Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark one)

 

x

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

For the quarterly period ended June 30, 2018

2019

OR

 

¨

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

For the transition period from: __________to __________


Commission File Number 000-52611


IMH FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

27-1537126

Delaware27-1537126
(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

7001 N. Scottsdale Rd #2050

Scottsdale, Arizona 85253

(Address of principal executive offices and zip code)


(480) 840-8400

 (Registrant’s

(Registrant’s telephone number, including area code)


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

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

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

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

(Do not check if a smaller reporting company)

Emerging growth company

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. ☐


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

Theþ


Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Class B-1 Common Stock
Class B-2 Common Stock
Class B-3 Common Stock
Class B-4 Common Stock
Class C Common Stock

As of August 14, 2019, the registrant had 1,576,616outstanding the following classes and series of stock: (i) 1,909,338 shares of Common Stock, 3,491,758(ii) 3,376,821 shares of Class B-1 Common Stock, 3,492,954(iii) 3,377,953 shares of Class B-2 Common Stock, 7,159,759(iv) 6,912,510 shares of Class B-3 Common Stock, (v) 313,790 shares of Class B-4 Common Stock, and 691,733(vi) 668,903 shares of Class C Common Stock, (vii) 2,604,852 shares of Series B-1 Cumulative Convertible Preferred Stock, (viii) 5,595,148 shares Series B-2 Cumulative Convertible Preferred Stock, (ix) 2,352,941 shares of Series B-2, 2,352,941 shares of B-3 Cumulative Convertible Preferred Stock, and (x) 22,000 shares of Series A Preferred Stock. The Series B-1, B-2 and B-3 Preferred Stock outstanding. There is collectively convertible, and when combined with outstandingno established market for the registrant’s shares of common stock would convert into 27,279,551 outstanding common shares as of June 30, 2018.

or preferred stock.


Table of Contents


IMH Financial Corporation

June 30, 20182019 Form 10-Q Quarterly Report

Index


Part I.

FINANCIAL INFORMATION

Page No.

Item 1.

Financial Statements

4

 Unaudited Condensed Consolidated Balance sheetSheet as of June 30,201830, 2019 and Audited Consolidated Balance Sheet as of December 31, 20172018

5

 Unaudited Condensed Consolidated Statements of Operations for the threeThree and six months endedSix Months Ended June 30, 20182019 and 20172018

6

 Unaudited Condensed Consolidated Statements of Stockholders'Stockholders’ Equity for the six months endedThree and Six Months Ended June 30, 2019 and 2018

7

 Unaudited Condensed Consolidated Statements of Cash Flows for the six months endedSix Months Ended June 30, 20182019 and 20172018

8

 

Notes to Unaudited Condensed Consolidated Financial Statements

9

Item 2.

Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations

36

Item 3

3.

Quantitative and Qualitative Disclosures about Market Risk

52

Item 4.

Controls and Procedures

53

Part II.

Item 1.

OTHER INFORMATION

Legal Proceedings
Item 1A.Risk Factors

Item 1.

Legal Proceedings

54

Item 1A.

Risk Factors

54

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

54

Item 3.

Defaults Upon Senior Securities

54

Item 4.

Mine Safety Disclosures

54

Item 5.

Other Information

54

Item 6.

Exhibits

55

Signatures

Signatures

56



2

Table of Contents


 

PART I



3F-1

Table of Contents

ITEM 1.     FINANCIAL STATEMENTS



4F-2

Table of Contents

IMH FINANCIAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

  

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


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

5F-3

Table of Contents

IMH FINANCIAL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)

  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


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

6F-4

Table of Contents

IMH FINANCIAL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’ EQUITY

Six Months Ended June 30, 2018

(In thousands, except share data)

  

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)

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

7F-5

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IMH FINANCIAL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

STOCKHOLDERS’ EQUITY

(In thousands)

thousands, except share data) 
  

Six months ended June 30,

 
  

2018

  

2017

 

OPERATING ACTIVITIES

        

Net loss

 $(6,176) $(1,096)

Adjustments to reconcile net loss to net cash used in operating activities:

        
       Income (loss) allocated to non-controlling interest  (115)  734 

Equity method loss from unconsolidated entities

  -   171 

Stock-based compensation and option amortization

  175   429 

Stock-based compensation related to purchase of treasury stock

  -   116 

Gain on disposal assets

  (395)  (8,506)

Amortization of deferred financing costs

  81   447 

Depreciation and amortization expense

  644   371 

Accretion of mortgage income

  (258)  397 

Accretion of discount on notes payable

  446   (228)

Non-cash interest expense funded by loan draw

  541   - 

Changes in operating assets and liabilities

        

Accrued interest receivable

  (12)  (83)

Other receivables

  (68)  (211)

Other assets

  (411)  608 

Accrued property taxes

  37   (191)

Accounts payable and accrued expenses

  (2,774)  (2,109)

Customer deposits and funds held for others

  317   1,497 

Accrued interest

  230   (401)

Total adjustments, net

  (1,562)  (6,959)
Net cash used in operating activities  (7,738)  (8,055)

INVESTING ACTIVITIES

        

Proceeds from sale of real estate owned, operating properties, and other assets

  526   97,052 

Purchase of property and equipment

  (24)  (260)

Mortgage loan investment and funding

  (2,920)  (7,000)

Investment in unconsolidated entities

  -   (1,810)

Investment in real estate owned and other operating properties

  (3,157)  (1,069)
Net cash provided by (used in) investing activities  (5,575)  86,913 

FINANCING ACTIVITIES

        
Proceeds from issuance of preferred equity  30,000   - 

Equity issuance costs paid

  (387)  - 

Purchase of interest rate cap

  (548)  - 

Debt issuance costs paid

  -   (100)

Repayments of notes payable

  -   (50,257)

Repayments of capital leases

  -   (2)

Dividends paid

  (1,998)  (1,066)

Purchase of treasury stock

  -   (338)
Distributions to noncontrolling interests  -   (9)

Distributions to Hotel Fund investors

  (100)  - 

Contributions from Hotel Fund investors

  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 

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD

  11,932   13,689 

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD

  30,406   40,775 

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH OF DISCONTINUED OPERATIONS

  -   425 

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH OF CONTINUING OPERATIONS, END OF PERIOD

 $30,406  $40,350 
         
SUPPLEMENTAL CASH FLOW INFORMATION        

Cash paid for interest

 $204  $1,500 

Cash paid for taxes

 $-  $5 

Non-Cash Investing and Financing Transactions

        

Capital expenditures in accounts payables and accrued expenses

 $287  $446 

Decrease in non-controlling interest through profit participation

 $-  $(1,537)

Non-cash recovery of credit losses

 $-  $(228)

Capital lease and other liabilities assumed by buyer in sale of property

 $-  $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

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

8F-6

Table of Contents

IMH FINANCIAL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data) 


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


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-7

IMH FINANCIAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

  Six Months Ended June 30,
  2019 2018
Cash flows from operating activities:    
Net loss $(9,083) $(6,291)
Adjustments to reconcile net loss to net cash used in operating activities: 
 
Stock-based compensation and option amortization 192
 178
Gain on disposal of assets (20) (395)
Amortization of deferred financing costs 81
 78
Depreciation and amortization expense 591
 644
Accretion of mortgage income (55) (258)
Accretion of discount on note payable 259
 446
Non-cash interest expense funded by loan draw 752
 541
Unrealized loss on derivatives 291
 
Changes in operating assets and liabilities, net of business combination: 
 
Accrued interest receivable 315
 (12)
Other receivables 87
 (68)
Other assets (2,383) (411)
Accrued property taxes 333
 37
Accounts payable and accrued expenses 1,823
 (2,774)
Customer deposits and funds held for others 1,481
 317
Accrued interest (239) 230
Total adjustments, net 3,508
 (1,447)
Net cash used in operating activities (5,575) (7,738)
     
Cash flows from investing activities:    
Proceeds from sale of real estate owned and operating properties and other assets 39
 526
Purchases of property and equipment (23) (24)
Mortgage loan payoff 3,000
 
Mortgage loan investment and fundings (921) (2,920)
Investment in real estate owned and other operating properties (9,804) (3,157)
Net cash used in investing activities (7,709) (5,575)
     
Cash flows from financing activities:    
Proceeds from notes payable 11,158
 
Debt issuance costs paid (144) 
Repayments of notes payable (10,162) 
Dividends paid (1,709) (1,998)
Purchase of treasury stock (1,000) 
Proceeds from Issuance of Preferred Equity 
 30,000
Equity issuance costs paid 
 (387)
Purchase of Interest rate cap 
 (548)
Contribution of Hotel Fund capital costs (48) 
Contributions from Hotel Fund investors 7,518
 4,820
Distributions to Hotel Fund investors (610) (100)
Net cash provided by financing activities 5,003
 31,787

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-8

IMH FINANCIAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

  Six Months Ended June 30,
  2019 2018
     
Net increase (decrease) in cash, cash equivalents, and restricted cash (8,281) 18,474
Cash, cash equivalents, and restricted cash, beginning of period 25,650
 11,932
Cash, cash equivalents, and restricted cash, end of period $17,369
 $30,406
     
Supplemental cash flow information 
  
Cash paid for interest $681
 $204
Cash paid for taxes $45
 $
Non-cash investing and financing transactions 
 
Foreclosure on investment in mortgage loan $7,625
 $
Acquisition of operating property building and operations through foreclosure $7,300
 $
Assumption of first mortgage, accrued interest and operating liabilities through foreclosure $15,457
 $
Loan from JPM Chase Funding, Inc., (a related party) for purchase first mortgage on operating property $11,000
 
Lease liability arising from the recognition of right-of-use asset $1,548
 $
Noncash interest cost added to notes payable $752
 $
Noncash interest costs capitalized to operating property $760
 $
Capital expenditures in accounts payable and accrued expenses $3,566
 $287


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-9





IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1-1 — BUSINESS, BASIS OF PRESENTATION AND LIQUIDITY


Our Company


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

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

Our History and Structure

We were formed from the conversion of our predecessor entity, IMH Secured Loan Fund, LLC (the “Fund”), into a Delaware corporation. The CompanyFund, which was organized in May 2003, commenced operations in August 2003, focusing on investments in senior short-term whole commercial real estate mortgage loans collateralized by first mortgages on real property. The Fund was externally managed by Investors Mortgage Holdings, Inc. (the “Manager”), which was incorporated in Arizona in June 1997 and is seekinglicensed as a mortgage banker by the State of Arizona. Through a series of private placements to expand its hospitality footprintaccredited investors, the Fund raised $875 million of equity capital from May 2003 through December 2008. Due to the cumulative number of investors in the Fund, the Fund registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on April 30, 2007 and began filing periodic reports with the Securities and Exchange Commission (“SEC”). On June 18, 2010, the Fund became internally-managed through the acquisition orof the Manager, and converted into a Delaware corporation in a series of transactions that we refer to as the “Conversion Transactions”. The Company continues to explore additional alternative management of other luxury boutique hotels.

structures in an effort to reduce Company overhead.


Basis of Presentation


The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for a complete set of financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the results for the periods presented have been made. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018. These condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2017.

. 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.


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

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.



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Table of Contents

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


Liquidity

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

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

The Company has taken a number of steps to maintain an adequate level of on-going liquidity over the years. Our liquidity plan has included obtaining outside financing, selling mortgage loans, and selling the majority of our legacy real estate assets.

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

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

In addition, in connection with the acquisition and renovation of certain hotel and related assets consisting of 64 luxury guest rooms, indoor and outdoor function space, full-service food and beverage outlet and restaurant operations, and spa operations located in Sonoma, California (“MacArthur Place”),Place, the Company entered into a building loan agreement/disbursement scheduleagreement and related agreements (the “MacArthur Loan”) in October 2017 with MidFirst Bank in the amount of $32.3 million. As described in Note 9, the MacArthur Loan was modified during the first quarter of 2019 to increase the loan facility to $37.0 million and to establish certain additional reserve accounts in the amount of which approximately $19.4 million was utilized for the purchase$2.0 million. The renovation of MacArthur Place $10.0 million of which has been set asideis scheduled to fund planned hotel improvements, andbe completed in the balance is to fund interest reserves and operating capital. The Company has begun to undertake a significant renovation project of MacArthur Place which is expected to continue until the first or secondthird quarter of 2019.


The modified MacArthur Loan requiredrequires the Company to fund minimum equity of $17.4$27.7 million, all of which has been funded.funded as of June 30, 2019. The Company was required to providehas provided a loan repayment guaranty equal to 50% of the original principal amount of the MacArthur Loan principal along with a guaranty of interest and operating deficits, as well as other customary non-recourse carve-out matters such as bankruptcy and environmental matters. Under the guarantees, the Company is required to maintain a minimum Tangible Net Worth, as defined, of $50.0 million and minimum liquidity of $5.0 million throughout the term of the MacArthur Loan. The Company was in compliance with such financial covenants as of June 30, 2018.2019. The loan includes a provision requiring substantial completion of the project by June 30, 2019, which the lender agreed to waive and extend to September 1, 2019. In addition, the MacArthur Loan requiredrequires MacArthur Place to establish various operating and reserve accounts at MidFirst Bank which are subject to a cash management agreement. In the event of default, MidFirst Bank has the ability to take control of such accounts for the allocation and distribution of proceeds in accordance with the cash management agreement.


