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Unaudited Pro Forma Condensed Combined Financial Information
Introduction
On May 25, 2022, Westwood Holdings Group, Inc. (the “Company” or “Westwood”), a Delaware corporation, Salient Capital Management, LLC, a Delaware limited liability company, Salient Partners, L.P. (“Salient Partners”), a Delaware limited partnership, the other Sellers as listed on Annex A attached thereto entered into a Purchase Agreement (the “Purchase Agreement”), pursuant to which the Company agreed to purchase Salient Partners’ asset management business (the “Business”).
Salient Partners is a Houston-based real asset and investment firm that offered a suite of strategies focused on energy and infrastructure, real estate and tactical alternative investments. The firm had $4.5 billion in assets under management as of November 18, 2022. Pursuant to the Purchase Agreement, Westwood purchased substantially all of the properties, rights and assets and assume certain liabilities of the Business (the “Acquisition”). Westwood acquired Salient Partners’ four distinct investment capabilities: Energy Infrastructure, Tactical Equity, Real Estate, and Private Investments, as defined in the Company’s Form 8-K filed on May 25, 2022. The Acquisition closed on November 18, 2022, and Westwood is accounting for this asset acquisition as a business combination.
In order to provide additional cash for the purchase of the Business, in November 2022 the Company liquidated certain investments (“Investment Liquidation”) within its portfolio. These investments primarily consisted of liquid investments held in United States Treasury Bills. The Investment Liquidation resulted in the Company receiving cash proceeds of approximately $36.7 million, a portion of which will be used to fund the Acquisition.
The following unaudited pro forma combined financial information has been prepared in accordance with Article 11 of Regulation S-X. The unaudited pro forma condensed combined balance sheet as of September 30, 2022 gives effect to the Acquisition and Investment Liquidation as if the transactions had been completed on September 30, 2022 and combines the unaudited condensed consolidated balance sheet of Westwood as of September 30, 2022 with the unaudited condensed consolidated balance sheet of Salient Partners as of September 30, 2022.
The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2022 and the year ended December 31, 2021 give effect to the Acquisition and Investment Liquidation as if they had occurred on January 1, 2021, the beginning of the earliest period presented, and combines the historical results of Westwood and Salient Partners. The unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2022 combines the unaudited condensed consolidated statement of operations of Westwood for the nine months ended September 30, 2022, and the unaudited condensed consolidated statement of operations of Salient Partners for the nine months ended September 30, 2022. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2021 combines the audited consolidated statement of operations of Westwood for the year ended December 31, 2021 with the audited consolidated statement of operations of Salient Partners for the year ended December 31, 2021.
The historical condensed consolidated financial statements of Westwood and the historical condensed consolidated financial statements of Salient Partners have been adjusted in the accompanying unaudited pro forma condensed combined financial information to give effect to pro forma events that are transaction accounting adjustments which are necessary to account for the Acquisition, in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The unaudited pro forma adjustments are based upon available information and certain assumptions that our management believes are reasonable.
The unaudited pro forma condensed combined financial information should be read in conjunction with:
a.the accompanying notes to the unaudited pro forma condensed combined financial information;
b.the separate unaudited condensed consolidated financial statements of Westwood as of and for the nine months ended September 30, 2022 and the related notes, included in Westwood's Quarterly Report on Form 10-Q for the nine months ended September 30, 2022;
c.the separate audited consolidated financial statements of Westwood as of and for the year ended December 31, 2021 and the related notes, included in Westwood's Annual Report on Form 10-K for the year ended December 31, 2021;
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d.the separate unaudited condensed consolidated financial information of Salient Partners as of and for the nine months ended September 30, 2022, filed as Exhibit 99.2 to this Form 8-K/A;
e.the separate audited consolidated financial statements of Salient Partners as of and for the year ended December 31, 2021 and the related notes, filed as Exhibit 99.1 to this Form 8-K/A.
Accounting for the Acquisition
The Acquisition is being accounted for as a business combination using the acquisition method with Westwood as the accounting acquirer in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. Under this method of accounting, the aggregate purchase consideration will be allocated to Salient Partner’s assets acquired and liabilities assumed based upon their estimated fair values at the date of completion of the Acquisition.
The process of valuing the net assets of Salient Partners immediately prior to the Acquisition, as well as evaluating accounting policies for conformity, is preliminary. Any excess between the estimated fair value of the consideration transferred and the estimated fair value of the assets acquired, and liabilities assumed will be recorded as goodwill. Accordingly, the aggregate consideration allocation and related adjustments reflected in the unaudited pro forma condensed combined financial information are preliminary and subject to revision based on a final determination of the fair value of Salient Partners’ net assets and certain elements of Westwood’s consideration transferred. Amounts for both entities are the best estimate based on information available at the time of the analysis. Refer to Note 1—Basis of Presentation below for more information.
The unaudited pro forma condensed combined financial information has been prepared for illustrative purposes only to reflect the Acquisition related pro forma adjustments, and is not necessarily indicative of what the combined company’s financial position or results of operations actually would have been had the purchase occurred as of the dates indicated. The pro forma adjustments are based on information available at the time of the filing, and on certain assumptions that Westwood believes are reasonable. The unaudited pro forma condensed combined financial information also should not be considered indicative of the future results of operations or financial position of Westwood.
The reclassification and transaction accounting adjustments presented within the unaudited condensed combined financial information are subject to change. As additional information is obtained, final values may be materially different than the amounts shown within the unaudited pro forma financial information.
