Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Business Description and Basis of Presentation
Business Description
Voltari
Corporation (“Voltari” or the “Company”) is
in the business of acquiring, financing and leasing commercial real
properties through its wholly owned subsidiary, Voltari Real Estate
Holding LLC (“Voltari Holding”). The Company had
previously been engaged in the business of providing mobile
marketing and advertising solutions to brands, marketers and
advertising agencies. In August 2015, we began implementing a
transformation plan pursuant to which, among other things, we
exited our mobile marketing and advertising business. The majority
of the costs related to the transformation plan had been incurred
as of the end of 2017. Additional amounts to be incurred subsequent
to the year ended December 31, 2017, if any, cannot be reasonably
estimated. As of June 30, 2018, we owned three commercial real
properties. All of our revenue is derived from the rental income we
receive under the three leases associated with these three
properties. We have been funding our operations with borrowings
under our Amended Note (as defined herein) as described in
Note 4 - Liquidity and Capital
Resources.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q
for interim financial reporting pursuant to the rules and
regulations of the Securities and Exchange Commission
(“SEC”). Accordingly, they do not include all the
information and footnotes required by U.S. generally accepted
accounting principles (“U.S. GAAP”) for complete
financial statements. The condensed consolidated balance sheet as
of December 31, 2017 included herein was derived from the
audited financial statements as of that date but does not include
all disclosures required by U.S. GAAP.
The
unaudited condensed consolidated financial statements have been
prepared on the same basis as the audited consolidated financial
statements and, in the opinion of management, reflect all normal
recurring adjustments which are necessary for a fair statement of
the results of the interim period. These unaudited condensed
consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and accompanying
notes for the fiscal year ended December 31, 2017 included in
our Annual Report on Form 10-K for the year ended December 31,
2017. The results of operations for the three and six months ended
June 30, 2018 are not necessarily indicative of the results to be
expected for the full year or for any other period. Certain amounts
from prior periods have been reclassified to conform with the
presentation in the current period.
The
preparation of the condensed consolidated financial statements in
conformity with U.S. GAAP requires management to make estimates and
assumptions in certain circumstances that affect the reported
amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the condensed consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. The more significant
estimates include those involved in allocating the costs of real
estate investments, valuation of long-lived and intangible assets,
provision for income taxes, and accounting for our redeemable
preferred stock. Actual results could differ from those
estimates.
2. Summary of Significant Accounting Policies
Our
significant accounting policies are those that we believe are both
important to the portrayal of our financial condition and results
of operations.
Reclassifications
Certain
prior year balances have been reclassified to conform with the
current year presentation. As of January 1, 2018, the Company
adopted Accounting Standards Update (“ASU”) No.
2016-18, "
Statement of Cash Flows
(Topic 230): Restricted Cash
", which requires restricted
cash to be included with cash and cash equivalents when reconciling
beginning-of-period and end-of-period total amounts shown on the
Consolidated Statements of Cash Flows. As a result of the adoption,
Other assets were reduced by $91 thousand and Restricted cash was
increased for the same amount as of June 30, 2017.
Cash, Cash Equivalents and Restricted Cash
The
Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents. The
Company's restricted cash consists of a security deposit for our
office operating lease for our former headquarters, our credit card
and the security deposit held on behalf of a tenant.
Voltari Corporation
Notes
to Condensed Consolidated Financial Statements
(unaudited)
The
following table provides a reconciliation of cash, cash
equivalents, and restricted cash reported within the Condensed
Consolidated Balance Sheets that sums to the total of such amounts
shown in the Condensed Consolidated Statements of Cash
Flows.
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
344
|
$
126
|
Restricted
cash
|
489
|
91
|
Total cash, cash
equivalents, and restricted cash
|
$
833
|
$
217
|
Significant Accounting Policies - Real Estate
Investments
As a
result of our entry into the business of acquiring, financing and
leasing commercial real properties, we have adopted the following
significant accounting policies. Management believes there have
been no other material changes to our significant accounting
policies discussed in Note 2 of our Annual Report on Form 10-K for
the fiscal year ended December 31, 2017, except for the
standards adopted this period.
Investments
in real estate are recorded at cost. Improvements and replacements
are capitalized when they extend the useful life of the asset.
Costs of repairs and maintenance are expensed as incurred. The fair
value of the tangible assets of an acquired property with an
in-place operating lease will be determined by valuing the property
as if it were vacant, and the “as-if-vacant” value will
then be allocated to the tangible assets based on the fair value of
the tangible assets. The fair value of in-place leases will be
determined by considering current market conditions, as well as
costs to execute similar leases. The fair value of above- or
below-market leases will be recorded based on the present value of
the difference between the contractual amount to be paid pursuant
to the in-place lease and the Company's estimate of the fair market
lease rate for the corresponding in-place lease, measured over the
remaining term of the lease, including any below-market fixed-rate
renewal options for below-market leases.
