i) the magnitude of the theft, as a percentage, was low relative to revenue, pretax income and asset balance, (ii) the theft would not create any changes to the financial reporting line items, and (iii) most of the journal entries created by the employee, if revised today, would cause zero change to net income or assets and liabilities as those entries related to the Company’s former business operations which were sold to a third parties.

 

The Company is currently evaluating its options on how best to proceed with recovering these assets.

 

Other litigation

The Company and certain subsidiaries are, and have been, involved in other miscellaneous litigation and legal actions, including product liability, consumer, commercial, tax and governmental matters, which can arise from time to time in the ordinary course of our business. The Company believes that these other litigations and claims will likely be resolved without a material effect on our consolidated financial position, results of operations or liquidity. However, litigation and legal actions are inherently unpredictable, and excessive verdicts can result in such situations. Although the Company believes it has or will have substantial defenses in these matters, it may, in the future, incur judgments or enter into settlements of claims that could have a material adverse effect on results of operations in a particular period.

 

Registration Rights Agreement with OFI

As a condition to the first closing under the OFI Purchase Agreement, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with OFI, pursuant to which the Company agreed to register all shares of common stock that may be issued upon conversion of the Series B Preferred Stock (the “Registrable Securities”) under the Securities Act of 1933, as amended (the “Securities Act”). The Company agreed to file a registration statement covering the resale of such Registrable Securities within 30 days of the first closing and cause such registration statement to be declared effective under the Securities Act as soon as possible but, in any event, no later than 120 days following the filing date if such registration statement is filed on Form S-3 or 150 days if such registration statement is filed on Form S-1. If such registration statement is not filed or declared effective by the SEC on or prior to such dates, or if after such registration statement is declared effective, without regard for the reason thereunder or efforts therefor, such registration statement ceases for any reason to be effective for more than an aggregate of 30 trading days during any 12-month period, which need not be consecutive, then in addition to any other rights the holders of Series B Preferred Stock may have under the Registration Rights Agreement or under applicable law, the Company shall pay to each holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 1% of the product obtained by multiplying (x) $1.00 by (y) the number of shares of Registrable Securities held by the holder (such product being the “OFI Investment Amount”); provided that, in no event will the Company be liable for liquidated damages in excess of 1% of the OFI Investment Amount in any single month and that the maximum aggregate liquidated damages payable to the holders under the Registration Rights Agreement shall be 10% of the OFI Investment Amount.

 

On January 23, 2018, the Company had filed a registration statement on Form S-3 to register the shares issued to OFI in the first closing. OFI waived its right to liquidated damages in connection with the late filing of such registration statement until May 31, 2018.  However, as that registration statement did not become effective by the required deadline, the Company may be required to make liquidated damages payments to the holder of Series B Preferred Stock as of May 31, 2018. As of June 30, 2018, the Company has not completed the registration process and therefore recorded a provision of $59 as part of other accrued liabilities based on management’s best estimate of the liability that the Company has incurred under the Registration Rights Agreement.

 

A-16 

 

 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

 

Note 4 (Cont.)

 

Registration Rights Agreements with Payout Note Holders

On October 12, 2017, the Company issued secured convertible promissory notes (the “Payout Notes”) to Dr. Dolev Rafaeli, the Company’s former Chief Executive Officer, Dennis M. McGrath, the Company’s former President and Chief Financial Officer, and Dr. Yoav Ben-Dror, the former director of the Company’s foreign subsidiaries (collectively, the “Note Holders”) in the principal amounts of $3,134, $978 and $1,515, respectively. The Payout Notes were due on October 12, 2018, carried a 10% interest rate, payable monthly in arrears commencing on December 1, 2017, and were convertible into shares of the Company’s Common Stock at maturity. The Company had agreed to register the shares underlying the Payout Notes within 30 days of issuance with best efforts to cause the registration statement covering such shares to become effective within 120 days of issuance. On November 14, 2017, the Company filed a registration statement on Form S-3 (the “First Registration Statement”) to register all shares that may be issued upon conversion of the Payout Notes. On December 22, 2017, the Company and the Note Holders entered into a stock grant agreement (the “Stock Grant Agreement”) to, among other things, cause the early conversion of the Payout Notes into an aggregate of 5,628,291 shares of the Company’s Common Stock (the “Payout Shares”) and provide for the issuance of an aggregate of 1,857,336 additional shares of Common Stock to the Note Holders as consideration for the various agreements of the Note Holders contained in the Stock Grant Agreement (the “Additional Shares”), subject to stockholder approval. On January 23, 2018, the First Registration Statement was amended to include the Payout Shares issued under the Stock Grant Agreement.