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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET | |||||||||||||||||||||||||||||
As of September 30, 2022 | |||||||||||||||||||||||||||||
(in thousands, except per share amounts) | |||||||||||||||||||||||||||||
Historical | |||||||||||||||||||||||||||||
Westwood | Salient Partners Reclassified (Note 2) | Other Transaction Accounting Adjustments | Transaction Accounting Adjustments | Pro Forma Combined | |||||||||||||||||||||||||
ASSETS | |||||||||||||||||||||||||||||
Current assets | |||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 22,470 | $ | 5,982 | $ | 36,663 | $ | (5,982) | 5(A) | $ | 17,553 | ||||||||||||||||||
(41,580) | 5(B) | ||||||||||||||||||||||||||||
Accounts receivable | 9,290 | 3,294 | — | — | 12,584 | ||||||||||||||||||||||||
Investments, at fair value | 51,564 | — | (36,850) | — | 14,714 | ||||||||||||||||||||||||
Prepaid income taxes | 569 | — | — | — | 569 | ||||||||||||||||||||||||
Other current assets | 2,647 | 1,034 | — | — | 3,681 | ||||||||||||||||||||||||
Total Current assets | 86,540 | 10,310 | (187) | (47,562) | 49,101 | ||||||||||||||||||||||||
Investments | 4,455 | 4,659 | — | 1,941 | 5(E) | 11,055 | |||||||||||||||||||||||
Noncurrent investments at fair value | 4,001 | 319 | — | — | 4,320 | ||||||||||||||||||||||||
Goodwill | 16,401 | 25,922 | — | (4,548) | 5(C) | 37,775 | |||||||||||||||||||||||
Deferred income taxes | 1,097 | — | — | — | 1,097 | ||||||||||||||||||||||||
Operating lease right-of-use assets | 5,286 | — | — | — | 5,286 | ||||||||||||||||||||||||
Intangible assets, net | 10,693 | 2,046 | — | 17,254 | 5(D) | 29,993 | |||||||||||||||||||||||
Property and equipment, net of accumulated depreciation | 1,717 | 88 | — | — | 1,805 | ||||||||||||||||||||||||
Other long-term assets | 797 | — | — | — | 797 | ||||||||||||||||||||||||
Total Assets | $ | 130,987 | $ | 43,344�� | $ | (187) | $ | (32,915) | $ | 141,229 | |||||||||||||||||||
LIABILITIES | |||||||||||||||||||||||||||||
Current liabilities | |||||||||||||||||||||||||||||
Accounts payable and accrued liabilities | $ | 2,876 | $ | 13,415 | $ | — | $ | (7,682) | 5(A) | $ | 6,786 | ||||||||||||||||||
(1,823) | 5(F) | ||||||||||||||||||||||||||||
Dividends payable | 1,726 | — | — | 1,726 | |||||||||||||||||||||||||
Compensation and benefits payable | 5,900 | — | — | — | 5,900 | ||||||||||||||||||||||||
Operating lease liabilities | 1,484 | — | — | — | 1,484 | ||||||||||||||||||||||||
Subordinated debt | — | 41,414 | — | (41,414) | 5(A) | — | |||||||||||||||||||||||
Senior debt | — | 16,891 | — | (16,891) | 5(A) | — | |||||||||||||||||||||||
Note payable | — | 4,004 | — | (4,004) | 5(A) | — | |||||||||||||||||||||||
Restructuring fee payable | — | 2,500 | — | (2,500) | 5(A) | — | |||||||||||||||||||||||
SBA loan | — | 1,860 | — | (1,860) | 5(A) | — | |||||||||||||||||||||||
Total Current liabilities | 11,986 | 80,084 | — | (76,174) | 15,896 | ||||||||||||||||||||||||
Accrued dividends | 554 | — | — | — | 554 | ||||||||||||||||||||||||
Noncurrent operating lease liabilities | 4,940 | — | — | — | 4,940 | ||||||||||||||||||||||||
Contingent consideration for acquisitions | — | — | — | 12,999 | 5(G) | 12,999 | |||||||||||||||||||||||
Total Liabilities | $ | 17,480 | $ | 80,084 | $ | — | $ | (63,175) | $ | 34,389 | |||||||||||||||||||
EQUITY | |||||||||||||||||||||||||||||
Stockholder’s equity (deficit) |
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Common stock, $0.01 par value | $ | 110 | $ | — | $ | — | $ | — | $ | 110 | |||||||||||||||||||
Additional paid-in capital | 199,594 | — | — | — | 199,594 | ||||||||||||||||||||||||
Treasury stock, at cost -2,648,278 shares at September 30, 2022; 2,405,154 shares at December 31, 2021 | (85,227) | — | — | — | (85,227) | ||||||||||||||||||||||||
Retained earnings (accumulated deficit) | (970) | (36,740) | (187) | 68,369 | 5(A) | (7,637) | |||||||||||||||||||||||
(38,109) | 5(H) | ||||||||||||||||||||||||||||
Total Stockholder’s equity (deficit) | $ | 113,507 | $ | (36,740) | $ | (187) | $ | 30,260 | $ | 106,840 | |||||||||||||||||||
Total Liabilities and Stockholder’s Equity (Deficit) | $ | 130,987 | $ | 43,344 | $ | (187) | $ | (32,915) | $ | 141,229 |
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS | |||||||||||||||||||||||
For the Nine Months Ended September 30, 2022 | |||||||||||||||||||||||
(in thousands, except per share amounts) | |||||||||||||||||||||||
Historical | |||||||||||||||||||||||
Westwood | Salient Partners Reclassified (Note 2) | Transaction Accounting Adjustments | Pro Forma Combined | ||||||||||||||||||||
Revenues | |||||||||||||||||||||||
Advisory Fees | |||||||||||||||||||||||
Asset-based | $ | 33,244 | $ | 22,925 | $ | — | $ | 56,169 | |||||||||||||||
Trust fees | 16,257 | — | — | 16,257 | |||||||||||||||||||
Other, net | (1,276) | — | — | (1,276) | |||||||||||||||||||
Private placement commission | — | 186 | — | 186 | |||||||||||||||||||
Total Revenues | 48,225 | 23,111 | — | 71,336 | |||||||||||||||||||
Expenses | |||||||||||||||||||||||
Employee compensation and benefits | 28,993 | 11,942 | 750 | 6(D) | 41,685 | ||||||||||||||||||
Sales and marketing | 1,326 | 164 | — | 1,490 | |||||||||||||||||||
Westwood mutual funds | 1,812 | — | — | 1,812 | |||||||||||||||||||
Information technology | 5,934 | 2,223 | — | 8,157 | |||||||||||||||||||
Professional services | 4,655 | 1,460 | — | 6,115 | |||||||||||||||||||
General and administrative | 6,570 | 1,857 | 1,945 | 6(A) | 10,372 | ||||||||||||||||||
Servicing and placement fees | — | 4,620 | — | 4,620 | |||||||||||||||||||
Total Expenses | 49,290 | 22,266 | 2,695 | 74,251 | |||||||||||||||||||
Net operating income (loss) | (1,065) | 845 | (2,695) | (2,915) | |||||||||||||||||||
Net change in unrealized appreciation (depreciation) on private investments | (511) | — | — | (511) | |||||||||||||||||||
Net investment income | 93 | 2 | — | 95 | |||||||||||||||||||
Other income | 598 | — | — | 598 | |||||||||||||||||||
Debt modification costs | — | (298) | 298 | 6(C) | — | ||||||||||||||||||
Interest expense | — | (1,120) | 1,120 | 6(C) | — | ||||||||||||||||||
Restructuring fee | — | (1,750) | 1,750 | 6(C) | — | ||||||||||||||||||
