General
Cadus Corporation
(“Cadus”) was incorporated under the laws of the State of Delaware in January 1992 and initially devoted substantially
all of its resources to the development and application of novel yeast-based and other drug discovery technologies. Cadus no longer
seeks to develop, maintain or license its drug discovery technologies. Beginning in the fourth quarter of 2013, Cadus began to
explore opportunities to profit from purchasing land and residential homes for construction or renovation and resale in areas
of the United States where there may be increases in real estate value. Cadus then formed directly or indirectly wholly-owned
subsidiaries (such subsidiaries together with Cadus Technologies, Inc. which holds the intellectual property associated with the
Company’s prior business, the “Subsidiaries,” and Cadus together with its Subsidiaries, the “Company”)
through which it would purchase individual homes and individual residential lots for purposes of renovation or construction and
resale. Cadus’ corporate web site may be found at
www.caduscorp.com.
The Company has predominantly
concentrated its real estate acquisition, renovation and construction activities in south Florida. The Company bought its first
residential properties in Florida in February 2014. As of March 15, 2017, the Company had purchased and continued to own twelve
single-family residential zoned properties in Miami-Dade County, Florida. The majority of the properties are waterfront properties.
In addition, the Company has purchased and continues to own an approximately one-acre single-family residential zoned vacant lot
in East Hampton, New York.
Of its twelve properties
in Miami-Dade County, ten are slated for the construction of new single-family homes, although certain of these properties may
be sold without undertaking construction, and two properties have been renovated.
The Company conducted
a rights offering for the issuance of up to 13,144,040 shares of its common stock pursuant to its S-1 filing with the Securities
and Exchange Commission that became effective April 28, 2014. In connection with the rights offering, the Company distributed to
the holders of its common stock non-transferable subscription rights to purchase up to 13,144,040 shares of its common stock at
$1.53 per share. Effective June 6, 2014, all 13,144,040 shares available in the offering were subscribed and the company received
gross proceeds of $20,110,381 less offering costs of approximately $263,300. The Company is using the proceeds from the offering
for, among other things, the acquisition, renovation, and construction of properties as well as for maintenance, property tax and
other costs connected with its inventory of properties.
Depending on the availability
of transactions acceptable to Cadus, all of Cadus’ available cash may be utilized, and Cadus may seek debt or equity financing.
Although no such acquisitions or investments are currently contemplated, Cadus may also consider other acquisitions or investments
in various industries.
Industry Overview and Current Market Conditions
The sale of homes has
been and will likely remain a large industry in the United States for four primary reasons: historical growth in both population
and households, demographic patterns that indicate an increased likelihood of home ownership as age and income increase, job creation
within geographic markets that necessitate new home construction or the renovation of existing homes, and consumer demand for home
features in new or renovated homes.
In any year, the demand
for homes is closely tied to job growth, the availability and cost of mortgage financing, the supply of new and existing homes
for sale and, importantly, consumer confidence. Consumer confidence is perhaps the most important of these demand variables and
is the hardest one to predict accurately because it is a function of, among other things, consumers' views of their employment
and income prospects, recent and likely future home price trends, localized new and existing home inventory, the level of current
and near-term interest and mortgage rates, the availability of consumer credit, valuations in stock and bond markets, and other
geopolitical factors. In general, high levels of employment, significant affordability and low new home and resale home inventories
contribute to a strong and growing home renovation and homebuilding market environment.
While the Company believes
that long-term fundamentals for home renovation and new home construction remain intact, it does not believe market conditions
in Miami-Dade County, Florida are currently favorable for sellers of residential properties. This assessment is based upon a review
of recent comparisons of listed prices for properties in the county and the prices at which they actually sell, the prevalence
of price reductions for listed homes, the length of time properties remain on the market, and feedback received from local brokers.
In addition, the Company is seeing a rise in construction costs.
