NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
BUSINESS AND ORGANIZATION
ACRE Realty Investors Inc. (the “company”)
(formerly known as Roberts Realty Investors, Inc. until its name was changed on January 30, 2015), a Georgia corporation, was formed
on July 22, 1994 to serve as a vehicle for investments in, and ownership of, a professionally managed real estate portfolio of
multifamily apartment communities. The company’s strategy has since changed upon the consummation of the transaction with
A-III Investment Partners LLC, as described below.
The company conducts all of its operations
and owns all of its assets in and through ACRE Realty LP (formerly known as Roberts Properties Residential, L.P. until its name
was changed on January 30, 2015), a Georgia limited partnership (the “operating partnership”), or through wholly owned
subsidiaries of the operating partnership. The company controls the operating partnership as its sole general partner and has a
96.39% and a 95.66% ownership interest in the operating partnership at December 31, 2016 and 2015, respectively.
On November 19, 2014, the company and its operating
partnership entered into a Stock Purchase Agreement with A-III Investment Partners LLC (“A-III”) (the “Stock
Purchase Agreement”). On January 30, 2015, the company and A-III closed the transactions contemplated under the Stock Purchase
Agreement. At the closing, A-III purchased 8,450,704 shares of the company’s common stock at a purchase price of $1.42 per
share, for an aggregate purchase price of $12 million, and the company issued to A-III warrants to purchase up to an additional
26,760,563 shares of common stock at an exercise price of $1.42 per share ($38 million in the aggregate). The purchase price per
share and the exercise price of the warrants are subject to a potential post-closing adjustment upon completion of the sale of
the company’s four land parcels owned at January 30, 2015, which could result in the issuance of additional shares of common
stock to A-III and an increase in the number of shares of common stock issuable upon exercise of the warrants.
After the closing, Roberts Realty Investors, Inc. amended its articles of incorporation to change its name
to ACRE Realty Investors Inc. At the closing, the company, A-III and Mr. Roberts, Roberts Realty Investors, Inc.’s chairman
and chief executive officer, entered into a Governance and Voting Agreement, dated January 30, 2015 (the “Governance and
Voting Agreement”) and the company and Mr. Roberts entered into an employment agreement pursuant to which Mr. Roberts was
appointed and employed by the company to serve as an Executive Vice President of our company. Pursuant to two extension agreements,
the Governance and Voting Agreement and Employment Agreement were extended until December 31, 2016. On December 31, 2016, the Employment
Agreement expired and Mr. Roberts ceased to be an officer or employee of our company. On October 10, 2016, the company, A-III and
Mr. Roberts, entered into an agreement (the “Extension of Governance and Voting Agreement”), effective as of October
10, 2016, further extending the term of the Governance and Voting Agreement, but not the Employment Agreement. As a result of the
Extension of Governance and Voting Agreement, the parties have agreed to extend the expiration of the term of the Governance and
Voting Agreement from December 31, 2016 to June 30, 2017. As a result, all of the respective rights and obligations of the parties
under, and all other terms, conditions and provisions of, the Governance and Voting Agreement shall continue in full force and
effect until June 30, 2017, unless the Governance and Voting Agreement is amended in writing by the parties or is sooner terminated
in accordance with the provisions thereof. Pursuant to the Extension of Governance and Voting Agreement, the parties agreed to
nominate Mr. Roberts for re-election to the Board. Mr. Roberts was elected by the company’s shareholders at the annual meeting
on December 14, 2016. Mr. Roberts has agreed to resign from the Board immediately upon the first to occur of the following two
events: (a) if he fails to continuously maintain beneficial ownership of at least 1,100,000 shares of common stock (subject to
adjustment for stock splits, stock dividends and other similar adjustments to the shares of common stock) and (b) upon the expiration
of the Governance and Voting Agreement on June 30, 2017.
2.
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation.
The accompanying
consolidated financial statements include the consolidated accounts of the company and the operating partnership. All inter-company
accounts and transactions have been eliminated in consolidation. The financial statements of the company have been adjusted for
the non-controlling interest of the unitholders in the operating partnership.
Principles of Consolidation.
The accompanying
consolidated financial statements include the consolidated accounts of the company and the operating partnership, which is controlled
by the company. The operating partnership is a variable interest entity (“VIE”), in which the company is considered
to be the primary beneficiary. All inter-company accounts and transactions have been eliminated in consolidation. The financial
statements of the company have been adjusted for the non-controlling interest of the unitholders in the operating partnership.
The company consolidates the operating partnership,
a VIE, in which it is considered to be the primary beneficiary. The primary beneficiary is the entity that has (i) the power to
direct the activities that most significantly impact the entity’s economic performance and (ii) the obligation to absorb
losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. The company is required to
reassess whether it is the primary beneficiary of a VIE for each reporting period. Our maximum exposure to loss is the carrying
value of assets and liabilities of our operating partnership which represents all of our assets and liabilities.
Use of Estimates.
The preparation of
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Real Estate Asset Held For Sale.
Real
estate asset held for sale is recorded at the lower of the carrying amount or fair value less estimated selling costs. The company
reviews the real estate asset held for sale each reporting period to determine that the carrying amount remains recoverable. If
the carrying amount of the real estate asset exceeds the fair value, the asset will be written down by the amount the carrying
amount exceeds the fair value amount. The fair value is determined by an evaluation of an appraisal, discounted cash flow analysis,
sale price and other applicable valuation techniques. As of December 31, 2016, the carrying amount of our real estate asset remained
recoverable.
The company recognizes gains on the sales of
assets in accordance with FASB ASC Topic 360-20,
Property, Plant, and Equipment – Real Estate Sales
. If any significant
continuing obligation exists at the date of sale, the company defers a portion of the gain attributable to the continuing obligation
until the continuing obligation has expired or is removed. There were no such continuing obligations on the sales of any of the
company’s assets as of December 31, 2016 and December 31, 2015.
Cash and Cash Equivalents.
The company
considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents.
The company maintains cash and cash equivalent balances with financial institutions that may at times exceed the limits for insurance
provided by the Federal Depository Insurance Corporation. The company has not experienced any losses related to these excess balances
and management believes its credit risk is minimal.
Deferred Financing Costs.
Deferred financing
costs include fees and expenses incurred to obtain financing and are amortized to interest expense in the consolidated statements
of operations, using the straight-line method over the terms of the related indebtedness. Although GAAP requires that the effective-yield
method be used to amortize financing costs, the effect of using the straight-line method is not materially different from the results
that would have been obtained using the effective-yield method. Effective January 1, 2016, the company adopted the newly issued
accounting guidance for presentation of debt financing costs. Under the new standard, debt financing costs are required to be presented
in the consolidated balance sheets as a direct deduction from the carrying value of the associated debt liability. There was
no debt or deferred financing costs at December 31, 2016 or 2015.
Equity Issuance Costs.
Costs related to raising the equity
are accounted for as a deduction from equity.
Warrants.
The company accounts for the
warrants issued in connection with the A-III Stock Purchase Agreement in accordance with ASC 815, Accounting for Derivative Instruments
and Hedging Activities, which provides guidance on the specific accounting treatment of a multitude of derivative instruments.
The company received proceeds in a private placement stock offering and issued detachable warrants. The company evaluated the warrants
to determine their relative fair value, using the backsolve method of the market approach, incorporating the adjusted Black-Scholes
option valuation model at their time of issuance and allocated a portion of the proceeds from the private placement to the warrants
based on their fair value. The warrants were recorded as a component of equity. In connection with the A-III recapitalization transaction
that occurred on January 30, 2015, the company allocated values of $8,990,000 and $3,010,000 to the warrants and common shares,
respectively, in the company’s Form 10-Q for the quarterly period ended June 30, 2015. As disclosed in the company’s
Form 10-K for the year ended December 31, 2015, subsequent to the issuance of the company’s aforementioned interim financial statements,
the company determined that it needed to revise this allocation based on the application of a valuation methodology which should
have considered the market transaction and results in a corrected allocation of $4,910,000 and $7,090,000 amongst warrants and
common shares, respectively. This reallocation had no effect on net income, equity, net change in cash, or total assets of the
company reported for that period.
Earnings Per Share.
Earnings per share
is computed using the two-class method of accounting, which includes the weighted-average number of shares of common stock outstanding
during the period and other securities that participate in dividends, such as our vested restricted stock, to arrive at total common
equivalent shares. In applying the two-class method, earnings are allocated to both shares of common stock and securities that
participate in dividends based on their respective weighted-average shares outstanding for the period. During periods of net loss,
losses are allocated only to the extent that the participating securities are required to absorb such losses. Diluted earnings
per share is calculated to reflect the potential dilution of all instruments or securities that are convertible into shares of
common stock. For the company, this includes the warrants and unvested restricted stock during the periods presented. The company
uses the two-class method or the treasury method, whichever is more dilutive.
Share-Based Compensation
. The company
records share-based awards to directors, which have no vesting conditions other than time of service, at the fair value of the
award, measured at the date of grant. The fair value of share-based grants is being amortized to compensation expense ratably over
the requisite service period, which is the vesting period. The company records share-based awards to non-employee officers, based
on the estimated fair value of such award at the grant date that is remeasured quarterly for unvested awards. We amortize expense
over the requisite service period related to share-based awards granted to non-employee officers
.
Income Taxes.
The company follows the
asset and liability method of accounting for deferred income taxes. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The company recognizes the effect of income tax positions only if those positions are
more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than
50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment
occurs.
In general, a valuation allowance is recorded
if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will
not be realized. Realization of the company’s deferred tax assets depends upon the company generating sufficient taxable
income in future years in the appropriate tax jurisdictions to obtain a benefit from the reversal of deductible temporary differences
and from loss carryforwards. The company records a valuation allowance, based on the expected timing of reversal of existing taxable
temporary differences and its history of losses and future expectations of reporting taxable losses, if management does not believe
it met the requirements to realize the benefits of certain of its deferred tax assets.
Fair Value of Financial Instruments.
The
company is required to disclose the fair value information about its financial instruments, whether or not recognized in the consolidated
balance sheets, for which it is practicable to estimate fair value. See Note 7 - Fair Value Measurements.
Recent Accounting Pronouncements
In May 2014, the FASB issued an update (“ASU
2014-09”) establishing ASC Topic 606,
Revenue from Contracts with Customers
. ASU 2014-09 establishes a single comprehensive
model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue
recognition guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services
and also requires certain additional disclosures. In August 2015, the FASB issued an update (“ASU 2015-14”) to ASC
606,
Deferral of the Effective Date
, which defers the adoption of ASU 2014-09 to interim and annual reporting periods in
fiscal years that begin after December 15, 2017. In March 2016, the FASB issued an update (“ASU 2016-08”) to ASC 606,
Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal
versus agent considerations in the new revenue recognition standard pursuant to ASU 2014-09. In April 2016, the FASB issued an
update (“ASU 2016-10”) to ASC 606, Identifying Performance Obligations and Licensing, which clarifies guidance related
to identifying performance obligations and licensing implementation guidance contained in ASU 2014-09. In May 2016, the FASB issued
an update (“ASU 2016-12”) to ASC 606, Narrow-Scope Improvements and Practical Expedients, which amends certain aspects
of the new revenue recognition standard pursuant to ASU 2014-09. The company is currently evaluating the impact of the adoption
of these ASUs on the company’s consolidated financial statements.
In June 2014, the FASB issued an update (“ASU
2014-12”) to ASC Topic 718,
Compensation – Stock Compensation
. ASU 2014-12 requires an entity to treat performance
targets that can be met after the requisite service period of a share based award has ended, as a performance condition that affects
vesting. ASU 2014-12 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015.
The adoption of this update on January 1, 2016 did not have any impact on the company’s consolidated financial statements.
In August 2014, the FASB issued an
update (“ASU 2014-15”),
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going
Concern
, which will require an entity’s management to evaluate whether there is substantial doubt about an
entity’s ability to continue as a going concern and to provide related footnote disclosures. According to the new
guidance, substantial doubt exists when conditions and events, considered in the aggregate, indicate that it is probable that
the entity will be unable to meet its obligations as they become due within one year after the date the financial statements
are issued. The term “probable” is used consistently with its current use in GAAP for loss contingencies.
Disclosures will be required if conditions give rise to substantial doubt about the entity’s ability to continue as a
going concern, including whether management’s plans that are intended to mitigate those conditions will alleviate the
substantial doubt when implemented. The guidance is effective for interim and annual periods ending after December 15,
2016, with early adoption permitted. The adoption of this update in 2016 had no impact on the
company’s consolidated financial statements.
In February 2015, the FASB issued an update
(“ASU 2015-02”),
Amendments to the Consolidation Analysis
to ASC Topic 810,
Consolidation
. ASU 2015-02
affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically,
the amendments: (i) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities
(“VIEs”) or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited
partnership, (iii) affect the consolidated analysis of reporting entities that are involved with VIEs, and (iv) provide a scope
exception for certain entities. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15,
2015. The adoption of this update on January 1, 2016 did not have a material impact on the company’s consolidated financial
statements. See Principles of Consolidation above.
In April 2015, the FASB issued an update (“ASU
2015-03”),
Simplifying the Presentation of Debt Issuance Costs
to ASC Topic 835,
Interest
. ASU 2015-03 requires
that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability
to which they relate, consistent with debt discounts, as opposed to being presented as assets. ASU 2015-03 is effective for interim
and annual reporting periods in fiscal years that begin after December 15, 2015. The adoption of this update on January 1, 2016
had no impact on the company’s consolidated financial statements.
In February 2016, the FASB issued an update
(“ASU 2016-02”), Leases (Topic 842), which sets out the principles for the recognition,
measurement, presentation and disclosure of leases for both parties to a contract. ASU 2016-02 requires lessees to apply a dual
approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively
a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective
interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset
and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term
of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors
to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing
leases and operating leases. ASU 2016-02 supersedes the previous leases standard, Leases (Topic 840). The standard is effective
on January 1, 2019, with early adoption permitted. The company is currently in the process of evaluating the impact the adoption
of ASU 2016-02 will have on the company’s consolidated financial statements.
In March 2016, the FASB issued guidance
(“ASU 2016-09”),
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting.
ASU 2016-09 changes the accounting for certain aspects of share-based payments to employees. The
guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are
settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase more of
an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance
allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. For a public
company, the standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods
within that reporting period. Early adoption is permitted in any interim or annual period. The company is
currently assessing the impact that this guidance will have on the company’s consolidated financial statements when
adopted.
In August 2016, the FASB issued an update (“ASU
2016-15”),
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
ASU 2016-15 amends
ASC 230,
Statement of Cash Flows
, to provide guidance on the classification of certain cash receipts and payments in the
statement of cash flows. For a public company, the standard is effective for fiscal years beginning after December 15, 2017, including
interim periods within those fiscal years. Early adoption is permitted. The company is currently assessing the impact that this
guidance will have on the company’s consolidated financial statements when adopted.
In November 2016, the FASB issued an update
(ASU 2016-18),
Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).
ASU
2016-18 provides guidance on the classification and presentation of restricted cash in the statement of cash flows. Under the new
guidance, restricted cash will be included in the cash and cash equivalent balances in the statement of cash flows. This guidance
is effective for fiscal years beginning after December 31, 2017, including interim periods within those fiscal years. Early adoption
is permitted. The company has evaluated the impact that this guidance will have on the company’s consolidated financial statements
and related disclosures and determined it will not have a material impact.
In January 2017, the FASB issued an update
(“ASU 2017-01”),
Clarifying the Definition of a Business to ASC Topic 805, Business Combinations
. ASU 2017-01
clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals)
of assets or businesses. This guidance is effective prospectively for fiscal years beginning after December 15, 2017, including
interim periods within those fiscal years. Early adoption is permitted for transactions that occurred before the issuance date
or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available
for issuance. The adoption of this ASU 2017-01 will result in less real estate acquisitions qualifying as businesses and, accordingly,
acquisition costs for those acquisitions that are not businesses will be capitalized rather than expensed. The company is currently
assessing the impact that this guidance will have on the company’s consolidated financial statements when adopted.
3.
REAL ESTATE ASSET
HELD FOR SALE
Real Estate Assets Held for Sale
As of December 31, 2016 and 2015, the company
owned the land parcel known as Highway 20, a 38-acre site located in the City of Cumming, Georgia in Forsyth County, in the North
Atlanta metropolitan area, zoned for 210 multifamily apartment units, which is classified as held for sale. During the fourth quarter
of 2015, the company determined that the carrying amount of Highway 20 was not fully recoverable. Accordingly, the company recorded
an impairment charge of $500,038. No such adjustment was required during the year ended December 31, 2016. On October 7, 2016,
the operating partnership entered into a sale contract with Roberts Capital Partners, LLC, a related party, to sell Highway 20
for a purchase price of $4,725,000, including a reimbursement of $1,050,000 relating to prepaid sewer taps. This transaction is
expected to close during the second quarter of 2017, subject to an extension option and certain closing conditions.
FASB ASC Topic 360-10,
Property, Plant and
Equipment – Overall
requires a long-lived asset to be classified as “held for sale” in the period in which
certain criteria are met. The company classifies real estate assets as held for sale after the following conditions have been satisfied:
i) receipt of approval from its board of directors (the “Board”) to sell the asset; ii) the initiation of an active
program to sell the asset; iii) the asset is available for immediate sale; iv) it is probable that the sale of the asset will be
completed within one year; and v) it is unlikely the plan to sell will change. When assets are classified as held for sale, they
are recorded at the lower of the assets’ carrying amount or fair value, less the estimated selling costs.
The table below sets forth the assets and
liabilities related to real estate asset held for sale as of December 31, 2016 and 2015:
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Real Estate Asset Held for Sale
|
|
$
|
4,283,385
|
|
|
$
|
4,283,385
|
|
|
|
|
|
|
|
|
|
|
Liabilities Related to Real Estate Asset Held For Sale
|
|
$
|
1,498
|
|
|
$
|
2,612
|
|
There was no real estate sold during the year
ended December 31, 2016. During the year ended December 31, 2015, the company sold three land parcels known as North Springs Land,
Northridge Land and Bradley Park Land for an aggregate sales price of $21,647,073 and recognized in aggregate a gain of $2,569,625.
Except for Bradley Park, the related mortgages of North Springs Land, Northridge Land and Highway 20 aggregating to $9,270,000
were repaid using a portion of the proceeds from the A-III transaction. The land loan encumbering the Bradley Park land was paid
in full at the closing of its sale.
4.