Equity in earnings of unconsolidated affiliates | — | 899 | — | 899 | |||||||||||||||||||
Other expense, net | — | (1,479) | — | (1,479) | |||||||||||||||||||
Income (loss) before income taxes | (885) | (2,901) | 473 | 6(E) | (3,313) | ||||||||||||||||||
Income tax provision | 618 | — | (631) | 6(E) | (13) | ||||||||||||||||||
Net income (loss) | $ | (1,503) | $ | (2,901) | $ | 1,104 | $ | (3,300) | |||||||||||||||
Total comprehensive income (loss) | $ | (1,503) | $ | (2,901) | $ | 1,104 | $ | (3,300) | |||||||||||||||
Earnings (loss) per share: | |||||||||||||||||||||||
Basic 6(F) | $ | (0.19) | — | $ | (0.42) | ||||||||||||||||||
Diluted 6(F) | $ | (0.19) | — | $ | (0.42) | ||||||||||||||||||
Weighted average shares outstanding: | |||||||||||||||||||||||
Basic | 7,867,555 | — | 7,867,555 | ||||||||||||||||||||
Diluted | 7,867,555 | — | 7,867,555 |
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS | |||||||||||||||||||||||||||||
For the Year Ended December 31, 2021 | |||||||||||||||||||||||||||||
(in thousands, except per share amounts) | |||||||||||||||||||||||||||||
Historical | |||||||||||||||||||||||||||||
Westwood | Salient Partners Reclassified (Note 2) | Other Transaction Accounting Adjustments | Transaction Accounting Adjustments | Pro Forma Combined | |||||||||||||||||||||||||
Revenues | |||||||||||||||||||||||||||||
Advisory Fees | |||||||||||||||||||||||||||||
Asset-based | $ | 45,927 | $ | 28,111 | $ | — | $ | — | $ | 74,038 | |||||||||||||||||||
Performance-based | 3,335 | — | — | — | 3,335 | ||||||||||||||||||||||||
Trust fees | 24,030 | — | — | — | 24,030 | ||||||||||||||||||||||||
Trust performance-based | 101 | — | — | — | 101 | ||||||||||||||||||||||||
Other, net | (339) | — | — | — | (339) | ||||||||||||||||||||||||
Private placement commission | — | 300 | — | — | 300 | ||||||||||||||||||||||||
Total Revenues | 73,054 | 28,411 | — | — | 101,465 | ||||||||||||||||||||||||
Expenses | |||||||||||||||||||||||||||||
Employee compensation and benefits | 42,532 | 15,864 | — | 600 | 6(B) | 59,996 | |||||||||||||||||||||||
1,000 | 6(D) | ||||||||||||||||||||||||||||
Sales and marketing | 1,280 | 96 | — | — | 1,376 | ||||||||||||||||||||||||
Westwood mutual funds | 2,657 | — | — | — | 2,657 | ||||||||||||||||||||||||
Information technology | 8,161 | 2,855 | — | 909 | 6(B) | 11,925 | |||||||||||||||||||||||
Professional services | 4,391 | 2,914 | — | 4,888 | 6(B) | 12,193 | |||||||||||||||||||||||
General and administrative | 8,074 | 2,299 | — | 2,593 | 6(A) | 13,049 | |||||||||||||||||||||||
83 | 6(B) | ||||||||||||||||||||||||||||
Servicing and placement fees | — | 5,706 | — | — | 5,706 | ||||||||||||||||||||||||
Total Expenses | 67,095 | 29,734 | — | 10,073 | 106,902 | ||||||||||||||||||||||||
Net operating income (loss) | 5,959 | (1,323) | — | (10,073) | (5,437) | ||||||||||||||||||||||||
Realized gains on private investments | 8,371 | — | — | — | 8,371 | ||||||||||||||||||||||||
Net change in unrealized appreciation (depreciation) on private investments | (1,797) | — | — | — | (1,797) | ||||||||||||||||||||||||
Net investment income | 868 | 11 | — | — | 879 | ||||||||||||||||||||||||
Other income | 602 | 30 | (187) | — | 445 | ||||||||||||||||||||||||
Debt modification costs | — | (1,247) | — | 1,247 | 6(C) | — | |||||||||||||||||||||||
Interest expense | — | (2,912) | — | 2,912 | 6(C) | — | |||||||||||||||||||||||
Restructuring fee | — | (750) | — | 750 | 6(C) | — | |||||||||||||||||||||||
Impairment of investments in unconsolidated affiliates | — | (156) | — | — | (156) | ||||||||||||||||||||||||
Equity in earnings of unconsolidated affiliates | — | 768 | — | — | 768 | ||||||||||||||||||||||||
SBA loan forgiven | — | 1,711 | — | (1,711) | 6(C) | — | |||||||||||||||||||||||
Term loan and revolver including interest forgiveness | — | 18,436 | — | (17,715) | 6(C) | 721 | |||||||||||||||||||||||
Realized loss on unconsolidated affiliates | — | (105) | — | — | (105) | ||||||||||||||||||||||||
Other expense, net | — | — | — | — | — | ||||||||||||||||||||||||
Income (loss) before income taxes | 14,003 | 14,463 | (187) | (24,590) | 6(E) | 3,689 | |||||||||||||||||||||||
Income tax provision | 4,240 | — | — | (2,682) | 6(E) | 1,558 | |||||||||||||||||||||||
Income from discontinued operations | — | 734 | — | — | 734 | ||||||||||||||||||||||||
Gain on sale of business, net of transaction cost | — | 2,660 | — | — | 2,660 |
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Net income (loss) | $ | 9,763 | $ | 17,857 | $ | (187) | $ | (21,908) | $ | 5,525 | |||||||||||||||||||
Total comprehensive income (loss) | $ | 9,763 | $ | 17,857 | $ | (187) | $ | (21,908) | $ | 5,525 | |||||||||||||||||||
Earnings (loss) per share: | |||||||||||||||||||||||||||||
Basic 6(F) | $ | 1.24 | — | — | — | $ | 0.70 | ||||||||||||||||||||||
Diluted 6(F) | $ | 1.23 | — | — | — | $ | 0.68 | ||||||||||||||||||||||
Weighted average shares outstanding: | |||||||||||||||||||||||||||||
Basic | 7,875,395 | — | — | — | 7,875,395 | ||||||||||||||||||||||||
Diluted | 7,927,972 | — | — | — | 8,123,898 |
Note 1. Basis of Presentation
The pro forma condensed combined financial information has been prepared by Westwood in accordance with Article 11 of Regulation S-X. The pro forma condensed combined financial information reflects transaction accounting adjustments management believes are necessary to present fairly Westwood’s pro forma financial position and results of operations following the closing of the Acquisition and the Investment Liquidation as of and for the periods indicated. The transaction accounting adjustments depict the accounting for the Acquisition as required by U.S. GAAP. The adjustments related to the Investment Liquidation are shown in a separate column as Other Transaction Accounting Adjustments. The unaudited pro forma condensed combined financial information does not reflect any cost savings, operating synergies, or revenue enhancements that the combined company may achieve as a result of the Acquisition, nor does it reflect the costs to integrate the operations of Westwood and Salient Partners or the costs necessary to achieve any cost savings, operating synergies, and revenue enhancements.
