Company Quick10K Filing
IMH Financial
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 16 $-0
10-Q 2019-11-14 Quarter: 2019-09-30
10-Q 2019-08-14 Quarter: 2019-06-30
10-Q 2019-05-15 Quarter: 2019-03-31
10-K 2019-04-12 Annual: 2018-12-31
10-Q 2018-11-14 Quarter: 2018-09-30
10-Q 2018-08-14 Quarter: 2018-06-30
10-Q 2018-05-15 Quarter: 2018-03-31
10-K 2018-03-29 Annual: 2017-12-31
10-Q 2017-11-20 Quarter: 2017-09-30
10-Q 2017-08-14 Quarter: 2017-06-30
10-Q 2017-05-12 Quarter: 2017-03-31
10-K 2017-04-14 Annual: 2016-12-31
10-Q 2016-11-10 Quarter: 2016-09-30
10-Q 2016-08-11 Quarter: 2016-06-30
10-Q 2016-05-12 Quarter: 2016-03-31
10-K 2016-03-31 Annual: 2015-12-31
10-Q 2015-11-12 Quarter: 2015-09-30
10-Q 2015-08-14 Quarter: 2015-06-30
10-Q 2015-05-13 Quarter: 2015-03-31
10-K 2015-03-31 Annual: 2014-12-31
10-Q 2014-11-14 Quarter: 2014-09-30
10-Q 2014-08-14 Quarter: 2014-06-30
10-Q 2014-05-15 Quarter: 2014-03-31
10-K 2014-03-28 Annual: 2013-12-31
10-Q 2013-11-13 Quarter: 2013-09-30
10-Q 2013-08-19 Quarter: 2013-06-30
10-Q 2013-05-20 Quarter: 2013-03-31
10-K 2013-03-29 Annual: 2012-12-31
10-Q 2012-08-14 Quarter: 2012-06-30
10-Q 2012-05-15 Quarter: 2012-03-31
10-K 2012-03-30 Annual: 2011-12-31
10-Q 2011-11-21 Quarter: 2011-09-30
10-Q 2011-08-15 Quarter: 2011-06-30
10-Q 2011-05-16 Quarter: 2011-03-31
10-K 2011-04-15 Annual: 2010-12-31
10-Q 2010-11-22 Quarter: 2010-09-30
10-Q 2010-08-23 Quarter: 2010-06-30
10-Q 2010-05-17 Quarter: 2010-03-31
10-K 2010-04-15 Annual: 2009-12-31
8-K 2019-12-03 Other Events
8-K 2019-11-19 Shareholder Vote
8-K 2019-11-01 Officers
8-K 2019-09-27 Enter Agreement, Sale of Shares, Control, Amend Bylaw, Exhibits
8-K 2019-09-06 Enter Agreement, Officers, Exhibits
8-K 2019-07-30 Enter Agreement, Officers
8-K 2019-07-23 Enter Agreement, Shareholder Rights, Exhibits
8-K 2019-05-29 M&A
8-K 2019-01-17 Other Events, Exhibits
8-K 2018-12-20 Other Events, Exhibits
8-K 2018-11-29 Other Events, Exhibits
8-K 2018-06-14 Shareholder Vote
8-K 2018-05-31 Enter Agreement, Sale of Shares, Amend Bylaw, Exhibits
8-K 2018-02-09 Enter Agreement, Sale of Shares, Control, Amend Bylaw, Exhibits
IFCN 2019-09-30
Part I
Item 1. Financial Statements
Note 1 - Business, Basis of Presentation and Liquidity
Note 2 - Significant Accounting Policies
Note 3 - Revenue
Note 4 - Mortgage Loans, Net
Note 5 - Operating Properties, Real Estate Held for Sale and Other Real Estate Owned
Note 6 - Variable Interest Entities and Investments in Unconsolidated Entities
Note 7 - Derivative Instruments and Hedging Activities
Note 8 - Fair Value
Note 9 - Notes Payable and Special Assessment Obligations
Note 10 - Segment Information
Note 11 - Stockholders' Equity and Earnings per Share
Note 12 - Intangible Assets and Goodwill
Note 13 - Commitments and Contingencies
Note 14 - Leases
Note 15 - Related Party Transactions and Commitments
Note 16 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II
Item 1. Legal Proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
EX-10.6 a10q-exx106ithconsultingag.htm
EX-31.1 a2019093010q-exx311.htm
EX-31.2 a2019093010q-exx312.htm
EX-32.2 a2019093010q-exx322.htm

IMH Financial Earnings 2019-09-30

IFCN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
CNHC 12,949 11,626 877 0 149 771 5,714 0% 7.4 1%
RMES 1 1 0 0 -0 -0 -0 0.5 -13%
TCT 210 12 13 0 11 11 -200 0% -18.3 5%
VDI 1,766 1,288 779 0 465 632 222 0% 0.4 26%
POYE 0 0 0 0 -0 -0 -0 0.0 -1,973%
SCTF 0 0 0 0 -0 -0 -0 3.0 -33%
SEK 302,033 283,794 0 0 0 0 -0 0%
DAVEY 570 398 1,095 98 32 97 161 9% 1.7 6%
SLDV 25 6 2 0 13 19 -1 0% -0.0 53%
MBCC 216 243 112 0 -7 10 215 0% 21.5 -3%

10-Q 1 ifcn-2019930xform10q.htm FORM 10-Q IMH Q3 2019 Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-Q
 
(Mark one)
 
x
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2019
OR
 
¨
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from: __________to __________

Commission File Number 000-52611

IMH FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
27-1537126
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
7001 N. Scottsdale Rd #2050
Scottsdale, Arizona 85253
(Address of principal executive offices and zip code)

(480) 840-8400
 (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨ No þ

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Class B-1 Common Stock
Class B-2 Common Stock
Class B-3 Common Stock
Class B-4 Common Stock
Class C Common Stock

As of November 14, 2019, the registrant had outstanding the following classes and series of stock: (i) 1,909,338 shares of Common Stock, (ii) 3,376,682 shares of Class B-1 Common Stock, (iii) 3,377,814 shares of Class B-2 Common Stock, (iv) 6,912,232 shares of Class B-3 Common Stock, (v) 313,790 shares of Class B-4 Common Stock, (vi) 668,903 shares of Class C Common Stock, (vii) 2,604,852 shares of Series B-1 Cumulative Convertible Preferred Stock, (viii) 5,595,148 shares Series B-2 Cumulative Convertible Preferred Stock, (ix) 2,352,941 shares of Series B-3 Cumulative Convertible Preferred Stock, (x) 1,875,000 shares of Series B-4 Cumulative Convertible Preferred Stock and (xi) 22,000 shares of Series A Preferred Stock. There is no established market for the registrant’s shares of common stock or preferred stock.



IMH Financial Corporation
September 30, 2019 Form 10-Q Quarterly Report
Index

Item 1.
Financial Statements
 
Unaudited Condensed Consolidated Balance Sheet as of September 30, 2019 and Consolidated Balance Sheet as of December 31, 2018
 
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018
 
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018
 
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
Item 1.
Legal Proceedings
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signatures
 


2



 
PART I

ITEM 1.     FINANCIAL STATEMENTS


F-1

IMH FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

 
 
September 30,
 
December 31,
 
 
2019
 
2018
Assets
 
(unaudited)
 
 
Cash and cash equivalents
 
$
7,447

 
$
25,452

Funds held by lender and restricted cash
 
3,729

 
198

Mortgage loans, net
 
11,714

 
23,234

Real estate held for sale
 
7,400

 
7,418

Operating properties, net
 
65,102

 
33,866

Other real estate owned
 
33,300

 
33,727

Goodwill
 
15,357

 
15,357

Other intangibles, net
 
431

 
641

Other receivables
 
1,253

 
1,320

Investment in unconsolidated entities
 
2,612

 

Other assets
 
3,882

 
2,033

Property and equipment, net
 
332

 
393

Total assets
 
$
152,559

 
$
143,639


 

 

Liabilities
 

 

Accounts payable and accrued expenses
 
$
9,530

 
$
8,385

Accrued property taxes
 
979

 
305

Dividends payable
 
1,517

 
857

Accrued interest
 
537

 
653

Customer deposits and funds held for others
 
1,936

 
552

Notes payable, net of deferred financing fees
 
52,164

 
36,314

Total liabilities
 
66,663

 
47,066


 

 

Series B Redeemable convertible preferred stock, $.01 par value; 100,000,000 total preferred shares authorized; 12,427,941 shares issued and outstanding as of September 30, 2019 and 10,552,941 as of December 31, 2018; liquidation preference of $59,870 as of September 30, 2019 and $51,170 as of December 31, 2018.
 
