| Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
2019
| Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
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| Delaware | 27-1537126 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
(Registrant’s
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
Non-accelerated filer |
| Smaller reporting company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
The
IMH Financial Corporation
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| Item 1. | Financial Statements |
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| Unaudited Condensed Consolidated Balance |
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| Unaudited Condensed Consolidated Statements of Operations for the |
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| Unaudited Condensed Consolidated Statements of |
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| Unaudited Condensed Consolidated Statements of Cash Flows for the |
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Notes to Unaudited Condensed Consolidated Financial Statements |
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Item 2. |
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Item | Quantitative and Qualitative Disclosures about Market Risk |
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Item 4. | Controls and Procedures |
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| Item 1A. | Risk Factors | |||
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
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Item 3. | Defaults Upon Senior Securities |
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Item 4. | Mine Safety Disclosures |
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Item 5. | Other Information |
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Item 6. | Exhibits |
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| Signatures |
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4F-2
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Cash and cash equivalents | $ | 30,098 | $ | 11,789 | ||||
Funds held by lender and restricted cash | 308 | 143 | ||||||
Mortgage loans, net | 22,859 | 19,668 | ||||||
Real estate held for sale | 12,615 | 5,853 | ||||||
Operating properties, net | 21,885 | 20,484 | ||||||
Other real estate owned | 32,832 | 38,304 | ||||||
Goodwill | 15,380 | 15,380 | ||||||
Other intangibles, net | 780 | 958 | ||||||
Other receivables | 477 | 410 | ||||||
Other assets | 1,858 | 899 | ||||||
Property and equipment, net | 463 | 570 | ||||||
Total assets | $ | 139,555 | $ | 114,458 | ||||
Liabilities | ||||||||
Accounts payable and accrued expenses | $ | 5,130 | $ | 7,904 | ||||
Accrued property taxes | 338 | 301 | ||||||
Dividends payable | - | 539 | ||||||
Accrued interest | 419 | 189 | ||||||
Customer deposits and funds held for others | 1,067 | 750 | ||||||
Notes payable, net of discount | 35,173 | 34,105 | ||||||
Total liabilities | 42,127 | 43,788 | ||||||
Redeemable convertible preferred stock, $.01 par value; 100,000,000 shares authorized; 10,552,941 and 8,200,000 shares outstanding; liquidation preference of $51,170 and $39,570 at June 30, 2018 and December 31, 2017, respectively | 43,778 | 34,859 | ||||||
| Perpetual preferred stock, liquidation preference of $22,000 | 21,743 | - | ||||||
| Commitments and contingencies (Notes 13 and 14) | ||||||||
Stockholders’ Equity | ||||||||
| Common stock, $.01 par value; 200,000,000 shares authorized; 18,596,774 and 18,079,522 shares issued at June 30, 2018 and December 31, 2017; 16,726,610 and 16,253,426 shares outstanding at June 30, 2018 and December 31, 2017, respectively | 185 | 181 | ||||||
| Less: Treasury stock at cost, 1,870,164 at June 30, 2018 and 1,826,096 at December 31, 2017, respectively | (6,286 | ) | (6,286 | ) | ||||
Paid-in Capital | 712,552 | 714,889 | ||||||
Accumulated Deficit | (685,711 | ) | (679,535 | ) | ||||
Total IMH Financial Corporation Stockholders' Equity | 20,740 | 29,249 | ||||||
Noncontrolling Interests | 11,167 | 6,562 | ||||||
Total Stockholders' Equity | 31,907 | 35,811 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 139,555 | $ | 114,458 | ||||
June 30, December 31, 2019 2018 ASSETS (unaudited) Cash and cash equivalents $ 12,222 $ 25,452 Funds held by lender and restricted cash 5,147 198 Mortgage loans, net 13,270 23,234 Real estate held for sale 7,400 7,418 Operating properties, net 63,696 33,866 Other real estate owned 33,727 33,727 Goodwill 15,357 15,357 Other intangibles, net 501 641 Other receivables 1,233 1,320 Other assets 4,125 2,033 Property and equipment, net 360 393 Total assets $ 157,038 $ 143,639 LIABILITIES Accounts payable and accrued expenses $ 12,004 $ 8,385 Accrued property taxes 638 305 Dividends payable 1,267 857 Accrued interest 414 653 Customer deposits and funds held for others 2,033 552 Notes payable, net of deferred financing fees 49,258 36,314 Total liabilities 65,614 47,066 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 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 ) Paid-in capital 704,557 708,523 Accumulated deficit (702,400 ) (692,876 ) Total IMH Financial Corporation stockholders' equity (deficit) (4,941 ) 9,547 Non-controlling interests 26,965 19,616 Total stockholders' equity 22,024 29,163 Total liabilities and stockholders’ equity $ 157,038 $ 143,639 5F-3
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenue | ||||||||||||||||
Operating property revenue | $ | 2,105 | $ | 654 | $ | 3,668 | $ | 1,682 | ||||||||
Mortgage loan income, net | 641 | 44 | 1,266 | 52 | ||||||||||||
Management fees, investment, and other income | 255 | 360 | 292 | 508 | ||||||||||||
Total revenue | 3,001 | 1,058 | 5,226 | 2,242 | ||||||||||||
Operating Expenses | ||||||||||||||||
Operating property direct expenses (exclusive of interest and depreciation) | 2,099 | 620 | 4,334 | 1,439 | ||||||||||||
Expenses for non-operating real estate owned | 171 | 170 | 367 | 336 | ||||||||||||
Professional fees | 754 | 1,193 | 1,629 | 2,122 | ||||||||||||
General and administrative expenses | 1,708 | 2,613 | 3,588 | 4,358 | ||||||||||||
Interest expense | 780 | 441 | 1,525 | 874 | ||||||||||||
Depreciation and amortization expense | 303 | 49 | 644 | 93 | ||||||||||||
Total Operating Expenses | 5,815 | 5,086 | 12,087 | 9,222 | ||||||||||||
| Recovery of Investment and Credit Losses, Gain on Disposal, and Equity Method Loss from Unconsolidated Entities, Net | ||||||||||||||||
Gain on disposal of assets, net | (142 | ) | (1,683 | ) | (395 | ) | (1,715 | ) | ||||||||
Recovery of investment and credit losses, net | (175 | ) | (272 | ) | (175 | ) | (338 | ) | ||||||||
| Equity method loss from unconsolidated entities, net | - | 52 | - | 171 | ||||||||||||
| Total Recovery of Investment and Credit Losses, Gain on Disposal, and Equity Method Loss from Unconsolidated Entities, Net | (317 | ) | (1,903 | ) | (570 | ) | (1,882 | ) | ||||||||
Total costs and expenses | 5,498 | 3,183 | 11,517 | 7,340 | ||||||||||||
| Loss from Continuing Operations, Net of Tax | (2,497 | ) | (2,125 | ) | (6,291 | ) | (5,098 | ) | ||||||||
| Income (loss) from discontinued operations, net of tax | - | (240 | ) | - | 4,736 | |||||||||||
| Net Loss | (2,497 | ) | (2,365 | ) | (6,291 | ) | (362 | ) | ||||||||
| Income (Loss) attributable to noncontrolling interest | 25 | (755 | ) | 115 | (734 | ) | ||||||||||
Cash dividend on redeemable convertible preferred stock | (647 | ) | (533 | ) | (1,239 | ) | (1,061 | ) | ||||||||
Deemed dividend on redeemable convertible preferred stock | (915 | ) | (672 | ) | (1,731 | ) | (1,331 | ) | ||||||||
| Cash dividend on perpetual preferred stock | (142 | ) | - | (142 | ) | - | ||||||||||
| Net Loss Attributable to Common Shareholders | $ | (4,176 | ) | $ | (4,325 | ) | $ | (9,288 | ) | $ | (3,488 | ) | ||||
| Loss per Common Share | ||||||||||||||||
| Basic and diluted, continuing operations | $ | (0.25 | ) | $ | (0.25 | ) | $ | (0.56 | ) | $ | (0.51 | ) | ||||
| Basic and diluted, discontinued operations | $ | - | $ | (0.01 | ) | $ | - | $ | 0.29 | |||||||
| Net basic and diluted, income (loss) per share | $ | (0.25 | ) | $ | (0.26 | ) | $ | (0.56 | ) | $ | (0.22 | ) | ||||
| Weighted average common share outstanding - basic and diluted | 16,696,684 | 16,154,341 | 16,680,988 | 16,121,992 | ||||||||||||
Three Months Ended June 30, Six Months Ended June 30, 2019 2018 2019 2018 Revenues 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 Operating Expenses Operating property direct expenses (exclusive of interest and depreciation) 3,657 2,099 6,007 4,334 Expenses for non-operating real estate owned 83 171 174 367 Professional fees 1,680 754 2,486 1,629 General and administrative expenses 1,560 1,708 3,465 3,588 Interest expense 335 780 791 1,525 Depreciation and amortization expense 321 303 591 644 Total operating expenses 7,636 5,815 13,514 12,087 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 ) Unrealized loss on derivatives 124 — 291 — 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 Loss before provision for income tax (4,070 ) (2,497 ) (9,083 ) (6,291 ) Income tax (provision) benefit — — — — Net Loss (4,070 ) (2,497 ) (9,083 ) (6,291 ) Net (income) loss attributable to non-controlling interests (318 ) 25 (441 ) 115 Cash dividends on Series B redeemable convertible preferred stock (648 ) (647 ) (1,288 ) (1,239 ) Deemed dividend on Series B redeemable convertible preferred stock (954 ) (915 ) (1,889 ) (1,731 ) Cash dividends on Series A redeemable preferred stock (417 ) (142 ) (830 ) (142 ) Net Loss attributable to common shareholders $ (6,407 ) $ (4,176 ) $ (13,531 ) $ (9,288 ) Net Loss per common share Basic and Diluted $ (0.39 ) $ (0.25 ) $ (0.83 ) $ (0.56 ) Weighted average common shares outstanding - basic and diluted 16,375,649 16,696,684 16,383,921 16,680,988 6F-4
Six Months Ended June 30, 2018
Common Stock | Treasury Stock | Paid-in | Accumulated | Total IMH Financial Corporation Stockholders' | Non- controlling | Total Stockholders' | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | capital | deficit | Equity | interest | 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 | - | - | - | - | - | (6,176 | ) | (6,176 | ) | (115 | ) | (6,291 | ) | |||||||||||||||||||||||
Contributions from Hotel Fund investors | - | - | - | - | - | - | - | 4,820 | 4,820 | |||||||||||||||||||||||||||
Distributions to Hotel Fund investors | - | - | - | - | - | - | - | (100 | ) | (100 | ) | |||||||||||||||||||||||||
| Contribution of Hotel Fund capital costs | - | - | - | - | (87 | ) | - | (87 | ) | - | (87 | ) | ||||||||||||||||||||||||
Issuance of common stock warrants | - | - | - | - | 688 | - | 688 | - | 688 | |||||||||||||||||||||||||||
Cash dividends on redeemable convertible preferred stock | - | - | - | - | (1,239 | ) | - | (1,239 | ) | - | (1,239 | ) | ||||||||||||||||||||||||
Deemed dividends on redeemable convertible preferred stock | - | - | - | - | (1,731 | ) | - | (1,731 | ) | - | (1,731 | ) | ||||||||||||||||||||||||
Cash dividends on perpetual preferred stock | - | - | - | - | (142 | ) | - | (142 | ) | - | (142 | ) | ||||||||||||||||||||||||
| Transfer of class C common stock to treasury | - | - | 44,068 | - | - | - | - | - | - | |||||||||||||||||||||||||||
| Stock-based compensation | 517,252 | 4 | - | - | 174 | - | 178 | - | 178 | |||||||||||||||||||||||||||
Balance at June 30, 2018 | 18,596,774 | $ | 185 | 1,870,164 | $ | (6,286 | ) | $ | 712,552 | $ | (685,711 | ) | $ | 20,740 | $ | 11,167 | $ | 31,907 | ||||||||||||||||||
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 ) 7F-5
IMH FINANCIAL CORPORATION
STOCKHOLDERS’ EQUITY Six months ended June 30, 2018 2017 OPERATING ACTIVITIES Net loss Adjustments to reconcile net loss to net cash used in operating activities: Equity method loss from unconsolidated entities Stock-based compensation and option amortization Stock-based compensation related to purchase of treasury stock Gain on disposal assets Amortization of deferred financing costs Depreciation and amortization expense Accretion of mortgage income Accretion of discount on notes payable Non-cash interest expense funded by loan draw Changes in operating assets and liabilities Accrued interest receivable Other receivables Other assets Accrued property taxes Accounts payable and accrued expenses Customer deposits and funds held for others Accrued interest Total adjustments, net INVESTING ACTIVITIES Proceeds from sale of real estate owned, operating properties, and other assets Purchase of property and equipment Mortgage loan investment and funding Investment in unconsolidated entities Investment in real estate owned and other operating properties FINANCING ACTIVITIES Equity issuance costs paid Purchase of interest rate cap Debt issuance costs paid Repayments of notes payable Repayments of capital leases Dividends paid Purchase of treasury stock Distributions to Hotel Fund investors Contributions from Hotel Fund investors CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD CASH, CASH EQUIVALENTS, AND RESTRICTED CASH OF DISCONTINUED OPERATIONS CASH, CASH EQUIVALENTS, AND RESTRICTED CASH OF CONTINUING OPERATIONS, END OF PERIOD Cash paid for interest Cash paid for taxes Non-Cash Investing and Financing Transactions Capital expenditures in accounts payables and accrued expenses Decrease in non-controlling interest through profit participation Non-cash recovery of credit losses Capital lease and other liabilities assumed by buyer in sale of propertyCASH FLOWSthousands)thousands, except share data) $ (6,176 ) $ (1,096 ) Income (loss) allocated to non-controlling interest (115 ) 734 - 171 175 429 - 116 (395 ) (8,506 ) 81 447 644 371 (258 ) 397 446 (228 ) 541 - (12 ) (83 ) (68 ) (211 ) (411 ) 608 37 (191 ) (2,774 ) (2,109 ) 317 1,497 230 (401 ) (1,562 ) (6,959 ) Net cash used in operating activities (7,738 ) (8,055 ) 526 97,052 (24 ) (260 ) (2,920 ) (7,000 ) - (1,810 ) (3,157 ) (1,069 ) Net cash provided by (used in) investing activities (5,575 ) 86,913 Proceeds from issuance of preferred equity 30,000 - (387 ) - (548 ) - - (100 ) - (50,257 ) - (2 ) (1,998 ) (1,066 ) - (338 ) Distributions to noncontrolling interests - (9 ) (100 ) - 4,820 - Net cash provided by (used in) financing activities 31,787 (51,772 ) NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 18,474 27,086 11,932 13,689 30,406 40,775 - 425 $ 30,406 $ 40,350 SUPPLEMENTAL CASH FLOW INFORMATION $ 204 $ 1,500 $ - $ 5 $ 287 $ 446 $ - $ (1,537 ) $ - $ (228 ) $ - $ 4,187
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 Cash dividends on Series B redeemable convertible preferred stock — — — — (648 ) — (648 ) — (648 ) Deemed dividend on Series B redeemable convertible preferred stock — — — — (954 ) — (954 ) — (954 ) Cash dividends on Series A redeemable preferred stock — — — — (417 ) — (417 ) — (417 ) Stock-based compensation 55,680 1 — — 75 — 76 — 76 Balance at June 30, 2019 18,764,758 $ 188 2,370,164 $ (7,286 ) $ 704,557 $ (702,400 ) $ (4,941 ) $ 26,965 $ 22,024 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 8F-6
| 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 | ||||||||||||||||
| 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 | ||||||
| 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 | ||||
structures in an effort to reduce Company overhead.