The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations, with Westwood being considered the accounting acquirer, using the fair value concepts defined in ASC Topic 820, Fair Value Measurement, and based on the historical condensed consolidated financial statements of Westwood and the historical condensed consolidated financial statements of Salient Partners. Under ASC Topic 805, all assets acquired and liabilities assumed in a business combination are generally recognized and measured at their assumed acquisition date fair value, while transaction costs and restructuring costs associated with the business combination are expensed as incurred. The excess of acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill.
The transaction accounting adjustments represent Westwood’s managements’ best estimates and are based upon currently available information and certain assumptions that Westwood believes are reasonable under the circumstances. The fair values are subject to adjustment for up to one year after the close of the Acquisition as additional information is obtained.
No additional adjustments were deemed to be necessary in order to conform accounting policies of Westwood and Salient Partners. As additional information is obtained, Westwood will continue to evaluate Salient Partner’s accounting policies. As a result of the evaluation, Westwood may identify additional differences between the accounting policies of the two companies, which when conformed, could have a material impact on the unaudited pro forma condensed combined financial information.
Note 2. Reclassification Adjustments
The reclassification adjustments are considered by management to be reasonable, and reflective of adjustments necessary to report Westwood’s financial condition and results of operations as if the Acquisition were completed. Certain reclassification adjustments have been made to the opening balances of the condensed combined financial information to conform Salient Partner’s historical condensed consolidated balance sheet and income statements to Westwood’s financial statement presentation.
The combined company will finalize the review of accounting policies and reclassifications as additional information is obtained, which could be materially different from the amounts set forth in the unaudited pro forma condensed combined financial information presented herein:
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Notes To Unaudited Pro Forma Condensed Combined Financial Information
SALIENT PARTNERS’ HISTORICAL AS ADJUSTED BALANCE SHEET | |||||||||||||||||
As of September 30, 2022 | |||||||||||||||||
(in thousands) | |||||||||||||||||
As of September 30, 2022 | |||||||||||||||||
Historical (Before Reclassifications) | Reclassification | Reclassified | |||||||||||||||
ASSETS | |||||||||||||||||
Current assets | |||||||||||||||||
Cash and cash equivalents | $ | 5,982 | $ | — | $ | 5,982 | |||||||||||
Accounts receivable | 3,294 | — | 3,294 | ||||||||||||||
Other current assets | 1,034 | — | 1,034 | ||||||||||||||
Total Current assets | 10,310 | — | 10,310 | ||||||||||||||
Investments | 4,978 | (319) | (i) | 4,659 | |||||||||||||
Noncurrent investments at fair value | — | 319 | (i) | 319 | |||||||||||||
Goodwill | 25,922 | — | 25,922 | ||||||||||||||
Intangible assets, net | 2,046 | — | 2,046 | ||||||||||||||
Property and equipment, net of accumulated depreciation | 88 | — | 88 | ||||||||||||||
Total Non-current assets | 33,034 | — | 33,034 | ||||||||||||||
Total Assets | 43,344 | — | 43,344 | ||||||||||||||
LIABILITIES AND PARTNERS’ DEFICIT | — | ||||||||||||||||
Current liabilities | — | ||||||||||||||||
Accounts payable and accrued liabilities | $ | 13,238 | $ | 177 | (ii) | $ | 13,415 | ||||||||||
Subordinated debt | 41,414 | — | 41,414 | ||||||||||||||
Senior debt | 16,891 | — | 16,891 | ||||||||||||||
Note payable | 4,004 | — | 4,004 | ||||||||||||||
Restructuring fee payable | 2,500 | — | 2,500 | ||||||||||||||
SBA loan | 1,860 | — | 1,860 | ||||||||||||||
State margin taxes payable | 82 | (82) | (ii) | — | |||||||||||||
Other current liabilities | 95 | (95) | (ii) | — | |||||||||||||
Total Current liabilities | 80,084 | — | 80,084 | ||||||||||||||
Total Liabilities | 80,084 | — | 80,084 | ||||||||||||||
PARTNERS’ DEFICIT | |||||||||||||||||
Total partners’ deficit | (36,740) | (36,740) | |||||||||||||||
Total Liabilities and Equity | $ | 43,344 | $ | — | $ | 43,344 |
i. Represents the reclassification of readily marketable investments to align with historical reporting of Westwood. Westwood classifies these amounts within Noncurrent investments at fair value.
ii. Represents the reclassification of state margin taxes payable and other current liabilities to align with historical reporting of Westwood. Westwood classifies these amounts within Accounts payable and accrued liabilities.
