NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
1.
|
BUSINESS AND ORGANIZATION
|
ACRE Realty
Investors Inc. (the “company”) (formerly known as Roberts Realty Investors, Inc. until its name was changed on January
30, 2015), a Georgia corporation, was formed on July 22, 1994 to serve as a vehicle for investments in, and ownership of, a professionally
managed real estate portfolio of multifamily apartment communities. The company’s strategy has since changed upon the consummation
of the transaction with A-III Investment Partners LLC, as described below.
The company
conducts all of its operations and owns all of its assets in and through ACRE Realty LP (formerly known as Roberts Properties
Residential, L.P. until its name was changed on January 30, 2015), a Georgia limited partnership (the “operating partnership”),
or through wholly owned subsidiaries of the operating partnership. The company controls the operating partnership as its sole
general partner and had a 96.41% and a 96.39% ownership interest in the operating partnership at June 30, 2017 and December 31,
2016, respectively.
On November 19, 2014, the company and its operating partnership entered into a Stock Purchase Agreement with
A-III Investment Partners LLC (“A-III”) (the “Stock Purchase Agreement”). On January 30, 2015, the company
and A-III closed the transactions contemplated under the Stock Purchase Agreement. At the closing, A-III purchased 8,450,704 shares
of the company’s common stock at a purchase price of $1.42 per share, for an aggregate purchase price of $12 million, and
the company issued to A-III warrants to purchase up to an additional 26,760,563 shares of common stock at an exercise price of
$1.42 per share ($38 million in the aggregate). The purchase price per share and the exercise price of the warrants are subject
to a potential post-closing adjustment upon completion of the sale of the company’s four land parcels owned at January 30,
2015, which could result in the issuance of additional shares of common stock to A-III and an increase in the number of shares
of common stock issuable upon exercise of the warrants. As of June 30, 2017, all of these land parcels owned at January 30,
2015 had been sold and there were no post-closing adjustments to the number of shares of our common stock previously issued to
A-III or issuable upon exercise of the warrants.
After the closing, Roberts Realty Investors, Inc. amended its articles of incorporation to change its name to ACRE
Realty Investors Inc. At the closing, the company, A-III and Charles S. Roberts (“Mr. Roberts”), Roberts Realty Investors,
Inc.’s chairman and chief executive officer, entered into a Governance and Voting Agreement, dated January 30, 2015 (the
“Governance and Voting Agreement”) and the company and Mr. Roberts entered into an employment agreement pursuant to
which Mr. Roberts was appointed and employed by the company to serve as an Executive Vice President of our company. Pursuant to
two extension agreements, the Governance and Voting Agreement and Employment Agreement were extended until December 31, 2016.
On December 31, 2016, the Employment Agreement expired and Mr. Roberts ceased to be an officer or employee of our company,
but remained a member of our board of directors (the “Board”) through April 4, 2017, the effective date of Mr. Roberts’
resignation from the Board. As a result of his resignation from the Board, all rights and obligations of Mr. Roberts under the
Governance and Voting Agreement, dated January 30, 2015, as further amended, were terminated upon his resignation.
Plan of
Dissolution
On June 26,
2017, in light of management’s recommendation and other factors described below, the Board approved the company’s
voluntary dissolution and liquidation pursuant to a plan of dissolution (the “Plan of Dissolution”). As of June 30,
2017, the company has sold all of its legacy properties and as such, virtually, all of its assets consist of cash resulting
from the sale of these legacy properties. Management and the company’s advisors, under the oversight of our Board, have
explored strategic alternatives to enhance shareholder value but the process to date has not yielded any opportunities viewed
by the company’s Board as reasonably likely to provide greater realizable value to the shareholders. In addition, management
informed the company’s Board that, absent public announcement of a transaction that would result in the company becoming
or acquiring an operating company, the NYSE MKT was expected to commence proceedings to suspend trading and delist its common
stock. Accordingly, the company’s management and Board concluded that the voluntary dissolution and liquidation of
the company pursuant to the Plan of Dissolution, subject to the shareholders’ approval, is in the best interests of the
company and its shareholders. The principal purpose of the Plan of Dissolution is to maximize shareholder value by distributing
the net proceeds from liquidation to the company’s shareholders. As the Plan of Dissolution requires approval of the affirmative
vote of three-quarters of all of the shareholders entitled to vote on the matter, there can be no assurance that the Plan of Dissolution
will be approved by the company’s shareholders.
The liquidation process and the amount and timing of any future liquidating distributions paid to shareholders
involves risks and uncertainties. Accordingly, it is not possible to predict the timing of any future liquidating distributions
or the aggregate amount which will ultimately be distributed to shareholders.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of
Quarterly Presentation
. The accompanying consolidated financial statements and related notes of the company have been prepared
in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial reporting
and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. The consolidated financial statements, including the notes
are unaudited and exclude some disclosures required in audited financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation of the company’s financial position, results of operations and cash flows have
been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily
indicative of the results that may be expected for any other interim period or for the entire year. These financial statements
should be read in conjunction with the company’s December 31, 2016 consolidated financial statements and notes thereto included
in the company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission. Capitalized terms
used herein and not otherwise defined, are defined in the company’s December 31, 2016 consolidated financial statements.
The consolidated financial statements have been prepared on a going concern basis. The company will adopt
the liquidation basis of accounting once the Plan of Dissolution is approved by the shareholders.
Principles
of Consolidation.
The accompanying consolidated financial statements include the consolidated accounts of the company and
the operating partnership, which is controlled by the company. The operating partnership is a variable interest entity (“VIE”),
in which the company is considered to be the primary beneficiary. All inter-company accounts and transactions have been eliminated
in consolidation. The financial statements of the company have been adjusted for the non-controlling interest of the unitholders
in the operating partnership.