While the Company initially utilized its own equity (along with debtand proceeds as described above)from the MacArthur Loan to fund the purchase of MacArthur Place, the Company sponsored L’Auberge Fund Manager, LLC, a wholly-owned subsidiary of the Company, whichand commenced an offering in November 2017 of up to $25.0 million of preferred limited liability company interests (the “Preferred Interests”) inof the L’Auberge de Sonoma Resort Fund, LLC (the “Hotel Fund”) pursuant to Regulation D and Regulation S promulgated under the Securities Act.. The net proceeds of the Offeringthis offering are being used primarily to (i) reimburse the Company’s for its initial $17.8 million common investment in the Hotel Fund and (ii) fund certain renovations to MacArthur Place. The Company is expected to retain a 10.0% Preferred Interest inand operating losses at the hotel. As of June 30, 2019, the Hotel Fund. The Hotel Fund hashad sold Preferred Interests to unrelated investors in the aggregate amount of $5.6 million through June 30, 2018. The amount of Preferred Interests raised reduced the Company’s common member interests by a corresponding amount.  At June 30, 2018, the Company’s common member interest in the Hotel Fund totaled $15.6 million and the Company held a preferred interest of $0.6$22.5 million. Since the Company is deemed the primary beneficiary of and controls the Hotel Fund, we have consolidated this entity.


As of June 30, 2018,2019, we had cash and cash equivalents of $30.1$12.2 million, REO assets held for sale with a carrying value of $12.6$7.4 million and other REO assets with a carrying value of $32.8$33.7 million that we intendseek to dispose of within the next 12 months. We

F-12

IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BUSINESS, BASIS OF PRESENTATION AND LIQUIDITY - continued

continue to evaluate potential disposition strategies for our remaining REO assets and to seek additional sources of debt and equity for investment and working capital purposes.

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.


At any time after July 24, 2020, each holder of our Series B-1 and B-2 Preferred Stock may require the Company entered intoto redeem, out of legally available funds, the shares held by such holder at a Series B-3 Cumulative Convertible Preferred Stock Subscription Agreement with its largest shareholder, JPMorgan Chase Funding Inc. (“Chase Funding”price (the “Redemption Price”), pursuant equal to which Chase Funding agreed to purchase 2,352,941 sharesthe greater of Series B-3 Cumulative Convertible Preferred Stock, $0.01 par(i) 150% of the sum of the original price per share plus all accrued and unpaid dividends or (ii) the sum of the tangible book value of the Company per share of voting Common Stock and all accrued and unpaid dividends as of the date of redemption. At any time after February 9, 2023, the holder of our Series B-3 Preferred Stock may require the Company (the “Series B-3 Preferred Stock”),to redeem, out of legally available funds, at a purchaseRedemption Price equal to the greater of (i) 145% of the sum of the original price of $3.40 per share for a total purchase price of $8.0 million. The Company intends to useplus all accrued and unpaid dividends or (ii) the proceeds from the sale of these shares for general corporate purposes. While severalsum of the termstangible book value of the Second Amended CertificateCompany per share of Designation remained consistent with the Restated Certificate of Designationvoting Common Stock and provide substantially all accrued and unpaid dividends as of the rightsdate of redemption. While the Preferred Shareholders have indicated their willingness to potentially extend the redemption period beyond July 24, 2020, a cash payment in the aggregate amount of $2.6 million is due and preferencespayable to the holders of the Series B-1 and Series B-2 Preferred Stock except that 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. In connection with this transaction, the Company issuedJuly 24, 2020 whether or not a warrant to Chase Funding to acquire 600,000 sharesredemption is requested. The current holders of our common stock that is exercisable at any time on or after February 9, 2021 for a two (2) year period at an exercise price of $2.25 per share.

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”.


As described in arrears on or before the last day of each calendar quarter.  The Series A Preferred Stock shall, with respect to dividend and redemption rights and rights upon liquidation, dissolution or winding up of the Corporation, rank senior to all other classes or series of shares ofNote 9, the Company’s preferred and common stock and to all other equity securities issued by the Company from time to time. See Note 11 for additional information relating to the Series B-3 Preferred Stock and Series A Perpetual Preferred Stock.

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.


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

While we


We have been successful thus far in securing financing through June 30, 20182019 to provide adequate funding and funding commitments for working capital purposes, which has been supplemented by proceeds from the sale of certain REO assets, receipts of principal and interest on mortgage and related investments,investments. Moreover, we are continuing to negotiate potential extensions or restructuring of our Series B Preferred Stock and/or our outstanding debt obligations. However, there is no assurance that we will be successful in such negotiations, or in selling our remaining REO assets in a timely manner or in obtaining additional or replacement financing, if needed, to sufficiently fund future operations, repay existing debt, or to implement our investment strategy. Our failure to generate sustainable earning assets and to successfully liquidate a sufficient number of our loans and REO assets may have a material adverse effect on our business, results of operations and financial position.

In the absence of favorably resolving the matters described above, the collective nature of these uncertainties create substantial doubt about our ability to continue as a going concern for a period beyond one year from the date of issuance of these condensed consolidated financial statements.
10

Table of Contents

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES


Our significant accounting policies are detailed in “Note 2 - Summary of Significant Accounting Policies" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

Redeemable Convertible Preferred Stock

During the six months ended June 30, 2018,2018.


Operating Properties Acquired Through Foreclosure

Operating properties acquired through foreclosure consist of certain operating assets acquired through foreclosure that the Company issued redeemable convertible preferred stock. The preferred stock is convertible into common stock on a one-to-one basis, and is redeemable five years from the issuance date at the option of the holder for a redemption price of 145% of the original purchase price of the preferred stock. The preferred stock is reported in the mezzanine equity section of the accompanying consolidated balance sheets.  Since the preferred stock does not have a mandatory redemption date (rather it is at the option of the holder), under applicable accounting guidance, the Companyhas elected to amortize the redemption premium over the five year redemption period using the effective interest methodhold for on-going operations and recording this as a deemed dividend, rather than recording the entire accretion of the redemption premium as a deemed dividend upon issuance of the preferred stock. The Company is required to assess whether the preferred stock is redeemable at each reporting period.

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.


Leases

Lessee Accounting

As further discussed below, the Company adopted the provisions of Accounting Standards Update 2016-02, Leases, effective January 1, 2019. We determine if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets are reported asrecorded in other assets and operating lease liabilities are recorded in accounts payable and other accrued expenses in the accompanying condensed consolidated balance sheets. Changes in the fair value of interest rate derivatives, are recognized in earnings as unrealized gain (loss) on derivatives in the accompanying condensed consolidated statements of operations.

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.


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Table of Contents

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued

The significant accounting policies that have changed


condensed consolidated balance sheet. Finance leases, none of which existed as a result of the adoption of ASU 2014-09Accounting Standards Codification (“ASC”) 842 or as of June 30, 2019, would be reflected in property and equipment and other liabilities in our condensed consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are set forth below.

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.


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

Lessor Accounting

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

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

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

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

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

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

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued

Commercial Real Estate Rental Revenue

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

The Company regularly reviews receivables related to rent and unbilled rent receivables and determines collectability by taking into consideration the amount we expect to be entitled to for providingtenant’s payment history, the goods or services:

• 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, the Company recognizes all changes in the collectability assessment for free or discounted goods or services are satisfied atan operating lease as an adjustment to rental income and does not record an allowance for uncollectible accounts.


The Company recognizes the earlier point in time whenrental income on a straight-line basis over the material right expires or the underlying free or discounted good or service is provided to the hotel guest.

• 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.


Funds Held by Lender and Restricted Cash


Funds held by lender and restricted cash includes amounts maintained in escrow or other restricted accounts deposited into reserve accounts held by lenders for contractually specified purposes, which includes property taxes insurance, and interest reserves.insurance. The following table provides a reconciliation of cash, cash equivalents, and funds held by lender and restricted cash reported within the condensed consolidated balance sheetsheets that sum to the total of the same such amounts shown in the condensed consolidated statement of cash flows as of June 30, 20182019 and December 31, 20172018 (in thousands):

  

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 

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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

This balance includes property tax, insurance and construction related reserves for the FASB issued ASU 2014-09. This ASU supersedes the revenue recognition requirements in Revenue Recognition (Topic 605)MacArthur Loan totaling $2.3 million and requires entities to recognize revenue when a customer obtains control of promised goods or services$0.2 million at June 30, 2019 and in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. Subsequent to ASU 2014-09, the FASB issued several related ASUs to clarify the application of the new revenue recognition standard, collectively referred to herein as ASU 2014-09. We adopted this standard effective January 1,December 31, 2018, under the modified retrospective method, and the adoption of this standard did not have a material impact on our consolidated financial statements. See related disclosures in Note 3.

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.


Mortgage Investment Revenue Recognition

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

Recent Accounting Pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of adopting this ASU, adding approximately $2.2 millionaccounting standards updates (“ASUs”) to the beginningFASB’s ASC. The Company considers the applicability and impact of the period cash, cash equivalents, and restricted cash and approximately $0.6 million to the end of the period cash, cash equivalents, and restricted cash. The reclassification resulted in an increase to cash, cash equivalents, and restricted cash used in operating activities by $1.4 million and a decrease to cash, cash equivalents, and restricted cash provided by investing activities by $0.2 million. The preceding table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown on the condensed consolidated statement of cash flows.

all ASUs.

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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.


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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


F-15

IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued

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

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or entered into after,superseded. In addition, the beginningamendments expanded the requirements on the analysis of stockholders' equity for interim financial statements. Under the earliest comparative periodamendments, an analysis of changes in each caption of stockholders' equity presented in the financial statements, with certain practical expedients available.balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The Company is continuing to evaluatehas adopted the impact thatrequirements of this new guidance will have on its consolidated financial statements and related disclosures

accounting pronouncement in fiscal 2019.


Accounting Standards Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (“ASU 2016-13”). The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019. We have not yet determinedThe Company is currently evaluating the impact of the adoption of ASU 2016-13 will havethis guidance on the Company’s consolidatedits financial statements and related disclosures.


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

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.




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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3 — REVENUE

On January 1, 2018, we adopted Topic 606 using


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

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

 2019 2018 2019 2018
Operating property revenue     
 
Commercial real estate rental revenue $398
 $
 $398
 $
Hotel revenues        
Rooms 766
 1,205
 957
 1,897
Food and beverage 536
 523
 539
 1,008
Banquet 26
 96
 30
 276
Spa and fitness center 118
 188
 212
 328
Other 36
 93
 57
 159
Total operating property revenue 1,880
 2,105
 2,193
 3,668
Mortgage loan income, net 447
 641
 1,098
 1,266
Management fees, investment and other income 208
 255
 276
 292
Total revenue $2,535
 $3,001
 $3,567
 $5,226

Operating Property Revenue

Commercial Real Estate Rental Revenue

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

Hotel Revenues

The adoptionCompany derives hotel revenues from our hotel in Sonoma, California, which is reflected as operating property revenue in the consolidated statements of this standard did not have an impact on our consolidated financial statements, thus no adjustments to opening retained earnings were made as of January 1, 2018. Results for reporting periods beginning after January 1, 2018, are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 605-Revenue Recognition.

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.


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


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

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 

Mortgage Investment Revenue Recognition


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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


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.


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 in 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.


NOTE 4 — MORTGAGE LOANS, NET


Lending Activities

As of June 30, 2018,2019, the Company had sixheld four portfolio loans with a carrying valuebalance of $22.9$13.3 million, fournet of which were performing loans bearing a weighted-average interest rate of 9.71% as of June 30, 2018. As of December 31, 2017, the Company had four loans with a carrying value of $19.7 million,valuation allowances, two of which were performing loans bearing a weighted-average interest rate of 9.69%9.7% as of June 30, 2019. As of December 31, 2018, the Company held six portfolio loans with a balance of $23.2 million, net of valuation allowances, three of which were performing loans bearing a weighted-average interest rate of 9.4%. As of June 30, 20182019 and December 31, 2017,2018, the Company hadheld two and three non-performing portfolio loans, respectively, two of which have been fully reserved and hadhave a zero carrying value. Asvalue as of June 30, 2019. During the three months ended June 30, 2019, one performing loan with a principal balance of $3.0 million was repaid in full. In addition, during the three months ended June 30, 2019, we foreclosed on one of the Company’s mezzanine loan investments that had a carrying value of $8.2 million as of the date of foreclosure, which had been in default since September 2018. In May 2019, we foreclosed on the loan collateral consisting of 100% of the membership interests in the limited liability company owning the underlying property. We recorded the acquired assets and assumed liabilities at fair value and consolidated the operations commencing on the foreclosure date. See additional discussion in Notes 5 and 8.

During the three months ended June 30, 2019, and 2018, we recorded mortgage interest income of $0.4 million and December 31, 2017,$0.6 million, respectively. During the six months ended June 30, 2019 and 2018, we recorded mortgage interest income of $1.1 million and $1.3 million, respectively. The valuation allowance was $12.7 million.

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.

2019.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


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


As of June 30, 2018,2019, we held total REO assets of $67.3$104.8 million, of which $12.6$7.4 million were classified as held for sale, $21.9$63.7 million were held as operating properties, and $32.8$33.7 million were classified as other real estate owned. AtAs of December 31, 2017,2018, we held total REO assets of $64.6$75.0 million, of which $5.9$7.4 million were held for sale, $20.5$33.9 million were held as operating properties and $38.3$33.7 million were classified as other real estate owned.