 

In connection with the Stock Grant Agreement, the Company entered into a registration rights agreement (the “Payout Registration Rights Agreement”) with the Note Holders, pursuant to which the Company agreed to register the shares of common stock under the Additional Shares under the Securities Act. The Company agreed to file a registration statement covering the resale of the Additional Shares within 30 days of the Stock Grant Agreement and cause such registration statement to be declared effective under the Securities Act as soon as possible but, in any event, no later than 120 days following the filing date if such registration statement is filed on Form S-3 or 150 days if such registration statement is filed on Form S-1. If such registration statement is not filed or declared effective by the SEC on or prior to such dates, or if after such registration statement is declared effective, without regard for the reason thereunder or efforts therefor, such registration statement ceases for any reason to be effective for more than an aggregate of 30 trading days during any 12-month period, which need not be consecutive, then in addition to any other rights the Note Holders may have under the Payout Registration Rights Agreement or under applicable law, the Company shall pay to each Note Holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 1% of the product obtained by multiplying (x) $1.00 by (y) the number of shares of common stock held by the Note Holder included in the registration statement (such product being the “Payout Investment Amount”); provided that, in no event will the Company be liable for liquidated damages in excess of 1% of the Payout Investment Amount in any single month and that the maximum aggregate liquidated damages payable to the Note Holders under the Payout Registration Rights Agreement shall be 10% of the Payout Investment Amount. The registration rights provision contained in the Payout Notes was incorporated by reference into the Payout Registration Rights Agreement, except that the Note Holders waived the breach by the Company for failure to timely file the First Registration Statement and agreed that they are not entitled to liquidated damages as a result of such failure. Under the Payout Registration Rights Agreement, the Note Holders are entitled to liquidated damages if the First Registration Statement is not declared effective within 120 days following the date of the Payout Notes.

 

On January 23, 2018, the Company filed a registration statement on Form S-3 for the Additional Shares. The Note Holders waived their rights to liquidated damages in connection with the late filing of such registration statement and in connection with the effectiveness deadline for such registration statement until May 31, 2018. However, as that registration statement did not become effective by the required deadline, the Company may be required to make liquidated damages payments to the holders of the Payout Notes since May 31, 2018. As of June 30, 2018, the Company has not completed the registration process and therefore recorded a provision of $56 as part of other accrued liabilities based on management’s best estimate of the liability that the Company has incurred under the Registration Rights Agreement.

 

A-17 

 

 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

 

Note 4 (Cont.)

 

Amended and Restated Separation Agreement

On February 12, 2018, the Company entered into an Amended and Restated Separation Agreement with Mr. Stephen Johnson, its former Chief Financial officer, pursuant to which the Company has agreed to pay Mr. Johnson an amount of $123 in 11 installments as follows: the first six installments of $10 each, and the following five installments of $12.5 each. The first payment was made on February 15, 2018, and subsequent payments are to be made on or before the 15th day of each succeeding month, with the final installment to be paid on or before December 15, 2018.

 

The Company will also provide a health (medical, dental and/or vision) insurance reimbursement payment for Mr. Johnson and his family, for a period of 11 months, in the agreed upon amount of $3 per month.

 

In addition, the Company has agreed to issue to Mr. Johnson 271,000 shares of the Company’s common stock, subject to appropriate adjustment for any stock splits, stock or business combinations, recapitalizations or similar events occurring after the date of the agreement. Those shares will be issued on any business day during the period commencing on the date that is six months after the date of the agreement and ending on the date that is three business days after such six-month anniversary. As of June 30, 2018, the aforesaid shares were not issued to Mr. Johnson. As of June 30, 2018, the balance payable to Mr. Johnson, included in accrued compensation and related expenses, is $343 (including the amount related to the shares component).

 

Resignation of Officers and Director

As discussed in Note 1, the former CEO and CFO of the Company resigned on June 16, 2018 asserting resignations for “good reason” as that term is used in their employment agreements, to which the Company disagrees. To the Company’s knowledge, no complaints against the Company have been filed to date. The Company and its legal counsel believes that a potential claim, if any, would be without merit and intends to vigorously defend against such a claim should one arise. At this stage, the amount of any loss, or range of loss, is highly uncertain and cannot be reasonably estimated. Therefore, the Company has not recorded any contingent liability or reserve related to this particular potential legal matter. If, in the future, the likelihood that the Company could have a loss becomes probable and estimable, the Company may be required to record a contingent liability or reserve for this matter.

  

A-18 

 

 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

 

Note 5

Redeemable Convertible Preferred Stock and Stockholders’ Deficit:

 

Common Stock

The Company’s common stock confers upon their holders the following rights:

 

The right to participate and vote in the Company’s stockholder meetings, whether annual or special. Each share will entitle its holder, when attending and participating in the voting in person or via agent or letter, to one vote;

 

The right to a share in the distribution of dividends, whether in cash or in the form of bonus shares, the distribution of assets or any other distribution pro rata to the par value of the shares held by them; and

 

The right to a share in the distribution of the Company’s excess assets upon liquidation pro rata to the par value of the shares held by them.

 

Convertible Series A Preferred Stock

The terms of the Convertible Series A Preferred Stock are governed by a certificate of designation (the “Series A Certificate of Designation”) filed by the Company with the Nevada Secretary of State on May 15, 2017. Pursuant to the Series A Certificate of Designation, the Company designated 3,000,000 shares of the Company’s preferred stock as “Series A Convertible Preferred Stock.” The Company issued 123,668 shares of Convertible Series A Preferred Stock in connection with the Contribution Agreement. Following is a summary of the material terms of the Series A Convertible Preferred Stock:

 

Dividends. Except for stock dividends or distributions for which adjustments are to be made, holders shall be entitled to receive, and the Company shall pay, dividends on shares of Convertible Series A Preferred Stock equal (on an as-if-converted-to-common-stock basis) to and in the same form as dividends actually paid on shares of the common stock when, as and if such dividends are paid on shares of the common stock. No other dividends shall be paid on shares of Convertible Series A Preferred Stock.

