UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)



	x	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~June 30, 2019~~March 31, 2020



	¨	Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from: __________to __________

Commission File Number 000-52611

IMH FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)



Delaware	27-1537126
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

7001 N. Scottsdale Rd #2050

Scottsdale, Arizona 85253

(Address of principal executive offices and zip code)

(480) 840-8400

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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



Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒

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

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

None

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

Common Stock

Class B-1 Common Stock

Class B-2 Common Stock

Class B-3 Common Stock

Class B-4 Common Stock

Class C Common Stock

As of ~~August 14, 2019,~~May 15, 2020, the registrant had outstanding the following classes and series of stock: (i) ~~1,909,338~~2,003,028 shares of Common Stock, (ii) ~~3,376,821~~3,375,528 shares of Class B-1 Common Stock, (iii) ~~3,377,953~~3,376,660 shares of Class B-2 Common Stock, (iv) ~~6,912,510~~6,909,922 shares of Class B-3 Common Stock, (v) 313,790 shares of Class B-4 Common Stock, (vi) ~~668,903~~666,700 shares of Class C Common Stock, (vii) 2,604,852 shares of Series B-1 Cumulative Convertible Preferred Stock, (viii) 5,595,148 shares Series B-2 Cumulative Convertible Preferred Stock, (ix) 2,352,941 shares of Series B-3 Cumulative Convertible Preferred Stock, (x) 1,875,000 shares of Series B-4 Cumulative Convertible Preferred Stock and ~~(x)~~(xi) 22,000 shares of Series A Preferred ~~Stock outstanding.~~Stock. There is no established market for the registrant’s shares of common stock or preferred stock.

IMH Financial Corporation

~~June 30, 2019~~March 31, 2020 Form 10-Q Quarterly Report

Index



PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	~~F-2~~F-1
	~~Unaudited~~ Condensed Consolidated Balance ~~Sheet~~Sheets as of ~~June 30, 2019~~March 31, 2020 (Unaudited) and ~~Consolidated Balance Sheet as of~~ December 31, ~~2018~~2019	~~F-3~~F-2
	Unaudited Condensed Consolidated Statements of Operations for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	~~F-4~~F-3
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	~~F-5~~F-4
	Unaudited Condensed Consolidated Statements of Cash Flows for the ~~Six~~Three Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	~~F-8~~F-6
	Notes to Unaudited Condensed Consolidated Financial Statements	~~F-10~~F-8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~F-38~~F-32
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	~~F-55~~F-47
Item 4.	Controls and Procedures	~~F-55~~F-49
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	~~F-57~~
~~Item 1A.~~	~~Risk Factors~~	XF-50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	~~F-57~~F-51
Item 3.	Defaults Upon Senior Securities	~~F-57~~F-52
Item 4.	Mine Safety Disclosures	~~F-57~~F-53
Item 5.	Other Information	~~F-57~~F-54
Item 6.	Exhibits	~~F-58~~F-55
Signatures		~~F-60~~F-58

PART I

ITEM 1. FINANCIAL STATEMENTS

F-1

IMH FINANCIAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	June 30,			December 31,			March 31,			December 31,
	2019			2018			2020			2019
ASSETS	(unaudited)
Assets							(unaudited)
Cash and cash equivalents	$	12,222		$	25,452		$	9,897		$	7,925
Funds held by lender and restricted cash	5,147			198			2,424			2,564
Mortgage loans, net	13,270			23,234
Real estate held for sale	7,400			7,418			7,400			25,505
Operating properties, net	63,696			33,866			45,452			45,199
Other real estate owned	33,727			33,727			33,341			33,341
Goodwill	15,357			15,357			15,357			15,357
Other intangibles, net	501			641			291			361
Other receivables	1,233			1,320			1,223			1,630
Investment in unconsolidated entities							3,900			3,753
Other assets	4,125			2,033			2,419			3,668
Property and equipment, net	360			393			279			305
Total assets	$	157,038		$	143,639		$	121,983		$	139,608

LIABILITIES
Liabilities
Accounts payable and accrued expenses	$	12,004		$	8,385		$	6,256		$	8,383
Accrued property taxes	638			305			439			305
Dividends payable	1,267			857			2,324			2,406
Accrued interest	414			653			257			162
Customer deposits and funds held for others	2,033			552			1,204			1,281
Notes payable, net of deferred financing fees	49,258			36,314			41,739			51,277
Total liabilities	65,614			47,066			52,219			63,814

Series B Redeemable convertible preferred stock, $.01 par value; 100,000,000 shares authorized; 10,552,941 shares outstanding as of June 30, 2019 and December 31, 2018; liquidation preference of $51,170 as of June 30, 2019 and December 31, 2018.	47,624			45,663
Series A redeemable preferred stock, 22,000 shares outstanding; liquidation preference of $22,000 at June 30, 2019 and December 31, 2018	21,776			21,747
Series B redeemable convertible preferred stock, $.01 par value; 100,000,000 total preferred shares authorized; 12,427,941 shares issued and outstanding as of March 31, 2020 and December 31, 2019; liquidation preference of $59,870 as of March 31, 2020 and December 31, 2019							54,683			54,356
Series A redeemable preferred stock, 22,000 issued and outstanding; liquidation preference of $22,000 as of March 31, 2020 and December 31, 2019							21,819			21,805

Commitments and contingencies (Note 13)

STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 200,000,000 shares authorized; 18,764,758 and 18,596,774 shares issued at June 30, 2019 and December 31, 2018, respectively; 16,394,594 and 16,726,610 shares outstanding at June 30, 2019 and December 31, 2018, respectively	188			186
Less: Treasury stock, at cost, 2,370,164 and 1,870,164 shares at June 30, 2019 and December 31, 2018, respectively	(7,286		)	(6,286		)
Stockholders' Deficit
Common stock, $.01 par value; 200,000,000 shares authorized; 18,989,582 and 18,929,496 shares issued as of March 31, 2020 and December 31, 2019, respectively; 16,612,294 and 16,558,759 shares outstanding as of March 31, 2020 and December 31, 2019, respectively							190			189
Less: Treasury stock, at cost, 2,377,558 and 2,370,737 shares at March 31, 2020 and December 31, 2019, respectively							(7,286		)	(7,286		)
Paid-in capital	704,557			708,523			699,365			701,379
Accumulated deficit	(702,400		)	(692,876		)	(723,014		)	(718,790		)
Total IMH Financial Corporation stockholders' equity (deficit)	(4,941		)	9,547
Total IMH Financial Corporation stockholders' deficit							(30,745		)	(24,508		)
Non-controlling interests	26,965			19,616			24,007			24,141
Total stockholders' equity	22,024			29,163
Total liabilities and stockholders’ equity	$	157,038		$	143,639
Total stockholders' deficit							(6,738		)	(367		)
Total liabilities and stockholders’ deficit							$	121,983		$	139,608

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

F-2

IMH FINANCIAL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)


	Three Months Ended June 30,						Six Months Ended June 30,						Three months ended March 31,
	2019			2018			2019			2018			2020			2019
Revenues
Operating property revenue	$	1,880		$	2,105		$	2,193		$	3,668		$	2,048		$	314
Mortgage loan income, net	447			641			1,098			1,266			—			650
Management fees, investment and other income	208			255			276			292			92			68
Total revenue	2,535			3,001			3,567			5,226
Total revenues													2,140			1,032
Operating Expenses
Operating property direct expenses (exclusive of interest and depreciation)	3,657			2,099			6,007			4,334			3,473			2,349
Expenses for non-operating real estate owned	83			171			174			367			75			91
Professional fees	1,680			754			2,486			1,629			1,356			806
General and administrative expenses	1,560			1,708			3,465			3,588			1,519			1,905
Interest expense	335			780			791			1,525			760			456
Depreciation and amortization expense	321			303			591			644			793			271
Total operating expenses	7,636			5,815			13,514			12,087			7,976			5,878
Recovery of Credit Losses, Impairment, Gain Disposal of Assets, and Other
Gain on disposal of assets	(20		)	(142		)	(20		)	(395		)
Recovery of credit losses	(1,135		)	(175		)	(1,135		)	(175		)
Other (Income) Expense
Provision for (recovery of) credit losses, net													(1,750		)	—
Unrealized loss on derivatives	124			—			291			—			—			167
Total Recovery, Impairment Charges, Gain on Disposal of Assets and Other	(1,031		)	(317		)	(864		)	(570		)
Total costs and expenses	6,605			5,498			12,650			11,517
Equity earnings from unconsolidated entities													(122		)	—
Other (income) expense, net													(1,872		)	167
Total costs and expenses, net													6,104			6,045
Loss before provision for income tax	(4,070		)	(2,497		)	(9,083		)	(6,291		)	(3,964		)	(5,013		)
Income tax (provision) benefit	—			—			—			—
Income tax provision													—			—
Net Loss	(4,070		)	(2,497		)	(9,083		)	(6,291		)	(3,964		)	(5,013		)
Net (income) loss attributable to non-controlling interests	(318		)	25			(441		)	115
Net loss attributable to non-controlling interests													(260		)	(123		)
Cash dividends on Series B redeemable convertible preferred stock	(648		)	(647		)	(1,288		)	(1,239		)	(1,394		)	(641		)
Deemed dividend on Series B redeemable convertible preferred stock	(954		)	(915		)	(1,889		)	(1,731		)	(287		)	(936		)
Cash dividends on Series A redeemable preferred stock	(417		)	(142		)	(830		)	(142		)	(417		)	(412		)
Net Loss attributable to common shareholders	$	(6,407	)	$	(4,176	)	$	(13,531	)	$	(9,288	)
Net Loss per common share
Net Loss Attributable to Common Shareholders													$	(6,322	)	$	(7,125	)
Net Loss per Common Share
Basic and Diluted	$	(0.39	)	$	(0.25	)	$	(0.83	)	$	(0.56	)	$	(0.38	)	$	(0.43	)
Weighted average common shares outstanding - basic and diluted	16,375,649			16,696,684			16,383,921			16,680,988			16,616,355			16,392,286

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

F-3

IMH FINANCIAL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share data)

Three and Six Months Ended June 30, 2019
Common Stock Treasury Stock
Shares Amount Shares Amount Paid-in Capital Accumulated deficit Total IMH Financial Corporation Stockholders' Equity (Deficit) Non-controlling Interest Total Stockholders' Equity
Balance at December 31, 2018 18,596,774
$ 186
1,870,164
$ (6,286 ) $ 708,523
$ (692,876 ) $ 9,547
$ 19,616
$ 29,163
Net income (loss) —
—
—
—
—
(5,136 ) (5,136 ) 123
(5,013 )
Contributions from Hotel Fund investors —
—
—
—
—
—
—
3,520
3,520
Distributions to Hotel Fund investors —
—
—
—
—
—
—
(266 ) (266 )
Hotel Fund syndication costs —
—
—
—
(12 ) —
(12 ) —
(12 )
Stock warrant and equity cost accretion —
—
—
—
(70 ) —
(70 ) —
(70 )
Cash dividends on Series B redeemable convertible preferred stock —
—
—
—
(641 ) —
(641 ) —
(641 )
Deemed dividend on Series B redeemable convertible preferred stock —
—
—
—
(936 ) —
(936 ) —
(936 )
Cash dividends on Series A redeemable preferred stock —
—
—
—
(412 ) —
(412 ) —
(412 )
Stock-based compensation 112,304
1
—
—
116
—
117
—
117
Treasury stock repurchase —
—
500,000
(1,000 ) —
—
(1,000 ) —
(1,000 )
Balance at March 31, 2019 18,709,078
187
2,370,164
(7,286 ) 706,568
(698,012 ) 1,457
22,993
24,450
Net income (loss) —
—
—
—
—
(4,388 ) (4,388 ) 318
(4,070 )
Contributions from Hotel Fund investors —
—
—
—
—
—
—
3,998
3,998
Distributions to Hotel Fund investors —
—
—
—
—
—
—
(344 ) (344 )
Hotel Fund syndication costs —
—
—
—
(36 ) —
(36 ) —
(36 )
Stock warrant and equity cost accretion —
—
—
—
(31 ) —
(31 ) —
(31 )



	Three months ended March 31, 2020
	Common Stock			Treasury Stock
	Shares	Amount		Shares	Amount			Paid-in Capital			Accumulated deficit			Total IMH Financial Corporation Stockholders' Deficit			Non-controlling Interest			Total Stockholders' Deficit
Balance at December 31, 2019	18,929,496	$	189	2,370,737	$	(7,286	)	$	701,379		$	(718,790	)	$	(24,508	)	$	24,141		$	(367	)
Net income (loss)	—	—		—	—			—			(4,224		)	(4,224		)	260			(3,964		)
Distributions to Hotel Fund investors	—	—		—	—			—			—			—			(394		)	(394		)
Stock warrant and preferred equity cost accretion	—	—		—	—			(53		)	—			(53		)	—			(53		)
Cash dividends on Series B redeemable convertible preferred stock	—	—		—	—			(1,394		)	—			(1,394		)	—			(1,394		)
Deemed dividend on Series B redeemable convertible preferred stock	—	—		—	—			(287		)	—			(287		)	—			(287		)
Cash dividends on Series A redeemable preferred stock	—	—		—	—			(417		)	—			(417		)	—			(417		)
Stock-based compensation	60,356	1		—	—			137			—			138			—			138
Relinquishment of Class B and Class C treasury stock	—	—		6,821	—			—			—			—			—			—
Balance at March 31, 2020	18,989,852	$	190	2,377,558	$	(7,286	)	$	699,365		$	(723,014	)	$	(30,745	)	$	24,007		$	(6,738	)

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

F-4

IMH FINANCIAL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share data)

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

F-5

Three and Six Months Ended June 30, 2018
Common Stock Treasury Stock
Shares Amount Shares Amount Paid-in Capital Accumulated deficit Total IMH Financial Corporation Stockholders' Equity Non-controlling Interest Total Stockholders' Equity
Balance at December 31, 2017 18,079,522
$ 181
1,826,096
$ (6,286 ) $ 714,889
$ (679,535 ) $ 29,249
$ 6,562
$ 35,811
Net loss —
—
—
—
—
(3,704 ) (3,704 ) (90 ) (3,794 )
Contributions from Hotel Fund investors —
—
—
—
—
—
—
3,485
3,485
Distributions to Hotel Fund investors —
—
—
—
—
—
—
(20 ) (20 )
Hotel Fund syndication costs —
—
—
—
(51 ) —
(51 ) —
(51 )
Issuance of common stock warrants —
—
—
—
688
—
688
—
688

~~IMH FINANCIAL CORPORATION~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY~~

~~(In thousands, except share data)~~

Three and Six Months Ended June 30, 2018
Common Stock Treasury Stock
Shares Amount Shares Amount Paid-in Capital Accumulated deficit Total IMH Financial Corporation Stockholders' Equity Non-controlling Interest Total Stockholders' Equity
Cash dividends on Series B redeemable convertible preferred stock —
—
—
—
(592 ) —
(592 ) —
(592 )
Deemed dividend on Series B redeemable convertible preferred stock —
—
—
—
(817 ) —
(817 ) —
(817 )
Stock-based compensation 438,161
4
—
—
96
—
100
—
100
Balance at March 31, 2018 18,517,683
185
1,826,096
(6,286 ) 714,213
(683,239 ) 24,873
9,937
34,810
Net loss —
—
—
—
—
(2,472 ) (2,472 ) (25 ) (2,497 )
Contributions from Hotel Fund investors —
—
—
—
—
—
—
1,335
1,335
Distributions to Hotel Fund investors —
—
—
—
—
—
—
(80 ) (80 )
Hotel Fund syndication costs —
—
—
—
(35 ) —
(35 ) —
(35 )
Cash dividends on Series B redeemable convertible preferred stock —
—
—
—
(647 ) —
(647 ) —
(647 )
Deemed dividend on Series B redeemable convertible preferred stock —
—
—
—
(914 ) —
(914 ) —
(914 )
Cash dividends on Series A redeemable preferred stock —
—
—
—
(142 ) —
(142 ) —
(142 )
Stock-based compensation 79,091
—
—
—
77
—
77
—
77
Relinquishment of Class C common stock to treasury —
—
44,068
—
—
—
—
—
—
Balance at June 30, 2018 18,596,774
$ 185
1,870,164
$ (6,286 ) $ 712,552
$ (685,711 ) $ 20,740
$ 11,167
$ 31,907

~~IMH FINANCIAL CORPORATION~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(In thousands)~~

Six Months Ended June 30,
2019 2018
Cash flows from operating activities:
Net loss $ (9,083 ) $ (6,291 )
Adjustments to reconcile net loss to net cash used in operating activities:

Stock-based compensation and option amortization 192
178
Gain on disposal of assets (20 ) (395 )
Amortization of deferred financing costs 81
78
Depreciation and amortization expense 591
644
Accretion of mortgage income (55 ) (258 )
Accretion of discount on note payable 259
446
Non-cash interest expense funded by loan draw 752
541
Unrealized loss on derivatives 291
—
Changes in operating assets and liabilities, net of business combination:

Accrued interest receivable 315
(12 )
Other receivables 87
(68 )
Other assets (2,383 ) (411 )
Accrued property taxes 333
37
Accounts payable and accrued expenses 1,823
(2,774 )
Customer deposits and funds held for others 1,481
317
Accrued interest (239 ) 230
Total adjustments, net 3,508
(1,447 )
Net cash used in operating activities (5,575 ) (7,738 )

Cash flows from investing activities:
Proceeds from sale of real estate owned and operating properties and other assets 39
526
Purchases of property and equipment (23 ) (24 )
Mortgage loan payoff 3,000
—
Mortgage loan investment and fundings (921 ) (2,920 )
Investment in real estate owned and other operating properties (9,804 ) (3,157 )
Net cash used in investing activities (7,709 ) (5,575 )

Cash flows from financing activities:
Proceeds from notes payable 11,158
—
Debt issuance costs paid (144 ) —
Repayments of notes payable (10,162 ) —
Dividends paid (1,709 ) (1,998 )
Purchase of treasury stock (1,000 ) —
Proceeds from Issuance of Preferred Equity —
30,000
Equity issuance costs paid —
(387 )
Purchase of Interest rate cap —
(548 )
Contribution of Hotel Fund capital costs (48 ) —
Contributions from Hotel Fund investors 7,518
4,820
Distributions to Hotel Fund investors (610 ) (100 )
Net cash provided by financing activities 5,003
31,787

IMH FINANCIAL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Six Months Ended June 30,
2019 2018

Net increase (decrease) in cash, cash equivalents, and restricted cash (8,281 ) 18,474
Cash, cash equivalents, and restricted cash, beginning of period 25,650
11,932
Cash, cash equivalents, and restricted cash, end of period $ 17,369
$ 30,406

Supplemental cash flow information

Cash paid for interest $ 681
$ 204
Cash paid for taxes $ 45
$ —
Non-cash investing and financing transactions

Foreclosure on investment in mortgage loan $ 7,625
$ —
Acquisition of operating property building and operations through foreclosure $ 7,300
$ —
Assumption of first mortgage, accrued interest and operating liabilities through foreclosure $ 15,457
$ —
Loan from JPM Chase Funding, Inc., (a related party) for purchase first mortgage on operating property $ 11,000
—
Lease liability arising from the recognition of right-of-use asset $ 1,548
$ —
Noncash interest cost added to notes payable $ 752
$ —
Noncash interest costs capitalized to operating property $ 760
$ —
Capital expenditures in accounts payable and accrued expenses $ 3,566
$ 287



	Three months ended March 31,
	2020			2019
Cash flows from operating activities:
Net loss	$	(3,964	)	$	(5,013	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation and option amortization	137			117
Amortization of deferred financing costs	97			40
Depreciation and amortization expense	793			271
Accretion of mortgage income	—			(55		)
Accretion of discount on note payable	—			259
Non-cash interest expense funded by loan draw	—			325
Unrealized loss on derivatives	—			167
Changes in operating assets and liabilities, net of business combination:
Accrued interest receivable	—			(233		)
Other receivables	409			(51		)
Other assets	1,013			(1,332		)
Accrued property taxes	134			(32		)
Accounts payable and accrued expenses	(2,360		)	(289		)
Customer deposits and funds held for others	(77		)	1,239
Accrued interest	95			(294		)
Total adjustments, net	241			132
Net cash used in operating activities	(3,723		)	(4,881		)

Cash flows from investing activities:
Proceeds from sale of real estate owned and operating properties	18,339			—
Investment in unconsolidated entities	(147		)	—
Investment in real estate owned and other operating properties	(715		)	(4,667		)
Net cash provided by (used in) investing activities	17,477			(4,667		)

Cash flows from financing activities:
Proceeds from notes payable	1,365			7,459
Repayments of notes payable	(11,000		)	—
Dividends paid	(1,893		)	(655		)
Purchase of treasury stock	—			(1,000		)
Contribution of Hotel Fund capital costs	—			(12		)
Contributions from Hotel Fund investors	—			3,520
Distributions to Hotel Fund investors	(394		)	(266		)
Net cash provided by (used in) financing activities	(11,922		)	9,046

Net increase (decrease) in cash, cash equivalents, and restricted cash	1,832			(502		)
Cash, cash equivalents, and restricted cash, beginning of period	10,489			25,650
Cash, cash equivalents, and restricted cash, end of period	$	12,321		$	25,148

Supplemental cash flow information:
Cash paid for interest	$	568		$	551

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

F-6

IMH FINANCIAL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



	Three months ended March 31,
	2020		2019
Cash paid for taxes	$	—	$	—
Non-cash investing and financing transactions:
Capital expenditures in accounts payable and accrued expenses	$	569	$	2,109
Dividends payable	$	2,324	$	2,406

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

F-7

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BUSINESS, BASIS OF PRESENTATION AND LIQUIDITY

IMH Financial Corporation (together with its subsidiaries, the “Company”) is a real estate investment and finance company based in the southwestern United States engaged in various and diverse facets of the real estate lending and investment process, including origination, acquisition, underwriting, servicing, enforcement, development, marketing, and disposition. The Company’s focus is to invest in, manage and dispose of commercial real estate mortgage investments, hospitality assets, and other real estate assets, and to perform all functions reasonably related thereto, including developing, managing and either holding for investment or disposing of real property acquired through acquisition, foreclosure or other means.

