Item
1. Financial Statements
Pillarstone
Capital REIT
Condensed
Consolidated Balance Sheets
September
30, 2016 and December 31, 2015
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|
September
30, 2016
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|
December
31, 2015
|
|
|
(unaudited)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
57,761
|
|
|
$
|
174,283
|
|
Marketable
securities
|
|
|
100
|
|
|
|
100
|
|
Other
assets
|
|
|
3,706
|
|
|
|
9,952
|
|
Total
Assets
|
|
$
|
61,567
|
|
|
$
|
184,335
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
243,546
|
|
|
$
|
14,010
|
|
Convertible
notes payable – related parties
|
|
|
197,780
|
|
|
|
197,780
|
|
Accrued
interest payable
|
|
|
17,123
|
|
|
|
2,276
|
|
Total
Liabilities
|
|
|
458,449
|
|
|
|
214,066
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Deficit
|
|
|
|
|
|
|
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|
Preferred
A Shares – $0.01 par value per share; 1,518,000 authorized: 256,636 Class A cumulative convertible shares issued and
outstanding as of September 30, 2016, 10,000,000 authorized: 258,236 Class A cumulative convertible shares issued and outstanding
as of December 31, 2015, $10.00 per share liquidation preference
|
|
|
2,566
|
|
|
|
2,583
|
|
Preferred
C Shares – $0.01 par value per share; 300,000 authorized: 244,444 Class C cumulative convertible shares issued and outstanding
as of September 30, 2016 and December 31, 2015, $10.00 per share liquidation preference
|
|
|
2,444
|
|
|
|
2,444
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|
Common Shares
- $0.01 par value per share; 400,000,000 authorized: 443,299 shares issued and 405,169 outstanding as of September 30, 2016,
100,000,000 authorized: 443,226 shares issued and 405,096 outstanding as of December 31, 2015
|
|
|
4,052
|
|
|
|
4,051
|
|
Additional
paid-in capital
|
|
|
28,146,987
|
|
|
|
28,146,971
|
|
Accumulated
deficit
|
|
|
(27,752,196
|
)
|
|
|
(27,385,045
|
)
|
Treasury
stock, at cost, 38,130 shares
|
|
|
(800,735
|
)
|
|
|
(800,735
|
)
|
Total
Shareholders’ Deficit
|
|
|
(396,882
|
)
|
|
|
(29,731
|
)
|
Total
Liabilities and Shareholders’ Deficit
|
|
$
|
61,567
|
|
|
$
|
184,335
|
|
The
accompanying notes are an integral part of the condensed consolidated financial statements.
Pillarstone
Capital REIT
Condensed Consolidated Statements of Operations
(unaudited)
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|
For
the nine months ended September 30,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Interest/dividend
income
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
revenues
|
|
|
—
|
|
|
|
—
|
|
Expenses
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
352,305
|
|
|
|
41,807
|
|
Interest
|
|
|
14,847
|
|
|
|
—
|
|
Total
expenses
|
|
|
367,152
|
|
|
|
41,807
|
|
Income
(loss) from operations
|
|
|
(367,152
|
)
|
|
|
(41,807
|
)
|
Net
income (loss) attributable to common shareholders
|
|
|
(367,152
|
)
|
|
|
(41,807
|
)
|
Net
income (loss) attributable to common shareholders per Common Share: basic and diluted
|
|
$
|
(.91
|
)
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|
$
|
(.10
|
)
|
Weighted
average number of Common Shares outstanding: basic and diluted
|
|
|
405,127
|
|
|
|
405,096
|
|
The
accompanying notes are an integral part of the condensed consolidated financial statements.