The company
consolidates the operating partnership, a VIE, in which it is considered to be the primary beneficiary. The primary beneficiary
is the entity that has (i) the power to direct the activities that most significantly impact the entity’s economic performance
and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to
the VIE. The company is required to reassess whether it is the primary beneficiary of a VIE for each reporting period. Our maximum
exposure to loss is the carrying value of assets and liabilities of our operating partnership which represents all of our assets
and liabilities.
Use
of Estimates.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Real Estate
Asset Held For Sale.
The company classifies real estate assets as held for sale after the following conditions have been satisfied:
(i) receipt of approval from its Board to sell the asset; (ii) the initiation of an active program to sell the asset; (iii) the
asset is available for immediate sale; (iv) it is probable that the sale of the asset will be completed within one year; and (v)
it is unlikely the plan to sell will change.
Real estate
asset held for sale is recorded at the lower of the carrying amount or fair value less estimated selling costs. The company reviews
the real estate asset held for sale each reporting period to determine that the carrying amount remains recoverable. If the carrying
amount of the real estate asset exceeds the fair value, the asset will be written down by the amount the carrying amount exceeds
the fair value amount. The fair value is determined by an evaluation of an appraisal, discounted cash flow analysis, sale price
and/or other applicable valuation techniques. As of June 30, 2017, the company had sold all its real estate assets.
The company
recognizes gains on the sales of assets when the sale has closed, title has passed to the buyer, adequate initial and continuing
investment by the buyer is received and other attributes of ownership have been transferred to the buyer. All of these conditions
are typically met at or shortly after closing. If any significant continuing obligation exists at the date of sale, the company
defers a portion of the gain attributable to the continuing obligation until the continuing obligation has expired or is removed.
Cash
and Cash Equivalents.
The company considers all highly liquid investments with a maturity of three months or less at the time
of purchase to be cash equivalents. The company maintains cash and cash equivalent balances with financial institutions that may
at times exceed the limits for insurance provided by the Federal Depository Insurance Corporation. The company has not experienced
any losses related to these excess balances and management believes its credit risk is minimal.
Warrants.
The company accounts for the warrants issued in connection with the A-III Stock Purchase Agreement in accordance with ASC
815, Accounting for Derivative Instruments and Hedging Activities, which provides guidance on the specific accounting treatment
of a multitude of derivative instruments. The company received proceeds in a private placement stock offering and issued detachable
warrants. The company evaluated the warrants to determine their relative fair value, using the backsolve method of the market
approach, incorporating the adjusted Black-Scholes option valuation model at their time of issuance and allocated a portion of
the proceeds from the private placement to the warrants based on their fair value. The warrants were recorded as a component of
equity.
Earnings
Per Share.
Earnings per share is computed using the two-class method of accounting, which includes the weighted-average number
of shares of common stock outstanding during the period and other securities that participate in dividends, such as our vested
restricted stock, to arrive at total common equivalent shares. In applying the two-class method, earnings are allocated to both
shares of common stock and securities that participate in dividends based on their respective weighted-average shares outstanding
for the period. During periods of net loss, losses are allocated only to the extent that the participating securities are required
to absorb such losses. Diluted earnings per share is calculated to reflect the potential dilution of all instruments or securities
that are convertible into shares of common stock. For the company, this includes the warrants and unvested restricted stock during
the periods presented. The company uses the two-class method or the treasury method, whichever is more dilutive.
Share-Based
Compensation.
The company records share-based awards to directors, which have no vesting conditions other than time of service,
at the fair value of the award, measured at the date of grant. The fair value of share-based grants is being amortized to compensation
expense ratably over the requisite service period, which is the vesting period. The company records share-based awards to non-employee
officers, based on the estimated fair value of such award at the grant date that is remeasured quarterly for unvested awards.
We amortize expense over the requisite service period related to share-based awards granted to non-employee officers.
Income
Taxes.
The company follows the asset and liability method of accounting for deferred income taxes. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts
of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date. The company recognizes the effect of income tax positions
only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest
amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in
which the change in judgment occurs.
In general,
a valuation allowance is recorded if, based on the weight of available evidence, it is more likely than not that some portion
or all of the deferred tax asset will not be realized. Realization of the company’s deferred tax assets depends upon the
company generating sufficient taxable income in future years in the appropriate tax jurisdictions to obtain a benefit from the
reversal of deductible temporary differences and from loss carryforwards. The company records a valuation allowance, based on
the expected timing of reversal of existing taxable temporary differences and its history of losses and future expectations of
reporting taxable losses, if management does not believe it met the requirements to realize the benefits of certain of its deferred
tax assets.
Fair Value
of Financial Instruments.
The company is required to disclose the fair value information about its financial instruments,
whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate fair value. See Note 7,
“Fair Value Measurements.”
Recent Accounting Pronouncements
In May 2014,
the Financial Accounting Standards Board (“FASB”) issued an update (“ASU 2014-09”) establishing ASC Topic
606,
Revenue from Contracts with Customers
. ASU 2014-09 establishes a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance.
ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires
certain additional disclosures. In August 2015, the FASB issued an update (“ASU 2015-14”) to ASC 606,
Deferral
of the Effective Date
, which defers the adoption of ASU 2014-09 to interim and annual reporting periods in fiscal years that
begin after December 15, 2017. In March 2016, the FASB issued an update (“ASU 2016-08”) to ASC 606,
Principal
versus Agent Considerations (Reporting Revenue Gross versus Net)
, which clarifies the implementation guidance on principal
versus agent considerations in the new revenue recognition standard pursuant to ASU 2014-09. In April 2016, the FASB issued
an update (“ASU 2016-10”) to ASC 606,
Identifying Performance Obligations and Licensing
, which clarifies guidance
related to identifying performance obligations and licensing implementation guidance contained in ASU 2014-09. In May 2016,
the FASB issued an update (“ASU 2016-12”) to ASC 606,
Narrow-Scope Improvements and Practical Expedients
, which
amends certain aspects of the new revenue recognition standard pursuant to ASU 2014-09. In December 2016, the FASB issued an update
(“ASU No. 2016-20”) to ASC 606,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with
Customers
, which provides technical corrections and improvements to clarify Topic 606 or to correct unintended application
of Topic 606. In February 2017, the FASB issued an update (“ASU No. 2017-05”),
Other Income - Gains and Losses
from the Derecognition of Nonfinancial Assets (Subtopic 610-20),
which clarifies the scope of asset derecognition guidance
and accounting for partial sales of nonfinancial assets and simplifies GAAP for derecognition of a business or nonprofit activity
by eliminating several accounting differences between transactions involving assets and transactions involving businesses. The
company is currently evaluating the impact of the adoption of these ASUs on the company’s consolidated financial statements.
In February
2016, the FASB issued an update (“ASU 2016-02”) establishing ASC Topic 842,
Leases
, which sets out the principles
for the recognition, measurement, presentation and disclosure of leases for both parties to a contract. ASU 2016-02 requires lessees
to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the
lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized
based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record
a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.
Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new
standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type
leases, direct financing leases and operating leases. ASU 2016-02 supersedes the previous leases standard, Leases (Topic 840).
The standard is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The company
is currently in the process of evaluating the impact the adoption of ASU 2016-02 will have on the company’s consolidated
financial statements.
In March 2016,
the FASB issued guidance (“ASU 2016-09”),
Compensation—Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting.
ASU 2016-09 changes the accounting for certain aspects of share-based payments to employees.
The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are
settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase more of an
employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows
for a policy election to account for forfeitures as they occur rather than on an estimated basis. For a public company,
the standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that
reporting period. Early adoption is permitted in any interim or annual period. The adoption of this update beginning
January 1, 2017 did not impact the company’s consolidated financial statements.
In August 2016,
the FASB issued an update (“ASU 2016-15”),
Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments.
ASU 2016-15 amends ASC 230,
Statement of Cash Flows
, to provide guidance on the classification
of certain cash receipts and payments in the statement of cash flows. For a public company, the standard is effective for fiscal
years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The
company has evaluated the impact that this guidance will have on the company’s consolidated financial statements and related
disclosures and determined it will not have a material impact.
In November
2016, the FASB issued an update (“ASU 2016-18”),
Statement of Cash Flows (Topic 230): Restricted Cash (a consensus
of the FASB Emerging Issues Task Force)
. ASU 2016-18 provides guidance on the classification and presentation of restricted
cash in the statement of cash flows. Under the new guidance, restricted cash will be included in the cash and cash equivalent
balances in the statement of cash flows. This guidance is effective for fiscal years beginning after December 31, 2017, including
interim periods within those fiscal years. Early adoption is permitted. The company has evaluated the impact that this guidance
will have on the company’s consolidated financial statements and related disclosures and determined it will not have a material
impact.
In January 2017,
the FASB issued an update (“ASU 2017-01”),
Clarifying the Definition of a Business to ASC Topic 805, Business Combinations
.
ASU 2017-01 clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions
(or disposals) of assets or businesses. This guidance is effective prospectively for fiscal years beginning after December 15,
2017, including interim periods within those fiscal years. Early adoption is permitted for transactions that occurred before the
issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued
or made available for issuance. The adoption of this ASU 2017-01 will result in less real estate acquisitions qualifying as businesses
and, accordingly, acquisition costs for those acquisitions that are not businesses will be capitalized rather than expensed. The
company has early adopted this new guidance beginning January 1, 2017 and had no impact on the company’s consolidated financial
statements when adopted.
In May 2017, the FASB issued an update (“ASU 2017-09”),
Compensation – Stock Compensation
(Topic 718), Scope of Modification Accounting
. ASU 2017-09 clarifies which changes to the terms or conditions of share-based
payment awards require an entity to apply modification accounting. Modification accounting should be applied unless all of the
following have been met. The fair value of the modified award is the same as the fair value of the original award, the vesting
condition of the modified award is the same as the vesting condition of the original award and the classification as an equity
instrument or liability instrument of the modified award is the same as the classification of the original award immediately before
the original award was modified. This guidance is effective for annual periods and interim periods within those annual periods
beginning after December 15, 2017. Early adoption is permitted. The amendments should be applied prospectively to an award modified
on or after the adoption date. The company is evaluating the impact that this guidance will have on the company’s consolidated
financial statements and related disclosures.
3.
|
REAL ESTATE ASSET HELD FOR SALE
|
As of December 31, 2016, the company owned the land parcel known as Highway 20, a 38-acre site located in
the City of Cumming, Georgia in Forsyth County, in the North Atlanta metropolitan area, zoned for 210 multifamily apartment units,
which was classified as held for sale. On October 7, 2016, the operating partnership entered into a sale contract with Roberts
Capital Partners, LLC, a related party, to sell Highway 20 for a purchase price of $4,725,000, including a reimbursement of $1,050,000
relating to prepaid sewer taps. On June 28, 2017, the company completed the sale of Highway 20 at a gain of $432,793. As a result
of this sale, the company has no assets held for sale as of June 30, 2017.
