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EX-32.2 - EXHIBIT 32.2 - IMH Financial Corpifcn-20170630x10qxexx322.htm
EX-31.2 - EXHIBIT 31.2 - IMH Financial Corpifcn-20170630x10qxexx312.htm
EX-31.1 - EXHIBIT 31.1 - IMH Financial Corpifcn-20170630x10qxexx311.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-Q
 
(Mark one)
 
x
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2017
OR
 
¨
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from: __________to __________

Commission File Number 000-52611 

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to post such files).  Yes þ   No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):
Large accelerated filer
¨
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
þ
(Do not check if a smaller reporting company)
 
Emerging growth company
¨

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. ¨ 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes ¨   No þ
 
The registrant had 1,059,364 shares of Common Stock, 3,491,758 shares of Class B-1 Common Stock, 3,492,954 shares of Class B-2 Common Stock, 7,159,759 shares of Class B-3 Common Stock, 313,790 shares of Class B-4 Common Stock and 735,801 shares of Class C Common Stock, 2,604,852 shares of Series B-1 Preferred Stock and 5,595,148 shares of Series B-2 Preferred Stock. The Preferred Stock is collectively convertible, and when combined with outstanding common stock would convert into 24,453,426 outstanding common shares as of August 14, 2017.



IMH Financial Corporation
June 30, 2017 Form 10-Q Quarterly Report
Index

Item 1.
Financial Statements
 
Unaudited Condensed Consolidated Balance Sheet as of June 30, 2017 and Audited Consolidated Balance Sheet as of December 31, 2016
 
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016
 
Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2017
 
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016
 
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signatures
 


2


PART I
 

3


ITEM 1.     FINANCIAL STATEMENTS

4


IMH FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) 
 
 
June 30, 2017
 
December 31, 2016
Assets
 
(Unaudited)

 
 
Cash and Cash Equivalents
 
$
39,739

 
$
9,702

Funds Held by Lender and Restricted Cash
 
611

 
177

Mortgage Loans, Net
 
7,461

 
378

Real Estate Held for Sale
 
14,595

 
17,837

Other Real Estate Owned
 
19,423

 
15,501

Other Receivables
 
2,241

 
1,125

Investment in Unconsolidated Entities
 
4,099

 
6,522

Other Assets
 
274

 
628

Property and Equipment, Net
 
450

 
284

Assets of Discontinued Operations
 
674

 
94,112

Total Assets
 
$
89,567

 
$
146,266

Liabilities
 
 

 
 

Accounts Payable and Accrued Expenses
 
$
3,722

 
$
3,237

Accrued Property Taxes
 
157

 
219

Dividends Payable
 
534

 
539

Accrued Interest Payable
 
298

 
379

Customer Deposits and Funds Held for Others
 
626

 
264

Notes Payable, Net of Discount
 
14,343

 
14,046

Notes Payable and Special Assessment Obligations, Held for Sale
 
3,269

 
3,581

Liabilities of Discontinued Operations
 
554

 
55,184

Total Liabilities
 
23,503

 
77,449

Redeemable Convertible Preferred Stock, $.01 par value; 100,000,000 shares authorized; 8,200,000 shares outstanding; liquidation preference of $39,570
 
33,474

 
32,143

 
 
 
 
 
Commitments, Contingencies and Subsequent Events
 


 


 
 
 
 
 
Stockholders’ Equity
 
 
 
 
Common stock, $.01 par value; 200,000,000 shares authorized; 18,079,523 and 17,552,139 shares issued at June 30, 2017 and December 31, 2016; 16,253,426 and 15,922,321 shares outstanding at June 30, 2017 and December 31, 2016, respectively
 
181

 
176

Less: Treasury stock at cost, 1,826,096 and 1,629,818 shares at June 30, 2017 and December 31, 2016, respectively
 
(6,170
)
 
(5,948
)
Paid-in Capital
 
716,943

 
718,911

Accumulated Deficit
 
(679,874
)
 
(678,778
)
Total IMH Financial Corporation Stockholders’ Equity
 
31,080

 
34,361

Noncontrolling Interests
 
1,510

 
2,313

Total Stockholders’ Equity
 
32,590

 
36,674

Total Liabilities and Stockholders’ Equity
 
$
89,567

 
$
146,266


The accompanying notes are an integral part of these condensed consolidated financial statements.