NON-CONTROLLING
INTEREST – OPERATING PARTNERSHIP
Holders of operating partnership units (“OP
Units”) generally have the right to require the operating partnership to redeem their units for shares of the company’s
common stock. Upon submittal of units for redemption, the operating partnership has the option either (a) to acquire those units
in exchange for shares, currently on the basis of 1.647 shares for each unit submitted for redemption (the “Conversion Factor”),
or (b) to pay cash for those units at their fair market value, based upon the then current trading price of the shares and using
the same exchange ratio. Prior to December 29, 2015, we had an informal policy of issuing shares, in lieu of cash in exchange for
units. On December 28, 2015, our Board formally adopted a policy whereby we shall only issue our common stock for redemption of
units, rather than paying cash for such redemption in accordance with the operating partnership agreement. As a result of this
change in policy, the company now requires the issuance of shares of common stock of the company in payment for the redemption
of OP Units and therefore has effective control over the redemption and therefore the non-controlling interest is now being classified
in permanent equity as of December 28, 2015 as opposed to temporary equity, and similarly at December 31, 2016 and 2015.
In July 2013, the operating partnership privately
offered to investors who held both units of the operating partnership and shares of common stock the opportunity to contribute
shares to the operating partnership in exchange for units (provided that the investors were “accredited investors”
under SEC Rule 501 of Regulation D under the Securities Act of 1933, as amended). This opportunity remains open to those accredited
investors. Consistent with the Conversion Factor noted above, the offering of units uses a “Contribution Factor” such
that an accredited investor who contributes shares to the operating partnership will receive one unit for every 1.647 shares contributed.
The non-controlling interest of the unitholders
in the operating partnership on the accompanying consolidated balance sheets is calculated by multiplying the non-controlling interest
ownership percentage at the balance sheet date by the operating partnership’s net assets (total assets less total liabilities).
The non-controlling interest ownership percentage is calculated at any point in time by dividing (x) (the number of units outstanding
multiplied by 1.647) by (y) the total number of shares plus (the number of units outstanding multiplied by 1.647). The non-controlling
interest ownership percentage will change as additional shares and/or units are issued or as units are redeemed for shares of the
company’s common stock or as the company’s common stock is contributed to the operating partnership and units are issued
in accordance with the Contribution Factor. The non-controlling interest of the unitholders in the income or loss of the operating
partnership in the accompanying consolidated statements of operations is calculated based on the weighted average percentage of
units outstanding during the period, which was 3.89% for the year ended December 31, 2016 and 6.64% for the year ended December
31, 2015. There were 466,259 units outstanding at December 31, 2016 and 553,625 units outstanding as of December 31, 2015. The
equity balance of the non-controlling interest of the unitholders was $735,116 at December 31, 2016 and $1,026,751 at December
31, 2015.
The following table details the components
of non-controlling interest in the operating partnership as of December 31, 2015 which was classified as a liability through December
28, 2015:
|
|
December 31,
2015
|
Beginning balance
|
|
$
|
3,468,972
|
|
Net loss attributable to non-controlling interest
|
|
|
(206,065
|
)
|
Redemptions of non-controlling partnership units
|
|
|
(3,285,713
|
)
|
Adjustment to non-controlling interest in the operating partnership
|
|
|
1,054,968
|
|
Non-controlling interest liability balance at December 28, 2015
|
|
|
1,032,162
|
|
Transfer non-controlling interest from liability to equity
|
|
|
(1,032,162
|
)
|
Non-controlling interest liability - ending balance
|
|
$
|
—
|
|
5.
SHAREHOLDERS’
EQUITY
Private Placement.
On January 30, 2015,
A-III purchased 8,450,704 shares of the company’s common stock at a purchase price of $1.42 per share, for an aggregate purchase
price of $12,000,000, and the company, for no additional consideration, issued to A-III warrants to purchase up to an additional
26,760,563 shares of the company’s common stock at an exercise price of $1.42 per share ($38,000,000 in the aggregate). The
purchase price per share and the exercise price of the warrants are subject to a potential post-closing adjustment upon completion
of the sale of the company’s four land parcels owned at January 30, 2015, which could result in the issuance of additional
shares of common stock to A-III and an increase in the number of shares of common stock issuable upon exercise of the warrants.
Warrants.
Each of the aforementioned
warrants entitles the holder to acquire one share of the company’s common stock. At the time of issuance, each warrant had
an exercise price of $1.42 per share, subject to post-closing adjustments related to the sales of the legacy properties. The company
evaluated the warrants to determine their relative fair value, using a variation of the adjusted Black-Scholes option valuation
model at their time of issuance and allocated $4,910,000 of the proceeds from the private placement to the warrants based on their
fair value. The warrants were recorded as a component of equity. The warrants expire on January 30, 2018. As of December 31, 2016,
the warrants remained unexercised.
Redemption of Units for Shares.
In accordance
with the conversion factor explained in Note 4
–
Non-controlling Interest – Operating Partnership, 87,366 OP
Units were redeemed for 143,897 shares of the company’s common stock for the year ended December 31, 2016, and 597,799 OP
Units were redeemed for 984,572 shares during the year ended December 31, 2015. Redemptions are reflected in the accompanying consolidated
financial statements at the closing price of the company’s stock on the date of redemption.
Contribution of Shares to the Operating
Partnership.
In accordance with the contribution factor explained in Note 4 – Non-controlling Interest –
Operating Partnership, for the years ended December 31, 2016 and 2015, there were no contribution of shares to the operating
partnership. Contributions, if any, are reflected in the accompanying consolidated financial statements based on the closing price
of the company’s stock on the date of contribution.
Restricted Stock.
Shareholders of the
company approved and adopted the company’s 2006 Restricted Stock Plan (the “Plan”) in August 2006. The Plan provides
for the grant of stock awards to employees, directors, consultants, and advisors. Under the Plan, as amended, the company may grant
up to 654,000 shares of restricted common stock, subject to the anti-dilution provisions of the Plan. The maximum number of shares
of restricted stock that may be granted to any one individual during the term of the Plan may not exceed 20% of the aggregate number
of shares of restricted stock that may be issued. The Plan is administered by the Compensation Committee of the company’s
Board. On October 12, 2015, based on the recommendation of the Compensation Committee of the Board of Directors, the Board approved
a restricted stock grant of 260,000 shares of common stock to the independent directors and certain officers of the company, which
was issued on March 28, 2016. The restricted stock was awarded pursuant to the Plan. Vesting of the awards for the independent
directors and officers is subject to continued service through the vesting period. The company’s independent directors were
each awarded 20,000 shares of restricted common stock, which vested on January 30, 2016. Certain of the company’s officers
were awarded an aggregate of 180,000 shares of restricted common stock, which vest in equal one-third installments. There were
60,000 shares, which vested on each of January 30, 2016 and October 12, 2016. The remaining 60,000 shares will vest on October
12, 2017. Compensation expense related to restricted stock was $124,762 and $154,307 for the years ended December 31, 2016 and
2015, respectively. On December 31, 2016, the Company had unamortized compensation expense of $25,930 which is expected to be recognized
over a weighted average period of 0.78 years. The Plan expired on August 21, 2016.
Treasury Stock.
The company has a stock
repurchase plan under which it is authorized to repurchase up to 600,000 shares of its outstanding common stock. Under the stock
repurchase plan, as of December 31, 2016, the company had authority to repurchase up to 540,362 shares of its outstanding common
stock. The stock repurchase plan does not have an expiration date. The company did not repurchase any additional shares for the
years ended December 31, 2016 and December 31, 2015.
Earnings Per Share.
The following table
shows the reconciliations of income (loss) available for common shareholders and the weighted average number of shares used in
the company’s basic and diluted earnings per share computations.
|
|
Year Ended December 31,
|
Numerator
|
|
2016
|
|
2015
|
Net loss attributable to common shareholders – basic
|
|
$
|
(3,287,105
|
)
|
|
$
|
(1,530,061
|
)
|
Loss attributable to non-controlling interest
|
|
|
(132,652
|
)
|
|
|
(208,112
|
)
|
Net loss – diluted
|
|
$
|
(3,419,757
|
)
|
|
$
|
(1,738,173
|
)
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted average common shares – basic
|
|
|
20,319,270
|
|
|
|
18,976,996
|
|
Effect of potential dilutive securities:
|
|
|
|
|
|
|
|
|
Weighted average number of operating partnership units, assuming conversion of all units to common shares
|
|
|
821,340
|
|
|
|
1,350,002
|
|
Weighted average number of shares – diluted
(a)
|
|
|
21,140,610
|
|
|
|
20,326,998
|
|
(a)
|
Due to the net loss for the years ended December 31, 2016 and 2015, the incremental shares related to the unvested restricted stock and the warrants were excluded as they were anti-dilutive. Furthermore, the average share price of the company’s common stock was below the exercise price of the warrants for both the years ended December 31, 2016 and 2015. During the years ended December 31, 2016 and 2015, we have excluded the incremental shares of 2,541,412 and 129,951, respectively, for the warrants, and 117,814 and 57,699, respectively, for the unvested restricted stock, as they were not dilutive.
|
6.
INCOME TAXES
At December 31, 2016, the company had a federal
net operating loss carryforward of approximately $27.8 million, which begins to expire during the fiscal year ending in
2029 and will fully expire by the end of the fiscal year ending 2036. Deferred taxes at December 31, 2016 and 2015
consisted of the following:a
|
|
December 31,
|
|
|
2016
|
|
2015
|
Net operating loss carry forwards
|
|
$
|
10,563,821
|
|
|
$
|
9,536,644
|
|
Impairment of real estate
|
|
|
744,111
|
|
|
|
738,476
|
|
Other
|
|
|
13,677
|
|
|
|
314
|
|
Total deferred tax assets
|
|
|
11,321,609
|
|
|
|
10,275,434
|
|
Valuation allowance
|
|
|
(10,692,355
|
)
|
|
|
(9,592,386
|
)
|
Net deferred tax assets
|
|
|
629,254
|
|
|
|
683,048
|
|
Deferred gains
|
|
|
(612,692
|
)
|
|
|
(650,026
|
)
|
Amortization of shared-based compensation expense
|
|
|
(16,562
|
)
|
|
|
(33,022
|
)
|
Total deferred tax liabilities
|
|
|
(629,254
|
)
|
|
|
(683,048
|
)
|
Balance
|
|
$
|
—
|
|
|
$
|
—
|
|
In assessing the realization of deferred tax
assets, management considered whether it was more likely than not that some, or all, of the deferred tax asset will be realized.
The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income. Management has considered
the history of the company’s operating losses and believes that the realization of the benefit of the deferred tax assets
is not more likely than not. In addition, under Internal Revenue Code Section 382, the company’s ability to utilize these
net operating loss carryforwards has been limited or eliminated as a result of the A-III transaction due to a change in ownership.
No Section 382 study has been completed for the company.
The company has no federal or state current
or deferred tax expense or benefit. The company’s effective tax rate differs from the applicable federal statutory tax rate.
The reconciliation of these rates for the years ended December 31, 2016 and 2015 is as follows:
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
Federal Rate
|
|
|
(34.00
|
%)
|
|
|
(34.00
|
%)
|
State tax rate, net of federal benefit
|
|
|
(3.96
|
)
|
|
|
(5.31
|
)
|
Permanent differences
|
|
|
(0.02
|
)
|
|
|
(11.6
|
)
|
Change in valuation allowance
|
|
|
37.98
|
|
|
|
50.91
|
|
Effective tax rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The company
applies the provisions of ASC 740, “Accounting for Uncertainty in Income Taxes,” which requires financial statement
expense to be recognized for positions taken for tax return purposes when it is not more likely than not that the income tax position
will be sustained. The company believes it has no uncertain tax positions at restatement. The company’s tax returns for
the years 2010 through 2015
remain open to
examination by the major domestic taxing jurisdictions to which the company is subject.
7.
FAIR VALUE MEASUREMENTS
As discussed in Note 2, GAAP requires disclosure
of fair value information about financial instruments, whether or not recognized in the statement of financial position, for which
it is practicable to estimate that value. The company measures and/or discloses the estimated fair value of financial assets and
liabilities based on a hierarchy that distinguishes between market participant assumptions based on market data obtained from sources
independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. This
hierarchy consists of three broad levels:
|
·
|
Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date;
|
|
·
|
Level 2 - inputs other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and
|
|
·
|
Level 3 - unobservable inputs for the asset or liability that are used when little or no market data is available.
|
The fair value hierarchy gives the highest
priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, the company uses valuation techniques
that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. Considerable judgment
is necessary to interpret Level 2 and 3 inputs in determining fair value of financial and non-financial assets and liabilities.
Accordingly, the fair values may not reflect the amounts ultimately realized on a sale or other disposition of these assets. Below
summarizes the methods and assumptions used to estimate the fair value of each class of financial instruments, for which it is
practicable to estimate that value.
|
·
|
Cash and cash equivalents: The carrying amount of the cash approximates fair value.
|
|
·
|
Real estate asset held for sale: Highway 20 is carried at the lower of carrying amount or fair value, less the estimated selling costs.
|
|
·
|
Accounts payable and accrued expenses: The carrying amount approximates fair value due to the short term nature of these liabilities.
|
The company held no financial assets or liabilities required to be measured at fair value on a recurring or
nonrecurring basis as of December 31, 2016 and December 31, 2015. From time to time, we record certain assets at fair value
on a nonrecurring basis when there is evidence of impairment. As discussed in Note 3, we recorded an impairment charge on Highway
20 during the year ended December 31, 2015 as its fair value, less the estimated costs to sell, was lower than its carrying value.
We determined the fair value of Highway 20 using Level 3 inputs. As of December 31, 2016, Highway 20 is carried at net realizable
value.
8.
SEGMENT REPORTING
FASB ASC Topic 280-10, Segment Reporting –
Overall, established standards for reporting financial and descriptive information about operating segments in annual financial
statements. Operating segments are defined as components of an enterprise about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
The company operated in a single business segment, which is the ownership and management of real estate assets.
9.
RELATED PARTY TRANSACTIONS
Management Agreement.
In connection
with the recapitalization transactions with A-III, on January 30, 2015, the company entered into a management agreement (the “Management
Agreement”) with A-III Manager LLC (the “Manager”), which is a wholly-owned subsidiary of A-III, among other
things, to provide for the day-to-day management of the company by the Manager, including investment activities and operations
of the company and its properties. The Management Agreement requires the Manager to manage and administer the business activities
and day-to-day operations of the company and all of its subsidiaries in conformity with the company’s investment guidelines
and other policies that are approved and monitored by the Board.
The Manager maintains an administrative services
agreement with A-III, pursuant to which A-III and its affiliates, including Avenue Capital Group and C-III Capital Partners, will
provide a management team along with appropriate support personnel for the Manager to deliver the management services to the company.
Under the terms of the Management Agreement, among other things, the Manager will refrain from any action that, in its reasonable
judgment made in good faith, is not in compliance with the investment guidelines and would, when applicable, adversely affect the
qualification of the company as a REIT. The Management Agreement has an initial five-year term and will be automatically renewed
for additional one-year terms thereafter unless terminated either by the company or the Manager in accordance with its terms.
For the services to be provided by the Manager,
the company is required to pay the Manager the following fees:
|
·
|
an annual base management fee equal to 1.50% of the company’s “Equity” (as defined below), calculated and payable quarterly in arrears in cash;
|
|
·
|
a property management fee equal to 4.0% of the gross rental receipts received each month at the company’s and its subsidiaries’ properties, calculated and payable monthly in arrears in cash;
|
|
·
|
an acquisition fee equal to 1.0% of the gross purchase price paid for any property or other investment acquired by the company or any of its subsidiaries, subject to certain conditions and limitations and payable in arrears in cash with respect to all such acquisitions occurring after the date of the Management Agreement;
|
|
·
|
a disposition fee equal to the lesser of (a) 50% of a market brokerage commission for such disposition and (b) 1.0% of the sale price with respect to any sale or other disposition by the company or any of its subsidiaries of any property or other investment, subject to certain conditions and limitations and payable in arrears in cash with respect to all such dispositions occurring after the date of the Management Agreement with certain exceptions (this disposition fee will not apply to the sale of the four legacy land parcels); and
|
|
·
|
an incentive fee (as described below) based on the company’s “Adjusted Net Income” (as defined below) for the trailing four quarter period in excess of the “Hurdle Amount” (as defined below), calculated and payable in arrears in cash on a rolling quarterly basis.
|
For purposes of calculating the base management
fee, “Equity” means (a) the sum of (1) the net proceeds from all issuances of the company’s common stock and
OP Units (without double counting) and other equity securities on and after the closing, which will include the common stock issued
to A-III in the recapitalization transaction (allocated on a pro rata basis for such issuances during the fiscal quarter of any
such issuance) and any issuances of common stock or OP Units in exchange for property investments and other investments by the
company, plus (2) the product of (x) the sum of (i) the number of shares of common stock issued and outstanding immediately before
the closing of the recapitalization transaction and (ii) the number of shares of common stock for which the number of OP Units
issued and outstanding immediately before the date of the closing of the recapitalization transaction (excluding any OP Units held
by the company) may be redeemed in accordance with the terms of the agreement of limited partnership of the operating partnership
and (y) the purchase price per share paid by A-III for the shares of common stock the company issued to A-III in the recapitalization
transaction, as the purchase price per share may be subsequently adjusted as described above, plus (3) the retained earnings of
the company and the operating partnership (without double counting) calculated in accordance with GAAP at the end of the most recently
completed fiscal quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods),
minus (b) any amount in cash that the company or the operating partnership has paid to repurchase common stock, OP Units, or other
equity securities of the company as of the closing date of the recapitalization transaction. Equity excludes (1) any unrealized
gains, losses or non-cash equity compensation expenses that have impacted shareholders’ equity as reported in the financial
statements prepared in accordance with GAAP, regardless of whether such items are included in other comprehensive income or loss,
or in net income, (2) one-time events pursuant to changes in GAAP, and certain non-cash items not otherwise described above in
each case, after discussions between the Manager and the company’s independent directors and approval by a majority of the
independent directors and (3) the company’s accumulated deficit as of the closing date of the recapitalization transaction.
For purposes of the Management Agreement, “Incentive
Fee” means an incentive fee, calculated and payable after each fiscal quarter, in an amount equal to the excess, if any,
of (i) the product of (A) 20% and (B) the excess, if any, of (1) the company’s Adjusted Net Income (described below) for
such fiscal quarter and the immediately preceding three fiscal quarters over (2) the Hurdle Amount (described below) for such four
fiscal quarters, less (ii) the sum of the Incentive Fees already paid or payable for each of the three fiscal quarters preceding
that fiscal quarter. Any adjustment to the Incentive Fee calculation proposed by the Manager will be subject to the approval of
a majority of the independent directors.
For purposes of calculating the Incentive Fee,
“Adjusted Net Income” for the preceding four fiscal quarters means the net income calculated in accordance with GAAP
after all base management fees but before any acquisition expenses, expensed costs related to equity issuances, incentive fees,
depreciation and amortization and any non-cash equity compensation expenses for such period. Adjusted Net Income will be adjusted
to exclude one-time events pursuant to changes in GAAP, as well as other non-cash charges after discussion between the Manager
and the independent directors and approval by a majority of the independent directors in the case of non-cash charges. Adjusted
Net Income includes net realized gains and losses, including realized gains and losses resulting from dispositions of properties
and other investments during the applicable measurement period.