Pillarstone
Capital REIT
Condensed Consolidated Statements of Operations
(unaudited)
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|
For
the three months ended September 30,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Interest/dividend
income
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
revenues
|
|
|
—
|
|
|
|
—
|
|
Expenses
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
247,278
|
|
|
|
11,078
|
|
Interest
|
|
|
4,985
|
|
|
|
—
|
|
Total
expenses
|
|
|
252,263
|
|
|
|
11,078
|
|
Income
(loss) from operations
|
|
|
(252,263
|
)
|
|
|
(11,078
|
)
|
Net
income (loss) attributable to common shareholders
|
|
|
(252,263
|
)
|
|
|
(11,078
|
)
|
Net
income (loss) attributable to common shareholders per Common Share: basic and diluted
|
|
$
|
(.62
|
)
|
|
$
|
(.03
|
)
|
Weighted
average number of Common Shares outstanding: basic and diluted
|
|
|
405,169
|
|
|
|
405,096
|
|
The
accompanying notes are an integral part of the condensed consolidated financial statements.
Pillarstone
Capital REIT
Condensed Consolidated Statements of Cash Flows
(unaudited)
|
|
For
the nine months ended September 30,
|
|
|
2016
|
|
2015
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(367,152
|
)
|
|
$
|
(41,807
|
)
|
Net
change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
6,247
|
|
|
|
6,617
|
|
Accounts
payable and accrued expenses
|
|
|
244,383
|
|
|
|
6,206
|
|
Net
cash from (used in) continuing operations
|
|
|
(116,522
|
)
|
|
|
(28,984
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Cash
used for the purchase of marketable securities
|
|
|
—
|
|
|
|
—
|
|
Proceeds
from the sale of marketable securities
|
|
|
—
|
|
|
|
19,278
|
|
Net
cash from (used for) investing activities
|
|
|
—
|
|
|
|
19,278
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
cash from (used for) financing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
(116,522
|
)
|
|
|
(9,706
|
)
|
Cash
|
|
|
|
|
|
|
|
|
Beginning
of period
|
|
|
174,283
|
|
|
|
10,726
|
|
(End
of period
|
|
$
|
57,761
|
|
|
$
|
1,020
|
|
The
accompanying notes are an integral part of the condensed consolidated financial statements.
Pillarstone
Capital REIT
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
1 – Organization
In
March 2016, shareholders of Paragon Real Estate Equity and Investment Trust approved changing the company’s name to Pillarstone
Capital REIT (the “Company,” “Pillarstone Capital,” “we,” “our,” or “us”).
We are a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”))
and a Maryland real estate investment trust (“REIT”). Pillarstone Capital is primarily focused on maintaining its
trust existence and Securities and Exchange Commission (“SEC”) reporting history to enable it, in the future, to raise
additional capital and make real estate investments. Future real estate investments may include acquisition and development of
retail, office, office warehouse, industrial, multifamily, hotel, other commercial properties, acquisition of or merger with a
REIT or real estate operating company and joint venture investments. Excess funds may be invested in marketable securities of
other real estate companies depending on market conditions.
Note
2 – Basis of Presentation
Condensed
Consolidated Financial Statement Presentation
We
have prepared the condensed consolidated financial statements without audit pursuant to the rules and regulations of the SEC.
Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, we believe that
the included disclosures are adequate to make the information presented not misleading. In our opinion, all adjustments (consisting
solely of normal recurring items) necessary for a fair presentation of our financial position as of September 30, 2016, the results
of our operations for the nine month periods ended September 30, 2016 and 2015 and the three month periods ended September 30,
2016 and 2015, and of our cash flows for the nine month periods ended September 30, 2016 and 2015 have been included. The results
of operations for interim periods are not necessarily indicative of the results for a full year. For further information, please
see our consolidated financial statements and footnotes included in the Annual Report on Form 10-K for the year ended December
31, 2015, as filed with the SEC on February 5, 2016 (the “2015 Form 10-K”).
The
Company presents its financial statements on a consolidated basis because it combines its accounts with a wholly-owned subsidiary
that ceased operations in 2002. All significant intercompany transactions are eliminated in consolidation.