Depreciation
is computed using the straight-line method over the estimated
useful lives of up to 43 years for buildings, up
to 13 years for improvements and the shorter of the useful
life or the remaining lease term for tenant improvements and
leasehold interests. Capitalized above-market lease values are
amortized as a reduction of rental income over the remaining terms
of the respective leases. Capitalized below-market lease values are
amortized as an increase to rental income over the remaining terms
of the respective leases and expected below-market renewal option
periods. The value of in-place leases, exclusive of the value of
above-market and below-market in-place leases, are amortized to
expense over the remaining periods of the respective
leases.
The
Company’s revenues are derived from rental income, which
include rents due in accordance with the lease terms, reported on a
straight-line basis over the initial term of the leases. Our leases
with our tenants are classified as operating leases.
Recently Adopted Accounting Pronouncements
In May
2014, the FASB issued ASU 2014-09,
"Revenue from Contracts with
Customers
". The guidance in this ASU supersedes nearly all
existing revenue recognition guidance under U.S. GAAP and creates a
single, principle-based revenue recognition framework that is
codified in a new FASB ASC Topic 606. The core principle of this
guidance is for the recognition of revenue to depict the transfer
of goods or services to customers at an amount that reflects the
consideration to which the company expects to be entitled in
exchange for those goods or services. The ASU also requires
additional disclosure about the nature, amount, timing and
uncertainty of revenue and cash flows arising from customer
contracts, including significant judgments and changes in judgments
and assets recognized from costs incurred to obtain or fulfill a
contract. We adopted this standard effective January 1, 2018.
Currently, all revenues are derived from lease contracts which are
not within the scope of this guidance.
In
November 2016, the FASB issued ASU 2016-18,
"Statement of Cash Flows - Restricted
Cash
". The guidance requires that the statement of cash
flows explain the change during the period in the total of cash,
cash equivalents, and amounts generally described as restricted
cash or cash equivalents. Therefore, amounts generally described as
restricted cash and equivalents should be included with cash and
cash equivalents when reconciling the beginning and end of period
total amounts on the statement of cash flows. We adopted this
standard effective January 1, 2018 and have adjusted our cash flows
to reflect the new guidance.
Voltari Corporation
Notes
to Condensed Consolidated Financial Statements
(unaudited)
In
January 2017, the FASB issued ASU 2017-01, “
Business Combinations (Topic
805), Clarifying the Definition of a Business”.
The amendments in this ASU provide a
more robust framework to use in determining when a set of assets
and activities is a business. The amendments provide more
consistency in applying the guidance, reduce the costs of
application, and make the definition of a business more
operable.
The guidance changes the definition of a business
to exclude acquisitions where substantially all the fair value of
the assets acquired are concentrated in a single identifiable asset
or a group of similar identifiable assets. Given this change in
definition, we believe most of our real estate acquisitions will be
considered asset acquisitions. The new guidance will be
applied prospectively to any transactions occurring in the period
of adoption. We adopted this standard effective January 1,
2018. Under the new standard, transaction costs will be capitalized
under asset acquisitions and expensed for business combinations and
transactions that will be considered asset acquisitions will not be
afforded the one-year measurement period to complete any valuation
studies and resulting purchase price allocation. For our purchase
of the McClatchy property we capitalized $271 thousand of such
transaction costs.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,
"Leases."
The guidance significantly changes the accounting
for leases by requiring lessees to recognize assets and liabilities
for leases greater than 12 months on their balance sheet. The
lessor model stays substantially the same; however, there were
modifications to, conform lessor accounting with the lessee model,
eliminate real estate specific guidance, further define certain
lease and non-lease components, and change the definition of
initial direct costs of leases by requiring significantly more
leasing related costs to be expensed upfront. ASU 2016-02 is
effective as of January 1, 2019, and we are currently assessing the
impact of this standard on our
condensed
consolidated financial
statements.
In
February 2018, the FASB issued ASU 2018-02, “
Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income”
, which amends
FASB ASC Topic 220, Income Statement - Reporting Comprehensive
Income. This ASU allows a reclassification out of accumulated other
comprehensive income into retained earnings for standard tax
effects resulting from the Tax Cuts and Jobs Act (the “Tax
Act”) and consequently, eliminates the stranded tax effects
resulting from the Tax Act. This ASU is effective for fiscal years
beginning after December 15, 2018, and interim periods within those
fiscal years. Early adoption is permitted. We are currently
evaluating the impact of this guidance on our condensed
consolidated financial statements.