54,028

 
45,663

Series A redeemable preferred stock, 22,000 issued and outstanding; liquidation preference of $22,000 at September 30, 2019 and December 31, 2018
 
21,790

 
21,747

 
 
 
 
 
Commitments and contingencies (Note 13)
 

 

 
 
 
 
 
Stockholders' Equity
 
 
 

Common stock, $.01 par value; 200,000,000 shares authorized; 18,929,496 and 18,596,774 shares issued at September 30, 2019 and December 31, 2018, respectively; 16,559,315 and 16,726,610 shares outstanding at September 30, 2019 and December 31, 2018, respectively
 
189

 
186

Less: Treasury stock, at cost, 2,370,181 and 1,870,164 shares at September 30, 2019 and December 31, 2018, respectively
 
(7,286
)
 
(6,286
)
Paid-in capital
 
703,813

 
708,523

Accumulated deficit
 
(710,885
)
 
(692,876
)
Total IMH Financial Corporation stockholders' equity (deficit)
 
(14,169
)
 
9,547

Non-controlling interests
 
24,247

 
19,616

Total stockholders' equity
 
10,078

 
29,163

Total liabilities and stockholders’ equity
 
$
152,559

 
$
143,639



The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-2

IMH FINANCIAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019

2018
Revenues
 
 
 
 
 
 
 
 
Operating property revenue
 
$
4,082

 
$
2,085

 
$
6,195

 
$
5,753

Mortgage loan income, net
 
340

 
709

 
1,438

 
1,976

Management fees, investment and other income
 
129

 
32

 
486

 
323

Total revenue
 
4,551

 
2,826

 
8,119

 
8,052

Operating Expenses
 
 
 
 
 
 
 
 
Operating property direct expenses (exclusive of interest and depreciation)
 
4,703

 
2,364

 
10,710

 
6,699

Expenses for non-operating real estate owned
 
72

 
151

 
246

 
519

Professional fees
 
1,185

 
1,125

 
3,671

 
2,754

General and administrative expenses
 
2,463

 
1,788

 
5,928

 
5,376

Interest expense
 
427

 
775

 
1,218

 
2,300

Depreciation and amortization expense
 
879

 
281

 
1,470

 
925

Total operating expenses
 
9,729

 
6,484

 
23,243

 
18,573

Provision for Credit Losses, Impairment, Gain Disposal of Assets, and Other
 
 
 
 
 
 
 
 
Gain on disposal of assets
 
(223
)
 
(3,543
)
 
(244
)
 
(3,938
)
Provision for (recovery of) credit losses, net
 
2,598

 

 
1,463

 
(175
)
Unrealized loss on derivatives
 
39

 

 
330

 

Total Recovery, Impairment Charges, Gain on Disposal of Assets and Other
 
2,414

 
(3,543
)
 
1,549


(4,113
)
Total costs and expenses
 
12,143

 
2,941

 
24,792


14,460

Loss before provision for income tax
 
(7,592
)
 
(115
)
 
(16,673
)

(6,408
)
Income tax provision
 

 

 



Net Loss
 
(7,592
)
 
(115
)

(16,673
)

(6,408
)
Net (income) loss attributable to non-controlling interests
 
(893
)
 
(1,105
)
 
(1,334
)
 
(990
)
Cash dividends on Series B redeemable convertible preferred stock
 
(1,320
)
 
(655
)
 
(2,609
)
 
(1,894
)
Deemed dividend on Series B redeemable convertible preferred stock
 
(366
)
 
(920
)
 
(2,255
)
 
(2,651
)
Cash dividends on Series A redeemable preferred stock
 
(422
)
 
(422
)
 
(1,251
)

(569
)
Net Loss attributable to common shareholders
 
$
(10,593
)
 
$
(3,217
)
 
$
(24,122
)
 
$
(12,512
)
Net Loss per common share
 
 
 
 
 
 
 
 
Basic and Diluted
 
$
(0.64
)
 
$
(0.19
)
 
$
(1.47
)
 
$
(0.75
)
Weighted average common shares outstanding - basic and diluted
 
16,525,282
 
16,726,610
 
16,431,448
 
16,696,201


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-3

IMH FINANCIAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data) 


 
 
Three and Nine Months Ended September 30, 2019
 
 
Common Stock
 
Treasury Stock
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Paid-in Capital
 
Accumulated deficit
 
Total IMH Financial Corporation Stockholders' Equity (Deficit)
 
Non-controlling Interest
 
Total Stockholders' Equity
Balance at December 31, 2018
 
18,596,774

 
$
186

 
1,870,164

 
$
(6,286
)
 
$
708,523

 
$
(692,876
)
 
$
9,547

 
$
19,616

 
$
29,163

Net income (loss)
 

 

 

 

 

 
(5,136
)
 
(5,136
)
 
123

 
(5,013
)
Contributions from Hotel Fund investors
 

 

 

 

 

 

 

 
3,520

 
3,520

Distributions to Hotel Fund investors
 

 

 

 

 

 

 

 
(266
)
 
(266
)
Hotel Fund syndication costs
 

 

 

 

 
(12
)
 

 
(12
)
 

 
(12
)
Stock warrant and equity cost accretion
 

 

 

 

 
(70
)
 

 
(70
)
 

 
(70
)
Cash dividends on Series B redeemable convertible preferred stock
 

 

 

 

 
(641
)
 

 
(641
)
 

 
(641
)
Deemed dividend on Series B redeemable convertible preferred stock
 

 

 

 

 
(936
)
 

 
(936
)
 

 
(936
)
Cash dividends on Series A redeemable preferred stock
 

 

 

 

 
(412
)
 

 
(412
)
 

 
(412
)
Stock-based compensation
 
112,304

 
1

 

 

 
116

 

 
117

 

 
117

Treasury stock repurchase
 

 

 
500,000

 
(1,000
)
 

 

 
(1,000
)
 

 
(1,000
)
Balance at March 31, 2019
 
18,709,078

 
187

 
2,370,164

 
(7,286
)
 
706,568

 
(698,012
)
 
1,457

 
22,993

 
24,450

Net income (loss)
 

 

 

 

 

 
(4,388
)
 
(4,388
)
 
318

 
(4,070
)
Contributions from Hotel Fund investors
 

 

 

 

 

 

 

 
3,998

 
3,998

Distributions to Hotel Fund investors
 

 

 

 

 

 

 

 
(344
)
 
(344
)
Hotel Fund syndication costs
 

 

 

 

 
(36
)
 

 
(36
)
 

 
(36
)
Stock warrant and equity cost accretion
 

 

 

 

 
(31
)
 

 
(31
)
 

 
(31
)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-4

IMH FINANCIAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data) 


 
 
Three and Nine Months Ended September 30, 2019
 
 
Common Stock
 
Treasury Stock
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Paid-in Capital
 
Accumulated deficit
 
Total IMH Financial Corporation Stockholders' Equity (Deficit)
 
Non-controlling Interest
 
Total Stockholders' Equity
Cash dividends on Series B redeemable convertible preferred stock
 

 

 

 

 
(648
)
 

 
(648
)
 

 
(648
)
Deemed dividend on Series B redeemable convertible preferred stock
 

 

 

 

 
(954
)
 

 
(954
)
 

 
(954
)
Cash dividends on Series A redeemable preferred stock
 

 

 

 

 
(417
)
 

 
(417
)
 

 
(417
)
Stock-based compensation
 
83,734

 
1

 

 

 
75

 

 
76

 

 
76

Balance at June 30, 2019
 
18,792,812

 
$
188

 
2,370,164

 
$
(7,286
)
 
$
704,557

 
$
(702,400
)
 
$
(4,941
)
 
$
26,965

 
$
22,024

Net income (loss)
 

 

 

 

 

 
(8,485
)
 
(8,485
)
 
893

 
(7,592
)
Reclassification of profit participation to liability
 

 

 

 

 

 

 

 
(463
)
 
(463
)
Acquisition of non-controlling interests
 

 

 

 

 
1,146

 

 
1,146

 
(2,753
)
 
(1,607
)
Distributions to Hotel Fund investors
 

 

 

 

 

 

 

 
(395
)
 
(395
)
Stock warrant and equity cost accretion
 

 

 

 

 
(52
)
 