Going
Concern
The
financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the continued
operations as a public company and paying liabilities in the normal course of business. The Company is being maintained as a corporate
shell that is current in its SEC filings. Management and the board of trustees are evaluating real estate opportunities to put
into the Company.
At
September 30, 2016, our cash in the operating account was $57,761. In November 2015, we issued convertible notes payable for proceeds
of $197,780, which have been and will continue to be used to pay expenses to keep the Company current in its SEC filings and to
do due diligence on potential acquisitions. The Company expects that the due diligence costs incurred will be included in any
potential transaction and reimbursed to the Company through the structure of the transaction. If we are unable to complete a potential
transaction using this structure, the Company has other sources of raising funds, including additional debt and equity, to cover
the due diligence costs and to continue its SEC filings for the next twelve months. Other expenses, such as salaries and rent,
have been eliminated. Our ability to continue as a going concern will be dependent upon acquiring assets to generate cash flow.
There
can be no assurance that the Company will be able to acquire an operating company, be acquired by or merge with another company,
raise capital or otherwise continue to exist as a going concern. Even if our management is successful in closing a transaction,
investors may not value the transaction in the same manner as we did, and investors may not value the transaction as they would
value other transactions or alternatives. Failure to obtain external sources of capital and complete a transaction will materially
and adversely affect the Company’s ability to continue operations.
Note
3 – Marketable Securities
As
of September 30, 2016, our marketable securities had a fair market value of $100 and was in the form of cash in an insured deposit
account at the brokerage firm. During the nine month period ended September 30, 2016, there were no transfers to the operating
account from the brokerage firm and there was no interest income earned in the account at the brokerage firm.
During
the nine month period ended September 30, 2015, the Company transferred $19,278 to the operating account, which is shown as proceeds
from the sale of marketable securities on the cash flow statement.
Note
4 – Convertible Notes Payable – Related Parties
On
November 20, 2015, five trustees on our board of trustees loaned $197,780 to the Company in exchange for convertible notes payable.
The convertible notes payable accrue interest at 10% per annum and mature on November 20, 2018. The convertible notes payable
can be converted by the noteholders into common shares at the rate of $1.331 per common share at any time. The Company can convert
the notes payable into common shares at any time. At maturity or when the Company chooses to convert the convertible notes payable
into common shares, the noteholders have the option to receive cash plus accrued interest or convert the convertible notes payable
into common shares.
Note
5 – Loss Per Share
Net
loss per weighted average common share outstanding—basic and diluted are computed based on the weighted average number of
common shares outstanding for the period. The weighted average number of common shares outstanding for the nine month period ended
September 30, 2016 was 405,127 and for the nine month period ended September 30, 2015 was 405,096. The weighted average number
of common shares outstanding for the three month period ended September 30, 2016 was 405,169 and for the three month period ended
September 30, 2015 was 405,096. Common share equivalents of 2,610,275 as of the nine month period ended September 30, 2016 include
outstanding Class A Cumulative Convertible Preferred Shares (the “Preferred Class A Shares”), Class C Cumulative Convertible
Preferred Shares (the “Preferred Class C Shares”), and convertible notes payable. Common share equivalents of 2,448,892
as of the nine month period ended September 30, 2015 include outstanding Preferred Class A Shares and Preferred Class C Shares,
The common share equivalents are not included in net loss per weighted average common share outstanding—diluted as they
would be anti-dilutive.
Note
6 – Shareholders’ Equity (Deficit)
At
our annual shareholders meeting held on March 23, 2016 (the “2016 Annual Meeting”) our shareholders approved changes
to our declaration of trust, as amended and restated, in March 2016. We presently have authority to issue up to 450,000,000 shares
of beneficial interest, $0.01 par value per share, of which 400,000,000 are classified as common shares of beneficial interest,
$0.01 par value per share and 50,000,000 are classified as preferred shares of beneficial interest, $0.01 par value per share.
Of the 50,000,000 preferred shares of beneficial interest, 1,518,000 shares are designated as Preferred Class A Shares and 300,000
shares are designated as Preferred Class C Shares.