Over the past several years, we acquired certain operating properties through deed-in-lieu of foreclosure which contributed to our operating revenues and expenses prior to their disposal. In the second quarter of 2019, we conducted a UCC foreclosure on the collateral securing $7.6 million mezzanine note receivable that was in default. That collateral was 100% of the membership interests in a limited liability company that owns a commercial real estate building and operations in St. Louis, Missouri. In the fourth quarter of 2017, we purchased a 64-room operating hotel, spa and restaurant located in Sonoma, California, commonly known as MacArthur Place (“MacArthur Place”), which is presently our sole operating property and is currently undergoing a major renovation.

Our History and Structure

We were formed from the conversion of our predecessor entity, IMH Secured Loan Fund, LLC (the “Fund”), into a Delaware corporation. The Fund, which was organized in May 2003, commenced operations in August 2003, focusing on investments in senior short-term whole commercial real estate mortgage loans collateralized by first mortgages on real property. The Fund was externally managed by Investors Mortgage Holdings, Inc. (the “Manager”), which was incorporated in Arizona in June 1997 and is licensed as a mortgage banker by the State of Arizona. Through a series of private placements to accredited investors, the Fund raised $875 million of equity capital from May 2003 through December 2008. Due to the cumulative number of investors in the Fund, the Fund registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on April 30, 2007 and began filing periodic reports with the Securities and Exchange Commission (“SEC”). On June 18, 2010, the Fund became internally-managed through the acquisition of the Manager, and converted into a Delaware corporation in a series of transactions that we refer to as the “Conversion Transactions”. ~~The~~Effective August 1, 2019, the Company ~~continues~~entered into a Non-Discretionary Investment Advisory Agreement (“Advisory Agreement”) with Juniper Investment Advisors, LLC (“JIA”) pursuant to ~~explore additional alternative management structures in an effort~~which JIA agreed to ~~reduce~~manage certain assets of the Company, ~~overhead.~~including the Company’s loan portfolio and certain of its legacy real estate owned properties.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying unaudited condensed consolidated financial statements include the accounts of IMH Financial Corporation and the following wholly-owned operating subsidiaries: 11333, Inc. (formerly known as Investors Mortgage Holdings, Inc.), an Arizona corporation; Investors Mortgage Holdings California, Inc., a California corporation; IMH Holdings, LLC, a Delaware limited liability company (“Holdings”); and various other wholly owned subsidiaries established in connection with the acquisition of real estate either through foreclosure or purchase and/or for borrowing purposes and majority owned or controlled real estate entities and interests in variable interest entities (“VIEs”) in which the Company is considered the primary beneficiary. IMH Management Services, LLC, an Arizona limited liability company, provides us and our affiliates with human resources and administrative services, including the supply of employees. Other entities in which we have invested and have the ability to exercise significant influence over operating and financial policies of the investee, but upon over which we do not possess control, are accounted for by the equity method of accounting within the financial statements and they are therefore not consolidated.

All significant intercompany accounts and transactions have been eliminated in consolidation.

Liquidity and Going Concern

We require liquidity and capital resources for our general working capital needs, including maintenance, development costs and capital expenditures for our operating properties and non-operating real estate owned (“REO”) assets, professional fees, general and administrative operating costs, loan enforcement costs, financing costs, debt service payments, and dividends to our preferred shareholders, as well as to acquire our target assets.

As of March 31, 2020, our accumulated deficit aggregated $723.0 million primarily as a result of previous provisions for credit losses recorded between 2008 and 2010 (due primarily to the erosion of the U.S. and global real estate and credit markets during those periods) relating to the decrease in the fair value of the collateral securing our legacy loan portfolio, impairment charges

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BUSINESS, BASIS OF PRESENTATION AND LIQUIDITY - continued

We require liquidity and capital resources for our general working capital needs, including maintenance, development costs and capital expenditures for our operating properties and non-operating REO assets, professional fees, general and administrative operating costs, loan enforcement costs, financing costs, debt service payments, and dividends to our preferred shareholders, as well as to acquire our target assets.

As of June 30, 2019, our accumulated deficit aggregated $702.4 million primarily as a result of previous provisions for credit losses recorded relating to the decrease in the fair value of the collateral securing our legacy loan portfolio and impairment charges relating to the value of ~~real estate owned (“REO”)~~REO assets acquired primarily through foreclosure, as well as on-going net operating losses resulting primarily from the lack of income-producing assets.

The Company has ~~taken a number of steps to maintain an adequate level of on-going~~met its near-term liquidity ~~over the years. Our liquidity plan has included~~requirements by, among other things, obtaining outside debt and equity financing, selling mortgage loans, and selling the majority of our legacy real estate assets. During the three months ended March 31, 2020, we sold a commercial office building (the “Broadway Tower”) in a cash sale for $19.5 million which, after selling expenses and payoff of underlying secured indebtedness of $11.0 million, netted $8.0 million in cash to the Company.

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of Coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

On March 17, 2020, in response to the COVID-19 pandemic, the Company temporarily closed its MacArthur Place hotel (“MacArthur Place”) located in Sonoma, California. While we expect restaurants, hotels and other hospitality assets to gradually reopen in the near future, we cannot state with any degree of reasonable certainty when MacArthur Place, our only operating asset, will re-open and when it does open, what occupancy or other operational restrictions will be put in place. If closure of or demand for the Company’s hotel rooms and other services is negatively impacted for an extended period as a result of cancellations, travel restrictions, governmental travel advisories and/or state of emergency declarations, or a prevailing reluctance with respect to traveling and patronizing hotels and restaurants the Company’s hospitality business and financial results could be materially and adversely impacted. As a result of the uncertainty with respect to when the MacArthur Place hotel may reopen, we furloughed certain hotel employees. Further employee furloughs or layoffs may be necessary in the future. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. The extent to which the Company’s business will be affected by the current outbreak of the Coronavirus will largely depend on both current and future developments, including its duration, spread and treatment, and related travel advisories and restrictions, which could impact overall demand in the hospitality industry, all of which are highly uncertain and cannot be reasonably predicted. Accordingly, we cannot be certain as to the full magnitude the pandemic will have on the Company’s consolidated financial condition, liquidity, and future results of operations. Subsequent to March 31, 2020, the Company applied and received funding totaling $1.8 million under the CARES Act in the form of Payroll Protection Program loan (“PPP Loans”). The PPP Loans may be forgivable if the Company’s use of funds meets the criteria for such forgiveness.

In 2018, the Company entered into stock subscription agreements with its largest shareholder, JPMorgan Chase Funding Inc., a related party (“Chase Funding”), pursuant to which Chase Funding purchased shares of our Series B-3 Cumulative Convertible Preferred Stock and Series A Senior Redeemable Preferred Stock for a total purchase price of $30.0 million. The Company is using the proceeds from the sale of these shares for general corporate purposes.

In the second quarter of 2019, we conducted a UCC foreclosure on the collateral securing a $7.6 million mezzanine note receivable that was in default. That collateral was 100% of the membership interests in an LLC that owns a commercial real estate building and operations in St. Louis, Missouri. In connection with this foreclosure, a subsidiary of the Company purchased the $13.2 million first mortgage note secured by this property. The purchase of the first mortgage note was funded partially with an $11.0 million loan (under a master repurchase agreement) from Chase Funding (related party) and the balance using Company funds. The master repurchase agreement has an initial maturity date of May 22, 2020 with the potential to extend to May 2021 if, among other conditions, certain debt yield and occupancy percentages are achieved. We are working with Chase funding to restructure and extend the maturity date of this facility.

~~In addition, in~~ connection with the Company’s acquisition and renovation of the MacArthur Place hotel, in October 2017, the Company entered into a building loan agreement and related agreements ~~(the “MacArthur Loan”) in October 2017~~ with MidFirst Bank in the amount of ~~$32.3 million. As described in Note 9,~~$37.0 million (the “MacArthur Loan”).

In connection with the MacArthur Loan, was modified during the first quarter of 2019 to increase the loan facility to $37.0 million and to establish certain additional reserve accounts in the amount of $2.0 million. The renovation of MacArthur Place is scheduled to be completed in the third quarter of 2019.

~~The modified MacArthur Loan requires~~ the Company was required to ~~fund minimum equity of $27.7 million, all of which has been funded as of June 30, 2019. The Company has provided~~provide a loan repayment guaranty equal to 50% of the original principal amount of the MacArthur Loan along with a guaranty of interest and operating deficits, as well as other customary non-recourse carve-out matters such as bankruptcy and environmental matters. Under the guarantees, the Company is required to maintain a minimum Tangible Net Worth, as defined, of $50.0 million and minimum liquidity of $5.0 million throughout the term of the MacArthur Loan. The Company was in compliance with such financial covenants as of ~~June 30, 2019. The loan includes a provision requiring substantial completion of the project by June 30, 2019, which the lender agreed to waive and extend to September 1, 2019.~~March 31, 2020. In addition, the MacArthur Loan requires MacArthur Place to establish various operating and reserve accounts at MidFirst Bank which are subject to a cash management agreement. In the event of default, MidFirst Bank has the ability to take control of such accounts for the allocation and distribution of proceeds in accordance with the cash management agreement.

~~While the Company initially utilized its own equity and proceeds from the~~ The MacArthur Loan ~~to fund~~has an initial maturity of October 1, 2020 with two one-year extension options available if certain criteria is met, including minimum debt service coverage ratios. Given the ~~purchase~~impact of the COVID-19 outbreak and resulting temporary closure of MacArthur Place, the Company ~~sponsored~~does not expect it will meet the current criteria to exercise its extension options. The Company has commenced negotiations with the lender for potential forbearance of debt service payments and ~~commenced an offering in November 2017 of up to $25.0 million of preferred limited liability company interests (the “Preferred Interests”)~~extension of the L’Auberge de Sonoma Resort Fund, LLC (the “Hotel Fund”). The net proceeds of this offering are being used primarily to (i) reimburse the Company’s for its initial $17.8 million common investment in the Hotel Fund and (ii) fund certain renovations and operating losses at the hotel. As of June 30, 2019, the Hotel Fund had sold Preferred Interests in the aggregate amount of $22.5 million. Since the Company is deemed the primary beneficiary of and controls the Hotel Fund, we have consolidated this entity.maturity date.

As of ~~June 30, 2019,~~March 31, 2020, we had cash and cash equivalents of ~~$12.2~~$9.9 million, REO assets held for sale with a carrying value of $7.4 million and other REO assets with a carrying value of ~~$33.7~~$33.3 million that we seek to dispose of within the next 12 months. We

~~IMH FINANCIAL CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 1 – BUSINESS, BASIS OF PRESENTATION AND LIQUIDITY - continued~~

continue to evaluate potential disposition strategies for our remaining REO assets and to seek additional sources of debt and equity for investment and working capital purposes. ~~During the second quarter of 2019, a court-ordered stay was issued which prevents the sale of certain assets, pending the outcome of a related hearing in September 2019.~~

At any time after July 24, 2020, each holder of our Series B-1 and B-2 Preferred Stock may require the Company to redeem, out of legally available funds, the shares held by such holder at a price (the “Redemption Price”) equal to the greater of (i) 150% of the sum of the original price per share plus all accrued and unpaid dividends or (ii) the sum of the tangible book value of the Company per share of voting Common Stock and all accrued and unpaid dividends as of the date of redemption. ~~At any time after February 9, 2023,~~As of March 31,

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BUSINESS, BASIS OF PRESENTATION AND LIQUIDITY - continued

2020, the ~~holder of our~~aggregate Redemption Price for the Series ~~B-3~~B-1 and Series B-2 Preferred Stock ~~may require the Company~~would be approximately $39.6 million. In addition, pursuant to ~~redeem, out of legally available funds, at a Redemption Price equal~~an agreement to the greater of (i) 145% of the sum of the original price per share plus all accrued and unpaid dividends or (ii) the sum of the tangible book value of the Company per share of voting Common Stock and all accrued and unpaid dividends as of the date of redemption. While the Preferred Shareholders have indicated their willingness to potentially extend the ~~redemption period beyond July 24, 2020,~~Redemption Date, a cash payment in the aggregate amount of $2.6 million is due and payable to the holders of the Series B-1 and B-2 Preferred Stock on July 24, 2020 whether or not a redemption is requested. The current holders of our Series B Preferred Stock are collectively referred to herein as the “Series B Investors”.

~~As described~~ We are presently in discussions with the Series B Investors regarding a restructuring of the of terms of these securities. There is no assurance, however, that all or any of the Series B Investors will agree to restructure these securities, or if so, whether the terms will be beneficial to the Company. See Note ~~9, the Company’s unsecured exchange offering notes (“EO Notes”) with a face value of $10.2 million matured on April 29, 2019 and were repaid in full.~~10.

We expect our primary sources of liquidity over the next twelve months to consist of ~~our~~ proceeds from the disposition of our existing REO assets, ~~held for sale (assuming that the court-order stay is lifted within that time frame),~~ proceeds from borrowings and equity issuances, current cash, ~~mezzanine and mortgage loan interest income, and~~ revenues from the ownership orand management of ~~MacArthur Place. If we are able to resolve these matters favorably, we believe that our cash~~hotels, and cash equivalents coupled with our operating and investing revenues, as well as proceeds that we anticipate receiving from the disposition of our real estate held for sale and debt and equity financing efforts will be sufficient to allow us to fund our operations for a period of one year from the date these condensed consolidated financial statements are issued.investment income.

WeHistorically, we have ~~been successful thus far in securing financing through June 30, 2019 to provide adequate funding and funding commitments for working capital purposes, which has been supplemented by~~used proceeds from the issuance of preferred equity and/or debt, proceeds from the sale of ~~certain~~our REO assets, ~~receipts~~and the liquidation of ~~principal and interest on mortgage~~mortgages and related ~~investments. Moreover,~~investments to satisfy our working capital requirements. As described above, we sold our Broadway Tower commercial office building in January 2020, netting $8.0 million in cash to the Company after payment of related debt. We also are ~~continuing to negotiate potential extensions or restructuring~~in discussions with the holders of our Series B Preferred Stock ~~and/~~regarding a restructuring or modification of those securities and our ~~outstanding debt~~ obligations. ~~However, there is~~There can be no assurance that wethese efforts will be successful ~~in such negotiations,~~ or ~~in selling~~that we will sell our remaining REO assets in a timely manner or that will be successful in obtaining additional or replacement financing, if needed, to sufficiently fund our future operations, redeem our Series B-1 and B-2 Preferred Stock if so required, repay existing debt, or to implement our investment strategy. ~~Our~~In the event we are unsuccessful in negotiating a deferral or restructuring of the terms of our Series B-1 and B-2 Preferred Stock, we will be required to fund the redemption of $39.6 million, in an addition to the cash payment in the aggregate amount of $2.6 million, in July 2020. In the absence of proceeds from asset sales, equity issuances or borrowings to fund payment of the Redemption Price, the required redemption would likely render the Company insolvent. Moreover, our failure to generate sustainable earning assets and to successfully liquidate a ~~sufficient number~~significant portion of our REO assets ~~may~~will have a material adverse effect on our business, results of operations and financial position. In addition, the ~~absence~~Company may continue to be materially adversely impacted by the COVID-19 outbreak. These accompanying unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of ~~favorably resolving the matters described above, the~~these uncertainties.

The collective nature of ~~these~~the above uncertainties create substantial doubt about our ability to continue as a going concern for a period beyond one year from the date of issuance of these accompanying unaudited condensed consolidated financial statements. The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business. They do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to its ability to continue as a going concern.

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES

~~Operating Properties Acquired Through Foreclosure~~Funds Held by Lender and Restricted Cash

~~Operating properties acquired through foreclosure consist~~The balance sheet item, “Funds held by lender and restricted cash”, includes amounts maintained in escrow or other restricted accounts deposited into reserve accounts held by lenders for contractually specified purposes. The following table provides a reconciliation of ~~certain operating assets acquired through foreclosure~~cash, cash equivalents, and funds held by lender and restricted cash reported within the accompanying condensed consolidated balance sheets that sum to the ~~Company has elected to hold for on-going operations~~total of the amounts shown in the accompanying unaudited condensed consolidated statement of cash flows as of March 31, 2020 and ~~are recorded at fair value at the time of foreclosure.~~December 31, 2019 (in thousands):

~~Lessee Accounting~~

F-10

~~As further discussed below, the Company adopted the provisions of Accounting Standards Update 2016-02,~~ ~~Leases~~, effective January 1, 2019. We determine if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets are recorded in other assets and operating lease liabilities are recorded in accounts payable and other accrued expenses in the accompanying

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued

~~condensed consolidated~~The balance ~~sheet. Finance leases, none~~ of ~~which existed as of the adoption of Accounting Standards Codification (“ASC”) 842 or as of~~ ~~June 30, 2019, would be reflected in property and equipment and other liabilities in our condensed consolidated balance sheets.~~

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Under the available practical expedient, we account for the lease and non-lease components as a single lease component for all classes of underlying assets. Further, we elected a short-term lease exception policy on all classes of underlying assets, permitting us to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less).

~~Lessor Accounting~~

On May 29, 2019, the Company acquired a commercial real estate building through a foreclosure action known as Broadway Tower located in St. Louis, Missouri which leases office space to various tenants. The assumed leases were previously accounted for according to ASC 840 and were classified as operating leases. Upon transitioning these leases from being accounted for according to ASC 840 to being accounted for under ASC 842, the Company did not reassess the lease classification as allowed under the practical expedient package elected by the Company.

New lessor leases are subject to the following policies for lease classification. Pursuant to ASC 842 – 30, the Company will classify a lease as a sales – type lease if: (i) the lease transfers ownership of the underlying asset to the lessee by the end of the lease term, (ii) the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise, (iii) the lease term is for the major part of the remaining economic life of the underlying asset, (iv) the present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds substantially all (90% or more) of the fair value of the underlying asset, or (v) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. As of June 30, 2019, none of our leases, as a lessor, met the above criteria to be classified as a sale – type lease.

Pursuant to ASC 842 – 30, when none of the sales-type lease classification criteria are met, a lessor would classify the lease as a direct financing lease when both of the following criteria are met: (i) the present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments and/or any other third party unrelated to the lessor equals or exceeds substantially all (90% or more) of the fair value of the underlying asset and (ii) it is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value guarantee. As of June 30, 2019, none of our leases, as a lessor, met the above criteria to be classified as a financing lease.

Pursuant to ASC 842 – 30, a lessor would classify a lease as an operating lease when none of the sales-type or direct financing lease classification criteria are met. As of June 30, 2019, all leases of the Company’s rental properties were classified as operating leases.

The Company has lease agreements with lease and non-lease components. The Company has elected to not separate non-lease components from lease components for all classes of underlying assets (primarily real estate assets) and will account for the combined components as commercial real estate rental revenue. Non-lease components included in commercial real estate rental revenue include certain tenant reimbursements for maintenance services, (including common-area maintenance services or “CAM”). Variable consideration for costs that are not contract components (e.g., real estate taxes, utilities) are excluded from total consideration and would be recorded as incurred by the lessee and earned by the lessor. As a lessor, the Company has further determined that this policy will be effective only on a lease that has been classified as an operating lease and the revenue recognition pattern and timing is the same for both types of components. Therefore, Accounting Standards Codification Topic 842, Leases (“ASC 842”), has been applied to these lease contracts for both types of components.

The Company has elected to present sales tax and other tax collections in the condensed consolidated statements of operations on a net basis and, accordingly, such taxes are excluded from reported revenues.

~~IMH FINANCIAL CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued~~

~~Commercial Real Estate Rental Revenue~~

The Company derives revenues from our commercial real estate building in St. Louis, Missouri, known as Broadway Tower, which, as more fully described in Notes 4 and 5, was acquired in a foreclosure action by the Company in May 2019. Rental revenue, which is reflected as operating property revenue in the consolidated statements of operations and is presented in Mortgage and REO Legacy portfolio and other operations segment, represents revenue from the leasing of commercial office space to tenants, common area maintenance charges and parking space rental. Leases with tenants are classified as operating leases and revenue is recognized on a straight line basis over the term of the respective leases.