 
(52
)
 

 
(52
)
Cash dividends on Series B redeemable convertible preferred stock
 

 

 

 

 
(1,320
)
 

 
(1,320
)
 

 
(1,320
)
Deemed dividend on Series B redeemable convertible preferred stock
 

 

 

 

 
(366
)
 

 
(366
)
 

 
(366
)
Cash dividends on Series A redeemable preferred stock
 

 

 

 

 
(422
)
 

 
(422
)
 

 
(422
)
Stock-based compensation
 
136,684

 
1

 

 

 
270

 

 
271

 

 
271

Relinquishment of treasury stock
 

 

 
17

 

 

 

 

 

 

Balance at September 30, 2019
 
18,929,496

 
$
189

 
2,370,181

 
$
(7,286
)
 
$
703,813

 
$
(710,885
)
 
$
(14,169
)
 
$
24,247

 
$
10,078


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-5

IMH FINANCIAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data) 




 
 
Three and Nine Months Ended September 30, 2018
 
 
Common Stock
 
Treasury Stock
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Paid-in Capital
 
Accumulated deficit
 
Total IMH Financial Corporation Stockholders' Equity
 
Non-controlling Interest
 
Total Stockholders' Equity
Balance at December 31, 2017
 
18,079,522

 
$
181

 
1,826,096

 
$
(6,286
)
 
$
714,889

 
$
(679,535
)
 
$
29,249

 
$
6,562

 
$
35,811

Net loss
 

 

 

 

 

 
(3,704
)
 
(3,704
)
 
(90
)
 
(3,794
)
Contributions from Hotel Fund investors
 

 

 

 

 

 

 

 
3,485

 
3,485

Distributions to Hotel Fund investors
 

 

 

 

 

 

 

 
(20
)
 
(20
)
Hotel Fund syndication costs
 

 

 

 

 
(51
)
 

 
(51
)
 

 
(51
)
Issuance of common stock warrants
 

 

 

 

 
688

 

 
688

 

 
688

Cash dividends on Series B redeemable convertible preferred stock
 

 

 

 

 
(592
)
 

 
(592
)
 

 
(592
)
Deemed dividend on Series B redeemable convertible preferred stock
 

 

 

 

 
(817
)
 

 
(817
)
 

 
(817
)
Stock-based compensation
 
438,161

 
4

 

 

 
96

 

 
100

 

 
100

Balance at March 31, 2018
 
18,517,683

 
185

 
1,826,096

 
(6,286
)
 
714,213

 
(683,239
)
 
24,873

 
9,937

 
34,810

Net loss
 

 

 

 

 

 
(2,474
)
 
(2,474
)
 
(25
)
 
(2,499
)
Contributions from Hotel Fund investors
 

 

 

 

 

 

 

 
1,335

 
1,335

Distributions to Hotel Fund investors
 

 

 

 

 

 

 

 
(80
)
 
(80
)
Hotel Fund syndication costs
 

 

 

 

 
(35
)
 

 
(35
)
 

 
(35
)
Cash dividends on Series B redeemable convertible preferred stock
 

 

 

 

 
(647
)
 

 
(647
)
 

 
(647
)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-6

IMH FINANCIAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data) 


 
 
Three and Nine Months Ended September 30, 2018
 
 
Common Stock
 
Treasury Stock
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Paid-in Capital
 
Accumulated deficit
 
Total IMH Financial Corporation Stockholders' Equity
 
Non-controlling Interest
 
Total Stockholders' Equity
Deemed dividend on Series B redeemable convertible preferred stock
 

 

 

 

 
(914
)
 

 
(914
)
 

 
(914
)
Cash dividends on Series A redeemable preferred stock
 

 

 

 

 
(142
)
 

 
(142
)
 

 
(142
)
Stock-based compensation
 
79,091

 

 

 

 
77

 

 
77

 

 
77

Relinquishment of Class C common stock to treasury
 

 

 
44,068

 

 

 

 

 

 

Balance at June 30, 2018
 
18,596,774

 
$
185

 
1,870,164

 
$
(6,286
)
 
$
712,552

 
$
(685,713
)
 
$
20,738

 
$
11,167

 
$
31,905

Net loss
 

 

 

 

 

 
(1,220
)
 
(1,220
)
 
1,105

 
(115
)
Contributions from Hotel Fund investors
 

 

 

 

 

 

 

 
4,995

 
4,995

Distributions to Hotel Fund investors
 

 

 

 

 

 

 

 
(105
)
 
(105
)
Hotel Fund syndication costs
 

 

 

 

 
(1
)
 

 
(1
)
 

 
(1
)
Cash dividends on Series B redeemable convertible preferred stock
 

 

 

 

 
(655
)
 

 
(655
)
 

 
(655
)
Profit participation distribution to non-controlling interests
 

 

 

 

 

 

 

 
(1,939
)
 
(1,939
)
Issuance of common stock warrants, net of cost accretion
 

 

 

 

 
(107
)
 

 
(107
)
 

 
(107
)
Deemed dividend on Series B redeemable convertible preferred stock
 

 

 

 

 
(920
)
 

 
(920
)
 

 
(920
)
Cash dividends on Series A redeemable preferred stock
 

 

 

 

 
(427
)
 

 
(427
)
 

 
(427
)
Stock-based compensation
 

 
1

 

 

 
130

 

 
131

 

 
131

Balance at September 30, 2018
 
18,596,774

 
$
186

 
1,870,164

 
$
(6,286
)
 
$
710,572

 
$
(686,933
)
 
$
17,539

 
$
15,223

 
$
32,762


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-7

IMH FINANCIAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

 
 
Nine Months Ended September 30,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(16,673
)
 
$
(6,408
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 

Stock-based compensation and option amortization
 
464

 
308

Gain on disposal of assets
 
(244
)
 
(3,938
)
Amortization of deferred financing costs
 
123

 
87

Depreciation and amortization expense
 
1,470

 
925

Accretion of mortgage income
 
(55
)
 
(323
)
Accretion of discount on note payable
 
263

 
705

Non-cash interest expense funded by loan draw
 
1,122

 
811

Non-cash provision for (recovery of) credit losses
 
2,598

 

Unrealized loss on derivatives
 
330

 

Changes in operating assets and liabilities, net of business combination:
 

 

Accrued interest receivable
 
318

 
12

Other receivables
 
(179
)
 
(360
)
Other assets
 
(2,179
)
 
78

Accrued property taxes
 
674

 
111

Accounts payable and accrued expenses
 
(1,454
)
 
(2,901
)
Customer deposits and funds held for others
 
1,384

 
137

Accrued interest
 
(626
)
 
344

Total adjustments, net
 
4,009

 
(4,004
)
Net cash used in operating activities
 
(12,664
)
 
(10,412
)
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Proceeds from sale of real estate owned and operating properties and other assets
 
895

 
8,709

Purchases of property and equipment
 
(23
)
 
(23
)
Mortgage loan payoff
 
3,000

 

Mortgage loan investment and fundings
 
(1,966
)
 
(3,000
)
Investment in unconsolidated entities
 
(2,612
)
 

Acquisition of cash and restricted cash through foreclosure
 
2,900

 

Investment in real estate owned and other operating properties
 
(13,359
)
 
(7,208
)
Acquisition of non-controlling interests
 
(2,250
)
 

Net cash used in investing activities
 
(13,415
)
 
(1,522
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Proceeds from notes payable
 
13,662

 

Debt issuance costs paid
 
(144
)
 
(405
)
Repayments of notes payable
 
(10,176
)
 
(14
)
Dividends paid
 
(3,202
)
 
(1,926
)
Purchase of treasury stock
 
(1,000
)
 

Proceeds from Issuance of Preferred Equity
 
6,000

 
30,000

Purchase of Interest rate cap
 

 
(548
)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-8

IMH FINANCIAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

 
 
Nine Months Ended September 30,
 
 
2019
 
2018
Contribution of Hotel Fund capital costs
 
(48
)
 
(87
)
Contributions from Hotel Fund investors
 
7,518

 
9,815

Distributions to Hotel Fund investors
 
(1,005
)
 
(205
)
Net cash provided by financing activities
 
11,605

 
36,630

 
 
 
 
 
Net increase (decrease) in cash, cash equivalents, and restricted cash
 
(14,474
)
 
24,696

Cash, cash equivalents, and restricted cash, beginning of period
 
25,650

 
11,932

Cash, cash equivalents, and restricted cash, end of period
 
$
11,176

 
$
36,628

 
 