On
June 3, 2016, 1,600 Class A preferred shares were converted into 73 common shares, at a conversion rate of 0.046 common shares
for each preferred share.
Note
7 – 2016 Equity Plan
At
the 2016 Annual Meeting, our shareholders approved the 2016 Equity Plan (“2016 Plan”).
The
2016 Plan provides that awards may be made in common shares of the Company or units in the Company’s operating partnership,
which may be converted into common shares. Subject to adjustment as provided by the terms of the 2016 Plan, the maximum aggregate
number of common shares with respect to which awards may be granted under the 2016 Plan is 57,870, which will be increased based
on future issuances of common shares and units of the operating partnership. The maximum aggregate number of common shares that
may be issued under the 2016 Plan will be increased upon each issuance of common shares and units of the operating partnership
by the Company (including issuances pursuant to the 2016 Plan) so that at any time the maximum number of shares that may be issued
under the 2016 Plan shall equal 12.5% of the aggregate number of common shares and units of the operating partnership issued and
outstanding (other than treasury shares and/or units issued to or held by the Company).
The
Management, Organization and Compensation Committee (the “Committee”) administers the 2016 Plan, except with respect
to awards to non-employee trustees, for which the 2016 Plan will be administered by the board of trustees. Subject to the terms
of the 2016 Plan, the Committee is authorized to select participants, determine the type and number of awards to be granted, determine
and later amend (subject to certain limitations) the terms and conditions of any award, interpret and specify the rules and regulations
relating to the 2016 Plan, and make all other determinations which may be necessary or desirable for the administration of the
2016 Plan. The 2016 Plan includes the types of awards for grants and the types of financial performance measures.
As
of September 30, 2016, no grants were issued under the 2016 Plan.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Forward-Looking
Information
This
report on Form 10-Q contains historical information, as well as forward-looking statements that involve known and unknown risks
and relate to future events, our future financial performance, or our expected future operations and actions. In some cases, you
can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,”
“plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,”
“could,” “hope,” “predict,” “target,” “potential,” or “continue”
or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based upon
current information and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially
from these forward-looking statements for many reasons. While it is impossible to identify all such factors, factors that could
cause actual results to differ materially from those estimated by us include:
|
●
|
uncertainties
related to the national economy, including liquidity in the capital markets and lending requirements imposed by financial
institutions;
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|
|
|
●
|
changes
in values for commercial real estate properties and companies;
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|
●
|
increases
in interest rates and in the availability, cost and terms of mortgage funds;
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|
|
|
●
|
decreases
in market prices of the shares of publicly traded real estate companies;
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|
|
|
|
●
|
adverse
changes in governmental rules and fiscal policies; and
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|
|
|
|
●
|
other
factors which are beyond our control.
|
In
addition, an investment in the Company involves numerous risks that potential investors should consider carefully, including,
without limitation:
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●
|
we
have no operating assets;
|
|
|
|
|
●
|
our
cash resources are limited;
|
|
|
|
|
●
|
we
have a history of losses;
|
|
|
|
|
●
|
we
have not raised funds through a public equity offering;
|
|
|
|
|
●
|
our
trustees control a significant percentage of our voting shares;
|
|
|
|
|
●
|
shareholders
could experience possible future dilution through the issuance of additional equity;
|
|
|
|
|
●
|
we
are dependent on a small number of key senior professionals who are part-time employees; and
|
|
|
|
|
●
|
we
currently do not plan to distribute dividends to the holders of our shares.
|
The
forward-looking statements should be read in light of these factors and the factors identified in the “Risk Factors”
section of the 2015 Form 10-K.
Overview
Pillarstone
Capital is a shell company (as defined in Rule 12b-2 of the Exchange Act) and a Maryland REIT primarily focused on maintaining
its trust existence and SEC reporting history to enable it, in the future, to raise additional capital and make real estate investments.
