The
following risk factors should be considered carefully in addition
to the other information contained in this Annual Report on Form
10-K. This Annual Report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. See "Special
Statement Regarding Forward-Looking Statements" appearing at the
beginning of this report. Our actual results could differ
materially from those contained in the forward-looking statements.
Factors that may cause such differences include, but are not
limited to, those discussed below as well as those discussed
elsewhere in this Annual Report on Form 10-K. Additional risks and
uncertainties that management is not aware of or that are currently
deemed immaterial may also adversely affect our business
operations. If any of the following risks materialize, our
business, financial condition or operating results could be
materially adversely affected. We undertake no obligations to
update or revise publicly any forward-looking statements, whether
as a result of new information, future events or
otherwise.
The market price of our common stock is highly volatile and may not
relate to our operating performance, financial results or
prospects. In addition, features of our Series J preferred stock
may make it difficult for holders of our common stock to realize
value on their investment.
The
market price for our common stock is highly volatile. For example,
for the year ended December 31, 2018, the closing sales price
of our common stock, which is quoted on the OTCQB marketplace under
the symbol “VLTC” fluctuated from a low of $0.36 per
share to a high of $1.48 per share. As of March 5, 2019, the
closing sales price of our common stock was $0.86 per
share.
Broad
market and industry factors may adversely affect the market price
of our common stock regardless of our actual operating performance,
financial results or prospects. The stock market in general has in
the past and may in the future experience extreme price and volume
fluctuations that have often been unrelated or disproportionate to
individual companies’ operating performance. The price of our
common stock could fluctuate widely based on a variety of
additional factors, including actual or anticipated changes in our
financial condition and operating results; media speculation
regarding the intentions of our controlling stockholder; actual or
potential transactions in our securities by us or our security
holders, including acquisitions or dispositions by our controlling
stockholder, directors or officers; announcements by us of capital
commitments or significant changes in our business strategy; and
other factors affecting us and our industry, as well as general
economic, political and market conditions such as recessions,
interest rate changes or international currency
fluctuations.
The
current market price of our common stock may not be indicative of
future market prices or intrinsic value, and we may not be able to
sustain or increase the value of an investment in our common stock.
Investors in our securities may experience a decrease, which could
be substantial, in the value of their securities, including
decreases unrelated to our operating performance, financial results
or prospects. Investors in our securities could lose part or all of
their investment.
Other
factors may adversely affect the market price, and intrinsic value,
of our common stock, including features of our Series J preferred
stock.
Our common
stock is ranked junior to our Series J preferred stock with respect
to cash dividends and amounts payable in the event of our
dissolution, liquidation or winding up. This means that, unless
full cumulative dividends have been paid or set aside for payment
on all outstanding Series J preferred stock for all accrued
dividends, no cash dividends may be declared or paid on our common
stock. As of December 31, 2018, holders of our Series J
preferred stock were owed $36.4 million in dividends. Also, in the
event of our voluntary or involuntary liquidation, dissolution or
winding up, no distribution of our assets may be made to holders of
our common stock until we have paid to our Series J preferred
stockholders the liquidation preference relating to such preferred
stock, including in each case any accrued and unpaid dividends. As
of December 31, 2018, the total liquidation preference on the
outstanding shares of our Series J preferred stock, including
accrued and unpaid dividends as of such date, was $65.7 million. In
the event of our voluntary or involuntary liquidation, dissolution
or winding up, our asset value would inure to the benefit of
holders of our Series J preferred stock, up to the value of the
Series J preferred stock liquidation preference plus any accrued
and unpaid dividends thereon, before holders of our common stock
would realize any return from our asset value.
The
value of our common stock may also be adversely affected if, and to
the extent that, our Series J preferred stock becomes redeemable.
The holders of our Series J preferred stock may require us to
redeem their shares of Series J preferred stock at a redemption
price equal to 100% of the liquidation preference per share in
effect at such time plus accrued and unpaid dividends through the
next dividend payment date after the redemption date, in connection
with a redemption event. A redemption event occurs if (i) we
undergo 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 all or 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,
or (ii) we experience an ownership change (within the meaning of
Section 382 (“Section 382”)of the Internal Revenue Code
of 1986, as amended (the ”Code”)), which results in a
substantial limitation on our ability to use our net operating
losses and related tax benefits. The Company believes that, if
a redemption event were to occur, limited, if any, funds would be
available for such redemption under the terms of the Series J
preferred stock and applicable Delaware law. As a result, in
the event that a redemption event were to occur, the Company
currently expects that it would be precluded, under the terms of
the Series J preferred stock and applicable Delaware law, from
making any material redemptions.
As of
December 31, 2018, our Series J preferred stock had an
aggregate redemption value of approximately $65.7 million,
including paid in-kind dividends of $36.4 million and accrued
dividends of $2.2 million. Dividends declared or accrued on the
Series J preferred stock reduce the amount of net earnings, if any,
that may be available to common stockholders.
In
addition, our ability to pay dividends on our common stock is
currently limited by the terms of our Series J preferred stock and
may be further restricted by the terms of any future debt or
preferred securities. Accordingly, your only opportunity to achieve
a return on your investment in our common stock may be if the
market price of our common stock appreciates and you sell your
shares at a profit. The market price for our common stock may never
exceed, and may fall below, the price that you paid for such common
stock.
We are implementing a transformation plan, which may not be
successful.
We have
been implementing a transformation plan pursuant to which, among
other things, we have exited our mobile marketing and advertising
business and have entered into the business of acquiring, leasing
and financing commercial real properties. In connection with this
transformation plan, on September 17, 2015 we acquired our
first commercial real property, located in Long Branch, New Jersey
and on May 18, 2016 we acquired our second commercial property,
located in Flanders, New York, and on April 23, 2018 we acquired
our third commercial property, located in Columbia, South Carolina.
Our ability to generate revenues and become profitable will be
dependent in large part on our ability to acquire, lease and
finance additional commercial real properties. There can be no
assurance that we will be able to do so or that we will ever
achieve profitability.
Our
failure to successfully execute our transformation plan would
adversely affect our financial condition, results of operations and
stockholders’ equity. While we believe our transition costs
are generally completed, we could still incur unanticipated costs
or become subject to liabilities in connection with our exit from
the mobile marketing and advertising business and our entry into
the business of acquiring, leasing and financing commercial real
properties. For example, we may incur unanticipated costs and/or
become subject to litigation from customers, vendors or other third
parties in connection with our exit from the mobile marketing and
advertising business, which could materially adversely affect our
financial condition, results of operations and stockholders’
equity.