5


IMH FINANCIAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 

 
 
 
 
Operating Property Revenue
 
$
654

 
$
1,155

 
$
1,682

 
$
2,361

Management Fees, Investment and Other Income
 
360

 
77

 
508

 
171

Mortgage Loan Income, Net
 
44

 
96

 
52

 
313

Total Revenue
 
1,058

 
1,328

 
2,242

 
2,845

Operating Expenses:
 
 
 
 
 
 
 
 
Operating Property Direct Expenses (Exclusive of Interest and Depreciation)
 
620

 
759

 
1,439

 
1,631

Expenses for Non-Operating Real Estate Owned
 
170

 
133

 
336

 
291

Professional Fees
 
1,193

 
1,262

 
2,122

 
2,223

General and Administrative Expenses
 
2,613

 
1,947

 
4,358

 
3,862

Interest Expense
 
441

 
1,256

 
874

 
2,264

Depreciation and Amortization Expense
 
49

 
384

 
93

 
659

Total Operating Expenses
 
5,086

 
5,741

 
9,222

 
10,930

Recovery of Credit Losses, (Gain) Loss on Disposal, and Equity Method Loss from Unconsolidated Entities
 
 
 
 
 
 
 
 
(Gain) Loss on Disposal of Assets, Net
 
(1,683
)
 
226

 
(1,715
)
 
(22
)
Recovery of Credit Losses, Net
 
(272
)
 
(120
)
 
(338
)
 
(120
)
Equity Method Loss from Unconsolidated Entities, Net
 
52

 
46

 
171

 
190

Total Recovery of Credit Losses, (Gain) Loss on Disposal and Equity Method Loss from Unconsolidated Entities
 
(1,903
)

152

 
(1,882
)
 
48

Total Costs and Expenses
 
3,183

 
5,893

 
7,340

 
10,978

Loss from Continuing Operations, Before Provision for Income Taxes
 
(2,125
)
 
(4,565
)
 
(5,098
)
 
(8,133
)
Provision for Income Taxes
 

 

 

 
(2
)
Loss from Continuing Operations, Net of Tax
 
(2,125
)
 
(4,565
)
 
(5,098
)
 
(8,135
)
Income (Loss) from Discontinued Operations, Net of Tax
 
(240
)
 
40

 
4,736

 
(1,157
)
Net Loss
 
(2,365
)
 
(4,525
)
 
(362
)
 
(9,292
)
(Income) Loss Attributable to Noncontrolling Interest Income Allocation
 
(755
)
 
18

 
(734
)
 
73

Cash Dividend on Redeemable Convertible Preferred Stock
 
(533
)
 
(533
)
 
(1,061
)
 
(1,067
)
Deemed Dividend on Redeemable Convertible Preferred Stock
 
(672
)
 
(620
)
 
(1,331
)
 
(1,227
)
Net Loss Attributable to Common Shareholders
 
$
(4,325
)
 
$
(5,660
)
 
$
(3,488
)
 
$
(11,513
)
Earnings (Loss) per Common Share
 
 
 
 
 
 
 
 
Basic and Diluted, Continuing Operations
 
$
(0.25
)
 
$
(0.36
)
 
$
(0.51
)
 
$
(0.65
)
Basic and Diluted, Discontinued Operations
 
$
(0.01
)
 
$

 
$
0.29

 
$
(0.07
)
Net Basic and Diluted, Loss Per Share
 
$
(0.26
)
 
$
(0.36
)
 
$
(0.22
)
 
$
(0.72
)
Basic and Diluted Weighted Average Common Shares Outstanding
 
16,154,341

 
15,922,321

 
16,121,992

 
15,910,197

 The accompanying notes are an integral part of these condensed consolidated financial statements.

6


IMH FINANCIAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Six Months Ended June 30, 2017
(In thousands, except share data) 
 
 
Common Stock
 
Treasury Stock
 
 
 
 
 
Total IMH Financial Corporation Stockholders’ Equity
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Paid-in Capital
 
Accumulated Deficit
 
 
Non-controlling Interest
 
Total Stockholders’ Equity
Balance at December 31, 2016
 
17,552,139

 
$
176

 
1,629,818

 
$
(5,948
)
 
$
718,911

 
$
(678,778
)
 
$
34,361

 
$
2,313

 
$
36,674

Net Income (Loss)
 

 

 

 

 

 
(1,096
)
 
(1,096
)
 
734

 
(362
)
Decrease in Noncontrolling Interest due to Profit Participation
 

 

 

 

 

 

 

 
(1,537
)
 
(1,537
)
Dividends Declared on Redeemable Convertible Preferred Stock
 

 

 

 

 
(1,061
)
 

 
(1,061
)
 

 
(1,061
)
Deemed Dividend on Redeemable Convertible Preferred Stock
 

 

 

 

 
(1,331
)
 

 
(1,331
)
 

 
(1,331
)
Stock-Based Compensation
 
527,383

 
5

 

 

 
424

 

 
429

 

 
429

Treasury Stock
 

 

 
196,278

 
(222
)
 

 

 
(222
)
 

 
(222
)
Balance at June 30, 2017
 
18,079,522

 
$
181

 
1,826,096

 
$
(6,170
)
 
$
716,943

 
$
(679,874
)
 
$
31,080

 
$
1,510

 
$
32,590

 
The accompanying notes are an integral part of these condensed consolidated financial statements.