Property Acquisition
In connection with
the Company’s program to purchase residential properties for purposes of renovation or construction and resale, as of March
15, 2017, the Company has purchased for an aggregate original purchase price of approximately $29.9 million, and continues to own,
through two indirect wholly-owned subsidiaries, twelve residential properties in Miami-Dade County, Florida and one residential
property in East Hampton, New York. Of the properties in Miami-Dade County, when purchased, eight properties had existing homes
on them and three properties were vacant lots (one of which, 700 88
th
Street, Surfside, Florida) was subsequently subdivided
into two equal lots). The Company does not currently intend to purchase additional properties until it has sold sufficient properties
from its existing inventory of properties. To date, with the exception of the East Hampton property, the Company has concentrated
its real estate activities in Miami-Dade County, Florida.
Demolition, Construction and Renovation
When individual homes
are purchased, Cadus intends, as appropriate, to renovate them for resale or to demolish them for new home construction. When vacant
lots are purchased, Cadus intends to construct new homes on them. In some cases, the Company may resell acquired land without undertaking
construction.
As of March 15, 2017,
the Company’s existing inventory or properties consisted of twelve residential properties in Miami-Dade County, Florida and
one property in East Hampton, New York at the following addresses: (i) 700 88th Street, Surfside, FL 33154; (ii) 88th Street, Surfside,
FL 33154 (this lot currently does not have its own street address, but has a folio number); (iii) 1420 Biscaya Drive, Surfside,
FL 33154; (iv) 1211 Stillwater Drive, Miami Beach, FL 33141; (v) 2535 Shelter Avenue, Miami Beach, FL 33140; (vi) 2555 Shelter
Avenue, Miami Beach, FL 33140; (vii) 11400 N. Bayshore Drive, North Miami, FL 33181; (viii) 11404 N. Bay Shore Drive, North Miami,
FL 33181; (ix) 241 Atlantic Isle, Sunny Isles Beach, FL 33160 and the adjacent island which has its own folio number; (x) 18970
North Bay Road, Sunny Isles Beach, FL 33160; (xi) 3506 Main Lodge Drive, Coconut Grove, FL 33133; (xii) 3437 N. Moorings Way, Miami,
FL 33133; and (xiii) 65 East Hollow Road, East Hampton, NY 11937. As of that date, all were vacant lots, except for two properties
where the renovation of the existing homes have been completed and except for one of the properties where a home is under construction,
and a number of properties had been listed for sale.
The Company engaged
the architectural firm of Max Strang Architecture, Inc. for schematic designs (including floor plans, design renderings and construction
budgets), which they completed, and other architectural services with respect to homes to be built on the Company’s current
Florida properties. Renderings of proposed construction on certain of the Company’s properties may be found at the Company’s
web site: www.caduscorp.com. As the Company sells homes into the market, its plan, depending on market conditions, is to begin
construction on spec or custom homes on other of its properties.
Competition
The business of developing
and selling residential properties is highly competitive and fragmented. The Company’s long-term success depends on its ability
to acquire at reasonable prices existing residential properties suitable for renovation or construction and resale. The acquisition
of residential homes and lots for renovation or construction and resale is highly competitive. In addition, the Company anticipates
that it will compete for residential sales on the basis of a number of interrelated factors, including location, reputation, amenities,
design, quality and price, with numerous large and small homebuilders, including some homebuilders with nationwide operations and
much greater financial resources and/or lower costs than the Company. The Company will also compete for residential sales with
individual resales of existing homes and available rental housing.
Brokerage Services Provided by Bayswater
Brokerage Florida LLC
Bayswater Brokerage
Florida LLC (“Bayswater”) provides brokerage services to the Company. Carl C. Icahn, the controlling shareholder of
Cadus, is also indirectly the principal shareholder of Bayswater; Jack Wasserman, a director and the lead independent director
of Cadus is a director of Bayswater’s indirect parent; and Hunter C. Gary, a director and President and Chief Executive Officer
of Cadus, is a Senior Vice President of Bayswater’s indirect parent and Vice President, Secretary and Treasurer of Bayswater.