The table below
sets forth the assets and liabilities related to real estate asset held for sale at December 31, 2016:
|
|
December
31,
2016
|
|
Real
Estate Asset Held for Sale
|
|
$
|
4,283,385
|
|
|
|
|
|
|
Liabilities
Related to Real Estate Asset Held For Sale
|
|
$
|
1,498
|
|
4.
|
NON-CONTROLLING INTEREST – OPERATING
PARTNERSHIP
|
Holders of operating
partnership units (“OP Units”) generally have the right to require the operating partnership to redeem their units
for shares of the company’s common stock. Upon submittal of units for redemption, the operating partnership has the option
either (a) to acquire those units in exchange for shares, currently on the basis of 1.647 shares for each unit submitted for redemption
(the “Conversion Factor”), or (b) to pay cash for those units at their fair market value, based upon the then current
trading price of the shares and using the same exchange ratio. Prior to December 29, 2015, we had an informal policy of issuing
shares, in lieu of cash in exchange for units. On December 28, 2015, our Board formally adopted a policy whereby we shall only
issue our common stock for redemption of units, rather than paying cash for such redemption in accordance with the operating partnership
agreement. As a result of this change in policy, the company now requires the issuance of shares of common stock of the company
in payment for the redemption of OP Units and therefore has effective control over the redemption and therefore the non-controlling
interest is now being classified in permanent equity as of December 28, 2015 as opposed to temporary equity, and similarly at
June 30, 2017 and December 31, 2016.
In July 2013,
the operating partnership privately offered to investors who held both units of the operating partnership and shares of common
stock the opportunity to contribute shares to the operating partnership in exchange for units (provided that the investors were
“accredited investors” under SEC Rule 501 of Regulation D under the Securities Act of 1933, as amended). This opportunity
remains open to those accredited investors. Consistent with the Conversion Factor noted above, the offering of units uses a “Contribution
Factor” such that an accredited investor who contributes shares to the operating partnership will receive one unit for every
1.647 shares contributed.
The non-controlling
interest of the unitholders in the operating partnership on the accompanying consolidated balance sheets is calculated by multiplying
the non-controlling interest ownership percentage at the balance sheet date by the operating partnership’s net assets (total
assets less total liabilities). The non-controlling interest ownership percentage is calculated at any point in time by dividing
(x) (the number of units outstanding multiplied by 1.647) by (y) the total number of shares plus (the number of units outstanding
multiplied by 1.647). The non-controlling interest ownership percentage will change as additional shares and/or units are issued
or as units are redeemed for shares of the company’s common stock or as the company’s common stock is contributed
to the operating partnership and units are issued in accordance with the Contribution Factor. The non-controlling interest of
the unitholders in the income or loss of the operating partnership in the accompanying consolidated statements of operations is
calculated based on the weighted average percentage of units outstanding during the period, which was 3.60% and 4.19% for the
six months ended June 30, 2017 and 2016. There were 463,729 units and 466,259 units outstanding at June 30, 2017 and December 31,
2016, respectively. The equity balance of the non-controlling interest of the unitholders was $695,454 at June 30, 2017 and $735,116
at December 31, 2016.
Private Placement.
On January 30, 2015, A-III purchased 8,450,704 shares of the company’s common stock at a purchase price
of $1.42 per share, for an aggregate purchase price of $12,000,000, and the company, for no additional consideration, issued to
A-III warrants to purchase up to an additional 26,760,563 shares of the company’s common stock at an exercise price of $1.42
per share ($38,000,000 in the aggregate). The purchase price per share and the exercise price of the warrants are subject to a
potential post-closing adjustment upon completion of the sale of the company’s four land parcels owned at January 30, 2015,
which could result in the issuance of additional shares of common stock to A-III and an increase in the number of shares of common
stock issuable upon exercise of the warrants. As of June 30, 2017, all of these land parcels owned at January 30, 2015
had been sold and there were no post-closing adjustments to the number of shares of common stock previously issued to A-III or
issuable upon exercise of the warrants.
Warrants.
Each of the aforementioned warrants entitles the holder to acquire one share of the company’s common stock. At the time
of issuance, each warrant had an exercise price of $1.42 per share, subject to post-closing adjustments related to the sales of
the legacy properties. The company evaluated the warrants to determine their relative fair value, using a variation of the adjusted
Black-Scholes option valuation model at their time of issuance and allocated $4,910,000 of the proceeds from the private placement
to the warrants based on their fair value. The warrants were recorded as a component of equity. The warrants expire on January
30, 2018. As of June 30, 2017, the warrants remained unexercised.
Redemption
of Units for Shares.
In accordance with the conversion factor explained in Note 4, “Non-controlling Interest –
Operating Partnership,” 2,530 OP Units were redeemed for 4,166 shares of the company’s common stock for the six months
ended June 30, 2017, and 87,366 OP Units were redeemed for 143,897 shares of the company’s common stock for the twelve months
ended December 31, 2016. Redemptions are reflected in the accompanying consolidated financial statements at the closing price
of the company’s stock on the date of redemption.
Contribution
of Shares to the Operating Partnership.
In accordance with the contribution factor explained in Note 4 – “Non-controlling
Interest – Operating Partnership”, for the six months ended June 30, 2017 and the year ended December 31, 2016, there
were no contribution of shares to the operating partnership. Contributions, if any, are reflected in the accompanying consolidated
financial statements based on the closing price of the company’s stock on the date of contribution.
Restricted
Stock.