Other
recent accounting pronouncements issued by the FASB (including the
Emerging Issues Task Force) and the SEC did not, or are not
expected to, have a material effect on the Company’s results
of operations or financial position.
3. Real Estate Investments
On April 23, 2018, we, through our wholly owned subsidiary, Voltari
Real Estate Holding LLC ("Voltari Holdings"), completed the
acquisition of a real estate parcel in Columbia, South
Carolina.
Pursuant to a
Purchase and Sale Agreement, between Voltari Holdings and the State
Media Company, (the "Seller"), dated January 19, 2018, as amended,
for a purchase price of approximately $16.89 million, inclusive of
all costs. The purchase price was paid using cash on hand and
borrowings under the Company’s revolving loan facility with
Koala Holding LP ("Koala"), an affiliate of Mr. Carl C. Icahn, the
Company’s controlling stockholder.
The property (the "McClatchy Property") is subject to a triple net
lease (the "lease") with the McClatchy Company ("McClatchy"), an
affiliate of the seller. The Lease has an initial term of fifteen
years, with three five-year extension options (collectively, the
“Term”). During the Term, in addition to rent,
McClatchy is responsible for the payment of all real estate taxes,
utilities, tenant’s insurance and other property related
costs, and the maintenance of the McClatchy Property and its
premises.
Refer to
http://investors.mcclatchy.com/phoenix.zhtml?c=87841&p=irol-sec
for the financial statements of the tenant.
The initial average annual rental receipts for the
McClatchy Property will be approximately $1,613,000 (the
“Base Rent”). On each of the fifth (5th) and tenth
(10th) anniversaries of the commencement date of the Lease, the
Base Rent will be increased by ten percent (10%) above the then
current Base Rent.
Voltari Corporation
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Information
related to major categories of real estate investments, net, is as
follows (dollars in thousands):
|
|
|
|
Useful
life
|
|
|
Real Estate
Investments, at cost:
|
|
|
|
Land
|
|
$
5,844
|
$
2,345
|
Building,
fixtures and improvements
|
10 - 43
yrs.
|
15,890
|
3,494
|
Total
tangible assets
|
|
21,734
|
5,839
|
Acquired
Intangibles - In-place leases
|
5 to 13
yrs.
|
1,639
|
607
|
Total cost of Real
Estate Investments
|
|
23,373
|
6,446
|
Less: Accumulated
depreciation and amortization
|
|
(760
)
|
(451
)
|
Total cost of Real
Estate Investments, net
|
|
$
22,613
|
$
5,995
|
Depreciation
expense for the six months ended June 30, 2018 and 2017 amounted to
$247 thousand and $61 thousand respectively.
Intangible
amortization expense for the six months ended June 30, 2018 and
2017 amounted to $62 thousand and $49 thousand respectively, of
which a net of $20 thousand and $21 thousand, respectively, of
favorable and unfavorable lease amortization was reflected as a
reduction in revenue.
Included
in the accumulated depreciation and amortization balance are
amounts for in place leases and favorable leases, as of June 30,
2018 and December 31, 2017, amounting to $275 thousand and $213
thousand, respectively.
Expected
in-place lease and favorable and unfavorable lease amortization for
each of the next five (5) years, and thereafter, is as follows
(dollars in thousands):
Years
Ending December 31,
|
|
Balance of
2018
|
$
85
|
2019
|
167
|
2020
|
125
|
2021
|
84
|
2022
|
84
|
Thereafter
|
819
|
Total
|
$
1,364
|
The
following table presents future minimum base rental receipts due to
us over the next five (5) years (dollars in
thousands):
Year
Ending December 31,
|
|
Balance of
2018
|
$
981
|
2019
|
1,961
|
2020
|
1,857
|
2021
|
1,773
|
2022
|
1,773
|
Thereafter
|
20,364
|
Total
|
$
28,709
|
Voltari Corporation
Notes
to Condensed Consolidated Financial Statements
(unaudited)
4.
Liquidity and
Capital Resources
Our
principal needs for liquidity since we began executing our
transformation plan in August, 2015, have been to fund operating
losses, working capital requirements, capital expenditures,
restructuring expenses, acquisitions and integration and debt
service. Our principal sources of liquidity as of June 30, 2018
consisted of cash and cash equivalents of $0.3 million, and our
ability to borrow on our Amended Note (as defined below). As of
June 30, 2018, there is $7.0 million remaining available under our
Amended Note, of which we can borrow up to $4.0 million for working
capital purposes.