As described in Note 4, on May 29, 2019, we foreclosed on the membership interests of a limited liability company that was pledged as collateral on a defaulted mezzanine note receivable. The entity owns and operates a commercial office building known as Broadway Tower, located in St. Louis, Missouri. Upon foreclosure, we acquired the membership interests in the limited liability company that owns the office building and related assets, and assumed related liabilities of Broadway Tower, all of which were recorded at fair value in accordance with GAAP. The acquired assets consist of a building, land, furniture and fixtures, operating

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IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

During the three and six months ended June 30, 2019, the Company sold one REO asset for $39.0 thousand resulting in a gain on sale of $20.0 thousand. During the three and six months ended June 30, 2018, wethe Company sold two REO assets (or portions thereof) for $0.2 million and $0.5 million (net of transaction costs and other adjustments)costs) resulting in a total net gain on sale of $0.1 million and $0.4 million. During the six months ended June 30, 2017, we sold four REO assets (or portions thereof) for $92.9 million, (net of transaction costs and other adjustments), resulting in a total net gain of $8.5 million, of which $6.8 million was included as a component of discontinued operations in the unaudited condensed consolidated statement of operations.

respectively.


REO Planned Development and Operations


Costs and expenses related to operating, holding and maintaining our operating properties and REO assets are expensed as incurred and included in operating property direct expenses and as expenses for non-operating real estate owned in the accompanying condensed consolidated statements of operations. For the three months ended June 30, 20182019 and 2017,2018, these costs and expenses were $2.3$3.7 million and $1.1$2.3 million, ($0.3 million of which is included in income from discontinued operations), respectively. For the six months ended June 30, 20182019 and 2017,2018, these costs and expenses were $4.7$6.2 million and $5.8$4.7 million, respectively, ($4.0 million of which is included in loss from discontinued operations), respectively. Costs related to the development, renovation or improvements of the Company’s real estate assets are generally capitalized.capitalized, and costs relating to holding the assets are generally charged to expense. Cash outlays for capitalized developmentrenovation costs totaled $9.8 million and $3.2 million and $1.1 million forduring the six months ended June 30, 2019 and 2018, and 2017, respectively.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 - INVESTMENTS

— VARIABLE INTEREST ENTITIES


As of June 30, 20182019 and December 31, 2017,2018, we consolidated multiple variable interest entities (“VIE’s”) relating to threetwo projects: two areone is comprised of real estate holdings and one isthe Hotel Fund that owns an operating hotel, property.restaurant and spa. We are deemed to be the primary beneficiaries of these consolidated VIE’s as we have the power to direct the activities that most significantly affect their economic performance and we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. The assets of our consolidated VIE’s are only available to settle the obligations of the respective entities. Our

The following table summarizes the carrying amounts of the above referenced entities’ assets and liabilities included in the Company’s condensed consolidated balance sheets included the assetsat June 30, 2019 and liabilitiesDecember 31, 2018, net of these assets, which primarily comprised the followingintercompany eliminations (in thousands):

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

The following table summarizes the results of operations for the three and six months ended June 30, 2019 and 2018, thenet of intercompany eliminations (in thousands):
  Three Months Ended June 30, Six Months Ended June 30,
  2019 2018 2019 2018
Net loss $(2,890) $(833) $(6,040) $(2,333)

The Company’s maximum exposure to loss consists of its combined equity in those entities which totaled $25.1 million as of June 30, 2019. The Hotel Fund raised $1.4made a preferred distribution, payable monthly, accruing at a rate of 7.0% per annum on invested capital, cumulative and non-compounding (the “Preferred Distribution”) of $0.3 million and $4.8 in Preferred Interests$0.6 million and made distributions ofduring the three and six months ended June 30, 2019, and $0.1 million.

million during the three and six months ended June 30, 2018.
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NOTE 7 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES


Interest Rate Derivative


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IMH FINANCIAL CORPORATION
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We are exposed to risks arising from rising interest rates on our variable rate debt instruments. To manage these risks, we primarilyperiodically use interest rate derivatives. Our interest rate derivatives, which currently consistconsists of onean interest rate cap. To mitigate the nonperformance risk, we routinely use a third party’s analysis of the creditworthiness of the counterparties, which supports our belief that the counterparties’ nonperformance risk is limited. All derivatives are recorded at fair value.


During the six months ended June 30, 2018, we entered into an interest rate cap with a notional amount of $36.0 million and a rate cap of 2.2% for a total cost of $0.5 million.. The interest rate cap had an effective date of March 21, 2018 and terminates on March 1, 2021. This instrument was not designated as a cash flow hedge.  During the three and six months ended June 30, 2018, there was no adjustment of the fair value on the interest rate cap.

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NOTE 8 — FAIR VALUE


Valuation Allowance and Fair Value Measurement of Loans, and Real Estate Held for Sale,

Other REO, and Derivative Instruments


Our valuation analysis process and procedures are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.2018. We perform a valuation analysis of our loans, REO held for sale, and other REO, and derivative instruments on a quarterly basis. We consider all relevant, material circumstances to determine if, and the extent to which, a valuation allowance is required.


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


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


Selection of Single Best Estimate of Value


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


Fair Value Measurements of Operating Properties Acquired Through Foreclosure

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

Fair Value Measurements of Derivative Instrument

As described in Note 7, during the six months ended June 30, 2018, we purchased


The Company acquired an interest rate cap in order2018 to mitigate ourits risk on certain variable debt against rising interest rates. In order to estimate the fair value of this derivative instrument, we use valuation reports from athe third party broker who issued the derivative instrument. The report contemplatescalculates fair value by using inputs, including market-observable data such as USDU.S dollar and foreign-denominated interest rate curves, foreign exchange rates, volatilities, and information derived from or corroborated by that market-observable data which are classified as Level 2 inputs in the fair value hierarchy. The fair value method does not contemplate credit valuation adjustments (“CVA”) which would be a Level 3 input as the CVA uses credit spreads which are generally unobservable to the market. The fair value used in theseour financial statements approximate fair value without the CVA. As of June 30, 20182019, the fair value of the interest rate cap was $.5approximated $39 thousand and we recorded an unrealized loss on derivative instruments of $0.1 million and there were no gains or losses on the instrument$0.3 million during the three orand six months ended June 30, 2018.

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:

2018.

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 

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NOTE 8 — FAIR VALUE – continued

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:

Expected stock price volatility

40%

Risk-free interest rate

2%

Expected life of warrants (in years)

3

Expected dividend yield

0%

Common Stock value discount for lack of marketability

25%



Valuation Conclusions


Based on the results of our evaluation and analysis, we did not record any non-cash provision for credit losses on our loan portfolio or impairment of REO during the 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.


As of June 30, 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.

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NOTE 9 — NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS


As of June 30, 20182019 and December 31, 2017,2018, our debt, notes payable and special assessment obligations consisted of the following (in thousands):

  

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

Interest expense for the three months ended June 30, 20182019 and 20172018 was $0.8$0.3 million and $0.4$0.8 million, respectively. Interest expense for the six months ended June 30, 2019 and 2018 and 2017 was $1.5$0.8 million and $1.9$1.5 million, respectively. The 2017 amount includes $1.1 million, which is included in income from discontinued operationsCompany capitalized

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IMH FINANCIAL CORPORATION
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NOTE 9 — NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS – continued

interest relating to the MacArthur Loan in the accompanying condensed consolidated statementsamount of operations.

$0.3 million and $0.8 million for the three and six months ended June 30, 2019. There was no capitalized interest during 2018.


Senior Indebtedness


MacArthur Place


In October 2017, we borrowedclosed on a $32.3 million acquisition and construction loan from MidFirst Bank in connection with our purchase of MacArthur Place (the “MacArthur Loan”), of which (i) $19.4 million was utilized for the purchase of MacArthur Place, (ii) approximately $10.0 million of which was set aside to fund planned hotel improvements, and (iii) the balance was to fund interest reserves and operating capital. TheDuring the six months ended June 30, 2019, the MacArthur Loan was modified to, among other things, increase the total loan facility to $37.0 million, thereby increase the Company’s equity commitment to $27.7 million due to projected increased renovation costs, and to establish certain additional reserve accounts in the amount of $2.0 million for the completion of certain aspects of the renovation project. The principal balance of the loan was $32.6 million and $20.7 million at June 30, 2019 and December 31, 2018, respectively. The loan bears floating interest equal to the 30-day LIBOR rate (2.09% and 1.56%(2.40% at June 30, 2018 and December 31, 2017, respectively)2019) plus 3.75%3.54%, which may be reduced by up to 0.50% if certain conditions are met.met, which were met as of June 30, 2019. The loan has an initial term of three years subject to the right of the Company to extend the maturity date for two one-year periods, provided that the loan is in good standing and upon satisfaction of certain other conditions, including payment of an extension fee equal to 0.35% of outstanding principal per extension. The Company is required to make interest-only payments during the initial three year term. During the six months ended June 30, 2018,2019, the Company made interestloan draws totaling $0.3$11.9 million, of which $11.2 million represented renovation cost and operating draws and $0.8 million represented draws against the interest reserve on the loan. The Company incurred deferred financing fees of $0.5 million which are being amortized over the term of the loan using the effective interest method.


The MacArthur Loan is secured by a deed of trust on all MacArthur Place real property and improvements, and a security interest in all furniture, fixtures and equipment, licenses and permits, and MacArthur Place related revenues. The Company agreed to provide a construction completion guaranty with respect to the planned improvement project which shall be released upon payment of all project costs and receipt of a certificate of occupancy. In addition, the Company provided a loan repayment guaranty equal to 50% of the loan principal along with a guaranty of interest and operating deficits, as well as other customary carve-out matters such as bankruptcy and environmental matters. Under the guarantees, the Company is required to maintain a minimum tangible net worth as defined, of $50.0 million and minimum liquidity of $5.0 million throughout the term of the loan. Preferred equity is included as a component of equity with respect to the minimum tangible net worth covenant. The Company was in compliance with these covenants and guarantees at June 30, 20182019. The loan includes a provision requiring substantial completion of the project by June 30, 2019 which the lender agreed to waive and December 31, 2017.extend to September 1, 2019. In addition, the Company is required to establish various operating and reserve accounts at MidFirst Bank which are subject to a cash management agreement. In the event of default, MidFirst Bank has the ability to take control of such accounts for the allocation and distribution of proceeds in accordance with the cash management agreement.

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NOTE 9 — NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS – continued

Exchange Notes


In April 2014, we completed an offering of a five-year, 4%, unsecured notes to certain of our shareholders in exchange for common stock held by such shareholders at an exchange price of $8.02 per share (“Exchange Offering”). Upon completion of the Exchange Offering, we issued Exchange Offering notes (“EO Notes”) with a face value of $10.2 million,million. which were recorded by the Company at fair value of $6.4 million based on the fair value and the imputed effective yield of such notes of 14.6% (as compared to the note rate of 4%) resulting in an initial debt discount on the EO Notes of $3.8 million with a balance of $0.8 million at June 30, 2018. This amount is reflected as a debt discount in the accompanying financial statements and is beingwhich was amortized as an adjustment to interest expense using the effective interest method over the term of the EO Notes. Interest is payable quarterly in arrears each January, April, July, and October. The EO Notes mature on April 28, 2019, and may be prepaid in whole or in part without penalty atamortized discount added to the option of the Company. Had the Company met certain minimum cash and profitability conditions, the Company would have been required to prepay fifty percent (50%) of the outstanding principal balance of the EO Notes during the six months ended June 30, 2019 totaled $0.3 million. The EO Notes matured and all outstanding principal and interest were paid on April 29, 2018. Such2019.

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

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

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NOTE 9 — NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS – continued

The purchase of the first mortgage note was funded partially with an $11.0 million loan (under a master repurchase agreement) from Chase Funding and the balance using Company funds. The Chase Funding master repurchase agreement is secured by the $13.2 million first mortgage note and bears interest at one month LIBOR plus 3.81%, requires interest only payments and a balloon payment of unpaid principal and interest upon maturity. The initial maturity date is May 22, 2020 with the potential to extend to May 2021 if, among other conditions, were not metcertain debt yield and no prepayment was required.

occupancy percentages are achieved. The master purchase agreement is subject to a third party loan servicing agreement.


Our notes payable and special assessment obligations have the following scheduled maturities as of June 30, 20182019 (in thousands):

Year

 

Amount

 

2018

 $14 

2019

  16,130 
2020  20,124 

2021

  26 

2022

  8 
Unamortized discounts  (764)

Total

 $35,538 

24

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

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10 SEGMENT INFORMATION


Operating segments are defined as components of an enterprise that engage in business activity from which revenues are earned and expenses incurred for which discrete financial information is available that is evaluated regularly by our chief operating decision makers in deciding how to allocate resources and in assessing performance. The Company intends to expand its hospitality footprint through the acquisition and/or management of other luxury and boutique hotels.


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


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

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

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

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

Condensed consolidated financial information for our reportable operating segments as of June 30, 20182019 and December 31, 20172018 and for the three and six months ended June 30, 20182019 and 20172018 is summarized as follows (in thousands):

  

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 


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NOTE 10 – SEGMENT INFORMATION - continued

  

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)

26
  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)



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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10 – SEGMENT INFORMATION - continued

  

Six months ended June 30, 2018

 

Income Statement Items

 

Mortgage and

REO Legacy

Portfolio and

Other Operations

  

Hospitality and

Entertainment

Operations

  

Corporate and

Other

  

Consolidated

 
                 

Revenues

                

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)

27
  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)


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IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10 – SEGMENT INFORMATION - continued




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









Revenues







Operating property revenue $398

$1,795

$
 $2,193
Mortgage loan income
1,098





1,098
Management fees, investment and other income
5



271

276
Total revenue
1,501

1,795

271

3,567









Total operating expenses
1,625

7,404

4,485

13,514









Other (income) expense







Gain on Disposal of Assets, Net
(20)




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




(1,135)
Unrealized loss on derivatives


291



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



(864)









Total costs and expense, net
470

7,695

4,485

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

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







Net income (loss)
$1,031

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

F-26

IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – SEGMENT INFORMATION - continued



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









Revenues







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





1,266
Management fees, investment and other income


243

49

292
Total revenue
1,266

3,911

49

5,226









Total operating expenses
1,412

6,212

4,463

12,087









Other (income) expense







Gain on disposal of assets, net
(395)




(395)
Recovery of credit losses
(175)




(175)
Total other income
(570)




(570)









Total costs and expense, net
842

6,212

4,463

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

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







Net income (loss)
$424

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


NOTE 11 — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE


Common Stock


Shares of Common Stock, Class B Common Stock, Class C Common Stock, and Class D Common Stock share proportionately in our earnings and losses attributable to common shareholders. During the six months ended June 30, 2018, we acquired 44,068 shares of Class C common stock from a shareholder at no cost. Such shares have been recorded as treasury stock. There are no shares of Class D Common Stock outstanding as of June 30, 20182019 or December 31, 2017.  