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Notes To Unaudited Pro Forma Condensed Combined Financial Information
SALIENT PARTNERS’ AS ADJUSTED HISTORICAL FINANCIAL STATEMENT OF OPERATIONS | |||||||||||||||||
For the Nine Months Ended September 30, 2022 | |||||||||||||||||
(in thousands) | |||||||||||||||||
Nine Months Ended September 30, 2022 | |||||||||||||||||
Historical (Before Reclassification | Reclassification | Reclassified | |||||||||||||||
Revenues | |||||||||||||||||
Advisory Fees | |||||||||||||||||
Asset-based | $ | — | $ | 22,925 | (i) | $ | 22,925 | ||||||||||
Performance-based | — | — | — | ||||||||||||||
Fund management and investment advisory | 22,802 | (22,802) | (i) | — | |||||||||||||
Other, net | 123 | (123) | (i) | — | |||||||||||||
Private placement commission | 186 | — | 186 | ||||||||||||||
Total Revenues | 23,111 | — | 23,111 | ||||||||||||||
Expenses | |||||||||||||||||
Servicing and private placement fees | 4,620 | — | 4,620 | ||||||||||||||
Employee compensation and benefits | 11,942 | — | 11,942 | ||||||||||||||
Travel expense | 107 | (107) | (ii) | — | |||||||||||||
Sales and marketing | 57 | 107 | (ii) | 164 | |||||||||||||
Information technology | 2,223 | — | 2,223 | ||||||||||||||
Professional services | 1,460 | — | 1,460 | ||||||||||||||
Depreciation and amortization | 61 | (61) | (iii) | — | |||||||||||||
Occupancy expense | 375 | (375) | (iii) | — | |||||||||||||
Insurance expense | 384 | (384) | (iii) | — | |||||||||||||
State margin tax | 88 | (88) | (iii) | — | |||||||||||||
General and administrative | 949 | 908 | (iii) | 1,857 | |||||||||||||
Total Expenses | 22,266 | — | 22,266 | ||||||||||||||
Net operating income | 845 | — | 845 | ||||||||||||||
Debt modification costs | (298) | — | (298) | ||||||||||||||
Interest expense | (1,120) | — | (1,120) | ||||||||||||||
Restructuring fee | (1,750) | — | (1,750) | ||||||||||||||
Equity in earnings of unconsolidated affiliates, net | 899 | — | 899 | ||||||||||||||
Interest and dividend income | 2 | (2) | (iv) | — | |||||||||||||
Net investment income | — | 2 | (iv) | 2 | |||||||||||||
Other expense, net | (1,479) | — | (1,479) | ||||||||||||||
Other income | — | — | — | ||||||||||||||
Income (loss) before income taxes | (2,901) | — | (2,901) | ||||||||||||||
Income tax provision | — | — | — | ||||||||||||||
Net income (loss) | $ | (2,901) | $ | — | $ | (2,901) | |||||||||||
Total comprehensive income (loss) | $ | (2,901) | $ | — | $ | (2,901) |
10
Notes To Unaudited Pro Forma Condensed Combined Financial Information
SALIENT PARTNERS’ AS ADJUSTED HISTORICAL FINANCIAL STATEMENT OF OPERATIONS | |||||||||||||||||
For the Year Ended December 31, 2021 | |||||||||||||||||
(in thousands) | |||||||||||||||||
Year Ended December 31, 2021 | |||||||||||||||||
Historical (Before Reclassification) | Reclassification | Reclassified | |||||||||||||||
Revenues | |||||||||||||||||
Advisory Fees | |||||||||||||||||
Asset-based | $ | — | $ | 28,111 | (i) | $ | 28,111 | ||||||||||
Fund management and investment advisory | 27,940 | (27,940) | (i) | — | |||||||||||||
Other, net | 171 | (171) | (i) | — | |||||||||||||
Private placement commission | 300 | — | 300 | ||||||||||||||
Total Revenues | 28,411 | — | 28,411 | ||||||||||||||
Expenses | |||||||||||||||||
Servicing and private placement fees | 5,706 | — | 5,706 | ||||||||||||||
Employee compensation and benefits | 15,864 | — | 15,864 | ||||||||||||||
Travel expense | 44 | (44) | (ii) | — | |||||||||||||
Sales and marketing | 52 | 44 | (ii) | 96 | |||||||||||||
Information technology | 2,855 | — | 2,855 | ||||||||||||||
Professional services | 2,914 | — | 2,914 | ||||||||||||||
Depreciation and amortization | 144 | (144) | (iii) | — | |||||||||||||
Occupancy expense | 419 | (419) | (iii) | — | |||||||||||||
Insurance expense | 416 | (416) | (iii) | — | |||||||||||||
State margin tax | 102 | (102) | (iii) | — | |||||||||||||
General and administrative | 1,218 | 1,081 | (iii) | 2,299 | |||||||||||||
Total Expenses | 29,734 | — | 29,734 | ||||||||||||||
Net operating loss | (1,323) | — | (1,323) | ||||||||||||||
Debt modification costs | (1,247) | — | (1,247) | ||||||||||||||
Interest expense | (2,912) | — | (2,912) | ||||||||||||||
Restructuring fee | (750) | — | (750) | ||||||||||||||
Impairment of investments in unconsolidated affiliates | (156) | — | (156) | ||||||||||||||
Equity in earnings of unconsolidated affiliates, net | 768 | — | 768 | ||||||||||||||
Interest and dividend income | 11 | (11) | (iv) | — | |||||||||||||
SBA loan forgiven | 1,711 | — | 1,711 | ||||||||||||||
Term loan and revolver including interest forgiveness | 18,436 | — | 18,436 | ||||||||||||||
Realized loss on unconsolidated affiliates | (105) | — | (105) | ||||||||||||||
Net investment income | — | 11 | (iv) | 11 | |||||||||||||
Other expense, net | 30 | — | 30 | ||||||||||||||
Income (loss) before income taxes | 14,463 | — | 14,463 | ||||||||||||||
Income tax provision | — | — | — | ||||||||||||||
Income from discontinued operations | 734 | — | 734 | ||||||||||||||
Gain on sale of business, net of transaction costs | 2,660 | — | 2,660 | ||||||||||||||
Net income | $ | 17,857 | $ | — | $ | 17,857 | |||||||||||
Total comprehensive income | $ | 17,857 | $ | — | $ | 17,857 |
i. Represents the reclassification of Fund management and investment advisory and Fiduciary fee income, to align with historical reporting of Westwood. Westwood classifies these amounts as Asset-based advisory fees.
ii. Represents the reclassification of Travel expense, to align with historical reporting of Westwood. Westwood classifies travel expenses as Sales and Marketing expenses.
iii. Represents the reclassification of Depreciation and amortization, Occupancy expense, insurance expense, and state margin tax, to align with historical reporting of Westwood. Westwood classifies these expenses as General and Administrative.