For purposes of calculating the Incentive Fee,
the “Hurdle Amount” is, with respect to any four fiscal quarter period, the product of (i) 7% and (ii) the weighted
average gross proceeds per share of all issuances of common stock and OP Units (excluding issuances of common stock and OP Units,
or their equivalents, as equity incentive awards), with each such issuance weighted by both the number of shares of common stock
and OP Units issued in such issuance and the number of days that such issued shares of common stock and OP Units were outstanding
during such four fiscal quarter period.
The first Incentive Fee calculation will not
occur until after completion of the 2015 fiscal year. The Incentive Fee will be prorated for partial quarterly periods based on
the number of days in such partial period compared to a 90-day quarter.
The Manager is also entitled to receive a termination
fee from the company under certain circumstances equal to four times the sum of (x) the average annual base management fee, (y)
the average annual incentive fee, and (z) the average annual acquisition fees and disposition fees, in each case earned by the
Manager in the most recently completed eight calendar quarters immediately preceding the termination.
Additionally, the company will be responsible
for paying all of its own operating expenses and the Manager will be responsible for paying its own expenses, except that the company
will be required to pay or reimburse certain expenses incurred by the Manager and its affiliates in connection with the performance
of the Manager’s obligations under the Management Agreement, including:
|
·
|
reasonable out of pocket expenses incurred by personnel of the Manager for travel on the company’s behalf;
|
|
·
|
the portion of any costs and expenses incurred by the Manager or its affiliates with respect to market information systems and publications, research publications and materials that are allocable to the company in accordance with the expense allocation policies of the Manager or such affiliates;
|
|
·
|
all insurance costs incurred with respect to insurance policies obtained in connection with the operation of the company’s business, including errors and omissions insurance covering activities of the Manager and its affiliates and any of their employees relating to the performance of the Manager’s duties and obligations under the Management Agreement or of its affiliates under the administrative services agreement between the Manager and A-III, other than insurance premiums incurred by the Manager for employer liability insurance;
|
|
·
|
expenses relating to any office or office facilities, including disaster backup recovery sites and facilities, maintained expressly for the company and separate from offices of the Manager;
|
|
·
|
the costs of the wages, salaries, and benefits incurred by the Manager with respect to certain Dedicated Employees
that the Manager elects to provide to the company pursuant to the Management Agreement; provided that (A) if any such Dedicated Employee devotes less than 100% of his or her working time and efforts to matters related to the company and its business, the company will be required to bear only a pro rata portion of the costs of the wages, salaries and benefits the Manager incurs for such Dedicated Employees based on the percentage of such employee’s working time and efforts spent on matters related to the company, (B) the amount of such wages, salaries and benefits paid or reimbursed with respect to the Dedicated Employees shall be subject to the approval of the Compensation Committee of the Board and, if required by the Board, of the Board and (C) during the one-year period following the date of the Management Agreement, the aggregate amount of cash compensation paid to Dedicated Employees of the Manager and its affiliates by the company, or reimbursed by the company to the Manager in respect thereof, will not exceed $500,000; and
|
|
·
|
any equity-based compensation that the company, upon the approval of the Board or the Compensation Committee of the Board, elects to pay to any director, officer or employee of the company or the Manager or any of the Manager’s affiliates who provides services to the company or any of its subsidiaries.
|
For the years ended December 31, 2016 and
2015, the company incurred a base management fee of $391,065 and $389,111, respectively, which was classified in management
fee, affiliates in the consolidated statements of operations. In addition to the base management fee, the company is required
to reimburse certain expenses, related wages, salaries and benefits incurred by the Manager. For the years ended December 31,
2016 and 2015, the company reimbursed expenses of $533,814 and $500,000, respectively, which was classified in allocated
salaries and other compensation, affiliates in the consolidated statements of operations. At December 31, 2016 and 2015,
the unpaid portion of the base management fee and allocated expenses in the amount of $216,991 and $245,753, respectively, was
recorded in due to affiliates in the consolidated balance sheets.
For the year ended December 31, 2015, the company
paid legal fees on behalf of the Manager in the amount of $18,442, for which it was reimbursed.
Additionally, for the year ended December 31,
2015, the Manager paid professional fees on behalf of the company in the amount of $50,000, which was reimbursed to the Manager
in July 2015.
Transactions with Roberts Properties, Inc.
and Roberts Properties Construction (the “Roberts Companies”) and its Affiliates
Reimbursement Arrangement for Consulting
Services.
The company entered into a reimbursement arrangement for services provided by the Roberts Companies, effective February 4, 2008,
as amended January 1, 2014. Under the terms of the arrangement, the company reimburses the Roberts Companies for the cost of providing
consulting services in an amount equal to an agreed-upon hourly billing rate for each employee multiplied by the number of hours
that the employee provided services to the company.
Additionally, at the request of the company,
Roberts Construction performed repairs and maintenance and other consulting services related to the company’s land parcels.
Roberts Construction received cost reimbursements of $68 and $2,104 for the years ended December 31, 2016 and 2015, respectively,
which were recorded in general and administrative expenses in the consolidated statements of operations.
For a period of 180 days after the closing
of the recapitalization transaction with A-III, the company had the right to request the reasonable assistance of employees of
Roberts Properties, Inc. with respect to transition issues and questions relating to the company’s properties and operations.
This 180 day period terminated July 30, 2015. The employees of Roberts Properties, Inc. continued to provide limited services with
respect to transition issues from July 30, 2015 through December 31, 2016. Consistent with the expired arrangement for transition
services, the cost for these services was reimbursed in an amount equal to an agreed-upon hourly billing rate for each employee
multiplied by the number of hours that the employee provided such services to the company. Under Mr. Robert’s Employment
Agreement, First Extension Agreement and Second Extension Agreement, Mr. Roberts has agreed to supervise the disposition of the
remaining legacy property. Affiliates of Mr. Roberts may provide services to the company in connection with the sale of such property.
The fees and costs we pay for such services will be considered selling costs for purposes of the true-up arrangement under the
Stock Purchase Agreement.
Under these arrangements, the company incurred
costs with Roberts Properties of $68,513 and $119,589 for the years ended December 31, 2016 and 2015, respectively, which were
recorded in general and administrative expenses in the consolidated statements of operations. Roberts Properties also received
cost reimbursements in the amount of $86 and $9,768 for the years ended December 31, 2016 and 2015, respectively, for the company’s
operating costs and other related expenses paid by Roberts Properties. At December 31, 2016 and 2015, the unpaid portion of these
costs in the amount of $85 and $2,179, respectively, was recorded in due to affiliates, which none was related to real estate assets
held for sale in the consolidated balance sheets. Included in the liabilities related to real estate assets held for sale as of
December 31, 2015 were unpaid costs of $640.
Sale of Bradley Park Land
. The company entered into a contract to sell its Bradley Park Land to Bradley Park Apartments, LLC, which is
an affiliate of Mr. Roberts, who is a director of the company. The company’s Audit Committee in existence prior to and after
the A-III transaction approved the transaction in accordance with the committee’s charter and in compliance with applicable
listing rules of the Exchange. The company’s Board in existence prior to and after the A-III transaction also approved the
transaction in accordance with its Code of Business Conduct and Ethics. See Note 3 for details of the transaction.
Sale of Highway 20
.
The operating partnership entered into a contract to sell Highway 20 to Roberts Capital Partners, LLC, which is an affiliate of
Mr. Roberts, who is a director of the company. The company’s Audit Committee approved the transaction in accordance with
the committee’s charter and in compliance with applicable listing rules of the Exchange. The company’s Board also
approved the transaction in accordance with its Code of Business Conduct and Ethics. See Note 3 for details of the transaction.
Sublease of Office Space.
The company
is under a sublease agreement for 1,817 square feet of office space with Roberts Capital Partners, LLC since April 7, 2014, the
lease commencement date. Roberts Capital Partners, LLC is owned by Mr. Roberts. The terms of the sublease agreement were the same
terms that Roberts Capital Partners, LLC has with the unrelated third party landlord. Roberts Capital Partners, LLC is liable to
the building owner for the full three-year term of its lease; however, the company negotiated a 90-day right to terminate its sublease.
The sublease expires on April 7, 2017, subject to a one-year extension option. The company paid a security deposit of $20,577 upon
the execution of the lease. During the years ended December 31, 2016 and 2015, the company incurred rent expense of $33,274 and
$31,003, respectively.
Extension Agreement Extending Term of Governance and Voting Agreement
and Employment Agreement
On February 1, 2016, the company, A-III and
Mr. Roberts, entered into the First Extension Agreement, effective as of January 28, 2016, extending the terms of the Employment
Agreement by and between the company and Mr. Roberts and the Governance and Voting Agreement by and among the company, A-III and
Mr. Roberts. On June 15, 2016, the company, A-III and Mr. Roberts, entered into the Second Extension Agreement, effective as of
June 15, 2016, further extending the terms of the Employment Agreement and the Governance and Voting Agreement. As a result of
these amendments, the parties agreed to extend the expiration of the term of each of the Employment Agreement and the Governance
and Voting Agreement from June 30, 2016, the first extension date, to December 31, 2016. On December 31, 2016, the Employment Agreement
expired and Mr. Roberts ceased to be an officer or employee of our company. On October 10, 2016, the company, A-III and Mr. Roberts,
entered into the Extension of Governance and Voting Agreement, effective as of October 10, 2016, further extending the term of
the Governance and Voting Agreement, but not the Employment Agreement. As a result of the Extension of Governance and Voting Agreement,
the parties have agreed to extend the expiration of the term of the Governance and Voting Agreement from December 31, 2016 to June
30, 2017. As a result, all of the respective rights and obligations of the parties under, and all other terms, conditions and provisions
of, the Governance and Voting Agreement shall continue in full force and effect until June 30, 2017, unless the Governance and
Voting Agreement is amended in writing by the parties or is sooner terminated in accordance with the provisions thereof.
10.
COMMITMENTS AND CONTINGENCIES
The company and the operating partnership may
be subject to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of these
matters cannot be predicted with certainty, management believes that the final outcome of these matters should not have a material
adverse effect on the company’s financial position, results of operations or cash flows.
Under various federal, state, and local environmental
laws and regulations, the company may be required to investigate and clean up the effects of hazardous or toxic substances at its
properties, including properties that have previously been sold. The preliminary environmental assessment of the company’s
property has not revealed any environmental liability that the company believes would have a material adverse effect on its business,
assets, or results of operations, nor is the company aware of any such environmental liability.
See Note 9 - Related Party Transactions for
details of the company’s management agreement and sublease for office space with related parties.
Exhibit
No.
|
|
Description
|
|
|
|
3.1
|
|
Amended
and Restated Articles of Incorporation of Roberts Realty Investors, Inc. filed with the Georgia Secretary of State on
July 22, 2004. [Incorporated by reference to Exhibit 3.1 in our quarterly report on Form 10-Q for the quarter ended September
30, 2004.]
|
3.2
|
|
Articles
of Amendment to Amended and Restated Articles of Incorporation of Roberts Realty Investors, Inc. to eliminate ownership
limit, effective January 30, 2015. [Incorporated by reference to Exhibit 3.1 in our current report on Form 8-K dated February
2, 2015.]
|
3.3
|
|
Articles of Amendment
to Amended and Restated Articles of Incorporation of Roberts Realty Investors, Inc. to change company name, effective January
30, 2015. [Incorporated by reference to Exhibit 3.1 in our current report on Form 8-K dated February 2, 2015.]
|
|
|
|
3.4
|
|
Amended and Restated
Bylaws of Roberts Realty Investors, Inc. [Incorporated by reference to Exhibit 3.1 in our current report on Form
8-K dated February 4, 2008.]
|
|
|
|
3.5
|
|
Amendment to Amended
and Restated Bylaws of Roberts Realty Investors, Inc. to give the Board of Directors the authority to fix the number of Directors
at five or any greater number, effective January 30, 2015. [Incorporated by reference to Exhibit 3.1 in our current report
on Form 8-K dated February 2, 2015.]
|
|
|
|
4.1
|
|
Agreement of Limited
Partnership of Roberts Properties Residential, L.P., dated October 4, 1994. [Incorporated by reference to Exhibit
4.1 in our quarterly report on Form 10-Q for the quarter ended June 30, 2011.]
|
|
|
|
4.1.1
|
|
First Amended and
Restated Agreement of Limited Partnership of Roberts Properties Residential, L.P., dated as of October 4, 1994, as amended. [Incorporated
by reference to Exhibit 4.1.1 in our quarterly report on Form 10-Q for the quarter ended June 30, 2011.]
|
|
|
|
4.1.2
|
|
Amendment #1 to First
Amended and Restated Agreement of Limited Partnership of Roberts Properties Residential, L.P., dated as of October 13, 1994. [Incorporated
by reference to Exhibit 4.1.2 in our quarterly report on Form 10-Q for the quarter ended June 30, 2011.]
|
|
|
|
4.1.3
|
|
Amendment #2 to First
Amended and Restated Agreement of Limited Partnership of Roberts Properties Residential, L.P. [Incorporated by
reference to Exhibit 10.1 in our Registration Statement on Form S-3 filed July 8, 1999, registration number 333-82453.]
|
|
|
|
4.2
|
|
Certificate
of Limited Partnership of Roberts Properties Residential, L.P. filed with the Georgia Secretary of State on July 22, 1994. [Incorporated
by reference to Exhibit 4.2 in our quarterly report on Form 10-Q for the quarter ended June 30, 2011.]
|
|
|
|
|
|
Highway 20
|
|
|
|
10.1.1
|
|
Design and Development
Agreement between Roberts Properties Residential, L.P. and Roberts Properties, Inc. for the Highway 20 land parcel in Cumming,
Georgia, dated as of February 21, 2006. [Incorporated by reference to Exhibit 10.1 in our current report on Form
8-K dated February 21, 2006.]
|
|
|
|
10.1.2
|
|
Construction
Contract between Roberts Properties Residential, L.P. and Roberts Properties Construction, Inc. for the Highway 20 land
parcel in Cumming, Georgia, dated as of February 21, 2006. [Incorporated by reference to Exhibit 10.2 in our
current report on Form 8-K dated February 21, 2006.]
|
Exhibit
No.
|
|
Description
|
|
|
|
10.1.3
|
|
Sales Contract dated
October 7, 2016, by and between ACRE Realty LP and Roberts Capital Partners, LLC, a Georgia limited liability company. [Incorporated
by reference to Exhibit 10.1 in our current report on Form 8-K dated October 13, 2016.]
|
|
|
|
|
|
Compensation Agreements
and Arrangements, and Restricted Stock Plan
|
|
|
|
10.2.1
|
|
2006 Roberts Realty
Investors, Inc. Restricted Stock Plan, as amended effective January 27, 2009. [Incorporated by reference to Exhibit
4.1 in the company’s post-effective amendment to its Registration Statement on Form S-8 filed with the SEC on January
29, 2009.]
|
|
|
|
10.2.2
|
|
Revised
Form of Restricted Stock Award Agreement (supersedes the form of restricted stock award agreement attached as Exhibit
A to Annex A to our proxy statement for our 2006 annual meeting filed with the SEC on July 20, 2006). [Incorporated by
reference to Exhibit 10.3 in our quarterly report on Form 10-Q for the quarter ended March 31, 2007.]
|
10.2.3
|
|
Form
of Independent Director Restriction Agreement. [Incorporated by reference to Exhibit 10.1 in our current report on Form
8-K dated October 14, 2015.]
|
10.2.4
|
|
Form of Officer Restriction
Agreement. [Incorporated by reference to Exhibit 10.1 in our current report on Form 8-K dated October 14, 2015.]
|
|
|
|
|
|
Miscellaneous Agreements
with Affiliates
|
|
|
|
10.3.1
|
|
Reimbursement arrangement
between Roberts Realty Investors, Inc. and Roberts Properties, Inc., effective February 8, 2008. [Incorporated
by reference to Exhibit 10.1 in our current report on Form 8-K dated February 4, 2008.]
|
|
|
|
10.3.2
|
|
Summary of Amended
Reimbursement Arrangement Between Roberts Realty Investors, Inc. and Each of Roberts Properties, Inc. and Roberts Properties
Construction, Inc. (effective January 1, 2011). [Incorporated by reference to Exhibit 10.3 in our current
report on Form 8-K dated January 24, 2011.]
|
|
|
|
10.3.3
|
|
Summary of Amended
Reimbursement Arrangement Between Roberts Realty Investors, Inc. and Each of Roberts Properties, Inc. and Roberts Properties
Construction, Inc. (effective January 1, 2014). [Incorporated by reference to our current report on Form 8-K
dated January 20, 2014.]
|
|
|
|
10.3.4
|
|
Office Lease by and
between Roberts Capital Partners, LLC, as Landlord, and Roberts Properties Residential, L.P., as Tenant, dated as of February
19, 2014. [Incorporated by reference to our current report on Form 8-K dated February 19, 2014.]
|
|
|
|
10.3.5
|
|
Stock Purchase Agreement
dated as of November 19, 2014 by and among Roberts Realty Investors, Inc., Roberts Properties Residential, L.P., and A-III
Investment Partners LLC. [Incorporated by reference to Exhibit 10.1 in our current report on Form 8-K dated November
19, 2014.]
|
|
|
|
10.3.6
|
|
Form of Indemnification
Agreement dated as of November 19, 2014 by and between Roberts Realty Investors, Inc. and each of its directors and officers. [Incorporated
by reference to Exhibit 10.2 in our current report on Form 8-K dated November 19, 2014.]
|
|
|
|
10.3.7
|
|
Management Agreement,
dated as of January 30, 2015 by and among Roberts Realty Investors, Inc., Roberts Properties Residential, L.P. and A-III Manager
LLC. [Incorporated by reference to Exhibit 10.1 in our current report on Form 8-K dated February 2, 2015.]
|
|
|
|
10.3.8
|
|
Governance and Voting
Agreement, dated as of January 30, 2015 by and among Roberts Realty Investors, Inc., A-III Investment Partners LLC and Charles
S. Roberts. [Incorporated by reference to Exhibit 10.2 in our current report on Form 8-K dated February 2, 2015.]
|
|
|
|
10.3.9
|
|
Employment Agreement,
dated as of January 30, 2015 by and between Roberts Realty Investors, Inc. and Charles S. Roberts. [Incorporated by reference
to Exhibit 10.3 in our current report on Form 8-K dated February 2, 2015.]
|
|
|
|
10.3.10
|
|
Extension Agreement,
dated as of January 28, 2016, by and among ACRE Realty Investors Inc., A-III Investment Partners LLC and Charles S. Roberts.