Barberry Corp., of which Carl Icahn is the sole shareholder, is a significant shareholder of Cadus. Pursuant to an agreement between
Barberry Corp. and Cadus, to the extent Bayswater receives any compensation for such brokerage services, Barberry Corp. makes capital
contributions to Cadus for the full amount of any such compensation received by Bayswater. Barberry Corp. is not issued stock of
the Company or given other consideration in connection with any such capital contributions.
Employees
The Company currently has no full-time employees
and its only employee is Hunter C. Gary, the President and Chief Executive Officer of Cadus. Under his employment agreement with
Cadus, Mr. Gary is required to devote such time as may be required by Cadus’ Board of Directors to perform his duties and
responsibilities. David Blitz, the Treasurer and Secretary of Cadus, is not an employee of the Company, and is serving under a
consulting arrangement. The Company intends to hire employees as required in connection with the growth of its real estate activities.
Patents
As of March 1, 2017,
Cadus Technologies, Inc., Cadus’ wholly-owned subsidiary, is the assignee of two issued U.S. patents covering aspects of
its yeast technology. The Company has not received any revenues from the licensing of its patents since 2010 and has not entered
into a new license for its patents since 2000. The Company no longer maintains or seeks to license its patents.
An investment in the shares of Cadus’
common stock involves a high degree of risk. Accordingly, investors and prospective investors should consider carefully the following
risk factors, as well as all other information contained in this Annual Report on Form 10-K, in connection with investments in
shares of Cadus’ common stock.
The Company is implementing a new business
plan.
The Company has decided
not to maintain or seek to license or sell its drug discovery technologies. The Company has determined that it will seek to purchase
individual homes or individual residential lots for purposes of renovation or construction and resale. The Company has very limited
operating experience in this business and the Company’s limited operating history makes it difficult to predict the long-term
success of its business model. In addition, because of the Company’s new business plan, the Company’s historical performance
is not a meaningful indicator of future results.
Uncertainty of Future Profitability
The Company's ability to generate revenues
and become profitable is dependent in large part on the ability of the Company to acquire residential homes and lots, renovate
existing homes or construct new ones and sell them at a profit. There can be no assurance that the Company will be able to do so
or that the Company will ever achieve profitability.
Inability to Identify and Consummate
Acquisitions or Investments
Although the Company
intends to engage in the purchase and renovation of existing homes for resale and the purchase of land and the building of residential
homes on such land for sale, the Company is also seeking to acquire or invest in companies or income producing assets. To date
the Company has not been able to identify and consummate an appropriate acquisition or investment in companies or income producing
assets and there can be no assurance that it will do so. There also can be no assurance that acquisitions or investments by the
Company will be profitable.
The Company’s long-term success
depends on its ability to acquire at reasonable prices existing residential properties suitable for renovation or construction
and resale.
The acquisition of
residential homes and lots for renovation or construction and resale is highly competitive and the risk inherent in purchasing
and renovating or constructing such properties increases as consumer demand for housing increases. The availability of existing
residential properties, finished and partially finished developed lots and undeveloped land for purchase that meet the Company’s
investment criteria depends on a number of factors outside the Company’s control, including residential housing and land
availability in general, competition with other homebuilders and land and home buyers, inflation in land and home prices, zoning,
allowable housing density, the ability to obtain building permits and other regulatory requirements. Should suitable residential
homes, lots or land become less available, the number of homes the Company may be able to renovate or build and sell could be reduced,
and the cost of existing homes or land could be increased, perhaps substantially, which could adversely impact the Company’s
results of operations.
As competition for suitable homes and land
increases, the cost of acquiring existing homes and finished and undeveloped lots and the cost of renovating or constructing homes
could rise and the availability of suitable homes and land at acceptable prices may decline, which could adversely impact the Company’s
financial results. The availability of suitable homes and land assets could also affect the success of the Company’s residential
homes and land acquisition strategy, which may impact the Company’s ability to increase the number of properties that it
has for sale, to grow the Company’s revenues and margins, and to achieve or maintain profitability.
The market value of the Company’s
land and/or homes may decline, leading to impairments and reduced profitability.