 
 
 
Supplemental cash flow information:
 

 
 
Cash paid for interest
 
$
1,212

 
$
308

Cash paid for taxes
 
$
90

 
$

Non-cash investing and financing transactions:
 

 

Foreclosure on investment in mortgage loan
 
$
7,625

 
$

Acquisition of operating property building and operations through foreclosure
 
$
7,379

 
$

Assumption of first mortgage, accrued interest and operating liabilities through foreclosure
 
$
13,303

 
$

Loan from JPM Chase Funding, Inc., (a related party) for purchase first mortgage on operating property
 
$
11,000

 

Lease liability arising from the recognition of right-of-use asset
 
$
1,431

 
$

Non-cash interest costs capitalized to operating property
 
$
1,000

 
$

Capital expenditures in accounts payable and accrued expenses
 
$
1,790

 
$
929

Decrease in non-controlling interest through profit participation
 
$

 
$
(1,939
)


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-9

IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 — BUSINESS, BASIS OF PRESENTATION AND LIQUIDITY

Our Company

IMH Financial Corporation (together with its subsidiaries, the “Company”) is a real estate investment and finance company based in the southwestern United States engaged in various and diverse facets of the real estate lending and investment process, including origination, acquisition, underwriting, servicing, enforcement, development, marketing, and disposition. The Company’s focus is to invest in, manage and dispose of commercial real estate mortgage investments, hospitality assets, and other real estate assets, and to perform all functions reasonably related thereto, including developing, managing and either holding for investment or disposing of real property acquired through acquisition, foreclosure or other means.

Our History and Structure

We were formed from the conversion of our predecessor entity, IMH Secured Loan Fund, LLC (the “Fund”), into a Delaware corporation. The Fund, which was organized in May 2003, commenced operations in August 2003, focusing on investments in senior short-term whole commercial real estate mortgage loans collateralized by first mortgages on real property. The Fund was externally managed by Investors Mortgage Holdings, Inc. (the “Manager”), which was incorporated in Arizona in June 1997 and is licensed as a mortgage banker by the State of Arizona. Through a series of private placements to accredited investors, the Fund raised $875 million of equity capital from May 2003 through December 2008. Due to the cumulative number of investors in the Fund, the Fund registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on April 30, 2007 and began filing periodic reports with the Securities and Exchange Commission (“SEC”). On June 18, 2010, the Fund became internally-managed through the acquisition of the Manager, and converted into a Delaware corporation in a series of transactions that we refer to as the “Conversion Transactions”. Effective August 1, 2019, the Company entered into a Non-Discretionary Investment Advisory Agreement (“Advisory Agreement”) with Juniper Investment Advisors, LLC (“Juniper Advisors”) pursuant to which Juniper Advisors will manage certain assets of the Company, including the Company’s loan portfolio and certain of its legacy real estate owned properties.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying condensed consolidated financial statements include the accounts of IMH Financial Corporation and the following wholly-owned operating subsidiaries: 11333, Inc. (formerly known as Investors Mortgage Holdings, Inc.), an Arizona corporation; Investors Mortgage Holdings California, Inc., a California corporation; IMH Holdings, LLC, a Delaware limited liability company (“Holdings”); and various other wholly owned subsidiaries established in connection with the acquisition of real estate either through foreclosure or purchase and/or for borrowing purposes and majority owned or controlled real estate entities and interests in variable interest entities (“VIEs”) in which the Company is considered the primary beneficiary. IMH Management Services, LLC, an Arizona limited liability company, provides us and our affiliates with human resources and administrative services, including the supply of employees. Other entities in which we have invested and have the ability to exercise significant influence over operating and financial policies of the investee, but upon over which we do not possess control, are accounted for by the equity method of accounting within the financial statements and they are therefore not consolidated.

All significant intercompany accounts and transactions have been eliminated in consolidation.

Liquidity

We require liquidity and capital resources for our general working capital needs, including maintenance, development costs and capital expenditures for our operating properties and non-operating REO assets, professional fees, general and administrative operating costs, loan enforcement costs, financing costs, debt service payments, and dividends to our preferred shareholders, as well as to acquire our target assets.

As of September 30, 2019, our accumulated deficit aggregated $710.9 million primarily as a result of previous provisions for credit losses recorded relating to the decrease in the fair value of the collateral securing our legacy loan portfolio, impairment charges


IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 – BUSINESS, BASIS OF PRESENTATION AND LIQUIDITY - continued

relating to the value of real estate owned (“REO”) assets acquired primarily through foreclosure, as well as on-going net operating losses resulting primarily from the lack of income-producing assets.

The Company has taken a number of steps to maintain an adequate level of on-going liquidity over the years. Our liquidity plan has included obtaining outside financing, selling mortgage loans, and selling the majority of our legacy real estate assets.

As further described in Note 11, during the three months ended September 30, 2019, JPMorgan Chase Funding Inc. (“Chase Funding”) purchased 1,875,000 shares of our Series B-4 Cumulative Convertible Preferred Stock (the “Series B-4 Preferred Stock”), at a price of $3.20 per share, for a total purchase price of $6.0 million. Dividends on the Series B-4 Preferred Stock are cumulative and accrue from the issue date, compounding quarterly at the rate of 5.65% of the issue price per year, and are payable quarterly in arrears. Holders of the Series B-4 Preferred Stock are entitled to receive a liquidation preference of 145% of the sum of the original price per share of the Series B-4 Preferred Stock plus all accrued and unpaid dividends. The Series B-4 Preferred Stock contains redemption features similar in all material respects to the Company’s other outstanding shares of Series B Preferred Stock.

In the second quarter of 2019, we conducted a UCC foreclosure on the collateral securing a $7.6 million mezzanine note receivable that was in default. That collateral was 100% of the membership interests in an LLC that owns a commercial real estate building and operations in St. Louis, Missouri. In connection with this foreclosure, a subsidiary of the Company purchased the $13.2 million first mortgage note secured by this property. The purchase of the first mortgage note was funded partially with an $11.0 million loan (under a master repurchase agreement) from Chase Funding and the balance using Company funds. The master repurchase agreement has an initial maturity date of May 22, 2020. The Company has the option to extend the maturity date for one year if, among other conditions, certain debt yield and Broadway Tower occupancy rates are achieved.

In addition, in connection with the Company’s acquisition and renovation of the MacArthur Place Hotel in Sonoma, California (“MacArthur Place”), the Company entered into a building loan agreement and related agreements in October 2017 with MidFirst Bank in the amount of $32.3 million (the “MacArthur Loan”). As described in Note 9, the MacArthur Loan was modified during the first quarter of 2019 to increase the loan facility to $37.0 million and to establish certain additional reserve accounts in the amount of $2.0 million. The MacArthur Loan has an initial maturity of October 1, 2020 with two one-year extension options available if certain criteria is met.

The modified MacArthur Loan required the Company to fund minimum equity of $27.7 million, all of which has been funded as of September 30, 2019. The Company has provided a loan repayment guaranty equal to 50% of the original principal amount of the MacArthur Loan along with a guaranty of interest and operating deficits, as well as other customary non-recourse carve-out matters such as bankruptcy and environmental matters. Under the guarantees, the Company is required to maintain a minimum Tangible Net Worth, as defined, of $50.0 million and minimum liquidity of $5.0 million throughout the term of the MacArthur Loan. The Company was in compliance with such financial covenants as of September 30, 2019. In addition, the MacArthur Loan requires MacArthur Place to establish various operating and reserve accounts at MidFirst Bank which are subject to a cash management agreement. In the event of default, MidFirst Bank has the ability to take control of such accounts for the allocation and distribution of proceeds in accordance with the cash management agreement.

Commencing in November 2017 the Company sponsored an offering under SEC Regulation D of up to $25.0 million of preferred limited liability company interests (the “Preferred Interests”) of the L’Auberge de Sonoma Resort Fund, LLC (the “Hotel Fund”). The net proceeds of this offering were used primarily to (i) reimburse the Company’s for its initial $17.8 million common investment in the Hotel Fund and (ii) fund certain renovations and operating losses at MacArthur Place. As of September 30, 2019, the Hotel Fund had sold all of the Preferred Interests in the aggregate amount of $22.5 million. The Company has guaranteed and funded the payment of monthly 7% distributions to Preferred Interests since the commencement of the Hotel Fund which has totaled $1.6 million through September 30, 2019.