 

Liquidation. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders shall be entitled to receive out of the assets, whether capital or surplus, of the Company, after the Redeemable Convertible Series B Preferred Stockholder’s liquidation preference, the same amount that a holder of common stock would receive if the Convertible Series A Preferred Stock were fully converted (disregarding for such purposes any conversion limitations) to common stock which amounts shall be paid pari passu with all holders of common stock.

 

Voting. Except as otherwise provided in the Series A Certificate of Designation or as otherwise required by law, the Convertible Series A Preferred Stock shall have no voting rights. However, as long as any shares of Convertible Series A Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of the then outstanding shares of the Convertible Series A Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Convertible Series A Preferred Stock or alter or amend the Series A Certificate of Designation, (b) amend the Company’s articles of incorporation or other charter documents in any manner that adversely affects any rights of the holders, (c) increase the number of authorized shares of Convertible Series A Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.

 

Conversion. Each share of Convertible Series A Preferred Stock shall be convertible, at any time and from time to time from at the option of the holder thereof, into that number of shares of common stock determined by dividing $62.9575 by the Conversion Price. The Conversion Price for the Series A Convertible Preferred Stock is equal to $2.5183, subject to adjustment as described in the Series A Certificate of Designation.

  

A-19 

 

 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

 

Note 5 (Cont.)

Stockholders’ Equity (Cont.):

 

Redeemable Convertible Series B Preferred Stock

The terms of the Redeemable Convertible Series B Preferred Stock are governed by a certificate of designation (the “Series B Certificate of Designation”) filed by the Company with the Nevada Secretary of State on December 22, 2018, as supplemented by that certain supplemental agreement, dated April 20, 2018, between the Company and OFI (the “Supplemental Agreement”), which clarified certain voting and conversion limitations with respect to the Series B Preferred Stock in response to comments from the staff of NASDAQ. Pursuant to the Series B Certificate of Designation, the Company designated 15,000,000 shares of the Company’s preferred stock as “Series B Preferred Stock”. As more fully described below, the Company has issued a total of 3,725,000 shares of Redeemable Convertible Series B Preferred Stock in connection with the OFI Purchase Agreement during 2017 and 2018. Following is a summary of the material terms of the Redeemable Convertible Series B Preferred Stock: 

 

Dividends. Holders of shares of Redeemable Convertible Series B Preferred Stock shall receive cumulative dividends, pro rata among such holders, prior to and in preference to any dividend on our outstanding common stock at the per annum rate of 8% of the Series B Original Issue Price (as defined below). Dividends on each share of Series B Preferred Stock will accrue daily and be cumulative from December 22, 2017 (the “Series B Original Issue Date”) and shall be payable upon the occurrence of any voluntary or involuntary liquidation, dissolution or winding up of the Company (a “Liquidation Event”), a conversion or a redemption. The “Series B Original Issue Price” shall mean $1.00 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Redeemable Convertible Series B Preferred Stock. Holders shall also be entitled to receive dividends on shares of Redeemable Convertible Series B Preferred Stock equal (on an as-if-converted-to-common-stock basis regardless of whether the Redeemable Convertible Series B Preferred Stock is then convertible or otherwise subject to conversion limitations) to and in the same form as dividends actually paid on shares of our common stock when, as and if such dividends are paid on shares of the common stock.

 

Liquidation. In the event of (i) a Liquidation Event or (ii) a merger or consolidation (other than one in which our stockholders own a majority by voting power of the outstanding shares of the surviving or acquiring corporation) or a sale, lease, transfer, exclusive license or other disposition of all or substantially all of our assets (a “Deemed Liquidation Event”), the holders of shares of Redeemable Convertible Series B Preferred Stock then outstanding shall be entitled to be paid out of our assets available for distribution to stockholders before any payment shall be made to the holders of our common stock, Series A Convertible Preferred Stock or any other class of securities authorized that is specifically designated as junior to the Redeemable Convertible Series B Preferred Stock (the “Junior Securities”) by reason of their ownership thereof, but  -pari passu-  with the holders of shares of any class of securities authorized that is specifically designated as  pari passu  with the Redeemable Convertible Series B Preferred Stock (the “Parity Securities”) on a pro rata basis, an amount per share equal to the Series B Original Issue Price, plus any accrued dividends thereon. If upon any such Liquidation Event or Deemed Liquidation Event, our assets available for distribution to stockholders shall be insufficient to pay the holders of shares of Redeemable Convertible Series B Preferred Stock the full amount to which they shall be entitled and the holders of Parity Securities the full amount to which they shall be entitled, the holders of shares of Redeemable Convertible Series B Preferred Stock and the holders of shares of Parity Securities shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. Upon a Liquidation Event or a Deemed Liquidation Event, in the event that following the payment of such liquidation preference the Company shall have additional cash and other assets of available for distribution to stockholders, then the holders of shares of Redeemable Convertible Series B Preferred Stock shall participate  pari passu  with the holders of shares of Parity Securities and Junior Securities based on the then current conversion rate (disregarding for such purposes any conversion limitations) with respect to all remaining distributions, dividends or other payments of cash, shares or other assets and property of our company, if any. As of June 30, 2018, the aggregate liquidation preference amounted to $1,948 (unaudited). The foregoing dollar amount does not include dividends, as the Company’s Board of Directors has not declared any dividends since inception.