Future real estate investments may include (i) acquisition and development of retail, office, office warehouse, industrial, multifamily,
hotel and other commercial properties, (ii) acquisition of or merger with a REIT or real estate operating company, and (iii) joint
venture investments.
As
of September 30, 2016, the Company is a shell company current in its SEC filings, that may make future real estate investments
or be sold to another company. While the Company has initiated due diligence for acquisition opportunities, there can be no assurance
that we will be able to close a transaction or keep the Company currently filed with the SEC. Even if our management is successful
in closing a transaction, investors may not value the transaction or the current filing status with the SEC in the same manner
as we did, and investors may not value the transaction as they would value other transactions or alternatives. Failure to obtain
external sources of capital will materially and adversely affect the Company’s ability to continue operations, as well as
its liquidity and financial results.
Executive
Overview
The
Company was formed on March 15, 1994 as a Maryland REIT. We operated as a traditional real estate investment trust by buying,
selling, owning and operating commercial and residential properties through December 31, 1999. In 2000, the Company purchased
a software technology company, resulting in the Company not meeting the qualifications to be a REIT under the Internal Revenue
Code of 1986, as amended. In 2002, the Company discontinued the operations of the technology segment.
On
November 20, 2015, five trustees on our board of trustees loaned $197,780 to the Company in exchange for convertible notes payable.
The loan was made to allow the Company to maintain its existence as a shell company current in its SEC filings so that the Company
may be used for future real estate transactions or sold to another company. Excess funds may be invested in marketable securities
of other real estate companies depending on market conditions. In the second and third quarters of 2016, we incurred $291,910
for due diligence costs to analyze acquisition opportunities and legal fees for reorganizing the corporate structure.
On
February 19, 2016, the Company filed its Definitive Proxy Statement containing five proposals for shareholder approval. The proposals
included electing six trustees to three classes with terms expiring for each class in 2017, 2018, and 2019; amending and restating
the declaration of trust; approving the 2016 Plan; approving in a non-binding advisory vote the compensation of the executive
officers; and approving in a non-binding advisory vote the frequency of when future voting of the compensation of the executive
officers would occur. At the 2016 Annual Meeting, all proposals were approved by the shareholders. As part of the amended and
restated declaration of trust, the name of the Company was changed to “Pillarstone Capital REIT.”
Results
of Operations
The
following is a discussion of our results of operations for the nine month periods ended September 30, 2016 and 2015 and financial
condition, including:
|
●
|
Explanation
of changes in the results of operations in the Condensed Consolidated Statements of Operations for the nine month period ended
September 30, 2016 compared to the nine month period ended September 30, 2015.
|
|
|
|
|
●
|
Explanation
of changes in the results of operations in the Condensed Consolidated Statements of Operations for the three month period
ended September 30, 2016 compared to the three month period ended September 30, 2015.
|
|
|
|
|
●
|
Our
critical accounting policies and estimates that require our subjective judgment and are important to the presentation of our
financial condition and results of operations.
|
|
|
|
|
●
|
Our
primary sources and uses of cash for the nine month periods ended September 30, 2016 and September 30, 2015, and how we intend
to generate cash for long-term capital needs.
|
|
|
|
|
●
|
Our
current income tax status.
|
The
following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and notes
thereto appearing elsewhere herein.
Comparison
of the Nine Month Periods Ended September 30, 2016
and 2015
Revenues
from Operations
There
was no revenue for the nine month periods ended September 30, 2016 and 2015. This was the result of no operations or temporary
investments in marketable securities.
Expenses
from Operations
Total
expenses, comprised of general and administrative expenses and interest expense increased $325,345 from $41,807 for the nine month
period ended September 30, 2015 to $367,152 for the nine month period ended September 30, 2016. This increase is the result $291,910
costs incurred to analyze potential acquisitions and legal fees for reorganizing the corporate structure, $12,814 for filing and
mailing a definitive proxy statement in the first quarter of 2016, increased interest expense of $14,847 for the convertible notes
payable issued November 20, 2015, increased accounting expenses of $3,675, increased transfer agent and SEC filing fees of $1,806,
and increased other expenses of $293.