The Company intends to regularly acquire
residential homes and land for replacement and expansion of inventory within the Company’s existing or new markets. The market
value of land, building lots and housing inventories can fluctuate significantly as a result of changing market conditions and
the measures the Company employs to manage inventory risk may not be adequate to insulate its operations from a severe drop in
inventory values. When market conditions are such that real estate values are not appreciating, previously entered into option
agreements may become less desirable, at which time the Company may elect to forgo deposits and preacquisition costs and terminate
the agreements. In a situation of adverse market conditions, the Company may incur impairment charges or have to sell its real
estate inventory at a loss which would adversely affect its financial condition, results of operations and stockholders' equity
and its ability to comply with covenants in any future debt instruments linked to tangible net worth.
The Company’s home sales and operating
revenues could decline due to macro-economic and other factors outside of its control, such as changes in consumer confidence,
declines in employment levels, changes in mortgage interest rates, changes in tax laws and rates and increases in the quantity
and decreases in the prices of new homes and resale homes in the market.
Changes in international, national and
regional economic conditions, as well as local economic conditions where the Company conducts its operations and where prospective
purchasers of its homes currently live, may result in more caution on the part of homebuyers and, consequently, fewer home purchases.
These economic uncertainties involve, among other things, conditions of supply and demand in local markets and changes in consumer
confidence and income, employment levels, changes in mortgage interest rates, changes in tax laws and rates, and government regulations.
These risks and uncertainties could periodically have an adverse effect on consumer demand for and the pricing of the Company’s
homes, which could cause the Company’s operating revenues and profitability to decline. Such reductions in the Company’s
revenues and profitability could, in turn, negatively affect the market price of the Company’s securities.
Increases in the cost of labor or materials
could have a material adverse effect on the Company’s business.
Any increase in the cost of labor or materials
could increase construction costs and have a material adverse effect on the Company’s business.
Our geographic concentration could materially
and adversely affect us if sales of new homes and resale homes in Florida should experience a decline.
The Company currently
intends to concentrate its real estate acquisition, renovation and construction activities in Florida. A prolonged economic downturn
in the future in Florida could have a material adverse effect on our business, prospects, liquidity, financial condition and results
of operations, and a disproportionately greater impact on us than other homebuilders with more diversified operations.
Moreover, certain insurance
companies doing business in Florida have restricted, curtailed or suspended the issuance of homeowners’ insurance policies
on single-family homes. This has both reduced the availability of hurricane and other types of natural disaster insurance in Florida,
in general, and increased the cost of such insurance to prospective purchasers of homes in Florida. Mortgage financing for a new
home is conditioned, among other things, on the availability of adequate homeowners’ insurance. There can be no assurance
that homeowners’ insurance will be available or affordable to prospective purchasers of our homes offered for sale in the
Florida market. Long-term restrictions on, or unavailability of, homeowners’ insurance in the Florida market could have an
adverse effect on the homebuilding industry in that market in general, and on our business within the market in particular.
The homebuilding industry is cyclical.
A severe downturn in the industry, as recently experienced, could adversely affect the Company’s business, results of operations
and stockholders' equity.
During periods of downturn in the industry,
housing markets across the United States may experience an oversupply of both new and resale home inventory, an increase in foreclosures,
reduced levels of consumer demand for new homes, increased cancellation rates, aggressive price competition among homebuilders
and increased incentives for home sales. In the event of a downturn, the Company may temporarily experience a material reduction
in revenues and margins. Continued weakness in the homebuilding market could adversely affect the Company’s business, results
of operations and stockholders' equity as compared to prior periods and could result in additional inventory impairments in the
future.
The Company will
be dependent on the continued availability and satisfactory performance of its general contractors and their subcontractors, which,
if unavailable, could have a material adverse effect on the Company’s business.
The Company will conduct
its renovation and construction operations through one or more general contractors and their respective subcontractors. As a consequence,
the Company will depend on the continued availability of and satisfactory performance by its general contractors and their respective
subcontractors for the renovation and constructions of its homes. There may not be sufficient availability of and satisfactory
performance by these general contractors and subcontractors in the markets in which the Company operates. In addition, inadequate
subcontractor resources could have a material adverse effect on the Company’s business.