We have
limited operating experience in the commercial real estate
business, which makes it difficult to predict the long-term success
of our new business model. In addition, because of our new business
plan, our historical performance is not a meaningful indicator of
future results.
We have a history of net operating losses and may continue to
suffer losses in the future.
For the
years ended December 31, 2010, 2011, 2012, 2013, 2014, 2015, 2016,
2017 and 2018, we had net losses of approximately $7.0 million,
$195.4 million, $34.2 million, $10.3 million, $29.3 million, $6.6
million, $3.1 million, $1.9 million and $1.5 million, respectively.
If we cannot become profitable, our financial condition will
deteriorate further, and we may be unable to achieve our business
objectives.
Our common stock is traded on the OTCQB Market, which could have
material adverse consequences for us and our
investors.
Since
the opening of business on December 23, 2016, our common stock has
been quoted on the OTCQB marketplace under the symbol
“VLTC.” Stocks traded on the OTCQB marketplace
generally have a more limited trading volume and exhibit a wider
spread between the bid/ask quotations than stock traded on national
exchanges. Many institutional investors have investment policies
which prohibit them from trading in stocks on the OTCQB
marketplace. The OTCQB marketplace affords our stockholders fewer
corporate governance protections than if we were listed on a
national exchange, such as requirements concerning the independence
of our board of directors. As a result of our delisting from
trading on The NASDAQ Stock Market, and the subsequent quotation of
our common stock on the OTCQB marketplace, we and our investors
could face adverse consequences, including:
●
limited
availability of market quotations for our securities;
|
●
reduced
liquidity for our securities;
|
●
increased
volatility in the market price and trading volume for our
securities;
|
●
a
determination that our common stock is a “penny stock,”
which would require brokers trading in our common stock to adhere
to more stringent rules and possibly result in a reduced level of
trading activity for our securities;
|
●
a
limited amount of news and analyst coverage; and
|
●
a
decreased ability to issue additional securities or obtain
additional financing in the future.
|
We have limited experience acquiring commercial real estate
properties.
Our
experience in acquiring, leasing and financing commercial real
estate properties is limited. As a result, we may encounter
unforeseen difficulties in our efforts to identify essential
assets, assess the risk levels associated with such assets,
negotiate favorable terms with property owners, negotiate favorable
terms with lessees, and comply with applicable laws and
regulations.
If we
are unable to correctly predict rental rates, cancellation rates,
demand, consolidation trends and growth trends, a material adverse
impact on our results of operations could result. If we are unable
to effectively expand, our growth rate may be adversely
impacted.
We intend to pursue acquisitions of additional properties and may
be unsuccessful in this pursuit, and any acquisitions that we do
consummate may fail to meet our expectations.
We
intend to pursue acquisitions of additional properties to grow our
business in connection with our transformation plan. Further,
in order to continue to grow our real estate portfolio in a manner
designed to, over time, help us generate profits, we may pursue
higher valued properties, such as the McClatchy Property. While we
anticipate that acquisitions of any such higher valued properties
would likely generate relatively higher rental income, such
acquisitions would likely also involve higher acquisition costs and
may involve higher costs of maintenance. There can be no assurance
that we will be successful in acquiring additional real estate
properties, including any such higher valued properties on
commercially reasonable terms, if at all.
Accordingly,
from time to time, we may engage in discussions that may result in
one or more transactions. Although there is uncertainty that any of
these discussions will result in definitive agreements or the
completion of any transaction, we may devote a significant amount
of management and other resources to such a transaction, which
could negatively impact our operations. We may incur significant
costs in connection with seeking acquisitions regardless of whether
any transaction is completed.
As of
the date of this report, we have completed three real estate
acquisitions in connection with the execution of our transformation
plan. Until and unless we acquire additional properties, the rental
payments by our existing lessees will represent the sole source of
our revenues. The termination of any of our leases or our failure
to maintain them on favorable terms could have a material adverse
effect on our business and financial condition.
The
real estate industry is highly competitive, and we will face
competition from many other entities engaged in real estate
investment activities, including individuals, corporations, REITs,
investment companies, private equity and hedge fund investors, and
other investors, some of whom are significantly larger and have
greater resources and lower costs of capital. This competition will
make it more challenging to identify and successfully capitalize on
acquisition opportunities that meet our investment objectives. If
we cannot identify and purchase a sufficient quantity of properties
at favorable prices or if we are unable to finance acquisition
opportunities on commercially favorable terms, our business,
financial condition or results of operations could be materially
adversely affected.
Investments
in, and acquisitions of, properties we might seek to acquire entail
risks associated with real estate investments generally, including,
but not limited to, the following risks and as noted elsewhere in
this report:
●
we may
be unable to acquire a desired property because of
competition;
|
●
even if
we are able to acquire a desired property, competition from other
potential acquirers may significantly increase the purchase
price;
|
●
even if
we enter into agreements for the acquisition of properties, these
agreements are subject to customary conditions to closing,
including completion of due diligence investigations to our
satisfaction;
|
●
we may
incur significant costs and divert management attention in
connection with evaluation and negotiation of potential
acquisitions, including ones that we are subsequently unable to
complete;
|
●
we may
acquire properties that are not initially accretive to our results
upon acquisition, and we may not successfully lease those
properties to meet our expectations;
|
●
we may
be unable to finance the acquisition on favorable terms in the time
period we desire, or at all; even if we are able to finance the
acquisition, our cash flow may be insufficient to meet our required
principal and interest payments;
|
●
we may
spend more than budgeted to make necessary improvements or
renovations to acquired properties;
|
●
we may
be unable to quickly and efficiently integrate new acquisitions,
particularly the acquisition of portfolios of properties, into our
existing operations;
|
●
market
conditions may result in higher than expected vacancy rates and
lower than expected rental rates; and
|
●
we may
acquire properties subject to liabilities and without any recourse,
or with only limited recourse, with respect to unknown
liabilities.
|
In the
event that we consummate an acquisition in the future, there is no
assurance that we would fully realize the potential benefits of
such a transaction. Further, acquisitions of properties we might
seek to acquire entail risks associated with real estate
investments generally, including that the investment's performance
will fail to meet expectations. To the extent we acquire higher
valued properties as discussed above, these and other real
estate-related risks may be exacerbated by the increased costs and
obligations associated with any such higher valued
properties.