11
Notes To Unaudited Pro Forma Condensed Combined Financial Information
iv. Represents the reclassification of Interest and dividend income, to align with historical reporting of Westwood. Westwood classifies this income as Net investment income.
Note 3. Other Transaction Accounting Adjustments
In November 2022 the Company sold investments held in United States Treasury Bills with a fair value of $36.9 million for $36.7 million in cash, resulting in a loss on disposal of $0.2 million. The investments in Treasury Bills were classified as Investments, at fair value within the balance sheet. The Investment Liquidation was completed by the Company mainly to provide additional cash to fund the Acquisition. Adjustments related to the Investment Liquidation have been shown separately from the transaction adjustments. Adjustments to the Pro Forma Condensed Combined Balance Sheet reflect receipt of cash proceeds and liquidation of investments, with an impact to retained earnings for the realized losses on disposal of investments. Adjustments to the Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2021 reflect the realized loss on disposal of investments.
Note 4. Calculation of Estimated Acquisition Consideration and Preliminary Purchase Price Allocation
Estimated Acquisition Consideration
The estimated Acquisition consideration for the purpose of this unaudited pro forma condensed combined financial information is estimated to be approximately $46.3 million, subject to adjustments for working capital, client consent agreements and contingent consideration. The following table summarizes the preliminary estimate of the acquisition consideration to be transferred as a result of the Acquisition:
(in thousands) | |||||
Base Purchase Price - Cash | $ | 35,000 | |||
Plus: Net Working Capital Adjustment (1) | 1,662 | ||||
Less: Client Consent Adjustment (2) | (3,293) | ||||
Less: Due For Transaction Expenses (3) | (92) | ||||
Total Cash Consideration: | 33,277 | ||||
Plus: Revenue Retention Payments (4) | 10,637 | ||||
Plus: Growth Earnout Period Payments (5) | 2,362 | ||||
Total Estimated Consideration: | $ | 46,276 |
(1) The estimated consideration includes an adjustment based on net working capital of Salient Partners. The net working capital adjustment is determined by calculation of the net working capital of Salient Partners at Acquisition close date, less a target net working capital amount of $250.0 thousand. The adjustment above of $1.7 million is based on the available information at the time of the analysis. The net working capital adjustment will increase the cash amount of the base purchase price and is not expected to materially change from the estimated amount.
(2) The Client Consent Adjustment is an adjustment of the base purchase price based off a mutually agreed upon revenue run rate metric expressed as a percentage. The revenue run rate metric is the closing revenue run rate divided by a contractually stipulated base revenue run rate. No adjustment is made to the base purchase price if the revenue run rate metric is greater than 95%. If the revenue run rate metric is less than 95%, an adjustment is made to the base purchase price. Based off the best estimate at the time of the analysis, the revenue run rate metric was estimated as approximately 91%. The end adjustment resulting from this calculated as 100% less the 91%, multiplied by the base purchase price of $35.0 million. This amount is estimated to be $3.3 million and is a reduction to the cash purchase price.
(3) Due For Transaction Expense is comprised of $92.0 thousand of transaction expenses payable by Salient Partners.
(4) The Acquisition contains contingent consideration related to Revenue Retention Payments. This has a maximum payment amount of $15.0 million. The gross amount is based on the retention of a minimum level of net revenue (as calculated under the Purchase Agreement) of the Business in the 15, 18, 21 and 24 months following the close of the Acquisition. The revenue retention payment if any, is expected to be paid using cash on hand. The estimated fair value of $10.6 million is included in total estimated consideration, and is based on the best estimate at the time of the analysis utilizing an income based approach, specifically a probability-weighted discounted cash flow method to
12
Notes To Unaudited Pro Forma Condensed Combined Financial Information
capture the uncertainty in the future payments related to uncertainty of the condition underlying the earn out being met. This amount is an increase to Total Estimated Consideration. A hypothetical 10% change in the valuation of the Revenue Retention Payment would result in a change to Total Estimated Consideration of approximately $1.0 million, with a corresponding change in goodwill.
(5) The Acquisition contains contingent consideration related to Growth Earnout Period payments. The contingent consideration has a maximum payment amount of $10.0 million. The growth earnout payment is based on the growth in net revenue (as calculated under the Purchase Agreement) of the Business in the second and third years following the close of the Acquisition. The growth earnout payment, if any, would be paid in shares of the Company’s common stock in amount equivalent to the dollar value of the earn out. The estimated fair value of $2.4 million is included in total estimated consideration, and is based on the best estimate at the time of the analysis utilizing income based approach, specifically a probability-weighted discounted cash flow method to capture uncertainty in the future payments related to uncertainty of the condition underlying the earn out being met. This amount is an increase to Total Estimated Consideration. A hypothetical 10% change in the valuation of the Growth Earnout Period payments would result in a change to Total Estimated Consideration of approximately $0.2 million, with a corresponding change in goodwill.
Preliminary Purchase Price Allocation
Under the business combination method of accounting, the identifiable assets acquired, and liabilities assumed of Salient Partners will be recognized and measured at fair value as of the closing date of the Acquisition and added to those of Westwood. The determination of fair value used in the transaction adjustments presented herein are preliminary and based on management estimates of the fair value and useful lives of the assets acquired and liabilities assumed, and may be subject to change if additional information is obtained. The costs of finite-lived intangible assets are amortized through expense over their estimated lives. The actual allocations may differ from the transaction accounting adjustments presented.