The Company will
be dependent on the services of certain key employees, and the loss of their services could hurt its business.
The Company’s
future success will depend upon its ability to attract, train, assimilate and retain skilled personnel. If the Company is unable
to retain key employees or attract, train, assimilate or retain other skilled personnel in the future, it could hinder its business
strategy and impose additional costs of identifying and training new individuals. The Company anticipates that competition for
qualified personnel in its operating markets will be intense.
Loans obtained by the Company may impose
significant restrictions and obligations on the Company. Restrictions on the Company’s ability to borrow could adversely
affect its liquidity. In addition, any substantial indebtedness could adversely affect the Company’s financial condition,
limit its growth and make it more difficult for the Company to satisfy its debt obligations.
Any secured or unsecured
indebtedness or revolving credit or letter of credit facilities obtained by the Company will impose certain restrictions and obligations
on the Company. Under certain of these instruments, the Company may be required to comply with defined covenants which limit the
Company's ability to, among other things, incur additional indebtedness, engage in certain asset sales, make certain types of restricted
payments, engage in transactions with affiliates and create liens on assets of the Company. Failure to comply with certain of these
covenants could result in an event of default under the applicable instrument. Any such event of default could negatively impact
other covenants or lead to cross defaults under other debt of the Company. In such cases, there can be no assurance that the Company
will be able to obtain any waivers or amendments that may become necessary in the event of a future default situation without significant
additional cost or at all.
Any substantial indebtedness
of the Company could have important consequences to it and the holders of its securities, including, among other things:
|
·
|
causing the Company to be unable to satisfy its obligations under its debt agreements;
|
|
·
|
making the Company more vulnerable to adverse general economic and industry conditions;
|
|
·
|
making it difficult to fund future working capital, home and land purchases, renovation and construction, general corporate
purposes or other purposes; and
|
|
·
|
causing the Company to be limited in its flexibility in planning for, or reacting to, changes in its business.
|
In addition, subject
to restrictions in its debt instruments, the Company may incur additional indebtedness. If new debt is added to the Company’s
then current debt levels, the related risks that the Company then faces could intensify. The Company’s growth plans and its
ability to make payments of principal or interest on, or to refinance, its indebtedness, will depend on its future operating performance
and its ability to enter into additional debt and/or equity financings. If the Company is unable to generate sufficient cash flows
in the future to service its debt, it may be required to refinance all or a portion of its then existing debt, to sell assets or
to obtain additional financing. The Company may not be able to do any of the foregoing on terms acceptable to the Company, if at
all.
A substantial increase in short-term
and/or long-term mortgage interest rates, the unavailability of mortgage financing or a change in tax laws regarding the deductibility
of mortgage interest may reduce consumer demand for the Company’s homes.
Purchasers of the Company’s homes
may finance their acquisition with mortgage financing. Housing demand is adversely affected by reduced availability of mortgage
financing and factors that increase the upfront or monthly cost of financing a home such as increases in interest rates, insurance
premiums, or limitations on mortgage interest deductibility. The recent decrease in the willingness and ability of lenders to make
home mortgage loans, the tightening of lending standards and the limitation of financing product options, have made it more difficult
for homebuyers to obtain acceptable financing. Any substantial increase in short-term and/or long-term mortgage interest rates
or unavailability of mortgage financing may adversely affect the ability of prospective homebuyers to obtain financing for the
Company’s homes, as well as adversely affect the ability of prospective homebuyers to sell their current homes. A disruption
in the credit markets and/or the curtailed availability of mortgage financing may adversely affect the Company’s business,
financial condition, results of operations and cash flows.
If the Company is
unsuccessful in competing against its homebuilding competitors, any future market share of the Company could decline or the Company’s
growth could be impaired and, as a result, the Company’s financial results could suffer.