Leadership transitions could have a material adverse impact on our
business, operating results or financial condition.
We have
experienced leadership transitions in the past and any additional
leadership transitions could have a material adverse impact on our
business, operating results or financial condition. On May 11,
2015, Richard Sadowsky resigned from his position as our acting
Chief Executive Officer and from all other positions he held,
effective immediately. In addition, effective May 11, 2015, Aaron
Epstein was appointed as our President. John Breeman, in addition
to his role as our Chief Financial Officer, served as our acting
principal executive officer and principal financial officer. During
2016, both John Breeman and Aaron Epstein departed from the
Company. On September 24, 2015, each of Messrs. Andrew Roberto,
James Nelson and Hunter Gary notified us of his resignation from
our Board and each committee of the Board on which he served,
effective September 25, 2015. On September 24, 2015, Peter Shea was
appointed to the Board, effective September 25, 2015. Mr. Shea was
also appointed to serve as Chairperson of the Board, Chairperson of
the Compensation and Governance and Nominating Committees and as a
member of our Audit Committee. On September 28, 2015, the Board
appointed Kenneth Goldmann as Chief Administrative and Accounting
Officer of the Company, effective as of October 5, 2015. On April
30, 2016, the Board appointed Andreea Paraschivoiu as the Chief
Financial Officer of the Company. On November 14, 2016, Ms.
Paraschivoiu resigned from her position as our Chief Financial
Officer. On April 21, 2017, Sachin Latawa was appointed to the
Board. On May 10, 2017, the Board appointed Peter Kaouris as Chief
Accounting Officer and Kenneth Goldmann as Chief Financial Officer
of the Company. On August 8, 2017, the Board changed Mr. Kenneth
Goldmann's title to Principal Executive Officer of the Company. Mr.
Kaouris also currently serves as our Principal Financial
Officer.
The
uncertainty inherent in leadership transitions can be difficult to
manage, may cause concerns from third parties with whom we do
business, and may increase the likelihood of turnover of other
employees. In addition, our current management team lacks
significant experience in the commercial real estate business, and
we may need to hire personnel with relevant experience to help us
execute our transformation plan. We cannot assure that we will be
able to do so, and our failure to do so could materially harm our
results of operations.
We will be dependent on our tenants to make payments to us under
our leases, and an event that materially and adversely affects our
tenants’ business, financial position or results of
operations could materially and adversely affect our business,
financial position or results of operations.
Pursuant
to our transformation plan, to the extent we generate revenues, we
will generate substantially all of our revenues from payments made
by our tenants. Additionally, to the extent we are able to enter
into triple net leases, we will depend on our tenants to pay all
insurance, taxes, utilities, and maintenance and repair expenses
related to the applicable property, subject to limited carveouts,
and to indemnify, defend and hold us harmless from and against
various claims, litigation and liabilities arising in connection
with its business. There can be no assurance that our tenants will
have sufficient assets, income and access to financing to enable
them to satisfy their payment obligations under the applicable
leases. The failure of a tenant to satisfy its other obligations
under the lease, such as the payment of insurance, taxes and
utilities, could materially and adversely affect the condition of
our properties. For these reasons, if a tenant were to experience a
material and adverse effect on its business, financial position or
results of operations, our business, financial position or results
of operations could also be materially and adversely
affected.
Due to
our dependence on rental payments from our tenants as our primary
source of revenues, we may be limited in our ability to enforce our
rights under, or to terminate, the applicable leases. Failure by a
tenant to comply with the terms of a lease could require us to find
another lessee for the property. There is no assurance that we
would be able to lease a property to another lessee on
substantially equivalent or better terms, or at all, successfully
reposition the property for other uses or sell the property on
terms that are favorable to us.
The historical information included in this Annual Report on Form
10-K may not be a reliable indicator of future
results.
Our
historical financial data included in this Annual Report on Form
10-K may not reflect what our business, financial position or
results of operations will be in the future. The historical
financial statements included in this Annual Report on Form 10-K
are not necessarily indicative of how we will conduct our business
as we continue our efforts to implement our transformation plan.
Significant changes have and may continue to occur in our cost
structure, financing and business operations as a result of our
transformation plan.
Our operating results may be affected by economic and regulatory
changes that have an adverse impact on the commercial real estate
market in general, and we can provide no assurance that we will be
profitable or that we will realize growth in the value of our
commercial real estate properties.
Our
operating results are subject to risks generally incident to the
ownership of real estate, including:
●
changes
in general economic or local conditions;
|
●
changes
in supply of or demand for competing properties in an
area;
|
●
changes
in interest rates and availability of permanent mortgage funds that
may render the sale of a property difficult or
unattractive;
|
●
changes
in tax, real estate, environmental and zoning laws;
and
|
●
periods
of high interest rates and tight money supply.
|
These
and other risks may prevent us from realizing growth or maintaining
the value of our real estate properties or from becoming
profitable.
Our
operations may face adverse effects from tenant bankruptcies or
insolvencies.
The
bankruptcy or insolvency of any of our tenants may adversely affect
the income produced by our properties. If a tenant defaults, we may
experience delays and incur substantial costs in enforcing our
rights as landlord. If a tenant files for bankruptcy, we cannot
evict the tenant solely because of such bankruptcy. A court,
however, may authorize a tenant to reject or terminate its lease
with us. We may also incur additional vacancy and other
re-tenanting expense.
Mr. Carl C. Icahn indirectly owns a majority of our common stock
and Series J preferred stock, our certificate of incorporation
waives the corporate opportunity doctrine as it relates to funds
affiliated with him and he may have interests that diverge from
those of other stockholders, and one of his affiliates is our
principal lender.
Following
the completion, and as a result of, our rights offering on March
30, 2015, entities affiliated with Mr. Carl C. Icahn, our largest
stockholder, became the beneficial owner of, and had voting control
over, approximately 52.3% of our common stock. This amount
increased to 52.7% following the forfeiture by our Board on August
20, 2015 of 73,525 shares of restricted common stock, in the
aggregate. Entities affiliated with Mr. Carl C. Icahn also
previously owned warrants to purchase an additional 9.7% of our
common stock. On October 11, 2017, warrants to purchase 1,014,958
shares of our common stock, including the warrants beneficially
owned by Mr. Icahn, expired without being exercised. Further, Mr.