As of September 30, 2019, we had cash and cash equivalents of $7.4 million, REO assets held for sale with a carrying value of $7.4 million and other REO assets with a carrying value of $33.3 million that we seek to dispose of within the next 12 months. We continue to evaluate potential disposition strategies for our remaining REO assets and to seek additional sources of debt and equity for investment and working capital purposes. During the third quarter of 2019, a court-ordered stay that was previously issued, and which prevented the sale of certain assets, was lifted, thereby allowing us to market such assets for sale.

At any time after July 24, 2020, each holder of our Series B-1 and B-2 Preferred Stock may require the Company to redeem, out of legally available funds, the shares held by such holder at a price (the “Redemption Price”) equal to the greater of (i) 150% of the sum of the original price per share plus all accrued and unpaid dividends or (ii) the sum of the tangible book value of the

F-11

IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 – BUSINESS, BASIS OF PRESENTATION AND LIQUIDITY - continued

Company per share of voting Common Stock and all accrued and unpaid dividends as of the date of redemption. A cash payment in the aggregate amount of $2.6 million is due and payable to the holders of the Series B-1 and B-2 Preferred Stock on July 24, 2020 whether or not a redemption is requested. The current holders of our Series B Preferred Stock are collectively referred to herein as the “Series B Investors”.

We expect our primary sources of liquidity over the next twelve months to consist of proceeds from the disposition of our existing REO assets held for sale and loan assets, proceeds from borrowings and equity issuances, current cash, mezzanine and mortgage loan interest income, and revenues from ownership or management of MacArthur Place and Broadway Tower. If we are able to resolve these matters favorably, we believe that our cash and cash equivalents coupled with our operating and investing revenues, as well as proceeds that we anticipate receiving from the disposition of our real estate assets and debt and equity financing efforts will be sufficient to allow us to fund our operations for a period of one year from the date these condensed consolidated financial statements are issued.

We have used third-party financing, proceeds from the sale of certain REO assets, and the payment of principal and interest on mortgage and related investments to satisfy for working capital purposes requirements through September 30, 2019. Subsequent to September 30, 2019, in order to meet impending liquidity requirements, we sold one of our mezzanine loan investments with a principal balance of $12.3 million at a discount incurring a loss of $2.6 million. We are also continuing to discuss the potential extension or restructuring of our Series B Preferred Stock with the holders of those shares and our outstanding debt obligations. There can be no assurance that these efforts will be successful or that we will sell our remaining REO assets in a timely manner or in obtaining additional or replacement financing, if needed, to sufficiently fund our future operations, repay existing debt, or to implement our investment strategy. Our failure to generate sustainable earning assets and to successfully liquidate a sufficient number of our REO assets may have a material adverse effect on our business, results of operations and financial position. In the absence of favorably resolving the matters described above, the collective nature of these uncertainties create substantial doubt about our ability to continue as a going concern for a period beyond one year from the date of issuance of these condensed consolidated financial statements.


NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies are detailed in “Note 2 - Summary of Significant Accounting Policies" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Investment in Unconsolidated Entities

The Company holds ownership interests in an entity that does not meet the criteria under GAAP for consolidation. For this entity, the Company utilizes the equity method of accounting and records the net income and losses from the unconsolidated entity, as applicable, in net income attributable to non-controlling interests in the accompanying consolidated statements of operations.

Redeemable Convertible Preferred Stock

During the nine months ended September 30, 2019, the Company issued an additional 1,875,000 shares of Series B-4 Preferred Stock. The Series B-4 Preferred Stock is convertible into common stock on a one-to-one basis, and is redeemable five years from the issuance date at the option of the holder for a redemption price equal to the greater of 145% of the original purchase price of the preferred stock or tangible net book value per share at redemption. The Series B-4 Preferred Stock is reported in the mezzanine equity section of the accompanying condensed consolidated balance sheet. Since the Series B-4 Preferred Stock does not have a mandatory redemption date (it is at the option of the holder), under applicable accounting guidance, the Company elected to amortize the redemption premium over the five year redemption period using the effective interest method and recording this as a deemed dividend, rather than recording the entire accretion of the redemption premium as a deemed dividend upon issuance of the preferred stock. The Company is required to assess whether the preferred stock is redeemable at each reporting period.

Operating Properties Acquired Through Foreclosure

Operating properties acquired through foreclosure consist of certain operating assets that the Company has elected to hold for on-going operations and are recorded at fair value at the time of foreclosure.


F-12

IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued

Leases

Lessee Accounting

As further discussed below, the Company adopted the provisions of Accounting Standards Update 2016-02, Leases, effective January 1, 2019. We determine if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets are recorded in other assets and operating lease liabilities are recorded in accounts payable and other accrued expenses in the accompanying condensed consolidated balance sheet. Finance leases, none of which existed as of the adoption of Accounting Standards Codification (“ASC”) 842 or as of September 30, 2019, would be reflected in property and equipment and other liabilities in our condensed consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Under the available practical expedient, we account for the lease and non-lease components as a single lease component for all classes of underlying assets. Further, we elected a short-term lease exception policy on all classes of underlying assets, permitting us to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less).

Lessor Accounting

On May 29, 2019, the Company acquired a commercial real estate building through a foreclosure action known as Broadway Tower located in St. Louis, Missouri which leases office space to various tenants. The assumed leases were previously accounted for according to ASC 840 and were classified as operating leases.  Upon transitioning these leases from being accounted for according to ASC 840 to being accounted for under ASC 842, the Company did not reassess the lease classification as allowed under the practical expedient package elected by the Company.

Pursuant to ASC 842 – 30, the Company will classify a lease as a sales – type lease if: (i) the lease transfers ownership of the underlying asset to the lessee by the end of the lease term, (ii) the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise, (iii) the lease term is for the major part of the remaining economic life of the underlying asset, (iv) the present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds substantially all (90% or more) of the fair value of the underlying asset, or (v) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. As of September 30, 2019, none of our leases, as a lessor, met the above criteria to be classified as a sale – type lease.

Pursuant to ASC 842 – 30, when none of the sales-type lease classification criteria are met, a lessor would classify the lease as a direct financing lease when both of the following criteria are met: (i) the present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments and/or any other third party unrelated to the lessor equals or exceeds substantially all (90% or more) of the fair value of the underlying asset and (ii) it is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value guarantee. As of September 30, 2019, none of our leases, as a lessor, met the above criteria to be classified as a financing lease.

Pursuant to ASC 842 – 30, a lessor would classify a lease as an operating lease when none of the sales-type or direct financing lease classification criteria are met. As of September 30, 2019, all leases of the Company’s rental properties were classified as operating leases.

The Company has lease agreements with lease and non-lease components. The Company has elected to not separate non-lease components from lease components for all classes of underlying assets (primarily real estate assets) and will account for the combined components as commercial real estate rental revenue. Non-lease components included in commercial real estate rental revenue include certain tenant reimbursements for maintenance services, (including common-area maintenance services or “CAM”). Variable consideration for costs that are not contract components (e.g., real estate taxes, utilities) are excluded from

F-13

IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued

total consideration and would be recorded as incurred by the lessee and earned by the lessor. As a lessor, the Company has further determined that this policy will be effective only on a lease that has been classified as an operating lease and the revenue recognition pattern and timing is the same for both types of components. Therefore, Accounting Standards Codification Topic 842, Leases (“ASC 842”), has been applied to these lease contracts for both types of components.

The Company has elected to present sales tax and other tax collections in the condensed consolidated statements of operations on a net basis and, accordingly, such taxes are excluded from reported revenues.

Commercial Real Estate Rental Revenue

The Company derives revenues from our commercial real estate building in St. Louis, Missouri, known as Broadway Tower, which, as more fully described in Notes 4 and 5, was acquired in a foreclosure action by the Company in May 2019. Rental revenue, which is reflected as operating property revenue in the consolidated statements of operations and is presented in Mortgage and REO Legacy portfolio and other operations segment, represents revenue from the leasing of commercial office space to tenants, common area maintenance charges and parking space rental. Leases with tenants are classified as operating leases and revenue is recognized on a straight line basis over the term of the respective leases. The cumulative differences between rental income recognized in the Company’s condensed unaudited consolidated statements of operations and contractual payment terms have been recorded as deferred rental income and presented on the accompanying condensed consolidated balance sheets.

The Company regularly reviews receivables related to rent and unbilled rent receivables and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. Upon adoption of ASU 2016-02, effective January 1, 2019, the Company recognizes all changes in the collectability assessment for an operating lease as an adjustment to rental income and does not record an allowance for uncollectible accounts.