2018.


Preferred Stock


In July 2014, the Company issued a total of 8.2 million shares of the Company’s Series B-1 and B-2 Cumulative Convertible Preferred Stock to certain investor groups in exchange for $26.4 million. Except for certain voting and transfer rights, the rights and obligations of the Series B-1 Preferred Stock and Series B-2 Preferred Stock are substantially the same.

On April 11, 2017, Chase Funding, an affiliate of JPMorgan Chase & Co., purchased all of the Company’s outstanding Series B-2 Preferred Shares directly from SRE Monarch pursuant to a Preferred Stock Purchase Agreement among the Company, Chase Funding and SRE Monarch.

initial purchaser of such shares.


On February 9, 2018, Chase Funding purchased 2,352,941 shares of the Company entered into aCompany’s Series B-3 Cumulative Convertible Preferred Stock Subscription Agreement (the “Subscription Agreement”) with Chase Funding. Pursuant to the Subscription Agreement, Chase Funding agreed to purchase 2,352,941 shares (the “JPM (“Series B-3 Shares”) of Series B-3 Cumulative Convertible Preferred Stock, $0.01 par value per share, of the Company (the “Series B-3 Preferred Stock”, and togethercollectively with the Series B-1 Cumulative Convertible Preferred Stock $0.01 par value per share, of the Company (the “Series B-1 Preferred Stock”) and the Series B-2 Cumulative Convertible Preferred Stock, $0.01 par value per share, of the Company (the “Series B-2 Preferred Stock”), referred to herein as the “Series B Preferred Stock”), at a purchase price of $3.40 per share, for a total purchase price of $8.0 million. The Subscription AgreementSeries B-3 Preferred Stock contains various representations, warranties and other obligations and terms that are commonly containedredemption features similar in a subscription agreementall material respects to those of this nature. The Company intends to use the proceeds from the sale of these shares for general corporate purposes. In connection with this transaction, the Company’s board of directors approved for filing with Secretary of State of the State of Delaware, the Second Amended and Restated Certificate of Designation ofall Series B-1 Cumulative Convertible Preferred Stock, Seriesand B-2 Cumulative Convertible Preferred, which are disclosed in IMH’s annual 10-K for the year ended December 31, 2018.

On July 23, 2019 with an effective date of April 1, 2019, we entered into a Deferral and Consent agreement with the holders of our Series B Preferred Stock pursuant to which they agreed to extend the redemption date for one (1) year. A cash payment in the

F-27

IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE – continued

aggregate amount of $2.6 million is due and payable to the holders of the Series B-1 and B-2 Preferred Stock on July 24, 2020 whether or not a redemption is requested.
Concurrent with Chase Funding’s purchase of our Series B-3 Cumulative Convertible Preferred Stock, of the Company (the “Second Amended Certificate of Designation”).

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.

The warrant is classified in stockholders’ equity under the applicable guidance and were recorded at relative fair value at issuance.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Series A Redeemable Preferred Perpetual Stock Issuance


On May 31, 2018, Chase Funding purchased 22,000 shares of the Company entered into aCompany’s Series A Senior PerpetualRedeemable Preferred Stock Subscription Agreement (the “Series A Subscription Agreement”) with Chase Funding. Pursuant to the Series A Subscription Agreement, Chase Funding agreed to purchase 22,000 shares of Series A Preferred Stock,Stock”) at a purchase price of $1,000 per share, (the “Face Value”), for a total purchase price of $22.0 million. The Series A Subscription Agreement contains various representations, warranties and other obligations and terms that are commonly contained in a subscription agreement of this nature. The Company intends to use the proceeds from the sale of these shares for general corporate purposes.


The Series A Preferred Stock ranks senior with respect to dividend and redemption rights and rights upon liquidation, dissolution or winding up of the CorporationCompany to all other classes or series of shares of the Company’s preferred and common stock and to all other equity securities issued by the Company from time to time. The Series A Preferred Stock is non-voting stock. Holders of the Series A Preferred Stock are entitled to receive a liquidation preference equal to the sum of the Face Valueinitial purchase price of the Series A Preferred Stock plus all accrued and unpaid dividends in accordance with the Certificate of Designation of Series A Senior Perpetual Preferred Stock (the “Series A Certificate of Designation”).

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.


Our Series B Preferred Stock and Series A Preferred stockStock are classified as mezzanine equity onin the accompanying condensed consolidated balance sheets at June 30, 2018 and December 31, 2017.

Additionalsheets.


Treasury Stock Related Issuances

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


On January 11, 2019, the Company concluded a tender offer to our officers, employees, directors and certain consultants. The maximum number ofpurchase up to 477,170 shares of Class B Common Stock and 22,830 shares of Class C common stock available to be issued under such awardsfor $2.00 per share. The tender offer was not to exceed 2,700,000 commonover-subscribed and the 500,000 shares subject to increase to 3,300,000were purchased on a pro rata basis among the participating shareholders. The repurchase of these shares after an initial public offering.

was treated as a treasury stock repurchase as reflected in the condensed consolidated balance sheet.


Share-Based Compensation

During the six months ended June 30, 2018,2019, the Company issued 473,120167,984 shares of common stock pursuant to previous restricted stock awards. We granted 30,000The Company did not grant shares of restricted stock or stock options to employees pursuant to our Equity Incentive Plan during the three and six months ended June 30, 2018. Those2019, nor were any stock options have an exercise price of $1.81 per share, vest over a three year term, and have an estimated fair value of $0.73 per option. During the six months ended June 30, 2018, 33,849 options wereor warrants exercised or forfeited as a result of employment terminations.

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.


As of June 30, 2018,2019, there were 1,051,648(i) 1,102,627 stock options outstanding, of which 952,994983,429 shares were fully vested, (ii) 2,600,000 fully-vested stock warrants outstandingoutstanding; and 310,487(iii) 172,800 shares of unvested restricted stock grants outstanding. Vested restricted stock grants have been issued and are included in outstanding common stock. During the six months ended June 30, 2018, 7,905 shares of previously awarded but unvested restricted stock awards were forfeited as a result of employment terminations.


Net stock-based compensation expense relating to the stock-based awards was $0.1 million and $0.2 million for each of the three months ended June 30, 2019 and 2018, and 2017, respectively $0.2 million and $0.6 million for each of the six months ended June 30, 20182019 and 2017, respectively. No stock options or warrants were exercised and we2018. We did not receive any cash from option or warrant exercises during the three or six months ended June 30, 20182019 or 2017.2018. As of June 30, 2018,2019, there was $0.3$0.4 million of unrecognized compensation cost related to the time-based restricted stock that is expected to be recognized as a charge to earnings over a weighted-average vesting period of 1.51.63 years.


Net Income (Loss) Per Share

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

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IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE – continued

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


29

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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)

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

  

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

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

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

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IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


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

A summary of our intangible assets and goodwill as of June 30, 20182019 and December 31, 20172018 is as follows (in thousands):

  

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,
 20192018 20192018 20192018
Amortizing intangible assets:        
Trade name and other$90
$90
 $(22)$(16) $68
$74
Customer relationships800
800
 (467)(333) 333
467
Non-amortizing intangible assets:        
Liquor license100
100
 

 100
100
Goodwill15,357
15,357
 

 15,357
15,357
 $16,347
$16,347
 $(489)$(349) $15,858
$15,998

Trade name and other, and customer relationships have weighted-average useful lives from the date of purchase of 7.0 years and 3.0 years, respectively. Goodwill and our liquor license are not subject to amortization due to the indeterminable life of such assets. Amortization expense relating to our purchased intangible assets was $0.1 million for each of the three and six months ended June 30, 2019. Amortization expense relating to our purchased intangible assets was $0.1 million and $0.2 million for the three and six months ended June 30, 2018, respectively. We performed an impairment assessment on goodwill and intangible assets and based on this assessment no impairment charges were recorded forannually in the three or six months ended June 30, 2018.

fourth quarter of each year.


As of June 30, 2018,2019, expected amortization expense for our purchased amortizing intangible assets for each of the next five years and thereafter is as follows (in thousands):

Year

 

Amount

 

2018

 $140 

2019

  280 

2020

  213 

2021

  13 

2022

  13 

Thereafter

  21 

Total

 $680 

31

Year Amount
2019 $140
2020 213
2021 13
2022 13
2023 13
Thereafter 9
Total $401

Table of Contents

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 13 — COMMITMENTS AND CONTINGENCIES


Construction and Related Guarantees


As described in Note 9, the Company agreed to provide MidFirst Bank with a loan repayment guaranty equal to 50% of the outstanding principal amount ofand accrued, unpaid interest on the MacArthur Loan, plus a 50% guaranty of hotel operating expenses, and a construction completion guaranty with respect to the planned renovations of MacArthur Place. The construction completion guaranty will be released upon payment of all project costs and receipt of a certificate of occupancy. The MidFirst Bank loan documents also require that the loan remain “in balance” throughout its term such that the sum of all remaining undisbursed loan

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IMH FINANCIAL CORPORATION
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NOTE 13 — COMMITMENTS AND CONTINGENCIES - continued

funds and the amounts expended by the borrowerCompany will be sufficient to completemeet the approved construction budget and pay the loan interest. If the loan becomes out“out of balance,balance”, the Company must fund the differencedifference. Management expects that any excess costs not funded by loan funds will be funded using offering proceeds from its own equity.

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.


Guarantor Recovery

As more fully described in our Form 10-K for the year ended December 31, 2017, we


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

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.


We continue to pursue, investigate and evaluate the assets available of guarantors to collect all amounts due under judgments received in our favor. However, to the extent that such amounts are not determinable, they have not been recognized as recovery income in the accompanying consolidated statements of operations. Further recoveries under this and other judgments received in our favor will be recognized when realization of the recovery is deemed probable and when all contingencies relating to recovery have been resolved.

32

Table We recorded recoveries during the three and six months ended June 30, 2019 of Contents$1.1 million relating to cash collected on a guarantor claim. We recorded recoveries during the three and six months ended June 30, 2018 of $0.2 million.

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 — COMMITMENTS AND CONTINGENCIES - continued

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

Legal Matters


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


Partnership Claims


In August 2016, a limited liability company member of Carinos Properties, LLC (“Carinos”) and Unit 6 Partners, LLC (“UP6”), filed a complaint in the United States District Court for the District of Arizona (“Federal Court”) generally alleging the Company breached its fiduciary duty to plaintiff under ERISA with respect to certain property we own in New Mexico. 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.


In the first fiscal quarter of 2017, Recorp-New Mexico Limited Partnership 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 evidentiary

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IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 — COMMITMENTS AND CONTINGENCIES - continued

hearing was held in another 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.

In September 2017, the State Court ordered the termination of the receivership over Stockholder, LLC, a wholly-owned subsidiary of the Company (“Stockholder”). Stockholder is the owner of all of the shares of stock in certain corporations that act as the general partner / limited liability company manager of several entities that own land and/or certain water interests in New Mexico.

In December 2017, the State Court entered an interim “stay” order in the Company’s case against judgment debtor David P. Maniatis and his affiliates (“Maniatis”) enjoining the Company from taking any further collection action against Maniatis, pending an accounting of all previous debt collection activities and a trial on certain limited issues involving the calculation of interest and penalties on the original defaulted debt guaranteed by Maniatis. The stay order also temporarily 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.

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 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.


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

Intercreditor Agreement Claim

The Company and certain of our subsidiaries are defendants in a case that is in the Arizona 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

If the Hotel Fund has insufficient operating cash flow to pay the Preferred Distribution in a given month, the Company has agreedis obligated to provide the funds necessary to pay the Preferred Distribution for such month. Such payments arepayment will be treated as an additional capital contribution andto the Company’s capital account will be increasedHotel Fund by such amount. Moreover, we, as the sponsor, haveCompany. During the six months ended June 30, 2019, the Company funded $0.6 million of Preferred Distributions. The Company also has agreed to fund, in the form of common capital contributions, up to 6.0% of the Hotel Fund offering’s gross proceeds as selling commissions and up to 1.0% of the gross proceeds raised in the offering as nonaccountable expense reimbursements to broker-dealers based on the capital raised by them for the Hotel Fund. These portions of our common equity in the Hotel Fund are subordinate to the distribution of capital to Preferred Investors in the event of a capital transaction. During the three and six months ended June 30, 2018,2019, the Company contributedpaid $0.1 million and $0.1 million, respectively, and paid commissions of $50 thousand and $74 thousand, respectively, under these provisions. The ultimate timing and amount of such required shortfall funding is indeterminable and could be material to the Company’s operations and liquidity.

Hotel Fund pursuant to these obligations.

Other

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


34F-32

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IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 14 — LEASES

Lessor

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

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

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

The following table presents minimum lease revenues and variable lease revenue for the three and six months ended June 30, 2019 (in thousands).
 Three and Six Months Ended June 30,
 2019 2018
Lease revenue   
Fixed rent - Minimum lease revenue$377
 $
Variable lease revenue21
 
Total lease revenue$398
 $
Variable rent includes costs reimbursed related to property operating expenses, common area maintenance, insurance and property taxes.