Icahn beneficially owns 98.0% of our Series J preferred stock,
which has limited voting rights. Mr. Carl C. Icahn is able to
control and exert substantial influence over us, including the
election of our directors and controlling most matters requiring
board or stockholder approval, including business strategies,
mergers, business combinations, acquisitions or dispositions of
significant assets, issuances of common stock, incurrence of debt
or other financing and the payment of dividends. The existence of a
controlling stockholder may have the effect of making it difficult
for, or may discourage or delay, a third party from seeking to
acquire a majority of our outstanding common stock, which could
adversely affect the market price of our stock. Mr. Carl C. Icahn
owns, controls and has an interest in many companies, some of which
may compete directly or indirectly with us. As a result, his
interests may not always be consistent with our interests or the
interests of our other stockholders.
In our
certificate of incorporation, we renounce and provide for a waiver
of the corporate opportunity doctrine as it relates to the funds
affiliated with Koala, an affiliate of Mr. Carl C. Icahn,
Technology Crossover Ventures, and any person or entity affiliated
with these investors. As a result, Mr. Carl C. Icahn and entities
controlled by him will have no fiduciary duty to present corporate
opportunities to us. These exempted persons are in the business of
making investments in companies and may, from time to time, acquire
and hold interests in businesses that compete directly or
indirectly with us. They may also pursue, for their own accounts,
acquisition opportunities that may be complementary to our
business, and, as a result, those acquisition opportunities may not
be available to us. These potential conflicts of interest could
have a material adverse effect on our business, financial
condition, results of operations or prospects if attractive
corporate opportunities are directed by the exempted persons to
themselves or their other affiliates instead of to us. As a result,
corporate opportunities that may benefit us may not be available to
us. To the extent that conflicts of interest may arise between us,
Mr. Carl C. Icahn and his affiliates, those conflicts may be
resolved in a manner adverse to us or our other
shareholders.
On
March 29, 2017, we, as borrower, and Koala, as lender, an affiliate
of Carl C. Icahn, our controlling stockholder, entered into a $30
million Amended Note, which amended and restated our prior
revolving note with Koala dated August 7, 2015. See Item 1 –
Financing Arrangements.
We may have future capital needs and may not be able to obtain
additional financing on acceptable terms.
We may
incur indebtedness in the future to refinance our existing
indebtedness or to finance newly acquired properties or for other
purposes. Demands on our cash resources from debt service will
reduce funds available to us to make capital expenditures and
acquisitions or carry out other aspects of our business strategy.
Our indebtedness may also limit our ability to adjust rapidly to
changing market conditions, make us more vulnerable to general
adverse economic and industry conditions and create competitive
disadvantages for us compared to other companies with relatively
lower debt levels. Increased future debt service obligations may
limit our operational flexibility, including our ability to acquire
properties, finance or refinance our properties or sell properties
as needed.
Further,
our Amended Note with Koala provides a revolving loan facility of
up to $30 million in aggregate principal amount (the
“Commitment”), which provides that the net proceeds
thereunder in excess of $10 million will be used by us for the
acquisition, improvement, development, modification, alteration,
repair, maintenance, financing or leasing of real property,
including any fees and expenses associated with such activities.
Our outstanding balance at December 31, 2017 totaled $5.5 million.
During the year ended December 31, 2018 we borrowed $16.75 million
to fund the purchase of the McClatchy Property and $0.75 million to
fund ongoing operating costs. As of December 31, 2018, borrowings
under the Amended Note totaled $23.0 million, and there remains
$4.0 million available for working capital purposes. The
outstanding balance, including accumulated interest of $1.0
million, totaled $24.0 million as of December 31, 2018. We 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.
However, Koala has no obligation to provide any Increased
Commitment and may refuse to do so in its sole discretion. If
we are unable to increase our availability under the Amended Note,
or obtain other suitable financing, our ability to purchase other
properties and execute our transformation plan could be materially
adversely affected.
Moreover,
our ability to obtain additional financing and satisfy our
financial obligations under indebtedness outstanding from time to
time will depend upon our future operating performance, which is
subject to then- prevailing general economic, real estate and
credit market conditions, including interest rate levels and the
availability of credit generally, and financial, business and other
factors, many of which are beyond our control. A prolonged
worsening of credit market conditions would have a material adverse
effect on our ability to obtain financing on favorable terms, if at
all.
We may
be unable to obtain additional financing or financing on favorable
terms or our operating cash flow may be insufficient to satisfy our
financial obligations under any indebtedness outstanding from time
to time. If financing is not available when needed, or is available
only on unfavorable terms, we may be unable to enhance our
properties or develop new properties, complete acquisitions or
otherwise take advantage of business opportunities or respond to
competitive pressures, any of which could have a material adverse
effect on our business, financial condition and results of
operations.
We may be unable to secure funds for future tenant improvements or
capital needs, which could adversely impact the returns we generate
on our properties.
When
tenants do not renew their leases or otherwise vacate their space,
in order to attract replacement tenants, we may be required to
expend substantial funds for tenant improvements and tenant
refurbishments to the vacated space. In addition, we will likely be
responsible for any major structural repairs, such as repairs to
the foundation, exterior walls and rooftops, even if our leases
with tenants may require tenants to pay routine property
maintenance costs. We may use cash flow from operations,
borrowings, property sales or future debt or equity offerings in
order to improve or maintain our properties or for any other
reason. These sources of funding may not be available on attractive
terms or at all. If we cannot procure additional funding for
capital improvements, our investments may generate lower cash flows
or decline in value, or both, all of which could have a material
adverse effect on the value of our investments.
Rising expenses could reduce cash flow and funds available for
future acquisitions.