 

A-20 

 

 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

 

Note 5 (Cont.)

Stockholders’ Equity (Cont.):

 

Voting Rights. On any matter presented to our stockholders for their action or consideration, each holder of Redeemable Convertible Series B Preferred Stock shall be entitled to cast the number of votes equal to the quotient of the aggregate investment amount invested to purchase Series B Preferred Stock divided by $1.12, the market value of the Company’s common stock on December 21, 2017, or approximately 0.893 votes per share (subject to certain conversion limitations described below). Except as provided by law or by the other provisions of the Series B Certificate of Designation, the holders shall vote together with the holders of shares of common stock as a single class. However, as long as any shares of Redeemable Convertible Series B Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of the outstanding shares of Redeemable Convertible Series B Preferred Stock (the “Requisite Holders”), (i) issue any class of equity securities that is senior in rights to the Redeemable Convertible Series B Preferred Stock, (ii) issue any Parity Securities, (iii) alter or change adversely the powers, preferences or rights given to the Redeemable Convertible Series B Preferred Stock or alter or amend the Series B Certificate of Designation, (iv) amend our articles of incorporation or other charter documents in any manner that adversely affects any rights of the holders of Redeemable Convertible Series B Preferred Stock, (v) except pursuant to the redemption provisions of Parity Securities, redeem any shares of our preferred stock or common stock (other than pursuant to employee or consultant agreements giving us the right to repurchase shares at the original cost thereof upon the termination of services and provided that such repurchase is approved by our Board of Directors), or (vi) enter into any agreement with respect to any of the foregoing.

 

Conversion. Each share of Redeemable Convertible Series B Preferred Stock plus accrued, but unpaid, dividends thereon (the “Aggregate Preference Amount”), shall be convertible, at any time and from time to time at the option of the holder thereof, into that number of shares of common stock determined by a formula (computed on the date of conversion), (i) the numerator of which is equal to the Aggregate Preference Amount and (ii) the denominator of which is equal to the quotient of the Conversion Price divided by $1.33. The “Conversion Price” for the Redeemable Convertible Series B Preferred Stock was adjusted to $0.8684 starting in February 2018, subject to adjustment as described in the Series B Certificate of Designation. In addition, upon the earlier to occur of: (i) a Deemed Liquidation Event or (ii) if there has not been a breach or default by us under the OFI Purchase Agreement that has occurred and is continuing, May 31, 2018, each share of Redeemable Convertible Series B Preferred Stock plus accrued, but unpaid, dividends thereon shall be automatically converted into that number of shares of common stock determined by dividing $1.33 by the Conversion Price. Notwithstanding the forgoing, if the Company has not obtained stockholder approval with respect to the issuance of shares upon conversion in excess of 19.99% of the issued and outstanding common stock on the applicable conversion date (the “Stockholder Approval”), then the Company may not issue, upon conversion of the Redeemable Convertible Series B Preferred Stock, a number of shares of common stock which, when aggregated with any shares of common stock issued on or after the Series B Original Issue Date and prior to such conversion date, would exceed 19.99% of the issued and outstanding shares of common stock (subject to adjustment for forward and reverse stock splits, recapitalizations and the like) (the “Issuable Maximum”). Each holder shall be entitled to a portion of the Issuable Maximum equal to the quotient obtained by dividing (i) the Series B Original Issue Price of such holder’s Redeemable Convertible Series B Preferred Stock by (ii) the aggregate Series B Original Issue Price of all Redeemable Convertible Series B Preferred Stock issued to all holders. In the light of the above, on May 31, 2018, 1,869,663 shares of the Series B Preferred Stock along with pro-rata accrued dividends were automatically converted into 2,965,301 shares of common stock. As a result of this conversion, an amount of $2,553 was transferred from Redeemable Convertible Preferred Stock Series B account into equity.

 

A-21 

 

 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

 

Note 5 (Cont.)

Stockholders’ Equity (Cont.):

 

Redemption. If (i) there is a breach by us of any of our representations and warranties contained in Sections 3.1(a) (Subsidiaries), 3.1(b) (Organization and Qualification), 3.1(c) (Authorization; Enforcement), 3.1(d) (No Conflicts), 3.1(f) (Issuance of the Shares), 3.1(g) (Capitalization), or 3.1(n) (Taxes) of the OFI Purchase Agreement that has not been cured within 30 days after the date of such breach or (ii) Stockholder Approval has not been obtained by March 31, 2018 (each, a “Redemption Event”), then each holder of Redeemable Convertible Series B Preferred Stock may, at its option, require us to redeem any or all of the shares of Redeemable Convertible Series B Preferred Stock held by such holder at a price per share equal to $1.33, plus accrued, but unpaid, dividends through and including the date of such redemption. The Company must provide a notice (as “Event Notice”) to each holder of the occurrence of a Redemption Event of the kind described in (i) above (a “Breach Event”) as soon as practicable after becoming aware of such Breach Event, but in any event, not later than 15 days after such Breach Event and such notice shall provide a reasonable description of such Breach Event. A holder must send written notice of redemption (a “Redemption Notice”) to the Company within 90 days after (i) the Company provides such holder an Event Notice with respect to a Breach Event or (ii) the occurrence of a Redemption Event of the kind described in (ii) above. For the avoidance of doubt, if the Company does not timely provide an Event Notice, the holder shall nevertheless have the right to deliver a Redemption Notice in connection with any Redemption Event. If a holder fails to send a Redemption Notice on prior to the 90th day after the occurrence of any Redemption Event, then such holder will lose such holder’s right to redemption with respect to the particular Redemption Event, but not any other Redemption Event. As of March 31, 2018, the Company did not obtain shareholder approval and therefore, the then outstanding Series B Preferred Stock became redeemable at the option of OFI. Consequently, in each reporting period commencing March 31, 2018, the outstanding Series B Preferred stock is recorded on its maximum redemption value until the earlier of an redemption or conversion occurrence.