Shareholders of the company approved and adopted the company’s 2006 Restricted Stock Plan (the “Plan”)
in August 2006. Prior to its expiration on August 21, 2016, the Plan provided for the grant of stock awards to employees, directors,
consultants, and advisors. Under the Plan, as amended, the company could grant up to 654,000 shares of restricted common stock,
subject to the anti-dilution provisions of the Plan. The maximum number of shares of restricted stock that could be granted to
any one individual during the term of the Plan should not exceed 20% of the aggregate number of shares of restricted stock that
could be issued. The Plan was administered by the Compensation Committee of the company’s Board. On October 12, 2015, based
on the recommendation of the Compensation Committee of the Board of Directors, the Board approved a restricted stock grant of
260,000 shares of common stock to the independent directors and certain officers of the company, which was issued on March 28,
2016. The restricted stock was awarded pursuant to the Plan. Vesting of the awards for the independent directors and officers
is subject to continued service through the vesting period. The company’s independent directors were each awarded 20,000
shares of restricted common stock, which vested on January 30, 2016. Certain of the company’s officers were awarded an aggregate
of 180,000 shares of restricted common stock, which vest in equal one-third installments. There were 60,000 shares, which vested
on each of January 30, 2016 and October 12, 2016. The remaining 60,000 shares will vest on October 12, 2017 or will be accelerated
in connection with the Plan of Dissolution. Compensation expense related to restricted stock was $1,540 and $110,824 for the six
months ended June 30, 2017 and 2016, respectively. On June 30, 2017, the company had unamortized compensation expense of $6,990
which is expected to be recognized over a weighted average period of 0.28 years.
Treasury
Stock.
The company has a stock repurchase plan under which it is authorized to repurchase up to 600,000 shares of its outstanding
common stock. Under the stock repurchase plan, as of June 30, 2017, the company had authority to repurchase up to 540,362 shares
of its outstanding common stock. The stock repurchase plan does not have an expiration date. The company did not repurchase any
additional shares for the six months ended June 30, 2017 and 2016.
Earnings
Per Share.
The following table shows the reconciliation of loss available for common shareholders and the weighted average
number of shares used in the company’s basic and diluted earnings per share computations.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
Numerator
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders – basic
|
|
$
|
(162,070
|
)
|
|
$
|
(1,138,590
|
)
|
|
$
|
(958,549
|
)
|
|
$
|
(2,004,724
|
)
|
Loss
attributable to non-controlling interest
|
|
|
(6,045
|
)
|
|
|
(45,446
|
)
|
|
|
(35,886
|
)
|
|
|
(83,269
|
)
|
Net
loss – diluted
|
|
$
|
(168,115
|
)
|
|
$
|
(1,184,036
|
)
|
|
$
|
(994,435
|
)
|
|
$
|
(2,087,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares – basic
|
|
|
20,434,494
|
|
|
|
20,318,219
|
|
|
|
20,432,490
|
|
|
|
20,262,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Effect
of potential dilutive securities:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average operating partnership units, assuming conversion of all units to common shares
|
|
|
763,930
|
|
|
|
820,205
|
|
|
|
765,934
|
|
|
|
853,288
|
|
Weighted
average number of common shares – diluted
(a)
|
|
|
21,198,424
|
|
|
|
21,138,424
|
|
|
|
21,198,424
|
|
|
|
21,116,116
|
|
(a)
|
Due to the net loss
for the three and six months ended June 30, 2017 and 2016, the incremental shares related to the unvested restricted stock
and the warrants were excluded as they were anti-dilutive. Furthermore, the average share price of the company’s common
stock was below the exercise price of the warrants for the three and six months ended June 30, 2017 and 2016.
|
The company
prepared the provision following the guidance of FASB ASC 740,
Income Taxes
, using the estimated annual effective tax rate
applied to the operating results of the company as of June 30, 2017. This rate does not include items related to significant
unusual or extraordinary items that would be required to be separately reported or reported net of their related tax effect in
the consolidated financial statements. At the end of each interim period the company makes its best estimate of the effective
tax rate expected to be applicable for the full year. There were no discrete items during this quarter; therefore, the effective
rate was the same rate that was used for the year ended December 31, 2016. The consolidated effective tax rate was
zero for the three and six months ended June 30, 2017 and 2016. In addition, the company had a taxable loss in each
of the quarterly periods ended June 30, 2017 and 2016, and accordingly did not have an income tax liability in either of
those periods.
7.
|
FAIR VALUE MEASUREMENTS
|
As discussed
in Note 2, GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the statement
of financial position, for which it is practicable to estimate that value. The company measures and/or discloses the estimated
fair value of financial assets and liabilities based on a hierarchy that distinguishes between market participant assumptions
based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions
about market participant assumptions. This hierarchy consists of three broad levels:
|
·
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Level 1 - quoted prices
(unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement
date;
|
|
·
|
Level 2 - inputs other
than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly;
and
|
|
·
|
Level 3 - unobservable
inputs for the asset or liability that are used when little or no market data is available.
|
The fair value
hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, the
company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the
extent possible. Considerable judgment is necessary to interpret Level 2 and 3 inputs in determining fair value of financial and
non-financial assets and liabilities. Accordingly, the fair values may not reflect the amounts ultimately realized on a sale or
other disposition of these assets. Below summarizes the methods and assumptions used to estimate the fair value of each class
of financial instruments, for which it is practicable to estimate that value.
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·
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Cash and cash equivalents:
The carrying amount of the cash approximates fair value.
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·
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Real estate asset
held for sale: At December 31, 2016, Highway 20 was carried at the lower of the carrying amount or fair value, less the estimated
selling costs. The sale of Highway 20 closed on June 28, 2017.
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|
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|
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·
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Accounts payable and
accrued expenses: The carrying amount approximates fair value due to the short term nature of these liabilities.
|
The company held no financial assets or liabilities required to be measured at fair value on a recurring or nonrecurring
basis as of June 30, 2017 and December 31, 2016. From time to time, we record certain assets at fair value on a nonrecurring
basis when there is evidence of impairment. There was no impairment charge on Highway 20 during the six months ended June 30,
2017 and 2016. As December 31, 2016, Highway 20 was carried at net realizable value. We determined the fair value of Highway
20 based on market data of comparable transactions, which are classified as Level 3 inputs.