Any
properties that we may buy will be subject to operating risks
common to real estate in general, any or all of which may
negatively affect us. If any property is not fully occupied or if
rents are being paid in an amount that is insufficient to cover
operating expenses, we could be required to expend funds with
respect to that property for operating expenses. Any of our
properties could be subject to increases in tax rates, utility
costs, operating expenses, insurance costs, repairs and maintenance
and administrative expenses. Leases may not be negotiated on a
double- or triple-net basis or on a basis requiring the tenants to
pay all or some of such expenses, in which event we may have to pay
those costs. If we are unable to lease properties on a
triple-net-lease basis or on a basis requiring the tenants to pay
all or some of such expenses, or if tenants fail to pay required
tax, utility and other impositions, we could be required to pay
those costs which could adversely affect our cash flows and funds
available for future acquisitions.
Costs of complying with governmental laws and regulations,
including those relating to environmental matters, may adversely
affect our operations and cash position.
All
real property and the operations conducted on real property are
subject to federal, state and local laws and regulations relating
to environmental protection and human health and safety. These laws
and regulations generally govern wastewater and storm water
discharges, air emissions, the operation and removal of underground
and above-ground storage tanks, the use, storage, treatment,
transportation and disposal of solid and hazardous materials, and
the remediation of contamination associated in soils or
groundwater. Environmental laws and regulations may impose joint
and several liabilities on tenants, owners or operators for the
costs to investigate or remediate contaminated properties,
regardless of fault or whether the acts causing the contamination
were legal. This liability could be substantial. In addition, the
presence of hazardous substances, or the failure to properly
remediate these substances, may adversely affect our ability to
sell, rent or pledge such property as collateral for future
borrowings.
Some of
these laws and regulations are amended from time to time and may
require compliance with new or more stringent standards in the
future. Compliance with new or more stringent laws or regulations
or stricter interpretation of existing laws may require material
expenditures by us. Future laws, ordinances or regulations may
impose material environmental liability. Additionally, our
tenants’ operations, the existing condition of land when we
buy it, operations in the vicinity of our properties, such as the
presence of underground storage tanks, contamination from others in
the soils or groundwater on adjoining properties, or activities of
unrelated third parties may affect our properties. In addition,
there are various local, state and federal fire, health,
life-safety and similar regulations with which we may be required
to comply, and that may subject us to liability in the form of
fines or damages for noncompliance. Any material expenditures,
fines, or damages we must pay could materially adversely affect our
results from operations and may reduce the value of an investment
in our shares. The cost of defending against claims of liability,
of compliance with environmental regulatory requirements, of
remediating any contaminated property, or of paying personal injury
claims may materially adversely affect our business, assets or
results of operations.
Environmental compliance costs and liabilities associated with real
estate properties owned by us may materially and adversely affect
us.
Our
properties may be subject to known and unknown environmental
liabilities under various federal, state and local laws and
regulations relating to human health and the environment. Certain
of these laws and regulations may impose joint and several
liabilities on certain statutory classes of persons, including
owners or operators, and past owners and operators for the costs of
investigation or remediation of contaminated properties. These laws
and regulations apply to past and present business operations on
the properties, and the use, storage, handling and recycling or
disposal of hazardous substances or wastes. We may face liability
regardless of our knowledge of the contamination, the timing of the
contamination, the cause of the contamination or the party
responsible for the contamination of the property.
We may
be held primarily or jointly and severally liable for costs
relating to the investigation and clean-up of any of our properties
on which there is contamination, or from which there has been a
release or threatened release of a regulated material as well as
other affected properties, regardless of whether we knew of or
caused the release.
As the
owner or operator of real property, we may also incur liability
based on various building conditions. The presence of significant
asbestos, mold or other airborne contaminants at any of our
properties could require us to undertake a costly remediation to
contain or remove the asbestos, mold or other airborne contaminants
or increase ventilation and/or expose us to liability from our
tenants, employees of our tenants, or others if property damage or
personal injury occurs.
In
addition to these costs, which could exceed the property’s
value, we could be liable for certain other costs, including
governmental fines, and injuries to persons, property or natural
resources. Further, some environmental laws create a lien on the
contaminated site in favor of the government for damages and the
costs the government incurs in connection with such contamination.
Any such costs or liens could have a material adverse effect on our
business or financial condition.
Although
we intend to require our tenants to undertake to indemnify us for
certain environmental liabilities, including environmental
liabilities they cause, the amount of such liabilities could exceed
the financial ability of the tenant to indemnify us. The presence
of contamination or the failure to remediate contamination may
adversely affect our ability to sell or lease the real estate or to
borrow using the real estate as collateral.
We may obtain only limited warranties when we purchase a property
and would have only limited recourse if our due diligence did not
identify any issues that lower the value of our property, which
could adversely affect our financial condition.
The
seller of a property often sells such property in its “as
is” condition on a “where is” basis and
“with all faults,” without any warranties of
merchantability or fitness for a particular use or purpose. In
addition, purchase agreements may contain only limited warranties,
representations and indemnifications that will only survive for a
limited period after the closing. The purchase of properties with
limited warranties increases the risk that we may lose some or all
our invested capital in the property as well as the loss of rental
income from that property.
Our costs associated with complying with the Americans with
Disabilities Act may affect our operating results.
Our
properties are and will be subject to the Americans with
Disabilities Act of 1990 (the “ADA”). Under the ADA,
all places of public accommodation are required to comply with
federal requirements related to access and use by disabled persons.
The ADA has separate compliance requirements for “public
accommodations” and “commercial facilities” that
generally require that buildings and services, including
restaurants and retail stores, be made accessible and available to
people with disabilities. The ADA’s requirements could
require removal of access barriers and could result in the
imposition of injunctive relief, monetary penalties, or, in some
cases, an award of damages. There is no assurance that we will be
able to acquire properties or allocate the burden on the seller or
other third party, such as a tenant, to ensure compliance with the
ADA. If we cannot, our funds used for ADA compliance may affect our
results from operations. The fluctuation in market conditions makes
judging the future performance of these assets difficult. There is
a risk that we may not purchase real estate assets at absolute
discounted rates and that these assets may continue to decline in
value.
Properties that we may own and may acquire face competition that
may decrease the amount of rent that we may charge our
tenants.
Properties
that we may own and may acquire face competition for tenants. The
number of competitive properties could have a material effect on
our ability to rent space at our properties and the amount of rents
charged. We could be adversely affected if additional competitive
properties are built in locations competitive with our properties,
causing increased competition for customer traffic and creditworthy
tenants. This could result in decreased cash flow from tenants and
may require us to make capital improvements to properties that we
would not have otherwise made, thus affecting our income, financial
condition and results of operations.