 

Securities Purchase Agreement

On December 22, 2017, the Company entered into the OFI Purchase Agreement with OFI, under which OFI may, but is not obligated to, invest up to $15,000 in the Company in a series of closings over a period prior to December 31, 2018, in exchange for which OFI will receive shares of the Company’s Redeemable Convertible Series B Preferred Stock (“Series B Shares”) at a purchase price of $1.00 per share (the “Option”).

 

On December 22, 2017 (the “Initial Date”), the Company and OFI completed the first closing under the OFI Purchase Agreement, pursuant to which OFI exercised a portion of the Option and provided $1,500 to the Company in exchange for 1,500,000 Series B Shares. On January 24, 2018 (the “Second Date”), the Company and OFI completed a second closing under the OFI Purchase Agreement, pursuant to which OFI provided $2,225 to us in exchange for 2,225,000 Series B Shares.

 

Under the OFI Purchase Agreement, the proceeds from the first closing were to be used for working capital and general corporate purposes, the proceeds from the second closing were to be used to perform due diligence and invest in Income Generating Properties (as defined in the OFI Purchase Agreement) that have been approved by our Board of Directors, and proceeds from subsequent closings were be used to invest in Income Generating Properties (as defined in the OFI Purchase Agreement) that have been approved by our Board of Directors or as otherwise agreed to between us and OFI in writing prior to such subsequent closings. On March 16, 2018, the Company and OFI entered into a letter agreement, pursuant to which OFI agreed that the Company may use all proceeds for the purposes and uses described in a budget agreed to between us and OFI at the time the letter agreement was signed. In connection with such letter agreement, the Company agreed to provide OFI, on a quarterly basis, on or prior to 15 days after the end of each quarter, a report that describes, in reasonable detail, the actual expenses incurred and payments made during such period compared to the expenses and payments specified in the budget for such period, certified by our Chief Financial Officer.

 

A-22 

 

 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

 

Note 5 (Cont.)

Stockholders’ Equity:

 

Under ASC 480, “Distinguishing Liabilities from Equity”, Since the Series B Shares have conditional redemption provisions which are outside of the control of the Company and also contain a deemed liquidation preference, the Series B Shares were classified as mezzanine financing at the Initial Date at the residual amount, which was the difference between the total proceeds received and the fair value of the Option. Subsequently, accrete changes in the redemption value over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument using an appropriate methodology, usually the interest method. Changes in the redemption value are considered to be changes in accounting estimates. As described above, as of June 30, 2018, the Series B Shares are presented at their full redemption amount.

 

Under ASC 480, the aforementioned written call Option is considered freestanding, as the Company believes it is legally detachable and separately exercisable. As the option is exercisable for shares subject to possible redemption at the option of the holder, as of the Initial Date, the Option was measured at fair value and recorded as a non-current financial liability on the consolidated balance sheet. Excess of the initial value of the option liability over the proceeds received was charged immediately into the consolidated statement of comprehensive loss as financing expenses in the fourth quarter of 2017. The Option is marked to market in each reporting period until it is exercised or expired, as earlier, when changes in the fair value of the Option are charged into statement of comprehensive income or loss. For the three and six month periods ended June 30, 2018, the Company recorded income in the total amount of $2,568 and $2,295, respectively due to revaluation of Option to purchase redeemable convertible B preferred stock.

 

In addition, at the Initial Date, the Company incurred de minimis direct and incremental issuance costs which were charged immediately into the consolidated statement of comprehensive loss as finance expenses, as the written call Option was presented at fair value.

 

At the Initial Date, each Series B Share was convertible into 1.24789 shares of common stock valued at $1.00 per share. As a result, Beneficial Conversion Feature (the “BCF”) amounting to approximately $372 was measured assuming full conversion. However, the conversion of the Preferred Stock is subject to certain contingencies, which impact the timing and amount of the BCF. At the Initial Date which is also the commitment date, the Company should record a BCF for the Preferred Stock for any shares convertible at that time without requiring stockholder approval through the planned proxy statement. However, as no residual proceeds were allocable to the Series B Shares at the Initial Date, no BCF was recognized with respect to the first closing.

 

In conjunction with the Second Date, OFI partially exercised the written call option present in the OFI Purchase Agreement and therefore upon exercise, the pro-rata share of this liability amounting to $677 was reclassified in the condensed consolidated balance sheet from Option to purchase redeemable convertible preferred stock into redeemable convertible preferred stock Series B, during the three month period ended March 31, 2018.

 

On the Second Date, each Series B Share (exclusive of dividends) was convertible into 1.24789 shares of common stock valued at $1.00 per share. As a result of the reclassification of the exercised written call option, there was no additional BCF measured.