The Company regularly reviews receivables related to rent and unbilled rent receivables and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. Upon adoption of ASU 2016-02, effective January 1, 2019, ~~the Company recognizes all changes in the collectability assessment for an operating lease as an adjustment to rental income and does not record an allowance for uncollectible accounts.~~

The Company recognizes the rental income on a straight-line basis over the terms of the leases. The cumulative differences between rental income recognized in the Company’s condensed unaudited consolidated statements of operations and contractual payment terms have been recorded as deferred rental income and presented on the accompanying condensed consolidated balance sheets.

~~Funds Held by Lender and Restricted Cash~~

~~Funds~~“Funds held by lender and restricted cash includes amounts maintained in escrow or other restricted accounts deposited into reserve accounts held by lenders for contractually specified purposes, which includes property taxes and insurance. The following table provides a reconciliation of cash, cash equivalents, and funds held by lender and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statement of cash flows as of June 30, 2019 and December 31, 2018 (in thousands):

June 30, December 31,

2019
2018
Cash and cash equivalents
$ 12,222

$ 25,452
Funds held by lender and restricted cash
5,147

198
Total cash, cash equivalents, and restricted cash
$ 17,369

$ 25,650

~~This balance~~cash” includes property tax, insurance and construction related reserves for the MacArthur Loan totaling ~~$2.3~~$2.4 million and ~~$0.2~~$2.6 million at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. During the six months ended June 30, 2019, we acquired restricted cash reserves totaling $2.8 million in connection with our foreclosure and acquisition of a commercial office building in St. Louis, Missouri which is included in the balance above as of June 30, 2019.

~~Mortgage Investment~~ Revenue Recognition

~~See Note 3 for the Company’s accounting policy for Mortgage Investment~~ Revenue ~~Recognition.~~

~~Recent Accounting Pronouncements~~

~~Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”)~~is measured based on consideration specified in ~~the form of accounting standards updates (“ASUs”) to the FASB’s ASC.~~a contract with a customer. The Company ~~considers the applicability and impact of all ASUs.~~

~~Adopted Accounting Standards~~

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases~~ ~~(“ASU 2016-02”). This new standard establishes~~recognizes revenue when it satisfies a ~~ROU model that requires~~performance obligation by transferring control over a ~~lessee~~product or service to ~~record~~ a ~~ROU asset and~~customer. ASC Topic 606 defines a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. In July 2018, the FASB issued ASU No. 2018-11 which provides an alternative transition method that allows entitiesfive-step process to ~~apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to~~

~~IMH FINANCIAL CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued~~

~~the opening balance of retained earnings in the period of adoption.~~achieve this core principle. The Company has adopted the requirements of ASU 2016-02 on January 1, 2019, the first day of fiscal year 2019, and using the optional transition method. The Company elected the practical expedient package outlined in ASU No. 2016-02significant accounting policies under which we did not have to reassess whether an arrangement contains a lease, we carried forward our previous classification of leases as operating, and we did not have to reassess previously recorded initial direct costs. There was an increase in assets of $1.6 million and liabilities of $1.7 million due to the recognition of the required ROU asset and corresponding liability for all lease obligations thatASC Topic 606 are currently classified as operating leases with the difference of $0.1 million related to existing deferred rent that reduced the ROU asset recorded. The standard did not have an impact in our condensed consolidated statements of operations.

~~In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532,~~ ~~Disclosure Update and Simplification~~, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The Company has adopted the requirements of this accounting pronouncement in fiscal 2019.

~~Accounting Standards Not Yet Adopted~~

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (“ASU 2016-13”). The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.

~~In January 2017, the FASB issued ASU 2017-04,~~ ~~Simplifying the Test for Goodwill Impairment~~ (“ASU 2017-04”), which simplifies the current two-step goodwill impairment test by eliminating Step 2 of the test. The guidance requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, and should be applied on a prospective basis. Early adoption is permitted for the interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.

~~IMH FINANCIAL CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 3 — REVENUE~~

~~Following is a breakdown of revenue by source (in thousands):~~

Three Months Ended June 30, Six Months Ended June 30,

2019 2018 2019 2018
Operating property revenue

Commercial real estate rental revenue $ 398
$ —
$ 398
$ —
Hotel revenues
Rooms 766
1,205
957
1,897
Food and beverage 536
523
539
1,008
Banquet 26
96
30
276
Spa and fitness center 118
188
212
328
Other 36
93
57
159
Total operating property revenue 1,880
2,105
2,193
3,668
Mortgage loan income, net 447
641
1,098
1,266
Management fees, investment and other income 208
255
276
292
Total revenue $ 2,535
$ 3,001
$ 3,567
$ 5,226
set forth below.

Operating Property ~~Revenue~~

~~Commercial Real Estate Rental Revenue~~

The Company derives revenues from our commercial real estate building in St. Louis, Missouri, known as Broadway Tower, which, as more fully described in Notes 4 and 5, was acquired in a foreclosure action by the Company in May 2019. Rental revenue, which is reflected as operating property revenue in the consolidated statements of operations and is presented in Mortgage and REO Legacy portfolio and other operations segment, which represents revenue from the leasing of commercial office space to tenants, common area maintenance charges and parking space rental. Leases with tenants are classified as operating leases and revenue is recognized on a straight line basis over the term of the respective leases.

Revenues - Hotel Revenues

The Company derives hotel revenues from our hotel in Sonoma, California, which is reflected as operating property revenue in the accompanying unaudited consolidated statements of operations. Rooms revenue represents revenue from the occupancy of our hotel rooms and is driven by the occupancy and daily rate charged. Rooms revenue also includes revenue for guest no-shows, day use, and ~~early/~~early late departure fees. The contracts for room stays with customers are generally short in duration and revenues are recognized as services are provided over the course of the hotel stay.

Food & Beverage (“F&B”) revenue consists of revenue from the restaurants and lounges at our hotel, in-room dining and ~~mini-bar~~minibar revenue, and banquet/catering revenue from group and social functions. Other F&B revenue may include revenue from ~~audio-visual~~audiovisual equipment/services, rental of function rooms, and other F&B related revenue. Revenue is recognized as the services or products are provided. Our hotel property may employ third parties to provide certain services at the property, for example, audio visual services. We evaluate each of these contracts to determine if the hotel is the principal or the agent in the transaction, and record the revenue as appropriate (i.e., gross vs. net).

Other revenue consists of ancillary revenue at the property, including attrition and cancellation fees, resort fees, spa and other guest services. Attrition and cancellation fees are recognized for non-cancellable deposits when the customer provides notification of cancellation within established management policy time frames. Taxes collected from customers and submitted to taxing authorities are not recorded in revenue.

~~Mortgage Investment Revenue Recognition~~We identified the following performance obligations in connection with our hotel revenues, for which revenue is recognized as the respective performance obligations are satisfied, which results in recognizing the amount we expect to be entitled to for providing the goods or services:

Cancellable room reservations or ancillary services are satisfied as the good or service is transferred to the hotel guest, which is generally when the room stay occurs.

Noncancellable room reservations and banquet or conference reservations represent a series of distinct goods or

services provided over time and are satisfied as each distinct good or service is provided, which is reflected by the duration of the room reservation.

Material rights for free or discounted goods or services are satisfied at the earlier point in time when the material right expires or the underlying free or discounted good or service is provided to the hotel guest.

Other ancillary goods and services purchased independently of the room reservation at standalone selling prices are considered separate performance obligations, which are satisfied when the related good or service is provided to the hotel guest.

Components of package reservations for which each component could be sold separately to other hotel guests are considered separate performance obligations and are satisfied as set forth above.

Hotel revenues primarily consist of hotel room rentals, F&B sales, and other ancillary goods and services. Revenue is recognized when rooms are occupied or goods and services have been delivered or rendered, respectively. Payment terms typically align with when the goods and services are provided.

Although the transaction prices of room rentals, goods and other services are generally fixed and based on the respective room reservation or other agreement, an estimate to reduce the transaction price is required if a discount is expected to be provided to the customer. For corporate customers, the hotel offers discounts on goods and services sold in package reservations, and the corresponding transaction price is allocated to the performance obligations within the package based on the estimated standalone selling prices of each component. On occasion, the hotel may also provide the customer with a material right to a free or discounted good or service in conjunction with a room reservation or banquet contract. These material rights are considered separate performance obligations to which a portion of the transaction price is allocated based on the estimated standalone selling prices of the good or service, adjusted for the likelihood the hotel guest will exercise the right.

F-11

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued

Operating Property Revenue - Commercial Real Estate Rental Revenue

The Company derives revenues from Broadway Tower, which, was acquired in May 2019 (Note 5) and subsequently sold in January 2020 (Note 1). Rental revenue, which is reflected as operating property revenue in the accompanying condensed consolidated statements of operations and is presented in the Mortgage and REO Legacy portfolio and other operations segment, represents revenue from the leasing of commercial office space at Broadway Tower to tenants, common area maintenance charges and parking space rental. Leases with tenants are classified as operating leases and revenue is recognized on a straight-line basis over the term of the respective leases.

Management Fee Revenue Recognition

Management fees are typically composed of a base fee, which typically is a percentage of the hotel revenues, plus an incentive fee, which is generally based on hotel profitability. We recognize base management fees as revenue when we earn them under the contracts. In interim periods and at year-end, we recognize incentive management fees that would be due as if the contracts were to terminate at that date, exclusive of any termination fees payable or receivable by us.

Mortgage Loan Income

Interest on mortgage loans is recognized as revenue when earned using the interest method based on a ~~360~~360- or ~~365 day~~365-day year, in accordance with the related mortgage loan terms. We do not recognize interest income on loans once they are deemed to be impaired and placed in non-accrual status. Generally, a loan is placed in non-accrual status when ~~(i)~~ it is past its scheduled maturity by more than 90 ~~days; (ii)~~days, when it becomes delinquent as to interest due by more than 90 ~~days;~~days or ~~(iii)~~when the related fair value of the collateral is less than the total principal, accrued interest and related costs. We may determine that a loan, while delinquent in payment status, should not be placed in non-accrual status in instances where the fair value of the loan collateral significantly exceeds the principal and the accrued interest, as we expect that income recognized in such cases is probable of collection. Unless and until we have determined that the value of underlying collateral is insufficient to recover the total contractual amounts due under the loan term, generally our policy is to continue to accrue interest until the loan is more than 90 days delinquent with respect to accrued, uncollected interest or more than 90 days past scheduled maturity, whichever comes first. Mortgage loans classified as held for sale are recorded on the lower of carrying value or fair value less cost to sell.

We do not typically remove a loan from non-accrual status until (a) the borrower has brought the respective loan current as to the payment of past due interest, and (b) we are reasonably assured as to the collection of all contractual amounts due under the loan based on the value of the underlying collateral of the loan, the receipt of additional collateral required and the financial ability of the borrower to service our loan.

We do not generally reverse accrued interest on loans once they are deemed to be impaired and placed in non-accrual status. In conducting our periodic valuation analysis, we consider the total recorded investment for a particular loan, including outstanding principal, accrued interest, anticipated protective advances for estimated outstanding property taxes for the related property and estimated foreclosure costs, when computing the amount of valuation allowance required. As a result, our valuation allowance may increase based on interest income recognized in prior periods, but subsequently deemed to be uncollectible as a result of our valuation analysis.

We generally allocate cash receipts first to interest, except when such payments are specifically designated by the terms of the loan as a principal reduction. Loans with a principal or interest payment one or more days delinquent are in technical default and are subject to various fees and charges including default interest rates, penalty fees and reinstatement fees. Often these fees are negotiated in the normal course of business and, therefore, not subject to estimation. Accordingly, revenue for such fees is recognized over the remaining life of the loan as an adjustment to the interest income yield.

We defer fees for loan originations, processing and modifications, net of direct origination costs, at origination and amortize such fees as an adjustment to interest income using the effective interest method. Revenue for non-refundable commitment fees is recognized over the remaining life of the loan as an adjustment to the interest income yield.

We defer premiums or discounts arising from acquired loans at acquisition and amortize such premiums or discounts as an adjustment to interest income over the contractual term of the related loan using the effective interest method. We include the unamortized portion of the premium or discount as a part of the net carrying value of the loan inon the accompanying condensed consolidated

F-12

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued

balance sheets. Costs not directly paid to the seller of the loan are expensed as incurred and not amortized, except for any fees paid directly to the seller.

Recent Accounting Pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s ASC. The Company considers the applicability and impact of all ASUs.

Adopted Accounting Standards

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies the current two-step goodwill impairment test by eliminating Step 2 of the test. The guidance requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, and should be applied on a prospective basis. The Company adopted ASU 2017-04 for the period ended March 31, 2020. There was no material impact from the adoption of this standard on these condensed consolidated financial statements.

Accounting Standards Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. We are currently evaluating the impact of the guidance and our options related to the practical expedients.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (“ASU 2016-13”). The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. Recently, the FASB voted to delay the effective date of ASU 2016-13 to January 1, 2023, for smaller reporting companies with a revised ASU expected in the fourth quarter of 2019. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.

F-13

NOTE 3 — REVENUE

The following is a breakdown of revenue by source for the three months ended March 31, 2020 and 2019 (in thousands):



	Three months ended March 31,
	2020		2019
Operating property revenue
Commercial real estate rental revenue	$	239	$	—
Hotel revenues
Rooms	841		192
Food and beverage	672		3
Banquet	105		4
Spa and fitness center	126		94
Other	65		21
Total operating property revenue	2,048		314
Mortgage loan income, net	—		650
Management fees, investment and other income	92		68
Total revenue	$	2,140	$	1,032

NOTE 4 — MORTGAGE LOANS, NET

Lending Activities

As of ~~June 30,~~March 31, 2020 and December 31, 2019, the Company ~~held four portfolio~~had two loans outstanding with aan aggregate average principal and interest balance of ~~$13.3~~$6.3 million, ~~net of valuation allowances, two~~both of which were performing loans bearing a weighted-average interest rate of 9.7% as of June 30, 2019. As of December 31, 2018, the Company held six portfolio loans with a balance of $23.2 million, net of valuation allowances, three of which were performing loans bearing a weighted-average interest rate of 9.4%. As of June 30, 2019non-performing and ~~December 31, 2018, the Company held two and three non-performing portfolio loans, respectively, two of which~~ have been fully reserved ~~and have~~with a zero carrying ~~value as of June 30, 2019. During the three months ended June 30, 2019, one performing loan with a principal balance of $3.0 million was repaid in full. In addition,~~value. The Company did not originate any new loans on its own behalf during the three months ended June 30, 2019, we foreclosed on one of the Company’s mezzanine loan investments that had a carrying value of $8.2 million as of the date of foreclosure, which had been in default since September 2018. In May 2019, we foreclosed on the loan collateral consisting of 100% of the membership interests in the limited liability company owning the underlying property. We recorded the acquired assets and assumed liabilities at fair value and consolidated the operations commencing on the foreclosure date. See additional discussion in Notes 5 and 8.March 31, 2020 or 2019.

During the three months ended ~~June 30,~~March 31, 2020, and 2019, ~~and 2018,~~ we recorded mortgage interest income of ~~$0.4~~$0.0 and $0.7 million, ~~and $0.6 million,~~ respectively. During the six months ended June 30, 2019 and 2018, we recorded mortgage interest income of $1.1 million and $1.3 million, respectively. The valuation allowance was $12.7 million as of June 30, 2019 and $13.1 million as of December 31, 2018. The Company did not invest in any new loans during the three or six months ended June 30, 2019. During the three and six months ended June 30, 2018, the Company originated one new construction loan in the principal amount of $13.1 million, of which we funded $0.9 million of construction loan draws during the six months ended June 30, 2019.

NOTE 5 — OPERATING PROPERTIES, REAL ESTATE HELD FOR SALE AND OTHER REAL ESTATE OWNED

As of ~~June 30, 2019,~~March 31, 2020, we held total REO assets of ~~$104.8~~$86.2 million, of which $7.4 million were held for sale, ~~$63.7~~$45.5 million were held as operating properties, and ~~$33.7~~$33.3 million were classified as other real estate owned. As of December 31, ~~2018,~~2019, we held total REO assets of ~~$75.0~~$104.0 million, of which ~~$7.4~~$25.5 million were held for sale, ~~$33.9~~$45.2 million were held as operating properties and ~~$33.7~~$33.3 million were classified as other real estate owned.

~~As described in Note 4, on~~REO Asset Sales

On May 29, 2019, wethe Company foreclosed on the membership interests of a ~~limited liability company that was~~commercial office building in St Louis, Missouri, known as Broadway Tower, which were pledged as collateral on a ~~defaulted~~ mezzanine note ~~receivable. The entity owns and operates a commercial office building known as Broadway Tower, located in St. Louis, Missouri. Upon foreclosure, we acquired~~held by the ~~membership interests in~~Company. On January 22, 2020, the ~~limited liability company that owns~~Company completed the ~~office building and related assets, and assumed related liabilities~~sale of Broadway Tower ~~all~~for a selling price of $19.5 million, net of purchase price adjustments, and paid off at closing the $11.0 million note held by Chase Funding securing the property. Subsequent to payment of closing costs and the Chase Funding indebtedness, the Company’s net proceeds were $8.0 million. While the Company did not record a loss on sale during the three months ended March 31, 2020, the disposal of Broadway Tower resulted in a loss on sale of $1.5 million, which ~~were~~was recorded ~~at fair value in accordance with GAAP.~~as an impairment charge during the year ended December 31, 2019 when the impairment was determinable. The ~~acquired assets consist of a building, land, furniture and fixtures, operating~~Company had no other asset sales during the three months ended March 31, 2020 or 2019.

F-14

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 — OPERATING PROPERTIES, REAL ESTATE HELD FOR SALE AND OTHER REAL ESTATE OWNED – continued

and reserve cash, and tenant receivables totaling approximately $26.0 million. Liabilities assumed consist of trade accounts payable and accrued liabilities, and accrued interest and principal on the first mortgage loan totaling approximately $16.0 million. In accordance with ASC 842, we recorded a right of use asset and related lease liability of $0.6 million, see Note 14. As described in Note 9, we purchased the Broadway Tower first mortgage note and accrued interest.

During the three and six months ended June 30, 2019, the Company sold one REO asset for $39.0 thousand resulting in a gain on sale of $20.0 thousand. During the three and six months ended June 30, 2018, the Company sold REO assets (or portions thereof) for $0.2 million and $0.5 million (net of transaction costs) resulting in a total net gain on sale of $0.1 million and $0.4 million, respectively.

REO Planned Development and Operations

Costs related to the development, renovation or improvements of the Company’s real estate assets are generally capitalized, while costs and expenses related to operating, holding and maintaining our operating properties and REO assets are expensed as incurred. Costs that are expensed as incurred ~~and~~are included in operating property direct expenses and as expenses for non-operating real estate owned in the accompanying unaudited condensed consolidated statements of operations. For the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ these costs and expenses were ~~$3.7~~$3.5 million and ~~$2.3~~$2.4 million, respectively. ~~For the six months ended June 30, 2019 and 2018, these~~Cash outlays for capitalized costs ~~and expenses were $6.2~~totaled $0.7 million and $4.7 million ~~respectively. Costs related to~~during the ~~development, renovation or improvements~~three months ended March 31, 2020 and 2019, respectively, and consisted primarily of ~~the Company’s real estate assets are generally capitalized, and costs relating to holding the assets are generally charged to expense. Cash outlays for capitalized~~ renovation costs ~~totaled $9.8 million and $3.2 million during the six months ended June 30, 2019 and 2018, respectively.~~for MacArthur Place.

NOTE 6 — ~~VARIABLE INTEREST ENTITIES~~INVESTMENT IN JOINT VENTURES AND PARTNERSHIPS

Consolidated Variable Interest Entities

As of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, we consolidated multiple variable interest entities (“~~VIE’s”~~VIEs”) relating to two primary projects: ~~one~~1) various partnerships which own land and water rights located in New Mexico for which the Company retains both general partner and limited partner interests, and 2) the L’Auberge de Sonoma Resort Fund (the “Hotel Fund”) for which the Company is ~~comprised of real estate holdings~~the sponsor and its subsidiary is the ~~Hotel Fund~~common member that owns ~~an operating hotel, restaurant and spa.~~MacArthur Place. We are deemed to be the primary beneficiaries of these consolidated ~~VIE’s~~VIEs as we have the power to direct the activities that most significantly affect their economic performance and we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. The assets of ~~our~~these consolidated ~~VIE’s~~VIEs are only available to settle the obligations of the respective entities.

The following table summarizes the carrying amounts of the ~~above referenced~~above-referenced entities’ assets and liabilities included in the Company’s accompanying condensed consolidated balance sheets at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019 (in thousands):



	March 31, 2020		December 31, 2019
Total assets	$	100,490	$	99,990
Total liabilities	61,930		59,920

The following table summarizes the consolidated VIEs results of operations for the three months ended March 31, 2020 and 2019, net of intercompany eliminations (in thousands):

June 30, 2019 December 31, 2018
Total assets $ 97,730
$ 85,240
Total liabilities 57,640
37,770

~~The following table summarizes the results of operations for the three and six months ended June 30, 2019 and 2018, net of intercompany eliminations (in thousands):~~

Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018
Net loss $ (2,890 ) $ (833 ) $ (6,040 ) $ (2,333 )



	Three months ended March 31,
	2020			2019
Net loss	$	(3,077	)	$	(3,150	)

The Company’s maximum exposure to loss ~~consists~~ of its combined equity in those entities ~~which~~ totaled ~~$25.1~~$28.1 million as of ~~June 30, 2019.~~March 31, 2020.