We may be unable to renew leases or re-lease space as leases
expire.
If
tenants do not renew their leases upon expiration, we may be unable
to re-lease the vacated space. Even if the tenants do re-lease the
lease or we are able to re-lease to a new tenant, the terms and
conditions of the new lease may not be as favorable as the terms
and conditions of the expired lease. One or more of our properties
may incur a vacancy either by the continued default of a tenant
under its lease or the expiration of one of our leases. In
addition, the resale value of a property could be diminished
because the market value of a particular property will depend
principally upon the value of the cash flow generated from the
property which in the case of vacancies, will be
reduced.
Changes in building and/or zoning laws may require us to renovate
or reconstruct a property in connection with the continued use of
the property or the commencement of a new use of the property or
prevent us from fully restoring a property in the event of a
substantial casualty loss and/or require us to meet additional or
more stringent construction requirements.
Due to
changes, among other things, in applicable building and zoning
laws, ordinances and codes that may affect certain of our
properties that have come into effect after the initial
construction of the properties, certain properties may not comply
fully with current building and/or zoning laws, including
electrical, fire, health and safety codes and regulations, use, lot
coverage, parking and setback requirements, but may qualify as
permitted non-conforming uses. Such changes may require updating
various existing physical conditions of buildings in connection
with our recapture, renovation, and/or redevelopment of properties.
In addition, such changes may limit our or our tenant’s
ability to restore the premises of a property to its previous
condition in the event of a substantial casualty loss with respect
to the property or the ability to refurbish, expand or renovate
such property to remain compliant, or increase the cost of
construction in order to comply with changes in building or zoning
codes and regulations. If we are unable to restore a property to
its prior use after a substantial casualty loss or are required to
comply with more stringent building or zoning codes and
regulations, we may be unable to re-lease the space at a comparable
effective rent or sell the property at an acceptable price, which
may materially and adversely affect us.
We may be subject to unanticipated liabilities as a result of our
real properties.
We may
be involved in disputes and other matters with property owners,
tenants, their respective employees and agents, and other unrelated
parties, such as tort claims related to hazardous conditions,
foreclosure actions and access disputes. We cannot assure you that
we will not become subject to material litigation or other
liabilities. If these liabilities are not adequately covered by
insurance, they could have a material adverse impact on our results
from operations.
We intend to enter into leases that will generally make our tenants
contractually responsible for payment of taxes, maintenance,
insurance and other similar expenditures associated with our
tenants' use of a property. If our tenants fail to pay these
expenses as required, or if we are otherwise required to pay such
expenses, it could result in a material adverse impact on our
results of operations.
Under
triple net lease arrangements, tenant lease agreements typically
make tenants contractually responsible for payment of taxes,
maintenance, insurance and other similar expenditures associated
with tenants' infrastructure assets. If our tenants fail to pay
these expenses as required, it could result in a diminution in the
value of the infrastructure asset associated with our real property
interest and have a material adverse impact on our results of
operations. Further, if a tenant fails to pay real property taxes,
any lien resulting from such unpaid taxes would be senior to our
real property interest in the applicable site. Failure to pay such
real property taxes could result in our real property interest
being impaired or extinguished, or we may be forced to incur costs
and pay the real property tax liability to avoid impairment of our
assets. We may enter into leases or acquire properties already
subject to lease that are not triple net lease arrangements,
including double net lease arrangements, in which case we may be
primarily responsible for certain expenses, such as insurance,
taxes, maintenance or other expenditures. Such obligations could
have a material adverse impact on our results from operations, as
could any material increase in such amounts over what we anticipate
paying.
We or our tenants may experience uninsured or underinsured losses,
which could result in a significant loss of the capital we have
invested in a property, decrease anticipated future revenues or
cause us to incur unanticipated expenses.
Leases
that we enter into are expected to require that the tenant maintain
comprehensive insurance and hazard insurance or self-insure its
insurance obligations. However, there are certain types of losses,
generally of a catastrophic nature, such as earthquakes, hurricanes
and floods, which may be uninsurable or not economically insurable.
Insurance coverage may not be sufficient to pay the full current
market value or current replacement cost of a loss. Inflation,
changes in building codes and ordinances, environmental
considerations, and other factors also might make it infeasible to
use insurance proceeds to replace the property after such property
has been damaged or destroyed. Under such circumstances, the
insurance proceeds received might not be adequate to restore the
economic position with respect to such property.
If any
of our existing properties or any other property we acquire
experiences a loss that is uninsured or that exceeds policy
coverage limits, we could lose the capital invested in the damaged
property as well as the anticipated future cash flows from the
property. In addition, even if damage to our properties is covered
by insurance, a disruption of business caused by a casualty event
may result in loss of revenue for our tenants or us. Any business
interruption insurance may not fully compensate them or us for such
loss of revenue. If one of our tenants experiences such a loss, it
may be unable to satisfy its payment obligations to us under its
lease with us.
Our ability to fully control the maintenance of our net-leased
properties may be limited.
The
tenants or managers of net-leased properties are generally
responsible for maintenance and other day-to-day management of the
properties. If a property is not adequately maintained in
accordance with the terms of the applicable lease, we may incur
expenses for deferred maintenance expenditures or other liabilities
once the property becomes free of the lease. While we expect our
leases will generally provide for recourse against the tenant in
these instances, a bankrupt or financially-troubled tenant may be
more likely to defer maintenance and it may be more difficult to
enforce remedies against such a tenant. In addition, to the extent
tenants are unable to conduct their operation of the property on a
financially-successful basis, their ability to pay rent may be
adversely affected. Although we endeavor to monitor, on an ongoing
basis, compliance by tenants with their lease obligations and other
factors that could affect the financial performance of our
properties, such monitoring may not in all circumstances ascertain
or forestall deterioration either in the condition of a property or
the financial circumstances of a tenant.
Real estate investments are relatively illiquid, and therefore we
may not be able to dispose of properties when appropriate or on
favorable terms.