 

The fair value of the Option was based on management estimates and values derived from a calculation to provide an approximate indication of value. The fair value of Option is estimated at each reporting and exercise date, including, December 31, 2017, January 24, 2018 and June 30, 2018 by using hybrid method that includes scenario of conversion and scenario liquidation and the Black-Scholes option pricing model. In the first scenario, the Series B Preferred Stock price applied in the model was assumed based on the as-converted price on the date of estimation. Expected volatility was estimated by using a group of peers in the real estate development, homebuilding and income-producing properties sectors, and applying a 75% percentile ranking based on the total capitalization of the Company. In the second scenario, the Option was estimated based on the value of the Option in a proposed liquidation scenario. A probability weighting was applied to determine the expected value of the Option. The Company measured the fair value of the Option on a recurring basis in accordance with ASC 820, “Fair Value Measurement and Disclosures” (primary inputs classified at level 3).

 

A-23 

 

 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

 

Note 5 (Cont.)

Stockholders’ Equity:

 

The following are the key underlying assumptions that were used:

 

    December 31, 
2017
    January 24, 
2018
    June 30, 
2018
 
Dividend yield (%)     0       0       0  
Expected volatility (%)     36.9       37.9       42.4  
Risk free interest rate (%)     1.74       1.75       2.11  
Strike price     1.00       1.00       1.00  
Series B Preferred Stock price     1.13       1.10       0.83  
Probability of if-converted scenario (%)     90       90       90  
Probability assumed liquidation scenario (%)     10       10       10  
Expected term of Option (years)     1.0       0.9       0.5  
Option’s fair value per share   $ 0.33     $ 0.30     $ 0.13  

 

The following tabular presentation reflects the activity in the Option to purchase Redeemable Convertible B Preferred Stock during the six months ended June 30, 2018 -

 

    Fair value of Option to 
purchase Redeemable 
Convertible B Preferred 
Stock
 
    (Unaudited)  
       
Opening balance, January 1, 2018   $ 4,390  
Partial exercise of series B redeemable convertible preferred stock written call option     (677 )
Revaluation of option to purchase redeemable convertible B preferred stock     (2,295 )
         
Closing balance, June 30, 2018   $ 1,418  

 

In the absence of voluntary conversion and assuming no breaches as described above under “Redemption,” the Series B Shares would have automatically converted on May 31, 2018. As such, accretion adjustments to the carrying amount of the Series B Shares to the automatic conversion date of May 31, 2018 are recorded as deemed dividends. However, at March 31, 2018, the Company did not obtain shareholder approval and therefore, the then outstanding Series B Preferred Stock became redeemable at the option of OFI. As such, as of June 30, 2018, the Company has adjusted the carrying value of the Convertible Series B Preferred Stock to the maximum redemption amount. Activity in the account redeemable convertible preferred stock Series B for the six months ended June 30, 2018, is outlined in the below table -

 

    June 30, 2018  
    Unaudited  
       
Opening balance, January 1, 2018   $ 87  
Proceeds from issuance of Series B Shares     2,225  
Accretion of Series B Preferred Stock to redemption value     1,968  
Partial exercise of Series B Preferred Stock written call option on the second date     677  
Conversion of Series B Preferred Stock into Common Stock     (2,553)  
Dividend on Series B Preferred Stock     141  
         
Closing balance, June 30, 2018   $ 2,545  

  

A-24 

 

 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

 

Note 5 (Cont.)

Stockholders’ Equity:

 

Under the Agreement, the Series B Preferred Stock, up to the stated limits, would automatically convert to the Company’s common stock on May 31, 2018. Consequently, 1,869,663 shares of Series B Preferred Stock held by OFI have been converted into 2,965,301 shares, or 19.99% of the 11,868,619 outstanding shares of common stock as of May 31, 2018, which is the applicable conversion date under the OFI Purchase Agreement. The remaining 1,855,337 unconverted shares of the Series B Preferred Stock will remain as mezzanine and will accrued a preferred dividend until such time a conversion is approved by the Company’s shareholders.

 

In addition, pursuant to the OFI Purchase Agreement, the Company agreed that so long as the Series B Shares purchased by OFI are outstanding, the Company’s debt (as determined in accordance with U.S. generally accepted accounting principles) should not exceed 45% of its fixed assets, without the prior written consent of the Requisite Holders. As of June 30, 2018, the Company has met this covenant.

 

Cancellation  and Exchange Agreement

On April 20, 2018, the Company and OFI entered into a Cancellation and Exchange Agreement (the “Exchange Agreement”), pursuant to which OFI agreed to provide an additional $2,000 to the Company in exchange for 2,000,000 shares of the Company’s Series B Preferred Stock, subject to certain conditions set forth in the Exchange Agreement, including, among other things, the cancellation of 95,770 shares of the Company’s Series A Preferred Stock held by OFI in exchange for 5,382,274 shares of the Company’s common stock (the “OFI Shares”). Under the Exchange Agreement, closing of this additional investment shall occur promptly following the filing of the Information Statement (as defined below) with the SEC and mailing of the Information Statement to the stockholders of the Company, and in any event within 3 days thereafter.