Loss
from Operations and Net Loss Attributable to Common Shareholders
As
a result of the above, the loss from operations and net loss attributable to common shareholders increased $325,345 from $41,807
for the nine month period ended September 30, 2015 to $367,152 for the nine month period ended September 30, 2016.
Comparison
of the Three Month Periods Ended September 30, 2016
and 2015
Revenues
from Operations
There
was no revenue for the three month periods ended September 30, 2016 and 2015. This was the result of no operations or temporary
investments in marketable securities.
Expenses
from Operations
Total
expenses, comprised of general and administrative expenses and interest expense, increased $241,185 from $11,078 for the three
month period ended September 30, 2015 to $252,263 for the three month period ended September 30, 2016. This increase is the result
of $234,902 of costs incurred to analyze potential acquisitions and legal fees for reorganizing the corporate structure, increased
interest expense of $4,985 for the convertible notes payable issued November 20, 2015, increased accounting expenses of $500,
increased transfer agent and SEC filing fees of $689 and increased other expenses of $109.
Loss
from Operations and Net Loss Attributable to Common Shareholders
As
a result of the above, the loss from operations and net loss attributable to common shareholders increased $241,185 from $11,078
for the three month period ended September 30, 2015 to $252,263 for the three month period ended September 30, 2016.
Critical
Accounting Policies and Estimates
Our
Condensed Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles, which require
us to make certain estimates and assumptions. A summary of our significant accounting policies is provided in Note 3 to our Consolidated
Financial Statements included in the 2015 Form 10-K. The following section is a summary of certain aspects of those accounting
policies that both require our most subjective judgment and are most important to the presentation of our financial condition
and results of operations. It is possible that the use of different estimates or assumptions in making these judgments could result
in materially different amounts being reported in our Condensed Consolidated Financial Statements.
Valuation
Allowance of Deferred Tax Asset
Because
we have not elected to be taxed as a REIT for federal income tax purposes, we account for income taxes using the liability method
under which deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases
of assets and liabilities using enacted tax rates in effect for the period in which the differences are expected to affect taxable
income. At September 30, 2016, we have a net operating loss and at December 31, 2015, we had net operating loss carryforwards
totaling approximately $2,575,000. While these losses created a deferred tax asset, a full valuation allowance was applied against
this asset because of the uncertainty of whether we will be able to use these loss carryforwards that will expire in varying amounts
through the year 2035.
We
and our subsidiary are also subject to certain state and local income, excise and franchise taxes. The provision for state and
local taxes has been reflected in general and administrative expense in the Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) and has not been separately stated due to its insignificance.
Liquidity
and Capital Resources
Cash
provided by operations, equity transactions, and borrowings from affiliates and lending institutions have generally provided the
primary sources of liquidity to the Company. Historically, the Company has used these sources to fund operating expenses, satisfy
its debt service obligations and fund distributions to shareholders. Presently, we are dependent on our existing cash, which was
provided by loans of $197,780 from five trustees on our board of trustees in exchange for convertible notes payable in November
2015. The funds have been and continue to be used for the Company to maintain its status as a shell company current in its SEC
filings so that the Company may be used in the future for real estate transactions or sold to another company. We have kept the
public entity available for value-added real estate opportunities, including (i) acquisition and development of retail, office,
office warehouse, industrial, multifamily, hotel, and other commercial properties, (ii) acquisition of or merger with a REIT or
real estate operating company, and (iii) joint venture investments. Excess funds may be invested in marketable securities of other
real estate companies depending on market conditions. Cash of $57,761 at September 30, 2016 is being used to continue the Company’s
SEC filings and to do due diligence for potential acquisitions. The Company expects that the due diligence costs incurred will
be included in any potential transaction and reimbursed to the Company through the structure of the transaction. If we are unable
to complete a potential transaction using this structure, the Company has other sources of raising funds, including additional
debt and equity, to cover the due diligence costs and to continue its SEC filings for the next twelve months.