Investments
in real properties are relatively illiquid. We may not be able to
quickly alter our portfolio or generate capital by selling
properties. The real estate market is affected by many factors,
such as general economic conditions, availability of financing,
interest rates and other factors, including supply and demand, that
are beyond our control. If we need or desire to sell a property or
properties, we cannot predict whether we will be able to do so at a
price or on the terms and conditions acceptable to us. We cannot
predict the length of time needed to find a willing purchaser and
to close the sale of a property. Further, we may be required to
invest monies to correct defects or to make improvements before a
property can be sold. We can make no assurance that we will have
funds available to correct these defects or to make these
improvements. Moreover, in acquiring a property, we may agree to
restrictions that prohibit the sale of that property for a period
of time or impose other restrictions, such as a limitation on the
amount of debt that can be placed or repaid on that property. These
provisions would restrict our ability to sell a
property.
Any material weaknesses in our internal controls over financial
reporting or failure to maintain proper and effective internal
controls could impair our ability to produce accurate and timely
financial statements and investors' views of us could be harmed.
The execution of our transformation plan may make it more
challenging for us to maintain effective controls.
Ensuring
that we have adequate internal financial and accounting controls
and procedures in place so that we can manage our business and
produce accurate financial statements on a timely basis is a costly
and time-consuming effort. Our internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America
(“U.S. GAAP”). We are required to comply with Section
404(a) of the Sarbanes-Oxley Act of 2002, which requires annual
management assessment of the effectiveness of our internal control
over financial reporting. Our compliance with Section 404 has
required and will continue to require that we incur additional
expense and expend management time on compliance-related issues. We
have significantly reduced staffing in connection with the
execution of our transformation plan. As a result, our maintenance
of sufficient controls will be dependent on a smaller group of
individuals than in the past. We currently only have two full-time
employees, which may adversely affect our ability to maintain
proper internal controls.
If we
fail to maintain proper controls, our business could be adversely
affected, our ability to predict our cash needs and the market's
confidence in our financial statements could decline, and the
market price of our common stock could be adversely
affected.
We may not be able to realize value from our NOLs.
As of
December 31, 2018
, we had
U.S. federal net operating loss carryforwards of approximately $496
million (net of $3 million of limitations) and state net operating
loss carryforwards of $0.1 million to $202 million, which begin to
expire at varying dates starting in 2019 for U.S. federal and state
income tax purposes. If we had an “ownership
change” as defined in section 382 of the Code, our NOLs
generated prior to the ownership change would be subject to annual
limitations, which could reduce, eliminate, or defer the
utilization of these losses. Generally, an ownership change occurs
if one or more stockholders, each of whom owns 5% or more in value
of a corporation’s stock, increase their aggregate percentage
ownership by 50 percentage points or more as compared to the lowest
percentage of stock owned by such stockholders at any time during
the preceding three-year period. Based upon a review of past
changes in our ownership, we do not believe that we have
experienced an ownership change (as defined under Section 382) that
would result in any limitation on our future ability to use these
NOLs. There can be no assurance however that the Internal Revenue
Service or some other taxing authority will not disagree with our
position and contend that we have already experienced such an
ownership change, which would severely limit our ability to use our
NOLs to offset future taxable income.
In
connection with our Reorganization shares of our common stock are
subject to transfer restrictions contained in our certificate of
incorporation. In general, the transfer restrictions prohibit
transfers having the effect of increasing without our consent the
ownership of our common stock by (i) any person from less than 5%
to 5% or more or (ii) any person owning or deemed to own 5% of more
of our common stock.
While
we expect that the transfer restrictions will help guard against an
ownership change occurring under Section 382 of the Code and the
related rules, because we may use our common stock as consideration
to make acquisitions and because we may sell additional shares of
our common stock in the future to raise capital for our business,
we cannot guarantee that an ownership change will not occur in the
future.
Further,
under the Tax Act, the amount of post 2017 NOLs that we are
permitted to deduct in any taxable year is limited to 80% of our
taxable income in such year, where taxable income is determined
without regard to the NOL deduction itself. In addition, the Tax
Act generally eliminates the ability to carry back any NOL to prior
taxable years, while allowing post 2017 unused NOLs to be carried
forward indefinitely. There is a risk that due to changes under the
Tax Act, regulatory changes, or other unforeseen reasons, our
existing NOLs could expire or otherwise be unavailable to offset
future income tax liabilities. For these reasons, we may not be
able to realize a tax benefit from the use of our NOLs, whether or
not we attain profitability.
We may not be able to make use of the existing tax benefits of the
NOLs because we may not generate taxable income.
The use
of the NOLs is subject to uncertainty because it is dependent upon
the amount of taxable income generated by us and our consolidated
subsidiaries. Through December 31, 2018 we have not generated
federal taxable income on an annual basis, and there can be no
assurance that we will have sufficient taxable income in future
years to use the NOLs before they begin expiring at varying dates
starting in 2019 for U.S. federal and state income tax
purposes.
Future legislation may impede our ability to realize the tax
benefits of the NOLs.
It is
possible that legislation or regulations will be adopted in the
future that would further limit our ability to realize the tax
benefits associated with the NOLs.
The IRS could challenge the amount of the NOLs or claim that we
experienced an ownership change, which could reduce the amount of
NOLs that we can use.
As of
the date of this Annual Report on Form 10-K, the amount of the NOLs
has not been audited or otherwise validated by the IRS. The IRS
could challenge the amount of the NOLs, which could result in an
increase in our future income tax liability. The Company's U.S.
federal tax return for the year ended December 31, 2013 was audited
by the Internal Revenue Service and such audit was completed in
2017. No adjustments were made as a result of the
audit.
In
addition, calculating whether an ownership change has occurred is
subject to uncertainty, both because of the complexity and
ambiguity of Section 382 and because of limitations on a
publicly traded company's knowledge as to the ownership of, and
transactions in, its securities. Therefore, we cannot assure you
that a governmental authority will not claim that we experienced an
ownership change and attempt to reduce or eliminate the benefit of
the NOLs even if we are successful in implementing the protective
measures subjecting our stock to transfer
restrictions.
Any lawsuits filed against us could divert management's attention
and adversely affect our business, results of operations and cash
flows.
In the
past, lawsuits have been filed against us and certain of our former
directors and officers. Although these cases have been dismissed,
there is always the possibility for more suits to be brought
against the Company. These types of litigation often are expensive
and divert management's attention and resources. As a result, any
of those claims, whether or not ultimately successful, could
adversely affect our business, results of operations and cash
flows.