Competition in the
homebuilding industry is intense, there are relatively low barriers to entry into this business, and we may not be able to compete
successfully. Increased competition could hurt the Company’s business, as it could prevent the Company from acquiring existing
homes or parcels of land on which to build homes or make such acquisitions more expensive, hinder the Company’s market share
expansion, and lead to pricing pressures on its homes that may adversely impact its margins and revenues. If the Company is unable
to successfully compete, its financial results could suffer and the value of, or its ability to service, any of its indebtedness
could be adversely affected. The Company’s competitors may independently renovate existing homes or construct new homes that
are superior or substantially similar to the Company’s products. Furthermore, a number of the anticipated competitors of
the Company will have substantially greater financial resources and lower costs of funds than will the Company. Many of these competitors
will also have longstanding relationships with subcontractors and suppliers in the markets in which the Company operates.
The Company could
experience a reduction in home sales and revenues or reduced cash flows due to its inability to acquire existing homes or finished
lots or undeveloped land for renovation or construction, if it is unable to obtain reasonably priced financing to support its homebuilding
activities.
The homebuilding industry is capital intensive,
and homebuilding requires significant up-front expenditures to acquire existing homes or land and to begin development. Accordingly,
the Company will seek equity or debt financing from a variety of potential sources, including lender financing and/or securities
offerings. The availability of borrowed funds, especially for construction financing and existing home or land acquisition, may
be greatly reduced nationally, and the lending community may require increased amounts of equity to be invested in a project by
borrowers in connection with both new loans and the extension of existing loans. The credit and capital markets have recently experienced
significant volatility. If the Company is required to seek additional financing to fund its operations, continued volatility in
these markets may restrict the Company’s flexibility to access such financing. If the Company is not successful in obtaining
sufficient financing to fund its planned capital and other expenditures, it may be unable to acquire existing homes or land for
its homebuilding activities. Additionally, if the Company cannot obtain financing to fund the purchase of real estate properties
under contracts entered into by the Company, the Company may lose deposits or otherwise incur contractual penalties and fees.
The Company is subject
to government regulation which could cause it to incur significant liabilities or restrict its business activities.
Regulatory requirements
could cause the Company to incur significant liabilities and operating expenses and could restrict its business activities. The
Company is subject to local, state and federal statutes and rules regulating, among other things, certain developmental matters,
building and site design, and matters concerning the protection of health and the environment. The Company’s operating expenses
may be increased by governmental regulations such as building permit allocation ordinances and impact and other fees and taxes,
which may be imposed to defray the cost of providing certain governmental services and improvements. Any delay or refusal from
government agencies to grant the Company necessary licenses, permits and approvals could have an adverse effect on its operations.
The Company may
incur additional operating expenses due to compliance programs or fines, penalties and remediation costs pertaining to environmental
regulations.
The Company is subject
to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the
environment. The particular environmental laws which apply vary greatly according to the location of the site, the site's environmental
conditions and the present and former use of the site. Environmental laws may result in delays, may cause the Company to implement
time consuming and expensive compliance programs and may prohibit or severely restrict development or construction in certain environmentally
sensitive regions or areas. From time to time, the United States Environmental Protection Agency (EPA) and similar federal or state
agencies review homebuilders' compliance with environmental laws and may levy fines and penalties for failure to strictly comply
with applicable environmental laws or impose additional requirements for future compliance as a result of past failures. Any such
actions taken with respect to the Company may increase the Company’s costs. Further, the Company expects that increasingly
stringent requirements will be imposed on homebuilders in the future. Environmental regulations can also have an adverse impact
on the availability and price of certain raw materials such as lumber.
The Company may
be subject to significant potential liabilities as a result of construction defect, product liability and warranty claims made
against it.
As a homebuilder, the
Company will be subject to construction defect, product liability and home warranty claims, including moisture intrusion and related
claims, arising in the ordinary course of business. These claims are common to the homebuilding industry and can be costly.