 

In accordance with the Exchange Agreement, the Company has obtained the irrevocable written consent of at least a majority of the stockholders of the Company (excluding OFI) that is final and binding (the “Stockholder Consent”) approving the issuance of the OFI Shares and the issuance of Common Stock upon conversion of all of the Series B Preferred Stock held by OFI or issuable under the OFI Purchase Agreement. The Stockholder Consent shall become effective on the 20th day following the filing and mailing of a definitive information statement on Schedule 14C (the “Information Statement”), at which time stockholder approval of such issuances shall become effective (“Stockholder Approval”). Pursuant to the Exchange Agreement, the Company agreed to issue the OFI Shares as soon as practicable after obtaining Stockholder Approval and in any event within 3 business days of obtaining Stockholder Approval.

 

Pursuant to the Exchange Agreement, the Company agreed that the OFI Shares shall constitute “Registrable Securities” under the registration rights agreement between the Company and OFI, dated December 22, 2017, and the Company shall use commercially reasonable efforts to promptly amend the registration statement filed by the Company on January 23, 2018 to include the OFI Shares and any other shares of common stock of the Company that are issuable to OFI upon conversion of Series B Preferred Convertible Stock held by OFI that are not already included in such registration statement.

 

A-25 

 

 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

 

Note 5 (Cont.)

Stockholders’ Equity:

 

Common Stock Options

The Company’s Amended and Restated 2000 Non-Employee Director Stock Option Plan authorized 1,250,000 shares. As of June 30, 2018, the number of shares available for future issuance pursuant to this plan is 240,018; all other shares had either been issued or reserved for issuance upon exercise of stock options.

 

The Company’s Amended and Restated 2005 Equity Compensation Plan authorized 3,500,000 shares. As of June 30, 2018, there are no further shares available for future issuance pursuant to this plan; all other shares had either been issued or reserved for issuance upon exercise of stock options.

 

A summary of stock option transactions under these plans during the six months ended June 30, 2018 are as follows:

 

      Number of Stock 
Options
    Weighted 
Average 
Exercise Price
    Weighted 
Average 
Remaining 
Term 
(in years)
    Aggregate  
Intrinsic 
Value (*)
 
Outstanding at January 1, 2018       79,890     $ 94.51       4.1     $  
Granted/vested       147,088     $ 0.98       9.8     $  
Exercised                          
Expired/cancelled       (147,088 )                  
Outstanding at June 30, 2018       79,890     $ 33.90       7.8     $  
Exercisable at June 30, 2018       79,890     $ 33.90       7.8     $  

 

(*) The aggregate intrinsic value represents the total intrinsic value (the difference between the deemed fair value of the Company’s Ordinary Shares on the last day of the second quarter of 2018 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2018. This amount is impacted by the changes in the fair value of the Company’s shares.

 

The total equity-based compensation expense related to the Company’s equity-based awards, recognized during the six months ended June 30, 2018 and 2017, total the amounts of $5 (unaudited) and $935 (unaudited) ($811 out of which related to the three months ended June 30, 2017 is included in discontinued operations), respectively.

 

As of June 30, 2018, there was $11 (unaudited) of total unrecognized compensation cost related to non-vested stock awards that based on their original vesting terms was expected to be recognized.

 

A-26 

 

 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

 

Note 6

Income Taxes:

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; eliminating the corporate Alternative Minimum Tax (“AMT”) and changing how existing AMT credits can be realized; creating a new limitation on deductible interest expense; changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; and changing limitations on the deductibility of certain executive compensation.

 

In December 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which addresses situations where the accounting is incomplete for the income tax effects of the Act. SAB 118 directs taxpayers to consider the impact of the act as “provisional” when the Company does not have the necessary information available, prepared or analyzed (including computations) to finalize the accounting for the change in tax law. Companies are provided a measurement period of up to one year to obtain, prepare, and analyze information necessary to finalize the accounting for provisional amounts or amounts that cannot be estimated.

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.

 

A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which the related temporary difference becomes deductible. The benefit of tax positions taken or expected to be taken in the Company’s income tax returns are recognized in the consolidated financial statements if such positions are more likely than not of being sustained. As of June 30, 2018, an amount of $1.6 million related to corporate international unrecognized tax benefits is included in other accrued liabilities.

 

Taxes, which may apply in the event of a disposal of investments in subsidiaries, have not been included in computing the deferred taxes, as the Company anticipates it would liquidate those subsidiaries that can be closed on a tax free basis.

 

The Company files corporate income tax returns in the United States, both in the Federal jurisdiction and in various State jurisdictions. The Company is subject to Federal income tax examination for calendar years 2014 through 2017 and is also generally subject to various State income tax examinations for calendar years 2014 through 2017. Photo Therapeutics Limited files in the United Kingdom. Radiancy (Israel) Limited files in Israel. The Israeli subsidiary is subject to tax examination for calendar years 2013 through 2017.

 

During the six months ended June 30, 2018, the Company recognized an income tax provision of $209 relating to adjustments of accruals and prepaid tax assets.

 

A-27 

 

 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

 

Note 7

Subsequent Events:

 

Resignation of Director

 

Effective August 15, 2018, Michael Singer resigned as Chairman and a member of the Company’s Board of Directors as well as from his membership in the Board’s Audit, Compensation and Nominations and Corporate Governance Committees; he had served as Chairman of the Audit Committee.