FASB ASC Topic
280-10,
Segment Reporting
– Overall, established standards for reporting financial and descriptive information about operating segments
in annual financial statements. Operating segments are defined as components of an enterprise about which separate financial information
is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing
performance. Prior to the sale of Highway 20 on June 28, 2017, the company had operated in a single reportable segment, which was
the ownership and management of real estate assets. As of June 30, 2017, there was no reportable segment.
9.
|
RELATED PARTY TRANSACTIONS
|
Management
Agreement.
In connection with the recapitalization transactions with A-III, on January 30, 2015, the company entered into
a management agreement (the “Management Agreement”) with A-III Manager LLC (the “Manager”), which is a
wholly-owned subsidiary of A-III, among other things, to provide for the day-to-day management of the company by the Manager,
including investment activities and operations of the company and its properties. The Management Agreement requires the Manager
to manage and administer the business activities and day-to-day operations of the company and all of its subsidiaries in conformity
with the company’s investment guidelines and other policies that are approved and monitored by the Board.
The Manager
maintains an administrative services agreement with A-III, pursuant to which A-III and its affiliates, including Avenue Capital
Group and C-III Capital Partners, will provide a management team along with appropriate support personnel for the Manager to deliver
the management services to the company. Under the terms of the Management Agreement, among other things, the Manager will refrain
from any action that, in its reasonable judgment made in good faith, is not in compliance with the investment guidelines and would,
when applicable, adversely affect the qualification of the company as a REIT. The Management Agreement has an initial five-year
term and will be automatically renewed for additional one-year terms thereafter unless terminated either by the company or the
Manager in accordance with its terms.
For the
services to be provided by the Manager, the company is required to pay the Manager the following fees:
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·
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an
annual base management fee equal to 1.50% of the company’s “Equity” (as defined below), calculated and payable
quarterly in arrears in cash;
|
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·
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a
property management fee equal to 4.0% of the gross rental receipts received each month at the company’s and its subsidiaries’
properties, calculated and payable monthly in arrears in cash;
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·
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an
acquisition fee equal to 1.0% of the gross purchase price paid for any property or other investment acquired by the company
or any of its subsidiaries, subject to certain conditions and limitations and payable in arrears in cash with respect to all
such acquisitions occurring after the date of the Management Agreement;
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·
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a
disposition fee equal to the lesser of (a) 50% of a market brokerage commission for such disposition and (b) 1.0% of the sale
price with respect to any sale or other disposition by the company or any of its subsidiaries of any property or other investment,
subject to certain conditions and limitations and payable in arrears in cash with respect to all such dispositions occurring
after the date of the Management Agreement with certain exceptions (this disposition fee does not apply to the sale of the
four legacy land parcels that the company owned as of January 30, 2015); and
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·
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an incentive fee (as
described below) based on the company’s “Adjusted Net Income” (as defined below) for the trailing four quarter
period in excess of the “Hurdle Amount” (as defined below), calculated and payable in arrears in cash on a rolling
quarterly basis.
|
For purposes
of calculating the base management fee, “Equity” means (a) the sum of (1) the net proceeds from all issuances of the
company’s common stock and OP Units (without double counting) and other equity securities on and after the closing, which
will include the common stock issued to A-III in the recapitalization transaction (allocated on a pro rata basis for such issuances
during the fiscal quarter of any such issuance) and any issuances of common stock or OP Units in exchange for property investments
and other investments by the company, plus (2) the product of (x) the sum of (i) the number of shares of common stock issued and
outstanding immediately before the closing of the recapitalization transaction and (ii) the number of shares of common stock for
which the number of OP Units issued and outstanding immediately before the date of the closing of the recapitalization transaction
(excluding any OP Units held by the company) may be redeemed in accordance with the terms of the agreement of limited partnership
of the operating partnership and (y) the purchase price per share paid by A-III for the shares of common stock the company issued
to A-III in the recapitalization transaction, as the purchase price per share may be subsequently adjusted as described above,
plus (3) the retained earnings of the company and the operating partnership (without double counting) calculated in accordance
with GAAP at the end of the most recently completed fiscal quarter (without taking into account any non-cash equity compensation
expense incurred in current or prior periods), minus (b) any amount in cash that the company or the operating partnership has
paid to repurchase common stock, OP Units, or other equity securities of the company as of the closing date of the recapitalization
transaction. Equity excludes (1) any unrealized gains, losses or non-cash equity compensation expenses that have impacted shareholders’
equity as reported in the financial statements prepared in accordance with GAAP, regardless of whether such items are included
in other comprehensive income or loss, or in net income, (2) one-time events pursuant to changes in GAAP, and certain non-cash
items not otherwise described above in each case, after discussions between the Manager and the company’s independent directors
and approval by a majority of the independent directors and (3) the company’s accumulated deficit as of the closing
date of the recapitalization transaction.
For purposes
of the Management Agreement, “Incentive Fee” means an incentive fee, calculated and payable after each fiscal quarter,
in an amount equal to the excess, if any, of (i) the product of (A) 20% and (B) the excess, if any, of (1) the company’s
Adjusted Net Income (described below) for such fiscal quarter and the immediately preceding three fiscal quarters over (2) the
Hurdle Amount (described below) for such four fiscal quarters, less (ii) the sum of the Incentive Fees already paid or payable
for each of the three fiscal quarters preceding that fiscal quarter. Any adjustment to the Incentive Fee calculation proposed
by the Manager will be subject to the approval of a majority of the independent directors.