As a result of the implementation of measures designed to protect
the use of our NOLs by restricting transfers of our common stock to
the extent such transfers would affect the percentage of stock that
is treated as owned by a five-percent stockholder, your ability to
transfer your shares of common stock and your opportunity to
receive a premium on our stock may be limited.
In
connection with our Reorganization, shares of our common stock are
subject to transfer restrictions contained in our certificate of
incorporation. In general, the transfer restrictions prohibit
transfers without our consent having the effect of increasing the
ownership of our common stock by (i) any person from less than 5%
to 5% or more or (ii) any person owning or deemed to own 5% of more
of our common stock. Consequently, your ability to transfer your
shares of common stock may be limited.
Even if
our Board consented to a significant stock acquisition, a potential
buyer might be deterred from acquiring our common stock while we
still have significant tax losses being carried forward, because
such an acquisition might trigger an ownership change and severely
impair our ability to use our NOLs against future income. Thus,
this potential tax situation could have the effect of delaying,
deferring or preventing a change in control and, therefore, could
affect adversely our shareholders' ability to realize a premium
over the then prevailing market price for our common stock in
connection with a change in control. The transfer restrictions that
apply to shares of our common stock, although designed as a
protective measure to avoid an ownership change, may have the
effect of impeding or discouraging a merger, tender offer or proxy
contest, even if such a transaction may be favorable to the
interests of some or all of our shareholders. This effect might
prevent our stockholders from realizing an opportunity to sell all
or a portion of their common stock at a premium to the prevailing
market price. In addition, the transfer restrictions may delay the
assumption of control by a holder of a large block of our common
stock and the removal of incumbent directors and management, even
if such removal may be beneficial to some or all of our
stockholders.
Our common stock is ranked junior to our Series J preferred stock
with respect to cash dividends and amounts payable in the event of
our dissolution, liquidation or winding up.
With
respect to the payment of cash dividends and amounts payable in the
event our liquidation, dissolution or winding up, our common stock
is ranked junior to our Series J preferred stock. This means that,
unless full cumulative dividends have been paid or set aside for
payment on all outstanding Series J preferred stock for all accrued
dividends, no cash dividends may be declared or paid on our common
stock. Likewise, in the event of our voluntary or involuntary
liquidation, dissolution or winding up, no distribution of our
assets may be made to holders of our common stock until we have
paid to our Series J preferred stockholders the liquidation
preference relating to such preferred stock, plus in each case any
accrued and unpaid dividends. In the event of our voluntary or
involuntary liquidation, dissolution or winding up, our asset value
would first inure to the benefit of holders of our Series J
preferred stock, up to the value of the Series J preferred stock
liquidation preference plus any accrued and unpaid dividends
thereon, before holders of our common stock would realize any
benefits from such increase.
We have not paid or declared common stock cash dividends in the
past, and do not plan to pay or declare common stock cash dividends
in the future, and, as a result, your only opportunity to achieve a
return on an investment in our common stock is if the price of our
common stock appreciates.
We have
never declared or paid any dividends on our common stock other than
the distribution of subscription rights in the rights offerings
that closed in October 2012 and March 2015. We do not expect to
declare or pay dividends on our common stock in the foreseeable
future. Instead, we anticipate that all of our earnings in the
foreseeable future will be used in the operation and growth of our
business and the payment of dividends on our Series J preferred
stock. Any determination to pay dividends on our common stock in
the future will be at the discretion of our board of directors. In
addition, our ability to pay dividends on our common stock is
currently limited by the terms of our Series J preferred stock and
may be further restricted by the terms of any future debt or
preferred securities. Accordingly, your only opportunity to achieve
a return on your investment in our common stock may be if the
market price of our common stock appreciates and you sell your
shares at a profit. The market price for our common stock may never
exceed, and may fall below, the price that you paid for such common
stock.
We currently have fewer than 300 stockholders of record and,
therefore, are eligible to terminate the registration of our common
stock under the Securities Exchange Act of 1934, as
amended.
As a
public company with fewer than 300 stockholders of record, we
currently register our shares of common stock under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”),
on a voluntary basis. Section 12(g)(4) of the Exchange Act allows
for the registration of any class of securities to be terminated 90
days after a company files a certification with the SEC that the
number of holders of record of such class of security is fewer than
300 persons. Accordingly, we are eligible to deregister our common
stock under the Exchange Act. Upon the effectiveness of the
termination of registration under Section 12, we would not be
required to comply with certain disclosure requirements under the
Exchange Act, including, but not limited to, proxy statement
filings and filings by insiders to disclose the acquisition and
disposition of our securities. Even if we were to deregister,
however, Section 15(d) of the Exchange Act would require us to
continue to file annual, quarterly and current reports until no
earlier than when we file our next annual report on Form 10-K. At
such time, you may not have access to current information about our
Company.
We are subject to cybersecurity risks and other cyber incidents
that may disrupt and harm our business.
Threats
to information technology systems associated with cybersecurity
risks and cyber incidents or attacks continue to grow. We depend on
information technology systems. In addition, we may collect,
process and retain sensitive and confidential information in the
normal course of business. Our facilities and systems, and those of
our third-party service providers, could be vulnerable to security
breaches, computer viruses, lost or misplaced data, programming
errors, human errors, acts of vandalism or other events. Any
disruption of our systems or security breach or event resulting in
the misappropriation, loss or other unauthorized disclosure of
confidential information, whether by us directly or our third-party
service providers, could damage our reputation, expose us to the
risks of litigation and liability, disrupt our business or
otherwise materially and adversely affect our results of
operations.
Terrorist attacks and other acts of violence or war may adversely
impact the real estate industry generally and our business,
financial condition and results of operations.
Terrorist
attacks may negatively affect our operations. Such attacks in the
past have caused uncertainty in the global financial markets and
economic instability in the U.S. and elsewhere. Future acts of
terrorism, violence, war, prolonged periods of civil unrest, the
anticipation of any such events, and the consequences of any
military or other responses could similarly affect global financial
markets and trade. We cannot predict the severity of the effect
that any such future events would have on the U.S. financial
markets, including the real estate capital markets, the economy, or
our business. In addition, terrorist attacks or other hostilities
may directly impact our real properties or our tenants, which could
adversely impact our operations. These uncertainties could also
adversely affect our ability to obtain additional financing on
terms acceptable to us, or at all.