[Incorporated by reference to Exhibit 10.1 in our current report on Form 8-K dated February 2, 2016.]
|
Exhibit
No.
|
|
Description
|
|
|
|
10.3.11
|
|
Release Agreement
and Covenant Not to Sue of Charles S. Roberts dated November 30, 2015. [Incorporated by reference to Exhibit 10.1 in our current
report on Form 8-K dated December 3, 2015.]
|
|
|
|
10.3.12
|
|
Registration Rights
Agreement, dated as of January 30, 2015 by and between Roberts Realty Investors, Inc. and A-III Investment Partners LLC. [Incorporated
by reference to Exhibit 10.4 in our current report on Form 8-K dated February 2, 2015.]
|
|
|
|
10.3.13
|
|
Tax Protection Agreement,
dated as of January 30, 2015 by and among Roberts Realty Investors, Inc., Roberts Properties Residential, L.P., A-III Investment
Partners LLC and A-III Manager LLC. [Incorporated by reference to Exhibit 10.5 in our current report on Form 8-K dated February
2, 2015.]
|
|
|
|
10.3.14
|
|
Warrant Agreement,
dated as of January 30, 2015 by and between Roberts Realty Investors, Inc. and A-III Investment Partners LLC. [Incorporated
by reference to Exhibit 10.6 in our current report on Form 8-K dated February 2, 2015.]
|
|
|
|
10.3.15
|
|
Second Extension Agreement,
dated as of June 15, 2016, by and among ACRE Realty Investors Inc., A-III Investment Partners LLC and Charles S. Roberts.
[Incorporated by reference to Exhibit 10.1 in our current report on Form 8-K dated June 15, 2016.]
|
|
|
|
10.3.16
|
|
Extension of Governance
and Voting Agreement, dated as of October 10, 2016, by and among ACRE Realty Investors, Inc., A-III Investment Partners LLC
and Charles S. Roberts. [Incorporated by reference to Exhibit 10.1 in our current report on Form 8-K dated October 14, 2016.]
|
|
|
|
|
|
Other Exhibits:
|
|
|
|
21
|
|
Subsidiaries of ACRE
Realty Investors Inc.
|
|
|
|
23.1
|
|
Consent of Independent
Registered Public Accounting Firm – Deloitte & Touche LLP.
|
|
|
|
31
|
|
Certifications of
Edward Gellert and Mark E. Chertok pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32
|
|
Certifications of
Edward Gellert and Mark E. Chertok pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit is not
“filed” for purposes of Section 18 of the Securities Exchange Act of 1934 but is instead furnished as provided
by applicable rules of the Securities and Exchange Commission.
|
|
|
|
101
|
|
The following materials
from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, formatted in eXtensible Business
Reporting Language (XBRL): (a) Consolidated Balance Sheets at December 31, 2016 and December 31, 2015; (b)
Consolidated Statements of Operations for each of the years ended December 31, 2016 and 2015; (c) Consolidated Statements
of Shareholders’ Equity for each of the years ended December 31, 2016 and 2015; (d) Consolidated Statements
of Cash Flows for each of the years ended December 31, 2016 and 2015; and (e) Notes to Consolidated Financial Statements.*
|
* Pursuant to Rule 406T of
Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus
for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of
the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March
9, 2017
|
ACRE Realty Investors Inc.
|
|
(formerly named Roberts Realty Investors, Inc.)
|
|
|
|
|
|
By:
|
/s/ Mark
E. Chertok
|
|
|
|
Mark E. Chertok, Chief Financial Officer
|
|
|
|
(Principal Financial Officer
|
|
|
|
and Principal Accounting Officer)
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Edward Gellert
|
|
|
|
|
Edward
Gellert
|
|
Chairman,
President and Chief Executive Officer
(Principal Executive Officer)
|
|
March
9, 2017
|
/s/
Bruce D. Frank
|
|
|
|
|
Bruce
D. Frank
|
|
Director
|
|
March
9, 2017
|
/s/
Robert G. Koen
|
|
|
|
|
Robert
G. Koen
|
|
Director
|
|
March
9, 2017
|
/s/
Robert C. Lieber
|
|
|
|
|
Robert
C. Lieber
|
|
Director
|
|
March
9, 2017
|
/s/
Robert L. Loverd
|
|
|
|
|
Robert
L. Loverd
|
|
Director
|
|
March
9, 2017
|
/s/
Kyle A. Permut
|
|
|
|
|
Kyle
A. Permut
|
|
Director
|
|
March
9, 2017
|
/s/
Charles S. Roberts
|
|
|
|
|
Charles
S. Roberts
|
|
Director
|
|
March
9, 2017
|
APPENDIX
C
Quarterly
Report on Form 10-Q for the quarter ended JUNE 30, 2017
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|
|
|
SECURITIES
EXCHANGE ACT OF 1934
|
|
|
For
the quarterly period ended June 30, 2017
|
|
|
|
|
|
OR
|
|
|
|
|
o
|
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: 001-13183
ACRE REALTY
INVESTORS INC.
(Exact name of
registrant as specified in its charter)
Georgia
|
58-2122873
|
(State or other jurisdiction
of incorporation or organization)
|
(I.R.S. Employer Identification
No.)
|
|
|
c/o
Avenue Capital Group
399
Park Avenue, 6
th
Floor
New
York, New York
|
10022
|
(Address
of principal executive offices)
|
(Zip
Code)
|
212-878-3504
(Registrant’s
telephone number, including area code)
N/A
(Former
name, former address and former fiscal year, if changed since last report)
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
x
No
o
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 during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
|
Accelerated filer
o
|
Non-accelerated filer
o
(Do not check if a smaller reporting company)
|
Smaller reporting company
x
|
|
Emerging growth company
o
|
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
|
|
Outstanding
at August 4, 2017
|
Common
Stock, $.01 par value per share
|
|
20,494,631
shares
|
TABLE OF CONTENTS
NOTE
REGARDING FORWARD-LOOKING STATEMENTS
This
report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933,
as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). These statements relate to future economic performance, plans and objectives of management for future operations,
and projections of revenues and other financial items that are based on the beliefs of our management, as well as assumptions
made by, and information currently available to, our management. The words “expect,” “intend,” “estimate,”
“anticipate,” “believe,” and similar expressions are intended to identify forward-looking statements.
We make forward-looking statements in the notes to the unaudited consolidated financial statements included in this report and
in Part I, Item 2 of this report.
Some
of the forward-looking statements relate to our intent, belief, or expectations regarding our Plan of Dissolution (defined below).
See our preliminary proxy statement on Schedule 14A filed with the Securities and Exchange Commission (the “SEC”)
on July 24, 2017 for a description of the Risk Factors to be considered by shareholders in deciding whether to approve
the Plan of Dissolution. Other forward-looking statements relate to trends affecting our financial condition and results of operations,
our anticipated capital needs and expenditures, and how we may address these needs. These statements involve risks, uncertainties,
assumptions, and other factors discussed in this report and in our other filings with the SEC. These forward-looking statements
are not guarantees of future performance and our actual results may differ materially from those that are anticipated in the forward-looking
statements. See Item 1A, Risk Factors, in our Form 10-K for the year ended December 31, 2016, for a description of some of
the important factors that may affect actual outcomes.
The following are some of the risks
and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from
those presented in our forward-looking statements:
|
·
|
We can give no assurance that we will be able to
successfully implement the Plan of Dissolution and distribute the net proceeds from liquidation to our shareholders as we expect.
|
|
·
|
We
may face unanticipated delays or costs relating to our Plan of Dissolution,
which may reduce or delay our payment of liquidating distributions.
|
|
·
|
We
can give no assurance regarding the timing of the completion of the Plan of Dissolution
and the amount and timing of liquidating distributions to be received by our shareholders.
|
|
·
|
We may face risks associated with legal proceedings,
including shareholder litigation, that may be instituted against us related to the Plan of Dissolution.
|
|
·
|
Disruptions in the financial markets and uncertain
economic conditions could adversely affect the implementation of our Plan of Dissolution.
|
|
·
|
If the Plan of Dissolution is not approved by our shareholders, we would owe our Manager management fees.
|
For
these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995. You should not place undue reliance on the forward-looking statements, which speak only
as of the date of this report. All subsequent written and oral forward-looking statements attributable to us or any person acting
on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information,
future events, or otherwise.
PART I – Financial
Information
Item 1. Financial Statements
ACRE REALTY
INVESTORS INC.
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
|
|
June
30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate asset held for sale
|
|
$
|
—
|
|
|
$
|
4,283,385
|
|
Cash
and cash equivalents
|
|
|
19,904,391
|
|
|
|
16,638,702
|
|
Other
assets
|
|
|
197,116
|
|
|
|
125,436
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
20,101,507
|
|
|
$
|
21,047,523
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
537,437
|
|
|
$
|
479,683
|
|
Due
to affiliates
|
|
|
207,699
|
|
|
|
217,076
|
|
Liabilities
related to real estate asset held for sale
|
|
|
—
|
|
|
|
1,498
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
745,136
|
|
|
|
698,257
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity:
|
|
|
|
|
|
|
|
|
Preferred
shares, $.01 par value, 20,000,000 shares authorized, no shares issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common
shares, $.01 par value, 100,000,000 shares authorized, 20,567,348 and 20,563,182 shares issued and 20,494,631 and 20,490,465 shares
outstanding at June 30, 2017 and December 31, 2016, respectively
|
|
|
205,674
|
|
|
|
205,632
|
|
Additional
paid-in capital
|
|
|
44,490,555
|
|
|
|
44,485,281
|
|
Treasury
shares, at cost 72,717 shares both at June 30, 2017 and December 31, 2016
|
|
|
(71,332
|
)
|
|
|
(71,332
|
)
|
Accumulated
deficit
|
|
|
(25,963,980
|
)
|
|
|
(25,005,431
|
)
|
|
|
|
|
|
|
|
|
|
Total
ACRE Realty Investors Inc. shareholders’ equity
|
|
|
18,660,917
|
|
|
|
19,614,150
|
|
|
|
|
|
|
|
|
|
|
Non-controlling
interest – operating partnership
|
|
|
695,454
|
|
|
|
735,116
|
|
|
|
|
|
|
|
|
|
|
Total
equity
|
|
|
19,356,371
|
|
|
|
20,349,266
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
20,101,507
|
|
|
$
|
21,047,523
|
|
See notes to
the unaudited consolidated financial statements.
ACRE REALTY
INVESTORS INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
insurance and other expenses
|
|
|
3,210
|
|
|
|
3,575
|
|
|
|
6,421
|
|
|
|
7,080
|
|
Real
estate taxes
|
|
|
4,184
|
|
|
|
4,409
|
|
|
|
8,585
|
|
|
|
8,818
|
|
Management
fees, affiliate
|
|
|
86,430
|
|
|
|
97,687
|
|
|
|
175,478
|
|
|
|
200,013
|
|
Allocated
salaries and other compensation, affiliate
|
|
|
100,243
|
|
|
|
127,540
|
|
|
|
218,341
|
|
|
|
294,685
|
|
General
and administrative expenses
|
|
|
406,841
|
|
|
|
950,825
|
|
|
|
1,018,403
|
|
|
|
1,577,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Expenses
|
|
|
600,908
|
|
|
|
1,184,036
|
|
|
|
1,427,228
|
|
|
|
2,087,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of asset
|
|
|
432,793
|
|
|
|
—
|
|
|
|
432,793
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
(168,115
|
)
|
|
|
(1,184,036
|
)
|
|
|
(994,435
|
)
|
|
|
(2,087,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
Attributable to Non-controlling Interest
|
|
|
(6,045
|
)
|
|
|
(45,446
|
)
|
|
|
(35,886
|
)
|
|
|
(83,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Attributable to Common Shareholders
|
|
$
|
(162,070
|
)
|
|
$
|
(1,138,590
|
)
|
|
$
|
(958,549
|
)
|
|
$
|
(2,004,724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
Per Common Share - Basic and Diluted (Note 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.10
|
)
|
Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.10
|
)
|
See notes to
the unaudited consolidated financial statements.
ACRE REALTY
INVESTORS INC.
CONSOLIDATED
STATEMENTS OF EQUITY
(UNAUDITED)
|
|
Common
Shares
|
|
|
Attributable
to Common Shareholders
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
Issued
|
|
|
Amount
|
|
|
Additional
Paid-In
Capital
|
|
|
Treasury
Shares
|
|
|
Accumulated
Deficit
|
|
|
Total
ACRE
Shareholders’
Equity
|
|
|
Non-
controlling
Interest
|
|
|
Total
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
AT DECEMBER 31, 2016
|
|
|
20,563,182
|
|
|
$
|
205,632
|
|
|
$
|
44,485,281
|
|
|
$
|
(71,332
|
)
|
|
$
|
(25,005,431
|
)
|
|
$
|
19,614,150
|
|
|
$
|
735,116
|
|
|
$
|
20,349,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(958,549
|
)
|
|
|
(958,549
|
)
|
|
|
(35,886
|
)
|
|
|
(994,435
|
)
|
Amortization
of share based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
1,540
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,540
|
|
|
|
—
|
|
|
|
1,540
|
|
Redemption
of operating partnership units for common shares
|
|
|
4,166
|
|
|
|
42
|
|
|
|
4,874
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,916
|
|
|
|
(4,916
|
)
|
|
|
—
|
|
Adjustment
for non-controlling interest in the operating partnership
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,140
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,140
|
)
|
|
|
1,140
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
AT JUNE 30, 2017
|
|
|
20,567,348
|
|
|
$
|
205,674
|
|
|
$
|
44,490,555
|
|
|
$
|
(71,332
|
)
|
|
$
|
(25,963,980
|
)
|
|
$
|
18,660,917
|
|
|
$
|
695,454
|
|
|
$
|
19,356,371
|
|
See notes to
the unaudited consolidated financial statements.
ACRE REALTY
INVESTORS INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Six
Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(994,435
|
)
|
|
$
|
(2,087,993
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Gain
on sale of real estate asset
|
|
|
(432,793
|
)
|
|
|
—
|
|
Amortization
of shared-based compensation
|
|
|
1,540
|
|
|
|
110,824
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase
in other assets
|
|
|
(71,680
|
)
|
|
|
(53,949
|
)
|
Decrease
in due to affiliates
|
|
|
(9,377
|
)
|
|
|
(17,080
|
)
|
Increase
in accounts payable and accrued expenses
|
|
|
56,256
|
|
|
|
450,382
|
|
Net
cash used in operating activities
|
|
|
(1,450,489
|
)
|
|
|
(1,597,816
|
)
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of real estate asset
|
|
|
4,725,000
|
|
|
|
—
|
|
Costs
related to the sale of real estate asset
|
|
|
(8,822
|
)
|
|
|
—
|
|
Net
cash provided by investing activities
|
|
|
4,716,178
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
Net
cash from financing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
|
|
3,265,689
|
|
|
|
(1,597,816
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, Beginning of Period
|
|
|
16,638,702
|
|
|
|
19,874,915
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, End of Period
|
|
$
|
19,904,391
|
|
|
$
|
18,277,099
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash
paid for state taxes
|
|
$
|
4,550
|
|
|
$
|
5,356
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Schedule of Non-Cash Investing Activities and Financing Activities:
|
|
|
|
|
|
|
|
|
Redemption
of operating partnership units for common shares
|
|
$
|
4,916
|
|
|
$
|
169,667
|
|
See notes to
the unaudited consolidated financial statements.
ACRE REALTY
INVESTORS INC.
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
1.
|
BUSINESS AND ORGANIZATION
|
ACRE Realty
Investors Inc. (the “company”) (formerly known as Roberts Realty Investors, Inc. until its name was changed on January
30, 2015), a Georgia corporation, was formed on July 22, 1994 to serve as a vehicle for investments in, and ownership of, a professionally
managed real estate portfolio of multifamily apartment communities. The company’s strategy has since changed upon the consummation
of the transaction with A-III Investment Partners LLC, as described below.
The company
conducts all of its operations and owns all of its assets in and through ACRE Realty LP (formerly known as Roberts Properties
Residential, L.P. until its name was changed on January 30, 2015), a Georgia limited partnership (the “operating partnership”),
or through wholly owned subsidiaries of the operating partnership. The company controls the operating partnership as its sole
general partner and had a 96.41% and a 96.39% ownership interest in the operating partnership at June 30, 2017 and December 31,
2016, respectively.
On November 19, 2014, the company and its operating partnership entered into a Stock Purchase Agreement with
A-III Investment Partners LLC (“A-III”) (the “Stock Purchase Agreement”). On January 30, 2015, the company
and A-III closed the transactions contemplated under the Stock Purchase Agreement. At the closing, A-III purchased 8,450,704 shares
of the company’s common stock at a purchase price of $1.42 per share, for an aggregate purchase price of $12 million, and
the company issued to A-III warrants to purchase up to an additional 26,760,563 shares of common stock at an exercise price of
$1.42 per share ($38 million in the aggregate). The purchase price per share and the exercise price of the warrants are subject
to a potential post-closing adjustment upon completion of the sale of the company’s four land parcels owned at January 30,
2015, which could result in the issuance of additional shares of common stock to A-III and an increase in the number of shares
of common stock issuable upon exercise of the warrants. As of June 30, 2017, all of these land parcels owned at January 30,
2015 had been sold and there were no post-closing adjustments to the number of shares of our common stock previously issued to
A-III or issuable upon exercise of the warrants.
After the closing, Roberts Realty Investors, Inc. amended its articles of incorporation to change its name to ACRE
Realty Investors Inc. At the closing, the company, A-III and Charles S. Roberts (“Mr. Roberts”), Roberts Realty Investors,
Inc.’s chairman and chief executive officer, entered into a Governance and Voting Agreement, dated January 30, 2015 (the
“Governance and Voting Agreement”) and the company and Mr. Roberts entered into an employment agreement pursuant to
which Mr. Roberts was appointed and employed by the company to serve as an Executive Vice President of our company. Pursuant to
two extension agreements, the Governance and Voting Agreement and Employment Agreement were extended until December 31, 2016.
On December 31, 2016, the Employment Agreement expired and Mr. Roberts ceased to be an officer or employee of our company,
but remained a member of our board of directors (the “Board”) through April 4, 2017, the effective date of Mr. Roberts’
resignation from the Board. As a result of his resignation from the Board, all rights and obligations of Mr. Roberts under the
Governance and Voting Agreement, dated January 30, 2015, as further amended, were terminated upon his resignation.