The following table sets forth a preliminary allocation of the estimated acquisition consideration to the identifiable tangible and intangible assets acquired and liabilities assumed of Salient Partners (refer to Note 5(A) for assets not acquired and liabilities not assumed) based on Salient Partner’s unaudited condensed consolidated balance sheet as of September 30, 2022, with the excess recorded as goodwill:
13
Notes To Unaudited Pro Forma Condensed Combined Financial Information
(in thousands) | |||||
Total consideration | $ | 46,276 | |||
Assets | |||||
Current assets: | |||||
Accounts receivable | 3,294 | ||||
Other current assets | 1,034 | ||||
Total current assets | 4,328 | ||||
Investments(1) | 6,600 | ||||
Noncurrent investments at fair value | 319 | ||||
Property and equipment, net of accumulated depreciation(2) | 88 | ||||
Intangible assets, net | 19,300 | ||||
Total Assets | $ | 30,635 | |||
Liabilities | |||||
Current liabilities: | |||||
Accounts payable and accrued liabilities | 5,733 | ||||
Total Liabilities | $ | 5,733 | |||
Less: Net Assets | $ | 24,902 | |||
Goodwill | $ | 21,374 |
(1) Investments is comprised of historical equity method investments held by Salient Partners. The book value was adjusted to fair value based on the results of the valuation. These investments will continue to be accounted for as equity method investments by Westwood.
(2) Property and equipment, net of accumulated depreciation approximate fair value, thus no adjustment was recorded to the carrying value of the assets.
Intangible Assets
Preliminary identifiable intangible assets in the unaudited pro forma condensed combined financial information consist of the following:
Preliminary Estimated Fair Value | Estimated Useful Life | ||||||||||
(in thousands) | (in years) | ||||||||||
Client relationships | $ | 14,400 | 15 | ||||||||
Trade name | 3,800 | 3 | |||||||||
Non-compete agreements | 1,100 | 3 | |||||||||
Total | $ | 19,300 |
The estimated fair values and useful lives of identifiable intangible assets are preliminary and have been performed based on the best information available at the time of this analysis. As discussed above, the amount that will ultimately be allocated to identifiable intangible assets and the related amount of straight-line amortization, may differ materially from this preliminary allocation. Preliminary intangible assets include non-compete agreements entered into with Salient Partners employees in conjunction with the Acquisition. The non-compete agreements have an estimated fair value of $1.1 million. Although non-compete agreements with employees of a target may be accounted for as transactions separate from a business combination, management has determined the value of such assets to be immaterial and expects the accounting treatment to be similar if accounted for separate from the Acquisition.
14
Notes To Unaudited Pro Forma Condensed Combined Financial Information
Any change in the valuation of intangible assets would cause a corresponding increase or decrease in the balance of goodwill. A hypothetical 10% change in the valuation of intangible assets would result in a corresponding increase or decrease in the balance of goodwill of approximately $1.9 million. A hypothetical 10% change in the valuation of intangible assets would result in a change to annual amortization expense of approximately $195.0 thousand for the nine months ended September 30, 2022 and approximately $259.0 thousand for the year ended December 31, 2021.
The preliminary fair value of the Trade Name is determined using the income approach, specifically the relief from royalty method. The preliminary fair value of the Customer Relationships is also determined using the income approach, specifically the multi-period excess earnings method. The most significant assumptions applied in the development of the intangible asset fair values include: the amount and timing of future cash flows, the selection of discount and royalty rates, and the assessment of the asset’s economic life.
Investments
Preliminary investments in the unaudited pro forma condensed combined financial information consist of the following:
Preliminary Estimated Fair Value | |||||
(in thousands) | |||||
Investments | $ | 6,600 |
The estimated fair value of investments is preliminary and have been performed based on the best information available at the time of this analysis. As discussed above, the amount that will ultimately be allocated to investments, may differ materially from this preliminary allocation.
A hypothetical 10% change in the valuation of investments would result in a corresponding increase or decrease in the balance of goodwill of approximately $660.0 thousand, with a corresponding change in goodwill.
Note 5. Transaction Accounting Adjustments for Condensed Combined Balance Sheet
A.In connection with the Purchase Agreement, Westwood does not acquire certain assets nor assume certain liabilities. Assets not acquired are Cash and cash equivalents. Liabilities not assumed are certain liabilities, including transaction expenses, debt and liabilities not arising in the ordinary course of business. The adjustment reflects the excluded assets and liabilities with the offsetting related impact to retained earnings.
B.Reflects cash consideration transferred for the Acquisition and cash payment for accrued and estimated transaction costs. Cash payment for transaction costs already incurred and accrued, and estimated transaction costs is $1.8 million and $6.5 million, respectively.
(in thousands) | |||||
Cash transaction consideration | $ | 33,277 | |||
Cash payment of accrued and estimated transaction costs | 8,303 | ||||
Pro forma adjustment to Cash and cash equivalents | $ | 41,580 |
C.Reflects the removal of Salient Partners’ historical goodwill and recording of the preliminary goodwill for the estimated acquisition consideration in excess of the fair value of the net assets acquired in connection with the Acquisition:
(in thousands) | |||||
Fair value of consideration transferred in excess of preliminary fair value of assets acquired and liabilities assumed | $ | 21,374 | |||
Salient Partners’ historical goodwill amount | (25,922) | ||||
Pro forma adjustment to goodwill | $ | (4,548) |
15
Notes To Unaudited Pro Forma Condensed Combined Financial Information
D.Reflects the incremental balance of intangible assets, net to be recorded considering Salient Partners’ historical intangible assets, net and the preliminary purchase accounting adjustments for the estimated fair value of acquired intangible assets based on the acquisition method of accounting:
(in thousands) | |||||
Fair value of acquired intangible assets | $ | 19,300 | |||
Salient Partners’ historical intangible assets, net | (2,046) | ||||
Pro forma adjustment to intangible assets, net | $ | 17,254 |
E.Reflects the incremental balance of Investments be recorded considering Salient Partners’ historical Investments and the preliminary purchase accounting adjustments for the estimated fair value of acquired Investments based on the acquisition method of accounting:
(in thousands) | |||||
Fair value of acquired investments | $ | 6,600 | |||
Salient Partners’ historical investments | (4,659) | ||||
Pro forma adjustment to investments | $ | 1,941 |
F.Reflects the adjustment of transaction costs incurred and accrued related to the Acquisition. This adjustment only includes transaction costs incurred by Westwood as transaction expenses incurred by Salient Partners are excluded from Westwood’s assumed liabilities.