Funds Held by Lender and Restricted Cash

The balance sheet item, “Funds held by lender and restricted cash”, includes amounts maintained in escrow or other restricted accounts deposited into reserve accounts held by lenders for contractually specified purposes, which includes property taxes and insurance. The following table provides a reconciliation of cash, cash equivalents, and funds held by lender and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the amounts shown in the consolidated statement of cash flows as of September 30, 2019 and December 31, 2018 (in thousands):


September 30,
 
December 31,


2019

2018
Cash and cash equivalents

$
7,447


$
25,452

Funds held by lender and restricted cash

3,729


198

Total cash, cash equivalents, and restricted cash

$
11,176


$
25,650


The balance of funds held by lender and restricted cash includes property tax, insurance and construction related reserves for the MacArthur Loan totaling $2.5 million and $0.2 million at September 30, 2019 and December 31, 2018, respectively. The September 30, 2019 balance also includes $1.2 million in an account maintained by the loan servicer on the Broadway Tower mortgage loan and is set aside for capital projects and tenant improvements. This account was acquired in connection with our foreclosure and acquisition of the Broadway Tower commercial office building in St. Louis, Missouri in the second quarter of 2019.

Mortgage Investment Revenue Recognition

See Note 3 for the Company’s accounting policy for Mortgage Investment Revenue Recognition.

Recent Accounting Pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s ASC. The Company considers the applicability and impact of all ASUs.


F-14

IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued

Adopted Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). This new standard establishes a ROU model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. In July 2018, the FASB issued ASU No. 2018-11 which provides an alternative transition method that allows entities to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has adopted the requirements of ASU 2016-02 on January 1, 2019, the first day of fiscal year 2019, and using the optional transition method. The Company elected the practical expedient package outlined in ASU No. 2016-02 under which we did not have to reassess whether an arrangement contains a lease, we carried forward our previous classification of leases as operating, and we did not have to reassess previously recorded initial direct costs. There was an increase in assets of $1.6 million and liabilities of $1.7 million due to the recognition of the required ROU asset and corresponding liability for all lease obligations that are currently classified as operating leases with the difference of $0.1 million related to existing deferred rent that reduced the ROU asset recorded. The adoption of this standard did not have an impact in our condensed consolidated statements of operations.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The Company has adopted the requirements of this accounting pronouncement in fiscal 2019.

Accounting Standards Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (“ASU 2016-13”). The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. Recently, the FASB voted to delay the effective date of ASU 2016-13 to January 1, 2023 for smaller reporting companies with a revised ASU expected in the fourth quarter of 2019. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies the current two-step goodwill impairment test by eliminating Step 2 of the test. The guidance requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, and should be applied on a prospective basis. Early adoption is permitted for the interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.


F-15

IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3 — REVENUE

The following is a breakdown of revenue by source for the three and nine months ended September 30, 2019 and 2018 (in thousands):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,

 
2019
 
2018
 
2019
 
2018
Operating property revenue
 
 
 
 
 

 

Commercial real estate rental revenue
 
$
1,157

 
$

 
$
1,474

 
$

Hotel revenues
 
 
 
 
 
 
 
 
Rooms
 
1,498

 
1,311

 
2,456

 
3,207

Food and beverage
 
800

 
314

 
1,339

 
1,440

Banquet
 
343

 
175

 
373

 
333

Spa and fitness center
 
166

 
194

 
378

 
522

Other
 
118

 
91

 
175

 
251

Total operating property revenue
 
4,082

 
2,085

 
6,195

 
5,753

Mortgage loan income, net
 
340

 
709

 
1,438

 
1,976

Management fees, investment and other income
 
129

 
32

 
486

 
323

Total revenue
 
$
4,551

 
$
2,826

 
$
8,119

 
$
8,052


Operating Property Revenue

Commercial Real Estate Rental Revenue

The Company derives revenues from our commercial real estate building in St. Louis, Missouri, known as Broadway Tower, which, as more fully described in Notes 4 and 5, was acquired in a foreclosure action by the Company in May 2019. Rental revenue, which is reflected as operating property revenue in the consolidated statements of operations and is presented in Mortgage and REO Legacy portfolio and other operations segment, represents revenue from the leasing of commercial office space to tenants, common area maintenance charges and parking space rental. Leases with tenants are classified as operating leases and revenue is recognized on a straight line basis over the term of the respective leases.

Hotel Revenues

The Company derives hotel revenues from our hotel in Sonoma, California, which is reflected as operating property revenue in the consolidated statements of operations. Rooms revenue represents revenue from the occupancy of our hotel rooms and is driven by the occupancy and daily rate charged. Rooms revenue also includes revenue for guest no-shows, day use, and early/late departure fees. The contracts for room stays with customers are generally short in duration and revenues are recognized as services are provided over the course of the hotel stay.

Food & Beverage (“F&B”) revenue consists of revenue from the restaurants and lounges at our hotel, in-room dining and mini-bar revenue, and banquet/catering revenue from group and social functions. Other F&B revenue may include revenue from audio-visual equipment/services, rental of function rooms, and other F&B related revenue. Revenue is recognized as the services or products are provided. Our hotel property may employ third parties to provide certain services at the property, for example, audio visual services. We evaluate each of these contracts to determine if the hotel is the principal or the agent in the transaction, and record the revenue as appropriate (i.e., gross vs. net).

Other revenue consists of ancillary revenue at the property, including attrition and cancellation fees, resort fees, spa and other guest services. Attrition and cancellation fees are recognized for non-cancellable deposits when the customer provides notification of cancellation within established management policy time frames. Taxes collected from customers and submitted to taxing authorities are not recorded in revenue.


F-16

IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 3 — REVENUE – continued

Mortgage Investment Revenue Recognition

Interest on mortgage loans is recognized as revenue when earned using the interest method based on a 360 or 365 day year, in accordance with the related mortgage loan terms. We do not recognize interest income on loans once they are deemed to be impaired and placed in non-accrual status. Generally, a loan is placed in non-accrual status when (i) it is past its scheduled maturity by more than 90 days; (ii) it becomes delinquent as to interest due by more than 90 days; or (iii) the related fair value of the collateral is less than the total principal, accrued interest and related costs. We may determine that a loan, while delinquent in payment status, should not be placed in non-accrual status in instances where the fair value of the loan collateral significantly exceeds the principal and the accrued interest, as we expect that income recognized in such cases is probable of collection. Unless and until we have determined that the value of underlying collateral is insufficient to recover the total contractual amounts due under the loan term, generally our policy is to continue to accrue interest until the loan is more than 90 days delinquent with respect to accrued, uncollected interest or more than 90 days past scheduled maturity, whichever comes first.

We defer fees for loan originations, processing and modifications, net of direct origination costs, at origination and amortize such fees as an adjustment to interest income using the effective interest method. Revenue for non-refundable commitment fees is recognized over the remaining life of the loan as an adjustment to the interest income yield. We defer premiums or discounts arising from acquired loans at acquisition and amortize such premiums or discounts as an adjustment to interest income over the contractual term of the related loan using the effective interest method. We include the unamortized portion of the premium or discount as a part of the net carrying value of the loan in the condensed consolidated balance sheets. Costs not directly paid to the seller of the loan are expensed as incurred and not amortized, except for any fees paid directly to the seller.


NOTE 4 — MORTGAGE LOANS, NET

Lending Activities

As of September 30, 2019, the Company held four portfolio loans with a balance of $11.7 million, net of valuation allowances, two of which were performing loans bearing a weighted-average interest rate of 9.8% as of September 30, 2019. As of December 31, 2018, the Company held six portfolio loans with a balance of $23.2 million, net of valuation allowances, three of which were performing loans bearing a weighted-average interest rate of 9.4%. As of September 30, 2019 and December 31, 2018, the Company held two and three non-performing portfolio loans, respectively, two of which have been fully reserved and have a zero carrying value as of September 30, 2019. The valuation allowance was $15.3 million as of September 30, 2019 and $13.1 million as of December 31, 2018. During the nine months ended September 30, 2019, one performing loan with a principal balance of $3.0 million was repaid in full. In addition, during the nine months ended September 30, 2019, we foreclosed on one of the Company’s mezzanine loan investments that had a carrying value of $8.2 million as of the date of foreclosure, which had been in default since September 2018. In May 2019, we foreclosed on the loan collateral consisting of 100% of the membership interests in the limited liability company owning the underlying property. We recorded the acquired assets and assumed liabilities at fair value and consolidated the operations commencing on the foreclosure date. See additional discussion in Notes 5 and 8.