Plan of
Dissolution
On June 26,
2017, in light of management’s recommendation and other factors described below, the Board approved the company’s
voluntary dissolution and liquidation pursuant to a plan of dissolution (the “Plan of Dissolution”). As of June 30,
2017, the company has sold all of its legacy properties and as such, virtually, all of its assets consist of cash resulting
from the sale of these legacy properties. Management and the company’s advisors, under the oversight of our Board, have
explored strategic alternatives to enhance shareholder value but the process to date has not yielded any opportunities viewed
by the company’s Board as reasonably likely to provide greater realizable value to the shareholders. In addition, management
informed the company’s Board that, absent public announcement of a transaction that would result in the company becoming
or acquiring an operating company, the NYSE MKT was expected to commence proceedings to suspend trading and delist its common
stock. Accordingly, the company’s management and Board concluded that the voluntary dissolution and liquidation of
the company pursuant to the Plan of Dissolution, subject to the shareholders’ approval, is in the best interests of the
company and its shareholders. The principal purpose of the Plan of Dissolution is to maximize shareholder value by distributing
the net proceeds from liquidation to the company’s shareholders. As the Plan of Dissolution requires approval of the affirmative
vote of three-quarters of all of the shareholders entitled to vote on the matter, there can be no assurance that the Plan of Dissolution
will be approved by the company’s shareholders.
The liquidation process and the amount and timing of any future liquidating distributions paid to shareholders
involves risks and uncertainties. Accordingly, it is not possible to predict the timing of any future liquidating distributions
or the aggregate amount which will ultimately be distributed to shareholders.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of
Quarterly Presentation
. The accompanying consolidated financial statements and related notes of the company have been prepared
in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial reporting
and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. The consolidated financial statements, including the notes
are unaudited and exclude some disclosures required in audited financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation of the company’s financial position, results of operations and cash flows have
been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily
indicative of the results that may be expected for any other interim period or for the entire year. These financial statements
should be read in conjunction with the company’s December 31, 2016 consolidated financial statements and notes thereto included
in the company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission. Capitalized terms
used herein and not otherwise defined, are defined in the company’s December 31, 2016 consolidated financial statements.
The consolidated financial statements have been prepared on a going concern basis. The company will adopt
the liquidation basis of accounting once the Plan of Dissolution is approved by the shareholders.
Principles
of Consolidation.
The accompanying consolidated financial statements include the consolidated accounts of the company and
the operating partnership, which is controlled by the company. The operating partnership is a variable interest entity (“VIE”),
in which the company is considered to be the primary beneficiary. All inter-company accounts and transactions have been eliminated
in consolidation. The financial statements of the company have been adjusted for the non-controlling interest of the unitholders
in the operating partnership.
The company
consolidates the operating partnership, a VIE, in which it is considered to be the primary beneficiary. The primary beneficiary
is the entity that has (i) the power to direct the activities that most significantly impact the entity’s economic performance
and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to
the VIE. The company is required to reassess whether it is the primary beneficiary of a VIE for each reporting period. Our maximum
exposure to loss is the carrying value of assets and liabilities of our operating partnership which represents all of our assets
and liabilities.
Use
of Estimates.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Real Estate
Asset Held For Sale.
The company classifies real estate assets as held for sale after the following conditions have been satisfied:
(i) receipt of approval from its Board to sell the asset; (ii) the initiation of an active program to sell the asset; (iii) the
asset is available for immediate sale; (iv) it is probable that the sale of the asset will be completed within one year; and (v)
it is unlikely the plan to sell will change.
Real estate
asset held for sale is recorded at the lower of the carrying amount or fair value less estimated selling costs. The company reviews
the real estate asset held for sale each reporting period to determine that the carrying amount remains recoverable. If the carrying
amount of the real estate asset exceeds the fair value, the asset will be written down by the amount the carrying amount exceeds
the fair value amount. The fair value is determined by an evaluation of an appraisal, discounted cash flow analysis, sale price
and/or other applicable valuation techniques. As of June 30, 2017, the company had sold all its real estate assets.
The company
recognizes gains on the sales of assets when the sale has closed, title has passed to the buyer, adequate initial and continuing
investment by the buyer is received and other attributes of ownership have been transferred to the buyer. All of these conditions
are typically met at or shortly after closing. If any significant continuing obligation exists at the date of sale, the company
defers a portion of the gain attributable to the continuing obligation until the continuing obligation has expired or is removed.
Cash
and Cash Equivalents.
The company considers all highly liquid investments with a maturity of three months or less at the time
of purchase to be cash equivalents. The company maintains cash and cash equivalent balances with financial institutions that may
at times exceed the limits for insurance provided by the Federal Depository Insurance Corporation. The company has not experienced
any losses related to these excess balances and management believes its credit risk is minimal.
Warrants.
The company accounts for the warrants issued in connection with the A-III Stock Purchase Agreement in accordance with ASC
815, Accounting for Derivative Instruments and Hedging Activities, which provides guidance on the specific accounting treatment
of a multitude of derivative instruments. The company received proceeds in a private placement stock offering and issued detachable
warrants. The company evaluated the warrants to determine their relative fair value, using the backsolve method of the market
approach, incorporating the adjusted Black-Scholes option valuation model at their time of issuance and allocated a portion of
the proceeds from the private placement to the warrants based on their fair value. The warrants were recorded as a component of
equity.
Earnings
Per Share.
Earnings per share is computed using the two-class method of accounting, which includes the weighted-average number
of shares of common stock outstanding during the period and other securities that participate in dividends, such as our vested
restricted stock, to arrive at total common equivalent shares. In applying the two-class method, earnings are allocated to both
shares of common stock and securities that participate in dividends based on their respective weighted-average shares outstanding
for the period. During periods of net loss, losses are allocated only to the extent that the participating securities are required
to absorb such losses. Diluted earnings per share is calculated to reflect the potential dilution of all instruments or securities
that are convertible into shares of common stock. For the company, this includes the warrants and unvested restricted stock during
the periods presented. The company uses the two-class method or the treasury method, whichever is more dilutive.
Share-Based
Compensation.
The company records share-based awards to directors, which have no vesting conditions other than time of service,
at the fair value of the award, measured at the date of grant. The fair value of share-based grants is being amortized to compensation
expense ratably over the requisite service period, which is the vesting period. The company records share-based awards to non-employee
officers, based on the estimated fair value of such award at the grant date that is remeasured quarterly for unvested awards.
We amortize expense over the requisite service period related to share-based awards granted to non-employee officers.
Income
Taxes.
The company follows the asset and liability method of accounting for deferred income taxes. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts
of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date. The company recognizes the effect of income tax positions
only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest
amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in
which the change in judgment occurs.
In general,
a valuation allowance is recorded if, based on the weight of available evidence, it is more likely than not that some portion
or all of the deferred tax asset will not be realized. Realization of the company’s deferred tax assets depends upon the
company generating sufficient taxable income in future years in the appropriate tax jurisdictions to obtain a benefit from the
reversal of deductible temporary differences and from loss carryforwards. The company records a valuation allowance, based on
the expected timing of reversal of existing taxable temporary differences and its history of losses and future expectations of
reporting taxable losses, if management does not believe it met the requirements to realize the benefits of certain of its deferred
tax assets.
Fair Value
of Financial Instruments.
The company is required to disclose the fair value information about its financial instruments,
whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate fair value. See Note 7,
“Fair Value Measurements.”
Recent Accounting Pronouncements
In May 2014,
the Financial Accounting Standards Board (“FASB”) issued an update (“ASU 2014-09”) establishing ASC Topic
606,
Revenue from Contracts with Customers
. ASU 2014-09 establishes a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance.
ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires
certain additional disclosures. In August 2015, the FASB issued an update (“ASU 2015-14”) to ASC 606,
Deferral
of the Effective Date
, which defers the adoption of ASU 2014-09 to interim and annual reporting periods in fiscal years that
begin after December 15, 2017. In March 2016, the FASB issued an update (“ASU 2016-08”) to ASC 606,
Principal
versus Agent Considerations (Reporting Revenue Gross versus Net)
, which clarifies the implementation guidance on principal
versus agent considerations in the new revenue recognition standard pursuant to ASU 2014-09. In April 2016, the FASB issued
an update (“ASU 2016-10”) to ASC 606,
Identifying Performance Obligations and Licensing
, which clarifies guidance
related to identifying performance obligations and licensing implementation guidance contained in ASU 2014-09. In May 2016,
the FASB issued an update (“ASU 2016-12”) to ASC 606,
Narrow-Scope Improvements and Practical Expedients
, which
amends certain aspects of the new revenue recognition standard pursuant to ASU 2014-09. In December 2016, the FASB issued an update
(“ASU No. 2016-20”) to ASC 606,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with
Customers
, which provides technical corrections and improvements to clarify Topic 606 or to correct unintended application
of Topic 606. In February 2017, the FASB issued an update (“ASU No. 2017-05”),
Other Income - Gains and Losses
from the Derecognition of Nonfinancial Assets (Subtopic 610-20),
which clarifies the scope of asset derecognition guidance
and accounting for partial sales of nonfinancial assets and simplifies GAAP for derecognition of a business or nonprofit activity
by eliminating several accounting differences between transactions involving assets and transactions involving businesses. The
company is currently evaluating the impact of the adoption of these ASUs on the company’s consolidated financial statements.
In February
2016, the FASB issued an update (“ASU 2016-02”) establishing ASC Topic 842,
Leases
, which sets out the principles
for the recognition, measurement, presentation and disclosure of leases for both parties to a contract. ASU 2016-02 requires lessees
to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the
lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized
based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record
a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.
Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new
standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type
leases, direct financing leases and operating leases. ASU 2016-02 supersedes the previous leases standard, Leases (Topic 840).
The standard is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The company
is currently in the process of evaluating the impact the adoption of ASU 2016-02 will have on the company’s consolidated
financial statements.
In March 2016,
the FASB issued guidance (“ASU 2016-09”),
Compensation—Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting.
ASU 2016-09 changes the accounting for certain aspects of share-based payments to employees.
The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are
settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase more of an
employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows
for a policy election to account for forfeitures as they occur rather than on an estimated basis. For a public company,
the standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that
reporting period. Early adoption is permitted in any interim or annual period. The adoption of this update beginning
January 1, 2017 did not impact the company’s consolidated financial statements.
In August 2016,
the FASB issued an update (“ASU 2016-15”),
Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments.
ASU 2016-15 amends ASC 230,
Statement of Cash Flows
, to provide guidance on the classification
of certain cash receipts and payments in the statement of cash flows. For a public company, the standard is effective for fiscal
years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The
company has evaluated the impact that this guidance will have on the company’s consolidated financial statements and related
disclosures and determined it will not have a material impact.
In November
2016, the FASB issued an update (“ASU 2016-18”),
Statement of Cash Flows (Topic 230): Restricted Cash (a consensus
of the FASB Emerging Issues Task Force)
. ASU 2016-18 provides guidance on the classification and presentation of restricted
cash in the statement of cash flows. Under the new guidance, restricted cash will be included in the cash and cash equivalent
balances in the statement of cash flows. This guidance is effective for fiscal years beginning after December 31, 2017, including
interim periods within those fiscal years. Early adoption is permitted. The company has evaluated the impact that this guidance
will have on the company’s consolidated financial statements and related disclosures and determined it will not have a material
impact.
In January 2017,
the FASB issued an update (“ASU 2017-01”),
Clarifying the Definition of a Business to ASC Topic 805, Business Combinations
.
ASU 2017-01 clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions
(or disposals) of assets or businesses. This guidance is effective prospectively for fiscal years beginning after December 15,
2017, including interim periods within those fiscal years. Early adoption is permitted for transactions that occurred before the
issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued
or made available for issuance. The adoption of this ASU 2017-01 will result in less real estate acquisitions qualifying as businesses
and, accordingly, acquisition costs for those acquisitions that are not businesses will be capitalized rather than expensed. The
company has early adopted this new guidance beginning January 1, 2017 and had no impact on the company’s consolidated financial
statements when adopted.
In May 2017, the FASB issued an update (“ASU 2017-09”),
Compensation – Stock Compensation
(Topic 718), Scope of Modification Accounting
. ASU 2017-09 clarifies which changes to the terms or conditions of share-based
payment awards require an entity to apply modification accounting. Modification accounting should be applied unless all of the
following have been met. The fair value of the modified award is the same as the fair value of the original award, the vesting
condition of the modified award is the same as the vesting condition of the original award and the classification as an equity
instrument or liability instrument of the modified award is the same as the classification of the original award immediately before
the original award was modified. This guidance is effective for annual periods and interim periods within those annual periods
beginning after December 15, 2017. Early adoption is permitted. The amendments should be applied prospectively to an award modified
on or after the adoption date. The company is evaluating the impact that this guidance will have on the company’s consolidated
financial statements and related disclosures.
3.
|
REAL ESTATE ASSET HELD FOR SALE
|
As of December 31, 2016, the company owned the land parcel known as Highway 20, a 38-acre site located in
the City of Cumming, Georgia in Forsyth County, in the North Atlanta metropolitan area, zoned for 210 multifamily apartment units,
which was classified as held for sale. On October 7, 2016, the operating partnership entered into a sale contract with Roberts
Capital Partners, LLC, a related party, to sell Highway 20 for a purchase price of $4,725,000, including a reimbursement of $1,050,000
relating to prepaid sewer taps. On June 28, 2017, the company completed the sale of Highway 20 at a gain of $432,793. As a result
of this sale, the company has no assets held for sale as of June 30, 2017.
The table below
sets forth the assets and liabilities related to real estate asset held for sale at December 31, 2016:
|
|
December
31,
2016
|
|
Real
Estate Asset Held for Sale
|
|
$
|
4,283,385
|
|
|
|
|
|
|
Liabilities
Related to Real Estate Asset Held For Sale
|
|
$
|
1,498
|
|
4.
|
NON-CONTROLLING INTEREST – OPERATING
PARTNERSHIP
|
Holders of operating
partnership units (“OP Units”) generally have the right to require the operating partnership to redeem their units
for shares of the company’s common stock. Upon submittal of units for redemption, the operating partnership has the option
either (a) to acquire those units in exchange for shares, currently on the basis of 1.647 shares for each unit submitted for redemption
(the “Conversion Factor”), or (b) to pay cash for those units at their fair market value, based upon the then current
trading price of the shares and using the same exchange ratio. Prior to December 29, 2015, we had an informal policy of issuing
shares, in lieu of cash in exchange for units. On December 28, 2015, our Board formally adopted a policy whereby we shall only
issue our common stock for redemption of units, rather than paying cash for such redemption in accordance with the operating partnership
agreement. As a result of this change in policy, the company now requires the issuance of shares of common stock of the company
in payment for the redemption of OP Units and therefore has effective control over the redemption and therefore the non-controlling
interest is now being classified in permanent equity as of December 28, 2015 as opposed to temporary equity, and similarly at
June 30, 2017 and December 31, 2016.
In July 2013,
the operating partnership privately offered to investors who held both units of the operating partnership and shares of common
stock the opportunity to contribute shares to the operating partnership in exchange for units (provided that the investors were
“accredited investors” under SEC Rule 501 of Regulation D under the Securities Act of 1933, as amended). This opportunity
remains open to those accredited investors. Consistent with the Conversion Factor noted above, the offering of units uses a “Contribution
Factor” such that an accredited investor who contributes shares to the operating partnership will receive one unit for every
1.647 shares contributed.
The non-controlling
interest of the unitholders in the operating partnership on the accompanying consolidated balance sheets is calculated by multiplying
the non-controlling interest ownership percentage at the balance sheet date by the operating partnership’s net assets (total
assets less total liabilities). The non-controlling interest ownership percentage is calculated at any point in time by dividing
(x) (the number of units outstanding multiplied by 1.647) by (y) the total number of shares plus (the number of units outstanding
multiplied by 1.647). The non-controlling interest ownership percentage will change as additional shares and/or units are issued
or as units are redeemed for shares of the company’s common stock or as the company’s common stock is contributed
to the operating partnership and units are issued in accordance with the Contribution Factor. The non-controlling interest of
the unitholders in the income or loss of the operating partnership in the accompanying consolidated statements of operations is
calculated based on the weighted average percentage of units outstanding during the period, which was 3.60% and 4.19% for the
six months ended June 30, 2017 and 2016. There were 463,729 units and 466,259 units outstanding at June 30, 2017 and December 31,
2016, respectively. The equity balance of the non-controlling interest of the unitholders was $695,454 at June 30, 2017 and $735,116
at December 31, 2016.
Private Placement.
On January 30, 2015, A-III purchased 8,450,704 shares of the company’s common stock at a purchase price
of $1.42 per share, for an aggregate purchase price of $12,000,000, and the company, for no additional consideration, issued to
A-III warrants to purchase up to an additional 26,760,563 shares of the company’s common stock at an exercise price of $1.42
per share ($38,000,000 in the aggregate). The purchase price per share and the exercise price of the warrants are subject to a
potential post-closing adjustment upon completion of the sale of the company’s four land parcels owned at January 30, 2015,
which could result in the issuance of additional shares of common stock to A-III and an increase in the number of shares of common
stock issuable upon exercise of the warrants. As of June 30, 2017, all of these land parcels owned at January 30, 2015
had been sold and there were no post-closing adjustments to the number of shares of common stock previously issued to A-III or
issuable upon exercise of the warrants.
Warrants.
Each of the aforementioned warrants entitles the holder to acquire one share of the company’s common stock. At the time
of issuance, each warrant had an exercise price of $1.42 per share, subject to post-closing adjustments related to the sales of
the legacy properties. The company evaluated the warrants to determine their relative fair value, using a variation of the adjusted
Black-Scholes option valuation model at their time of issuance and allocated $4,910,000 of the proceeds from the private placement
to the warrants based on their fair value. The warrants were recorded as a component of equity. The warrants expire on January
30, 2018. As of June 30, 2017, the warrants remained unexercised.
Redemption
of Units for Shares.
In accordance with the conversion factor explained in Note 4, “Non-controlling Interest –
Operating Partnership,” 2,530 OP Units were redeemed for 4,166 shares of the company’s common stock for the six months
ended June 30, 2017, and 87,366 OP Units were redeemed for 143,897 shares of the company’s common stock for the twelve months
ended December 31, 2016. Redemptions are reflected in the accompanying consolidated financial statements at the closing price
of the company’s stock on the date of redemption.
Contribution
of Shares to the Operating Partnership.
In accordance with the contribution factor explained in Note 4 – “Non-controlling
Interest – Operating Partnership”, for the six months ended June 30, 2017 and the year ended December 31, 2016, there
were no contribution of shares to the operating partnership. Contributions, if any, are reflected in the accompanying consolidated
financial statements based on the closing price of the company’s stock on the date of contribution.
Restricted
Stock.
