Investment in LLC

12 Months Ended

Dec. 31, 2016

Investments in and Advance to Affiliates, Subsidiaries, Associates, and Joint Ventures [Abstract]

6.	Investment in LLC

The Company entered into a Limited Liability Company Agreement dated April 28, 2015 by and among EGS, LLC, a newly formed Delaware limited liability company (“EGS”) and the members named therein. The Company invested $333,333 and acquired 333,333 Units, representing a 33.33% Membership Interest in EGS. In addition to the Company, EGS has two other members, one of whom is Marshall Geller, a member of the Company’s Board of Directors. The EGS transaction, as well as Mr. Geller’s participation in the transaction, received the prior approval of the Company’s Audit Committee. Mr. Geller is the Managing Member of the LLC and also invested $333,333 and acquired 333,333 Units, representing a 33.33% Membership Interest in EGS.

EGS entered in a Note Purchase Agreement effective April 28, 2015 with Merriman Holdings, Inc. (“Merriman”), a publicly traded company, pursuant to which EGS purchased from Merriman for an aggregate purchase price of $1,000,000 (i) a one-year Senior Secured Note in the original principal amount of $1,000,000, at 12% interest, payable quarterly, in arrears (the “Note”) and (ii) a Common Stock Purchase Warrant which expires in five years to purchase 500,000 shares of Merriman common stock at $1.00 per share (the “Warrants”). EGS distributed the Warrants to its members and the Company received 166,666 Warrants which expire in five years. Marshall Geller also received 166,666 Warrants with an exercise price of $1.00 per share that expire in five years.

The investment in EGS is being accounted for under the equity method. Under this method, the Company records its share of EGS’s earnings (losses) in the statement of operations with equivalent amount of increases (decreases) to the investment. At April 28, 2015, the Company valued the Warrants at their fair value, or $120,000, using the Black Scholes model, and recorded their value as a reduction in the investment in EGS. The Company recorded approximately $74,000 as its share of EGS’s net income for the year ended December 31, 2015. At December 31, 2015, the carrying value of the investment in EGS was $287,000. The Warrant which permits a cashless exercise, qualifies as a derivative, and is recorded at fair value (based on observable inputs) with change in such value included in earnings. At December 31, 2015, the value of the Warrant (a Level 2 Security) was $12,000, which is included in Other Assets in the Consolidated Balance Sheet. The decrease in the value of the Warrant of $108,000 is included in Interest expense and other, net in the Consolidated Statement of Operations. Such reduction reflects the decrease in the price of Merriman’s common stock as measured for the period ended December 31, 2015.

On July 20, 2015, a fourth member joined EGS and invested $333,333, and received a 25% Membership Interest in EGS. EGS advanced the funds to Merriman and increased its investment in the Note and in addition, received 166,666 additional Warrants which it distributed to its new member. This transaction reduced the Company’s interest in EGS to 25%, changed the expiration date of the Note to July 20, 2016 from April 28, 2016, and extended the exercise date of the warrant to five years from that date.

Merriman is a financial services holding company that provides capital markets advisory and research, corporate and investment banking services through its wholly-owned principal operating subsidiary, Merriman Capital, Inc. (“MC”). The Note is secured by 99.998% of the capital stock of MC.

The Note, pursuant to the terms of an Intercreditor Agreement entered into with Merriman’s current debt holders, is senior to all of Merriman’s debt.

On July 27, 2016, FINRA suspended Merriman’s securities business due to an ongoing dispute over accounting for working capital, and MC filed a Broker Dealer Withdrawal with the SEC to begin the process of terminating its licenses. Substantially all of Merriman’s revenues are derived from MC. Merriman has not made the April 2016 interest payment or the $1,333,333 principal payment due at maturity in July 2016, and is currently in default of the Note with EGS.

The above events indicate that EGS may not be able to recover all or a significant portion of the carrying amount of the Note and accordingly, in the quarter ended June 30, 2016, EGS discontinued accruing interest income on the Note and provided a valuation allowance and related provision for loss for the entire carrying amount of the Note, including accrued interest in a prior quarter. Correspondingly, for the year ended December 31, 2016, the Company recorded $294,000 as to its share of EGS’s net loss for such period, which resulted in a zero carrying value for the Company’s investment in EGS at December 31, 2016. In addition, the warrants were ascribed no value at such date resulting in a loss of $12,000 for the year ended December 31, 2016. Any future recovery by the Company on its investment in EGS will be recognized as income when received. During the year ended December 31, 2016, there were no amounts recovered from the Company’s investment in EGS.