G.Reflects the accrual of the estimated fair value of the contingent consideration arrangements within the transaction. The contingent consideration was assessed to be liability classified:
(in thousands) | |||||
Estimated fair value of the Revenue Retention Payment | $ | 10,637 | |||
Estimated fair value of the Growth Earnout Payment | 2,362 | ||||
Pro forma adjustment to contingent consideration | $ | 12,999 |
H.Reflects the adjustments to retained earnings:
(in thousands) | |||||
Salient Partners’ historical Retained Earnings Adjusted for assets not acquired, liabilities not assumed (see Note 5(A)) | $ | (31,629) | |||
Retained Earnings impact of Westwood estimated transaction related costs (see Note 5(B)) | (6,480) | ||||
Pro forma adjustment to retained earnings | $ | (38,109) |
Note 6. Transaction Accounting Adjustments for Condensed Combined Statements of Operations
Adjustments included in the Transaction Accounting Adjustments column in the accompanying unaudited pro forma condensed combined statements of operations the nine months ended September 30, 2022 and for the year ended December 31, 2021 are as follows:
A.Reflects the adjustments to eliminate Salient Partners’ historical amortization expense and record new amortization expense based on the estimated fair value of the identifiable acquired intangible assets:
Nine months ended September 30, 2022 | Year ended December 31, 2021 | ||||||||||
(in thousands) | |||||||||||
Elimination of historical amortization on intangible assets | $ | — | $ | — | |||||||
Amortization of acquired intangible assets | $ | 1,945 | $ | 2,593 | |||||||
Pro forma net adjustment to general and administrative expenses | $ | 1,945 | $ | 2,593 |
16
Notes To Unaudited Pro Forma Condensed Combined Financial Information
B.Reflects the adjustments to information technology, professional services, general and administrative, and Employee compensation and benefits expenses to record transaction costs expected to be incurred in conjunction with the Acquisition.
C.Reflects the adjustments in expenses related to liabilities not assumed in connection with the Acquisition. As stated in Note 5(A), Westwood is not assuming certain liabilities of Salient Partners, including Subordinated debt, Senior debt, Note payable, restructuring fee payable, and SBA Loan. This adjustment removes historical expenses related to the liabilities not assumed.
Nine months ended September 30, 2022 | Year ended December 31, 2021 | ||||||||||
(in thousands) | |||||||||||
Debt modification costs | $ | 298 | $ | 1,247 | |||||||
Interest expense | 1,120 | 2,912 | |||||||||
Restructuring fee | 1,750 | 750 | |||||||||
SBA loan forgiven | — | (1,711) | |||||||||
Term loan including interest forgiveness | — | (17,715) | |||||||||
Total | $ | 3,168 | $ | (14,517) |
D.Reflects compensation expense related to newly issued restricted stock grants issued in conjunction with the Acquisition. 468,607 shares were granted with a grant date fair value of $5.0 million. The grant is subject only to service condition of 5 years, and will cliff vest upon the employee providing the requisite service.
Nine months ended September 30, 2022 | Year ended December 31, 2021 | ||||||||||
(in thousands) | |||||||||||
Employee compensation and Benefits | $ | 750 | $ | 1,000 |
E.Following the close of the Acquisition, Salient Partners will be subject to U.S. federal income taxes, in addition to state, and local income taxes. As a result, the unaudited pro forma condensed consolidated statement of operations reflects adjustments to income tax expense to reflect a blended statutory rate of 26%.
Nine months ended September 30, 2022 | Year ended December 31, 2021 | ||||||||||
(in thousands) | |||||||||||
Salient Partners’ historical pre-tax income (loss) | $ | (2,901) | $ | 14,463 | |||||||
Pro forma adjustments | 473 | (24,777) | |||||||||
Total loss | (2,428) | (10,314) | |||||||||
Blended statutory rate | 26 | % | 26 | % | |||||||
Income tax provision | (631) | (2,682) |
F.The pro forma basic and diluted earnings per share amounts presented in the unaudited pro forma condensed combined statements of operations are based upon Westwood’s weighted average number of shares outstanding:
17
Notes To Unaudited Pro Forma Condensed Combined Financial Information
Nine months ended September 30, 2022 | Year ended December 31, 2021 | ||||||||||
(in thousands, except per share and share amounts) | |||||||||||
Numerator | |||||||||||
Pro forma net income (loss) attributable to common stockholders, basis and diluted | $ | (3,300) | $ | 5,525 | |||||||
Denominator | |||||||||||
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders, basic | 7,867,555 | 7,875,395 | |||||||||
Dilutive potential shares from unvested restricted shares (1) | — | 248,503 | |||||||||
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders, diluted | 7,867,555 | 8,123,898 | |||||||||
Net income (loss) per share attributable to common stockholders, basic | $ | (0.42) | $ | 0.70 | |||||||
Net income (loss) per share attributable to common stockholders, diluted | $ | (0.42) | $ | 0.68 |
(1) The Company has an undetermined amount of contingently issuable shares related to the Growth Earnout Payment. The conditions to satisfy the issuance of these shares are not met yet, as these shares will be evaluated for issuance at a future date based off of conditions that will be assessed at that point in time. These contingently issuable shares are excluded from the diluted EPS calculation.
Nine months ended September 30, 2022 | Year ended December 31, 2021 | ||||||||||
The weighted-average shares for pro forma diluted earnings per share was computed as below: | |||||||||||
Historical Westwood weighted-average shares outstanding | 7,867,555 | 7,875,395 | |||||||||
Historical Westwood dilutive potential shares from unvested restricted shares | — | 52,577 | |||||||||
Dilutive potential shares from unvested restricted shares as if the Acquisition had occurred January 1, 2021(1) | — | 195,926 | |||||||||
Total | 7,867,555 | 8,123,898 |
(1) As the Company has a net loss for the nine months ended September 30, 2022, the impact of any additional dilutive shares would be anti-dilutive, as such, no additional shares are included. The dilutive potential shares included for the year ended December 31, 2021 are related to the 468,607 shares granted. See footnote 6(D) for more details.
18