During the three months ended September 30, 2019, and 2018, we recorded mortgage interest income of $0.3 million and $0.7 million, respectively. During the nine months ended September 30, 2019 and 2018, we recorded mortgage interest income of $1.4 million and $2.0 million, respectively.

While the Company has not originated any new loans in 2019, we funded $2.0 million during the nine months ended September 30, 2019 for a $13.1 million construction loan that was originated during 2018. As of September 30, 2019, our remaining commitment under that loan was $11.1 million.

As disclosed in Note 16, we sold a $12.3 million mezzanine note subsequent to September 30, 2019 at a discount and recorded a corresponding provision for credit loss of $2.6 million during the three and nine months ended September 30, 2019 which is reflected in the accompanying condensed consolidated financial statements.


F-17

IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 5 — OPERATING PROPERTIES, REAL ESTATE HELD FOR SALE AND OTHER REAL ESTATE OWNED

As of September 30, 2019, we held total REO assets of $105.8 million, of which $7.4 million were held for sale, $65.1 million were held as operating properties, and $33.3 million were classified as other real estate owned. As of December 31, 2018, we held total REO assets of $75.0 million, of which $7.4 million were held for sale, $33.9 million were held as operating properties and $33.7 million were classified as other real estate owned.

As described in Note 4, on May 29, 2019, we foreclosed on the membership interests of a limited liability company that was pledged as collateral on a defaulted mezzanine note receivable. The entity owns and operates a commercial office building known as Broadway Tower, located in St. Louis, Missouri. Upon foreclosure, we acquired the membership interests in the limited liability company that owns the office building and related assets, and assumed related liabilities of Broadway Tower, all of which were recorded at fair value in accordance with GAAP. The acquired assets consist of a building, land, furniture and fixtures, operating and reserve cash, and tenant receivables totaling approximately $22.6 million. Liabilities assumed consist of trade accounts payable and accrued liabilities, and accrued interest and principal on the first mortgage loan totaling approximately $15.5 million. In accordance with ASC 842, we recorded a right of use asset and related lease liability of $0.6 million, see Note 14. As described in Note 9, we purchased the Broadway Tower first mortgage note and accrued interest.

During the nine months ended September 30, 2019, the Company sold four REO assets for $0.9 million resulting in a gain on sale of $0.2 million for the three and nine months ended September 30, 2019. During the three and nine months ended September 30, 2018, the Company sold REO assets (or portions thereof) for $8.1 million and $8.7 million (net of transaction costs) resulting in a total net gain on sale of $3.5 million and $3.9 million, respectively.

REO Planned Development and Operations

Costs related to the development, renovation or improvements of the Company’s real estate assets are generally capitalized, while costs and expenses related to operating, holding and maintaining our operating properties and REO assets are expensed as incurred. Costs that are expensed as incurred are included in operating property direct expenses and as expenses for non-operating real estate owned in the accompanying condensed consolidated statements of operations. For the three months ended September 30, 2019 and 2018, these costs and expenses were $4.8 million and $2.5 million, respectively. For the nine months ended September 30, 2019 and 2018, these costs and expenses were $11.0 million and $7.2 million, respectively. Cash outlays for capitalized costs totaled $13.4 million and $7.2 million during the nine months ended September 30, 2019 and 2018, respectively, and consisted primarily of renovation costs for MacArthur Place and New Mexico properties well renovation costs.


NOTE 6 — VARIABLE INTEREST ENTITIES AND INVESTMENTS IN UNCONSOLIDATED ENTITIES

Variable Interest Entities

As of September 30, 2019 and December 31, 2018, we consolidated multiple variable interest entities (“VIE’s”) relating to two primary projects: 1) various partnerships which own land and water rights located in New Mexico for which the Company retains both general partner and limited partner interests, and 2) the Hotel Fund, for which the Company is the sponsor and its subsidiary is the common member, that owns an MacArthur Place. We are deemed to be the primary beneficiaries of these consolidated VIE’s as we have the power to direct the activities that most significantly affect their economic performance and we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. The assets of our consolidated VIE’s are only available to settle the obligations of the respective entities.

The following table summarizes the carrying amounts of the above referenced entities’ assets and liabilities included in the Company’s condensed consolidated balance sheets at September 30, 2019 and December 31, 2018, net of intercompany eliminations (in thousands):
 
 
September 30, 2019
 
December 31, 2018
Total assets
 
$
100,143

 
$
85,240

Total liabilities
 
58,205

 
37,770



F-18

IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 — VARIABLE INTEREST ENTITIES AND INVESTMENTS IN UNCONSOLIDATED ENTITIES – continued

The following table summarizes the VIE’s results of operations for the three and nine months ended September 30, 2019 and 2018, net of intercompany eliminations (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Net loss
 
$
(393
)
 
$
(262
)
 
$
(6,433
)
 
$
(786
)

The Company’s maximum exposure to loss from the operations of these VIE’s consists of its combined equity in those entities which totaled $26.4 million as of September 30, 2019. The Hotel Fund makes a preferred distribution, payable monthly accruing at a rate of 7.0% per annum on invested capital, cumulative and non-compounding (the “Preferred Distribution”). Preferred Distributions totaled $0.4 million and $1.0 million during the three and nine months ended September 30, 2019, respectively, and $0.1 million and $0.2 million during the three and nine months ended September 30, 2018, respectively.

Investment in Unconsolidated Entities

While the Company had not originated any new loans on its own behalf during 2019, during the three months ended September 30, 2019, the Company entered into an investment agreement with Juniper Bishops, LLC (a related party of a preferred shareholder and director of the Company) to participate in a $15.0 million mezzanine loan to a unrelated hotel owner and operator for the renovation of a luxury resort located in Sante Fe, New Mexico.  The mezzanine loan is secondary to a senior mortgage loan funded by an unrelated party.  The Company’s total commitment under this investment is $3.9 million, of which $2.6 million was funded as of September 30, 2019 and is reflected in “Investment in unconsolidated entities” in the accompanying condensed consolidated balance sheet. The Company funded $1.0 million of its remaining commitment subsequent to September 30, 2019.


NOTE 7 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Interest Rate Derivative

We are exposed to risks arising from rising interest rates on our variable rate debt instruments. To manage these risks, we periodically use interest rate derivatives, which currently consists of an interest rate cap. To mitigate nonperformance risk, we routinely use a third party’s analysis of the creditworthiness of the counterparties, which supports our belief that the counterparties’ nonperformance risk is limited. All derivatives are recorded at fair value.

During 2018, we entered into an interest rate cap with a notional amount of $36.0 million and a rate cap of 2.2%. The interest rate cap had an effective date of March 21, 2018 and terminates on March 1, 2021. This instrument was not designated as a cash flow hedge. After making fair value adjustments for this instrument during the 2019 and 2018 (see Note 8), the recorded value of the interest rate cap was zero as of September 30, 2019.


NOTE 8 — FAIR VALUE

Valuation Allowance and Fair Value Measurement of Loans, Real Estate Held for Sale, Other REO, and Derivative Instruments

Our valuation analysis process and procedures are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. We perform a valuation analysis of our loans, REO held for sale, other REO, and derivative instruments on a quarterly basis. We consider all relevant, material circumstances to determine if, and the extent to which, a valuation allowance is required.

Impairment for collateral dependent loans is measured at the balance sheet date based on the then fair value of the collateral in relation to contractual amounts due under the terms of the applicable loan if foreclosure is probable. Substantially all of our loans in default are deemed to be collateral dependent.

REO assets that are classified as held for sale and other REO are measured at the lower of carrying amount or fair value, less estimated cost to sell. If an asset is considered impaired, an impairment loss is recognized for the difference between the asset’s carrying amount and its fair value, less estimated cost to sell. If we elect to change the disposition strategy for our other REO, and such assets were deemed to be held for sale, we may record additional impairment charges, and the amounts could be significant.


F-19

IMH FINANCIAL CORPORATION
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 — FAIR VALUE – continued


Selection of Single Best Estimate of Value

The results of our valuation efforts generally provide a range of values for the collateral valued or REO assets rather than a single value. The selection of a value from within a range of values depends upon general overall market conditions as well as specific market conditions for each property valued and its stage of entitlement or development. In selecting the single best estimate of value, we consider the information in any relevant valuation reports, credible purchase offers received and agreements executed, as well as multiple observable and unobservable inputs.