Shareholders of the company approved and adopted the company’s 2006 Restricted Stock Plan (the “Plan”)
in August 2006. Prior to its expiration on August 21, 2016, the Plan provided for the grant of stock awards to employees, directors,
consultants, and advisors. Under the Plan, as amended, the company could grant up to 654,000 shares of restricted common stock,
subject to the anti-dilution provisions of the Plan. The maximum number of shares of restricted stock that could be granted to
any one individual during the term of the Plan should not exceed 20% of the aggregate number of shares of restricted stock that
could be issued. The Plan was administered by the Compensation Committee of the company’s Board. On October 12, 2015, based
on the recommendation of the Compensation Committee of the Board of Directors, the Board approved a restricted stock grant of
260,000 shares of common stock to the independent directors and certain officers of the company, which was issued on March 28,
2016. The restricted stock was awarded pursuant to the Plan. Vesting of the awards for the independent directors and officers
is subject to continued service through the vesting period. The company’s independent directors were each awarded 20,000
shares of restricted common stock, which vested on January 30, 2016. Certain of the company’s officers were awarded an aggregate
of 180,000 shares of restricted common stock, which vest in equal one-third installments. There were 60,000 shares, which vested
on each of January 30, 2016 and October 12, 2016. The remaining 60,000 shares will vest on October 12, 2017 or will be accelerated
in connection with the Plan of Dissolution. Compensation expense related to restricted stock was $1,540 and $110,824 for the six
months ended June 30, 2017 and 2016, respectively. On June 30, 2017, the company had unamortized compensation expense of $6,990
which is expected to be recognized over a weighted average period of 0.28 years.
Treasury
Stock.
The company has a stock repurchase plan under which it is authorized to repurchase up to 600,000 shares of its outstanding
common stock. Under the stock repurchase plan, as of June 30, 2017, the company had authority to repurchase up to 540,362 shares
of its outstanding common stock. The stock repurchase plan does not have an expiration date. The company did not repurchase any
additional shares for the six months ended June 30, 2017 and 2016.
Earnings
Per Share.
The following table shows the reconciliation of loss available for common shareholders and the weighted average
number of shares used in the company’s basic and diluted earnings per share computations.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
Numerator
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders – basic
|
|
$
|
(162,070
|
)
|
|
$
|
(1,138,590
|
)
|
|
$
|
(958,549
|
)
|
|
$
|
(2,004,724
|
)
|
Loss
attributable to non-controlling interest
|
|
|
(6,045
|
)
|
|
|
(45,446
|
)
|
|
|
(35,886
|
)
|
|
|
(83,269
|
)
|
Net
loss – diluted
|
|
$
|
(168,115
|
)
|
|
$
|
(1,184,036
|
)
|
|
$
|
(994,435
|
)
|
|
$
|
(2,087,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares – basic
|
|
|
20,434,494
|
|
|
|
20,318,219
|
|
|
|
20,432,490
|
|
|
|
20,262,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of potential dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average operating partnership units, assuming conversion of all units to common shares
|
|
|
763,930
|
|
|
|
820,205
|
|
|
|
765,934
|
|
|
|
853,288
|
|
Weighted
average number of common shares – diluted
(a)
|
|
|
21,198,424
|
|
|
|
21,138,424
|
|
|
|
21,198,424
|
|
|
|
21,116,116
|
|
(a)
|
Due to the net loss
for the three and six months ended June 30, 2017 and 2016, the incremental shares related to the unvested restricted stock
and the warrants were excluded as they were anti-dilutive. Furthermore, the average share price of the company’s common
stock was below the exercise price of the warrants for the three and six months ended June 30, 2017 and 2016.
|
The company
prepared the provision following the guidance of FASB ASC 740,
Income Taxes
, using the estimated annual effective tax rate
applied to the operating results of the company as of June 30, 2017. This rate does not include items related to significant
unusual or extraordinary items that would be required to be separately reported or reported net of their related tax effect in
the consolidated financial statements. At the end of each interim period the company makes its best estimate of the effective
tax rate expected to be applicable for the full year. There were no discrete items during this quarter; therefore, the effective
rate was the same rate that was used for the year ended December 31, 2016. The consolidated effective tax rate was
zero for the three and six months ended June 30, 2017 and 2016. In addition, the company had a taxable loss in each
of the quarterly periods ended June 30, 2017 and 2016, and accordingly did not have an income tax liability in either of
those periods.
7.
|
FAIR VALUE MEASUREMENTS
|
As discussed
in Note 2, GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the statement
of financial position, for which it is practicable to estimate that value. The company measures and/or discloses the estimated
fair value of financial assets and liabilities based on a hierarchy that distinguishes between market participant assumptions
based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions
about market participant assumptions. This hierarchy consists of three broad levels:
|
·
|
Level 1 - quoted prices
(unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement
date;
|
|
·
|
Level 2 - inputs other
than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly;
and
|
|
·
|
Level 3 - unobservable
inputs for the asset or liability that are used when little or no market data is available.
|
The fair value
hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, the
company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the
extent possible. Considerable judgment is necessary to interpret Level 2 and 3 inputs in determining fair value of financial and
non-financial assets and liabilities. Accordingly, the fair values may not reflect the amounts ultimately realized on a sale or
other disposition of these assets. Below summarizes the methods and assumptions used to estimate the fair value of each class
of financial instruments, for which it is practicable to estimate that value.
|
·
|
Cash and cash equivalents:
The carrying amount of the cash approximates fair value.
|
|
|
|
|
·
|
Real estate asset
held for sale: At December 31, 2016, Highway 20 was carried at the lower of the carrying amount or fair value, less the estimated
selling costs. The sale of Highway 20 closed on June 28, 2017.
|
|
|
|
|
·
|
Accounts payable and
accrued expenses: The carrying amount approximates fair value due to the short term nature of these liabilities.
|
The company held no financial assets or liabilities required to be measured at fair value on a recurring or nonrecurring
basis as of June 30, 2017 and December 31, 2016. From time to time, we record certain assets at fair value on a nonrecurring
basis when there is evidence of impairment. There was no impairment charge on Highway 20 during the six months ended June 30,
2017 and 2016. As December 31, 2016, Highway 20 was carried at net realizable value. We determined the fair value of Highway
20 based on market data of comparable transactions, which are classified as Level 3 inputs.
FASB ASC Topic
280-10,
Segment Reporting
– Overall, established standards for reporting financial and descriptive information about operating segments
in annual financial statements. Operating segments are defined as components of an enterprise about which separate financial information
is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing
performance. Prior to the sale of Highway 20 on June 28, 2017, the company had operated in a single reportable segment, which was
the ownership and management of real estate assets. As of June 30, 2017, there was no reportable segment.
9.
|
RELATED PARTY TRANSACTIONS
|
Management
Agreement.
In connection with the recapitalization transactions with A-III, on January 30, 2015, the company entered into
a management agreement (the “Management Agreement”) with A-III Manager LLC (the “Manager”), which is a
wholly-owned subsidiary of A-III, among other things, to provide for the day-to-day management of the company by the Manager,
including investment activities and operations of the company and its properties. The Management Agreement requires the Manager
to manage and administer the business activities and day-to-day operations of the company and all of its subsidiaries in conformity
with the company’s investment guidelines and other policies that are approved and monitored by the Board.
The Manager
maintains an administrative services agreement with A-III, pursuant to which A-III and its affiliates, including Avenue Capital
Group and C-III Capital Partners, will provide a management team along with appropriate support personnel for the Manager to deliver
the management services to the company. Under the terms of the Management Agreement, among other things, the Manager will refrain
from any action that, in its reasonable judgment made in good faith, is not in compliance with the investment guidelines and would,
when applicable, adversely affect the qualification of the company as a REIT. The Management Agreement has an initial five-year
term and will be automatically renewed for additional one-year terms thereafter unless terminated either by the company or the
Manager in accordance with its terms.
For the
services to be provided by the Manager, the company is required to pay the Manager the following fees:
|
·
|
an
annual base management fee equal to 1.50% of the company’s “Equity” (as defined below), calculated and payable
quarterly in arrears in cash;
|
|
·
|
a
property management fee equal to 4.0% of the gross rental receipts received each month at the company’s and its subsidiaries’
properties, calculated and payable monthly in arrears in cash;
|
|
·
|
an
acquisition fee equal to 1.0% of the gross purchase price paid for any property or other investment acquired by the company
or any of its subsidiaries, subject to certain conditions and limitations and payable in arrears in cash with respect to all
such acquisitions occurring after the date of the Management Agreement;
|
|
·
|
a
disposition fee equal to the lesser of (a) 50% of a market brokerage commission for such disposition and (b) 1.0% of the sale
price with respect to any sale or other disposition by the company or any of its subsidiaries of any property or other investment,
subject to certain conditions and limitations and payable in arrears in cash with respect to all such dispositions occurring
after the date of the Management Agreement with certain exceptions (this disposition fee does not apply to the sale of the
four legacy land parcels that the company owned as of January 30, 2015); and
|
|
·
|
an incentive fee (as
described below) based on the company’s “Adjusted Net Income” (as defined below) for the trailing four quarter
period in excess of the “Hurdle Amount” (as defined below), calculated and payable in arrears in cash on a rolling
quarterly basis.
|
For purposes
of calculating the base management fee, “Equity” means (a) the sum of (1) the net proceeds from all issuances of the
company’s common stock and OP Units (without double counting) and other equity securities on and after the closing, which
will include the common stock issued to A-III in the recapitalization transaction (allocated on a pro rata basis for such issuances
during the fiscal quarter of any such issuance) and any issuances of common stock or OP Units in exchange for property investments
and other investments by the company, plus (2) the product of (x) the sum of (i) the number of shares of common stock issued and
outstanding immediately before the closing of the recapitalization transaction and (ii) the number of shares of common stock for
which the number of OP Units issued and outstanding immediately before the date of the closing of the recapitalization transaction
(excluding any OP Units held by the company) may be redeemed in accordance with the terms of the agreement of limited partnership
of the operating partnership and (y) the purchase price per share paid by A-III for the shares of common stock the company issued
to A-III in the recapitalization transaction, as the purchase price per share may be subsequently adjusted as described above,
plus (3) the retained earnings of the company and the operating partnership (without double counting) calculated in accordance
with GAAP at the end of the most recently completed fiscal quarter (without taking into account any non-cash equity compensation
expense incurred in current or prior periods), minus (b) any amount in cash that the company or the operating partnership has
paid to repurchase common stock, OP Units, or other equity securities of the company as of the closing date of the recapitalization
transaction. Equity excludes (1) any unrealized gains, losses or non-cash equity compensation expenses that have impacted shareholders’
equity as reported in the financial statements prepared in accordance with GAAP, regardless of whether such items are included
in other comprehensive income or loss, or in net income, (2) one-time events pursuant to changes in GAAP, and certain non-cash
items not otherwise described above in each case, after discussions between the Manager and the company’s independent directors
and approval by a majority of the independent directors and (3) the company’s accumulated deficit as of the closing
date of the recapitalization transaction.
For purposes
of the Management Agreement, “Incentive Fee” means an incentive fee, calculated and payable after each fiscal quarter,
in an amount equal to the excess, if any, of (i) the product of (A) 20% and (B) the excess, if any, of (1) the company’s
Adjusted Net Income (described below) for such fiscal quarter and the immediately preceding three fiscal quarters over (2) the
Hurdle Amount (described below) for such four fiscal quarters, less (ii) the sum of the Incentive Fees already paid or payable
for each of the three fiscal quarters preceding that fiscal quarter. Any adjustment to the Incentive Fee calculation proposed
by the Manager will be subject to the approval of a majority of the independent directors.
For purposes
of calculating the Incentive Fee, “Adjusted Net Income” for the preceding four fiscal quarters means the net income
calculated in accordance with GAAP after all base management fees but before any acquisition expenses, expensed costs related
to equity issuances, incentive fees, depreciation and amortization and any non-cash equity compensation expenses for such period.
Adjusted Net Income will be adjusted to exclude one-time events pursuant to changes in GAAP, as well as other non-cash charges
after discussion between the Manager and the independent directors and approval by a majority of the independent directors in
the case of non-cash charges. Adjusted Net Income includes net realized gains and losses, including realized gains and losses
resulting from dispositions of properties and other investments during the applicable measurement period.
For purposes
of calculating the Incentive Fee, the “Hurdle Amount” is, with respect to any four fiscal quarter period, the product
of (i) 7% and (ii) the weighted average gross proceeds per share of all issuances of common stock and OP Units (excluding issuances
of common stock and OP Units, or their equivalents, as equity incentive awards), with each such issuance weighted by both the
number of shares of common stock and OP Units issued in such issuance and the number of days that such issued shares of common
stock and OP Units were outstanding during such four fiscal quarter period.
After the 2015
fiscal year, the Incentive Fee will be prorated for partial quarterly periods based on the number of days in such partial period
compared to a 90-day quarter.
The Manager
is also entitled to receive a termination fee from the company under certain circumstances equal to four times the sum of (x)
the average annual base management fee, (y) the average annual incentive fee, and (z) the average annual acquisition fees and
disposition fees, in each case earned by the Manager in the most recently completed eight calendar quarters immediately preceding
the termination.
Additionally,
the company will be responsible for paying all of its own operating expenses and the Manager will be responsible for paying its
own expenses, except that the company will be required to pay or reimburse certain expenses incurred by the Manager and its affiliates
in connection with the performance of the Manager’s obligations under the Management Agreement, including:
|
·
|
reasonable out of
pocket expenses incurred by personnel of the Manager for travel on the company’s behalf;
|
|
·
|
the
portion of any costs and expenses incurred by the Manager or its affiliates with respect
to market information systems and publications, research publications and materials that
are allocable to the company in accordance with the expense allocation policies of the
Manager or such affiliates;
|
|
·
|
all
insurance costs incurred with respect to insurance policies obtained in connection with
the operation of the company’s business, including errors and omissions insurance
covering activities of the Manager and its affiliates and any of their employees relating
to the performance of the Manager’s duties and obligations under the Management
Agreement or of its affiliates under the administrative services agreement between the
Manager and A-III, other than insurance premiums incurred by the Manager for employer
liability insurance;
|
|
·
|
expenses
relating to any office or office facilities, including disaster backup recovery sites
and facilities, maintained expressly for the company and separate from offices of the
Manager;
|
|
·
|
the
costs of the wages, salaries, and benefits incurred by the Manager with respect to certain
Dedicated Employees (as defined in the Management Agreement) that the Manager elects
to provide to the company pursuant to the Management Agreement; provided that (A) if
any such Dedicated Employee devotes less than 100% of his or her working time and efforts
to matters related to the company and its business, the company will be required to bear
only a pro rata portion of the costs of the wages, salaries and benefits the Manager
incurs for such Dedicated Employee based on the percentage of such employee’s working
time and efforts spent on matters related to the company, (B) the amount of such wages,
salaries and benefits paid or reimbursed with respect to the Dedicated Employees shall
be subject to the approval of the Compensation Committee of the Board and, if required
by the Board, of the Board and (C) during the one-year period following the date of the
Management Agreement, the aggregate amount of cash compensation paid to Dedicated Employees
of the Manager and its affiliates by the company, or reimbursed by the company to the
Manager in respect thereof, will not exceed $500,000; and
|
|
·
|
any
equity-based compensation that the company, upon the approval of the Board or the Compensation
Committee of the Board, elects to pay to any director, officer or employee of the company
or the Manager or any of the Manager’s affiliates who provides services to the
company or any of its subsidiaries.
|
In light of
the Plan of Dissolution, as discussed above, and in order to assist the company in preserving cash for future distributions to
the company’s shareholders, the Manager has agreed, commencing June 27, 2017, and subject to approval by the company’s
shareholders of the Plan of Dissolution, to waive the management fees and certain expense reimbursements that the Manager is entitled
to receive from the company under the management agreement between the company and the Manager.
For
the three and six months ended June 30, 2017 and 2016, the company incurred base management fees of $86,430, $175,478,
$97,687 and $200,013, respectively, which were classified in management fee, affiliate in the consolidated statements of operations.
In addition to the base management fee, the company is required to reimburse certain expenses, related wages, salaries and benefits
incurred by the Manager. For the three and six months ended June 30, 2017 and 2016, the company reimbursed expenses of $100,243,
$218,341, $127,540 and $294,685, respectively, which were classified in allocated salaries and other compensation, affiliate
in the consolidated statements of operations. Also, during the three and six months ended June 30, 2017, the company reimbursed
the Manager out of pocket travel expenses of $21,026 of the Manager on the company's behalf, which were included in general and
administrative expenses in the consolidated statements of operations. At June 30, 2017 and December 31, 2016, the
unpaid portion of the base management fee and, reimbursable allocated expenses in the amount of $207,768 and $216,991,
respectively, was recorded in due to affiliates in the consolidated balance sheets
.
Transactions
with Roberts Properties, Inc. and Roberts Properties Construction (the “Roberts Companies”) and its Affiliates
Reimbursement
Arrangement for Consulting Services.
The company entered into a reimbursement arrangement for services provided by the Roberts
Companies, effective February 4, 2008, as amended January 1, 2014. Under the terms of the arrangement, the company reimburses
the Roberts Companies for the cost of providing consulting services in an amount equal to an agreed-upon hourly billing rate for
each employee multiplied by the number of hours that the employee provided services to the company.
Additionally,
at the request of the company, Roberts Construction performed repairs and maintenance and other consulting services related to
the company’s land parcels. Roberts Construction received cost reimbursements of $68 for the three and six months ended
June 30, 2016. There were no cost reimbursements to Robert Construction for the three and six months ended June 30, 2017. These
cost reimbursements were recorded in general and administrative expenses in the consolidated statement of operations.
For a period
of 180 days after the closing of the recapitalization transaction with A-III, the company had the right to request the reasonable
assistance of employees of Roberts Properties, Inc. with respect to transition issues and questions relating to the company’s
properties and operations. This 180 day period terminated July 30, 2015. The employees of Roberts Properties, Inc. continued to
provide limited services with respect to transition issues from July 30, 2015 through June 30, 2017. Consistent with the expired
arrangement for transition services, the cost for these services was reimbursed in an amount equal to an agreed-upon hourly billing
rate for each employee multiplied by the number of hours that the employee provided such services to the company. Under Mr. Roberts’
Employment Agreement, which expired December 31, 2016, Mr. Roberts agreed to supervise the disposition of the remaining legacy
property. Affiliates of Mr. Roberts provided services to the company in connection with the sale of such property through December
31, 2016. Prior to the expiration of Mr. Roberts’ Employment Agreement, the company reimbursed the Roberts Companies the
fees and costs for such services, which is included in the disclosure below and will be considered selling costs for purposes
of the true-up arrangement under the Stock Purchase Agreement. Following the expiration of Mr. Roberts’ Employment Agreement
on December 31, 2016, the company was no longer obligated to incur fees and costs for such services and accordingly, during the
three months and six months ended June 30, 2017 did not incur any such fees or costs.