For purposes
of calculating the Incentive Fee, “Adjusted Net Income” for the preceding four fiscal quarters means the net income
calculated in accordance with GAAP after all base management fees but before any acquisition expenses, expensed costs related
to equity issuances, incentive fees, depreciation and amortization and any non-cash equity compensation expenses for such period.
Adjusted Net Income will be adjusted to exclude one-time events pursuant to changes in GAAP, as well as other non-cash charges
after discussion between the Manager and the independent directors and approval by a majority of the independent directors in
the case of non-cash charges. Adjusted Net Income includes net realized gains and losses, including realized gains and losses
resulting from dispositions of properties and other investments during the applicable measurement period.
For purposes
of calculating the Incentive Fee, the “Hurdle Amount” is, with respect to any four fiscal quarter period, the product
of (i) 7% and (ii) the weighted average gross proceeds per share of all issuances of common stock and OP Units (excluding issuances
of common stock and OP Units, or their equivalents, as equity incentive awards), with each such issuance weighted by both the
number of shares of common stock and OP Units issued in such issuance and the number of days that such issued shares of common
stock and OP Units were outstanding during such four fiscal quarter period.
After the 2015
fiscal year, the Incentive Fee will be prorated for partial quarterly periods based on the number of days in such partial period
compared to a 90-day quarter.
The Manager
is also entitled to receive a termination fee from the company under certain circumstances equal to four times the sum of (x)
the average annual base management fee, (y) the average annual incentive fee, and (z) the average annual acquisition fees and
disposition fees, in each case earned by the Manager in the most recently completed eight calendar quarters immediately preceding
the termination.
Additionally,
the company will be responsible for paying all of its own operating expenses and the Manager will be responsible for paying its
own expenses, except that the company will be required to pay or reimburse certain expenses incurred by the Manager and its affiliates
in connection with the performance of the Manager’s obligations under the Management Agreement, including:
|
·
|
reasonable out of
pocket expenses incurred by personnel of the Manager for travel on the company’s behalf;
|
|
·
|
the
portion of any costs and expenses incurred by the Manager or its affiliates with respect
to market information systems and publications, research publications and materials that
are allocable to the company in accordance with the expense allocation policies of the
Manager or such affiliates;
|
|
·
|
all
insurance costs incurred with respect to insurance policies obtained in connection with
the operation of the company’s business, including errors and omissions insurance
covering activities of the Manager and its affiliates and any of their employees relating
to the performance of the Manager’s duties and obligations under the Management
Agreement or of its affiliates under the administrative services agreement between the
Manager and A-III, other than insurance premiums incurred by the Manager for employer
liability insurance;
|
|
·
|
expenses
relating to any office or office facilities, including disaster backup recovery sites
and facilities, maintained expressly for the company and separate from offices of the
Manager;
|
|
·
|
the
costs of the wages, salaries, and benefits incurred by the Manager with respect to certain
Dedicated Employees (as defined in the Management Agreement) that the Manager elects
to provide to the company pursuant to the Management Agreement; provided that (A) if
any such Dedicated Employee devotes less than 100% of his or her working time and efforts
to matters related to the company and its business, the company will be required to bear
only a pro rata portion of the costs of the wages, salaries and benefits the Manager
incurs for such Dedicated Employee based on the percentage of such employee’s working
time and efforts spent on matters related to the company, (B) the amount of such wages,
salaries and benefits paid or reimbursed with respect to the Dedicated Employees shall
be subject to the approval of the Compensation Committee of the Board and, if required
by the Board, of the Board and (C) during the one-year period following the date of the
Management Agreement, the aggregate amount of cash compensation paid to Dedicated Employees
of the Manager and its affiliates by the company, or reimbursed by the company to the
Manager in respect thereof, will not exceed $500,000; and
|
|
·
|
any
equity-based compensation that the company, upon the approval of the Board or the Compensation
Committee of the Board, elects to pay to any director, officer or employee of the company
or the Manager or any of the Manager’s affiliates who provides services to the
company or any of its subsidiaries.
|
In light of
the Plan of Dissolution, as discussed above, and in order to assist the company in preserving cash for future distributions to
the company’s shareholders, the Manager has agreed, commencing June 27, 2017, and subject to approval by the company’s
shareholders of the Plan of Dissolution, to waive the management fees and certain expense reimbursements that the Manager is entitled
to receive from the company under the management agreement between the company and the Manager.
For
the three and six months ended June 30, 2017 and 2016, the company incurred base management fees of $86,430, $175,478,
$97,687 and $200,013, respectively, which were classified in management fee, affiliate in the consolidated statements of operations.
In addition to the base management fee, the company is required to reimburse certain expenses, related wages, salaries and benefits
incurred by the Manager. For the three and six months ended June 30, 2017 and 2016, the company reimbursed expenses of $100,243,
$218,341, $127,540 and $294,685, respectively, which were classified in allocated salaries and other compensation, affiliate
in the consolidated statements of operations. Also, during the three and six months ended June 30, 2017, the company reimbursed
the Manager out of pocket travel expenses of $21,026 of the Manager on the company's behalf, which were included in general and
administrative expenses in the consolidated statements of operations. At June 30, 2017 and December 31, 2016, the
unpaid portion of the base management fee and, reimbursable allocated expenses in the amount of $207,768 and $216,991,
respectively, was recorded in due to affiliates in the consolidated balance sheets
.
Transactions
with Roberts Properties, Inc. and Roberts Properties Construction (the “Roberts Companies”) and its Affiliates
Reimbursement
Arrangement for Consulting Services.