Fair Value Measurements of Operating Properties Acquired Through Foreclosure

As described in Note 4, on May 29, 2019, we foreclosed on the membership interests of a limited liability company that was pledged as collateral on a defaulted mezzanine note receivable. The limited liability company owns and operates a commercial office building known as Broadway Tower, located in St. Louis, Missouri. Upon foreclosure, we acquired the membership interests in the limited liability company that owns the office building and related assets, and assumed related liabilities of Broadway Tower, all of which were recorded at fair value in accordance with GAAP. The valuation methodology used to conclude our position on the fair value was based on the income approach using a discounted cash flow methodology.

Fair Value Measurements of Derivative Instrument

The Company acquired an interest rate cap in 2018 to mitigate its risk on certain variable debt against rising interest rates. In order to estimate the fair value of this derivative instrument, we use valuation reports from the third party broker who issued the derivative instrument. The report calculates fair value by using inputs, including market-observable data such as U.S dollar and foreign-denominated interest rate curves, foreign exchange rates, volatilities, and information derived from or corroborated by market-observable data which are classified as Level 2 inputs in the fair value hierarchy. The fair value method does not contemplate credit valuation adjustments (“CVA”) which would be a Level 3 input as the CVA uses credit spreads which are generally unobservable to the market. The fair value used in our financial statements approximate fair value without the CVA. As of September 30, 2019, the fair value of the interest rate cap was $0 and we recorded an unrealized loss on derivative instruments of $39.0 thousand and $0.3 million during the three and nine months ended September 30, 2019, respectively, and none during the three and nine months ended September 30, 2018.

Valuation Conclusions

Based on the results of our evaluation, analysis and subsequent events, we recorded a provision for credit loss on our loan portfolio of $2.6 million in the third quarter of 2019 relating to the sale of a $12.3 million mezzanine loan investment subsequent to September 30, 2019 which resulted in a loss. We recorded no impairment of REO during the three and nine months ended September 30, 2019. We did not record any non-cash provision for credit losses on our loan portfolio or impairment of REO during the three and nine months ended September 30, 2018. We recorded offsetting net recoveries of investment and credit losses totaling $1.1 million during the nine months ended September 30, 2019, and $0.2 million for the nine months ended September 30, 2018, resulting from the collection of cash and/or other assets recovered from certain guarantors on certain legacy loans and insurance recoveries received during the period.

As of September 30, 2019, the valuation allowance on our mortgage loans totaled $15.3 million, representing 57.7% of the total outstanding loan principal and accrued interest balances. As of December 31, 2018, the valuation allowance on our mortgage loans totaled $13.1 million, representing 37.1% of total outstanding loan principal and accrued interest balances. With the existing valuation allowance recorded as of September 30, 2019, we believe that, as of that date, the fair value of our loans, REO assets held for sale, and other REO is adequate in relation to the net carrying value of the related assets and that no additional valuation allowance or impairment is considered necessary. While the above results reflect management’s assessment of fair value as of September 30, 2019 based on currently available data, we will continue to evaluate our loans and REO assets to determine the appropriateness of the carrying value of such assets. Depending on market conditions, such updates may yield materially different values and potentially increase or decrease the valuation allowance for loans or impairment charges for REO assets.


F-20

IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9 — NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS

As of September 30, 2019 and December 31, 2018, our notes payable and special assessment obligations consisted of the following (in thousands):
 
 
September 30,
 
December 31,
 
 
2019
 
2018
$37.0 million note payable, as amended, to MidFirst Bank secured by a first lien on MacArthur Place, interest-only payments due monthly at the 30-day LIBOR (2.00% and 2.50% at September 30, 2019 and December 31, 2018, respectively) plus between 3.54% - 3.75% depending on compensating balances and meeting certain financial thresholds and terms (5.54% and 6.04% effective rate at September 30, 2019 and December 31, 2018, respectively), matures October 1, 2020 with two one-year extension options, with construction completion and repayment guarantees provided by the Company.
 
$
35,455

 
$
20,669

$11.0 million note payable to JPMorgan Chase Funding Inc. secured by the $13.2 million first mortgage note on the property known as Broadway Tower, bearing interest at one month LIBOR plus 3.81% (5.81% as of September 30, 2019), requires interest only payments and a balloon payment of unpaid principal and interest upon maturity. The initial maturity date is May 22, 2020. The Company has the option to extend the maturity date for one year if, among other conditions, certain debt yield and Broadway Tower occupancy rates are achieved.
 
11,000

 

$5.9 million note payable to Southwest Lending, LLC, secured by real estate in New Mexico, annual interest only payments based on prime plus 3.0% through maturity date of December 31, 2019. (8.0 % and 8.25% as of September 30, 2019 and December 31, 2018, respectively.)
 
5,940

 
5,940

Unsecured note payable under class action settlement, face amount of $10.2 million, matured and paid in full on April 28, 2019.
 

 
9,899

Special assessment bonds dated between 2002 and 2007, secured by the residential land located in Dakota County, Minnesota, annual interest rate ranging from 6%-7.5%, maturing various dates through 2022 (classified as held for sale as of March 31, 2018).
 
75

 
90

Total notes payable
 
52,470

 
36,598

Less: deferred financing fees
 
(306
)
 
(284
)
Notes payable, net of deferred financing fees
 
$
52,164

 
$
36,314


Interest expense for the three months ended September 30, 2019 and 2018 was $0.4 million and $0.8 million, respectively. Interest expense for the nine months ended September 30, 2019 and 2018 was $1.2 million and $2.3 million, respectively. The Company capitalized interest relating to the MacArthur Loan in the amount of $0.2 million and $1.0 million for the three and nine months ended September 30, 2019. There was no capitalized interest during 2018.


F-21

IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 9 — NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS – continued

Senior Indebtedness

MacArthur Place

In October 2017, we closed on a $32.3 million acquisition and construction loan from MidFirst Bank in connection with our purchase of MacArthur Place (the “MacArthur Loan”), of which (i) $19.4 million was utilized for the purchase of MacArthur Place, (ii) approximately $10.0 million was set aside to fund planned hotel improvements, and (iii) the balance to fund interest reserves and operating capital. During the nine months ended September 30, 2019, the MacArthur Loan was modified to, among other things, increase the total loan facility to $37.0 million, thereby increase the Company’s equity commitment to $27.7 million due to projected increased renovation costs, and to establish certain additional reserve accounts in the amount of $2.0 million for the completion of certain aspects of the renovation project. The principal balance of the loan was $35.5 million and $20.7 million at September 30, 2019 and December 31, 2018, respectively. The loan bears floating interest equal to the 30-day LIBOR rate (2.00% at September 30, 2019) plus 3.54%, which may be reduced by up to 0.50% if certain conditions are met, which were met as of September 30, 2019. The loan has an initial term of three years subject to the right of the Company to extend the maturity date for two one-year periods, provided that the loan is in good standing and upon satisfaction of certain other conditions, including payment of an extension fee equal to 0.35% of outstanding principal per extension. The Company is required to make interest-only payments during the initial three year term. During the nine months ended September 30, 2019, the Company made loan draws totaling $14.8 million, of which $13.7 million represented renovation costs and operating draws and $1.1 million represented draws against the interest reserve on the loan. The Company incurred deferred financing fees of $0.5 million which are being amortized over the term of the loan using the effective interest method.

The MacArthur Loan is secured by a deed of trust on all MacArthur Place real property and improvements, and a security interest in all furniture, fixtures and equipment, licenses and permits, and MacArthur Place related revenues. The Company agreed to provide a construction completion guaranty which shall be released upon payment of all project costs and receipt of a certificate of occupancy. In addition, the Company provided a loan repayment guaranty equal to 50% of the loan principal along with a guaranty of interest and operating deficits, as well as other customary carve-out matters such as bankruptcy and environmental matters. Under the guarantees, the Company is required to maintain a minimum tangible net worth of $50.0 million and minimum liquidity of $5.0 million throughout the term of the loan. The Company was in compliance with these covenants and guarantees at September 30, 2019. The Company is required to establish various operating and reserve accounts at MidFirst Bank which are subject to a cash management agreement, including a $2.0 million spa reserve to be used for the planned spa renovation which is scheduled to commence in the first quarter of 2020. In the event of default, MidFirst Bank has the ability to take control of such accounts for the allocation and distribution of proceeds in accordance with the cash management agreement.