Investment in Unconsolidated Entities

In the second quarter of 2019, the Company entered into a joint venture agreement with Juniper New Mexico, LLC and Juniper Bishops Manager, LLC (both related parties of Jay Wolf, a director of the Company) to participate in a $10.0 million mezzanine loan to be used to finance the renovation of a luxury resort located in Santa Fe, New Mexico. The ~~Hotel Fund made~~mezzanine loan is secondary to a ~~preferred distribution, payable monthly, accruing at~~senior mortgage loan funded by an unrelated party. The joint venture is named Juniper Bishops, LLC (“Juniper Bishops” or the “JV”), and is sponsored and managed by Juniper Bishops Manager, LLC, which manages and controls the joint venture. IMH’s subsidiary, IMH Bishops Lodge Mezz Lender, LLC (“IMH BL Mezz Lender”), is a limited member in the joint venture and does not manage, control or have any decision-making powers nor is it the primary beneficiary, and therefore, it is not consolidated. As such, we have accounted for this investment using the equity method of accounting. IMH BL Mezz Lender’s maximum commitment under this investment is $3.9 million, (or 39% of the $10.0 million loan), all of which was funded as of March 31, 2020. Under the terms of the mezzanine loan agreement, the interest rate of ~~7.0% per annum~~the loan is based on ~~invested capital, cumulative~~the one-month LIBOR plus 15% with a LIBOR floor of 2.4%, and ~~non-compounding (the “Preferred Distribution”)~~ of ~~$0.3 million~~which 6.0% is accrued and ~~$0.6 million~~deferred, and ~~during~~ the ~~three and six months ended June 30, 2019, and $0.1 million during~~balance is paid on a current basis. While the ~~three and six months ended June 30, 2018.~~Company is entitled to a 7% return under the terms of the JV agreement, the Company expects to receive a total preferred annualized return of 11.4%, less a management fee of 1.5%, of which 5.4% is payable quarterly in arrears, with the remaining 6.0% accrued

F-15

~~NOTE 7 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES~~

~~Interest Rate Derivative~~

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 — VARIABLE INTEREST ENTITIES AND INVESTMENTS IN UNCONSOLIDATED ENTITIES – continued

~~We are exposed~~and to ~~risks arising from rising interest rates~~be paid upon maturity in June 2021. During the three months ended March 31, 2020, the Company recorded $0.1 million in earnings on our variable rate debt instruments. To manage these risks, we periodically use interest rate derivatives, which currently consists of an interest rate cap. To mitigate nonperformance risk, we routinely use a third party’s analysis of the ~~creditworthiness of the counterparties, which supports our belief that the counterparties’ nonperformance risk is limited. All derivatives are recorded at fair value.~~

~~During 2018, we entered into an interest rate cap with a notional amount of $36.0 million~~investment and ~~a rate cap of 2.2%. The interest rate cap had an effective date~~received distributions totaling $0.1 million. As of March ~~21, 2018 and terminates on March 1, 2021. This instrument was not designated as a cash flow hedge.~~31, 2020, we recorded uncollected accrued revenue of $0.1 million.

NOTE ~~8 —~~7— FAIR VALUE

Valuation Allowance and Fair Value Measurement of Loans, Real Estate Held for Sale, Other REO ~~and Derivative Instruments~~

Our valuation analysis process and procedures are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018.~~2019. We perform a valuation analysis of our loans, REO held for sale, and other REO ~~and derivative instruments~~ on a quarterly basis. We consider all relevant, material circumstances to determine if, and the extent to which, a valuation allowance is required.

Impairment for collateral dependent loans is measured at the balance sheet date based on the then fair value of the collateral in relation to contractual amounts due under the terms of the applicable loan if foreclosure is probable. Substantially all of our loans in default are deemed to be collateral dependent.

REO assets that are classified as held for sale and other REO are measured at the lower of carrying amount or fair value, less estimated cost to sell. If an asset is considered impaired, an impairment loss is recognized for the difference between the asset’s carrying amount and its fair value, less estimated cost to sell. If we elect to change the disposition strategy for our other REO, and such assets were deemed to be held for sale, we may record additional impairment charges, and the amounts could be significant.

Selection of Single Best Estimate of Value

The results of our valuation efforts generally provide a range of values for the collateral valued or REO assets rather than a single value. The selection of a value from within a range of values depends upon general overall market conditions as well as specific market conditions for each property valued and its stage of entitlement or development. In selecting the single best estimate of value, we consider the information in any relevant valuation reports, credible purchase offers received and agreements executed, as well as multiple observable and unobservable inputs.

~~Fair Value Measurements of Operating Properties Acquired Through Foreclosure~~

As described in Note 4, on May 29, 2019, we foreclosed on the membership interests of a limited liability company that was pledged as collateral on a defaulted mezzanine note receivable. The limited liability company owns and operates a commercial office building known as Broadway Tower, located in St. Louis, Missouri. Upon foreclosure, we acquired the membership interests in the limited liability company that owns the office building and related assets, and assumed related liabilities of Broadway Tower, all of which were recorded at fair value in accordance with GAAP. The valuation methodology used to conclude our position on the fair value was based on the income approach using a discounted cash flow methodology.

~~Fair Value Measurements of Derivative Instrument~~

The Company acquired an interest rate cap in 2018 to mitigate its risk on certain variable debt against rising interest rates. In order to estimate the fair value of this derivative instrument, we use valuation reports from the third party broker who issued the derivative instrument. The report calculates fair value by using inputs, including market-observable data such as U.S dollar and foreign-denominated interest rate curves, foreign exchange rates, volatilities, and information derived from or corroborated by market-observable data which are classified as Level 2 inputs in the fair value hierarchy. The fair value method does not contemplate credit valuation adjustments (“CVA”) which would be a Level 3 input as the CVA uses credit spreads which are generally unobservable to the market. The fair value used in our financial statements approximate fair value without the CVA. As of June 30, 2019, the fair value of the interest rate cap approximated $39 thousand and we recorded an unrealized loss on derivative instruments of $0.1 million and $0.3 million during the three and six months ended June 30, 2019, respectively, and none during the three and six months ended June 30, 2018.

~~IMH FINANCIAL CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 8 — FAIR VALUE – continued~~

Valuation Conclusions

Based on the results of our evaluation and analysis, we ~~did not record any~~recorded no non-cash provision for credit losses ~~on our loan portfolio~~ or impairment ~~of REO~~losses during the ~~six~~three months ended ~~June 30, 2019 and 2018, respectively. We~~March 31, 2020 or 2019. However, we recorded ~~other net~~ recoveries of investment and credit losses totaling ~~$1.1~~$1.8 million during the three ~~and six~~ months ended ~~June 30, 2019, and $0.2 million for the three and six months ended June 30, 2018,~~March 31, 2020, resulting from the collection of cash ~~and/or~~and other assets recovered from certain guarantors on certain ~~legacy loans and insurance~~mezzanine loans. No recoveries ~~received~~were recorded during the ~~period.~~three months ended March 31, 2019.

As of ~~June 30,~~March 31, 2020 and December 31, 2019, the valuation allowance on our mortgage loans totaled $12.7 million, representing ~~49.9%~~100.0% of the ~~total outstanding loan principal and accrued interest balances. As of December 31, 2018, the valuation allowance on our mortgage loans totaled $13.1 million, representing 37.1% of~~ total outstanding loan principal and accrued interest balances. With the existing valuation allowance recorded as of ~~June 30, 2019,~~March 31, 2020, we believe that, as of that date, the fair value of our loans, REO assets held for sale, and other REO is adequate in relation to the net carrying value of the related assets and that no additional valuation allowance or impairment is considered necessary. While the above results reflect management’s assessment of fair value as of ~~June 30, 2019~~March 31, 2020, based on currently available data, we will continue to evaluate our loans and REO assets to determine the appropriateness of the carrying value of such assets. Depending on market conditions, such updates may yield materially different values and potentially increase or decrease the valuation allowance for loans or impairment charges for REO assets.

F-16

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 98 — NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS

As of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, our notes payable and special assessment obligations consisted of the following (in thousands):

June 30, December 31,
2019 2018
$37.0 million note payable, as amended, to MidFirst Bank secured by a first lien on an operating hotel property, interest-only payments due monthly at the 30-day Libor (2.40% and 2.50% at June 30, 2019 and December 31, 2018, respectively) plus 3.54% to 3.75% depending on compensating balances and meeting certain financial thresholds and terms (5.94% and 5.84% effective rate at June 30, 2019 and December 31, 2018, respectively), matures October 1, 2020 with two one-year extension options, with construction completion and repayment guarantees provided by the Company. $ 32,589
$ 20,669
$11.0 million note payable to JPMorgan Chase Funding Inc. (a related party), is secured by the $13.2 million first mortgage note on the property known as Broadway Tower, bears interest at one month LIBOR plus 3.81%, requires interest only payments and a balloon payment of unpaid principal and interest upon maturity. The initial maturity date is May 22, 2020 with the potential to extend to May 2021 if, among other conditions, certain debt yield and occupancy percentages are achieved. 11,000
—
$5.9 million note payable secured by real estate in New Mexico, annual interest only payments based on annual interest rates of prime plus 3.0% through maturity date of December 31, 2019. 8.5% and 8.25% as of June 30, 2019 and December 31, 2018, respectively. 5,940
5,940
Unsecured note payable under class action settlement, face amount of $10.2 million, net of discount of $30 thousand and $0.3 million at June 30, 2019 and December 31, 2018, respectively, 4% annual coupon interest rate (14.6% effective yield), interest payable quarterly, matured and paid in full on April 28, 2019. —
9,899
Special assessment bonds dated between 2002 and 2007, secured by the residential land located in Dakota County, Minnesota, annual interest rate ranging from 6%-7.5%, maturing various dates through 2022 (classified as held for sale as of March 31, 2018). 75
90
Total notes payable 49,604
36,598
Less: deferred financing costs of notes payable (346 ) (284 )
Total notes payable $ 49,258
$ 36,314



	March 31,			December 31,
	2020			2019
$37.0 million note payable to MidFirst Bank secured by a first lien on MacArthur Place, interest-only payments due monthly at the 30-day LIBOR (0.99% and 1.76% at March 31, 2020 and December 31, 2019, respectively) plus 3.25% to 3.75% depending on compensating balances and meeting certain financial thresholds and terms (total effective interest rate of 5.10% and 5.26% at March 31, 2020 and December 31, 2019, respectively), matures October 1, 2020, with construction completion and repayment guarantees provided by the Company.	$	36,819		$	35,454
$11.0 million note payable to JPMorgan Chase Funding Inc. secured by the $13.2 million first mortgage note on Broadway Tower, bearing interest at one month LIBOR plus 3.45%. The Company paid off the note in full during the three months ended March 31, 2020 in connection with the sale of the property.	—			11,000
$4.9 million note payable secured by real estate in New Mexico, annual interest only payments based on annual interest rates of prime plus 3.0% through maturity date of December 31, 2022 (total effective rate of 7.75% and 8.50% as of March 31, 2020 and December 31, 2019, respectively).	4,940			4,940
Special assessment bonds dated between 2002 and 2007, secured by the residential land located in Dakota County, Minnesota, annual interest rate ranging from 6%-7.5%, maturing various dates through 2022.	61			61
Total notes payable	41,820			51,455
Less: deferred financing fees	(81		)	(178		)
Notes payable, net of deferred financing fees	$	41,739		$	51,277

Interest expense for the three months ended ~~June 30, 2019~~March 31, 2020 and ~~2018~~2019 ~~was $0.3 million and $0.8 million, respectively. Interest expense for the six months ended June 30, 2019 and 2018~~, was $0.8 million and ~~$1.5~~$0.5 million, ~~respectively. The Company~~respectively, exclusive of capitalized

~~IMH FINANCIAL CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 9 — NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS – continued~~

interest ~~relating~~related to the MacArthur Loan ~~in the amount~~ of ~~$0.3 million~~$0.0 and ~~$0.8~~$0.5 million for the three ~~and six~~ months ended ~~June 30, 2019. There was no capitalized interest during 2018.~~March 31, 2020 and 2019, respectively.

Senior Indebtedness

MacArthur Place

In ~~October 2017,~~connection with our purchase and renovation of MacArthur Place, we ~~closed on~~secured a $32.3 million acquisition and construction loan, which was subsequently increased to $37.0 million, from MidFirst Bank ~~in connection with our purchase of MacArthur Place~~ (the “MacArthur Loan”), of which (i) $19.4 million was utilized for the purchase of MacArthur Place, (ii) ~~approximately $10.0~~$13.5 million was ~~set aside~~used to fund planned hotel improvements, and (iii) the balance was used to fund interest reserves and operating capital. ~~During~~The MidFirst Loan also required the six months ended June 30, 2019, the MacArthur Loan was modified to, among other things, increase the total loan facility to $37.0 million, thereby increase the Company’s equity commitment to $27.7 million due to projected increased renovation costs, and to establishestablishment of certain additional reserve accounts in the amount of $2.0 million for ~~the completion of certain aspects of the renovation project.~~ anticipated future spa renovations.

The principal balance of the ~~loan~~MacArthur Loan was ~~$32.6~~$36.8 million and ~~$20.7~~$35.5 million at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. The loan bears floating interest equal to the 30-day LIBOR rate ~~(2.40%~~(0.99% at ~~June 30, 2019)~~March 31, 2020) plus ~~3.54%~~3.50%, which may be reduced by up to 0.50% if certain conditions are met, which were met as of ~~June 30, 2019.~~March 31, 2020. The loan has an initial term of three years which matures on October 1, 2020, subject to the right of the Company to extend the maturity date for two one-year periods, provided that the loan is in good standing and upon satisfaction of certain other conditions, including meeting a specified minimum debt service ratio and payment of an extension fee equal to 0.35% of outstanding principal per extension. The Company is required to make interest-only payments during the initial ~~three year~~three-year term. During the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, the Company made loan draws totaling ~~$11.9~~$1.4 million, all of which ~~$11.2 million represented~~were used to fund MacArthur Place renovation cost and operating draws and $0.8 million represented draws against the interest reserve on the loan. The Company incurred deferred financing fees of $0.5 million which are being amortized over the term of the loan using the effective interest method.costs.

The MacArthur Loan is secured by a deed of trust on all MacArthur Place real property and improvements, and a security interest in all furniture, fixtures and equipment, licenses and permits, and MacArthur Place related revenues. The Company agreed to provide a construction completion guaranty which shall be released upon payment of all project costs and receipt of a certificate of occupancy. In addition, the Company provided a loan repayment guaranty equal to 50% of the loan principal along with a guaranty of interest and operating deficits, as well as other customary carve-out matters such as bankruptcy and environmental

F-17

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

matters. Under the guarantees, the Company is required to maintain a minimum tangible net worth of $50.0 million and minimum liquidity of $5.0 million throughout the term of the loan. The Company was in compliance with these covenants and guarantees at ~~June 30, 2019.~~March 31, 2020. The ~~loan includes a provision requiring substantial completion of the project by June 30, 2019 which the lender agreed to waive and extend to September 1, 2019. In addition, the~~ Company is required to establish various operating and reserve accounts at MidFirst Bank which are subject to a cash management agreement. In the event of default, MidFirst Bank has the ability to take control of such accounts for the allocation and distribution of proceeds in accordance with the cash management agreement.

~~Exchange Notes~~New Mexico Land Purchase Financing

~~In April 2014, we completed~~As of March 31, 2020, the Company had an ~~offering~~outstanding note payable in the amount of ~~a five-year, 4%, unsecured notes to~~$4.9 million, secured by certain ~~of our shareholders~~real estate located in exchange for common stock held by such shareholders at an exchange price of $8.02 per share (“Exchange Offering”). Upon completion of the Exchange Offering, we issued Exchange Offering notes (“EO Notes”)New Mexico with a ~~face~~carrying value of ~~$10.2~~$6.8 million. ~~which were recorded~~The note bears interest at the Prime Rate as reported by ~~the Company at fair value~~The Wall Street Journal plus 3% and requires interest only payments payable on December 31 of $6.4 million based on the fair value and the imputed effective yield of such notes of 14.6% (as compared to the note rate of 4%) resulting in an initial debt discount on the EO Notes of $3.8 million which was amortized using the effective interest method over the term of the EO Notes. The amortized discount added toeach year with the principal balance and any accrued unpaid interest due upon the earlier of 1) December 31, 2022, or 2) sale of the ~~EO Notes during~~underlying collateral property. The note may be prepaid in whole or in part without penalty, and includes certain maturity extension provisions which the ~~six months ended June 30, 2019 totaled $0.3 million. The EO Notes matured and all outstanding principal and interest were paid on April 29, 2019.~~Company may choose to exercise.

JPMorgan Chase Funding Inc. Master Repurchase Agreement ~~(related party)~~

In connection with the ~~second quarter~~purchase of 2019, we conducted a UCC foreclosure on the collateral securing a defaulted mezzanine note receivable That collateral was 100% of the membership interests in a limited liability company that owns a commercial real estate building and operations in St. Louis, Missouri, known as Broadway Tower, thereby assuming its assets and liabilities, including $13.2 million mortgage note payable secured by Broadway Tower. In a related transaction, a subsidiary of the Company purchased the $13.2 million first mortgage note secured by Broadway ~~Tower. Since~~Tower in May 2019, we ~~own both the entity that owns the first mortgage note, as well as the entity that owes this obligation, the first mortgage loan and related interest has been eliminated in consolidation.~~

~~IMH FINANCIAL CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 9 — NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS – continued~~

~~The purchase of the first mortgage note was funded partially with~~obtained an $11.0 million loan (under a master repurchase agreement) from Chase ~~Funding~~Funding. In January 2020, the Company sold Broadway Tower and paid off the ~~balance using Company funds. The~~related Chase Funding master repurchase agreement is secured by the $13.2 million first mortgage note and bears interest at one month LIBOR plus 3.81%, requires interest only payments and a balloon payment of unpaid principal and interest upon maturity. The initial maturity date is May 22, 2020 with the potential to extend to May 2021 if, among other conditions, certain debt yield and occupancy percentages are achieved. The master purchase agreement is subject to a third party loan servicing agreement.indebtedness.

Our notes payable and special assessment obligations have the following scheduled maturities as of ~~June 30, 2019~~March 31, 2020 (in thousands):


Year	Amount			Amount
2019	$	16,954
2020	32,616			$	36,846
2021	26			26
2022	8			4,948
Less: deferred financing costs of notes payable	(346		)	(81		)
Total	$	49,258		$	41,739

NOTE 109 — SEGMENT INFORMATION

Operating segments are defined as components of an enterprise that engage in business activity from which revenues are earned and expenses incurred for which discrete financial information is available that is evaluated regularly by our chief operating decision makers in deciding how to allocate resources and in assessing performance.

The information presented in our reportable segments tables that follow are based in part on internal allocations which involve management judgment. Substantially all revenues recorded are from external customers. There is no material intersegment activity.

Our operating segments reflect the distinct business activities from which revenues are earned and expenses incurred that are evaluated regularly by our executive management team in assessing performance and in deciding how to allocate resources. As of and for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the Company’s reportable segments consisted of the following:

Hospitality and Entertainment Operations — Consists of revenues ~~less~~and direct operating expenses, depreciation and amortization relating to our hotel, spa, and ~~food & beverage~~F&B operations. This segment also reflects the carrying value of such assets and the related financing and operating obligations.

Mortgage and REO - Legacy Portfolio and Other Operations — Consists of the collection, workout and sale of new and legacy loans and REO assets, including financing of such asset sales, as well as the operating expenses, ~~(if any),~~ carrying costs and other related expenses of such assets. This segment also includes operating properties that do not represent a strategic operating objective of the Company, such as Broadway Tower, and their rental revenue and tenant recoveries less direct property operating expenses (maintenance and repairs, real estate taxes, management fees, and other operating expenses), depreciation and amortization from commercial real estate leasing operations, and the carrying value of such assets and the related financing and operating obligations.

~~Corporate and Other —~~ Consists of our centralized general and administrative and corporate treasury activities. This segment also includes reclassifications and eliminations between the reportable operating segments and reflects the carrying value of corporate fixed assets and the related financing and operating obligations.

Condensed consolidated financial information for our reportable operating segments as of June 30, 2019 and December 31, 2018 and for the three and six months ended June 30, 2019 and 2018 is summarized as follows (in thousands):

F-18

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 109 – SEGMENT INFORMATION - continued

Corporate and Other — Consists of our centralized general and administrative and corporate treasury activities. This segment also includes reclassifications and eliminations between the reportable operating segments and reflects the carrying value of corporate fixed assets and the related financing and operating obligations.

Condensed consolidated financial information for our reportable operating segments as of March 31, 2020 and December 31, 2019, and for the three months ended March 31, 2020 and 2019, is summarized as follows (in thousands):


	June 30,		December 31,		March 31,		December 31,
Balance Sheet Items	2019		2018		2020		2019
Total Assets
Mortgage and REO Legacy portfolio and other operations	$	81,744	$	67,658	$	46,658	$	66,266
Hospitality and entertainment operations	64,075		52,753		67,384		67,510
Corporate and other	11,219		23,228		7,941		5,832
Consolidated total	$	157,038	$	143,639	$	121,983	$	139,608

	Six Months Ended June 30,				Three months ended March 31,
Cash Flow Items	2019		2018		2020		2019
Expenditures for additions to long-lived assets
Mortgage and REO Legacy portfolio and other operations	$	—	$	1,421	$	—	$	—
Hospitality and entertainment operations	9,804		1,736		715		4,667
Corporate and other	23		24		—		—
Consolidated total	$	9,827	$	3,181	$	715	$	4,667

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 109 – SEGMENT INFORMATION - continued

~~IMH FINANCIAL CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 10 – SEGMENT INFORMATION - continued~~

Six Months Ended June 30, 2019
Income Statement Items
Mortgage and REO Legacy Portfolio and Other Operations
Hospitality and Entertainment Operations
Corporate and Other
Consolidated

Revenues

Operating property revenue $ 398

$ 1,795

$ —
$ 2,193
Mortgage loan income
1,098

—

—

1,098
Management fees, investment and other income
5

—

271

276
Total revenue
1,501

1,795

271

3,567

Total operating expenses
1,625

7,404

4,485

13,514

Other (income) expense

Gain on Disposal of Assets, Net
(20 )
—

—

(20 )
Recovery of credit losses
(1,135 )
—

—

(1,135 )
Unrealized loss on derivatives
—

291

—

291
Total other (income) expense
(1,155 )
291

—

(864 )

Total costs and expense, net
470

7,695

4,485

12,650
Income (loss) before income taxes
1,031

(5,900 )
(4,214 )
(9,083 )
(Provision for) benefit from income taxes
—

—

—

—
Net income (loss)
$ 1,031

$ (5,900 )
$ (4,214 )
$ (9,083 )

~~IMH FINANCIAL CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 10 – SEGMENT INFORMATION - continued~~

Six Months Ended June 30, 2018
Income Statement Items
Mortgage and REO Legacy Portfolio and Other Operations
Hospitality and Entertainment Operations
Corporate and Other
Consolidated

Revenues

Operating property revenue $ —
$ 3,668
$ —
$ 3,668
Mortgage loan income
1,266

—

—

1,266
Management fees, investment and other income
—

243

49

292
Total revenue
1,266

3,911

49

5,226

Total operating expenses
1,412

6,212

4,463

12,087

Other (income) expense

Gain on disposal of assets, net
(395 )
—

—

(395 )
Recovery of credit losses
(175 )
—

—

(175 )
Total other income
(570 )
—

—

(570 )

Total costs and expense, net
842

6,212

4,463

11,517
Income (loss) from continuing operations, before income taxes
424

(2,301 )
(4,414 )
(6,291 )
(Provision for) benefit from income taxes
—

—

—

—
Net income (loss)
$ 424

$ (2,301 )
$ (4,414 )
$ (6,291 )

NOTE 1110 — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE

Shares of Common Stock, Class B Common Stock, Class C Common Stock, and Class D Common Stock share proportionately in our earnings and losses attributable to common shareholders. There are no shares of Class D Common Stock outstanding as of ~~June 30, 2019~~March 31, 2020 or December 31, ~~2018.~~2019.

In July 2014, the Company issued a total of ~~8.2 million~~8,200,000 shares of the Company’s Series B-1 and B-2 Cumulative Convertible Preferred Stock (“Series B-1 Preferred Stock” and “Series B-2 Preferred Stock,” respectively) to certain investor groups in exchange for $26.4 million. Except for certain voting and transfer rights, the rights and obligations of the Series B-1 Preferred Stock and Series B-2 Preferred Stock are substantially the same. ~~On April 11, 2017, Chase Funding, an affiliate of JPMorgan Chase & Co., purchased all of the Company’s outstanding Series B-2 Preferred Shares directly from the initial purchaser of such shares.~~

On February 9, 2018, Chase Funding purchased 2,352,941 shares of the Company’s Series B-3 Cumulative Convertible Preferred Stock (“Series B-3 Preferred ~~Stock,” and collectively with the Series B-1 Preferred Stock and Series B-2 Preferred Stock, the “Series B Preferred~~ Stock”), for a total purchase price of $8.0 million. The Series B-3 Preferred Stock contains redemption features similar in all material respects to those of all Series B-1 Preferred Stock and Series B-2 Preferred Stock.

On September 25, 2019, Chase Funding purchased 1,875,000 shares of our Series B-4 Cumulative Convertible Preferred ~~which are disclosed~~Stock (“Series B-4 Preferred Stock” and collectively with the Series B-1 Preferred Stock, Series B-2 Preferred Stock, and Series B-3 Preferred Stock, the “Series B Preferred Stock”), at a purchase price of $3.20 per share, for a total purchase price of $6.0 million. The Series B-4 Preferred Stock contains redemption features similar in ~~IMH’s annual 10-K for~~all material respects to the ~~year ended December 31, 2018.~~other Series B Preferred Stock.

On July 23, 2019, with an effective date of April 1, 2019, we entered into a Deferral and Consent Agreement with the holders of our Series B Preferred Stock pursuant to which they agreed to a one-year extension of the redemption date for shares of our Series

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE – continued

B-1 Preferred Stock and Series B-2 Preferred Stock they respectively hold. A cash payment in the aggregate amount of $2.6 million is due and payable to the holders of these shares on July 24, 2020, whether or not a redemption is requested.

In addition to various other rights and preferences belonging to the holders of the Series B Preferred Stock, the following provides a summary of certain financial obligations relating to the Series B Preferred Stock:

Dividends. Dividends on the Series B Preferred Stock are cumulative and accrue from the issue date and compound quarterly at the rate of 8% for Series B-1 and B-2 Preferred Stock and 5.65% for the Series B-3 and B-4 Preferred Stock, payable quarterly in arrears. Subject to certain dividend rights and restrictions, no dividend may be paid on any capital stock of the Company during any fiscal year unless all accrued dividends on the Series B Preferred Stock have been paid in full, except for dividends on shares of voting Common Stock. In the event that any dividends are declared with respect to the voting Common Stock or any junior ranking securities, the holders of the Series B Preferred Stock are entitled to receive as additional dividends the additional dividend amount. During the three months ended March 31, 2020 and 2019, we paid dividends on the Series B Preferred Stock totaling $1.9 million and $0.7 million, respectively.

Redemption upon Demand. Effective April 1, 2019, we entered into a Deferral and Consent agreement with the holders of our Series B Preferred Stock pursuant to which they agreed to ~~extend~~a one-year extension on the redemption date from July 24, 2019 to July 24, 2020, for ~~one (1) year. A~~shares of Series B-1 and B-2 Preferred Stock. In exchange for this extension, we agreed to a cash consent payment in the

~~IMH FINANCIAL CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 11 — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE – continued~~

aggregate amount of $2.6 million ~~is due and payable~~ to the holders of the Series B-1 and B-2 Preferred Stock on July 24, 2020, whether or not a redemption is requested.

At any time after (i) July 24, 2020 for the Series B-1 and B-2 Preferred Stock, (ii) February 9, 2023 for the Series B-3 Preferred Stock, and (iii) September 25, 2024 for the Series B-4 Preferred Stock, each holder of Series B Preferred Stock may require the Company to redeem, out of legally available funds, the shares of Series B Preferred Stock held by such holder at the a price (the “Redemption Price”) equal to the greater of (i) 150% of the sum of the original price per share of the Series B-1 and B-2 Preferred Stock, and 145% of the sum of the original price per share of the Series B-3 and B-4 Preferred Stock, plus all accrued and unpaid dividends or (ii) the sum of the tangible book value of the Company per share of voting Common Stock plus all accrued and unpaid dividends, as of the date of redemption. Based on the initial investment of $26.4 million, the Redemption Price for the Series B-1 and B-2 Stock would presently be $39.6 million, resulting in a redemption premium of $13.2 million, in addition to a cash payment in the aggregate amount of $2.6 million. The Redemption Price for the Series B-3 Preferred Stock would be $11.6 million, resulting in a redemption premium of $3.6 million, and the Redemption Price for the Series B-4 Preferred Stock would be $8.7 million, resulting in a redemption premium of $2.7 million. In accordance with applicable accounting standards, we have elected to amortize the redemption premiums using the effective interest method as an imputed dividend over the holding term of the preferred stock. During the three months ended March 31, 2020 and 2019, we recorded amortization of the redemption premium of $0.3 million and $0.9 million, respectively, as a deemed dividend.

Required Liquidation. Under the Preferred Stock Certificates of Designation, if at any time we are not in compliance with certain of our obligations to the holders of the Series B Preferred Stock and we fail to pay (i) full dividends on the Series B Preferred Stock for two consecutive fiscal quarters or (ii) the Redemption Price within 180 days following the later of (x) demand therefore resulting from such non-compliance and (y) July 24, 2020, for the Series B-1 and B-2 Preferred Stock, February 9, 2023 for the Series B-3 Preferred Stock, and September 25, 2024 for the Series B-4 Preferred Stock, unless a certain percentage of the holders of the Series B Preferred Stock elect otherwise, we will be required to use our best efforts to commence a liquidation of the Company. In addition, the default by the Company or any of its subsidiaries under one or more debt agreements that remains uncured for a period of thirty (30) days entitles the Series B Investors to accelerate repayment of the Redemption Price.

Concurrent with Chase Funding’s purchase of our Series B-3 Cumulative Convertible Preferred Stock, the Company issued to Chase Funding a warrant to acquire up to 600,000 shares of the Company’s common stock (the “JPM Warrant”). The JPM Warrant is exercisable at any time on or after February 9, 2021, for a two (2) year period, and has an exercise price of $2.25 per share. The JPM Warrant provides for certain adjustments that may be made to the exercise price and the number of shares issuable upon exercise due to customary anti-dilution provisions based on future corporate events. The JPM Warrant is exercisable in cash, and subject to certain conditions, may also be exercised on a cashless basis. The ~~warrant~~JPM Warrant is classified in stockholders’ equity on the accompanying condensed consolidated balance sheets under the applicable guidance and ~~were~~was recorded at relative fair value at issuance.

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE – continued

Series A Redeemable Preferred Stock Issuance

On May 31, 2018, Chase Funding purchased 22,000 shares of the Company’s Series A Senior Redeemable Preferred Stock (the “Series A Preferred Stock”) at a purchase price of $1,000 per share, for a total purchase price of $22.0 million.

The Series A Preferred Stock ranks senior with respect to dividend and redemption rights and rights upon liquidation, dissolution or winding up of the Company to all other classes or series of shares of the Company’s preferred and common stock and to all other equity securities issued by the Company from time to time. The Series A Preferred Stock is non-voting stock. Holders of the Series A Preferred Stock are entitled to receive a liquidation preference equal to the sum of the initial purchase price of the Series A Preferred Stock plus all accrued and unpaid dividends. Dividends on the Series A Preferred Stock are cumulative and accrue from the issue date at the rate of 7.5% of the issue price per year, payable quarterly in arrears on or before the last day of each calendar quarter. The Company has certain call rights with respect to the Series A Preferred Stock and the holders of Series A Preferred Stock have certain put rights which includes an acceleration of the put right if the Company is required to redeem any shares of junior securities in the event of certain non-compliance events as described in the Company’s ~~Series B Preferred~~Second Amended and Restated Certificate of ~~Designation.~~Designation of Series B-1 Cumulative Convertible Preferred Stock, Series B-2 Cumulative Convertible Preferred Stock and Series B-3 Cumulative Convertible Preferred Stock.

Our Series B Preferred Stock and Series A Preferred Stock are classified as mezzanine equity in the accompanying condensed consolidated balance sheets.

On January 11, 2019, the Company concluded a tender offer to purchase up to 477,170 shares of Class B Common Stock and 22,830 shares of Class C common stock for $2.00 per share. The ~~tender offer was over-subscribed and the 500,000 shares were purchased on a pro rata basis among the participating shareholders. The~~ repurchase of these shares was treated as a treasury stock repurchase as reflected in the accompanying condensed consolidated balance sheet. During the three months ended March 31, 2020, an aggregate of 4,618 shares of Class B common stock and 2,203 shares of Class C common stock were relinquished to the Company for no consideration to the shareholders.

During the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, the Company issued ~~167,984~~60,356 shares of common stock pursuant to previous restricted stock awards. The Company did not grant any shares of restricted stock or stock options during the three ~~and six~~ months ended ~~June 30, 2019,~~March 31, 2020, nor were any stock options or warrants exercised or forfeited during that period.

As of ~~June 30, 2019,~~March 31, 2020, there were (i) ~~1,102,627~~1,093,562 outstanding stock options ~~outstanding, of which 983,429 shares~~that were fully vested, (ii) 2,600,000 ~~fully-vested~~unvested stock warrants outstanding; and (iii) ~~172,800~~554,452 shares of unvested restricted stock grants ~~outstanding. Vested restricted stock grants have been issued and are included in~~ outstanding, ~~common stock.~~net of tax elections taken.

Net stock-based compensation expense ~~relating to the stock-based awards~~ was $0.1 million for each of the three months ended ~~June 30, 2019~~March 31, 2020 and ~~2018, and $0.2 million for each of the six months ended June 30, 2019 and 2018.~~2019. We did not receive any cash from option or warrant exercises during the three ~~or six~~ months ended ~~June 30, 2019~~March 31, 2020 or ~~2018.~~2019. As of ~~June 30, 2019,~~March 31, 2020, there was ~~$0.4~~$0.8 million of unrecognized compensation ~~cost~~expense related to ~~the time-based restricted stock~~all unvested equity-based awards that isare expected to be recognized as a charge to earnings over a weighted-average vesting period of ~~1.63~~1.25 years.

Net Income (Loss) Per Share

The Company has adopted the two-class computation method, and thus includes all participating securities in the computation of basic shares for the periods in which the Company has net income available to common shareholders. A participating security is

~~IMH FINANCIAL CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 11 — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE – continued~~

defined as an unvested share-based payment award containing non-forfeitable rights to dividends regardless of whether or not the awards ultimately vest or expire. Net losses are not allocated to participating securities unless the holder has a contractual obligation to share in the losses.

The following table presents a reconciliation of net loss to net loss attributable to common shareholders used in the basic and diluted earnings per share calculations for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ (amounts in thousands, except for per share data):

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE – continued

The following securities were not included in the computation of diluted net loss per share as their effect would have been anti-dilutive (presented on a weighted average balance):

NOTE 1211 — INTANGIBLE ASSETS AND GOODWILL

Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination and is not amortized. We review goodwill for impairment on an annual basis during the fourth quarter of each fiscal year, or whenever a triggering event occurs or circumstances change that could reduce the fair value of a reporting unit below its carrying amount. In making such assessment, qualitative factors are used to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If the estimated fair value of the reporting unit is less than its carrying value, then an impairment charge is recorded.

In connection with the purchase of MacArthur Place, we allocated a portion of the total purchase price to certain intangible assets and goodwill. Of the total $16.3 million allocated to purchased intangibles, ~~$0.1~~$15.4 million, $0.8 million, and ~~$15.4~~$0.1 million, were allocated to goodwill, customer relationships, and trade name and other, ~~customer relationships, and goodwill,~~ respectively.

The changes in the carrying amount of intangibles and goodwill allocated to our Hospitality and Entertainment Operations segment for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 is as follows (in thousands):

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1211 — INTANGIBLE ASSETS AND GOODWILL - continued

Trade name and other, and customer relationships have weighted-average useful lives from the date of purchase of 7.0 years and 3.0 years, respectively. Goodwill and our liquor license are not subject to amortization due to the indeterminable life of such assets. Amortization expense relating to our purchased intangible assets was $0.1 million for each of the three ~~and six~~ months ended ~~June 30, 2019. Amortization expense relating~~March 31, 2020 and 2019, respectively.

Impairment Considerations

Management considers the impact of COVID-19 coupled with the hotel’s inception-to-date losses incurred to be a triggering event under current accounting guidance, thereby causing us to perform a goodwill impairment analysis for the quarter ended March 31, 2020. The Company has decided to bypass the qualitative assessment and proceed directly to the simplified one step goodwill impairment test allowed by the implementation of ASU 2017-04.

To estimate the fair value of the reporting units, we use a discounted cash flow model and data regarding market comparables. The valuation process requires significant judgment and involves the use of significant estimates and assumptions. These assumptions include cash flow projections, and estimated capitalization and discount rates. Because assumptions and estimates are used in projecting future cash flows and selecting appropriate capitalization and discount rates, actual results may materially differ from our ~~purchased intangible assets was $0.1 million~~estimates under different assumptions or conditions. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is deemed not to be impaired.

In performing its assessment, the Company reviewed macro- and ~~$0.2 million~~microeconomic and market factors, industry-specific forecasts, and other applicable market data to influence our selection of appropriate assumptions for the discounted cash flows analysis, as well as a performing a sensitivity analysis on those assumptions and results. The results of our discounted cash flow analysis indicate that the fair value of the hospitality and entertainment reporting unit exceeds its carrying value as of March 31, 2020. In addition, despite the adverse economic and highly uncertain environment caused by the pandemic, the Company believes that, as of March 31, 2020, the longer-term outlook of the hospitality market, and specifically, the local submarket in which MacArthur Place operates, remains positive. Accordingly, the Company believes that the fair value of its goodwill reporting unit remains greater than its carrying value and has not recorded impairment to goodwill for the three ~~and six~~ months ended ~~June 30, 2018, respectively. We performed an impairment assessment on goodwill and intangible assets annually in the fourth quarter of each year.~~March 31, 2020.

~~As of June 30, 2019, expected amortization expense for our purchased amortizing intangible assets for each~~

IMH FINANCIAL CORPORATION

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NOTE 11 — INTANGIBLE ASSETS AND GOODWILL - continued

The full impact of the ~~next five years~~COVID-19 outbreak continues to evolve as of the date of our quarterly reporting. The extent to which the Company’s business may be affected by the current outbreak of the COVID-19 outbreak will largely depend on both current and ~~thereafter is~~future developments, including its duration, spread and treatment, and related travel advisories and restrictions, which could impact overall demand in the hospitality industry, all of which are highly uncertain and cannot be reasonably predicted at this time. Management will continue to monitor the situation as ~~follows (in thousands):~~

Year Amount
2019 $ 140
2020 213
2021 13
2022 13
2023 13
Thereafter 9
Total $ 401
events unfold and assess any potential further impairment triggers.

NOTE 1312 — COMMITMENTS AND CONTINGENCIES

Construction and Related Guarantees

As described in Note 9,8, the Company agreed to provide MidFirst Bank with a loan repayment guaranty equal to 50% of the sum of the outstanding principal and accrued and unpaid interest on the MacArthur Loan, plus a guaranty of 50% ~~guaranty~~ of hotel operating ~~expenses,~~costs, enforcement costs under the loan (if any), and recourse amounts that may come due (if any). The Company has also provided a construction completion guaranty with respect to the planned renovations of MacArthur Place. The construction completion guaranty will be released upon payment of all project costs and receipt of a certificate of ~~occupancy.~~occupancy, which occurred subsequent to March 31, 2020. The MidFirst Bank loan documents also require that the loan remain “in balance” throughout its term, such that the sum of all remaining undisbursed loan

~~IMH FINANCIAL CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 13 — COMMITMENTS AND CONTINGENCIES - continued~~

funds ~~and~~exceed the ~~amounts expended by~~aggregate of (i) future expenditures necessary to complete the ~~Company will be sufficient to meet~~renovations in accordance with the approved construction budget and ~~pay the~~(ii) loan interest. If the loan becomes “out of ~~balance”,~~balance,” the Company must fund the difference. ~~Management expects that any excess~~Excess costs ~~not~~incurred to date have been funded by ~~loan funds will be funded using offering proceeds from~~ the Hotel Fund inor the Company, and management expects that the Hotel Fund or the Company will continue to fund any further excess ~~of the reimbursement of our initial investment, and to the extent necessary, Company funds.~~costs.

We have pursued and periodically receive favorable judgments against guarantors in connection with their personal guarantees of certain legacy loans on which we previously foreclosed. Similarly, we have filed claims against certain insurance providers and other parties for reimbursement of amounts we believe are due to the Company under such policies. Due to the uncertainty of the nature and extent of the available assets of these guarantors to pay the judgment amounts or amounts collectible under insurance claims, we do not record recoveries for any amounts due under such judgments or claims, except to the extent we have received assets without contingencies.

We continue to pursue, investigate and evaluate the assets available of guarantors to collect all amounts due under judgments received in our favor. However, to the extent that such amounts are not determinable, they have not been recognized as recovery income in the accompanying condensed consolidated statements of operations. Further recoveries under this and other judgments received in our favor will be recognized when realization of the recovery is deemed probable and when all contingencies relating to recovery have been resolved. We recorded recoveries during the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020, of ~~$1.1~~$1.8 million relating to cash collected on a guarantor ~~claim. We recorded recoveries~~claim, and none during the three ~~and six~~ months ended ~~June 30, 2018 of $0.2 million.~~March 31, 2019.

Employee Benefit Plans

401(k) Retirement Savings Plan

The Company, through its human resource provider, participates in a 401(k) retirement savings plan that allows for eligible participants to defer compensation, subject to certain limitations imposed by the ~~Code.~~Internal Revenue Code of 1986, as amended. The Company may provide a discretionary matching contribution of up to 4% of each participant’s eligible compensation. During each of the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the Company’s matching contribution was $0.1 million, which is included in general and administrative expenses in the accompanying condensed consolidated ~~statement~~statements of operations.

IMH FINANCIAL CORPORATION

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NOTE 12 — COMMITMENTS AND CONTINGENCIES - continued

Deferred Compensation Plan

The Company maintains a non-qualified deferred compensation plan (the “Plan”), which allows a select group of executive employees to defer a portion of their compensation. Such deferred compensation is distributable in cash in accordance with the rules of the Plan. Deferred compensation amounts under such plan as of March 31, 2020, totaled approximately $0.1 million and are included in other accrued expenses in the accompanying condensed consolidated balance sheets. Distributions to participants can be either in one lump sum payment or annual installments as elected by the participants. During the three months ended March 31, 2020, we distributed $0.2 million to the former CEO in accordance with his termination agreement.

We may be a party to litigation as the plaintiff or defendant in the ordinary course of business. While various asserted and unasserted claims may exist, resolution of these matters cannot be predicted with certainty. We establish reserves for legal claims when payments associated with the claims become probable and the payments can be reasonably estimated. Given the uncertainty of predicting the outcome of litigation and regulatory matters, it is generally difficult to predict what the eventual outcome will be, and when the matter will be resolved. The actual costs of resolving legal claims may be materially higher or lower than any amounts reserved for the claims.

In August 2016, a limited liability company member of Carinos Properties, LLC (“Carinos”) and Unit 6 Partners, LLC (“UP6”), filed a complaint in the United States District Court for the District of Arizona (“Federal Court”) generally alleging the Company breached its fiduciary duty to plaintiff under ERISA with respect to certain property we own in New Mexico. In April 2018, the court denied the Company’s motion for summary judgment in the case, but stayed any further action in the case pending the results of related litigation before the state trial court (“State Court”) described below. Damages were not specified in the Federal Court. A settlement in this matter was reached in July 2019. Terms of the settlement include the dismissal of the Federal Court litigation. The Company is seeking necessary court approvals for the approval of this settlement and the dismissal of the lawsuit. No loss was incurred by the Company as a result of the settlement.RNMA Related Partnership Litigation

In the first fiscal quarter of 2017, Recorp-New Mexico Associates Limited Partnership (“RNMA I”) conducted a capital call pursuant to its organizational documents. As a result of the capital call, certain limited partnership interests in RNMA I were transferred to ~~one or more~~various subsidiaries of the Company. One of the limited partners in RNMA I whose limited partnership interests were transferred ~~challenged~~instigated the State Partnership Litigation challenging the effectiveness of the transfer and forfeiture of his limited partnership ~~interests~~interests. In a November 2019 ruling in ~~State Court. On January 4, 2019,~~ the State ~~Court issued a minute entry, finding, among other things,~~Partnership Litigation, the court held that (i) the limited ~~partner’s~~partners of RNMA I properly noticed the removal of Recorp Partners, Inc. (“RPI”) as the general partner effective as of December 2017 which rendered all actions taken by RPI from and after that date “ultra vires” or ineffective - including the purported capital call in the first quarter of 2017 and the resulting transfer and forfeiture of the limited partnership interest ~~in RNMA I was not forfeited. On January 22, 2019, the~~of all limited partners, and (ii) Stockholder, LLC, a wholly owned subsidiary of the Company, ~~filed a motion for reconsideration~~is the sole owner of all of the ~~minute entry finding. On~~stock of RPI as the corporate general partner of RNMA I. The Company has appealed these rulings to the state appellate court, and RPI has made demand on the RNMA I limited partners pursuant to the governing partnership documents for a separate arbitration to challenge the merits of the notice of RPI’s removal as the general partner.

During the three months ended March ~~21, 2019,~~31, 2020, the Company commenced negotiations to settle the State ~~Court issued an order staying~~Partnership Litigation pursuant to which, the ~~court’s January 4, 2019 minute entry ruling. An evidentiary~~

~~IMH FINANCIAL CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 13 — COMMITMENTS AND CONTINGENCIES - continued~~

~~hearing was held in early August 2019 in Arizona state trial court on certain factual questions and~~Company offered to buy the court has requested a post trial briefing in September 2019. Based on the advice of counsel, management believes (a) the State Court’s January 4, 2019 minute entry finding was incorrect as to matters of both fact and law, and (b) the transferinterests of the limited ~~partnership interests by the then-acting general partner was done in accordance with the rights granted~~partners for a cash payment of $1.3 million. The limited partners did not respond to the ~~general partner under the relevant organizational documents,~~settlement offer and we believe that it is probable that the court in the above referenced September 2019 post trial briefing will ultimately agree with those conclusions. However, if the State Court were to rule that the limited partner interest transfers were ineffective, this could result in the recording of non-controlling interests in that partnership of approximately $3.1 million as of ~~December 31, 2018. Management does not believe that loss is probable and, accordingly,~~the date of this report there are no ~~amounts have been accrued for this matter in the accompanying condensed consolidated financial statements.~~ongoing settlement discussions.

Maniatis-Related Litigation

In September 2017, the court hearing the State ~~Court ordered the termination of~~Partnership Litigation (the “State Court”) terminated the receivership over Stockholder, LLC, a wholly-owned subsidiary of the Company (“Stockholder”)~~. Stockholder is the~~ and owner of all of the shares of stock in certain corporations that act as the general partner /or the limited liability company manager of several entities that own land and/or certain water interests in New Mexico. David Maniatis (“Maniatis”) timely filed a notice of appeal of this order to the State Court of Appeals. That appeal is currently pending.

In December 2017, the State Court entered an interim “stay” order in the Company’s collection case against ~~judgment debtor David P.~~ Maniatis and his affiliates ~~(“Maniatis”)~~ enjoining the Company from taking any further collection action against Maniatis and his associates pending an accounting of all previous debt collection activities and a trial on certain limited issues involving the calculation of interest and penalties on the original defaulted debt guaranteed by Maniatis. The stay order also temporarily inhibited the Company from effecting the sale or transfer of all or any part of the property previously acquired by the Company through prior litigation involving Maniatis, including approximately 7,000 acres of land and related water interests in New Mexico, and 111 acres of land in Texas. Subsequent to March 31, 2019, the State Court lifted the stay on all property previously acquired by the Company through litigation involving Maniatis except for the ownership interests in, and property held by, RNMA ~~I. The ownership interests in, and property of, RNMA~~ I which remain subject to the stay until the date that

IMH FINANCIAL CORPORATION

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NOTE 12 — COMMITMENTS AND CONTINGENCIES - continued

is 30 days after the resolution of the ~~above-described RNMA I dispute.~~State Partnership Litigation. Management does not believe that loss is probable and, accordingly, no amounts have been accrued for this matter in the accompanying unaudited condensed consolidated financial statements.

In April 2019, the New Mexico state trial court amended an order enjoining certain individuals from taking any action with regard to certain real property in the Rio West/Albuquerque project. The amendment expanded the injunction to include Recorp/IMH from transferring any partnership ownership interests (or assets owned by these partnerships) until further order of the court. A hearing to dismiss that injunction and the underlying case is set for September 4, 2019.

~~Intercreditor Agreement Claim~~

The Company and certain of our subsidiaries are defendants in a case that is in the Arizona federal district court. The case arose from claims by a creditor of the Justin 123 receivership alleging breach of contract and other related claims stemming from a Partial Settlement and Intercreditor Agreement entered into among the major creditors, including the claimant and certain of our subsidiaries the a receiving proceeding. The suit seeks damages of $0.3 million, plus attorney fees and punitive damages. The Company believes that the claims are without merit and intends to vigorously defend its position. Management does not believe that loss is probable and the Company believes that any liability it may ultimately incur would not have a material adverse effect on its financial condition or its result of operations.

Hotel Fund Obligations

If the Hotel Fund has insufficient operating cash flow to pay the Preferred Distribution in a given month, the Company is obligated under the Hotel Fund’s operating agreement to provide the funds necessary to pay the Preferred Distribution for such ~~month. Such payment will~~month, such payments to be treated as an additional capital contribution to the Hotel Fund by the Company. During the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, the Company funded ~~$0.6~~$0.4 million of Preferred ~~Distributions.~~Distributions, and from inception through March 31, 2020, the Company has funded $2.4 million. The Company also ~~has~~ agreed to fund, in the form of common capital contributions, up to 6.0% of the Hotel Fund offering’s gross proceeds as selling commissions and up to 1.0% of the gross proceeds raised in the offering as nonaccountable expense reimbursements to broker-dealers based on the capital raised by them for the Hotel Fund. During the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, and from inception through March 31, 2020, the Company paid $0.1 million to the Hotel Fund pursuant to these obligations. In addition to these payments, the Company has funded cash deficits for various operating and related costs which are treated as non-interest bearing advances (which are eliminated in consolidation). Through March 31, 2020, the Company had funded such operating shortfalls in the amount of $12.9 million.

We are subject to oversight by various state and federal regulatory authorities, including, but not limited to, the Arizona Corporation Commission, the Arizona Department of Financial Institutions (Banking), and the SEC. Our income tax returns have not been examined by taxing authorities and all statutorily open years remain subject to examination.

~~IMH FINANCIAL CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

NOTE 1413 — LEASES

Lessor

On May 29, 2019, we foreclosed on ~~the loan collateral consisting of 100%~~all of the membership interests ~~in the limited liability company owning the underlying property~~ of Hertz Broadway Tower, LLC, ~~a private company, in full satisfaction~~(“Hertz Broadway”), the owner of ~~the outstanding defaulted loan.~~Broadway Tower. As a result, we acquired ~~the~~ Broadway Tower, ~~LLC’s building,~~its related assets and business operations and assumed related ~~liabilities. The Company assumed~~liabilities, including 51 commercial office ~~leases where the~~leases. The Company ~~is the lessor in lease arrangements for the building’s floor space and parking spaces. (See Note 4 for further discussion of this transaction).~~

~~Prior to the foreclosure transaction, Hertz~~sold Broadway Tower ~~LLC accounted for the~~inclusive of these commercial office leases ~~under ASC 840 - Leases. Upon our acquisition on May 29, 2019, the Company adopted the requirements of ASU 2016-02 for such leases. The lessor accounting model under ASU 2016-02~~in January 2020, which is similar to existing guidance, however, it limits the capitalization of initial direct leasing costs, such as internally generated costs. The adoption of ASU 2016-02 for this lease did not have an impactmore fully described in our consolidated financial statements. The Company elected the practical expedient package outlined in ASU No. 2016-02 under which we were not required to reassess whether the arrangements contain a lease, and we carried forward the previous classification of the leases as operating, and we did not have to reassess previously recorded initial direct costs.

These lease arrangements have been recorded in revenue for approximately one month during the three months ended June 30, 2019. The Company’s operating leases have non-cancelable lease terms of 0.9 years to 10.1 years as of June 30, 2019. Certain leases with tenants include options to extend or terminate the lease agreements. The Company believes the residual value risk is not a primary risk because of the long-lived nature of the asset.Note 5.

The following table presents minimum lease revenues and variable lease revenue for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 (in thousands).


	Three and Six Months Ended June 30,				Three months ended March 31,
	2019		2018		2020		2019
Lease revenue
Fixed rent - Minimum lease revenue	$	377	$	—	$	203	$	—
Variable lease revenue	21		—		36		—
Total lease revenue	$	398	$	—	$	239	$	—

Variable rent includes costs reimbursed related to property operating expenses, common area maintenance, insurance and property taxes.

~~The following table presents future minimum operating lease payments due to the Company over the next five years and thereafter (in thousands).~~

Years ending Amount
Remainder of 2019 $ 1,808
2020 3,748
2021 3,800
2022 3,420
2023 2,311
Thereafter 3,643
Total $ 18,730

We have operating leases for our corporate headquarters office space and certain office equipment. Our leases have remaining lease terms of between one ~~year~~ to four ~~one of which~~years. The lease for our corporate office includes an option to extend the lease term for up to five years. ~~The~~This option ~~to extend the lease relates to our corporate office lease and~~ is not included in the calculation of the ~~ROU~~right-of-use (“ROU”) assets and lease liabilities because the Company is not reasonably certain that it will exercise the option. Lease expense was $0.1 million for the three months ended March 31, 2020 and 2019, respectively, which is included in general and administrative expenses in the accompanying condensed consolidated statements of operations. As disclosed in Note 14, JIA has sublet a portion of the Company’s office space. During the three months ended March 31, 2020, we recorded expense reimbursements from JIA for the sublease of office space and certain overhead charges of $33,000.

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1413 — LEASES - continued

not reasonably certain that it will exercise the option. Lease expense was $0.1 million and for the three months ended June 30, 2019 and 2018, respectively, and $0.2 million for the six months ended June 30, 2019 and 2018, respectively, which is included in general and administrative expenses in the accompanying condensed consolidated statement of operations.

Variable lease payments are not included in the calculation of the ~~right-of-use~~ROU asset and lease liability due to uncertainty of the payment amount and were $0.1 million and $0.1 million for the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018, respectively, and $0.1 million and $0.1 million for the six months ended June 30, 2019 and 2018,~~ respectively.

Supplemental balance sheet information related to leases as of ~~June 30, 2019~~March 31, 2020, was as follows (thousands, except lease term and discount rate):

Years ending Amount
2019 $ 305
2020 307
2021 308
2022 233
Total $ 1,153

~~IMH FINANCIAL CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

NOTE 1514 — ~~RELATED PARTY~~RELATED-PARTY TRANSACTIONS AND COMMITMENTS

Contractual Agreements

Interim CEO ~~Legacy Fees~~Arrangement

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 — RELATED PARTY TRANSACTIONS AND COMMITMENTS - continued

During the ~~value of the disposition of certain legacy assets held by~~three months ended March 31, 2020, the Company ~~as of December 31, 2010, if such assets are sold at values in excess of 110% of their carrying value as of December 31, 2010. Our CEO earned legacy fees of $0.1 million during~~paid Mr. Bain $15,000 under the ~~three and six months ended June 30, 2019, and $34.6 thousand during the three and six months ended June 30, 2018 (see Note 16).~~New Mexico Asset Consulting Agreement.

Juniper Capital Partners, LLC and Related Entities

In July 2014, the Company and JCP Realty Partners, LLC, a Delaware limited liability company (“JCP”) entered into a consulting services agreement (the ~~“Consulting~~“JCP Consulting Agreement”) pursuant to which JCP ~~Realty~~ agreed to perform various services for the Company, including, but not limited to, (a) advising the Company with respect to identifying, structuring, and analyzing investment opportunities, and (b) assisting the Company in managing and liquidating assets, including non-performing assets.Company. Our director, Jay Wolf, is the Managing Member of Juniper Capital Partners, LLC, the parent company of ~~JCP Realty. The initial term of the Consulting Agreement was three years and was automatically renewable for an additional two years unless notice of termination was provided by either party.~~JCP. The Company and JCP entered into an amendment of the JCP Consulting Agreement dated October 17, 2017 pursuant to which: (i) the term was extended for two ~~years that ended on July 24, 2019;~~years; (ii) the annual base consulting fee was reduced from $0.6 million to $0.5 million (subject to possible upward adjustment based on an annual review by our board of directors); and (iii) JCP is entitled to receive an origination fee of up to 1.25% on any loans or investments in real estate, preferred equity or mezzanine securities that are originated or identified by JCP (subject to a reduced fee based on the increasing size of the loan or investment). JCP is also entitled to legacy fee payments derived from the disposition of certain assets held by the Company as of December 31, 2010, to persons or opportunities arising through the efforts of JCP equal to 5.5% of the positive difference derived by subtracting (i) 110% of our December 31, 2010, valuation mark of that asset from (ii) the gross sales proceeds (on a legacy asset by asset basis without any offset for losses realized on any individual asset sales). The ~~consulting services agreement~~JCP Consulting Agreement terminated on July 24, 2019 ~~(see Note 16). During each of~~and no amounts were incurred under this agreement during the ~~six~~three months ended ~~June 30,~~March 31, 2020. During the three months ended March 31, 2019, ~~and 2018,~~ we incurred base consulting fees to JCP of ~~$0.2~~$0.1 million. ~~JCP earned legacy fees of $0.1 million during the three and six months ended June 30, 2019 and $0.1 million during the three and six months ended June 30, 2018.~~

~~Notes Receivable from Certain Partnerships~~

A subsidiary of the Company has entered into a lending facility with certain consolidated partnerships to lend up to a maximum of $5.0 million to cover the partnerships’ anticipated operating and capital expenditures. As of June 30, 2019, the total principal advanced was $5.0 million. The loans earn interest at rates ranging from the JP Morgan Chase Prime rate plus 2.0% (7.50% at June 30, 2019) to 8.0% and have maturity dates which are the earliest to occur of: (1) the date of transfer of the partnership’s real estate assets; (2) the date on which the current general partner resigns, withdraws or is removed as general partner; or (3) July 31, 2018. The promissory notes received under this lending facility are presently in default and the Company is exploring its enforcement options. The promissory notes are cross collateralized and secured by real estate and other assets owned by such partnerships. These promissory notes and the related accrued interest receivable have been eliminated in consolidation.

~~JPMorgan Chase Funding Inc. Master Repurchase~~JIA Advisory Agreement

As described in Note 9, a subsidiary of the Company purchased the $13.2 million first mortgage note secured by Broadway Tower. The purchase of the first mortgage note was funded partially with an $11.0 million loan (under a master repurchase agreement) from Chase Funding and the balance using Company funds. The Chase Funding master repurchase agreement is secured by the $13.2 million first mortgage note and bears interest at one month LIBOR plus 3.81%, requires interest only payments and a balloon payment of unpaid principal and interest upon maturity. The initial maturity date is May 22, 2020 with the potential to extend to May 2021 if, among other conditions, certain debt yield and occupancy percentages are achieved.

~~IMH FINANCIAL CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 16 — SUBSEQUENT EVENTS~~

~~CEO Termination Agreement~~

The Employment Agreement between the Company and Mr. Bain, the Company’s Chairman of the Board and Chief Executive Officer, expired on July 24, 2019 (the “Expiration Date”). The Company and Mr. Bain have mutually agreed not to renew or extend Mr. Bain’s employment agreement. Accordingly, on April 11, 2019, the Company entered into a Termination of Employment Agreement, Release and Additional Compensation Agreement with Mr. Bain (the “Bain Termination Agreement”), and subsequent to June 30, 2019, the Company entered into certain consulting agreements with Mr. Bain. The material terms of these agreements are summarized below.

The Company and Mr. Bain agree that, effective on the Expiration Date, Mr. Bain’s employment with the Company will terminate and he will resign as an officer and director of the Company. On July 30, 2019, the ~~Company~~ ~~entered into a Consulting Services Agreement (the “Interim-CEO Consulting Services Agreement~~”) with ITH Partners, LLC, a Nevada limited liability company (“ITH”), pursuant to which ITH agreed to provide certain consulting services to the Company for a ninety (90) day period commencing effective as of July 25, 2019, subject to automatic thirty (30) day renewals unless earlier terminated by the parties as provided therein. Mr. Bain is the Managing Director of ITH. Mr. Bain had served as the Company’s Chairman of the Board and Chief Executive Officer from July 24, 2014 until July 24, 2019, at which time his employment terminated. Pursuant to the Interim-CEO Consulting Services Agreement, Mr. Bain has been appointed to fill a vacancy on the Board of Directors of the Company (created when Mr. Bain’s employment terminated and he stepped down from the Board of Directors) and will serve as interim Co-Chairman and Chief Executive Officer of the Company until his service as such is terminated by the Board of Directors of the Company for any or no reason. During such period, Mr. Bain will report to the Board of Directors of the Company. Mr. Bain also will serve as the interim chairman of the Investment Committee of the Board of Directors during this period. The Interim-CEO Consulting Services Agreement imposes certain limitations on the authority of Mr. Bain to act on behalf of the Company. In exchange for ITH’s services under this agreement, the Company has agreed to pay ITH a monthly consulting fee of $30,000 commencing August 1, 2019. The agreement also contains various representations, protective covenants, termination provisions and other obligations and terms that are commonly contained in an agreement of this nature;

~~On July 30, 2019, the Company and ITH also entered into a Consulting Services Agreement (the “New Mexico Asset Consulting Agreement”) pursuant to which ITH agreed to provide certain consulting services to the Company with respect to certain real property located in Sandoval County, New Mexico (the “New Mexico Asset~~”) for a period expiring on the earlier to occur of (a) consummation of the sale of all or substantially all of the New Mexico Asset and (b) December 31, 2022, unless such agreement is earlier terminated by the parties as provided therein. This agreement was entered into pursuant to the Termination of Employment Agreement, Release and Additional Compensation Agreement between Mr. Bain and the Company, dated as of April 11, 2019. During the term of the New Mexico Asset Consulting Agreement, Mr. Bain is obligated to report to the Company’s Board of Directors and will serve as president of various corporations that serve as general partner of those entities that own the New Mexico Asset. The agreement also imposes certain limitations on the authority of Mr. Bain to act on behalf of the Company. In exchange for ITH’s services under this agreement, the Company has agreed to pay ITH a base monthly consulting fee of $5,000 commencing August 1, 2019, and an incentive bonus in the event that the Net Cash received from the sale of the New Mexico Asset exceeds certain minimum thresholds, after the payment of various reimbursements and expenses. The agreement also contains various representations, protective

~~IMH FINANCIAL CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 16 — SUBSEQUENT EVENTS - continued~~

~~covenants, termination provisions and other obligations and terms that are commonly contained in an agreement of this nature;~~

~~Asset Management Agreement~~

On August 14, 2019, the Company and JIA entered into a non-discretionary investment advisory agreement (the “Advisory Agreement”) with Juniper Investment Advisors, LLC, a Delaware limited liability company (“JIA”), with an effective commencement date of August 1, 2019,the Advisory Agreement pursuant to which JIA ~~will~~agreed to manage, on a non-discretionary basis, certain assets of the Company, including the Company’s loan portfolio and certain of its legacy real-estate owned properties. Under the terms of the Advisory Agreement, the Company will pay JIA a management ~~fees ranging from~~fee between 1.0% to 1.5% of the net asset value of certain assets under management, as well as a performance fee equal to 20% of the net profits from those assets upon disposition after the Company has received an annualized 7% return on its investment from those assets and recovery of the Company’s basis in such assets. In connection with the Advisory Agreement, certain employees of the Company have transitioned to become employees of JIA, and JIA ~~will~~has also sublet a portion of the ~~Company’s~~Company��s office space. During the three months ended March 31, 2020, we incurred base consulting fees to JIA of $67,000 and recorded expense reimbursements from JIA for the sublease of office space and certain overhead charges of $33,000. In addition, we paid $0.2 million in performance

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 — RELATED PARTY TRANSACTIONS AND COMMITMENTS - continued

fees to JIA in connection with the disposal of Broadway Tower and collection of recoveries from the former borrower under the related mezzanine loan. Jay Wolf, ~~and Alejandro Krys together own 50% of JIA. Messrs. Wolf and Krys are also the owners of Juniper Capital Partners, LLC,~~ a Delaware limited liability company, the sole member of Juniper NVM, LLC, a Delaware limited liability company (“JNVM”) and the manager of JCP Realty Partners, LLC, a Delaware limited liability company (“JCP Realty”). JCP Realty and JNVM are the collective holders of all the Series B-1 Cumulative Convertible Preferred Stock in the Company. Mr. Wolf is also a member of the board of directorsdirector of the Company, and ~~its investment committee.~~Lawrence D. Bain, the former CEO of the Company, are managing partners of JIA.

~~New Loan Investment~~Nyack Asset Management Agreement

~~Subsequent to June 30,~~On February 14, 2019, the Company entered into an ~~investment~~asset management agreement with Juniper Time Investor, LLC (“JTI”), an affiliate of JCP and Jay Wolf to provide certain asset management and related services in connection with JTI’s ownership and operation of The Time Hotel Nyack in Nyack, New York, which agreement was amended on April 1, 2019 (the “Nyack Asset Management Agreement”). Under the terms of the Nyack Asset Management Agreement, the Company is entitled to a monthly base asset management fee of $38,000, reimbursement of expenses, and a one-time exit fee of $0.25 million, payable within five business days following the sale of the property. The Nyack Asset Management Agreement was terminated during the three months ended March 31, 2020. During the three months ended March 31, 2020 and 2019, the Company earned base asset management fees of $0.1 million and $0.1 million, respectively. As of March 31, 2020, the Company was due $0.1 million under this agreement.

Notes Receivable from Certain Partnerships

A subsidiary of the Company has entered into a lending facility with certain consolidated partnerships to lend up to a maximum of $5.0 million to cover the partnerships’ anticipated operating and capital expenditures. As of March 31, 2020, the total principal advanced was $5.6 million, including $0.5 million of protective advances in excess of the facility’s maximum face amount. The promissory notes earn interest at rates ranging from the JP Morgan Chase Prime Rate plus 2.0% (7.50% at March 31, 2020) to 8.0% and have maturity dates which are the earliest to occur of: (1) the date of transfer of the partnerships’ real estate assets; (2) the date on which the current general partner of those partnerships resigns, withdraws or is removed as general partner; or (3) July 31, 2018. As the maturity date of these promissory notes have expired, the notes are in default and the Company is exploring its enforcement options. The promissory notes are cross collateralized and secured by real estate and other assets owned by such partnerships. These promissory notes and the related accrued interest receivable have been eliminated in consolidation.

Investment in Unconsolidated Entities

As described in Note 6, in the second quarter of 2019, the Company entered into a joint venture agreement with Juniper New Mexico, LLC (aand Juniper Bishops, LLC (both related ~~party~~parties of ~~a preferred shareholder)~~Jay Wolf) to participate in a ~~$15~~$10.0 million investment in a mezzanine loan to aan unrelated hotel owner and operator for the renovation of a ~~96-key~~ luxury resort located in ~~Sante~~Santa Fe, New Mexico. The JV is sponsored and managed by Juniper Bishops Manager, LLC. The mezzanine loan is secondary to a senior mortgage loan funded by aan unrelated party. The Company’s total commitment under this investment is $3.9 million, all of which ~~$2.1 million~~ was funded ~~subsequent~~as of March 31, 2020, and is reflected in investment in unconsolidated entities in the accompanying condensed consolidated balance sheet. The Company funded $0.1 million of its obligation during the three months ended March 31, 2020.

NOTE 15 — SUBSEQUENT EVENTS

Coronavirus Aid, Relief, and Economic Security (CARES) Act

On March 26, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into federal law to ~~June 30, 2019.~~respond to the economic hardships caused by increased unemployment due to COVID-19 shelter in place orders. Among other forms of economic relief, the CARES Act allows qualifying small businesses to apply for the Paycheck Protection Program (“PPP”) which provides a federally-guaranteed loan, under the U.S. Small Business Administration, of up to $10.0 million with a two-year repayment term accruing at 1% annually. The loan may be forgivable provided that the Company uses at least 75% of the proceeds on payroll and the remaining 25% on other qualified expenses, in addition to meeting other guidelines. The Company applied for two (2) PPP loans, one on behalf of the Company’s corporate offices and the other for MacArthur Place, both of which were approved and funded in April 2020 for approximately $1.8 million in the aggregate.

The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 — SUBSEQUENT EVENTS - continued

to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria.

The following discussion should be read in conjunction with our Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited financial statements and accompanying notes as of and for the year ended December 31, ~~2018~~2019 included in our Annual Report on ~~Forms~~Form 10-K ~~and 10-K/A~~ (“Form 10-K”), and with the unaudited condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q (“Form 10-Q”).

Forward-Looking Statements

This Form 10-Q contains forward-looking statements which relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “will,” “plan,” “potential,” “should” and “would” or the negative of these terms or other comparable terminology. Forward-looking statements in this Form 10-Q include: our business strategy and liquidity plan, including our intention to dispose of a majority of the balance of our real estate assets in the next 12 months, and assuming adequate liquidity, our goals and plans to invest in different real estate platforms, including consideration of opportunities to act as a sponsor and co-investor in real estate mortgages, hospitality assets, and other real estate-based vehicles, diversify our investments geographically and expand our investment capital base and pursue development activities with certain REO properties; the outcome of actions we may take, or fail to take, that result in defaults of obligations that have liens or collateral interest in our commercial mortgage loan and REO properties, including our ability to cure such defaults; our plans and the anticipated timing and results relating to our actions to foreclose on defaulted mortgage loans; trends and expectations relating to the real estate, hospitality and lending markets we operate in; expected amortization period of unrecognized compensation costs; that future mortgage income will remain at minimal levels; that property taxes, costs and expenses relating to REO assets and other operating expenses may increase; that we may modify existing loans and/or subordinate our first lien position on our mortgage loans to protect our collateral and maximize our opportunity for recovery; that the concentration of our current loan portfolio will not materially change until we resume significant lending activities; our sources and the sufficiency of liquidity in the next twelve months; that our financial assets do not give rise to significant interest rate risk; that we may sell whole loans or participations in loans to increase our liquidity; expectations about future derivative investments; recent trends and expectations relating to rental and hospitality and entertainment activities; that changes in our disposition strategy and related changes in classifications of such assets under GAAP could result in material impairment charges; our future liability relating to ~~CFD~~community facility district (“CFD”) and special assessment obligations; that the fair value of the collateral underlying our mortgage loans is sufficient in relation to the current carrying value of the related loans; and that we may further increase our leverage.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance. These beliefs, assumptions and expectations can change, and actual results and events may differ materially, as a result of many possible events or factors, not all of which are known to us or are within our control. These risk factors and uncertainties should be carefully considered by current and potential investors. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements, and that could negatively affect our business include:

Overview of the Business

We are a real estate investment and finance company focusing on the commercial, hospitality, industrial and residential real estate markets. ~~The Company intends to expand its hospitality footprint through the acquisition or management of other luxury boutique hotels.~~

Our current business focus is to re-establish the Company’s access to significant investment capital in order to improve the performance of our portfolio. By increasing the level and quality of the assets in our portfolio, we believe that the Company can grow and ultimately provide its shareholders with favorable risk-adjusted returns and enhanced opportunity for ~~liquidity.~~liquidity to satisfy near-term financial obligations that are expected to come due.

As of ~~June 30, 2019,~~March 31, 2020, we held ~~mortgage and~~ real estate assets with a carrying value of ~~$118.1~~$86.2 million. ~~Our~~We expect that our REO held for sale and other REO ~~are being~~will be marketed for disposition within the next twelve months. With cash and cash equivalents of ~~$12.2~~$9.9 million at ~~June 30, 2019~~March 31, 2020, and anticipated proceeds from asset sales and third-party financing, our objective is to redeploy available amounts into income-producing investments, such as mortgage loans, joint ventures ~~or other attractive investments,~~and the acquisitions of hospitality orand other attractive other real estate assets. However, our ability to implement our investment strategy in dependent on the Company’s ability to generate sufficient liquidity.

~~During three months ended June 30, 2019, one performing loan~~COVID-19/Going Concern Considerations

The recent and rampant spread of the coronavirus (COVID-19) has caused businesses, restaurants, bars, entertainment centers and other public places across the country to shutter their operations. California has been particularly impacted by the spread of this virus. States, counties, and cities across the United States, including the State of California, have enacted “stay in place” orders that restrict anything other than essential travel. On March 17, 2020, by Order of the Health Officer of the County of Sonoma, California, Order No. C19-03 (the “Order”), all businesses with a ~~principal balance~~facility in Sonoma County were required to “cease all activities.” All travel in Sonoma County, except for Essential Travel and Essential Activities, is prohibited. The Order became effective at 12:00 a.m. on March 18, 2020 and will continue in effect until the Governor’s office releases guidelines for the reopening of ~~$3.0 million was repaid~~restaurants, hotels, and spas. The Company’s lone operating asset, a hospitality asset relying on room, event and restaurant revenue, is located in ~~full. In addition, during~~Sonoma County. While the Company is managing this asset prudently under these conditions, including by terminating non-essential vendor services and reducing other expenses where feasible, the continuance of the Company’s ongoing operations are at substantial risk barring immediate fiscal policy relief coming from the federal or California state government.

Prior to the outbreak of this virus in the United States, the Board of Directors of the Company independently determined that it would be in the best interests of the shareholders of the Company to consider, evaluate and possibly take action with respect to a re-capitalization of the Company. Accordingly, the Board appointed a Special Committee consisting exclusively of independent members of the Board of Directors to formulate, establish, oversee and direct a process for the identification, evaluation and negotiation of any proposed recapitalization or alternative transaction. The Special Committee has retained outside advisors to assist the members of the Special Committee in carrying out these responsibilities. It is possible that the Special Committee will recommend that the Company enter into a recapitalization or other transaction or set of transactions that, among other things, would: (i) constitute an event of default or termination event, and cause the automatic and immediate acceleration of all debt outstanding under or in respect of instruments and agreements relating to direct financial obligations of the Company, including

the mortgage loan on the Company’s lone operating asset, the MacArthur Place Hotel and Spa; (ii) permit holders of the Company’s preferred shares to exercise their rights to require the Company to redeem a portion or all of their preferred shares; (iii) constitute a breach under various agreements to which the Company is a party and which are materially important to the operations of the Company. and (iv) accelerate payments made to the Company’s CEO under his employment agreement. This evaluation process is on-going and no recommendations or determinations have been reached by the Special Committee and there can be no assurance that the Special Committee will recommend any such recapitalization or other transaction.

Historically, we have used proceeds from the issuance of preferred equity and/or debt, proceeds from the sale of our REO assets, and the liquidation of mortgages and related investments to satisfy our working capital requirements. During the three months ended ~~June 30, 2019,~~March 31, 2020, we ~~conducted~~sold our Broadway Tower commercial office building, netting $8.0 million in cash to the Company after payment of closing costs and related debt. We also are in discussions with the holders of our Series B-1 and B-2 Preferred Stock regarding a ~~UCC foreclosure~~potential restructuring or modification of those securities and our obligations, thereunder. There can be no assurance that these efforts will be successful, that we will sell our remaining REO assets in a timely manner, or that we will obtain additional or replacement financing, if needed, to sufficiently fund our future operations, redeem our Series B-1 and B-2 Preferred Stock if so required, repay existing debt, or to implement our investment strategy. In the event we are unsuccessful in negotiating a deferral or restructuring of the terms of our Series B-1 and B-2 Preferred Stock, we will be required to fund the redemption of $39.6 million. In the absence of proceeds from asset sales, equity issuances or borrowings to fund the Redemption Price, the required redemption would likely render the Company insolvent. Moreover, our failure to generate sustainable earning assets and to successfully liquidate a significant portion of our REO assets will have a material adverse effect on ~~collateral securing~~our business, results of operations and financial position. In the absence of favorably resolving the matters described above, the collective nature of these uncertainties create substantial doubt about our ability to continue as a ~~mezzanine loan investments that had~~going concern for a ~~carrying value of $8.2 million as of~~period beyond one year from the date of ~~foreclosure, which had been in default since September 2018. In May 2019, we foreclosed on the mezzanine loan collateral consisting~~issuance of 100% of the membership interests in the entity owning the underlying property, consisting of a commercial office building known as Broadway Tower, located in St. Louis, Missouri. Upon foreclosure, we acquired the membership interests in the limited liability company that owns the office building, related assets and cash with a value totaling approximately $26 million, and assumed related liabilities totaling approximately $16.0 million, all of which were recorded at estimated fair value in accordance with GAAP. The Company intends to operate the commercial office building to increase occupancy and improve the value of the asset.this Form 10-Q.

~~Key Operational Aspects~~

~~The Company’s net loss for the three and six months ended June 30, 2019 was $4.1 million and $9.1 million, respectively, compared to net loss for the three and six months ended June 30, 2018~~ ~~which was~~ $2.5 million and $6.3 million, respectively. The Company continues to realize net losses related its Hospitality and Entertainment Operations segment due to ongoing losses at MacArthur place during its renovation as well as expenditures for professional fees related to guarantor recovery and enforcement actions.

Results of Operations for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~

The following discussion compares historical results of operations on a GAAP basis for three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 and ~~2018.~~2019. Unless otherwise noted, all comparative performance data included below reflects year-over-year comparisons.

Operating Property Revenue. For the three months ended ~~June 30, 2019~~March 31, 2020, operating property revenue was $~~1.9~~2.0 million as compared to $~~2.1~~0.3 million during the three months ended ~~June 30, 2018~~March 31, 2019, ~~a decrease~~an increase of $~~0.2~~1.7 million~~. During the six months ended June 30, 2019, we recorded $2.2 million in operating property revenue as compared to $3.7 million for the six months ended June 30, 2018, a decrease of $1.5 million~~, or ~~40.2%~~552.2%. The year-over-year ~~decrease~~increase in operating property revenue is primarily ~~attributable~~attributed to MacArthur Place operating at full capacity during the majority of the first quarter 2020 (prior to the ~~renovation~~closure of ~~our~~the hotel ~~restaurant,~~in mid-March) as compared to the corresponding period in 2019 when rooms were taken out of service and spa operation known as MacArthur Place, which substantially began during the second quarter of 2018 and is expected to be completed in the third quarter of 2019. We expect operating property revenue to increaselimited F&B operations were available. As previously noted, hotel revenues were negatively impacted following the ~~completion~~mandatory closure of the ~~renovation. This overall decrease was partially offset by $0.3 million recognized~~hotel in Q2mid-March 2020 as a result of ~~2019~~COVID-19. Additionally, the 2020 amount includes operating income from the Broadway Tower commercial ~~real estate rental income.~~office building operation prior to its sale in late January 2020.


	Three Months Ended June 30,		Six Months Ended June 30,		Three months ended March 31,
	2019	2018	2019	2018	2020	2019
Options to purchase common stock	1,085,497	1,062,807	1,085,497	1,066,465	1,152,361	1,085,497
Restricted stock	249,486	372,815	230,134	382,638	494,034	209,419
Warrants to purchase common stock	2,600,000	2,600,000	2,600,000	2,470,718	2,600,000	2,600,000
Convertible preferred stock	10,552,941	10,552,941	10,552,941	10,045,954	12,427,941	10,552,941
Total	14,487,924	14,588,563	14,468,572	13,965,775	16,674,336	14,447,857



Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating lease	$	181

Non-cash investing and financing activities:
Right-of-use assets and lease liabilities recorded upon adoption of ASC 842
Right-of-use assets	$	1,574
Lease liabilities	$	1,693


Operating leases
Operating lease right-of-use assets in other assets	$	1,440
Operating lease ROU assets in other assets			$	637

Operating lease liabilities in accounts payable and other accrued expenses	$	1,548	$	724

Weighted average remaining lease term	3.0 years		3.0 years
Operating leases - Weighted average discount rate	7.1%		7.1%


Revenues (in thousands)
	Three Months Ended June 30,									Six Months Ended June 30,									Three months ended March 31,
Revenues:	2019		2018		$ Change			% Change		2019		2018		$ Change			% Change		2020		2019		$ Change			% Change
Operating property revenue	$	1,880	$	2,105	$	(225	)	(10.7	)%	$	2,193	$	3,668	$	(1,475	)	(40.2	)%	$	2,048	$	314	$	1,734		552.2	%
Mortgage loan income, net	447		641		(194		)	(30.3	)%	1,098		1,266		(168		)	(13.3	)%	—		650		(650		)	(100.0	)%
Management fees, investment and other income	208		255		(47		)	(18.4	)%	276		292		(16		)	(5.5	)%	92		68		24			35.3	%
Total Revenue	$	2,535	$	3,001	$	(466	)	(15.5	)%	$	3,567	$	5,226	$	(1,659	)	(31.7	)%	$	2,140	$	1,032	$	1,108		107.4	%


	Three Months Ended June 30,										Six Months Ended June 30,										Three Months Ended March 31,
	2019			% of Consolidated Total		2018			% of Consolidated Total		2019			% of Consolidated Total		2018			% of Consolidated Total		2020			% of Consolidated Total		2019			% of Consolidated Total
Total revenues	$	1,482		58.5	%	$	2,347		78.2	%	$	1,795		50.3	%	$	3,911		74.8	%	$	1,832		85.6	%	$	314		30.4	%
Operating expenses
Operating property direct expenses	3,434			91.6	%	2,099			100.0	%	5,783			94.9	%	4,334			100.0	%	3,189			91.8	%	2,349			100.0	%
Professional fees	275			17.3	%	43			5.7	%	356			14.9	%	102			6.3	%	422			31.1	%	81			10.0	%
General & administrative	265			16.4	%	309			18.1	%	641			18.2	%	624			17.4	%
General and administrative																					162			10.7	%	376			19.7	%
Interest expense	139			41.5	%	327			41.9	%	139			17.6	%	632			41.4	%	515			67.8	%	—			—	%
Depreciation & amortization expense	242			75.4	%	241			79.5	%	485			82.1	%	520			80.7	%
Depreciation and amortization expense																					767			96.7	%	243			89.7	%
Total operating expenses	4,355					3,019					7,404					6,212					5,055					3,049
Other expenses
Other (income) expense
Unrealized loss on derivatives	124			100.0	%	—			—	%	291			100.0	%	—			—	%	—			—	%	167			100.0	%
Total other expenses	124			(12.0	)%	—					291			(33.7	)%	—
Other (income) expense, net																					—			—	%	167			100.0	%
Total costs and expenses, net	4,479			67.8	%	3,019			54.9	%	7,695			60.8	%	6,212			53.9	%	5,055			82.8	%	3,216			53.2	%
Loss before income taxes	(2,997		)	73.6	%	(672		)	26.9	%	(5,900		)	65.0	%	(2,301		)	36.6	%
Provision (expense) for income taxes	—					—			—	%	—					—			—	%
Loss before provision for income tax																					(3,223		)	81.3	%	(2,902		)	57.9	%
Income Tax Provision																					—					—			—	%
Net loss	(2,997		)	73.6	%	(672		)	26.9	%	(5,900		)	65.0	%	(2,301		)	36.6	%	(3,223		)	81.3	%	(2,902		)	57.9	%
Net loss attributable to non-controlling interest	(368		)	115.7	%	(88		)	(352.0	)%	(653		)	147.7	%	(129		)	(112.2	)%	(393		)	151.2	%	(285		)	231.7	%
Net loss attributable to common shareholders	$	(3,365	)	52.5	%	$	(760	)	18.2	%	$	(6,553	)	48.4	%	$	(2,430	)	26.2	%	$	(3,616	)	57.2	%	$	(3,187	)	44.7	%


	Three and Six Months Ended June 30, 2019																					Three months ended March 31, 2019
	Common Stock			Treasury Stock																		Common Stock			Treasury Stock
	Shares	Amount		Shares	Amount			Paid-in Capital			Accumulated deficit			Total IMH Financial Corporation Stockholders' Equity (Deficit)			Non-controlling Interest		Total Stockholders' Equity			Shares	Amount		Shares		Amount			Paid-in Capital			Accumulated deficit			Total IMH Financial Corporation Stockholders' Equity			Non-controlling Interest			Total Stockholders' Equity
Balance at December 31, 2018																						18,596,774	$	186	1,870,164		$	(6,286	)	$	708,523		$	(692,876	)	$	9,547		$	19,616		$	29,163
Net income (loss)																						—	—		—		—			—			(5,136		)	(5,136		)	123			(5,013		)
Contributions from Hotel Fund investors																						—	—		—		—			—			—			—			3,520			3,520
Distributions to Hotel Fund investors																						—	—		—		—			—			—			—			(266		)	(266		)
Hotel Fund syndication costs																						—	—		—		—			(12		)	—			(12		)	—			(12		)
Stock warrant and preferred equity cost accretion																						—	—		—		—			(70		)	—			(70		)	—			(70		)
Cash dividends on Series B redeemable convertible preferred stock	—	—		—	—			(648		)	—			(648		)	—		(648		)	—	—		—		—			(641		)	—			(641		)	—			(641		)
Deemed dividend on Series B redeemable convertible preferred stock	—	—		—	—			(954		)	—			(954		)	—		(954		)	—	—		—		—			(936		)	—			(936		)	—			(936		)
Cash dividends on Series A redeemable preferred stock	—	—		—	—			(417		)	—			(417		)	—		(417		)	—	—		—		—			(412		)	—			(412		)	—			(412		)
Stock-based compensation	55,680	1		—	—			75			—			76			—		76			112,304	1		—		—			116			—			117			—			117
Balance at June 30, 2019	18,764,758	$	188	2,370,164	$	(7,286	)	$	704,557		$	(702,400	)	$	(4,941	)	$	26,965	$	22,024
Treasury stock repurchase																						—	—		500,000		(1,000		)	—			—			(1,000		)	—			(1,000		)
Balance at March 31, 2019																						18,709,078	$	187	$	2,370,164	$	(7,286	)	$	706,568		$	(698,012	)	$	1,457		$	22,993		$	24,450



	June 30, 2019		December 31, 2018
Total assets	$	97,730	$	85,240
Total liabilities	57,640		37,770


	Three Months Ended June 30, 2019												Three months ended March 31, 2020
Income Statement Items	Mortgage and REO Legacy Portfolio and Other Operations			Hospitality and Entertainment Operations			Corporate and Other			Consolidated			Mortgage and REO Legacy Portfolio and Other Operations			Hospitality and Entertainment Operations			Corporate and Other			Consolidated

Revenues
Operating property revenue	$	398		$	1,482		$	—		$	1,880		$	239		$	1,809		$	—		$	2,048
Mortgage loan income	447			—			—			447			—			—			—			—
Management fees, investment and other income	3			—			205			208			14			23			55			92
Total revenue	848			1,482			205			2,535			253			1,832			55			2,140

Total operating expenses	1,134			4,355			2,147			7,636			909			5,055			2,012			7,976

Other (income) expense
Gain on disposal of assets	(20		)	—			—			(20		)
Recovery of credit losses	(1,135		)	—			—			(1,135		)
Unrealized loss on derivatives	—			124			—			124
Total other (income) expense	(1,155		)	124			—			(1,031		)
Recovery of credit losses, net													(1,750		)	—			—			(1,750		)
Equity earnings from unconsolidated entities													(122		)	—			—			(122		)
Total other income, net													(1,872		)	—			—			(1,872		)

Total costs and expense, net	(21		)	4,479			2,147			6,605			(963		)	5,055			2,012			6,104
Income (loss) before income taxes	869			(2,997		)	(1,942		)	(4,070		)	1,216			(3,223		)	(1,957		)	(3,964		)
(Provision for) benefit from income taxes	—			—			—			—
Provision for income taxes													—			—			—			—
Net income (loss)	$	869		$	(2,997	)	$	(1,942	)	$	(4,070	)	$	1,216		$	(3,223	)	$	(1,957	)	$	(3,964	)


	Three Months Ended June 30, 2018												Three months ended March 31, 2019
Income Statement Items	Mortgage and REO Legacy Portfolio and Other Operations			Hospitality and Entertainment Operations			Corporate and Other			Consolidated			Mortgage and REO Legacy Portfolio and Other Operations		Hospitality and Entertainment Operations			Corporate and Other			Consolidated

Revenues
Operating property revenue	$	—		$	2,105		$	—		$	2,105		$	—	$	314		$	—		$	314
Mortgage loan income	641			—			—			641			650		—			—			650
Management fees, investment and other income	—			242			13			255			2		—			66			68
Total revenue	641			2,347			13			3,001			652		314			66			1,032

Total operating expenses	556			3,019			2,240			5,815			490		3,049			2,339			5,878

Other (income) expense
Gain on disposal of assets, net	(142		)	—			—			(142		)
Recovery of credit losses	(175		)	—			—			(175		)
Total other income	(317		)	—			—			(317		)
Unrealized loss on derivatives													—		167			—			167
Total other (income) expense, net													—		167			—			167

Total costs and expense, net	239			3,019			2,240			5,498			490		3,216			2,339			6,045
Income (loss) from continuing operations, before income taxes	402			(672		)	(2,227		)	(2,497		)
(Provision for) benefit from income taxes	—			—			—			—
Income (loss) before income taxes													162		(2,902		)	(2,273		)	(5,013		)
Provision for income taxes													—		—			—			—
Net income (loss)	$	402		$	(672	)	$	(2,227	)	$	(2,497	)	$	162	$	(2,902	)	$	(2,273	)	$	(5,013	)



	Six Months Ended June 30, 2019
Income Statement Items	Mortgage and REO Legacy Portfolio and Other Operations			Hospitality and Entertainment Operations			Corporate and Other			Consolidated

Revenues
Operating property revenue	$	398		$	1,795		$	—		$	2,193
Mortgage loan income	1,098			—			—			1,098
Management fees, investment and other income	5			—			271			276
Total revenue	1,501			1,795			271			3,567

Total operating expenses	1,625			7,404			4,485			13,514

Other (income) expense
Gain on Disposal of Assets, Net	(20		)	—			—			(20		)
Recovery of credit losses	(1,135		)	—			—			(1,135		)
Unrealized loss on derivatives	—			291			—			291
Total other (income) expense	(1,155		)	291			—			(864		)

Total costs and expense, net	470			7,695			4,485			12,650
Income (loss) before income taxes	1,031			(5,900		)	(4,214		)	(9,083		)
(Provision for) benefit from income taxes	—			—			—			—
Net income (loss)	$	1,031		$	(5,900	)	$	(4,214	)	$	(9,083	)



	Six Months Ended June 30, 2018
Income Statement Items	Mortgage and REO Legacy Portfolio and Other Operations			Hospitality and Entertainment Operations			Corporate and Other			Consolidated

Revenues
Operating property revenue	$	—		$	3,668		$	—		$	3,668
Mortgage loan income	1,266			—			—			1,266
Management fees, investment and other income	—			243			49			292
Total revenue	1,266			3,911			49			5,226

Total operating expenses	1,412			6,212			4,463			12,087

Other (income) expense
Gain on disposal of assets, net	(395		)	—			—			(395		)
Recovery of credit losses	(175		)	—			—			(175		)
Total other income	(570		)	—			—			(570		)

Total costs and expense, net	842			6,212			4,463			11,517
Income (loss) from continuing operations, before income taxes	424			(2,301		)	(4,414		)	(6,291		)
(Provision for) benefit from income taxes	—			—			—			—
Net income (loss)	$	424		$	(2,301	)	$	(4,414	)	$	(6,291	)


	Gross Carrying Amount				Accumulated Amortization						Net Carrying Amount				Gross Carrying Amount				Accumulated Amortization						Net Carrying Amount
	June 30,		December 31,		June 30,			December 31,			June 30,		December 31,		March 31,		December 31,		March 31,			December 31,			March 31,		December 31,
	2019		2018		2019			2018			2019		2018		2020		2019		2020			2019			2020		2019
Non-amortizing intangible assets:
Goodwill															$	15,357	$	15,357	$	—		$	—		$	15,357	$	15,357
Liquor license															100		100		—			—			100		100
Amortizing intangible assets:
Customer relationships															800		800		(667		)	(600		)	133		200
Trade name and other	$	90	$	90	$	(22	)	$	(16	)	$	68	$	74	90		90		(32		)	(29		)	58		61
Customer relationships	800		800		(467		)	(333		)	333		467
Non-amortizing intangible assets:
Liquor license	100		100		—			—			100		100
Goodwill	15,357		15,357		—			—			15,357		15,357
	$	16,347	$	16,347	$	(489	)	$	(349	)	$	15,858	$	15,998	$	16,347	$	16,347	$	(699	)	$	(629	)	$	15,648	$	15,718



Years ending	Amount
Remainder of 2019	$	1,808
2020	3,748
2021	3,800
2022	3,420
2023	2,311
Thereafter	3,643
Total	$	18,730


2)	Mr. Bain received a cash bonus of $0.6 million for his 2018 services (which was paid on April 15, 2019) and $0.35 million for his 2019 services, which was paid during the three months ended March 31, 2020. Such amounts were accrued in the fiscal 2019 consolidated financial statements as a component of general and administrative expenses;


3)	Mr. Bain is entitled to receive two payments of $0.25 million each by no later than January 31, 2020 and January 31, 2021, respectively, all of which were accrued in the 2019 consolidated financial statements as a component of general and administrative expenses. During the three months ended March 31, 2020, we made the first installment payment of $0.25 million;


4)	Mr. Bain is entitled to receive a Legacy Asset Performance Fee (“LAPF”), as calculated in accordance with his prior employment agreement, in connection with the disposition of the Company’s interests in the assets of the New Mexico Partnerships (the “New Mexico Assets”) provided that such disposition occurs prior to December 31, 2022;


6)	All unvested equity awards and deferred compensation benefits granted to Mr. Bain were vested.


3)	~~The Company has agreed to pay Mr. Bain two payments of $0.25 million each by no later than January 31, 2020 and January 31, 2021, respectively;~~


6)	~~All unvested equity awards and deferred compensation benefits granted to Mr. Bain were vested on the Expiration Date; and~~


7)	~~Mr. Bain has agreed to certain noncompetition and nonsolicitation covenants, cooperation covenants and certain other requirements.~~


Expenses (in thousands)
Expenses, gains and losses (in thousands)
	Three Months Ended June 30,											Six Months Ended June 30,											Three months ended March 31,
Expenses:	2019			2018			$ Change			% Change		2019			2018			$ Change			% Change
Expenses, gains and losses:																							2020			2019		$ Change			% Change
Operating property direct expenses (exclusive of interest and depreciation)	$	3,657		$	2,099		$	1,558		74.2	%	$	6,007		$	4,334		$	1,673		38.6	%	$	3,473		$	2,349	$	1,124		47.9	%
Expenses for non-operating real estate owned	83			171			(88		)	(51.5	)%	174			367			(193		)	(52.6	)%	75			91		(16		)	(17.6	)%
Professional fees	1,680			754			926			122.8	%	2,486			1,629			857			52.6	%	1,356			806		550			68.2	%
General and administrative expenses	1,560			1,708			(148		)	(8.7	)%	3,465			3,588			(123		)	(3.4	)%	1,519			1,905		(386		)	(20.3	)%
Interest expense	335			780			(445		)	(57.1	)%	791			1,525			(734		)	(48.1	)%	760			456		304			66.7	%
Depreciation and amortization expense	321			303			18			5.9	%	591			644			(53		)	(8.2	)%	793			271		522			192.6	%
Gain on disposal of assets	(20		)	(142		)	122			(85.9	)%	(20		)	(395		)	375			(94.9	)%
Recovery of credit losses	(1,135		)	(175		)	(960		)	548.6	%	(1,135		)	(175		)	(960		)	548.6	%
Provision for (recovery of) credit losses, net																							(1,750		)	—		(1,750		)	100.0	%
Unrealized loss on derivatives	124			—			124			100.0	%	291			—			291			100.0	%	—			167		(167		)	(100.0	)%
Total Costs and Expenses	$	6,605		$	5,498		$	1,107		20.1	%	$	12,650		$	11,517		$	1,133		9.8	%
Equity earnings from unconsolidated entities																							(122		)	—		(122		)	100.0	%
Total Expenses, Gains and Losses																							$	6,104		$	6,045	$	59		1.0	%



Quarter	Principal and Interest Balance			Percent		#
Matured	$	12,682		49	%	2
Q4 2019	13,270			51	%	2
Total principal and interest	25,952			100	%	4
Less: valuation allowance	(12,682		)
Mortgage loans, net	$	13,270


3)	~~The Company has agreed~~Mr. Bain is entitled to ~~pay Mr. Bain~~receive two payments of $0.25 million each by no later than January 31, 2020 (which was paid during the three months ended March 31, 2020) and January 31, 2021, respectively;



Exhibit No.		Description of Document

3.1		Certificate of Incorporation of IMH Financial Corporation (filed as Exhibit 3.1 to the Quarterly Report on Form 10-Q filed on August 23, 2010 and incorporated herein by reference).

3.1.1		Certificate of Correction of Certificate of Incorporation of IMH Financial Corporation (filed as Exhibit 3.1 to the Quarterly Report on Form 10-Q filed on May 20, 2013 and incorporated herein by reference).

3.2		Third Amended and Restated Bylaws of IMH Financial Corporation (filed as Exhibit 3.2 to Current Report on Form 8-K filed on July 29, 2014 and incorporated herein by reference).

3.2.1		First Amendment to the Third Amended and Restated Bylaws of IMH Financial Corporation (filed as Exhibit 3.2 to Current Report on Form 8-K filed on February 12, 2018 and incorporated herein by reference).

~~3.4~~3.3		Second Amended and Restated Certificate of Designation of Series B-1 Cumulative Convertible Preferred Stock, Series B-2 Cumulative Convertible Preferred Stock and Series B-3 Cumulative Convertible Preferred Stock (filed as Exhibit 3.1 to Current Report on Form 8-K on February 12, 2018 and incorporated herein by reference).

3.4		Certificate of Designation of Series B-4 Cumulative Convertible Preferred Stock of IMH Financial Corporation (filed as Exhibit 3.1 to Current Report on Form 8-K on September 27, 2019 and incorporated herein by reference to the filing).

4.1		Certificate of Designation of Series A Senior Perpetual Preferred Stock (filed as Exhibit 3.1 to Current Report on Form 8-K filed on June 4, 2018 and incorporated herein by reference to the filing).

~~4.3~~4.2		~~Second~~Third Amended and Restated Investment Agreement, dated as of May 31, 2018, by and among JPMorgan Chase Funding Inc., JCP Realty Partners, LLC, Juniper NVM, LLC, and the Company (filed as Exhibit 10.2 to Current Report on Form 8-K filed on June 4, 2018 and incorporated by reference to the filing).

~~4.4~~4.3		Second Amended and Restated Investors’ Rights Agreement by and among IMH Financial Corporation, JCP Realty Partners, LLC, Juniper NVM, LLC and JPMorgan Chase Funding Inc., dated ~~February 9, 2018~~September 25, 2019 (filed as Exhibit 4.1 to Current Report on Form 8-K on ~~February 12, 2018~~September 27, 2019 and incorporated ~~herein~~ by ~~reference)~~reference to the filing).

~~4.6~~		Common Stock Purchase Warrant, dated February 9, 2018, issued to JPMorgan Chase Funding Inc. (filed as Exhibit 4.2 to Current Report on Form 8-K on February 12, 2018 and incorporated herein by reference).

~~10.6~~10.1		Building Loan Agreement/Disbursement Schedule dated as of October 2, 2017, by and between MidFirst Bank and L’Auberge de Sonoma, LLC (filed as Exhibit 10.6 to Quarterly Report on Form 10-Q on November 20, 2017 and incorporated herein by ~~reference)~~reference).

10.2		Executive Employment Agreement between Chadwick Parson and IMH Financial Corporation, entered into as of August 30, 2019 (filed as Exhibit 10.1 to Current Report on Form 8-K on September 9, 2019 and incorporated herein by reference to the filing).

~~10.7~~10.3		~~Promissory Note dated as of October 2, 2017, made~~Second Amended and Restated Investors’ Rights Agreement by ~~L’Auberge de Sonoma,~~and among IMH Financial Corporation, JCP Realty Partners, LLC, ~~in favor of MidFirst Bank~~Juniper NVM, LLC and JPMorgan Chase Funding, Inc. entered into on September 25, 2019 (filed as Exhibit ~~10.7~~4.1 to ~~Quarterly~~Current Report on Form ~~10-Q~~8-K on ~~November 20, 2017~~September 27, 2019 and incorporated herein by ~~reference)~~reference to the filing).

~~10.8~~10.4		Construction Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of October 2, 2017, made by L’Auberge de Sonoma, LLC for the benefit of MidFirst Bank (filed as Exhibit 10.7 to Quarterly Report on Form 10-Q on November 20, 2017 and incorporated herein by reference).

~~10.9~~		Completion Guaranty, dated as of October 2, 2017, made by IMH Financial Corporation in favor of MidFirst Bank (filed as Exhibit 10.9 to Quarterly Report on Form 10-Q on November 20, 2017 and incorporated herein by reference).

~~10.10~~10.5		~~Continuing Guaranty, dated as of October 2, 2017, made~~Third Amended and Restated Investment Agreement by and among IMH Financial Corporation, ~~in favor of MidFirst Bank~~Juniper NVM, LLC, JCP Realty Partners, LLC and JPMorgan Chase Funding, Inc. entered into on September 25, 2019 (filed as Exhibit ~~10.10~~10.2 to ~~Quarterly~~Current Report on Form ~~10-Q~~8-K on ~~November 20, 2017 and incorporated herein by reference)~~September 27, 2019).

~~10.33~~10.6*		~~Termination of Employment Agreement, Release and Additional Compensation~~Consulting Services Agreement between ~~Lawrence D. Bain~~the Company and ~~IMH Financial Corporation, entered into~~ITH Partners, LLC, dated as of ~~April 19,~~July 30, 2019 ~~filed~~(filed as Exhibit ~~10.33~~10.6 to Quarterly Report on Form 10-Q filed on ~~May 15,~~November 14, 2019 and incorporated ~~herein~~ by ~~reference.~~reference to the filing).

10.7		Deferral and Consent Agreement, dated as of July 23, 2019 and effective as of April 1, 2019, between the Company, JPMorgan Chase Funding Inc., JCP Realty Partners, LLC, and Juniper NVM, LLC (filed as Exhibit 10.1 to Current Report on Form 8-K filed on July 29, 2019 and incorporated by reference to the filing).

31.1*		Certification of Chief Executive Officer of IMH Financial Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



Exhibit No.		Description of Document
31.2*		Certification of Chief Financial Officer of IMH Financial Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.2*†		Certification of Chief Executive Officer and Chief Financial Officer of IMH Financial Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



~~Exhibit~~ ~~No.~~		~~Description of Document~~
*		Filed herewith.

†		This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Exchange Act, and is not to be incorporated by reference into any filings of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.



Date:	~~August 14, 2019~~May 15, 2020	IMH FINANCIAL CORPORATION

		By:	/s/ Samuel J. Montes
			Samuel J. Montes
			Chief Financial Officer



Signature	Title	Date

/s/ ~~Lawrence D. Bain~~Chadwick Parson	~~Interim~~ Chief Executive Officer and ~~Co-Chairman~~Chairman	~~August 14, 2019~~May 15, 2020
~~Lawrence D. Bain~~Chadwick Parson	(Principal Executive Officer)

/s/ Samuel J. Montes	Chief Financial Officer (Principal Financial Officer	~~August 14, 2019~~May 15, 2020
Samuel J. Montes	and Principal Accounting Officer)