Under these
arrangements, the company incurred costs with Roberts Properties of zero, $296, $27,310 and $44,357 for the three and six months
ended June 30, 2017 and 2016, respectively, which were recorded in general and administrative expenses in the consolidated statements
of operations. Roberts Properties also received cost reimbursements in the amount of $86 for the six months ended June 30, 2016
for the company’s operating costs and other related expenses paid by Roberts Properties. There were no cost reimbursements
during the three months ended June 30, 2017 and 2016, and six months ended June 30, 2017. At June 30, 2017 and December 31, 2016,
the unpaid portion of these costs was zero and $85, respectively, which were recorded in due to affiliates in the
consolidated balance sheets.
Sale of Highway
20.
On June 28, 2017, the company closed on the sale of Highway 20 to Roberts Capital Partners, LLC, which is an affiliate
of Mr. Roberts, who was a director of the company until his resignation on April 4, 2017. The company’s Audit Committee
approved the transaction in accordance with the committee’s charter and in compliance with applicable listing rules of the
Exchange. The Board also approved the transaction in accordance with its Code of Business Conduct and Ethics. See Note 3, “Real
Estate Held for Sale,” for details of the transaction.
Sublease
of Office Space.
The company was under a sublease agreement for 1,817 square feet of office space with Roberts Capital Partners,
LLC from April 7, 2014 to April 7, 2017. Roberts Capital Partners, LLC is owned by Mr. Roberts. The terms of the sublease agreement
were the same terms that Roberts Capital Partners, LLC has with the unrelated third party landlord. Roberts Capital Partners,
LLC was liable to the building owner for the full three-year term of its lease; however, the company negotiated a 90-day right
to terminate its sublease. The company paid a security deposit of $20,577 upon the execution of the lease. This security deposit
was subsequently used to pay the monthly rent due beginning September 2016 through the end of the lease term. During the three
and six months ended June 30, 2017 and 2016, the company incurred rent expense of $1,498, $9,692, $8,838 and $16,737,
respectively, which was recorded in general and administrative expenses in the consolidated statements of operations.
Governance
and Voting Agreement and Employment Agreement.
Upon the closing of the A-III transaction,
Charles
S. Roberts, who previously served as the company’s Chairman, President and Chief Executive Officer, was appointed as an
Executive Vice President, and served in such role through December 31, 2016, pursuant to an Employment Agreement, which expired
on December 31, 2016, at which time Mr. Roberts ceased to be an officer or employee of our company, but remained a member of our
Board through April 4, 2017, the effective date of Mr. Roberts’ resignation from the Board. As a result of his resignation
from the Board, all rights and obligations of Mr. Roberts under the Governance and Voting Agreement, dated January 30, 2015, as
further amended, were terminated upon his resignation
.
10.
|
COMMITMENTS AND CONTINGENCIES
|
The company
and the operating partnership may be subject to various legal proceedings and claims that arise in the ordinary course of business.
While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of these
matters should not have a material adverse effect on the company’s financial position, results of operations or cash flows.
Under various
federal, state, and local environmental laws and regulations, the company may be required to investigate and clean up the effects
of hazardous or toxic substances at its properties, including properties that have previously been sold. The preliminary environmental
assessment of the company’s property has not revealed any environmental liability that the company believes would have a
material adverse effect on its business, assets, or results of operations, nor is the company aware of any such environmental
liability.
See Note 9,
“Related Party Transactions,” for details of the company’s management agreement with the related party.
See Note
11, “Subsequent Events,” for details regarding a books and records request from certain shareholders.
The company has engaged external counsel
to assist the company in responding to a letter received on July 26, 2017 from a lawyer representing four of the Company’s
shareholders who demand to inspect certain books and records of the company. On August 2, 2017, the company delivered, through
its external counsel, a response to the demand letter and the company is coordinating with external counsel to deliver information
in response to the demand.
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Safe
Harbor Statement under the Private Securities Litigation Reform Act of 1995. The statements in this report that are not historical
facts are forward-looking statements that involve a number of known and unknown risks, uncertainties, and other factors, all of
which are difficult or impossible to predict and many of which are beyond our control, that may cause our actual results, performance,
or achievements to be materially different from any future results, performance, or achievements expressed or implied by those
forward-looking statements. These risks are detailed in (a) Part I, Item 1A, Risk Factors, in our Form 10-K for the year
ended December 31, 2016 and (b) our other SEC filings. Please also see the cautionary statements included in the Note Regarding
Forward-Looking Statements at the beginning of this report.
Overview
ACRE
Realty Investors Inc. is a commercial real estate investment and operating company focused on commercial real estate investments.
On January 30, 2015, our company and A-III Investment Partners LLC (“A-III”) closed a series of transactions
that recapitalized our company and resulted in a change in control of our company. At the closing, A-III purchased 8,450,704 shares
of our company’s common stock at a purchase price of $1.42 per share, for an aggregate purchase price of $12,000,000, and
our company issued to A-III warrants to purchase up to an additional 26,760,563 shares of our company’s common stock at an
exercise price of $1.42 per share ($38,000,000 in the aggregate). The purchase price per share and the exercise price of the warrants
are subject to a potential post-closing adjustment upon completion of the sale of our company’s four legacy land parcels
held on January 30, 2015, which could result in the issuance of additional shares of common stock to A-III and an increase in the
number of shares of common stock issuable upon exercise of the warrants. We used a portion of the proceeds of A-III’s investment
to pay off certain of our outstanding indebtedness. As of June 28, 2017, all of these land parcels owned at January 30, 2015 were
sold and there were no post-closing adjustments to the common shares issued or to the common shares issuable upon exercise of the
warrants.
Immediately
after the closing, our company’s name was changed to ACRE Realty Investors Inc., and the name of our operating partnership
was changed to ACRE Realty LP. On February 2, 2015, our common stock began trading under the new ticker symbol “AIII”
(NYSE MKT: AIII). Our principal office was moved to 399 Park Avenue, 6
th
Floor, New York, New York 10022.
As
a result of the transaction, A-III is the largest shareholder of our company, owning as of June 30, 2017 approximately 41% of
our outstanding shares of common stock, or approximately 40% on a diluted basis assuming conversion of the outstanding units of
limited partnership interest in our operating partnership into company common stock and assuming no exercise of the warrants we
granted to A-III.
Effective
as of the closing of the A-III transaction, our management was changed and our company is externally managed by our Manager, which
is a wholly-owned subsidiary of A-III, pursuant to a management agreement between our company and the Manager that was executed
at the closing of the A-III transaction on January 30, 2015. Immediately after the closing, the Manager designated, and the Board
appointed, the following persons as the new executive officers of the company: Edward Gellert is Chief Executive Officer and President;
Robert Gellert is Executive Vice President, Chief Operating Officer and Treasurer; Gregory Simon is Executive Vice President,
General Counsel and Secretary; and Mark E. Chertok is Chief Financial Officer. Charles S. Roberts, who previously served as the
company’s Chairman, President and Chief Executive Officer, was appointed as an Executive Vice President, and served in such
role through December 31, 2016, pursuant to an Employment Agreement, which expired on December 31, 2016, at which time Mr. Roberts
ceased to be an officer or employee of our company, but remained a member of our Board through April 4, 2017, the effective date
of Mr. Roberts’ resignation from the Board. As a result of his resignation from the Board, all rights and obligations of
Mr. Roberts under the Governance and Voting Agreement, dated January 30, 2015, as further amended, were terminated upon his resignation.
The
Operating Partnership
We
conduct our business through ACRE Realty LP which will own, either directly or indirectly, through subsidiaries or joint ventures,
any future properties we acquire. We refer to ACRE Realty LP as our operating partnership. The agreement of limited partnership
of our operating partnership provides that it is not required to be dissolved until 2093. Our company is the sole general partner
of our operating partnership and, as of June 30, 2017, owned a 96.41% interest in our operating partnership. Our ownership interest
in our operating partnership entitles us to share in cash distributions from, and in the profits and losses of, the operating
partnership generally in proportion to our ownership percentage. In this report, we refer to units of limited partnership interest
in the operating partnership as “units” and to the holders of units as “unitholders.”
Under
the limited partnership agreement of our operating partnership, unitholders generally have the right to require the operating
partnership to redeem their units. A unitholder who submits units for redemption will receive, at our election, either (a) 1.647
shares for each unit submitted for redemption (the “Conversion Factor”), or (b) cash for those units at their fair
market value, based upon the then current trading price of the shares. Prior to December 29, 2015, we had an informal policy of
issuing shares, in lieu of cash in exchange for units. On December 28, 2015, our Board formally adopted a policy whereby we shall
only issue our common shares for redemption of units, rather than paying cash for such redemption in accordance with the operating
partnership agreement.
Whenever
we issue and sell shares of our common stock, we are obligated to contribute the net proceeds from that issuance and sale to the
operating partnership and the operating partnership is obligated to issue units to us. The operating partnership agreement permits
the operating partnership, without the consent of the unitholders, to sell additional units and add limited partners.
Plan of Dissolution
On
June 26, 2017, in light of management’s recommendation and other factors described below, the Board approved the Plan of
Dissolution. As of June 30, 2017, we have sold all of our legacy properties and as such, virtually, all of our assets
consist of cash resulting from the sale of these legacy properties. Management and our advisors, under the oversight of our Board,
have explored strategic alternatives to enhance shareholder value but the process to date has not yielded any opportunities viewed
by our Board as reasonably likely to provide greater realizable value to shareholders. In addition, management informed our Board
that, absent public announcement of a transaction that would result in the company becoming or acquiring an operating company,
the NYSE MKT was expected to commence proceedings to suspend trading and delist our common stock. Accordingly, our Board has concluded
that the voluntary dissolution and liquidation of the company pursuant to the Plan of Dissolution, subject to shareholder approval,
is in the best interests of the company and our shareholders. The principal purpose of the Plan of Dissolution is to maximize
shareholder value by distributing the net proceeds from liquidation to the company’s shareholders. As the Plan of Dissolution
requires approval of the affirmative vote of three-quarters of all of the shareholders entitled to vote on the matter, there can
be no assurance that the Plan of Dissolution will be approved by the company’s shareholders.
If
the Plan of Dissolution is approved by our shareholders, we expect to make an initial distribution of a portion
of our cash as soon as practicable. We will distribute our remaining cash in subsequent distributions. We cannot predict the precise
amount or timing of these subsequent liquidating distributions. The timing and amount of liquidating distributions will depend
upon the actual expenses incurred; the timing of the satisfaction, settlement or rejection of all obligations of the company; and
the amount to be paid in satisfaction of such obligations. Although our Board has not established a firm timetable for liquidating
distributions, subject to contingencies inherent in winding up our business, our Board intends to make such distributions as promptly
as practicable.
On June 29, 2017, we received notice that the NYSE
MKT had determined to immediately suspend trading in our common stock and commence proceedings to delist our common stock. In
its decision to commence delisting proceedings, the NYSE MKT cited Section 1002(c) of the NYSE MKT Company Guide, which applies
when a company has sold or otherwise disposed of its principal operating assets, or has ceased to be an operating company. We
have a right to a review of the NYSE MKT’s determination to delist our common stock by a committee of the Board of Directors
of the NYSE MKT. We do not intend to exercise this right at this time, and we do not expect our common stock to be listed for
trading again, including on one of the OTC markets.
Critical
Accounting Policies and Estimates
Refer
to the section of our Annual Report on Form 10-K for the year ended December 31, 2016 entitled “Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” for a discussion of
our critical accounting policies. There have been no material changes to these accounting policies for the three and six months
ended June 30, 2017.
Recent
Accounting Pronouncements
Please
refer to Note 2 – Summary of Significant Accounting Policies – Recent Accounting Pronouncements, in the notes to the
unaudited consolidated financial statements included in this Form 10-Q for information on recent accounting pronouncements and
the expected impact on our financial statements.
Results
of Operations
Comparison
of the three months ended June 30, 2017 to 2016
The
following table highlights our operating results and should be read in conjunction with the consolidated financial statements
and the accompanying notes included in this Form 10-Q.
|
|
Three
Months Ended
June 30,
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
insurance and other expenses
|
|
|
3,210
|
|
|
|
3,575
|
|
|
|
(365
|
)
|
Real
estate taxes
|
|
|
4,184
|
|
|
|
4,409
|
|
|
|
(225
|
)
|
Management
fees, affiliate
|
|
|
86,430
|
|
|
|
97,687
|
|
|
|
(11,257
|
)
|
Allocated
salaries and other compensation, affiliate
|
|
|
100,243
|
|
|
|
127,540
|
|
|
|
(27,297
|
)
|
General
and administrative expenses
|
|
|
406,841
|
|
|
|
950,825
|
|
|
|
(543,984
|
)
|
Total
expenses
|
|
|
600,908
|
|
|
|
1,184,036
|
|
|
|
(583,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of asset
|
|
|
432,793
|
|
|
|
—
|
|
|
|
432,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(168,115
|
)
|
|
$
|
(1,184,036
|
)
|
|
$
|
1,015,921
|
|
Net
loss decreased by $1,015,921 for the three months ended June 30, 2017 when compared to the three months ended June 30, 2016 primarily
as a result of the decrease in overall expenses for the three months ended June 30, 2017 and the gain recognized in June 2017
from the sale of Highway 20, our only remaining property, prior to its sale. We explain the major variances between the three
months ended June 30, 2017 and 2016 below.
Management
fees, affiliate, decreased by $11,257 primarily as a result of the continued reduction in the fee computation base which is attributable
to the company’s operating losses. The base management fee is equal to 1.50% per annum of our equity, as defined in the
management agreement.
Allocated
salaries and other compensation, affiliate, decreased by $27,297, primarily due to lower allocated time by certain dedicated officers.
Under the management agreement, we are required to reimburse our Manager for the costs of the wages, salaries, and benefits incurred
by the Manager with respect to certain dedicated officers and employees that the Manager elects to provide to us.
General and administrative expenses decreased by $543,984, primarily as a result of the decrease in professional
fees by $387,666,
as the company, as of June 30, 2017,
had ceased pursuing three potential acquisition transactions initiated between January 2016 and June 2017. In addition to the decrease
in professional fees, general and administrative expenses decreased as a result of (a) no accrual of the 2017 audit fee coupled
with the reversal of the prior quarter’s accrued audit fees in light of the Board’s Plan of Dissolution, which reduced
accounting and tax fees by $74,491, (b) the termination of Mr. Roberts’s employment in December 2016, which caused payroll
and related taxes to decrease by $62,500, (c) reduced activities as a result of the sale of all our legacy properties, which decreased
our financial outsourcing fees by $44,258 and reimbursements to Robert Companies by $27,310, and (d) a $40,741 decrease in equity
compensation expense related to the restricted stock, of which only one-third of the shares granted were unvested. The total decrease
was partially offset by an increase in legal fees by $65,241, which was related to the Plan of Dissolution and other corporate
matters, and an increase in director fees by $35,645 as a result of the increased number of meetings and the re-formation of a
special committee of our Board who was responsible for reviewing and evaluating the potential liquidation and delisting of the
company from the NYSE MKT exchange. The members of the special committee received an aggregate fee of $45,000 in February 2017
for their services relating to a potential acquisition transaction and a $1,000 fee for each meeting held
.
Gain
on sale of asset relates to the sale of Highway 20 in June 2017.
Comparison
of the six months ended June 30, 2017 to 2016
The
following table highlights our operating results and should be read in conjunction with the consolidated financial statements
and the accompanying notes included in this Form 10-Q.
|
|
Six
Months Ended
June 30,
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
insurance and other expenses
|
|
|
6,421
|
|
|
|
7,080
|
|
|
|
(659
|
)
|
Real
estate taxes
|
|
|
8,585
|
|
|
|
8,818
|
|
|
|
(233
|
)
|
Management
fees, affiliate
|
|
|
175,478
|
|
|
|
200,013
|
|
|
|
(24,535
|
)
|
Allocated
salaries and other compensation, affiliate
|
|
|
218,341
|
|
|
|
294,685
|
|
|
|
(76,344
|
)
|
General
and administrative expenses
|
|
|
1,018,403
|
|
|
|
1,577,397
|
|
|
|
(558,994
|
)
|
Total
expenses
|
|
|
1,427,228
|
|
|
|
2,087,993
|
|
|
|
(660,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of asset
|
|
|
432,793
|
|
|
|
—
|
|
|
|
432,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(994,435
|
)
|
|
$
|
(2,087,993
|
)
|
|
$
|
1,093,558
|
|
Net
loss decreased by $1,093,558 for the six months ended June 30, 2017 when compared to the six months ended June 30, 2016 primarily
as a result of the decrease in overall expenses for the six months ended June 30, 2017 and the gain recognized in June 2017 from
the sale of Highway 20, our only remaining property, prior to its sale. We explain the major variances between the six months
ended June 30, 2017 and 2016 below.
Management
fees, affiliate, decreased by $24,535 primarily as a result of the continued reduction in the fee computation base which is attributable
to the company’s operating losses. The base management fee was equal to 1.50% per annum of our equity, as defined in the
management agreement.
Allocated
salaries and other compensation, affiliate, decreased by $76,344, primarily due to lower allocated time by certain dedicated officers.
Under the management agreement, we are required to reimburse our Manager for the costs of the wages, salaries, and benefits incurred
by the Manager with respect to certain dedicated officers and employees that the Manager elects to provide to us.
General and administrative expenses decreased by $558,994, primarily as a result of the decrease in professional
fees by $256,742, as the company, as of June 30, 2017, had ceased pursuing three potential acquisition transactions initiated between
January 2016 and June 2017. In addition to the decrease in professional fees, general and administrative expenses decreased as
a result of (a) the termination of Mr. Roberts’s employment in December 2016, which caused payroll and related taxes to decrease
by $125,000, (b) a $109,283 decrease in equity compensation expense related to the restricted stock, of which only one-third of
the shares granted were unvested, (c) reduced activities as a result of the sale of all our legacy properties, which decreased
our financial outsourcing fees by $107,599 and reimbursements to Robert Companies by $44,061, and (d) no accrual of the 2017 audit
fee in light of the Board’s Plan of Dissolution, which reduced accounting and tax fees by $74,521. The total decrease was
partially offset by an increase in director fees by $117,645, as a result of the increased number of meetings and the formation
of a special committee of our Board who was responsible for reviewing and evaluating one of the potential acquisition transactions
and the potential liquidation and delisting of the company from the NYSE MKT exchange, and an increase in legal fees by $49,495
which was related to the Plan of Dissolution and other corporate matters. The members of the special committee received an aggregate
fee of $45,000 in February 2017 for their services relating to the potential acquisition transaction and a $1,000 fee for each
meeting held.
Gain
on sale of assets related to the sale of Highway 20 in June 2017.
Liquidity
and Capital Resources
Overview
We require capital to fund our operating activities. Our capital sources currently consist of our cash balance
of $19,904,391 derived from the sale of our legacy properties.