5. Revolving Note
On
August 7, 2015, we, as borrower, and Koala Holdings LP, as lender,
an affiliate of Mr. Carl C. Icahn, the Company’s controlling
stockholder (“Koala”), entered into a $10 million
revolving loan facility (the “Prior Note”) at a rate
equal to the greater of the LIBOR rate plus 350 basis points, per
annum, and 3.75%, per annum, plus a fee of 0.25% per annum on
undrawn amounts. The Company sought and received the Prior Note to,
in part, allay potential concerns regarding the Company’s
ability to invest in and execute its transformation plan while
retaining cash levels sufficient to fund its ongoing operations.
There were no limitations on the use of proceeds under the Prior
Note. As collateral for the Prior Note, we pledged and granted to
Koala a lien on our limited liability company interest in Voltari
Holding.
On
March 29, 2017, we as borrower, and Koala, as lender, entered into
a revolving note (the “Amended Note”), which amended
and restated the Prior Note. The Amended Note provides that the net
proceeds thereunder in excess of $10 million will be used by the
Company for the acquisition, improvement, development,
modification, alteration, repair, maintenance, financing or leasing
of real property, including any fees and expenses associated with
such activities. Pursuant to the Amended Note, Koala made available
to the Company a revolving loan facility of up to $30 million in
aggregate principal amount (the “Commitment”). The
Company may, by written notice to Koala, request that the
Commitment be increased (the “Increased Commitment”),
provided that the aggregate amount of all borrowings, plus
availability under the aggregate Increased Commitment, shall not
exceed $80 million. Koala has no obligation to provide any
Increased Commitment and may refuse to do so in its sole
discretion. Borrowings under the Amended Note will bear interest at
a rate equal to the LIBOR Rate (as defined in the Amended Note)
plus 200 basis points, per annum, subject to a maximum rate of
interest of 3.75%, per annum, payable at maturity. The Amended Note
matures on the earliest of (i) December 31, 2020, (ii) the date on
which any financing transaction, whether debt or equity, is
consummated by the Company (or its successors and assigns) with net
proceeds in an amount equal to or greater than $30 million, and
(iii) at the Company’s option, a date selected by the Company
that is earlier than December 31, 2020 (the “Maturity
Date”). The Amended Note also allows the Company to, upon
written notice to Koala not more than 60 days and not less than 30
days prior to the Maturity Date, request that Koala extend the
Maturity Date to December 31, 2022. Koala may, in its sole
discretion, agree to extend the Maturity Date by providing written
notice to the Company on or before the date that is 20 days prior
to the Maturity Date. If an event of default exists, the Amended
Note will bear interest at a default rate equal to the greater of
the LIBOR Rate plus 300 basis points, per annum, or 4.5%, per
annum. Subject to the terms and conditions of the Amended Note, the
Company may repay all or any portion of the amounts outstanding
under the Amended Note at any time without premium or penalty. The
amounts available under the Commitment or Increased Commitment, as
the case may be, will increase and decrease in direct proportion to
repayments and reborrowings under the Amended Note, respectively,
from time to time. As collateral for the Amended Note, the Company
has pledged and granted to Koala a lien on the Company’s
limited liability company interest in Voltari Holding.
As of
June 30, 2018, borrowings from this loan facility totaled $23.0
million. The outstanding balance, including accumulated interest of
$0.6 million, totaled $23.6 million as of June 30,
2018.
In
light of the above, the condensed consolidated financial statements
were prepared on the basis that the Company will continue as a
going concern. Therefore, the accompanying condensed consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets and
liabilities or any other adjustments that might result in the event
the Company is unable to continue as a going concern.
Voltari Corporation
Notes
to Condensed Consolidated Financial Statements
(unaudited)
6. Redeemable Preferred Stock
Upon
completion of our rights offering in October 2012, we issued
1,199,643 shares of Series J preferred stock and warrants to
acquire 1,014,982 common shares in exchange for approximately $30
million in cash proceeds. Net proceeds from the rights offering of
approximately $27.8 million were allocated between Series J
preferred stock and common stock warrants based on their estimated
relative fair market values at the date of issuance as determined
by management with the assistance of a third-party valuation
specialist. The portion of the net proceeds from the rights
offering attributable to the Series J preferred stock was
determined to be approximately $26.4 million and is included in
Redeemable preferred stock on our Condensed Consolidated Balance
Sheets at June 30, 2018 and December 31, 2017.