With respect to certain
general liability exposures, including construction defect claims, product liability claims and related claims, interpretation
of underlying current and future trends, assessment of claims and the related liability and reserve estimation process is highly
judgmental due to the complex nature of these exposures, with each exposure exhibiting unique circumstances. Furthermore, once
claims are asserted for construction defects, it can be difficult to determine the extent to which the assertion of these claims
will expand geographically.
The Company’s
operating expenses could increase if it were required to pay higher insurance premiums or litigation costs for various claims,
which could cause the Company’s net income to decline.
The costs of insuring
against construction defects, product liability claims and claims against directors and officers are substantial. Increasingly
in recent years, lawsuits (including class action lawsuits) have been filed against builders, asserting claims of personal injury
and property damage. Insurance obtained by the Company may not cover all of the claims, including personal injury claims, or such
coverage may become prohibitively expensive. If the Company is not able to obtain adequate insurance against these claims, the
Company may experience losses that could reduce its net income and restrict its cash flow available to service debt.
Historically, builders
have recovered from general contractors, subcontractors and insurance carriers a significant portion of the construction defect
liabilities and costs of defense that the builders have incurred. Insurance coverage available to general contractors and subcontractors
for construction defects is becoming increasingly expensive, and the scope of coverage is restricted. If the Company cannot effectively
recover from its general contractors or their respective subcontractors or their carriers, it may suffer greater losses which could
decrease its net income.
A builder's ability to recover against
any available insurance policy depends upon the continued solvency and financial strength of the insurance carrier that issued
the policy. Many states have lengthy statutes of limitations applicable to claims for construction defects. To the extent that
any carrier providing insurance coverage to the Company or its general contractors or their respective subcontractors becomes insolvent
or experiences financial difficulty in the future, the Company may be unable to recover on those policies, and its net income may
decline.
The Company may
experience fluctuations and variability in its operating results and, as a result, its historical performance may not be a meaningful
indicator of future results.
The Company expects
to experience variability in home sales and net earnings. As a result of such variability, the Company’s historical performance
may not be a meaningful indicator of future results. The Company’s results of operations may fluctuate in the future as a
result of a variety of both national and local factors, including, among others:
|
·
|
the timing of real estate acquisitions and home closings;
|
|
·
|
the Company’s ability to continue to acquire additional properties for renovation or construction
or to secure contracts to acquire additional properties on acceptable terms;
|
|
·
|
conditions of the real estate market in areas where the Company operates and of the general economy;
|
|
·
|
raw material and labor shortages;
|
|
·
|
seasonal home buying patterns; and
|
|
·
|
other changes in operating expenses, including the cost of labor and raw materials, personnel and
general economic conditions.
|
The occurrence of
natural disasters could increase the Company’s operating expenses and reduce its revenues and cash flows.
The climates and geology of states in which
the Company operates may present increased risks of natural disasters. To the extent that hurricanes, severe storms, earthquakes,
droughts, floods, wildfires or other natural disasters or similar events occur, the Company’s homes under renovation or construction
or the Company’s building lots could be damaged or destroyed, which may result in losses exceeding the Company’s insurance
coverage. Any of these events could increase the Company’s operating expenses, impair its cash flows and reduce its revenues,
which could, in turn, negatively affect the market price of the Company’s securities.
Terrorist attacks
against the United States or increased domestic or international instability could have an adverse effect on the Company’s
operations.
Adverse developments
in the war on terrorism, terrorist attacks against the United States, or any outbreak or escalation of hostilities between the
United States and any foreign power, may cause disruption to the economy, the Company, its employees and its customers, which could
adversely affect the Company’s revenues, operating expenses, and financial condition.
History of Operating Losses
The Company has incurred
operating losses in each year since its inception with the exception of 2002. At December 31, 2016, the Company had an accumulated
deficit of approximately $39.3 million. The Company’s losses have resulted principally from costs incurred in connection
with its previous research and development activities, its current real estate activities and from general and administrative costs
associated with the Company’s operations. These costs have exceeded the Company’s revenues and interest income.
Uncertainty of Utilization of Operating
Loss and Research and Development Credit Carryforwards.
The Company had a net
operating loss carryforward of approximately $21.4 million and a research and development credit carryforward of approximately
$1.5 million at December 31, 2016. These net operating loss carryforwards and the research and development credit carryforward
expire in various years from 2018 to 2036. The Company's ability to utilize such net operating loss and research and development
credit carryforwards for income tax savings is subject to certain conditions and may be subject to certain limitations in the future
due to ownership changes, if any, as defined by rules enacted with the Tax Reform Act of 1986. As such, there can be no assurance
that the Company will be able to utilize such carryforwards.
Uncertainty of Access to Capital
There can be no assurance that additional
funding, if necessary, will be available on favorable terms, if at all.
Control by Existing Stockholders; Concentration
of Stock Ownership
Carl C. Icahn beneficially owns, as of
March 15, 2017, approximately 67.81% of the outstanding shares of Common Stock. As a result, Mr. Icahn, acting alone, will be able
to control most matters requiring approval by the stockholders of the Company, including the election of directors, the adoption
of charter amendments, and the approval of mergers and other extraordinary corporate transactions. Such a concentration of ownership
may have the effect of delaying or preventing a change in control of the Company, including transactions in which stockholders
might otherwise receive a premium for their shares over then current market prices.
Anti-Takeover Effect of Delaware Corporate
Law
Certain provisions of the Delaware corporate
law may have the effect of deterring hostile takeovers or delaying or preventing changes in the control or management of the Company,
including transactions in which stockholders might otherwise receive a premium for their shares over the then current market prices.
The Company’s stock price is volatile
and could decline.
The securities
markets in general and the Company’s common stock in particular have experienced significant price and volume volatility
over the past few years. The market price and volume of the Company’s common stock may continue to experience significant
fluctuations due not only to general stock market conditions but also to a change in sentiment in the market regarding the Company’s
industry, operations or business prospects. In addition to the other risk factors discussed in this section, the price and volume
volatility of the Company’s common stock may be affected by:
|
·
|
operating results that vary from the expectations of securities analysts and investors;
|
|
·
|
factors influencing home purchases, such as availability of home mortgage loans and interest rates,
credit criteria applicable to prospective borrowers, ability to sell existing residences, and homebuyer sentiment in general;
|
|
·
|
the operating and securities price performance of companies that investors consider comparable
to the Company;
|
|
·
|
announcements of strategic developments, acquisitions and other material events by the Company
or its competitors;
|
|
·
|
changes in government regulations applicable to our business; and
|
|
·
|
changes in global financial markets and global economies and general market conditions, such as
interest rates, commodity and equity prices and the value of financial assets.
|
The Company’s ability to raise funds
through the issuance of equity or otherwise use its common stock as consideration is impacted by the price of its common stock.
A low stock price may adversely impact the Company’s ability to reduce its financial leverage, as measured by the ratio of
total debt to total capital. High levels of leverage or significant increases may adversely affect the Company’s credit ratings
and make it more difficult for the Company to access additional capital. These factors may limit the Company’s ability to
implement its operating and growth plans.
Absence of Dividends
The Company has not
paid any dividends on its Common Stock and does not anticipate paying dividends in the foreseeable future.
We Have a Limited Trading Market
There is a limited
public trading market for our common stock on the over-the-counter bulletin board. We cannot assure you that a regular trading
market for our common stock will ever develop or that, if developed, it will be sustained. Because of our limited public trading
market, the market price for our common stock could be highly volatile and, accordingly, substantial fluctuations in the price
of our common stock could limit the ability of our current stockholders to sell their shares at a favorable price.
If we ever become delinquent with the
filing of our reports with the SEC, Rule 144 will no longer be available until and unless we become current.
Rule 144 provides,
as indicated above, that sales of securities of Cadus may be made pursuant thereto only if Cadus has filed all relevant periodic
reports that it is required to file. If we become delinquent with our SEC reports, any holders of restricted securities will not
be able to sell pursuant to Rule 144 until, if ever, the Company becomes current for purposes of Rule 144. No assurance can be
made that the Company will be able to remain current with its reports.