To
further conserve cash, in 2006 each trustee signed a restricted share agreement with the Company to receive a total of 12,500
restricted Preferred Class C Shares in lieu of receiving fees in cash for service as a trustee for the two years ending September
29, 2008. Additionally, in 2006, James C. Mastandrea, our President, Chief Executive Officer, and Chairman of the board of trustees,
signed a subscription agreement to purchase 44,444 restricted Preferred Class C Shares. The consideration for the purchase was
Mr. Mastandrea’s services as an officer of Pillarstone Capital until September 29, 2008. The shares for the trustees’
services and Mr. Mastnadrea’s services vest upon the latest to occur of a public offering by the Company sufficient to liquidate
these shares, or an exchange of the Company’s shares for new shares, or September 29, 2008. The shares were fully amortized
by the original date in 2008.
Cash
Flows
As
of September 30, 2016, our unrestricted cash resources were $57,761. We are dependent on our existing cash, loaned by five trustees
on our board of trustees in exchange for convertible notes payable, to meet our liquidity needs because we do not have cash from
operations to meet our operating requirements.
During
the nine months ended September 30, 2016, the Company’s cash balance decreased by $116,522 from $174,283 at December 31,
2015 to $57,761 at September 30, 2016. During the nine months ended September 30, 2016, we used $116,522 to continue to maintain
the Company as a shell company current in its SEC filings, including the filing and mailing of our definitive proxy statement
filed in connection the 2016 Annual Meeting, to initiate due diligence for acquisition opportunities, and to reorganize the corporate
structure.
Future
Obligations
Because
the Company is a shell company that may be used in the future for real estate transactions or sold to another company, we have
no cash from operations and have reduced our day-to-day overhead expenses and material future obligations. We have reduced overhead
expenses by issuing equity for our CEO’s salary and trustee fees, placed our other employee on a part-time unpaid basis,
and have not replaced employees who have left. We have eliminated our office space and rent, and reduced the use of outside consultants,
negotiating discounts on or eliminated expenses wherever possible.
Long
Term Liquidity and Operating Strategies
Historically,
we have financed our long term capital needs, including acquisitions, as follows:
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borrowings
from new loans and
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additional
equity issuances of our common and preferred shares.
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Because
our unrestricted cash is not sufficient to allow us to continue operations, we have been reviewing other alternatives, including
selling the trust entity and seeking additional investors. In 2006 and 2007, the Company received total payments of $500,000 from
three independent trustees on our board of trustees in exchange for Preferred Class C Shares. In November 2015, five trustees
on our board of trustees loaned the Company $197,780 in exchange for convertible notes payable. These funds have been and continue
to be used to maintain the Company as a shell company current in its SEC filings and to do due diligence in 2016 on potential
acquisitions. Excess funds may be invested in marketable securities of other real estate companies depending on market conditions.
Current
Tax Status
At
September 30, 2016, we have a net operating loss, and at December 31, 2015, we had net operating loss carryforwards totaling approximately
$2,575,000. While the losses created a deferred tax asset, a full valuation allowance was applied against the asset because of
the uncertainty of whether we will be able to use these loss carryforwards that will expire in varying amounts through the year
2035. In the event of a change of ownership of the Company, our ability (or the ability of any company that acquires or merges
with us) to use our net operating loss carryforwards will be limited by federal tax regulations.
We
and our subsidiary are also subject to certain state and local income, excise and franchise taxes. The provision for state and
local taxes has been reflected in general and administrative expense in the Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) and has not been separately stated due to its insignificance.
Interest
Rates and Inflation
We
were not significantly affected by inflation during the periods presented in this report primarily due to the relative low nationwide
inflation rates and the Company being a shell company with minimal expenses.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements that have, or are likely to have, a current or future material effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources.