15. Commitments and Contingencies and Related Party Transactions

Commitments and Contingencies

Severance Arrangements

Pursuant to the terms of the employment agreement with our President and COO, employment may be terminated either by the employee or by the Company at any time. In the event the agreement is terminated by us without cause, or in certain circumstances terminates constructively or expires, our President and COO will receive severance compensation for a period of six months. Additionally, if terminated, our President and COO will continue to receive the employer portion of health coverage during the severance period. As of December 31, 2020, the maximum contingent liability under this agreement was $99,000.

Inadvertent Investment Company

We do not believe that we are engaged in the business of investing, reinvesting, or trading in securities, and we do not hold ourselves out as being engaged in the business of investing, reinvesting, or trading in securities. However, with the assistance of the Asset Manager, as defined below, we hold excess liquid resources in marketable securities to preserve resources needed to acquire operating businesses or assets and fund our finance and real estate activities. The Board of Directors and management monitor the Company’s status relative to the inadvertent investment company test under the Investment Company Act of 1940 (the “ICA”) and believe that the Company is not, and as of December 31, 2020 was not, an inadvertent investment company based on the assets test under Section 3(a)(1)(C) of the ICA.

If we were deemed to be an inadvertent investment company and determined to or were required to become a registered investment company, we would be subject to burdensome and costly compliance requirements and restrictions that would limit our activities, including limitations on our capital structure, additional corporate governance requirements, and other limitations on our ability to transact business as currently conducted. We do not believe that it would be practical or feasible for a company of our size, management, and financial resources to operate as a registered investment company. To avoid being deemed an inadvertent investment company or becoming a registered investment company, we may decide or be required to sell certain of our investments on disadvantageous terms, hold a greater proportion of our investments in marketable securities in U.S. government securities or cash equivalents that have a lower rate of return than other investment securities, or make other material modifications to our business operations and strategy, any or all of which could have a material adverse effect on our business, financial condition, results of operations, and future prospects.

Related Party Transactions

Management Agreement

In February 2019, the Company entered into a management agreement with CIDM LLC (the “Prior Asset Manager”) under which CIDM LLC provides consulting services and advice to the Board of Directors and the Company’s management regarding asset allocation and acquisition strategy. During our fiscal year 2020, the management agreement was assigned to CIDM II, LLC (“CIDM II,” or the “Asset Manager”). CIDM II exclusively manages the Company’s portfolio of publicly traded investments and, subject to the terms of the management agreement and the guidelines set forth therein, maintains investment authority over such portfolio, in order to better position the Company to increase its return on assets. CIDM II is an affiliate of the Company’s largest stockholder, JDS1, LLC.

Under the terms of the management agreement, the Company pays the Asset Manager both (i) an asset management fee on a quarterly basis, based upon the total assets of the Company, and (ii) an annual performance fee, based upon calendar year asset growth. Both the management fee and performance fee were settled through the issuance of cash-settled SARs with a base price of $0.01 per share.

On June 4, 2020, the Company entered into an “Omnibus Amendment Regarding the Management Agreement and SARs Agreements” (the “Omnibus Amendment”) by and among the Company, the Asset Manager and the Prior Asset Manager amending certain terms of the original management agreement, dated as of February 14, 2019 (the “Management Agreement”), by and between the Company and the Prior Asset Manager, including the form of SARs agreement (the “Form of SARs Agreement”), and the SARs agreements entered into pursuant to the Management Agreement between the Company and the Prior Manager (the “Prior SARs Agreements”). Pursuant to the Management Agreement, the Asset Manager, among other things, (i) provides the Company with advisory services with respect to the management and allocation of the assets of the Company and its subsidiaries, and (ii) exercises discretionary management authority over the Company’s trading portfolio of publicly traded securities.

The Omnibus Amendment amended the terms of the Management Agreement to provide that:

(i)

the Management Fee (as defined in the Management Agreement) due to the Asset Manager shall continue to be payable via a grant of SARs for services rendered through the quarter ending June 30, 2020. Thereafter, the Management Fee shall be payable in cash. The Performance Fee (as defined in the Management Agreement) shall continue to be payable in SARs;

(ii)

the cash value of a SAR grant for the purpose of determining the amount by which it reduces the fees payable under the Management Agreement shall equal $3.50 per SAR; and

(iii)

the value of the assets on which the Management Fee and Performance Fee are based shall be adjusted to exclude any deferred tax assets of the Company.

The Omnibus Amendment also affects the assignment of the Prior SARs Agreements from the Prior Manager to the Asset Manager and amends the Prior SARs Agreements and the Form of SARs Agreement, pursuant to which SARs will be granted to the Asset Manager in the future, in each case, to provide that SARs granted thereunder are exercisable as of the date of grant, subject to any restrictions in the applicable agreement.

Prior to this Omnibus Amendment, the Company granted 797,446 SARs, to be settled in cash, to the Prior Manager, as compensation for the Management Fee and the calendar year 2019 Performance Fee, with a base price of $0.01 per share, that were earnable upon completion of both service and performance conditions. The service condition was completed each quarter as the asset management services were provided, and annually upon calculation of the Performance Fee. The vesting performance condition required the Company to undergo a qualifying change of control before the SARs are exercisable by the Prior Asset Manager. As such, because a qualifying change of control had neither occurred nor become probable before the Omnibus Amendment, the Company did not record expense attributable to the granted SARs.

The Omnibus Amendment modified the granted SARs’ and future SAR grants’ vesting criteria by removing the performance condition of a qualifying change of control so that SARs are exercisable upon grant. With this modification, the Company recorded $2,552,000 of compensation expense during the fourth quarter of our fiscal year 2020 attributable to SARs for which vesting was previously subject to a qualifying change of control. Additionally, the Company recorded $289,000 of expense during the three months ended June 30, 2020 for the 90,310 cash-settled SARs that it granted to the Asset Manager during the three months ended September 30, 2020 as compensation for the Management Fee during the three months ended June 30, 2020. During the three and six months ended December 31, 2020, the Company also recorded $287,000 and $603,000, respectively, of expense as compensation for the Management Fee, and $116,000 and $214,000, respectively, of reductions of expense related to revaluation of previously issued SARs. These expenses are included in selling, general, and administrative expenses on the consolidated statements of operations. $2,915,000 and $2,841,000 are accrued as management fee payable on our consolidated balance sheets as of December 31, 2020 and June 30, 2020, respectively.

On October 15, 2020, the Company amended the Management Agreement to align the Performance Fee, as that term is defined in the Management Agreement, with the Company's fiscal year, as opposed to the calendar year.

Other Fees Paid to the Asset Manager

In addition to the SARs-settled Management and Performance Fees and the cash Management Fees, the Company provides the Asset Manager with $50,000 per quarter for the purpose of expense reimbursements.