The company entered into a reimbursement arrangement for services provided by the Roberts
Companies, effective February 4, 2008, as amended January 1, 2014. Under the terms of the arrangement, the company reimburses
the Roberts Companies for the cost of providing consulting services in an amount equal to an agreed-upon hourly billing rate for
each employee multiplied by the number of hours that the employee provided services to the company.
Additionally,
at the request of the company, Roberts Construction performed repairs and maintenance and other consulting services related to
the company’s land parcels. Roberts Construction received cost reimbursements of $68 for the three and six months ended
June 30, 2016. There were no cost reimbursements to Robert Construction for the three and six months ended June 30, 2017. These
cost reimbursements were recorded in general and administrative expenses in the consolidated statement of operations.
For a period
of 180 days after the closing of the recapitalization transaction with A-III, the company had the right to request the reasonable
assistance of employees of Roberts Properties, Inc. with respect to transition issues and questions relating to the company’s
properties and operations. This 180 day period terminated July 30, 2015. The employees of Roberts Properties, Inc. continued to
provide limited services with respect to transition issues from July 30, 2015 through June 30, 2017. Consistent with the expired
arrangement for transition services, the cost for these services was reimbursed in an amount equal to an agreed-upon hourly billing
rate for each employee multiplied by the number of hours that the employee provided such services to the company. Under Mr. Roberts’
Employment Agreement, which expired December 31, 2016, Mr. Roberts agreed to supervise the disposition of the remaining legacy
property. Affiliates of Mr. Roberts provided services to the company in connection with the sale of such property through December
31, 2016. Prior to the expiration of Mr. Roberts’ Employment Agreement, the company reimbursed the Roberts Companies the
fees and costs for such services, which is included in the disclosure below and will be considered selling costs for purposes
of the true-up arrangement under the Stock Purchase Agreement. Following the expiration of Mr. Roberts’ Employment Agreement
on December 31, 2016, the company was no longer obligated to incur fees and costs for such services and accordingly, during the
three months and six months ended June 30, 2017 did not incur any such fees or costs.
Under these
arrangements, the company incurred costs with Roberts Properties of zero, $296, $27,310 and $44,357 for the three and six months
ended June 30, 2017 and 2016, respectively, which were recorded in general and administrative expenses in the consolidated statements
of operations. Roberts Properties also received cost reimbursements in the amount of $86 for the six months ended June 30, 2016
for the company’s operating costs and other related expenses paid by Roberts Properties. There were no cost reimbursements
during the three months ended June 30, 2017 and 2016, and six months ended June 30, 2017. At June 30, 2017 and December 31, 2016,
the unpaid portion of these costs was zero and $85, respectively, which were recorded in due to affiliates in the
consolidated balance sheets.
Sale of Highway
20.
On June 28, 2017, the company closed on the sale of Highway 20 to Roberts Capital Partners, LLC, which is an affiliate
of Mr. Roberts, who was a director of the company until his resignation on April 4, 2017. The company’s Audit Committee
approved the transaction in accordance with the committee’s charter and in compliance with applicable listing rules of the
Exchange. The Board also approved the transaction in accordance with its Code of Business Conduct and Ethics. See Note 3, “Real
Estate Held for Sale,” for details of the transaction.
Sublease
of Office Space.
The company was under a sublease agreement for 1,817 square feet of office space with Roberts Capital Partners,
LLC from April 7, 2014 to April 7, 2017. Roberts Capital Partners, LLC is owned by Mr. Roberts. The terms of the sublease agreement
were the same terms that Roberts Capital Partners, LLC has with the unrelated third party landlord. Roberts Capital Partners,
LLC was liable to the building owner for the full three-year term of its lease; however, the company negotiated a 90-day right
to terminate its sublease. The company paid a security deposit of $20,577 upon the execution of the lease. This security deposit
was subsequently used to pay the monthly rent due beginning September 2016 through the end of the lease term. During the three
and six months ended June 30, 2017 and 2016, the company incurred rent expense of $1,498, $9,692, $8,838 and $16,737,
respectively, which was recorded in general and administrative expenses in the consolidated statements of operations.
Governance
and Voting Agreement and Employment Agreement.
Upon the closing of the A-III transaction,
Charles
S. Roberts, who previously served as the company’s Chairman, President and Chief Executive Officer, was appointed as an
Executive Vice President, and served in such role through December 31, 2016, pursuant to an Employment Agreement, which expired
on December 31, 2016, at which time Mr. Roberts ceased to be an officer or employee of our company, but remained a member of our
Board through April 4, 2017, the effective date of Mr. Roberts’ resignation from the Board. As a result of his resignation
from the Board, all rights and obligations of Mr. Roberts under the Governance and Voting Agreement, dated January 30, 2015, as
further amended, were terminated upon his resignation
.
10.
|
COMMITMENTS AND CONTINGENCIES
|
The company
and the operating partnership may be subject to various legal proceedings and claims that arise in the ordinary course of business.
While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of these
matters should not have a material adverse effect on the company’s financial position, results of operations or cash flows.
Under various
federal, state, and local environmental laws and regulations, the company may be required to investigate and clean up the effects
of hazardous or toxic substances at its properties, including properties that have previously been sold. The preliminary environmental
assessment of the company’s property has not revealed any environmental liability that the company believes would have a
material adverse effect on its business, assets, or results of operations, nor is the company aware of any such environmental
liability.
See Note 9,
“Related Party Transactions,” for details of the company’s management agreement with the related party.
See Note
11, “Subsequent Events,” for details regarding a books and records request from certain shareholders.
The company has engaged external counsel
to assist the company in responding to a letter received on July 26, 2017 from a lawyer representing four of the Company’s
shareholders who demand to inspect certain books and records of the company. On August 2, 2017, the company delivered, through
its external counsel, a response to the demand letter and the company is coordinating with external counsel to deliver information
in response to the demand.