. The accompanying unaudited condensed consolidated financial statements include the accounts of IMH Financial Corporation itsand 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 determined to beconsidered the primary beneficiary. The preparationIMH 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 in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and, accordingly, ultimate results could materially differ from those estimates. Additionally, interim resultsthey are therefore not necessarily indicative of full year performance. In our opinion, the accompanying condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods. consolidated.
On January 1, 2018, we adopted the requirements of Accounting Standards Update ("ASU") No. 2014-09 ("ASU 2014-09"), Revenue from Contracts with Customers (“Topic 606”). The adoption of Topic 606 had no impact on the Company’s consolidated financial statements. See “Note 2 - Summary of Significant Accounting Policies” below for additional information.
Liquidity
As of June 30, 2018, our accumulated deficit aggregated $685.7 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”) assets acquired primarily through foreclosure, as well as ongoing net operating losses resulting from the lack of income-producing assets, and the high cost of our previous debt financing. Beginning in 2008, we experienced significant defaults and foreclosures in our mortgage loan portfolio due primarily to the erosion of the U.S. and global real estate and credit markets during those periods. As a result, since that time we have been focused on enforcing our rights under our loan documents, working to repossess the collateral properties underlying those loans for purposes of disposing of or developing such assets, and pursuing recovery from guarantors under such loans.
Our liquidity plan has included obtaining additional debt and equity financing, and selling the majority of our legacy real estate assets. We secured various financings between 2011 and 2018 which, along with proceeds from asset sales, have been our primary sources of working capital. As part of our investment strategy to acquire income-producing assets, we acquired MacArthur Place and made certain mortgage investments during fiscal 2017 and 2018.
As further described 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 Note 11, on February 9, 2018,September 2019.
In addition, on May 31, 2018, the Company entered into a Series A Senior Perpetual Preferred Stock Subscription Agreement with Chase Funding, pursuant to which Chase Funding agreed to purchase 22,000 shares of Series A Senior Perpetual Preferred Stock, $0.01 par value per share, of the Company (the “Series A Preferred Stock”), at a purchase price of $1,000 per share, for a total purchase price of $22.0 million. The Company intends to use the proceeds from the sale of these shares for general corporate purposes and pursuing its investment strategy. Dividends on the Series AB Preferred Stock are cumulative and accrue fromcollectively referred to herein as the issue date at the rate of 7.5% of the issue price per year, payable quarterly“Series B Investors”.
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, including theunsecured exchange offering notes (“EO Notes”) with a face value of $10.2 million Exchange Notes debt duematured on April 29, 2019 and were repaid in April 2019 (see Note 9 for additional information), dividends to our preferred shareholders, as well as to acquire our target assets. full.
While we
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
Redeemable Convertible Preferred Stock
During the six months ended June 30, 2018,2018.
Perpetual Preferred Stock
As described in Note 11, the Company issued 22,000 shares perpetual preferred stock to Chase Funding during the six months ended June 30, 2018. While the perpetual preferred stock ranks senior to all other classes or series of shares of preferred or common stock, is does not have voting rights, is not convertible to common stock and has no stated redemption date. After five years, the holder of these shares has call rights to require the Company to redeem all of the shares at the redemption price. However, since the perpetual preferred stock maintains characteristics of both debt and equity as of the reporting date, such preferred stock has been presented in the mezzanine equity section of the accompanying condensed consolidated balance sheets in accordance with GAAP.
Derivative Instruments and Hedging
We occasionally use interest rate derivatives to mitigate our risks against rising variable interest rate debts. Our interest rate derivatives currently consist of one interest rate cap which is not designated as a hedge. As such, this derivative isare recorded at fair value in accordance withat the applicable authoritative accounting guidance. Interest rate derivativestime of foreclosure.
Revenue Recognition
In the first quarter of 2018, the Company implemented ASU 2014-09. Revenue is measured based on a consideration specified in a contract with a customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. ASU 2014-09 defines a five-step process to achieve this core principle.
Mortgage Investment Revenue Recognition
Interest on mortgage loans is recognized as revenue when earned using the interest method based on a 360 or 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 it is past its scheduled maturity by more than 90 days, when it becomes delinquent as to interest due by more than 90 days or 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 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 on the condensed consolidated 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.
The significant accounting policies that have changed
Hotel Revenues
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 identifieduse 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.
• Cancellable room reservations or ancillary services are typically 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 satisfied as each distinct good or service is provided, which is reflected by the durationfinancial condition of the room reservation.
• Material rightstenant, 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
• Other ancillary goods and services are purchased independentlyterms of the room reservation at standalone selling pricesleases. The cumulative differences between rental income recognized in the Company’s condensed unaudited consolidated statements of operations and 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, food and beverage sales, and other ancillary goods and services. Revenue is recognized when rooms are occupied or goods and servicescontractual payment terms have been delivered or rendered, respectively. Payment terms typically align with when the goodsrecorded as deferred rental income and services are provided.
Although the transaction prices of room rentals, goods and other services are generally fixed and basedpresented 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.
accompanying condensed consolidated balance sheets.
June 30, | June 30, | December 31, | ||||||||||
2018 | 2017 | 2017 | ||||||||||
Cash and cash equivalents | $ | 30,098 | $ | 40,164 | $ | 11,789 | ||||||
Funds held by lender and restricted cash | 308 | 611 | 143 | |||||||||
Total cash, cash equivalents, and restricted cash | $ | 30,406 | $ | 40,775 | $ | 11,932 | ||||||
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued
Recent Accounting Pronouncements
Adopted Accounting Standards
In May 2014,
| 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 | ||||
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10), which requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this update also require an entity to present separately in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this update require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. We adopted this standard effective January 1, 2018. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which is intended to address diversity in practice related to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in ASU 2016-15 address eight specific cash flow issues as well as application of the predominance principle (dependence on predominant source or use of receipt or payment) and are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. ASU 2016-15 requires retrospective adoption unless it is impracticable to apply, in which case it is to be applied prospectively as of the earliest date practicable. We adopted the requirements of ASU 2016-15 which had no significant impact on the consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. In accordance with ASU 2016-18, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning of period and end of period amounts shown on the statements of cash flows. The amendments of ASU 2016-18 are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. We adopted the requirements of ASU 2016-18 which resulted in a change in the presentation of the statement of cash flows. The Company’s statement of cash flows forrespectively. During the six months ended June 30, 2017 has been retroactively restated2019, 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.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public companies, ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those periods. We adopted this standard effective January 1, 2018. Under the new standard, certain future acquisitions may be considered asset acquisitions rather than business combinations, which would affect capitalization of acquisitions costs (such costs are expensed for business combinations and capitalized for asset acquisitions).
In February 2017, the FASB issued ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets(Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance andAdopted Accounting for Partial Sales of Nonfinancial Assets (ASU “2017-05”), which clarifies the scope of ASC Subtopic 610-20, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets and adds guidance for partial sales of nonfinancial assets. ASU 2017-05 is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. An entity may elect to apply ASU 2017-05 under a retrospective or modified retrospective method. We adopted this standard effective January 1, 2018, under the modified retrospective method. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) . The ASU provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. ASU 2017-09 does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions or award classification and would not be required if the changes are considered non-substantive. The amendments of this ASU are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. We adopted this standard effective January 1, 2018. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This ASU codifies existing SEC guidance contained in SEC Staff Accounting Bulletin No. 118 (SAB 118), which expresses the view of the staff regarding application of existing guidance for the accounting for income taxes as it relates to the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) which was signed into law in the fourth quarter of 2017. In accordance with ASU 2018-05, the Company has recorded provisional estimates for the accounting impacts of the Tax Act, including the transition tax, deferred tax remeasurements, and other items, due to the uncertainty regarding how these provisions are to be implemented and additional anticipated forthcoming guidance. Management has completed the analysis of the impacts of the Tax Act and we adopted ASU 2018-05, which had no impact to the consolidated financial statements during 2018.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception, (“ASU 2017-11”). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. We adopted this standard effective January 1, 2018. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued
Accounting Standards Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). This new standard establishes a right-of-use (ROU)ROU model that requires a lessee to record a ROU asset and 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. A modified retrospectiveIn July 2018, the FASB issued ASU No. 2018-11 which provides an alternative transition approach ismethod that allows entities to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to
accounting pronouncement in fiscal 2019.
In June 2018, the FASB issued ASU 2018-07, Stock Compensation - Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which intended to simplify nonemployee share-based payment accounting. This new guidance will more closely align the accounting for share-based payment awards issued to employees and nonemployees. This guidance is effective for fiscal years beginning after December 15, 2018 and for interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.
NOTE 3 — REVENUE
On January 1, 2018, we adopted Topic 606 using
| 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 | ||||||||
operations. Rooms revenue represents revenue from the occupancy of our hotel rooms and is driven by the occupancy and average daily rate charged. Rooms revenue includes revenue for guest no-shows, day use, and 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.
The Company derives hotel revenues from our hotel in Sonoma, California.
Following is a breakdown of revenue by source (in thousands):
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Operating property revenue | ||||||||||||||||
Rooms | $ | 1,205 | $ | - | $ | 1,897 | $ | - | ||||||||
Golf range fees | - | 245 | - | 820 | ||||||||||||
Banquet | 96 | 64 | 276 | 114 | ||||||||||||
Food and beverage | 523 | 132 | 1,008 | 352 | ||||||||||||
Spa and fitness center | 188 | 115 | 328 | 240 | ||||||||||||
| Other | 93 | 98 | 159 | 156 | ||||||||||||
| Total operating property revenue | 2,105 | 654 | 3,668 | 1,682 | ||||||||||||
Mortgage loan income | 641 | 44 | 1,266 | 52 | ||||||||||||
Management fees, investment and other income | 255 | 360 | 292 | 508 | ||||||||||||
| Total revenue | $ | 3,001 | $ | 1,058 | $ | 5,226 | $ | 2,242 | ||||||||
Interest on mortgage loans is recognized as revenue when earned using the interest method based on a 360 or 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) it becomes delinquent as to interest due by more than 90 days; or (iii) 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.
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 twoone new loans. The firstconstruction loan is ain the principal amount of $13.1 million, of which we funded $0.9 million of construction loan bearing annual interest at 8.5% plus one-month LIBOR, with an original maturity date of July 18, 2020 and a six-month extension option. As of June 30, 2018, the Company had not advanced any proceeds under the loan agreement pending the borrower meeting certain equity requirements. The loan is collateralized by a first lien security interest in certain real and personal property and related improvements thereon located in Phoenix, Arizona. The second loan was a mortgage loan for $3.0 million bearing annual interest rate of 6% plus one-month LIBOR (subject to an 8% interest rate floor), and an exit fee equal to 1% of the principal balance. The loan is collateralized by a first lien security interest in a residential unit located in New York, NY. The loan provides for interest only payments payable monthly during the initial 12 month term with a balloon payment due upon maturity. The borrower has the option to extend the loan by six months. We did not originate or sell any mortgage loansdraws during the six months ended June 30, 2017.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 — OPERATING PROPERTIES, REAL ESTATE HELD FOR SALE AND OTHER REAL ESTATE OWNED AND OPERATING PROPERTIES
respectively.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INVESTMENTS
— VARIABLE INTEREST ENTITIES
Assets, Liabilities, and Losses of Consolidated VIE's | June 30, 2018 | *December 31, 2017 | ||||||
Total assets | $ | 72,600 | $ | 69,480 | ||||
Total liabilities | 32,250 | 30,240 | ||||||
Net loss | (2,330 | ) | (1,480 | ) | ||||
* As restated
During
| June 30, 2019 | December 31, 2018 | |||||||
| Total assets | $ | 97,730 | $ | 85,240 | ||||
| Total liabilities | 57,640 | 37,770 | ||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Net loss | $ | (2,890 | ) | $ | (833 | ) | $ | (6,040 | ) | $ | (2,333 | ) | ||||
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 — FAIR VALUE
Other REO, and Derivative Instruments
As described in Note 7, during the six months ended June 30, 2018, we purchased
Fair Value Measurements of Equity Securities
As described elsewhere in this Form 10-Q,2019, respectively, and none during the three and six months ended June 30, 2018, we issued 2,352,941 shares of Series B-3 redeemable preferred convertible stock and a detachable common stock warrant to purchase 600,000 shares of common stock in connection with a financing transaction with Chase Funding. During the six months ended June 30, 2018, we also issued 22,000 shares of Series A Senior Perpetual Preferred Stock. In order to estimate the fair value of the securities issued in this transaction pursuant to applicable accounting guidance, we engaged a third party valuation firm to assist us in our fair value assessment as our securities are not traded on an open exchange. In estimating fair value, the valuation firm considered the negotiated terms of this transaction, utilized certain current and prospective financial and operational data provided by management, obtained financial and other data from various public, financial, and industry sources, and evaluated applicable economic and industry conditions as of the valuation date, and their effects on the Company. Based on this analysis, management estimated the fair value of the equity securities issued or granted in connection with the transaction completed February 9, 2018 for the Series B-3 Preferred Stock and May 31, 2018 for the Series A Senior Perpetual Preferred Stock as follows:
Subject securities | Estimated Fair Value per Share | |||
Series B-3 Preferred Stock | $ | 4.12 | ||
| Series A Senior Perpetual Preferred Stock | $ | 1,000 | ||
JPM Warrants | $ | 1.52 | ||
We accounted for the issuance of preferred convertible stock and common stock warrants in accordance with applicable accounting guidance, under which we allocated the $8.0 million investment amount in proportion to the relative fair value of the preferred convertible stock and common stock warrants. The allocated relative fair value of the warrants of $0.7 million was recorded as additional paid-in capital with an offsetting discount to the preferred convertible stock during the three months ended June 30, 2018. The common stock warrants have an exercise price of $2.25, a contractual term of 2 years and are not exercisable until February 9, 2021. The fair value of the common stock warrants was estimated at $0.9 million on the date of issuance using the Black-Scholes valuation model based on the exercise price of the award and other assumptions relating to expected dividend yield, expected stock price volatility, risk-free interest rate, and expected life of options granted. Expected volatility is based on the historical volatility of our peer companies’ stock for the length of time corresponding to the expected term of the warrants. The expected dividend yield is based on our historical and projected dividend payments. The risk-free interest rate is based on the U.S. treasury yield curve on the grant date for the expected term of the option. A summary of these applicable factors used in the valuation follows:
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three and six months ended June 30, 2019 and 2018, and 2017.respectively. We recorded other net recoveries of investment and credit losses totaling $0.2$1.1 million during the three and six months ended June 30, 20182019, and $0.3$0.2 million for the three and six months ended June 30, 2017,2018, resulting from the collection of cash and/or other assets recovered from certain guarantors on certain legacy loans and insurance recoveries received during the period.2018 and December 31, 2017,2019, the valuation allowance on our mortgage loans totaled $12.7 million, representing 35.9%49.9% of the total outstanding loan principal and 39.2%, respectively,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, 2018,2019, 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 estimated fair value as of June 30, 20182019 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.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 — NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
Note Payables, Net | ||||||||
| $32.3 million note payable to MidFirst Bank secured by a first lien on an operating hotel property, interest-only payments due monthly at the 30-day LIBOR (2.09% and 1.56% at June 30, 2018 and December 31, 2017, respectively) plus 3.25% to 3.75% depending on compensating balances and meeting certain financial thresholds and terms (5.41% and 5.31% effective rate at June 30, 2018 and December 31, 2017, respectively), matures October 1, 2020 with two one-year extension options, with construction completion and repayment guarantees provided by the Company | $ | 20,098 | $ | 19,557 | ||||
$5.9 million note payable secured by real estate in New Mexico, annual interest only payments based on annual interest rates of prime plus 2.0% through December 31, 2017, and prime plus 3.0% thereafter (7.50% and 5.75% at June 30, 2018 and December 31, 2017, respectively), matures December 31, 2019 | 5,940 | 5,940 | ||||||
Unsecured note payable under class action settlement, face amount of $10.2 million, net discount of $0.8 million and $1.2 million at June 30, 2018 and December 31, 2017, respectively, 4% annual coupon interest rate (14.6% effective yield), interest payable quarterly, matures April 28, 2019 | 9,397 | 8,938 | ||||||
$2.3 million 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 June 30, 2018) | 103 | 116 | ||||||
Total notes payable | 35,538 | 34,551 | ||||||
| Less: deferred financing costs of notes payable | (365 | ) | (446 | ) | ||||
| Total notes payable, net | $ | 35,173 | $ | 34,105 | ||||
| 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 | ||||
$0.3 million and $0.8 million for the three and six months ended June 30, 2019. There was no capitalized interest during 2018.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 — NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS – continued
Exchange Notes
occupancy percentages are achieved. The master purchase agreement is subject to a third party loan servicing agreement.
Year | Amount | |||
2018 | $ | 14 | ||
2019 | 16,130 | |||
| 2020 | 20,124 | |||
2021 | 26 | |||
2022 | 8 | |||
| Unamortized discounts | (764 | ) | ||
Total | $ | 35,538 | ||
| Year | Amount | |||
| 2019 | $ | 16,954 | ||
| 2020 | 32,616 | |||
| 2021 | 26 | |||
| 2022 | 8 | |||
| Less: deferred financing costs of notes payable | (346 | ) | ||
| Total | $ | 49,258 | ||
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 –— SEGMENT INFORMATION
June 30, | December 31, | |||||||
Balance Sheet Items | 2018 | 2017 | ||||||
Total Assets | ||||||||
Mortgage and REO - Legacy portfolio and other options | $ | 71,057 | $ | 66,577 | ||||
Hospitality and entertainment operations | 40,953 | 39,337 | ||||||
Corporate and other | 27,545 | 8,544 | ||||||
Consolidated total | $ | 139,555 | $ | 114,458 | ||||
| Six months ended June 30, | ||||||||
Cash Flow Items | 2018 | 2017 | ||||||
Expenditures for additions to long-lived assets | ||||||||
Mortgage and REO - Legacy portfolio and other options | $ | 1,421 | $ | 2,230 | ||||
Hospitality and entertainment operations | 1,736 | 649 | ||||||
Corporate and other | 24 | 260 | ||||||
| Consolidated total | $ | 3,181 | $ | 3,139 | ||||
Three 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 | ||||||||||||||||
| Mortgage loan income | $ | 641 | $ | - | $ | - | $ | 641 | ||||||||
| Operating property, management fees, and other | - | 2,346 | 14 | 2,360 | ||||||||||||
| Total Revenue | 641 | 2,346 | 14 | 3,001 | ||||||||||||
| Total Operating Expenses | 557 | 3,039 | 2,219 | 5,815 | ||||||||||||
Other (Income) expense | ||||||||||||||||
| Gain on disposal of assets, net | (142 | ) | - | - | (142 | ) | ||||||||||
| Recovery of credit losses | (175 | ) | - | - | (175 | ) | ||||||||||
| Total Other (Income) | (317 | ) | - | - | (317 | ) | ||||||||||
| Total Costs and expense, net | 240 | 3,039 | 2,219 | 5,498 | ||||||||||||
| Income (Loss) from continuing operations, before income taxes | 401 | (693 | ) | (2,205 | ) | (2,497 | ) | |||||||||
| Net Income (Loss) | $ | 401 | $ | (693 | ) | $ | (2,205 | ) | $ | (2,497 | ) | |||||
Three months ended June 30, 2017 | ||||||||||||||||
Income Statement Items | Mortgage and REO Legacy Portfolio and Other Operations | Hospitality and Entertainment Operations | Corporate and Other | Consolidated | ||||||||||||
Revenues | ||||||||||||||||
Mortgage loan income | $ | 44 | $ | - | $ | - | $ | 44 | ||||||||
Operating property, management fees, and other | - | 884 | 130 | 1,014 | ||||||||||||
Total Revenue | 44 | 884 | 130 | 1,058 | ||||||||||||
Total Operating Expenses | 1,073 | 709 | 3,304 | 5,086 | ||||||||||||
Other (Income) expense | ||||||||||||||||
Gain on disposal of assets, net | (1,514 | ) | (169 | ) | - | (1,683 | ) | |||||||||
Recovery of credit losses | (212 | ) | - | (60 | ) | (272 | ) | |||||||||
Equity loss from unconsolidated entities, net | 52 | - | - | 52 | ||||||||||||
Total Other (Income) | (1,674 | ) | (169 | ) | (60 | ) | (1,903 | ) | ||||||||
Total Costs and expense, net | (601 | ) | 540 | 3,244 | 3,183 | |||||||||||
Income (Loss) from continuing operations, before income taxes | 645 | 344 | (3,114 | ) | (2,125 | ) | ||||||||||
Income (Loss) from discontinued operations, net of tax | - | (240 | ) | - | (240 | ) | ||||||||||
Net Income (Loss) | $ | 645 | $ | 104 | $ | (3,114 | ) | $ | (2,365 | ) | ||||||
| June 30, | December 31, | |||||||
| Balance Sheet Items | 2019 | 2018 | ||||||
| Total Assets | ||||||||
| Mortgage and REO Legacy portfolio and other operations | $ | 81,744 | $ | 67,658 | ||||
| Hospitality and entertainment operations | 64,075 | 52,753 | ||||||
| Corporate and other | 11,219 | 23,228 | ||||||
| Consolidated total | $ | 157,038 | $ | 143,639 | ||||
| Six Months Ended June 30, | ||||||||
| Cash Flow Items | 2019 | 2018 | ||||||
| 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 | ||||||
| Corporate and other | 23 | 24 | ||||||
| Consolidated total | $ | 9,827 | $ | 3,181 | ||||
| Three 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 | $ | 1,482 | $ | — | $ | 1,880 | ||||||||
| Mortgage loan income | 447 | — | — | 447 | ||||||||||||
| Management fees, investment and other income | 3 | — | 205 | 208 | ||||||||||||
| Total revenue | 848 | 1,482 | 205 | 2,535 | ||||||||||||
| Total operating expenses | 1,134 | 4,355 | 2,147 | 7,636 | ||||||||||||
| 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 | ) | ||||||||||
| Total costs and expense, net | (21 | ) | 4,479 | 2,147 | 6,605 | |||||||||||
| Income (loss) before income taxes | 869 | (2,997 | ) | (1,942 | ) | (4,070 | ) | |||||||||
| (Provision for) benefit from income taxes | — | — | — | — | ||||||||||||
| Net income (loss) | $ | 869 | $ | (2,997 | ) | $ | (1,942 | ) | $ | (4,070 | ) | |||||
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 | ||||||||||||||||
Mortgage loan income | $ | 1,266 | $ | - | $ | - | $ | 1,266 | ||||||||
| Operating property, management fees, and other | - | 3,911 | 49 | 3,960 | ||||||||||||
| Total Revenue | 1,266 | 3,911 | 49 | 5,226 | ||||||||||||
| �� | ||||||||||||||||
| Total Operating Expenses | 1,413 | 6,234 | 4,440 | 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 | 843 | 6,234 | 4,440 | 11,517 | ||||||||||||
Income (Loss) from continuing operations, before income taxes | 423 | (2,323 | ) | (4,391 | ) | (6,291 | ) | |||||||||
Net Income (Loss) | $ | 423 | $ | (2,323 | ) | $ | (4,391 | ) | $ | (6,291 | ) | |||||
Six months ended June 30, 2017 | ||||||||||||||||
Income Statement Items | Mortgage and REO Legacy Portfolio and Other Operations | Hospitality and Entertainment Operations | Corporate and Other | Consolidated | ||||||||||||
| Revenues | ||||||||||||||||
| Mortgage loan income | $ | 52 | $ | - | $ | - | $ | 52 | ||||||||
| Operating property, management fees, and other | - | 1,995 | 95 | 2,190 | ||||||||||||
| Total Revenue | 52 | 1,995 | 95 | 2,242 | ||||||||||||
| Total Operating Expenses | 2,400 | 1,504 | 5,318 | 9,222 | ||||||||||||
Other (Income) expense | ||||||||||||||||
| Gain on disposal of assets, net | (1,546 | ) | (169 | ) | - | (1,715 | ) | |||||||||
| Recovery of credit losses | (278 | ) | - | (60 | ) | (338 | ) | |||||||||
| Equity loss from unconsolidated entities, net | 171 | - | - | 171 | ||||||||||||
| Total Other Income | (1,653 | ) | (169 | ) | (60 | ) | (1,882 | ) | ||||||||
| Total Costs and expense, net | 747 | 1,335 | 5,258 | 7,340 | ||||||||||||
| Income (Loss) from continuing operations, before income taxes | (695 | ) | 660 | (5,063 | ) | (5,098 | ) | |||||||||
| Income from discontinued operations, net of tax | - | 4,736 | - | 4,736 | ||||||||||||
| Net Income (Loss) | $ | (695 | ) | $ | 5,396 | $ | (5,063 | ) | $ | (362 | ) | |||||
| Three 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 | $ | — | $ | 2,105 | $ | — | $ | 2,105 | ||||||||
| Mortgage loan income | 641 | — | — | 641 | ||||||||||||
| Management fees, investment and other income | — | 242 | 13 | 255 | ||||||||||||
| Total revenue | 641 | 2,347 | 13 | 3,001 | ||||||||||||
| Total operating expenses | 556 | 3,019 | 2,240 | 5,815 | ||||||||||||
| Other (income) expense | ||||||||||||||||
| Gain on disposal of assets, net | (142 | ) | — | — | (142 | ) | ||||||||||
| Recovery of credit losses | (175 | ) | — | — | (175 | ) | ||||||||||
| Total other income | (317 | ) | — | — | (317 | ) | ||||||||||
| Total costs and expense, net | 239 | 3,019 | 2,240 | 5,498 | ||||||||||||
| Income (loss) from continuing operations, before income taxes | 402 | (672 | ) | (2,227 | ) | (2,497 | ) | |||||||||
| (Provision for) benefit from income taxes | — | — | — | — | ||||||||||||
| Net income (loss) | $ | 402 | $ | (672 | ) | $ | (2,227 | ) | $ | (2,497 | ) | |||||
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 | ) | |||||
| 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 | ) | |||||
2018.
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 SRE Monarch pursuant to a Preferred Stock Purchase Agreement among the Company, Chase Funding and SRE Monarch.
initial purchaser of such shares.
Dividends on the Series B-3 Preferred Stock are cumulative and accrue from the issue date and compound quarterly at the rate of 5.65% of the issue price per year, and are payable quarterly in arrears.
Holders of the Series B-3 Preferred Stock are entitled to receive a liquidation preference of 145% of the sum of the original price per share of Series B-3 Preferred Stock plus all accrued and unpaid dividends upon in accordance with the Second Amended Certificate of Designation.
Concurrent with the execution of the Subscription Agreement, the Company, Juniper, and Chase Funding entered into an Amended and Restated Investment Agreement pursuant to which the Company made certain representations and agreed to abide by certain covenants, including, but not limited to covenants relating to exemptions from registration under the Investment Company Act of 1940, as amended. The Amended and Restated Investment Agreement has been further amended and restated pursuant to the Second Amended and Restated Investment Agreement. See below for more information regarding the Second Amended and Restated Investment Agreement.
On February 9, 2018, the Company issued to Chase Funding a warrant to acquire up to 600,000 shares of the Company’s common stock (the “JPM Warrant”) in accordance with the terms of the Subscription Agreement.. 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.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE – continued
Series A Redeemable Preferred Perpetual Stock Issuance
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 each as set forthwhich 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 AB Preferred Certificate of Designation.
Additionalsheets.
Our First Amended and Restated 2010 IMH Financial Corporation Employee Stock Incentive Plan (“Equity Incentive Plan”) provides for awards of stock options, stock appreciation rights, restricted stock units and other performance based awards
was treated as a treasury stock repurchase as reflected in the condensed consolidated balance sheet.
In addition, during the six months ended June 30, 2018, the Company issued a total of 44,132 shares of restricted common stock to our non-employee independent directors pursuant to the 2014 Non-Employee Director Compensation Plan for the fiscal year 2017, which vested on June 29, 2018. Those restricted common stock have a fair value of $1.81 per share.
that period.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE – continued
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, 20182019 and 20172018 (amounts in thousands, except for per share data):
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Earnings allocable to common shares: | ||||||||||||||||
Numerator - Loss Attributable to Common Shareholders: | ||||||||||||||||
Net Loss from continuing operations | $ | (2,497 | ) | $ | (2,125 | ) | $ | (6,291 | ) | $ | (5,098 | ) | ||||
Loss attributable to noncontrolling interest loss allocation | 25 | (755 | ) | 115 | (734 | ) | ||||||||||
| Preferred dividends - cash and deemed | (1,704 | ) | (1,205 | ) | (3,112 | ) | (2,392 | ) | ||||||||
| Net Loss from continuing operations attributable to common shareholders | (4,176 | ) | (4,085 | ) | (9,288 | ) | (8,224 | ) | ||||||||
Net Income from discontinued operations attributable to common shareholders | - | (240 | ) | - | 4,736 | |||||||||||
| Net (Income) Loss attributable to common shareholders | $ | (4,176 | ) | $ | (4,325 | ) | $ | (9,288 | ) | $ | (3,488 | ) | ||||
Denominator - Weighted average shares: | ||||||||||||||||
Weighted average number of common shares - basic & diluted | 16,696,684 | 16,154,341 | 16,680,988 | 16,121,992 | ||||||||||||
Basic and diluted earnings per common share: | ||||||||||||||||
Net loss per share, continuing operations | $ | (0.15 | ) | $ | (0.18 | ) | $ | (0.37 | ) | $ | (0.36 | ) | ||||
Preferred dividends per share | (0.10 | ) | (0.07 | ) | (0.19 | ) | (0.15 | ) | ||||||||
Net loss per share, continuing operations, net | (0.25 | ) | (0.25 | ) | (0.56 | ) | (0.51 | ) | ||||||||
Net income per share, discontinued operations | - | (0.01 | ) | - | 0.29 | |||||||||||
Net income (loss) attributable to common shareholders per share | $ | (0.25 | ) | $ | (0.26 | ) | $ | (0.56 | ) | $ | (0.22 | ) | ||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Earnings allocable to common shares: | ||||||||||||||||
| Numerator - Loss Attributable to Common Shareholders: | ||||||||||||||||
| Net loss | $ | (4,070 | ) | $ | (2,497 | ) | $ | (9,083 | ) | $ | (6,291 | ) | ||||
| Net (income) loss attributable to non-controlling interest | (318 | ) | 25 | (441 | ) | 115 | ||||||||||
| Preferred dividends | (2,019 | ) | (1,704 | ) | (4,007 | ) | (3,112 | ) | ||||||||
| Net loss attributable to common shareholders | $ | (6,407 | ) | $ | (4,176 | ) | $ | (13,531 | ) | $ | (9,288 | ) | ||||
| Denominator - Weighted average shares: | ||||||||||||||||
| Weighted average common shares outstanding for basic and diluted earnings per common share | 16,375,649 | 16,696,684 | 16,383,921 | 16,680,988 | ||||||||||||
| Basic and diluted earnings per common share: | ||||||||||||||||
| Net loss per common share | $ | (0.27 | ) | $ | (0.15 | ) | $ | (0.58 | ) | $ | (0.37 | ) | ||||
| Preferred dividends per share | (0.12 | ) | (0.10 | ) | (0.24 | ) | (0.19 | ) | ||||||||
| Net loss attributable to common shareholder per share | $ | (0.39 | ) | $ | (0.25 | ) | $ | (0.83 | ) | $ | (0.56 | ) | ||||
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Options to purchase common stock | 1,062,807 | 939,951 | 1,066,465 | 939,312 | ||||||||||||
Restricted stock | 372,815 | 916,492 | 382,638 | 789,197 | ||||||||||||
Warrants to purchase common stock | 2,600,000 | 2,000,000 | 2,470,718 | 2,000,000 | ||||||||||||
Convertible preferred stock | 10,552,941 | 8,200,000 | 10,045,954 | 8,200,000 | ||||||||||||
Total | 14,588,563 | 12,056,443 | 13,965,775 | 11,928,509 | ||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||
| Options to purchase common stock | 1,085,497 | 1,062,807 | 1,085,497 | 1,066,465 | ||||||||
| Restricted stock | 249,486 | 372,815 | 230,134 | 382,638 | ||||||||
| Warrants to purchase common stock | 2,600,000 | 2,600,000 | 2,600,000 | 2,470,718 | ||||||||
| Convertible preferred stock | 10,552,941 | 10,552,941 | 10,552,941 | 10,045,954 | ||||||||
| Total | 14,487,924 | 14,588,563 | 14,468,572 | 13,965,775 | ||||||||
NOTE 12 — INTANGIBLE ASSETS AND GOODWILL
- continued
| Goodwill | Other intangibles, net | ||||||
| Balance at December 31, 2018 | $ | 15,357 | $ | 641 | |||
| Reductions: | |||||||
| Amortization expense | — | (140 | ) | ||||
| Balance at June 30, 2019 | $ | 15,357 | $ | 501 | |||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Amortizing intangible assets: | ||||||||||||||||||||||||
Trade name and other | $ | 90 | $ | 90 | $ | (10 | ) | $ | (3 | ) | $ | 80 | $ | 87 | ||||||||||
Customer relationships | 800 | 800 | (200 | ) | (29 | ) | 600 | 771 | ||||||||||||||||
Non-Amortizing intangible assets: | ||||||||||||||||||||||||
Liquor license | 100 | 100 | - | - | 100 | 100 | ||||||||||||||||||
Goodwill | 15,380 | 15,380 | - | - | 15,380 | 15,380 | ||||||||||||||||||
Total intangible assets | $ | 16,370 | $ | 16,370 | $ | (210 | ) | $ | (32 | ) | $ | 16,160 | $ | 16,338 | ||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
| June 30, | December 31, | June 30, | December 31, | June 30, | December 31, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||
| Amortizing intangible assets: | ||||||||||||||||||||
| Trade name and other | $ | 90 | $ | 90 | $ | (22 | ) | $ | (16 | ) | $ | 68 | $ | 74 | ||||||
| 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 | |||||||
fourth quarter of each year.
Year | Amount | |||
2018 | $ | 140 | ||
2019 | 280 | |||
2020 | 213 | |||
2021 | 13 | |||
2022 | 13 | |||
Thereafter | 21 | |||
Total | $ | 680 | ||
| Year | Amount | |||
| 2019 | $ | 140 | ||
| 2020 | 213 | |||
| 2021 | 13 | |||
| 2022 | 13 | |||
| 2023 | 13 | |||
| Thereafter | 9 | |||
| Total | $ | 401 | ||
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 — COMMITMENTS AND CONTINGENCIES
Well Repair Commitment
Certainthe Hotel Fund in excess of the New Mexico Partnerships hold ownershipreimbursement of rightsour initial investment, and to develop water on various parcels in Sandoval County, New Mexico. In order to preserve those rights, the related partnerships have agreed with the relevant New Mexico governmental authorities to undertake a remediation plan to replace the infrastructure of two existing deep well groundwater wells on one of the parcels as a more permanent solution. Under the terms of certain secured promissory notes with the related entities, theextent necessary, Company agreed to fund the infrastructure development costs under certain secured note agreements. Total projected well development and related costs are approximately $3.0 million, of which $1.2 million was incurred during the six months ended June 30, 2018, and $2.1 million has been incurred to date. The balance of remaining well repair work and related costs are expected to be completed during the third quarter of 2018.
Loan Origination
During the six months ended June 30, 2018, the Company originated a construction loan for up to $13.1 million, bearing interest at 8.5% plus one month LIBOR with an initial maturity date of July 18, 2020. Funding of the loan has not commenced as of June 30, 2018 and will not commence until the borrower meets its equity requirement in the project of $9.7 million, which is expected to be met in the third quarter of 2018.
funds.
As more fully described in our Form 10-K for the year ended December 31, 2017, we
During the three and six months ended June 30, 2018, we recorded cash, receivables and/or other asset recoveries of $0.2 million from guarantor settlements, insurance recoveries and other settlements. During the three and six months ended June 30, 2017, we recorded cash and/or other asset recoveries of $0.3 million from guarantor settlements, insurance recoveries and other settlements.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 — COMMITMENTS AND CONTINGENCIES - continued
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 Damages were not specified. 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. Management believes plaintiff’s claims are without merit and intends to vigorously defend againstDamages were not specified in the Federal Court. A settlement in this claim.On April 20, 2017, a subsidiarymatter was reached in July 2019. Terms of the settlement include the dismissal of the Federal Court litigation. The Company filed an action againstis 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 limited partner inresult of the settlement.LLC (“RNMA I”) withconducted a capital call pursuant to its organizational documents. As a result of the United States Districtcapital call, certain limited partnership interests in RNMA I were transferred to one or more subsidiaries of the Company. One of the limited partners in RNMA I whose limited partnership interests were transferred challenged the effectiveness of the transfer and forfeiture of his limited partnership interests in State Court. On January 4, 2019, the State Court District of Arizona (“USDC”) seeking declaratory reliefissued a minute entry, finding, among other things, that the limited partner’s limited partnership interest in RNMA I has been properly conveyed towas not forfeited. On January 22, 2019, the IMH subsidiary. The USDC dismissed the action andsubsidiary of the Company subsidiary appealed to the United States Court of Appeals, Ninth Circuit (“Ninth Circuit”). The limited partner had disputed the effectivenessfiled a motion for reconsideration of the transfer of his limited partnership interest and the similar transfer of other limited partnership interests in RNMA I to the Company. This limited partner has initiated litigation inminute entry finding. On March 21, 2019, the State Court seeking to resolve this disputeissued an order staying the court’s January 4, 2019 minute entry ruling. An evidentiaryanother forum. This matterearly August 2019 in Arizona state trial court on certain factual questions and the court has been stayed at the Ninth Circuit level pending the litigation described below.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 transfer of the limited partnership interests by the then-acting general partner was done in accordance with the rights granted to the general partner under the relevant organizational documents, and we believe that it is more likely than notprobable that the court in the above referenced matterSeptember 2019 post trial briefing will ultimately agree with that conclusion.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 noncontrollingnon-controlling interests in that partnership of approximately $3.1 million as of June 30,December 31, 2018. The ultimate outcome of this litigation cannot presently be determined with certaintyManagement does not believe that loss is probable and, accordingly, no amounts have been accrued for this matter in the accompanying condensed consolidated financial statements.inhibitsinhibited the Company from effecting the sale or transfer of all or any part of the property previously acquired by the Company through litigation involving Maniatis, including approximately 7,000 acres of land and related water interests in New Mexico, and 111 acres of land in Texas.potential rangeownership interests in, and property of, RNMA I remain subject to the stay until the date that is 30 days after the resolution of the above-described RNMA I dispute. Management does not believe that loss in this matter, if any, is indeterminable. The ultimate outcome of this litigation cannot presently be determinedprobable and, accordingly, no amounts have been accrued for this matter in thesethe accompanying condensed consolidated financial statements.District Court.federal district court. The case arose from claims by anothera creditor of receivership overthe Justin Ranch 123 LLP,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.subsidiaries the a receiving proceeding. The suit seeks damages totalingof $0.3 million, plus attorney fees and punitive damages. The suit has been stayed pending the outcome of other litigation. The Company believes that the claims are without merit and intends to vigorously defend its position. The ultimate outcome of this litigation cannot presently be determined. TheManagement 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.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 — COMMITMENTS AND CONTINGENCIES - continued
11333, Inc. Claim
In 2008, a subsidiary of the Company suffered a loss due to hurricane damage sustained to a property it owned in Galveston, Texas. This property did not have insurance coverage at the time of loss. In March of 2011, the subsidiary filed a claim under an errors and omissions policy with its insurer, Lloyd’s of London (“Lloyd’s”), for failure to maintain adequate insurance on the property. The claim which was denied by Lloyd’s and the Company filed a lawsuit with respect to this policy in the United States District Court of Arizona (the “Court”) against Lloyd’s and the Company’s insurance broker, HUB International Insurance Co. (“HUB”). On April 5, 2017, the Court denied the Company’s motion for summary judgment and granted the defendants’ motions for summary judgment, which the Company has appealed. Lloyd’s and HUB also filed motions seeking reimbursement of attorney fees in the amount of up to $1.2 million and the Company filed opposing motions. During the six months ended June 30, 2018, the Court entered judgments against its subsidiary awarding Lloyd’s attorney’s fees in the amount of $1.2 million and awarding HUB attorney’s fees in the amount of $0.1 million. IMH has filed an amended notice of appeal to include the Court’s rulings on the attorney’s fee awards. Its subsidiary does not have the ability to satisfy these judgments. Nevertheless, based upon the advice of its counsel in this matter, management believes that IMH will not be required to satisfy these judgements on behalf of its subsidiary and as such considers it is more likely than not that the Company will not suffer a loss on this matter. Accordingly, no adjustment relating to this claim has been recorded in the accompanying condensed consolidated financial statements.
Hotel Fund Obligations
As more fully described in our Form 10-K for the year ended December 31, 2017, if
Hotel Fund pursuant to these obligations.
| Three and Six Months Ended June 30, | |||||||
| 2019 | 2018 | ||||||
| Lease revenue | |||||||
| Fixed rent - Minimum lease revenue | $ | 377 | $ | — | |||
| Variable lease revenue | 21 | — | |||||
| Total lease revenue | $ | 398 | $ | — | |||
| 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 | ||
NOTE 14 — LEASES - continued
| 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 liabilities in accounts payable and other accrued expenses | $ | 1,548 | ||
| Weighted average remaining lease term | 3.0 years | |||
| Operating leases - Weighted average discount rate | 7.1% | |||
| Years ending | Amount | |||
| Remainder of 2019 | $ | 287 | ||
| 2020 | 575 | |||
| 2021 | 577 | |||
| 2022 | 304 | |||
| Total lease payments | 1,743 | |||
| Less imputed interest | (195 | ) | ||
| Total | $ | 1,548 | ||
| Years ending | Amount | |||
| 2019 | $ | 305 | ||
| 2020 | 307 | |||
| 2021 | 308 | |||
| 2022 | 233 | |||
| Total | $ | 1,153 | ||
(see Note 16).
The consulting services agreement terminated on July 24, 2019 (see Note 16). During the three months ended June 30, 2018 and 2017, we incurred base consulting fees to JCPeach of $0.1 million and $0.2 million, respectively. During the six months ended June 30, 20182019 and 2017,2018, we incurred base consulting fees to JCP of $0.2 million and $0.3 million, respectively.million. JCP earned legacy fees of $63.5 thousand during the three and six months ended June 30, 2018 and $43.7 thousand and $1.1$0.1 million during the three and six months ended June 30, 2017, respectively.
2019 and $0.1 million during the three and six months ended June 30, 2018.
During the year ended December 31, 2017, a
Preferred Stock
On February
| 1) | 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; |
| 2) | Since Mr. Bain remained employed by the Company through the Expiration Date, he is entitled to receive a cash bonus of $0.6 million for his 2018 services (which have been recorded in the accompanying consolidated financial statements and was paid during the six months ended June 30, 2019) and $0.35 million for his 2019 services, to be paid no later than April 30, 2019 and March 31, 2020, respectively; |
| 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; |
| 4) | Mr. Bain will be entitled to receive a Legacy Asset Performance Fee (“LAPF”), as calculated in accordance with his current 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. The parties agree that these are the only assets as to which Mr. Bain may be entitled to receive a LAPF following the Expiration Date; |
| 5) | 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 |
| 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. |
On May 31, 2018,Advisory Agreement, the Company will pay JIA a management fees ranging from 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 also sublet a portion of the Company’s office space.
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF |
that we may incur increased operating expenses;
that a substantial portion of our loan portfolio is comprised of non-performing and distressed assets;
the concentration of credit risk to a particular borrower or borrower group;
our inability to sell our current mortgage loan and REO assets and execute our business and liquidity strategy;
our inability to resume significant mortgage loan lending activities or implement our investment strategy and grow our business;
risks of owning real property obtained through foreclosure or other means;
the supply of commercial mortgage loans and the resulting impact on our strategy;
litigation;
our inability to retain and hire consultants and employees necessary to execute our business strategy;
the lack of a secondary market for our loans that impairs our ability to diversify our portfolio;
lack of access to public and private capital markets;
the inability to control the administration of mortgage loans where we hold only a participation interest;
risks of holding subordinated loans;
lender due diligence risks;
recent legislative initiatives;
government regulation;
failure to maintain our exemption from registration under the Investment Company Act of 1940, as amended;
lender loan covenants that restrict our liquidity;
our ability to secure joint venture partners on development projects;
risks related to additional borrowings;
that our liquidity is subject to a cash management agreement or other controlled accounts;
restrictive covenants that are contained in debt agreements;
the risks our borrowers are exposed to that could impair their ability to repay our loans;
inability of our commercial borrowers to generate sufficient income from their operating properties to repay our loans;
declines in value of our real estate collateral arising from inaccurate estimates of value due to management or appraisal errors or subsequent events;
failure of our underwriting standards;
that the guarantors of our mortgage loans will have insufficient assets or resources to support their guarantees;
a decline in the fair value of our assets;
uncertainty relating to assets valued at fair value;
reductions in income resulting from our borrowers’ refinancing their loans at lower interest rates;
the adverse effects on our business of increasing interest rates;
competition;
the inability of our borrowers to complete construction or development of the projects securing our loans;
cost-overruns and non-completion of renovation of properties underlying rehabilitation loans we make;
geographic concentration in our loan portfolio;
protection of our rights as a secured lender;
exposure to liability under lender liability laws;
inadequate insurance coverage on the REO properties we acquire;
hazardous substances on the REO properties we acquire;
our inability to utilize our tax net operating losses;
|
|
a decline in economic conditions;
conflicts of interest relating to existing contractual agreements;
complex accounting rules;
our failure to maintain adequate internal controls;
our ability to change our business, leverage and financing strategies without stockholder consent;
use of liquidity to pay required preferred dividends;
covenants relating to the issuance of preferred stock that restrict our ability to take certain actions;
restrictions on the payment of dividends to common stockholders;
dilution resulting from future issuances of debt and equity securities;
provisions in our certificate of incorporation, bylaws and Delaware law that could impede or delay an acquisition of the Company;
other factors listed in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2017.
You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date on which it was made. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. The factors described within this Form 10-Q could affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to such future periods. Except to the extent required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the events described by our forward-looking statements might not occur. We qualify any and all of our forward-looking statements by these cautionary factors. Please keep this cautionary note in mind as you read this Form 10-Q and the documents incorporated by reference into this Form 10-Q.
With cash and cash equivalents of the asset.investments inthe commercial, hospitality, industrial and residential real estate and mortgages secured by such assets. We are engaged in developing, managing, and either holding for investment or disposing of real property acquired through investment, foreclosure or other means.markets. The Company seeks opportunities to invest in real estate-related platforms or projects in partnership with other experienced real estate investment firms, and to sponsor and co-invest in real estate mortgages and other real estate-based investment vehicles. The Company intends to continue to expand its hospitality footprint through the acquisition or management of other luxury boutique hotels. We believe that our well-established hospitality management team can replicate the success we achieved at our Sedona hotels through the strategic expansion of our hospitality business model.strategyfocus is designed to re-establish the Company’s access to significant investment capital for investment purposes, whether through debt or equity issuance, 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 on its investments and ultimately provide enhanced opportunity for liquidity.2018,2019, we held mortgage and real estate assets with a carrying value of $90.2$118.1 million. Our REO held for sale and other REO with a carrying value $45.4 million are being marketed for disposition within the next twelve months.During the six months ended June 30, 2018, the Company raised $30.0 million in equity capital from Chase Funding through the issuance of Series B-3 Preferred Stock and Series A Preferred Stock. Dividends on the Series B-3 Preferred Stock accrue at the rate of 5.65% of the issue price per year, and are payable quarterly in arrears and 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 intends to use the proceeds from the issuance of these securities for general corporate purposes and pursuing its investment strategy. See Note 11 for additional information relating to the Series B-3 Preferred Stock and Series A Perpetual Preferred Stock.$30.1$12.2 million at June 30, 2018,2019 and anticipated proceeds from asset sales and financing, our objective is to redeploy available amounts into income-producing investments, such as mortgage loans, joint ventures or other attractive investments, acquisitions of hospitality, or other real estate assets.sixthree months ended June 30, 2018,2019, one performing loan with a principal balance of $3.0 million was repaid in full. In addition, during the Company originated two new loans. The firstthree months ended June 30, 2019, we conducted a UCC foreclosure on collateral securing a mezzanine loan isinvestments that had a $13.1carrying value of $8.2 million construction loan bearing annual interest at 8.5% plus one-month LIBOR, with an original maturityas of the date of July 18, 2020 and a six-month extension option,foreclosure, which has not yethad been funded. The secondin default since September 2018. In May 2019, we foreclosed on the mezzanine loan is a mortgage loan for $3.0 million bearing annual interest ratecollateral consisting of 6% plus one-month LIBOR (subject to an 8% interest rate floor), and an exit fee equal to 1%100% of the principal balance. In the fourth quarter of 2017,a commercial office building known as Broadway Tower, located in St. Louis, Missouri. Upon foreclosure, we acquired certain hotel andthe membership interests in the limited liability company that owns the office building, related assets consisting of 64 luxury guest rooms, indoor and outdoor function space, full-service foodcash with a value totaling approximately $26 million, and beverage outlet and restaurant operations, and spa operations located in Sonoma, California (the “MacArthur Hotel”, aka “MacArthur Place”) for a purchase price $36.0 million. In connection with the acquisition of the MacArthur Hotel, the Company entered into a building loan agreement/disbursement schedule andassumed related agreements (the “MacArthur Loan”) with MidFirst Bank (“MidFirst”) in the amount of $32.3 million, of whichliabilities totaling approximately $19.4 million was utilized for the purchase of the MacArthur Hotel, approximately $10.0 million of which was being set aside to fund planned hotel improvements, and the balance is to fund interest reserves and operating capital. The MacArthur Loan requires us to fund minimum equity of $17.4$16.0 million, all of which has been funded aswere 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 June 30, 2018.As a result of the issuance of the Series B-3 Preferred Stock and Series A Perpetual Preferred Stock, the Company’s total assets increased to $139.6 million as of June 30, 2018 compared to $114.5 million as of December 31, 2017.
The Company’s total revenue from continuing operations totaled2019, respectively, compared to $3.0 million and $5.2 million and for the three months ended June 30, 2018 compared to $1.1 million for the same period in 2017. Similarly, revenue from continuing operations for theand six months ended June 30, 2018, totaled $5.2 million comparedrespectively. The main driver in the reduction of revenues period over period is attributable to $2.2 million for the corresponding period in 2017.
Revenues 2018 2017 $ Change % Change 2018 2017 $ Change % Change 2019 and 2018. Unless otherwise noted, all comparative performance data included below reflects year-over-year comparisons. 2018 and is expected to be completed in the third quarter of 2019. We expect operating property revenue to increase following the completion of the renovation. This overall decrease was partially offset by $0.3 million recognized in Q2 of 2019 from commercial real estate rental income. earned on a Hotel in Nyack, NY. Expenses: 2018 2017 $ Change % Change 2018 2017 $ Change % Change 2019. incurred on currently held non-operating real estate owned.Threethree and Six Months Ended six months ended June 30, 2018 compared to the Three2019 and Six Months Ended20182017 Three months ended June 30, Six months ended June 30, Operating property revenue $ 2,105 $ 654 $ 1,451 222 % $ 3,668 $ 1,682 $ 1,986 118 % Mortgage loan income, net 641 44 597 1357 % 1,266 52 1,214 2335 % Management fees, investment and other income 255 360 (105 ) -29 % 292 508 (216 ) -43 % Total Revenue $ 3,001 $ 1,058 $ 1,943 184 % $ 5,226 $ 2,242 $ 2,984 133 % Revenues (in thousands) Three Months Ended June 30, Six Months Ended June 30, Revenues: 2019 2018 $ Change % Change 2019 2018 $ Change % Change Operating property revenue $ 1,880 $ 2,105 $ (225 ) (10.7 )% $ 2,193 $ 3,668 $ (1,475 ) (40.2 )% Mortgage loan income, net 447 641 (194 ) (30.3 )% 1,098 1,266 (168 ) (13.3 )% Management fees, investment and other income 208 255 (47 ) (18.4 )% 276 292 (16 ) (5.5 )% Total Revenue $ 2,535 $ 3,001 $ (466 ) (15.5 )% $ 3,567 $ 5,226 $ (1,659 ) (31.7 )% operating property revenue was $2.1, a decrease of $0.2 million compared to $0.6 million during the three months ended June 30, 2017, an increase of $1.5 million or 222%. During the six months ended June 30, 2018,2019, we recorded $2.2 million in operating property revenue was $3.7 millionas compared to $1.7$3.7 million for the six months ended June 30, 2017, an increase2018, a decrease of $2.0$1.5 million or 118%40.2%. The year-over-year increasedecrease in operating property revenue is primarily attributable to the purchaserenovation of theour hotel, restaurant, and spa operation known as MacArthur Place, hotel in the fourth quarter of 2017 and the sale of our golf course operation inwhich substantially began during the second quarter of 2017. income from mortgage loans was $0.6 million compared to $44 thousand during the corresponding period in 2017, an increase of $0.6 million. Mortgage loan income was $1.3 million during. For the six months ended June 30, 2018, compared2019, income from mortgage loans was $1.1 million, a decrease of $0.2 million or 13.3% over the six months ended June 30, 2018. Mortgage loan income decreased period over period due to $52 thousandthe defaulted Broadway Tower mortgage, and maturity of the $3.0 million loan which repaid during the corresponding period in 2017, an increase of $1.2 million. The year-over-year increase in mortgage loan income is primarily attributable to the increase in performing loan investments beginning in mid-2017. Atthree months ended June 30, 2018 we had2019. Our performing mortgage loans with an outstanding balance of $22.9 million andhave a weighted average interest rate of 9.71%9.7%. At June 30, 2017, we had performing loans with an outstanding balance of $7.5 million and a weighted average interest rate of 10.6%.compared to $0.4 million during the corresponding period in 2017, a decrease of $0.1$0.0 million, or 29.0%. For5.5%, from the threesix months ended June 30, 2018, management fees, investment and other income was $0.3 million compared to $0.5 million during the corresponding period in 2017, a decrease of $0.2 million, or 43%.2018. The 2018 balance consists primarily of an insurance recovery and the year-over-year decrease is primarily attributable to no longer receivingasset management fees for the Sedona hotels. Three months ended June 30, Six months ended June 30, Operating property direct expenses (exclusive of interest and depreciation) $ 2,099 $ 620 $ 1,479 239 % $ 4,334 $ 1,439 $ 2,895 201 % Expenses for non-operating real estate owned 171 170 1 1 % 367 336 31 9 % Professional fees 754 1,193 (439 ) -37 % 1,629 2,122 (493 ) -23 % General and administrative expenses 1,708 2,613 (905 ) -35 % 3,588 4,358 (770 ) -18 % Interest expense 780 441 339 77 % 1,525 874 651 74 % Depreciation and amortization expense 303 49 254 518 % 644 93 551 592 % Gain on disposal of assets, net (142 ) (1,683 ) 1,541 -92 % (395 ) (1,715 ) 1,320 -77 % Recovery of investment and credit losses, net (175 ) (272 ) 97 -36 % (175 ) (338 ) 163 -48 % Equity method loss from unconsolidated entities - 52 (52 ) -100 % - 171 (171 ) -100 % Total Costs and Expenses $ 5,498 $ 3,183 $ 2,315 73 % $ 11,517 $ 7,340 $ 4,177 57 % Expenses (in thousands) Three Months Ended June 30, Six Months Ended June 30, Expenses: 2019 2018 $ Change % Change 2019 2018 $ 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 % Expenses for non-operating real estate owned 83 171 (88 ) (51.5 )% 174 367 (193 ) (52.6 )% Professional fees 1,680 754 926 122.8 % 2,486 1,629 857 52.6 % General and administrative expenses 1,560 1,708 (148 ) (8.7 )% 3,465 3,588 (123 ) (3.4 )% Interest expense 335 780 (445 ) (57.1 )% 791 1,525 (734 ) (48.1 )% Depreciation and amortization expense 321 303 18 5.9 % 591 644 (53 ) (8.2 )% 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 % Unrealized loss on derivatives 124 — 124 100.0 % 291 — 291 100.0 % Total Costs and Expenses $ 6,605 $ 5,498 $ 1,107 20.1 % $ 12,650 $ 11,517 $ 1,133 9.8 % operating property direct expenses were $2.1 million, an increase of $1.5 million, or 239%, from $0.6 million for the three months ended June 30, 2017.. For the six months ended June 30, 2018,2019, operating property direct expenses were $4.3$6.0 million, an increase of $2.9$1.7 million, or 201%38.6%, from $1.4$4.3 million for the six months ended June 30, 2017. The year-over-year increase in operating property2018. Such amounts are primarily related to the direct expenses is primarily attributed to higher operating costs of MacArthur Place, and non-capitalizable renovation coststo a lesser extent beginning in June 2019, to Broadway Tower which we acquired through a foreclosure action in May of 2019. While revenues were negatively impacted during the MacArthur Place hotel over those ofrenovation period, operating expenses remained relatively consistent as the Company was required to retain personnel to avoid employee turnover while simultaneously incurring significant temporary operating golf course property that was sold incosts during the renovation period. Broadway Tower contributed operating expenses totaling $0.3 million during the second quarter of 2017.was consistent at $0.2decreased 51.5% to $0.1 million for the three months ended June 30, 20182019 and 2017. Expensescompared to $0.2 million for the corresponding period for 2018. For the six months ended June 30, 2019, expenses for non-operating real estate owned assets waswere $0.2 million, a decrease of $0.2 million or 52.6%, from $0.4 million for the six months ended June 30, 2018 compared2018. The decrease in period-over-period expense is attributed to $0.3 million for the corresponding period in 2017, and increase of less than $0.1 million or 9%. The slight year-over-year increase is primarily attributable to an increase indisposition non-operating real estate taxesowned in prior years and asset repair and maintenancelower costs relating to the New Mexico partnership.2018,2019, professional fees expense was $0.8$1.7 million, a decreasean increase of $0.4$0.9 million, or 37%122.8%, from $1.2$0.8 million incurred during the same period in 2017.2018. For the six months ended June 30, 2019 and 2018, professional fees expense waswere $2.5 million and $1.6 million, a decreaserespectively, an increase of $0.5$0.9 million or 23%, from $2.1 million incurred during the same period in 2017.52.6%. The year-over-year decreaseincrease in professional fees is primarily attributed to a decrease incontinued litigation surrounding the New Mexico assets, greater enforcement and recovery efforts over defaulted loans, the recording of Hotel Fund organizational costs, related to enforcement activities.and other corporate matters.40
General and Administrative Expenses. General and administrative expenses were $1.7$1.6 million for the three months ended June 30, 20182019 compared to $2.6$1.7 million for the corresponding period in 2017, 2018, a decrease of $0.9 million$148 thousand or 35%8.7%. During thisFor the six months ended June 30, 2018,2019, general and administrative expenses were $3.6relatively consistent at $3.5 million compared to $4.4$3.6 million for the six months ended June 30, 2018.
Interest Expense. Interest expense was $0.8 million for the threesix months ended June 30, 2018,2019, interest expense
2019.
Gain
Discontinued Operations. We sold our Sedona hotel assets on February 28, 2017 and, in accordance with GAAP, have presented the results of operations for such assets in net income from discontinued operations for the three and six months ended June 30, 2017. Our Sedona hotels contributed a net loss of $0.2 million for the three months ended June 30, 2017 and net income of $4.7 million forDerivatives.
Three months ended June 30, Six months ended June 30, 2018 % of Consolidated Total 2017 % of Consolidated Total 2018 % of Consolidated Total 2017 % of Consolidated Total Total Revenue Expenses: Operating property expenses (exclusive of interest and Professional fees General and administrative expenses Interest expense Depreciation and amortization expense Total operating expenses Other Expenses: Gain on disposal of assets, net Other expenses Total expenses Net Income (Loss) from Continuing Operations Net income from discontinued operations, net of tax Net Income (Loss) Attributable to Non-Controlling Interest Net Income (Loss) Attributable to Common Shareholders remained consistent year over year. Mortgage and REO - Legacy Portfolio and Other Operations 2018 % of Consolidated Total 2017 % of Consolidated Total 2018 % of Consolidated Total 2017 % of Consolidated Total Professional fees General and administrative expense Interest expense Gain on disposal of assets, net Earnings in unconsolidated subsidiaries Net loss attributable to noncontrolling interests 2019 and 2018 segment revenues were $1.5 million and $1.3 million which contributed 42.1% and 24.2%, respectively, of total consolidated revenues. The increase in the dollar amount of total revenues on a year-over-year basis, and as a percentage of total revenues, is attributed to the contribution of operating revenue from Broadway Tower acquired during the second quarter of 2019, offset by reduced mortgage income. isare 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, 20182019 and 2017,2018, the Company’s reportable segments consisted of the following: golf, spa, and food & beverage operations. This segment also reflects the carrying value of such assets and the related financing and operating obligations. As described elsewhere in this Form 10-Q, we sold our Sedona hotels on February 28, 2017 and, in accordance with GAAP, have presented the results of operations for such assets in net income (loss) from discontinued operations for the three months ended June 30, 2017. While the Sedona hotels have been presented as discontinued operations in the accompanying condensed consolidated financial statements, the Company intends to continue its active engagement in the Hospitality and Entertainment Operations segment through our hotel management group. In this regard, the Company acquired MacArthur Place in the fourth quarter of 2017 and is actively evaluating other hospitality assets for purchase or management.–- 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. This also encompassessales, as well as the operating expenses (if any), carrying costs of such assets and other related expenses.expenses of such assets. This segment also reflectsincludes operating properties that do not represent a strategic operating objective of the carrying value ofCompany, such assetsas Broadway Tower, and the related financingtheir rental revenue and operating obligations. This segment has also historically included rental revenue,tenant recoveries less direct property operating expenses (maintenance and repairs, real estate taxes, management fees, and other operating expenses), depreciation and amortization from commercial and residential real estate leasing operations, and the carrying value of such assets and the related financing and operating obligations.20182019 and 20172018 follows (in thousands): $ 2,346 78.2 % $ 884 83.6 % $ 3,911 74.8 % $ 1,995 89.0 %
depreciation) 2,099 100.0 % 620 100.0 % 4,334 100.0 % 1,439 100.0 % 43 5.7 % 42 3.5 % 102 6.3 % 30 1.4 % 309 18.1 % 47 1.8 % 623 17.4 % 35 0.8 % 327 41.9 % - 0.0 % 632 41.4 % - 0.0 % 241 30.9 % - 0.0 % 520 34.1 % - 0.0 % 3,019 709 6,211 1,504 - 0.0 % (169 ) 10.0 % - 0.0 % (169 ) 9.9 % - (169 ) - (169 ) 3,019 54.9 % 540 17.0 % 6,211 53.9 % 1,335 18.2 % (673 ) 27.0 % 344 -16.2 % (2,300 ) 36.6 % 660 -12.9 % - 0.0 % (240 ) 100.0 % - 0.0 % 4,736 100.0 % (88 ) 13.6 % - 0.0 % (129 ) 10.4 % - 0.0 % $ (761 ) 18.2 % $ 104 -2.4 % $ (2,429 ) 26.2 % $ 5,396 -154.7 % Three Months Ended June 30, Six Months Ended June 30, 2019 % of Consolidated Total 2018 % of Consolidated Total 2019 % of Consolidated Total 2018 % of Consolidated Total Total revenues $ 1,482 58.5 % $ 2,347 78.2 % $ 1,795 50.3 % $ 3,911 74.8 % Operating expenses Operating property direct expenses 3,434 91.6 % 2,099 100.0 % 5,783 94.9 % 4,334 100.0 % Professional fees 275 17.3 % 43 5.7 % 356 14.9 % 102 6.3 % General & administrative 265 16.4 % 309 18.1 % 641 18.2 % 624 17.4 % Interest expense 139 41.5 % 327 41.9 % 139 17.6 % 632 41.4 % Depreciation & amortization expense 242 75.4 % 241 79.5 % 485 82.1 % 520 80.7 % Total operating expenses 4,355 3,019 7,404 6,212 Other expenses Unrealized loss on derivatives 124 100.0 % — — % 291 100.0 % — — % Total other expenses 124 (12.0 )% — 291 (33.7 )% — Total costs and expenses, net 4,479 67.8 % 3,019 54.9 % 7,695 60.8 % 6,212 53.9 % Loss before income taxes (2,997 ) 73.6 % (672 ) 26.9 % (5,900 ) 65.0 % (2,301 ) 36.6 % Provision (expense) for income taxes — — — % — — — % Net loss (2,997 ) 73.6 % (672 ) 26.9 % (5,900 ) 65.0 % (2,301 ) 36.6 % Net loss attributable to non-controlling interest (368 ) 115.7 % (88 ) (352.0 )% (653 ) 147.7 % (129 ) (112.2 )% Net loss attributable to common shareholders $ (3,365 ) 52.5 % $ (760 ) 18.2 % $ (6,553 ) 48.4 % $ (2,430 ) 26.2 % 20182019 and 2017,2018, the hospitality and entertainment operations segment revenues were $1.5 million and $2.3 million, respectively which contributed 58.5% and $0.9 million, respectively. For the six months ended June 30, 2018 and 2017, the hospitality and entertainment operations segment revenues were $3.9 million and $2.0 million, respectively. Net income from discontinued operations for the six months ended June 30, 2017 includes gain on the sale of the Sedona hotels of $6.8 million.For the three months ended June 30, 2018 and 2017, the hospitality and entertainment operations segment contributed 78.2% and 83.6%, respectively, of total consolidated revenues. For the six months ended June 30, 20182019 and 2017,2018, the hospitality and entertainment operations segment revenues were $1.8 million and $3.9 million, respectively which contributed 74.8%50.3% and 89.0%74.8%, respectively, of total consolidated revenues. The year-over-year decrease in hospitality and entertainment operations revenues as a percentage of total consolidated revenues is attributable to increasedthe lack of revenues inresulting from the renovation at MacArthur Place. During the three and six months ended June 30, 2019, our mortgage loan segment.Similarly, duringresults were based on 31.4% and 22.9% occupancy, respectively, with an ADR of $418 and $361, respectively, and REVPAR of $131 and $82, respectively. For the three and six months ended June 30, 2018, our results were based on 57.5% and 2017,58.8% occupancy, respectively, with an ADR of $359 and $307, respectively, and REVPAR of $207 and $164, respectively. However, since our hospitality rooms were under construction during the majority of 2019, the adjusted results based on actual rooms available during the construction period for the six months ended June 30, 2019 reflected occupancy of 52.2% occupancy, an ADR of $361, and REVPAR of $189.entiretymajority of our consolidated operating property direct expenses.Ofexpenses (prior to the $3.0 millionacquisition of Broadway Tower in totalMay 2019). The decrease in net operating expensesincome percentages for the three and six months ended June 30, 2019, as compared to the same period in 2018, was primarily attributed to high operating property direct expenses, which was caused by rooms out of service during the hospitality management companyrenovation project while operating expenses accounted for $0.2 million of the total. and depreciation and amortization, the hospitality and entertainment operations segment contributed losses$3.0 million and $5.9 million of the total consolidated net loss for the three and six months ended June 30, 2019, respectively. The hospitality and entertainment operations segment contributed net loss of $0.7 million and net income of $2.3 million of the total consolidated net loss from continuing operations for the three and six months ended June 30, 2018, respectively. The hospitalityentertainment operationsREO - Legacy Portfolio and Other Operations Three Months Ended June 30, Six Months Ended June 30, 2019 % of Consolidated Total 2018 % of Consolidated Total 2019 % of Consolidated Total 2018 % of Consolidated Total Total revenues $ 848 33.5 % $ 641 21.4 % $ 1,501 42.1 % $ 1,266 24.2 % Operating expenses Operating property direct expenses 313 8.4 % — — % 313 5.1 % — — % Expenses for non-operating REO 32 100.0 % 171 100.0 % 123 100.0 % 367 100.0 % Professional fees 610 38.4 % 269 35.7 % 882 36.8 % 816 50.1 % Interest expense 129 38.5 % 116 14.9 % 257 32.5 % 229 15.0 % Depreciation & amortization expense 50 15.6 % — — % 50 8.5 % — — % Total operating expenses 1,134 556 1,625 1,412 Other expenses Gain on disposal of assets, net (20 ) 100.0 % (142 ) 100.0 % (20 ) — % (395 ) 100.0 % Recovery of credit losses, net (1,135 ) 100.0 % (175 ) — % (1,135 ) — % (175 ) — % Total other expenses (1,155 ) 112.0 % (317 ) (1,155 ) 133.7 % (570 ) Total costs and expenses, net (21 ) (0.3 )% 239 4.3 % 470 3.7 % 842 7.3 % Income before income taxes 869 (21.4 )% 402 (16.1 )% 1,031 (11.4 )% 424 (6.7 )% Provision (expense) for income taxes — — — % — — — % Net income 869 (21.4 )% 402 (16.1 )% 1,031 (11.4 )% 424 (6.7 )% Net income attributable to non-controlling interest 50 (15.7 )% 113 452.0 % 211 (47.7 )% 244 212.2 % Net income attributable to common shareholders $ 919 (14.3 )% $ 515 (12.3 )% $ 1,242 (9.2 )% $ 668 (7.2 )% contributed net income of $0.3revenues were $0.8 million and $0.7$0.6 million, to therespectively which contributed 33.5% and 21.4%, respectively, of total consolidated net loss from continuing operations forrevenues. For the three and six months ended June 30, 2017, respectively. Three months ended June 30, Six months ended June 30, Total Revenue $ 642 21.4 % $ 101 9.5 % $ 1,267 24.2 % $ 128 5.7 % Expenses: Expenses for non-operating real estate owned 171 100.0 % 170 100.0 % 367 100.0 % 336 100.0 % 269 35.7 % 663 55.6 % 816 50.1 % 1,684 79.4 % - 0.0 % 107 4.1 % - 0.0 % 115 2.6 % 116 14.9 % 133 30.2 % 229 15.0 % 265 30.3 % Total operating expenses 556 1,073 1,412 2,400 Other expenses (income): (142 ) 100.0 % (1,514 ) 90.0 % (395 ) 100.0 % (1,546 ) 90.1 % Recovery of investment and credit losses, net (175 ) 100.0 % (212 ) 77.9 % (175 ) 100.0 % (278 ) 82.2 % - 0.0 % 52 100.0 % - 171 100.0 % Other income (317 ) (1,674 ) (570 ) (1,653 ) Total expenses, net of gains 239 4.3 % (601 ) -18.9 % 842 7.3 % 747 10.2 % Net Income (Loss) 403 -16.1 % 702 -33 % 425 -6.8 % (619 ) 12.1 % 113 452.0 % (755 ) 100.0 % 244 212.2 % (734 ) 100.0 % Net Income (Loss) Attributable to Common Shareholders $ 516 -12.4 % $ (53 ) 1.2 % $ 669 -7.2 % $ (1,353 ) 38.8 % 20182019 and 2017,2018, the Mortgage and REO – Legacy Portfolio and Other Operations segment contributed 21.4% and 9.5%, respectively, of total consolidated revenues. For the six months ended June 30, 2018 and 2017, the Mortgage and REO – Legacy Portfolio and Other Operations segment contributed 24.2% and 5.7%, respectively, of total consolidated revenues. The year-over-year increase in segment revenue as a percentage of total revenue resulted primarily from mortgage investments made beginning in mid-2017.For the three months ended June 30, 2018 and 2017, the Mortgage and REO –- Legacy Portfolio and Other Operations segment recorded total consolidated expenses, net of (gains)gains (loss), of $0.2 million$(21.0) thousand and $(0.6)$0.2 million, respectively. For the six months ended June 30, 20182019 and 2017,2018, the Mortgage and REO – Legacy Portfolio and Other Operations segment recorded total consolidated expenses, net loss, net of (gains),gain, of $0.8$0.5 million and $0.7$0.8 million, respectively. The year-over-year increasedecrease in net expenses for the threesix months ended June 30, 2018,2019, as compared to the same period in 2017,2018, was primarily due to (i) increased recoveries in fiscal 2019, (ii) increases in professional fees relating to enforcement activities, and (iii) increases in operating expenses from Broadway Tower, offset by (iv) decreased gains from the sale of REO assets (or portions thereof), (iii) decreases in professional fees, and (iv) increases in mortgage revenue due to the mortgage investments made beginning in mid-2017.43
After revenues, less interest, recoveries of investmentdepreciation and amortization expenses, and (recoveries of) provision for credit losses, the Mortgage and REO – Legacy Portfolio and Other Operations segment contributed net income (loss) of $0.4$0.9 million and $0.7$0.4 million for the three months ended June 30, 20182019 and 2017,2018, respectively. The Mortgage and REO –- Legacy Portfolio and Other Operations segment contributed net income (loss) of $0.4$1.0 million and $(0.6)$0.4 million for the six months ended June 30, 2019 and 2018, respectively. We expect our lending activities and 2017, respectively.
related income to increase as available liquidity allows us to acquire our target assets.
Corporate and Other | ||||||||||||||||||||||||||||||||
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||||
2018 | % of Consolidated Total | 2017 | % of Consolidated Total | 2018 | % of Consolidated Total | 2017 | % of Consolidated Total | |||||||||||||||||||||||||
Total Revenue | $ | 13 | 0.4 | % | $ | 73 | 6.9 | % | $ | 48 | 0.9 | % | $ | 119 | 5.3 | % | ||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||||||
Professional fees | 442 | 58.6 | % | 488 | 40.9 | % | 711 | 43.6 | % | 408 | 19.2 | % | ||||||||||||||||||||
General and administrative expense | 1,399 | 81.9 | % | 2,459 | 94.1 | % | 2,965 | 82.6 | % | 4,208 | 96.6 | % | ||||||||||||||||||||
Interest expense | 337 | 43.2 | % | 308 | 69.8 | % | 664 | 43.5 | % | 609 | 69.7 | % | ||||||||||||||||||||
Depreciation & amortization expense | 62 | 20.5 | % | 49 | 100.0 | % | 124 | 19.3 | % | 93 | 100.0 | % | ||||||||||||||||||||
Total operating expenses | 2,240 | 3,304 | 4,464 | 5,318 | ||||||||||||||||||||||||||||
Other expenses | ||||||||||||||||||||||||||||||||
Recovery of investment and credit losses, net | - | (60 | ) | 0.0 | % | - | (60 | ) | 17.8 | % | ||||||||||||||||||||||
Other expenses | - | (60 | ) | - | (60 | ) | ||||||||||||||||||||||||||
Total expenses | 2,240 | 40.7 | % | 3,244 | 101.9 | % | 4,464 | 38.8 | % | 5,258 | 71.6 | % | ||||||||||||||||||||
Net Loss | (2,227 | ) | 89.2 | % | (3,171 | ) | 149.2 | % | (4,416 | ) | 70.2 | % | (5,139 | ) | 100.8 | % | ||||||||||||||||
Cash dividend on redeemable convertible preferred stock | (647 | ) | 455.6 | % | (533 | ) | 100.0 | % | (1,239 | ) | 872.5 | % | (1,061 | ) | 100.0 | % | ||||||||||||||||
Deemed dividend on redeemable convertible preferred stock | (915 | ) | 100.0 | % | (672 | ) | 100.0 | % | (1,731 | ) | 100.0 | % | (1,331 | ) | 100.0 | % | ||||||||||||||||
Cash dividend on perpetual preferred stock | (142 | ) | 15.5 | % | - | 0.0 | % | (142 | ) | 8.2 | % | - | 0.0 | % | ||||||||||||||||||
Net Loss Attributable to Common Shareholders | $ | (3,931 | ) | 94.1 | % | $ | (4,376 | ) | 101.2 | % | $ | (7,528 | ) | 81.1 | % | $ | (7,531 | ) | 215.9 | % | ||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||
| 2019 | % of Consolidated Total | 2018 | % of Consolidated Total | 2019 | % of Consolidated Total | 2018 | % of Consolidated Total | |||||||||||||||||||||
| Total revenues | $ | 205 | 8.1 | % | $ | 13 | 0.4 | % | $ | 271 | 7.6 | % | $ | 49 | 0.9 | % | ||||||||||||
| Operating expenses | ||||||||||||||||||||||||||||
| Professional fees | 705 | 44.3 | % | 442 | 58.6 | % | 1,161 | 48.4 | % | 711 | 43.6 | % | ||||||||||||||||
| General & administrative | 1,346 | 83.6 | % | 1,399 | 81.9 | % | 2,873 | 81.7 | % | 2,964 | 82.6 | % | ||||||||||||||||
| Interest expense | 67 | 20.0 | % | 337 | 43.2 | % | 395 | 49.9 | % | 664 | 43.5 | % | ||||||||||||||||
| Depreciation & amortization expense | 29 | 9.0 | % | 62 | 20.5 | % | 56 | 9.5 | % | 124 | 19.3 | % | ||||||||||||||||
| Total operating expenses | 2,147 | 2,240 | 4,485 | 33.2 | % | 4,463 | ||||||||||||||||||||||
| Other expenses | ||||||||||||||||||||||||||||
| Total costs and expenses, net | 2,147 | 32.5 | % | 2,240 | 40.7 | % | 4,485 | 35.5 | % | 4,463 | 38.8 | % | ||||||||||||||||
| Income (loss) before income taxes | (1,942 | ) | 47.7 | % | (2,227 | ) | 89.2 | % | (4,214 | ) | 46.4 | % | (4,414 | ) | 70.2 | % | ||||||||||||
| Provision (expense) for income taxes | — | — | — | % | — | — | — | % | ||||||||||||||||||||
| Net loss | (1,942 | ) | 47.7 | % | (2,227 | ) | 89.2 | % | (4,214 | ) | 46.4 | % | (4,414 | ) | 70.2 | % | ||||||||||||
| Cash dividends on series B-1 and B-2 preferred stock | (648 | ) | 100.0 | % | (647 | ) | 100.0 | % | (1,288 | ) | 100.0 | % | (1,239 | ) | 100.0 | % | ||||||||||||
| Imputed dividends on series B-1 and B-2 preferred stock | (954 | ) | 100.0 | % | (915 | ) | 100.0 | % | (1,889 | ) | 100.0 | % | (1,731 | ) | 100.0 | % | ||||||||||||
| Imputed dividends on series A preferred stock | (417 | ) | 100.0 | % | (142 | ) | 100.0 | % | (830 | ) | 100.0 | % | (142 | ) | 100.0 | % | ||||||||||||
| Net loss attributable to common shareholders | $ | (3,961 | ) | 61.8 | % | $ | (3,931 | ) | 94.1 | % | $ | (8,221 | ) | 60.8 | % | $ | (7,526 | ) | 81.0 | % | ||||||||
2018.
While our lending activities have historically been focused primarily in the southwestern United States, we investment policy. LIBOR. As of June 30, 2019 and December 31, 2018, the Prime Rate was 5.5%. As of June 30, 2019 and December 31, 2018, the one-month LIBOR was 2.4% and 2.0%, respectively. 64.0% mixed-use.2018,2019, our loan portfolio consisted of fivefour mortgage loans with a carrying value of $22.9$13.3 million. AsNo new loans were originated during the three and six months ended June 30, 2019. Two of December 31, 2017, our loan portfolio consisted of first mortgageloans were performing loans with a carrying valuean average outstanding principal and accrued interest balance of $19.7$6.6 million. As of June 30, 20182019 and December 31, 2017,2018, the Company held two and three non-performing portfolio loans, respectively, two of the loans arewhich have been fully reserved and have a zero carrying value.value as of June 30, 2019. During the sixthree months ended June 30, 2018,2019, one performing loan with a principal balance of $3.0 million was repaid in full. In the second quarter of 2019, we originated two loans for $13.1 million (noneconducted a UCC foreclosure on the collateral securing a defaulted mezzanine note receivable that had a carrying value of which$8.2 million. That collateral consisted of 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 that has been fundedrecorded as of June 30, 2018) and $3.0 million, and earned net origination fees related to underwritingan operating property following the loan of $0.1 million. foreclosure.20182019 and December 31, 2017,2018, the valuation allowance was $12.7 million and $13.1 million for each period, respectively and represented 35.8%49.9% and 39.2%37.1%, respectively, of the total outstanding loan principal and interest balances.2018, the collateral underlying our loan portfolio was located in New York, California, Missouri, Texas, and Arizona. As of December 31, 2017,2019, the collateral underlying our loan portfolio was located in California, Missouri,Texas, and Texas.Arizona. Unless and until we resume meaningful lending activities, our ability to diversify the geographic aspect of our loan portfolio remains significantly limited. The change in the geographic diversification of our loans is primarily attributed to loan purchases and originations.remain flexiblehave no geographic limitations in further diversification of our investments geographically if attractive opportunities arise when we recommence lending activities at a meaningful level.either the Prime rateRate or LIBOR rate with interest rate floors. At June 30, 2018 and December 31, 2017, the Prime rate was 5.00% and 4.50%, respectively. At June 30, 2018 and December 31, 2017, the LIBOR rate was 2.09% and 1.56%, respectively.of our six loans were performing, had a weighted averagewith principal balance $5.7and interest balances totaling $25.4 million and interest rates ranging from 9.6% to 12.0%. Of this total, two loans with principal and interest balances totaling $12.3 million and a weighted average interest rate of 9.64%. At12.1% were non-performing loans, both of which were fully reserved, while two loans with principal and interest balances totaling $13.3 million and a weighted average interest rate of 9.7% were performing. As of December 31, 2017, two2018, three of our foursix loans were performing and had a weighted average principal balance of $10.0$7.7 million and a weighted average interest rate of 9.69%9.44%.–- Mortgage Loans, Net” in the accompanying condensed consolidated financial statements for additional information regarding interest rates for our loan portfolio.The collateral supporting our loans historically have consisted of fee simple real estate zoned for residential, commercial or industrial use. The real estate may be in any stage of development from unimproved land to finished buildings with occupants or tenants. From a collateral standpoint, we believe the level of risk decreases as the borrower obtains governmental approvals (i.e., entitlements) for development. When the ultimate goal is to build an existing structure that can be sold or rented, in general, fully entitled land that is already approved for construction is more valuable than a comparable piece of land that has received no entitlement approvals. Each municipality or other governmental agency has its own variation of the entitlement process; however, in general, the functions tend to be relatively similar. In general, the closer to completion a construction project may be, the lower the level of risk that construction will be delayed. also generally classify loans into categories based on the underlying collateral’s projected end-use for purposes of identifying and managing loan concentration and associated risks. As of June 30, 2019, the original projected end-use of the collateral under our loans was classified as 52.4% residential and 47.6% commercial. As of December 31, 2018, the original projected end-use of the collateral under our loans was classified as 38.9%36.0% residential and 61.1% commercial. As of December 31, 2017, the original projected end-use of the collateral under our loans was classified as 39.2% residential and 60.8% commercial.See “Note 4 – Mortgage Loans, Net” in the accompanying condensed consolidated financial statements for additional information regarding the classification of our loan portfolio.45
Changes in the Portfolio Profile — Scheduled Maturities
Quarter | Principal and Interest Balance | Percent | # | |||||||||
Matured | $ | 12,682 | 35.7 | % | 2 | |||||||
Q3 2018 | 7,594 | 21.4 | % | 1 | ||||||||
Q2 2019 | 3,000 | 8.4 | % | 1 | ||||||||
Q4 2019 | 12,265 | 34.5 | % | 1 | ||||||||
Total principal and interest | 35,541 | 100.0 | % | 5 | ||||||||
Less: valuation allowance | (12,682 | ) | ||||||||||
Net carrying value | $ | 22,859 | ||||||||||
See “Note 4 – Mortgage Loans, Net”follows (dollar amounts in the accompanying condensed consolidated financial statements for additional information regarding loan modifications.
thousands):
| 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 | |||||||
At
respectively.
Broadway Tower.
See “Note 5 – Real Estate Held for Sale, Other Real Estate Owned, and Operating Properties”
Summary of Existing Loans in Default
Our loan in defaults at June 30, 2018 and December 31, 2017 consisted of impaired legacy mortgage loans. At June 30, 2018 and December 31, 2017, two of our outstanding loans were in default, both of which were past their respective scheduled maturity dates and fully reserved. We are in the process of pursuing certain enforcement action which could lead to foreclosure or other disposition of assets serving as collateral for our other portfolio loans in default. The timing of foreclosure on the remaining loan collateral is dependent on several factors, including applicable state statutes, other existing liens, potential bankruptcy filings by the borrowers, and our ability to negotiate a deed-in-lieu of foreclosure.
See “Note 4 – Mortgage Loans, Net” in the accompanying condensed consolidated financial statements for additional information regarding loans in default.
A discussion and Other REO
such assets.
the three and six months ended June 30, 2018.
Leveragebalances as of such dates.
the net carrying value of the related assets and that no additional valuation allowance or impairment is considered necessary. We have not historically employed a significant amountwill continue to evaluate our loan and REO assets to determine the adequacy and appropriateness of leverage to enhance our investment yield. However, we have secured financing when deemed beneficial, if not necessary,the valuation allowance and impairment balances. Depending on market conditions, such evaluations may employ additional leverage inyield materially different values and potentially increase or decrease the future as deemed appropriate.
valuation allowance for loans or impairment charges for REO assets.
Land Purchase Financing
During 2015, the Company obtained seller-financingamount of $5.9 million in connection with the purchase ofsecured by certain real estate located in New Mexico atwith a purchase pricecarrying value of $6.8 million. The note bears interest at the WSJ Prime Rate as of December 31, 2015 (recalculated annually) plus 2% through December 31, 2017, and the WSJ Prime Rate plus 3% thereafter. Interestand required interest only payments are due annually on December 31 of each year with the principal balance and any accrued unpaid interest due at maturity onupon the earlier of 1) December 31, 2019.2019, or 2) sale of the underlying collateral property. The note may be prepaid in whole or in part without penalty.
Special Assessment Obligations
As of June 30, 2018 and December 31, 2017, obligations arising from our allocated share of certain community facilities district special revenue bonds and special assessments had a remaining balance of $0.1 million and $0.1 million, respectively. This special assessment obligation has amortization periods that extend through 2022, with annual interest rates ranging from 6% to 7.5% and is secured by certain real estate classified as REO held for sale consisting of 1.5 acres of unentitled land located in Dakota County, Minnesota which had a carrying value of $0.1 million at June 30, 2018. We made no principal payments on this special assessment obligation during the six months ended June 30, 2018.
The responsibility for the repayment of each of the foregoing special assessment obligations rests with the owner of the property and will transfer to the buyer of the related real estate upon sale. Accordingly, if the assets to which these obligations arise from are sold before the full amortization period of such obligations, the Company would be relieved of any further liability since the buyer would assume the remaining obligations. Nevertheless, these special assessment obligations are deemed to be obligations of the Company in accordance with GAAP because they are fixed in amount and for a fixed period of time.
Hotel Acquisition and Construction Loan
first quarter of 2019.
During the fourth quarter of
renovations to MacArthur Place.
| 1) | 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. |
| 2) | Since Mr. Bain remained employed by the Company through the Expiration Date, he is entitled to receive a cash bonus of $0.6 million for his 2018 services (which have been recorded in the accompanying consolidated financial statements and was paid during the six months ended June 30, 2019) and $0.35 million for his 2019 services, to be paid no later than April 30, 2019 and March 31, 2020, respectively; |
| 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; |
| 4) | Mr. Bain will be entitled to receive a Legacy Asset Performance Fee (“LAPF”), as calculated in accordance with his current 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. The parties agree that these are the only assets as to which Mr. Bain may be entitled to receive a LAPF following the Expiration Date; |
| 5) | 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 covenants, termination provisions and other obligations and terms that are commonly contained in an agreement of this nature;; |
| 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. |
The Hotel Fund intends to pursue a liquidity event, with a focus on the sale of all or substantially all of the Hotel Fund’s assets, approximately four to six yearsfollowing commencement of the Offering.
Off-Balance Sheet Arrangements
2019.partnerships with varying structures.partnerships. Most of the joint ventures and partnerships in which we have an interest are involved in the ownership and/or development of real estate. A venture or partnership will fund capital requirements or operational needs with cash from operations or financing proceeds, if possible. If additional capital is deemed necessary, a venture or partnership may request a contribution from the partners, and we will evaluate such request.During the year ended December 31, 2017,subsidiary of the Company executed promissory notes$5.0 million collective lending facility with certain of the previously unconsolidatedconsolidated partnerships to provide aloan up to $0.7 million, which were subsequently amended to increase the collective lending facility withto a maximum of $5.0 million to cover anticipated operating and capital expenditures. As of June 30, 2018,2019, the total principal advanced under these notesthis facility was $4.8$5.0 million. The promissory notesloans under this facility earn interest at annual rates ranging from the JP Morgan Chase Prime rate plus 2.0% (6.75%(7.50% at June 30, 2018)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 all related accrued interest receivable have been eliminated in consolidation.Exceptconsolidation as previously discussed, based on the nature of the activities conducted in these ventures, we cannot estimate with any degree of accuracy amounts that we may be required to fund in the short or long-term. However, we do not believe that additional funding of these ventures or partnerships will have a material adverse effect on our financial condition or results of operations.DebtAt June 30, 2018 and December 31, 2017, certain of our joint ventures and partnerships had outstanding indebtedness to third parties which are generally mortgage loans, all of which are non-recourse to us.In connection with the MacArthur Loan executed on October 2, 2017,As of June 30, 2019, we have agreed to provide a construction completion guaranty in connection with the MacArthur Loan with respect to the planned MacArthur Hotelhotel improvement project which shallwill be released upon payment of all project costs and receipt of a certificate of occupancy. In addition, we have provided a loan repayment guaranty of fifty percent (50%)50% of the MacArthur Loan outstanding loan principal along with a guaranty ofand accrued unpaid interest and hotel operating deficits,expenses, as well as other customary carve-out matters such as bankruptcy and environmental matters. Under the guarantees, we arethe Company is required to maintain a minimum book valuetangible net worth of $50.0 million and minimum liquidity of $5.0 million throughout the term of the MacArthur Loan.loan.49F-53
At
an extension will be granted.
this filing. Nevertheless, as discussed above, we are pursuing a restructuring and or extension of our debt, as well as the redemption date of our Series B-1 and B-2 Preferred Stock and are hopeful that we will be successful in our negotiations.
The decrease in cash used in operating activities from 2018 to 2019 is primarily attributed to various changes in operating assets and liabilities.
Cash Provided By (Used In) Financing Activities.
Net cash provided by (used in) financing activities was $31.8 million and ($51.8) million for the six months ended June 30, 2018 and 2017, respectively. During the six months ended June 30, 2017, we repaid notes payable of $50.3 million and none during the six months ended June 30, 2018. We received $30.0 million for the issuance of preferred equity instruments and $4.8 million for the issuance of preferred equity in the Hotel Fund during the six months ended June 30, 2018. We also made dividend payments of $1.9 million and $1.1 million for the six months ended June 30, 2018 and 2017, respectively.
Critical Accounting Policies
Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. As of June 30, 2018, there have been no significant changes in our critical accounting policies from December 31, 2017, except as disclosed in Note 2 of the unaudited condensed consolidated financial statements included in this Form 10-Q.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements that are applicable to us, see Note 2 to our unaudited condensed financial statements included with this Form 10-Q.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
| ITEM 4. | CONTROLS AND PROCEDURES. |
2019. That evaluation did not identify any changes in our internal control over financial reporting that occurred during our latest fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, beginning January 1, 2019, we implemented ASC 842 and related changes to our processes related to identification of leases, calculation of right-of-use assets and lease liabilities and processes for gathering information for disclosures. 2019.2018.2019. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of these disclosure controls and procedures were effective as of June 30, 2018.U.S. GAAP. Also, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. ManagementUnder the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management assessed the effectiveness of our internal control over financial reporting as of June 30, 2018,2019, utilizing the 2013 framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013).2018.isas a smaller reporting company under the rules of the SEC.SEC, is not required to include such report.53F-56
ITEM 1. LEGAL PROCEEDINGS.
In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Item 1A, “Risk Factors,” in our Form 10-K for the year ended December 31, 2017, which could materially affect our business, financial condition or results of operations. The risks described in our Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.
Holders of the preferred limited liability company interests in the Hotel Fund may pursue rescission rights and related claims.
Holders of the preferred limited liability company interests in the Hotel Fund may allege that some aspects of the use of the net proceeds of the offering are inconsistent with the disclosure contained in the offering documents issued by the Hotel Fund in connection with the offer and sale of the preferred limited liability company interests. A successful claimant for damages under federal or state law could be awarded an amount to compensate for the decrease in the value of such holder's units caused by the alleged violation (including, possibly, punitive damages), together with interest, while retaining the units. If such holders bring successful rescission claims against the Hotel Fund, it may not have sufficient funds to pay such claims.
| ITEM 4. | MINE SAFETY |
| ITEM 5. | OTHER INFORMATION. |
None.
Exhibit
| Description of Document | |||
3.1 | ||||
3.1.1 | ||||
3.2 | ||||
3.2.1 | ||||
| ||||
| ||||
| ||||
| 4.4 | ||||
| ||||
| ||||
| 10.7 | ||||
| ||||
| 10.9 | ||||
| 10.10 | ||||
| 10.33 | ||||
| 31.1* | ||||
31.2* | ||||
32.2*† | ||||
| |||
| 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. | ||
IMH FINANCIAL CORPORATION /s/ Samuel J. Montes Title Date Lawrence D. Bain (Principal Executive Officer)Date: August 14, 20182019By: By:Samuel J. Montes Chief Financial Officer Signature /s/ Lawrence D. Bain Interim Chief Executive Officer and ChairmanCo-Chairman August 14, 20182019 /s/ Samuel J. Montes August 14, 20182019Samuel J. Montes (Principal Financial Officer 56