The following table presents future minimum operating lease payments due to the Company over the next five years and thereafter (in thousands).
Years ending Amount
Remainder of 2019 $1,808
2020 3,748
2021 3,800
2022 3,420
2023 2,311
Thereafter 3,643
Total $18,730

Lessee

We have operating leases for corporate headquarters office space and certain equipment. Our leases have remaining lease terms of one year to four, one of which includes an option to extend the lease for up to five years. The option to extend the lease relates to our corporate office lease and is not included in the calculation of the ROU assets and lease liabilities because the Company is

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IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 14 — LEASES - continued


not reasonably certain that it will exercise the option. Lease expense was $0.1 million and for the three months ended June 30, 2019 and 2018, respectively, and $0.2 million for the six months ended June 30, 2019 and 2018, respectively, which is included in general and administrative expenses in the accompanying condensed consolidated statement of operations. Variable lease payments are not included in the calculation of the right-of-use asset and lease liability due to uncertainty of the payment amount and were $0.1 million and $0.1 million for the three months ended June 30, 2019 and 2018, respectively, and $0.1 million and $0.1 million for the six months ended June 30, 2019 and 2018, respectively.

Supplemental cash flow information related to leases for the six months ended June 30, 2019 (in thousands):
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
Supplemental balance sheet information related to leases as of June 30, 2019 was as follows (thousands, except lease term and discount rate):

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%

The following represents future payments on operating leases as of June 30, 2019 (in thousands):
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

As of December 31, 2018, future minimum lease payments required under these various lease agreements are as follows (in thousands):
Years ending Amount
2019 $305
2020 307
2021 308
2022 233
Total $1,153


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IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 — RELATED PARTY TRANSACTIONS AND COMMITMENTS

Contractual Agreements


CEO Legacy Fees


Under the terms of his employment agreement that expired on July 24, 2019, our CEO is entitled to, among other things, legacy fee payments derived from the value of the disposition of certain legacy assets held by the Company as of December 31, 2010, if such assets are sold at values in excess of 110% of their carrying value as of December 31, 2010. Our CEO earned legacy fees of $0.1 million during the three and six months ended June 30, 2019, and $34.6 thousand during the three and six months ended June 30, 2018 and $23.8 thousand and $0.6 million during the three and six months ended June 30, 2017, respectively.

(see Note 16).


Juniper Capital Partners, LLC and Related Entities

In July 2014, the Company and JCP Realty entered into a consulting services agreement (the “Consulting Agreement”) with JCP Realty Advisors, LLC (“JCP”), an affiliate of Juniper Capital Partners, LLC (“Juniper Capital”), one of the Series B Investors, pursuant to which JCP Realty agreed to perform various services for the Company, including, but not limited to, (a) advising the Company with respect to identifying, structuring, and analyzing investment opportunities, and (b) assisting the Company in managing and liquidating assets, including non-performing assets. Our director, Jay Wolf, is the Managing Member of Juniper Capital Partners, the parent company of JCP Realty. The initial term of the Consulting Agreement was three years and was automatically renewable for an additional two years unless notice of termination was provided by either party. Pursuant to an amendment to the Consulting Agreement, theThe Company and JCP agreed to extend the termentered into an amendment of the Consulting Agreement dated October 17, 2017 pursuant to which: (i) the term was extended for successive one year periods with antwo years that ended on July 24, 2019; (ii) the annual base consulting fee ofwas reduced from $0.6 million to $0.5 million (subject to possible upward adjustment based on an annual review by our board of directors).; and (iii) JCP is entitled to receive a maximum 1.25%an origination fee of up to 1.25% on any loans or investments in real estate, preferred equity or mezzanine securities that are originated or identified by JCP subject(subject to a reduced fee based on the increasing size of the loan or investment. Under the terms of the Consulting Agreement,investment). JCP is also entitled to legacy fee payments derived from the disposition of certain assets held by the Company as of December 31, 2010 to persons or opportunities arising through the efforts of JCP equal to 5.5% of the positive difference derived by subtracting (i) 110% of our December 31, 2010 valuation mark of that asset from the (ii) the gross sales proceeds from the sale of that asset (on a legacy asset by asset basis without any offset for losses realized on any individual asset sales).

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.

Notes Receivable from Certain Partnerships

During the year ended December 31, 2017, a


A subsidiary of the Company executed promissory notes and related agreementshas entered into a lending facility with certain of the previously unconsolidatedconsolidated partnerships (which the Company began consolidating beginning September 2017) to loanlend up to a maximum of $5.0 million to cover the partnerships’ anticipated operating and capital expenditures. As of June 30, 2018 and December 31, 2017,2019, the total principal advanced was $5.0 million. The loans earn interest at rates ranging from the JP Morgan Chase Prime rate plus 2.0% (7.50% at June 30, 2019) to 8.0% and have maturity dates which are the earliest to occur of: (1) the date of transfer of the partnership’s real estate assets; (2) the date on which the current general partner resigns, withdraws or is removed as general partner; or (3) July 31, 2018. The promissory notes received under thesethis lending facility are presently in default and the Company is exploring its enforcement options. The promissory notes was $3.8 millionare cross collateralized and $1.9 million, respectively.secured by real estate and other assets owned by such partnerships. These promissory notes and allthe related accrued interest receivable have been eliminated in consolidation.

Preferred Stock

On February


JPMorgan Chase Funding Inc. Master Repurchase Agreement

As described in Note 9, 2018,a subsidiary of the Company purchased the $13.2 million first mortgage note secured by Broadway Tower. The purchase of the first mortgage note was funded partially with an $11.0 million loan (under a master repurchase agreement) from Chase Funding and the balance using Company funds. The Chase Funding master repurchase agreement is secured by the $13.2 million first mortgage note and bears interest at one month LIBOR plus 3.81%, requires interest only payments and a balloon payment of unpaid principal and interest upon maturity. The initial maturity date is May 22, 2020 with the potential to extend to May 2021 if, among other conditions, certain debt yield and occupancy percentages are achieved.


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IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 — SUBSEQUENT EVENTS

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

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IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 — SUBSEQUENT EVENTS - continued

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

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.

Asset Management Agreement Chase Funding agreed

On August 14, 2019, the Company entered into a non-discretionary investment advisory agreement (the “Advisory Agreement”) with Juniper Investment Advisors, LLC, a Delaware limited liability company (“JIA”), with an effective commencement date of August 1, 2019, pursuant to purchase 2,352,941 shares of Series B-3 Preferred Stock, $0.01 par value per share,which JIA will manage certain assets of the Company, at a purchase price of $3.40 per share, for a total purchase price of $8.0 million. Additionally, the Company issued to Chase Funding a warrant to acquire up to 600,000 shares ofincluding the Company’s common stock in accordance withloan portfolio and certain of its legacy real-estate owned properties. Under the terms of the Subscription Agreement. See Note 11 for additional information.

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.


Jay Wolf and Alejandro Krys together own 50% of JIA. Messrs. Wolf and Krys are also the owners of Juniper Capital Partners, LLC, a Delaware limited liability company, the sole member of Juniper NVM, LLC, a Delaware limited liability company (“JNVM”) and the manager of JCP Realty Partners, LLC, a Delaware limited liability company (“JCP Realty”). JCP Realty and JNVM are the collective holders of all the Series B-1 Cumulative Convertible Preferred Stock in the Company. Mr. Wolf is also a member of the board of directors of the Company and its investment committee.

New Loan Investment

Subsequent to June 30, 2019, the Company entered into an investment agreement with Juniper New Mexico, LLC (a related party of a preferred shareholder) to participate in a $15 million mezzanine loan to a unrelated hotel owner and operator for the Series A Subscription Agreement with Chase Funding. Pursuantrenovation of a 96-key luxury resort located in Sante Fe, New Mexico.  The mezzanine loan is secondary to the Series A Subscription Agreement, Chase Funding agreeda senior mortgage loan funded by a unrelated party.  The Company’s total commitment under this investment is $3.9 million, of which $2.1 million was funded subsequent to purchase 22,000 shares of the Series A Preferred Stock, at a purchase price of $1,000 per share, for a total purchase price of $22.0 million. See Note 11 for additional information.

June 30, 2019.

35F-37

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

OPERATIONS.


The following discussion should be read in conjunction with our Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited financial statements and accompanying notes as of and for the year ended December 31, 20172018 included in our Annual Report on FormForms 10-K and 10-K/A (“Form 10-K”), and with the unaudited condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q (“Form 10-Q”).


Forward-Looking Statements


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


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


that we may continue to record losses;

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;

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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;


F-38


the short-term nature of the loans we originate;

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;

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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;

a decline in economic conditions;

reliance on key personnel;

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;


F-39


the ability of JIA to successfully manage those assets described in the Advisory Agreement;
the ability to find a new permanent CEO; and

other factors listed in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2017.

2018;

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.


Overview of the Business

We are a real estate investment and finance company focusing on 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.


Our current business 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.


As of June 30, 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.

With cash and cash equivalents of $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.


During 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. 

38

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.

the asset.


Key Operational Aspects

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 net loss for the three and six months ended June 30, 20182019 was $2.5$4.1 million and $9.1 million, respectively, compared to net loss of $2.4 million for the three months ended June 30, 2017.  Net loss for theand six months ended June 30, 2018 which was$2.5 million and $6.3 million, comparedrespectively. The Company continues to $0.4realize net losses related its Hospitality and Entertainment Operations segment due to ongoing losses at MacArthur place during its renovation as well as expenditures for professional fees related to guarantor recovery and enforcement actions.

The Company’s total revenue totaled $2.5 million and $3.6 million for the three and six months ended June 30, 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.

Hospitality and Entertainment Operations segment as revenues are down due to the renovation of MacArthur place.


The Company’s basic and diluted net loss from continuing operations per common share for the three months ended June 30, 2018 was $0.25 compared to $0.24 for the three months ended March 31, 2017.  The Company’s basic and diluted net loss from continuing operations per common share for the six months ended June 30, 2019 and 2018 was $0.56 compared to $0.51 for the corresponding period in 2017.

$(0.83) and $(0.56), respectively.



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Results of Operations for the Threethree and Six Months Ended six months ended June 30, 2018 compared to the Three2019 and Six Months Ended2018

The following discussion compares historical results of operations on a GAAP basis for three and six months ended June 30, 2017

  Three months ended June 30,  Six months ended June 30, 

Revenues

 

2018

  

2017

  

$ Change

  

% Change

  

2018

  

2017

  

$ Change

  

% Change

 
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%

2019 and 2018. Unless otherwise noted, all comparative performance data included below reflects year-over-year comparisons.

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. For the three months ended June 30, 2019, operating property revenue was $1.9 million as compared to $2.1 million during the three months ended June 30, 2018 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.

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.


Mortgage Loan Income. For the three months ended June 30, 2019, income from mortgage loans was $0.4 million, a decrease of $0.2 million from the three months ended June 30, 2018 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%.


Management Fees, Investment and Other Income. For the three months ended June 30, 2019 and 2018, management fees, investment and other income was relatively consistent at $0.2 million. For the six months ended June 30, 2019, management fees, investment and other income was $0.3 million, 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.

earned on a Hotel in Nyack, NY.



F-41


Costs and Expenses

  Three months ended June 30,  Six months ended June 30, 

Expenses:

 

2018

  

2017

  

$ Change

  

% Change

  

2018

  

2017

  

$ Change

  

% Change

 
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 (exclusive of Interest and Depreciation). For the three months ended June 30, 2019, operating property direct expenses were $3.7 million, an increase of $1.6 million, or 74.2%, from $2.1 million for the three months ended June 30, 2018 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.

2019.


Expenses for Non-Operating Real Estate Owned. Expenses for non-operating real estate owned assets 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.

incurred on currently held non-operating real estate owned.


Professional Fees. For the three months ended June 30, 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.
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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 $0.3 million for the three months ended June 30, 2019, compared to $0.8 million for the corresponding period in 2017, 2018, a decrease of $0.8$0.4 million, or 18%57.1%. The year-over-year decrease in general and administrative costs is primarily attributed to decreased bonuses and stock-based compensation from 2017 to 2018, coupled with a one-time $0.3 million expense reimbursement incurred in 2017 in connection withFor the transfer of the preferred shareholder interest from SRE to JPM.

Interest Expense. Interest expense was $0.8 million for the threesix months ended June 30, 2018,2019, interest expense


F-42


was $0.8 million as compared to $0.4 million for the three months ended June 30, 2017, an increase of $0.3 million, or 77%. Interest expense was $1.5 million for the six months ended June 30, 2018, compareda decrease of $0.7 million, or 48.1%. The year-over-year decrease is attributed primarily to $0.9the capitalization of interest costs during the renovation period of MacArthur Place in the amount of $0.8 million for the six months ended June 30, 2017, an increase of $0.7 million, or 74%. The year-over-year increase is primarily attributed to interest incurred on the MacArthur loan.

2019.


Depreciation and Amortization Expense. For the three months ended June 30, 2019 and 2018, depreciation and amortization expense was consistent at $0.3 million compared to $49.0 thousand for the three months ended June 30, 2017, an increase of $0.3 million. Foreach period. Similarly, for the six months ended June 30, 2019 and 2018, depreciation and amortization expense was relatively consistent at $0.6 million compared to $0.1 million for the three months ended June 30, 2017, an increase of $0.5 million. The year-over-year increase is due primarily to depreciation and amortization relating to MacArthur Place.

Gain


(Gain) Loss on Disposal of Assets. We recognized gains on disposal of $0.1 million and $0.4 million during During the three and six months ended June 30, 2018, respectively,2019, we sold a REO asset for $39.0 thousand and $1.7 million and $8.5 million during the three and six months ended June 30, 2017, respectively.recognized a gain of $20.0 thousand. During the six months ended June 30, 2018, we sold two REO assets (or portions thereof) for $0.5 million, (net of transaction costs and other adjustments) resulting in a total net gain on sale ofrecorded gains totaling $0.4 million. During the six months ended June 30, 2017, we sold four REO assets (or portions thereof) for $92.9 million (net of transaction costs and other adjustments), resulting in a total net gain of $8.5 million, of which $6.8 million was included as a component of discontinued operations in the unaudited condensed consolidated statement of operations.


Recovery of Investment and Credit Losses. For each of the three and six months ended June 30, 2019 and 2018, we recorded recoveries of investment and credit losses oftotaling $1.1 million and $0.2 million.  For the three and six months ended June 30, 2017, we recorded recoveries of investment and credit losses of $0.3 million. Such recoveries primarily resulted frommillion, respectfully, relating to cash and other assets recovered from guarantorsrecoveries obtained in connection with our enforcement activities.
Unrealized Loss on certain legacy loans.

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. During the six months ended June 30, 2017 (including2019, the Company recorded an unrealized loss of $0.3 million on an interest rate cap we acquired to mitigate the risk of rising interest rates based on a gainfair value analysis of this derivative instrument. There were no unrealized losses on sale of $6.8 million).

this derivative during 2018.
41

Table of Contents

Operating Segments


Our operating segments reflect the distinct business activities from which revenues are earned and expenses incurred that 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:

Hospitality and Entertainment Operations — Consists of revenues less direct operating expenses, depreciation and amortization relating to our hotel, 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.


Mortgage and REO - Legacy Portfolio and Other Operations — Consists of the collection, workout and sale of new and legacy loans and REO assets, including financing of such asset sales. 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.


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


A summary of the financial results for each of our operating segments during the three and six months ended June 30, 20182019 and 20172018 follows (in thousands):



F-43


Hospitality and Entertainment Operations

 

                                
  

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

 $2,346   78.2% $884   83.6% $3,911   74.8% $1,995   89.0%

Expenses:

                                

Operating property expenses (exclusive of interest and
depreciation)

  2,099   100.0%  620   100.0%  4,334   100.0%  1,439   100.0%

Professional fees

  43   5.7%  42   3.5%  102   6.3%  30   1.4%

General and administrative expenses

  309   18.1%  47   1.8%  623   17.4%  35   0.8%

Interest expense

  327   41.9%  -   0.0%  632   41.4%  -   0.0%

Depreciation and amortization expense

  241   30.9%  -   0.0%  520   34.1%  -   0.0%

Total operating expenses

  3,019       709       6,211       1,504     

Other Expenses:

                                

Gain on disposal of assets, net

  -   0.0%  (169)  10.0%  -   0.0%  (169)  9.9%

Other expenses

  -       (169)      -       (169)    

Total expenses

  3,019   54.9%  540   17.0%  6,211   53.9%  1,335   18.2%

Net Income (Loss) from Continuing Operations

  (673)  27.0%  344   -16.2%  (2,300)  36.6%  660   -12.9%

Net income from discontinued operations, net of tax

  -   0.0%  (240)  100.0%  -   0.0%  4,736   100.0%

Net Income (Loss) Attributable to Non-Controlling Interest

  (88)  13.6%  -   0.0%  (129)  10.4%  -   0.0%

Net Income (Loss) Attributable to Common Shareholders

 $(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 %

For the three months ended June 30, 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.

42

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.


During the three and six months ended June 30, 2019 and 2018, the hospitality and entertainment operations segment constituted the 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.

remained consistent year over year.


After interest expense, 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 hospitality


F-44


Mortgage and entertainment 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)%

For the three months ended June 30, 2019 and 2018, the Mortgage and REO - Legacy Portfolio and Other Operations segment 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.

Mortgage and REO - Legacy Portfolio and Other Operations

                                
  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 $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%

Professional fees

  269   35.7%  663   55.6%  816   50.1%  1,684   79.4%

General and administrative expense

   -   0.0%  107   4.1%   -   0.0%   115   2.6%

Interest expense

  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):                                

Gain on disposal of assets, net

  (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%

Earnings in unconsolidated subsidiaries

  -   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%

Net loss attributable to noncontrolling interests

  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%

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.


For the three months ended June 30, 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.

assets.

43

Table of Contents

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.


See “Note 4 - Mortgage Loans, Net” and “Note 5 - Real Estate Held for Sale, Other Real Estate Owned, and Operating Properties” in the accompanying consolidated financial statements and Item 2. - “Real Estate Owned, Lending Activities, and Loan and Borrower Attributes” for additional information regarding our loan and REO portfolio.

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%


F-45



Corporate and Other

  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%

Other than occasional, non-recurring miscellaneous revenue and management fee income, the Corporate and Other segment did not generate any other material revenues for the Company for the three and six months ended June 30, 20182019 and 2017.

2018.


For the three months ended June 30, 20182019 and 2017,2018, the Corporate and Other segment contributed $2.2$2.1 million and $3.2$2.2 million, respectively, or 40.7%32.5% and 101.9%40.7%, to total consolidated expenses.expenses (net of total recovery of investment and credit losses, gain on disposal, and equity method loss from unconsolidated entities). For the six months ended June 30, 20182019 and 2017,2018, the Corporate and Other segment contributed $4.4$4.5 million and $5.3 million, respectively, or 38.8% and 71.6%, to total consolidated expenses.expenses during each period. The decrease in expenses remained relatively flat for this segment is primarily attributable to (i) decreased professional fees, and (ii) decreased general and administrative expense.

segment.
44

Table of Contents

Real Estate Owned, Lending Activities, Loan and Borrower Attributes


Lending Activities


As of June 30, 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.

As of June 30, 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.


We made mortgage loan investment and/or fundings the amount of $0.9 million and $2.9 million during the six months ended June 30, 2019 and 2018, respectfully. During the three and six months ended June 30, 2019, we recorded mortgage interest income

F-46


of $0.4 million and $1.1 million, respectively and during the three and six months ended June 30, 2018,$0.6 million and $1.3 million, respectively.

Geographic Diversification


As of June 30, 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.

While our lending activities have historically been focused primarily in the southwestern United States, we 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.

investment policy.


Interest Rate Information


Our loan portfolio includes loans that carry variable and fixed interest rates. All variable interest rate loans are indexed to 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.

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.


As of June 30, 2019, we had four 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%.


See “Note 4 - Mortgage Loans, Net” in the accompanying condensed consolidated financial statements for additional information regarding interest rates for our loan portfolio.


Loan and Borrower Attributes

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.


We 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.

64.0% mixed-use.

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Changes in the Portfolio Profile — Scheduled Maturities

The outstanding principal and interest balance of our mortgage loan portfolio, net of the valuation allowance, as of June 30, 2018,2019, has scheduled maturity dates as follows:

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, Netfollows (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
    

Operating Properties, Real Estate Held for Sale and Other Real Estate Owned

At


As of June 30, 2018,2019, we held total REO assets of $67.3$104.8 million, of which $12.6$7.4 million were held for sale, $21.9$63.7 million were held as operating properties, and $32.8$33.7 million were classified as other real estate owned. At December 31, 2017,2018, we held total REO assets of $64.6$75.0 million, of which $5.9$7.4 million werewas held for sale, $20.5$33.9 million were held as operating properties and $38.3$33.7 million were classified as other real estate owned. All our REO assets are located in California, Texas, Missouri, Arizona, Minnesota, Utah, and New Mexico.


As described above, we foreclosed on one mezzanine note during the three months ended June 30, 2019 and therefore acquired the office building and related assets and assumed related liabilities of Broadway Tower due to all of which were recorded at

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estimated fair value in accordance with GAAP. The acquired assets consist of a building, land, furniture and fixtures, operating and reserve cash, and tenant receivables totaling approximately $26.0 million. Liabilities assumed consist of trade accounts payable and accrued liabilities, and accrued interest and principal on the first mortgage loan totaling approximately $16.0 million.

In addition, during the three and six months ended June 30, 2019 we disposed of one REO asset for $39 thousand (net of transaction costs and other adjustments) resulting in a net gain on sale of for a net gain of $20 thousand. During the three and six months ended June 30, 2018 we solddisposed of one and two REO assets (or portions thereof) for $0.3 million and $0.5 million (net of transaction costs and other adjustments) resulting in a total net gain on sale of $0.4 million. During the six months ended June 30, 2017, we sold four REO assets (or portions thereof) for $92.9 million (net of transaction costs and other adjustments), resulting in a total net gain of $8.5$0.3 million of which $6.8and $(0.4) million, was included as a component of discontinued operations in the unaudited condensed consolidated statement of operations.

respectively.


Costs and expenses related to operating, holding and maintaining our operating properties and REO assets are expensed as incurred and included in operating property direct expenses and expenses for non-operating real estate owned in the accompanying condensed consolidated statements of operations. For the three and six months ended June 30, 2019, these costs and expenses were $3.7 million and $6.2 million, respectively. For the three and six months ended June 30, 2018, and 2017, these costs and expenses were $2.3 million and $1.1$4.7 million, ($0.3respectively. Costs related to the development or improvements of the Company’s real estate assets are generally capitalized and costs relating to holding the assets are generally charged to expense. Cash outlays for capitalized development costs and real estate investments totaled $9.8 million of which is included in income from discontinued operations), respectively.  Forand $3.2 million during the six months ended June 30, 2019 and 2018, respectively, which related primarily to the MacArthur Place renovation and 2017, these costs and expenses were $4.7 million and $5.8 million, respectively, ($4.0 millionthe acquisition of which is included in loss from discontinued operations), respectively. Cash outlays for capitalized development costs totaled $3.2 million and $1.1 million for the six months ended June 30, 2018 and 2017.

Broadway Tower.


The nature and extent of future costs for our REO properties depends on the holding period of such assets, the level of development undertaken, our projected return on such holdings, our ability to raise funds required to develop such properties, the number of additional foreclosures, and other factors. While substantially all our assets are generally available for sale, we continue to evaluate various alternatives for the ultimate disposition of these investments, including partial or complete development of the properties prior to sale or disposal of the properties on an as-is basis.

See “Note 5 – Real Estate Held for Sale, Other Real Estate Owned, and Operating Properties


Variable Interest Entities

L’Auberge de Sonoma Hotel Fund

As of June 30, 2019, the Hotel Fund has sold Preferred Interests totaling $25 million, of which $22.5 million is included in non-controlling interests in the accompanying condensedconsolidated balance sheets, and $2.5 million represents the Company’s preferred interest in the Hotel Fund. The Hotel Fund made Preferred Distributions of $0.6 million during the six months ended June 30, 2019. Based on (i) the structure of the Hotel Fund, (ii) our ability to direct the activities that most significantly impact the economic performance of the Hotel Fund, and (iii) the risk of absorbing losses or rights to receive benefits that could be potentially significant to the Hotel Fund, the Company is deemed to be the primary beneficiary of the Hotel Fund, and accordingly we have consolidated and expect to continue to consolidate the Hotel Fund in our consolidated financial statements for additional information.

statements.
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Table of Contents

Important Relationships between Capital Resources and Results of Operations

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.

Valuation Allowance and Fair Value Measurement of Loans and Real Estate Held for Sale

A discussion and Other REO


We perform a valuation analysis of our valuation allowance,loans, REO held for sale, other REO, and equity investments not less frequently than on a quarterly basis.

In determining fair value, we have adopted applicable accounting guidance which establishes a framework for measuring fair value in accordance with GAAP, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. This accounting guidance applies whenever other accounting standards require or permit fair value measurement.

Our fair value measurement is based on the highest and summariesbest use of each property which is generally consistent with our current use for each property subject to valuation. In addition, our assumptions are established based on assumptions that we believe market participants for those assets would also use. During the proceduresthree and six months ended June 30, 2019 and 2018, we performed in connection withboth a macro analysis of market trends and economic estimates as well as a detailed analysis on selected significant loan and REO assets. In addition, our fair value analysis asincludes a consideration of June 30, 2018, is presentedmanagement’s pricing strategy in Note 8disposing of the accompanying condensed consolidated financial statements.

such assets.


Valuation Conclusions
Based on the results of our evaluation and analysis, we did not record any non-cash provision for credit losses on our loan portfolio or REO assets during the six months ended June 30, 2019 and 2018. We recorded a loss of $0.1 million and $0.3 million during the three and six months ended June 30, 2018 and 2017. However, we2019, respectively, pertaining to a fair value adjustment for an interest rate cap. There

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was no loss recorded net recoveries of prior investment and credit losses of $0.1 million during the three months ended June 30, 2017 and none during the three months ended June 30, 2018 relating to the collection of cash, receivables and/or other assets from guarantors on certain legacy loans and insurance reimbursements. For both the three and six months ended June 30, 20182018. The Company recorded cash recoveries of credit losses of $1.1 million for each of the three and 2017, we recorded no impairmentsix months ended June 30, 2019 and $0.2 million for each of real estate owned.

the three and six months ended June 30, 2018.


As of June 30, 20182019 and December 31, 2017,2018, the valuation allowance totaledwas $12.7 million representing and 35.8%$13.1 million, respectively, and 39.2%represented 49.9% and 37.1%, respectively, of the total outstanding loan principal and accrued interest balance.

Leveragebalances as of such dates.


With the existing valuation allowance recorded on our loans and impairments recorded on our REO assets as of June 30, 2019, we believe that, as of that date, the fair value of our loans and REO is adequate in relation to Enhance Portfolio Yields

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.


Current and Anticipated Borrowings


Broadway Tower Note

As described above, in the second quarter of 2019, we foreclosed on the collateral securing a defaulted mezzanine note receivable and acquired 100% of the membership interests in a limited liability company that owns a commercial real estate building and operations in St. Louis, Missouri, known as Broadway Tower, thereby assuming its assets and liabilities, including $13.2 million mortgage note payable secured by Broadway Tower. In a related transaction, a subsidiary of the Company purchased the $13.2 million first mortgage note secured by Broadway Tower. Since we own both the entity that owns the first mortgage note, as well as the entity that owes this obligation, the first mortgage loan and related interest has been eliminated in consolidation in the accompanying consolidated financial statements. The purchase of the first mortgage note was funded partially with an $11.0 million loan under a master repurchase agreement (the “Chase Funding master repurchase agreement”), from JPMorgan Chase Funding Inc. (“Chase Funding”), a related party, and the balance using Company funds. The Chase Funding master repurchase agreement is secured by the $13.2 million first mortgage note and bears interest at one month LIBOR plus 3.81%, requires interest only payments and a balloon payment of unpaid principal and interest upon maturity. The initial maturity date is May 22, 2020 with the potential to extend to May 2021 if, among other conditions, certain debt yield and occupancy percentages are achieved.

Exchange Notes


In April 2014, we completed an offering of a five-year, 4%, unsecured notes to certain of our shareholders in exchange for common stock held by such shareholders at an exchange price of $8.02 per share (“Exchange Offering”). Upon completion of the Exchange Offering, we issued Exchange Offering notes (“EO Notes”) with a face value of $10.2 million, which were recorded by the Company at fair value of $6.4 million based on the fair value and the imputed effective yield of such notes of 14.6% (as compared to the note rate of 4%) resulting in an initial debt discount on the EO Notes of $3.8 million, with a remaining balance of $1.0 million at June 30, 2018. This amount is reflected as a debt discount in the accompanying financial statements, and is being amortized as an adjustment to interest expense using the effective interest method over the term of the EO Notes. The amortized discount added to the principal balance of the EO Notes during the three months ended June 30, 2018 totaled $0.2 million. Interest is payable quarterly in arrears each January, April, July, and October. The EO Notes maturematured and were repaid in full on April 28, 2019, and may be prepaid in whole or in part without penalty at the option2019.

New Mexico Land Purchase Financing

As of the Company. HadJune 30, 2019, the Company met certain minimum cash and profitability conditions,had an outstanding note payable in the Company would have been required to prepay fifty percent (50%) of the outstanding principal balance of the EO Notes on April 29, 2018. Such conditions were not met and no prepayment was required.

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.


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Table of Contents

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


In connection with the acquisition of the MacArthur Hotel in the fourth quarter of 2017,Place, the Company entered into a building loan agreement/disbursement schedule and related agreements with MidFirst, dated as of October 2, 2017, in the amount ofborrowed $32.3 million of which approximately $19.4 million was utilized for the purchase of the MacArthur Hotel, approximately $10.0 million of which is being set aside to fund planned hotel improvements, and the balance is to fund interest reserves and operating capital.from MidFirst Bank. The MacArthur Loan requires the Company to fund minimum equity of $17.4 million, the majority of which was funded at the time of the MacArthur Place purchase and the balance of which will be funded during the renovation period. The MacArthur Loanloan has an initial term of three years and, subject to certain conditions and the payment of certain fees, may be extended by the Company for two one year periods if the(2) one-year periods. The loan is in good standing and upon satisfaction of certain conditions, and upon payment of a fee of 0.35% of outstanding principal per extension. The MacArthur Loan requires interest-only payments during the initial three-year term and bears floating interest equal to the 30-day LIBOR rate plus 3.75%,3.54% subject to certain adjustments. During the six months ended June 30, 2019, the loan was modified to, among other things, increase the total loan facility to $37.0 million, and increase our equity requirement from $17.4 million to $27.7 million which may be reduced by (a) 0.25% if certain minimum compensating balances are maintained atwas satisfied in the Bank and by (b) 0.50% if certain additional conditions are met.

first quarter of 2019.


The MacArthur Loan is secured by a deed of trust on all MacArthur HotelPlace real property and improvements, and a security interest in all furniture, fixtures and equipment, licenses and permits, and MacArthur Hotel and relatedPlace-related revenues. The Company agreed to providehas provided a construction completion guaranty with respect to the planned MacArthur Hotel improvement project which shallwill be released upon payment of all project costs and receipt of a certificate of occupancy. In addition, Thethe Company has provided a loan repayment guaranty of fifty percent (50%)equal to 50% of the MacArthur Loan outstanding principal

F-49


along with a guaranty of interest and operating deficits, as well as other customary non-recourse carve-out matters such as bankruptcy and environmental matters. Under the guarantees, the Company is required to maintain a minimum book valuetangible net worth of $50.0 million and minimum liquidity of $5.0 million throughout the term of the MacArthur Loan.loan. The loan includes a provision requiring substantial completion of the project by June 30, 2019 which the lender agreed to waive and extend to September 1, 2019. In addition, the MacArthur Loan requires the MacArthur HotelPlace is required to establish various operating and reserve accounts at MidFirst Bank which are subject to a cash management agreement. In the event of default, MidFirst Bank has the ability to take control of such accounts for the allocation and distribution of proceeds in accordance with the cash management agreement.


Hotel Fund Offering

During the fourth quarter of


In November 2017, L’Auberge Fund Manager, LLC (the “Fund Manager”), a wholly-owned subsidiary of the Company sponsored and commenced anthe offering of up to $25.0 million of preferred limited liability company interests (the “Preferred Interests”) in L’Auberge de Sonoma Resort Fund, LLC (the “Hotel Fund”) pursuant to Regulation D and Regulation S promulgated under the Securities Act (the “Offering”). The Company, through another wholly-owned subsidiary (the “Common Member”), made an initial investment of approximately $17.8 million for common member interestsPreferred Interests in the Hotel Fund. The Common Member’s investment and anCompany made initial advancecontributions of $19.4$17.8 million onfor its common member interest in the MacArthur Loan were used to acquire the MacArthur Hotel (the “Property”) as described above.Fund. The net proceeds of this offering are being used (i) to redeem the Offering, afterCompany’s initial contributions to the payment of certain organizational and offering costs, are to be used to (i) repay the Common Member’s initial investmentHotel Fund and (ii) to partially fund the renovation of the Property.

renovations to MacArthur Place.


Purchasers of the Preferred Interests (the “Preferred Members”) will beare entitled to a preferred distribution, payable monthly, accruing at a rate of 7.0% per annum on invested capital, cumulative and non-compounding (the “Preferred Distribution”). The Fund Manager is expected to retain a 10.0% Preferred Interest inIf the Hotel Fund. Prior to the sale or other disposition of the Property, if the Hotel Fund has insufficient operating cash flow to pay any or all of the Preferred Distribution in a given month, the Company through the Common Member, willis obligated to provide the funds necessary to payfund the full payment of the Preferred Distribution for such month. Such payment by the Common Member willmonth, such payments to be treated as an additional capital contribution andby the Common Member’s capital account will be increased by such amount. In addition, on a quarterly basis, the Hotel Fund will distribute ten percent (10.0%) of cash available for distribution, as defined in the Hotel Fund’s LLC Agreement, after payment of the Preferred Distribution, calculated for the most recently completed fiscal quarter to the Preferred Members pro rata in proportion to the weighted average Preferred Interests owned during the applicable quarterly period (the “Quarterly Excess Cash Distribution”). Additionally, uponCompany. Upon the refinance or sale of all or a portion of the Property,hotel, the Preferred Members may be entitled to receive certain additional preferred distributions (the “Additional Preferred Distribution”) that will result in an overall return of up to 12.0% on the Preferred Interests. We have sold Preferred Interests to unrelated outside investors totaling $22.5 million, which when coupled with the Company’s Preferred Interests of $2.5 million, the Hotel Fund has met its funding goal of $25.0 million and is no longer accepting additional Preferred Interest investments.

Other Potential Borrowings and Borrowing Limitations

Our investment policy, the assets in our portfolio and the decision to utilize leverage are periodically reviewed by our board of directors as part of their oversight of our operations. We may employ leverage, to the extent available and permitted, through borrowings to finance our assets or operations, to fund the origination and acquisition of our target assets and to increase potential returns to our shareholders. Although we are not required to maintain any particular leverage ratio, the amount of leverage we will deploy for particular target assets will depend upon our assessment of a variety of factors, which may include the anticipated liquidity and price volatility of the target assets in our portfolio, the potential for losses and extension risk in our portfolio, the gap between the duration of our assets and liabilities, including hedges, the availability and cost of financing the assets, our opinion of the creditworthiness of our financing counterparties, the health of the U.S. economy and commercial mortgage markets, our outlook for the level, slope, and volatility of interest rates, the credit quality of our target assets, the collateral underlying our target assets, and our outlook for asset spreads relative to the LIBOR curve. Our charter and bylaws do not limit the amount of indebtedness we can incur, and our board of directors has discretion to deviate from or change our indebtedness policy at any time. We intend to use leverage for the sole purpose of financing our portfolio and not for the purpose of speculating on changes in interest rates.

Under the Second Amended Certificate of Designation, we may not undertake certain actions without the consent of the holders of at least 85% of the shares of Series B Preferred Stock outstanding, including entering into major contracts, entering into new lines of business, or selling REO assets other than within certain defined parameters. Further, certain actions, including breaching any of our material obligations to the holders of Series B Preferred Stock under the Second Amended Certificate of Designation, could require us to redeem the Series B Preferred Stock. In addition, some of our new financing arrangements may include other restrictions that limit our ability to secure additional financing.

The holders of our Series B Preferred Stock each have considerable influence over our corporate affairs which makes it difficult or impossible to enter into certain transactions without their consent.

Contractual Obligations

In addition to our existing indebtedness described elsewhere in this Form 10-Q, a summary of our significant outstanding contractual obligations that existed at June 30, 2019 follows:
Preferred Stock Requirements

During 2014, the Company issued 8.2 million shares of the Company’s Series B-1 and B-2 Preferred Stock to the Series B Investors in exchange for $26.4 million. During 2018, the Company issued 2.35 million shares of the Company’s Series B-3 Preferred Stock

F-50


in exchange for $8.0 million. Except for certain voting, transfer, dividend, and redemption rights, the rights and obligations of holders of the Series B Preferred Stock are substantially the same.

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

Dividends. Dividends on the Series B Preferred Stock are cumulative and accrue from the issue date and compound quarterly at the rate of 8% for Series B-1 and B-2 Preferred Stock and 5.65% for the Series B-3 Preferred Stock, payable quarterly in arrears. Subject to certain dividend rights and restrictions, no dividend may be paid on any capital stock of the Company during any fiscal year unless all accrued dividends on the Series B Preferred Stock have been paid in full, except for dividends on shares of voting Common Stock. In the event that any dividends are declared with respect to the voting Common Stock or any junior ranking securities, the holders of the Series B Preferred Stock are entitled to receive as additional dividends the additional dividend amount. For the six months ended June 30, 2019 and 2018, we paid dividends on the Series B Preferred Stock of $1.7 million and $2.0 million, respectively.

Redemption upon Demand. At any time after July 24, 2020 for the Series B-1 and B-2 Preferred Stock and after February 9, 2023 for the Series B-3 Preferred Stock, each holder of Series B Preferred Stock may require the Company to redeem, out of legally available funds, the shares of Series B Preferred Stock held by such holder at the a price (the “Redemption Price”) equal to the greater of (i) 150% of the sum of the original price per share of the Series B-1 and B-2 Preferred Stock, and 145% of the sum of the original price per share of the Series B-3 Preferred Stock, plus all accrued and unpaid dividends or (ii) the sum of the tangible book value of the Company per share of voting Common Stock plus all accrued and unpaid dividends, as of the date of redemption. Based on the initial investment of $26.4 million, the Redemption Price for the Series B-1 and B-2 Stock would presently be $39.6 million, resulting in a redemption premium of $13.2 million, and the Redemption Price for the Series B-3 Preferred Stock would be $11.6 million for the Series B-3 Stock, resulting in a redemption premium of $3.6 million. In accordance with applicable accounting standards, we have elected to amortize the redemption premium using the effective interest method as an imputed dividend over the holding term of the preferred stock. During six months ended June 30, 2019 and 2018, we recorded amortization of the redemption premium of $1.9 million and $1.7 million, respectively, as a deemed dividend.
Required Liquidation. Under the Second Amended Certificate of Designation authorizing the Series B Preferred Stock, if at any time we are not in compliance with certain of our obligations to the holders of the Series B Preferred Stock and we fail to pay (i) full dividends on the Series B Preferred Stock for two consecutive fiscal quarters or (ii) the Redemption Price within 180 days following the later of (x) demand therefore resulting from such non-compliance and (y) July 24, 2020 for the Series B-1 and B-2 Preferred Stock and February 9, 2023 for the Series B-3 Preferred Stock, unless a certain percentage of the holders of the Series B Preferred Stock elect otherwise, we will be required to use our best efforts to commence a liquidation of the Company. In addition, the default by the Company or any of its subsidiaries under one or more debt agreements that remains uncured for a period of thirty (30) days entitles the Series B Investors to accelerate repayment of the Redemption Price.

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

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During such period, Mr. Bain will have no obligationreport to contribute the funds necessaryBoard 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 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.

Juniper Consulting Agreements (related party)
Under the Preferred Distribution or the Additional Preferred Distribution upon a capital transaction such as the sale or refinancingterms of the Property. UponJCP Consulting Agreement, JCP is entitled to receive an annual base consulting fee of $0.5 million (subject to possible upward adjustment based on an annual review by our board of directors) an origination fee up to 1.25% on any loans or investments in real estate, preferred equity or mezzanine securities that are originated or identified by JCP, subject to reduction based on the increasing size of the loan or investment. Under the terms of the JCP Consulting Agreement, JCP is also entitled to legacy fee payments derived from the disposition of certain assets held by the Company as of December 31, 2010 to persons or opportunities arising through the efforts of JCP, equal to 5.5% of the positive difference derived by subtracting (i) 110% of our December 31, 2010 valuation mark of that asset from the (ii) the gross sales proceeds (on a capital transaction,legacy asset by asset basis without any offset for losses realized on any individual asset sales). The JCP Consulting Agreement contract was terminated on July 24, 2019. During each of the six months ended June 30, 2019 and 2018, we incurred base consulting fees to JCP of $0.2 million. JCP earned legacy fees of $0.1 million during the three and six months ended June 30, 2019 and $0.1 million during the three and six months ended June 30, 2018, respectively.

JIA Asset Management Agreement (related party)


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Effective August 1, 2019, the Company entered into a non-discretionary investment advisory agreement (the “Advisory Agreement”) with Juniper Investment Advisors, LLC, a Delaware limited liability company (“JIA”), pursuant to which JIA will manage certain assets of the Company, including the Company’s loan portfolio and certain of its legacy real-estate owned properties. Under the terms of the Advisory Agreement, the Company will distribute 10.0%pay JIA a management fee equal to 1.5% of any cash availablethe 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 paymentCompany has received an annualized 7% return on its investment from those assets and recovery of the Additional Preferred DistributionCompany’s basis in such assets. In connection with the Advisory Agreement, certain employees of the Company have transitioned to the Preferred Members pro rata in proportion to the Preferred Interests owned. Asbecome employees of June 30, 2018, the Hotel Fund raised $5.6 million in outside Preferred Interests. AsJIA, and JIA will also sublet a portion of June 30, 2018, the Company’s common interest balance was $15.6 millionoffice space.

Jay Wolf and Alejandro Krys together own 50% of JIA. Messrs. Wolf and Krys are also the owners of Juniper Capital Partners, LLC, a Delaware limited liability company, the sole member of Juniper NVM, LLC, a Delaware limited liability company (“JNVM”) and the manager of JCP Realty Partners, LLC, a Delaware limited liability company (“JCP Realty”). JCP Realty and JNVM are the collective holders of all the Series B-1 Cumulative Convertible Preferred Stock in the Company. Mr. Wolf is also a member of the board of directors of the Company and its Preferred Interest balance was $0.6 million.

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.

investment committee.

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Off-Balance Sheet Arrangements

General


We have equity interests in a number of consolidated joint ventures and limited 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,


The Company has entered into a 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.

Debt

At 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.

2019.


Debt Guarantees
In certain instances, we have provided “non-recourse carve-out guarantees” on certain non-recourse loans to our subsidiaries. Certain of these loans had variable interest rates, which created exposure in the form of market risk due to interest rate changes. 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.

Office Lease
The Company’s current office lease term ends on September 30, 2022. The lease commits the Company to rents totaling $1.5 million over the five year term, net of certain concessions granted.
Critical Accounting Policies
Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. As of June 30, 2019, there have been no significant changes in our critical accounting policies from December 31, 2018, except as disclosed in Note 2 of the unaudited condensed consolidated financial statements included in this Form 10-Q.


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Liquidity and Capital Resources

We require liquidity and capital resources for capitalized costs, expenses and 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, costs on borrowings, debt service payments on borrowings, dividends or distributions to preferred and/or common shareholders, distributions to non-controlling interests, to repurchase treasury stock, other costs and expenses, as well as to acquire our target assets. We expect our primary sources of liquidity over the next twelve months to consist of our current cash, revenues from remaining operating properties, income from anticipated investment activities, proceeds from the disposition of our existing loan and REO assets held for sale, and proceeds from debtborrowings and equity financing initiatives.issuances, current cash, mezzanine and mortgage loan interest income, and revenues from ownership or management of hotels. To the extent there is a shortfall in available cash, we would likely seek to reduce general and administrative costs, scale back projected investing activity costs, sell certain assets below our current asking prices, and/or seek possible additional financing. To the extent that we have excess liquidity at our disposal, we expect to funduse a portion of such proceeds for new investments in our target assets. However, the extent and amount of such investment is contingent on numerous factors outside of our control.

 At


As of June 30, 2018,2019, we had cash and cash equivalents of $30.1$12.2 million, as well as REO held for sale of $12.6$7.4 million and other REO assets of $33.7 million which, we believewhile not technically classified as held for sale, are sufficient to cover our liquidity needsgenerally available for sale. During the three months ended June 30, 2019, a court-imposed stay over the next twelve months. However,potential sale of certain assets impairs our ability to reasonably estimatedispose of such assets, although we believe that the proceeds fromcourt stay will be resolved and lifted within the end of the fiscal year. During the six months ended June 30, we made construction draws on our MidFirst Loan in the amount $11.9 million, of which $11.2 million represented renovation cost and operating draws and $0.8 million represented draws against the interest reserve on the loan. As of June 30, 2019, we have sold the entire $22.5 million in Preferred Interests to unrelated outside investors in the Hotel Fund, with the Company’s Preferred Interests totaling $2.5 million. With the total Preferred Interest sold of $25.0 million, the Hotel Fund has reached its capital raise threshold and is not seeking additional Preferred Interest investments.

Under the terms of our Second Amended Certificate of Designation, at any time after July 24, 2020, each holder of Series B-1 and B-2 Preferred Stock may require the Company to redeem, out of legally available funds, the shares of Series B-1 and B-2 Preferred Stock held by such holder at the a price (the “Redemption Price”) equal to the greater of (i) 160% of the sum of the original price per share of the Series B-1 and B-2 Preferred Stock plus all accrued and unpaid dividends or (ii) the sum of the tangible book value of the Company per share of voting Common Stock plus all accrued and unpaid dividends, as of the date of redemption. Based on the initial Preferred Investment amount, the Redemption Price would presently be approximately $42.2 million. We intend to negotiate a restructuring of these asset salesinstruments including an extension of the redemption period, although there is dependent on several factors that are outside our control including, but not limited to, real estate and credit market conditions, the actual timing ofno assurance we will be successful in such sales and ultimate proceeds from the sale of assets, our ability to sell such assets at our asking pricesnegotiations or at prices in excessterms favorable to us.

As previously described, during the three months ended June 30, 2019, a subsidiary of the current carrying valueCompany purchased the $13.2 million first mortgage note secured by Broadway Tower. The purchase of the first mortgage note was funded partially with an $11.0 million loan (under a master repurchase agreement) from Chase Funding and the balance using Company funds. The Chase Funding master repurchase agreement is secured by the $13.2 million first mortgage note and bears interest at one month LIBOR plus 3.81%, requires interest only payments and a balloon payment of unpaid principal and interest upon maturity. The initial maturity date is May 22, 2020 with the potential to extend to May 2021 if, among other conditions, certain debt yield and occupancy percentages are achieved, although there is no assurance that such real estate.

an extension will be granted.


When our required cash uses are met, we expect to redeploy excess proceeds, if any, to acquire our target assets, subject to approval of the investment committee, which we expect will generate periodic liquidity from mortgage loan interest payments and cash flows from dispositions of these assets through sales. If we are unable to achieve our projected sources of liquidity from the sources anticipated above, we would be unable to purchase the desired level of target assets and it is unlikely that we would be able to meet our investment income projections.


Our requirements for and sources of liquidity and capital resources are described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2017. There2018. Aside from the new JPM master repurchase agreement that matures in May 2020, there have been no material changes to our requirements for liquidity as of and for the three and six months ended June 30, 2018, except that our $10.2 million Exchange Notes have2019. However, given the court-imposed stay over the sale of certain assets, coupled with the maturity dates of certain indebtedness through June 2020, and the potential redemption of the Series B-1 and B-2 Preferred Stock in July 2020, the combination of these factors give rise to substantial doubt about the Company’s ability to continue as a maturitygoing concern for a period beyond 12 months from the date of April 28, 2019.

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.



F-54


Cash Flows

Cash Used In Operating Activities.

Cash used in operating activities was $7.7$5.6 million and $8.1$7.7 million for the six months ended June 30, 20182019 and 2017,2018, respectively. Cash from operating activities includes the cash generated from hospitality income, management fees, mortgage interest and investment and other income, offset by amounts paid for operating expenses for operating properties, real estate owned, professional fees, general and administrative costs, funding of other receivables, interest on borrowings and litigation settlement payments and related costs.

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)Used In Investing Activities.

Net cash provided by (used in)used in investing activities was $(5.6)$7.7 million and $86.9$5.6 million for the six months ended June 30, 20182019 and 2017,2018, respectively. The decreaseincrease in cash fromused in investing activities is attributed primarily to reducedincreased investments in operating properties and capitalized REO sales and their resulting proceeds from the disposal of assets, offset by increased investment in real estate owned.costs. Proceeds received from the sale of REO assets and mortgage loans totaled $0.5 million$39.0 thousand and $97.1$0.5 million for the six months ended June 30, 2019 and 2018, and 2017, respectively. Mortgage investment fundingInvestments in operating properties totaled $2.9 million and $7.0$9.8 million during the six months ended June 30, 2018 and 2017, respectively. Additionally, capital investments in real estate owned increased year over year totaling2019 compared to $3.2 million for the same period in 2018.

Cash Provided By Financing Activities.
Net cash provided by financing activities was $5.0 million and $1.1$31.8 million for the six months ended June 30, 2019 and 2018, respectively. During six months ended June 30, 2019, we received proceeds from debt issuance of $11.2 million. During six months ended June 30, 2019 and 2018, proceeds from Hotel Fund contributions of $7.5 million and $4.8 million. During the six months ended June 30, 2019, we used $1.0 million for the purchase of treasury stock and repaid $10.2 million in notes payable. During the six months ended June 30, 2018, we received proceeds from Hotel Fund contributions of $4.8 million and raised proceeds from preferred equity issuance of $30.0 million. We also made dividend payments of $1.7 million and $2.0 million during the six months ended June 30, 2019 and 2018, and 2017, respectively.

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.

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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.

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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The registrant is a Smaller Reporting Company and, therefore, is not required to provide the information under this item.

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ITEM 4.CONTROLS AND PROCEDURES.


Disclosure Controls and Procedures


An evaluation was performed under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of June 30, 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.

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.


Internal Control over Financial Reporting


Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with 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).

F-55


Based on their assessment, we determined that the Company’s internal control over financial reporting was effective as of June 30, 2018.

2019.


This report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting since the Company, isas a smaller reporting company under the rules of the SEC.

SEC, is not required to include such report.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II



ITEM 1.LEGAL PROCEEDINGS.

The status of our legal proceedings is provided in Note 13 - “CommitmentsCommitments and Contingencies” Contingenciesof the accompanying unaudited condensed consolidated financial statements and is incorporated herein by reference.

ITEM 1A.RISK FACTORS

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 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.


ITEM 3.DEFAULTS UPON SENIOR SECURITIES

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

Not applicable.


ITEM 4.MINE SAFETY DISCLOSURESDISCLOSURES.

Not applicable.


ITEM 5.OTHER INFORMATION.

None.

Asset Management Agreement

On August 14, 2019, the Company entered into a non-discretionary investment advisory agreement (the “Advisory Agreement”) with Juniper Investment Advisors, LLC, a Delaware limited liability company (“JIA”), with an effective commencement date of August 1, 2019, pursuant to which JIA will manage certain assets of the Company, including the Company’s loan portfolio and certain of its legacy real-estate owned properties. Under the terms of the Advisory Agreement, the Company will pay JIA a management fees ranging from 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.

Jay Wolf and Alejandro Krys together own 50% of JIA. Messrs. Wolf and Krys are also the owners of Juniper Capital Partners, LLC, a Delaware limited liability company, the sole member of Juniper NVM, LLC, a Delaware limited liability company (“JNVM”) and the manager of JCP Realty Partners, LLC, a Delaware limited liability company (“JCP Realty”). JCP Realty and JNVM are the collective holders of all the Series B-1 Cumulative Convertible Preferred Stock in the Company. Mr. Wolf is also a member of the board of directors of the Company and its investment committee.


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Table of Contents

Exhibit Index

ITEM 6.
 EXHIBITS

Exhibit


No.

 

Description of Document

   

3.1

 

   

3.1.1

 

   

3.2

 

   

3.2.1

 

   

3.3

3.4
 

   

3.4

4.1
 

   

4.1

4.3
 

4.4
   

4.2

4.6
 

   

10.1

10.6
 

   
10.7
  

31.1*

10.8
 

10.9
10.10
10.33
31.1*
   

31.2*

 

   

32.2*†

 

   
   

F-58


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.
  



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:August 14, 2018

2019

IMH FINANCIAL CORPORATION

By:

By:

/s/ Samuel J. Montes

Samuel J. Montes

Chief Financial Officer

KNOW ALL MEN BY THESE PRESENTS, that Lawrence D. Bain, whose signature appears below constitutes and appoints Samuel J. Montes his true and lawful attorney-in-fact and agent, for such person in any and all capacities, to sign any amendments to this report and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature

 

Title

 

Date

     
/s/ Lawrence D. Bain Interim Chief Executive Officer and ChairmanCo-Chairman August 14, 20182019

Lawrence D. Bain

 

(Principal Executive Officer)

  
     
/s/ Samuel J. Montes 
Chief Financial Officer(Principal Financial Officer
 August 14, 20182019
Samuel J. Montes (Principal Financial Officer
and Principal AccountingOfficer)
  

56


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