Short-
and Long-Term Liquidity Outlook
As of June 30, 2017, we have sold all our legacy properties. Virtually
all
of our assets consist of cash resulting from the sale of these legacy properties, which has a balance of $19,904,391 as of June 30,
2017, and we had no mortgage debt at June 30, 2017 or December 31, 2016. Our principal demands for funds during the short-
and long-term are and will be for the payment of operating expense and general and administrative expenses, including expenses
in connection with the Plan of Dissolution, if approved by our shareholders, and the payment of liquidating distributions to shareholders
.
As described above under “–
Overview
– Plan of Dissolution,” the Board approved the voluntary dissolution of the company. If the Plan of Dissolution is
approved by our shareholders, we expect to pay all of our known liabilities, provide for unknown liabilities and distribute the
net proceeds from liquidation to our shareholders. There can be no assurances regarding the amounts of any liquidating distributions
or the timing thereof. However, we intend to make an initial distribution of a portion of our cash as soon as practicable after
approval of the Plan of Dissolution
.
Cash Flows
Cash
and cash equivalents were $19,904,391 and $18,277,099 at June 30, 2017 and 2016, respectively. The following presents a summary
of our consolidated statements of cash flows for the six months ended June 30, 2017 and 2016.
|
|
Six
Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net
cash flow provided by (used in):
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(1,450,489
|
)
|
|
$
|
(1,597,816
|
)
|
Investing
activities
|
|
|
4,716,178
|
|
|
|
—
|
|
Financing
activities
|
|
|
—
|
|
|
|
—
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
3,265,689
|
|
|
$
|
(1,597,816
|
)
|
Six
Months Ended June 30, 2017 Compared to June 30, 2016
Net
cash used in operating activities decreased by $147,327, primarily as a result of a decrease in costs associated with pursuing
three potential acquisition transactions.
Net
cash provided by investing activities increased by $4,716,178 primarily as a result of the sale of Highway 20 in June 2017.
Capitalization
As
of June 30, 2017, the company had 20,494,631 shares of common stock outstanding and 463,729 operating partnership units that could
be exchanged for 763,793 shares of common stock, which are held by persons other than us.
Warrants
In connection with the A-III transaction, we issued warrants to purchase up to an additional 26,760,563 shares
of our common stock at an exercise price of $1.42 per share to A-III ($38,000,000 in the aggregate). The purchase price per share
and the exercise price of the warrants are subject to a potential post-closing adjustment upon completion of the sale of our four
land parcels owned at January 30, 2015, which could result in the issuance of additional shares of common stock to A-III and an
increase in the number of shares of common stock issuable upon exercise of the warrants. The warrants expire on January 30, 2018.
As of June 30, 2017, these warrants remained unexercised. As of June 30, 2017, all of these land parcels owned at January 30,
2015 had been sold and there were no post-closing adjustments to the number of shares of our common stock previously issued to
A-III or issuable upon exercise of the warrants.
Contractual Obligations
and Commitments
The
following table summarizes our future estimated cash payments under existing contractual obligations as of June 30, 2017:
|
|
Payment
Due by Period
|
|
|
|
Total
|
|
|
Less
than
One Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
Thereafter
|
|
Allocated
salaries and other compensation, affiliate
(1)
|
|
$
|
100,243
|
|
|
$
|
100,243
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) We
are required to reimburse our manager for salaries and other compensation of certain Dedicated Employees that the Manager elects
to provide to us.
The
table above only includes the allocated salaries and other compensation due under our Management Agreement and does not include
the base management fee, incentive fee, property management fee, acquisition fee and disposition fee as such obligations, discussed
below, do not have fixed and determinable payments. See below and in Note 9 to the consolidated financial statements, included
under Item 1 in this Form 10-Q for a discussion with respect to our obligations pursuant to the Management Agreement.
Management
Agreement
In
connection with the recapitalization transactions with A-III, on January 30, 2015, the company entered into a Management Agreement
with our Manager, which is a wholly-owned subsidiary of A-III, to among other things, provide for the day-to-day management of
the company by the Manager, including investment activities and operations of the company and its properties. The Management Agreement
requires the Manager to manage and administer the business activities and day-to-day operations of the company and all of its
subsidiaries in conformity with the company’s investment guidelines and other policies that are approved and monitored by
the Board.
For the services to be
provided by the Manager, we are required to pay the Manager the following fees:
|
·
|
an
annual base management fee equal to 1.50% of the company’s “Equity”
(as defined in the Management Agreement), calculated and payable quarterly in arrears
in cash;
|
|
·
|
a
property management fee equal to 4.0% of the gross rental receipts received each month
at the company’s and its subsidiaries’ properties, calculated and payable
monthly in arrears in cash;
|
|
·
|
an
acquisition fee equal to 1.0% of the gross purchase price paid for any property or other
investment acquired by the company or any of its subsidiaries, subject to certain conditions
and limitations and payable in arrears in cash with respect to all such acquisitions
occurring after the date of the Management Agreement;
|
|
·
|
a
disposition fee equal to the lesser of (a) 50% of a market brokerage commission for such
disposition and (b) 1.0% of the sale price with respect to any sale or other disposition
by the company or any of its subsidiaries of any property or other investment, subject
to certain conditions and limitations and payable in arrears in cash with respect to
all such dispositions occurring after the date of the agreement with certain exceptions
(this disposition fee does not apply to the sale of the four legacy land parcels that
the company owned as of January 30, 2015); and
|
|
·
|
an
incentive fee equal to 20% of the company’s “Adjusted Net Income” (as
defined in the Management Agreement) for the trailing four quarter period in excess of
the “Hurdle Amount” (as defined in the Management Agreement), calculated
and payable in arrears in cash on a rolling quarterly basis.
|
In
light of the Plan of Dissolution, as discussed above, and in order to assist the company in preserving cash for future distributions
to the company’s shareholders, the Manager has agreed, commencing June 27, 2017, and subject to approval by the company’s
shareholders of the Plan of Dissolution, to waive the management fees and certain expense reimbursements that the Manager is entitled
to receive from the company under the management agreement between the company and the Manager.
Effect of
Floating Rate Debt
As
of the filing date of this report, we have no outstanding indebtedness.
Off-Balance
Sheet Arrangements
We
do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured
investment vehicles, special purpose entities or variable interest entities, established to facilitate off-balance sheet arrangements
or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities
or entered into any commitment or intend to provide additional funding to any such entities.
No Quarterly
Dividends
We
have not paid regular quarterly dividends since the third quarter of 2001, and we have no present plans to pay distributions or
to resume paying regular quarterly dividends.
Inflation
Inflation
in the United States has been relatively low in recent years and did not have a significant impact on the results of operations
for the company’s business for the periods shown in the unaudited consolidated financial statements. Although the impact
of inflation has been relatively insignificant in recent years, it does remain a factor in the United States economy and could
increase the cost of acquiring, selling, replacing or leasing properties in the future.
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
required for smaller reporting companies.
ITEM 4. CONTROLS
AND PROCEDURES
Disclosure
Controls and Procedures
The
company’s management, with the participation of the company’s Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of the company’s disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) of the Exchange Act). Based upon such evaluation, the company’s Chief Executive Officer and Chief Financial
Officer concluded that its disclosure controls and procedures were effective, as of June 30, 2017, to provide assurance that information
that is required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized, and reported, within the time periods specified by the SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the company
in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management,
including its Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to
allow timely decisions regarding required disclosure.
Changes
in Internal Control
There
were no changes in our internal control over financial reporting during the three months ended June 30, 2017 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The
design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events.
There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless
of how remote.
PART II –
Other Information
ITEM 1.
|
LEGAL
PROCEEDINGS
|
The
company and the operating partnership are not presently subject to any material litigation nor, to our knowledge, is any material
litigation threatened against any of them. Routine litigation arising in the ordinary course of business is not expected to result
in any material losses to us or the operating partnership.
In
addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I,
Item 1A, “Risk Factors,” in our Form 10-K for the year ended December 31, 2016 (which was filed with the SEC
on March 9, 2017) and in our preliminary proxy statement on Schedule 14A (which was filed with the SEC on July 24,
2017). These risk factors could materially affect our business, financial condition, or future results. Additional risks and
uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business,
financial condition, and/or operating results.
ITEM 2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
None.
ITEM 3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
|
|
None.
ITEM 4.
|
MINE
SAFETY DISCLOSURES
|
|
|
Not
applicable.
ITEM 5.
|
OTHER
INFORMATION
|
|
|
None.
The
exhibits described in the following Index to Exhibits are filed as part of this Form 10-Q.
Exhibit
No.
|
|
Description
|
|
|
|
2.1
|
|
Plan of Dissolution of ACRE Realty Investors Inc. (incorporated by reference to Appendix A to Schedule 14A
filed July 24, 2017).
|
3.1
|
|
Amended
and Restated Articles of Incorporation of Roberts Realty Investors, Inc. filed with the
Georgia Secretary of State on July 22, 2004. (Incorporated by reference to Exhibit 3.1
in our quarterly report on Form 10-Q for the quarter ended September 30, 2004.)
|
3.2
|
|
Articles
of Amendment to Amended and Restated Articles of Incorporation of Roberts Realty Investors,
Inc. to eliminate ownership limit, effective January 30, 2015. (Incorporated by reference
to Exhibit 3.1 in our current report on Form 8-K dated February 2, 2015.)
|
3.3
|
|
Articles of Amendment
to Amended and Restated Articles of Incorporation of Roberts Realty Investors, Inc. to change company name, effective January
30, 2015. (Incorporated by reference to Exhibit 3.1 in our current report on Form 8-K dated February 2, 2015.)
|
|
|
|
3.4
|
|
Amended and Restated
Bylaws of Roberts Realty Investors, Inc. (Incorporated by reference to Exhibit 3.1 in our current report on Form
8-K dated February 4, 2008.)
|
|
|
|
3.5
|
|
Amendment to Amended
and Restated Bylaws of Roberts Realty Investors, Inc. to give the Board of Directors the authority to fix the number of Directors
at five or any greater number, effective January 30, 2015. (Incorporated by reference to Exhibit 3.1 in our current report
on Form 8-K dated February 2, 2015.)
|
Exhibit
No.
|
|
Description
|
|
|
|
31.1
|
|
Certification of Edward
Gellert pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification of Mark
E. Chertok pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification of Edward
Gellert pursuant to 18 U.S.C. Section 1350, Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit is not “filed”
for purposes of Section 18 of the Securities Exchange Act of 1934 but is instead furnished as provided by applicable
rules of the Securities and Exchange Commission.
|
|
|
|
32.2
|
|
Certification of Mark
E. Chertok pursuant to 18 U.S.C. Section 1350, Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit is not
“filed” for purposes of Section 18 of the Securities Exchange Act of 1934 but is instead furnished as provided
by applicable rules of the Securities and Exchange Commission.
|
|
|
|
101
|
|
The following financial
statements from ACRE Realty Investor Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 formatted
in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets (unaudited); (ii) the Consolidated Statements
of Operations (unaudited); (iii) the Consolidated Statements of Equity (unaudited); (iv) the Consolidated Statements of Cash
Flows (unaudited); and (v) the Notes to the Consolidated Financial Statements.*
|
|
|
|
|
|
* Pursuant to Rule
406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement
or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes
of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under
those sections.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
|
|
Date: August 9, 2017
|
|
|
|
|
|
|
ACRE Realty Investors Inc.
|
|
(formerly named Roberts
Realty Investors, Inc.)
|
|
|
|
|
By:
|
/s/ Mark E. Chertok
|
|
|
Mark E. Chertok, Chief Financial Officer
|
|
|
(the registrant’s principal financial and accounting officer,
|
|
|
who is duly authorized to sign this report)
|
SPECIAL
MEETING OF SHAREHOLDERS OF
ACRE
REALTY INVESTORS INC.
October
5
, 2017
GO GREEN
e-Consent makes
it easy to go paperless. With e-Consent, you can quickly access your proxy
material, statements
and other eligible documents online, while reducing costs, clutter and
paper waste.
Enroll today via www.amstock.com to enjoy online access.
NOTICE
OF INTERNET AVAILABILITY OF PROXY MATERIAL
:
The
Notice of Meeting, Proxy Statement, Proxy Card, and a copy of the 2016 Annual Report to Shareholders are also available at
www.acrerealtyinvestors.com
Please sign,
date and mail
your proxy card
in the
envelope provided
as soon
as possible.
Please detach
along perforated line and mail in the envelope provided
SPECIAL MEETING OF
SHAREHOLDERS OF ACRE REALTY INVESTORS INC. October 5, 2017 NOTICE OF INTERNET AVAILABILITY OF PROXY MATERIAL
: The Notice of
Meeting, Proxy Statement, Proxy Card, and a copy of the 2016 Annual Report to Shareholders are also available at http://www.acrerealtyinvestors.com
Please sign, date and mail your proxy card in the envelope provided as soon as possible. Signature of Shareholder Date: Signature
of Shareholder Date:
Note:
Please sign exactly as your name or names appear on this Proxy. When shares are held jointly,
each holder should sign. When signing as executor, administrator, attorney, trustee or guardian, please give full title as such.
If the signer is a corporation, please sign full corporate name by duly authorized officer, giving full title as such. If signer
is a partnership, please sign in partnership name by authorized person. To change the address on your account, please check the
box at right and indicate your new address in the address space above. Please note that changes to the registered name(s) on the
account may not be submitted via this method. 1. To approve the voluntary dissolution and liquidation of ACRE Realty Investors
Inc. (the “Company”) pursuant to a Plan of Dissolution (the “Plan of Dissolution”) in substantially the
form attached to the accompanying proxy statement as Appendix A. 2. To grant discretionary authority to the Board of Directors
to adjourn the Special Meeting, even if a quorum is present, to solicit additional proxies in the event that there are insufficient
shares present in person or by proxy voting in favor of the dissolution and liquidation of the Company pursuant to the Plan of
Dissolution.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS INDICATED, WILL BE VOTED "FOR" PROPOSALS
1 and 2.
If you requested to receive printed proxy materials, please sign and date this proxy as your name appears below and
return immediately in the enclosed envelope, whether or not you plan to attend the special meeting.
THE BOARD OF DIRECTORS
RECOMMENDS A VOTE "FOR" PROPOSAL 1 AND "FOR" PROPOSAL 2. PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE
x Please detach along perforated line and mail in the ------------------
envelope provided. ---------------- 00030030000000001000 0 100517
Please check box if you intend to attend the meeting in person.
FOR AGAINST ABSTAIN
GO GREEN
e-Consent makes it easy to go paperless. With e-Consent, you can quickly access your proxy
material, statements and other eligible documents online, while reducing costs, clutter and paper waste. Enroll today via www.astfinancial.com
to enjoy online access.
Signature of Shareholder
Date: Signature of Shareholder Date:
Note:
Please sign exactly as your name or names appear on this Proxy. When shares
are held jointly, each holder should sign. When signing as executor, administrator, attorney, trustee or guardian, please give
full title as such. If the signer is a corporation, please sign full corporate name by duly authorized officer, giving full title
as such. If signer is a partnership, please sign in partnership name by authorized person. To change the address on your account,
please check the box at right and indicate your new address in the address space above. Please note that changes to the registered
name(s) on the account may not be submitted via this method.
JOHN SMITH 1234 MAIN STREET APT. 203 NEW YORK, NY 10038 SPECIAL
MEETING OF SHAREHOLDERS OF ACRE REALTY INVESTORS INC. October 5, 2017 INTERNET -
Access “
www.voteproxy.com
”
and follow the on-screen instructions or scan the QR code with your smartphone. Have your proxy card available when you access
the web page.
TELEPHONE -
Call toll-free
1-800-PROXIES
(1-800-776-9437) in the United States or
1-718-921-8500
from foreign countries from any touch-tone telephone and follow the instructions. Have your proxy card available when you
call. Vote online/phone until 11:59 PM EST the day before the meeting.
MAIL -
Sign, date and mail your proxy card in the
envelope provided as soon as possible.
IN PERSON -
You may vote your shares in person by attending the Special Meeting.
GO GREEN -
e-Consent makes it easy to go paperless. With e-Consent, you can quickly access your proxy material, statements
and other eligible documents online, while reducing costs, clutter and paper waste. Enroll today via www.astfinancial.com to enjoy
online access.
PROXY VOTING INSTRUCTIONS
Please detach along perforated line and mail in the envelope provided IF you are
not voting via the Internet or Telephone.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 1 AND "FOR"
PROPOSAL 2. PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN
HERE
x ------------------ ---------------- 00030030000000001000 0 100517
COMPANY NUMBER ACCOUNT NUMBER NOTICE OF INTERNET
AVAILABILITY OF PROXY MATERIAL
: The Notice of Meeting, Proxy Statement, Proxy Card, and a copy of the 2016 Annual Report to
Shareholders are also available at http://www.acrerealtyinvestors.com 1. To approve the voluntary dissolution and liquidation
of ACRE Realty Investors Inc. (the “Company”) pursuant to a Plan of Dissolution (the “Plan of Dissolution”)
in substantially the form attached to the accompanying proxy statement as Appendix A. 2. To grant discretionary authority to the
Board of Directors to adjourn the Special Meeting, even if a quorum is present, to solicit additional proxies in the event that
there are insufficient shares present in person or by proxy voting in favor of the dissolution and liquidation of the Company
pursuant to the Plan of Dissolution.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS INDICATED, WILL BE VOTED "FOR"
PROPOSALS 1 and 2.
If you requested to receive printed proxy materials, please sign and date this proxy as your name appears
below and return immediately in the enclosed envelope, whether or not you plan to attend the special meeting.
Please check
box if you intend to attend the meeting in person.
FOR AGAINST ABSTAIN
0 ------------------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ---------------- 14475
ACRE REALTY INVESTORS INC.
c/o Avenue Capital Group 399 Park Avenue 6th Floor New York, NY 10022 PROXY SOLICITED BY THE BOARD
OF DIRECTORS FOR SPECIAL MEETING OF SHAREHOLDERS, OCTOBER 5, 2017
The shareholder(s) who sign this proxy card on the reverse
side appoint Edward Gellert and Gregory Simon, and each of them, proxies, with full power of substitution, for and in their name(s),
to vote all shares of common stock of ACRE Realty Investors Inc. that such person(s) hold of record at the special meeting of
shareholders to be held on Thursday, October 5, 2017, at the offices of our outside corporate counsel, Vinson & Elkins LLP,
located at 666 5th Avenue, 26th Floor, New York, New York, 10103 at 10:00 a.m. (Eastern Time) and at any adjournment of the meeting.
The signing shareholder(s) acknowledge receipt of the Notice of Special Meeting and Proxy Statement and direct the proxy to vote
as follows on the matters described in the accompanying Notice of Special Meeting and Proxy Statement and otherwise in their discretion
on any other business that may properly come before, and matters incident to the conduct of, the meeting or any adjournment of
it, as provided in the Proxy Statement.
(Continued and to be signed on the reverse side.)
1.1