Our
Series J preferred stock contains certain redemption features and
is classified as mezzanine equity at June 30, 2018, and December
31, 2017 since the shares are (i) redeemable at the option of the
holder upon the occurrence of certain events and (ii) have
conditions for redemption which are not solely within our control.
Our Series J preferred stock is redeemable at the option of the
holder if the Company undergoes a change in control, which includes
a person becoming a beneficial owner of securities representing at
least 50% of the voting power of our company, a sale of
substantially all of our assets, and certain business combinations
and mergers which cause a change in 20% or more of the voting power
of our company, and if we experience an ownership change (within
the meaning of Section 382 of the Internal Revenue Code of 1986, as
amended), which results in a substantial limitation on our ability
to use our net operating losses and related tax benefits. In the
event that a redemption event was to occur, currently the Company
would be precluded, under the terms of the Series J preferred stock
and applicable Delaware law, from making any material
redemptions.
The
difference between the carrying value of the Series J preferred
stock and its liquidation value was being accreted over an
anticipated redemption period of five years using the effective
interest method and was fully accreted as of September 30, 2017.
The shares of Series J preferred stock have limited voting rights
and are not convertible into shares of our common stock or any
other series or class of our capital stock.
Holders
of the Series J preferred stock are entitled to an annual dividend
of 14% (13% through December 31, 2017), which is payable in-cash or
in-kind at our discretion, on a quarterly basis. To date, we have
elected to pay all quarterly dividend payments on our Series J
preferred stock, in the cumulative amount of $29.9 million, in-kind
rather than in-cash. Accordingly, we have increased the carrying
value of our redeemable preferred stock for the amount of the
paid-in-kind dividend payments. Dividends on the Series J preferred
stock and the accretion increase the amount of net loss that is
attributable to common stockholders and are presented as separate
amounts on the condensed consolidated statements of
operations.
Our
Series J preferred stock has a preference upon dissolution,
liquidation or winding up of the Company in respect of assets
available for distribution to stockholders. The liquidation
preference of the Series J preferred stock is initially $25 per
share. If the dividend on the Series J preferred stock is paid
in-kind, which has been the case to date, the liquidation
preference is adjusted and increased quarterly (i) until October
11, 2017, by an amount equal to 3.25% of the liquidation preference
per share, as in effect at such time and (ii) thereafter, by an
amount equal to 3.5% of the liquidation preference per share, as in
effect at such time. The quarterly accretion will continue until
the shares are redeemed, or until the Company’s affairs are
liquidated, dissolved or wound-up.
As of
June 30, 2018, our Series J preferred stock had an aggregate
redemption value of approximately $61.3 million, including
paid-in-kind dividends of $29.9 million and accrued dividends of
$2.1 million. We recorded accretion associated with our Series J
preferred stock of $0.0 million and $0.5 million for the six months
ended June 30, 2018 and 2017, respectively.
Voltari Corporation
Notes
to Condensed Consolidated Financial Statements
(unaudited)
7. Net Loss Per Share Attributable to Common
Stockholders
The
following table sets forth the computation of basic and diluted net
loss per share attributable to common stockholders for the periods
indicated (dollars in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
Net loss
attributable to common stockholders
|
$
(2,413
)
|
$
(2,256
)
|
$
(4,857
)
|
$
(4,669
)
|
|
|
|
|
|
Weighted-average
common shares outstanding – basic and diluted
|
8,994,814
|
8,994,814
|
8,994,814
|
8,994,814
|
|
|
|
|
|
Net loss per share
attributable to common stockholders – basic and
diluted
|
$
(0.27
)
|
$
(0.25
)
|
$
(0.54
)
|
$
(0.52
)
|
Basic
net loss per share attributable to common stockholders is computed
by dividing net loss attributable to common stockholders by the
weighted-average number of common shares outstanding during the
applicable period. Diluted net loss per share attributable to
common stockholders includes the effects of any warrants, options
and other potentially dilutive securities outstanding during the
period. Due to net losses, for the periods presented, there were no
potentially dilutive securities outstanding, therefore basic and
diluted net loss per share attributable to common stockholders are
equal. The following table presents the outstanding antidilutive
securities excluded from the calculation of net loss per share
attributable to common stockholders:
|
|
|
|
|
Common stock
issuable upon exercise of Warrants
|
-
|
1,014,958
|
Options to purchase
common stock
|
-
|
-
|
Total
securities excluded from net loss per share attributable to common
stockholders
|
-
|
1,014,958
|
8. Legal Proceedings
From
time to time, we are subject to claims and legal proceedings
arising in the normal course of business. We do not believe that we
are currently party to any pending legal action that could
reasonably be expected to have a material adverse effect on our
business, financial condition, results of operations or cash
flows.