 

A-28 

 

 

FC GLOBAL REALTY INCORPORATED

 

CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 

 

A-29 

 

 

 

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Fahn Kanne & Co.

Head Office

32 Hamasger Street

Tel-Aviv 6721118, ISRAEL

PO Box 36172, 6136101

T +972 3 7106666

F +972 3 7106660

www.gtfk.co.il

 

Board of Directors and Stockholders

FC Global Realty Incorporated (Formerly: PhotoMedex Inc.)

 

 

 

 

 

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of FC Global Realty Incorporated (Formerly: PhotoMedex Inc.) (a Nevada corporation) and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of comprehensive loss, changes in redeemable convertible preferred stock and stockholders’ deficit, and cash flows for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred net losses for each of the years ended December 31, 2017 and 2016 and has not yet generated any revenues from real estate activities. As of December 31, 2017, there is an accumulated deficit of $135,022.  These conditions, along with other matters as set forth in Note 1, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Restatement of previously issued financial statements

As discussed in Note 1 to the consolidated financial statements, the 2017 consolidated financial statements have been restated to correct an error.

 

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ FAHN KANNE & CO. GRANT THORNTON ISRAEL

We have served as the Company’s auditor since 2011.

 

Tel Aviv, Israel

 

April 2, 2018 (except for Note 1, as to which the date is May 21, 2018)

 

A-30 

 

 

FC GLOBAL REALTY INCORPORATED (FORMERLY: PHOTOMEDEX, INC.) AND SUBSIDIARIES

 CONSOLIDATED BALANCE SHEETS

 (In thousands, except share and per share amounts)

 

    December 31,  
    2017     2016  
    (As Restated)        
ASSETS            
Current assets:                
Cash and cash equivalents   $ 948     $ 2,335  
Prepaid expenses and other current assets     646       601  
Assets held for sale (Note 2 and 4)           15,565  
Total current assets     1,594       18,501  
Non-current assets:                
Investment properties (Note 5)     2,055        
Investment in other company (Note 5)     1,806        
Property and equipment, net (Note 7)     5        
Other assets, net     334        
Total non-current assets     4,200        
Total assets   $ 5,794     $ 18,501  
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT                
Current liabilities:                
Notes payable   $ 778     $  
Accounts payable     612       6,648  
Accrued compensation and related expenses (Note 10)     467       4,029  
Other accrued liabilities     2,450       6,023  
Liabilities related to assets held for sale           3,209  
Total current liabilities     4,307       19,909  
Non-current liabilities:                
Option to purchase Redeemable Convertible B Preferred Stock (Note 14)     4,390        
Note payable, net of current portion (Note 12)     454        
Total non-current liabilities     4,844        
Total liabilities     9,151       19,909  
Commitment and contingencies (Note 13)                
Redeemable Convertible Preferred Stock Series B, $.01 par value; 15,000,000 shares authorized at December 31, 2017; 1,500,000 issued and outstanding at December 31, 2017, net of amount allocated to option to purchase additional shares; Aggregate liquidation preference $1,503,000 at December 31, 2017 (Note 14)     87        
Stockholders’ deficit (Note 14):                
Common Stock, $.01 par value, 500,000,000 and 50,000,000 shares authorized at December 31, 2017 and 2016 respectively; 11,868,619 and 4,361,094 shares issued and outstanding at December 31, 2017 and 2016, respectively     119       44  
Preferred stock, $.01 par value, 32,000,000 shares authorized at December 31, 2017; 0 shares issued and outstanding at December 31, 2017            
Preferred A Stock $.01 par value, 3,000,000 shares authorized at December 31 ,2017; 123,668 issued and outstanding at December 31, 2017;     1        
Additional paid-in capital     132,446       118,762  
Accumulated deficit     (135,022 )     (115,635 )
Accumulated other comprehensive loss     (1,162 )     (4,579 )
Total stockholders’ deficit attributable to FC Global Realty Incorporate     (3,618 )     (1,408 )
Noncontrolling interest (Note 5)     174        
Total stockholders’ deficit     (3,444 )     (1,408 )
Total liabilities, redeemable convertible preferred stock and stockholders’ deficit   $ 5,794     $ 18,501  

 

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

 

A-31 

 

FC GLOABAL REALTY INCORPORATED (FORMERLY: PHOTOMEDEX, INC.) AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (AS RESTATED)

  (In thousands, except share and per share amounts)

 

    For the Year Ended
December 31,
 
    2017     2016  
    (As Restated)        
             
Revenues:   $     $  
Cost of revenues            
Gross profit            
                 
Operating expenses:                
General and administrative     10,817        
Impairment of investment in other company (Note 5)     1,439        
      12,256        
                 
Operating loss     (12,256 )      
                 
Revaluation of asset contribution related financial instruments, net (Note 5)     (1,392 )      
Revaluation of Option to purchase redeemable convertible B preferred stock (Note 14)     (3,018 )      
Interest and other financing expense, net     (267 )      
Loss from continuing operations     (16,933 )      
                 
Discontinued operations:                
Loss from discontinued operations, net of taxes     (2,459 )     (13,264 )
                 
Net loss including portion attributable to noncontrolling interest     (19,392 )     (13,264 )
                 
Loss attributable to noncontrolling interest     8        
                 
Net loss attributable to FC Global Realty Incorporated   $ (19,384 )