7


IMH FINANCIAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
Six months ended June 30,
 
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
 
Net Loss
 
$
(362
)
 
$
(9,292
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Equity Method Loss from Unconsolidated Entities
 
171

 
190

Stock-Based Compensation and Option Amortization
 
429

 
425

Stock-Based Compensation Related to Purchase of Treasury Stock
 
116

 

Gain on Disposal of Assets
 
(8,506
)
 
(22
)
Amortization of Deferred Financing Costs
 
447

 
749

Depreciation and Amortization Expense
 
371

 
2,239

Accretion of Discount on Notes Payable
 
397

 
345

Other Non-Cash Recovery of Credit Losses
 
(228
)
 

Changes in operating assets and liabilities:
 
 
 
 
Accrued Interest Receivable
 
(83
)
 
5

Other Receivables
 
(211
)
 
(164
)
Other Assets
 
608

 
(116
)
Accrued Property Taxes
 
(191
)
 
(88
)
Accounts Payable and Accrued Expenses
 
(2,109
)
 
489

Customer Deposits and Funds Held for Others
 
1,497

 
678

Accrued Interest Payable
 
(401
)
 
131

Funds Held by Lender and Restricted Cash
 
1,383

 
918

Total adjustments, net
 
(6,310
)
 
5,779

Net cash used in operating activities
 
(6,672
)
 
(3,513
)
INVESTING ACTIVITIES
 
 
 
 
Proceeds from Sales of Mortgage Loans
 

 
3,044

Proceeds from Sale of Real Estate Owned and Operating Properties
 
97,052

 
3,292

Purchases of Property and Equipment
 
(260
)
 
(18
)
Mortgage Loan Fundings and Protective Advances
 
(7,000
)
 

Proceeds from Mortgage Note Receivable
 

 
7,632

Investment in Unconsolidated Entities
 
(1,810
)
 
(135
)
Investment in Real Estate Owned and Other Operating Properties
 
(1,069
)
 
(8,250
)
Funds Held by Lender and Restricted Cash
 
246

 
516

Net cash provided by investing activities
 
87,159

 
6,081

FINANCING ACTIVITIES
 
 
 
 
Proceeds from Notes Payable
 

 
6,574

Debt Issuance Costs Paid
 
(100
)
 
(504
)
Repayments of Notes Payable
 
(50,257
)
 
(5,616
)
Repayments of Capital Leases
 
(2
)
 
(11
)
Dividends Paid
 
(1,066
)
 
(1,073
)
Purchase of Treasury Stock
 
(338
)
 

Distributions to Noncontrolling Interests
 
(9
)
 

Net cash used in financing activities
 
(51,772
)
 
(630
)

8


 
 
Six months ended June 30,
 
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
NET INCREASE IN CASH AND CASH EQUIVALENTS
 
28,715

 
1,938

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
 
11,449

 
7,603

CASH AND CASH EQUIVALENTS, END OF PERIOD
 
40,164

 
9,541

CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS, END OF PERIOD
 
425

 
1,406

CASH AND CASH EQUIVALENTS OF CONTINUING OPERATIONS, END OF PERIOD
 
$
39,739

 
$
8,135

 
 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION
 
 

 
 

Cash paid for interest
 
$
1,500

 
$
1,891

Cash paid for taxes
 
$
5

 
$

Non-Cash Investing and Financing Transactions:
 
 
 
 
Capital Expenditures in Accounts Payable and Accrued Expenses
 
$
446

 
$
2,916

Capital Lease and Other Liabilities Assumed by Buyer in Sale of Property
 
$
4,187

 
$

Decrease in Non-Controlling Interests through Profit Participation
 
$
(1,537
)
 
$

Non-cash Recovery of Credit Losses
 
$
(228
)
 
$

The accompanying notes are an integral part of these condensed consolidated financial statements.



9


IMH FINANCIAL CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1- BUSINESS, BASIS OF PRESENTATION AND LIQUIDITY
 
Our Company
 
IMH Financial Corporation (the “Company”) is a real estate investment and finance company based in the southwestern United States engaged in various and diverse facets of the real estate lending and investment process, including origination, acquisition, underwriting, servicing, enforcement, development, marketing, and disposition. The Company’s focus is to invest in, manage and dispose of commercial real estate mortgage investments or other real estate assets, and to perform all functions reasonably related thereto, including developing, managing and either holding for investment or disposing of real property acquired through acquisition, foreclosure or other means.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for a complete set of financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the results for the periods presented have been made. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017. These condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2016.

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

The Company, through certain subsidiaries, obtained certain real estate assets and equity interests in a number of limited liability companies and limited partnerships with various real estate holdings and related assets as a result of certain loan and guarantor enforcement and collection efforts. Certain of these entities have been consolidated in the accompanying consolidated financial statements while others have been accounted for under the equity method of accounting based on the extent of the Company’s controlling financial interest in each such entity. See Note 5 for a discussion of our equity investments and VIEs.

In accordance with ASC 205-20, Presentation of Financial Statements-Discontinued Operations, a component of an entity is reported in discontinued operations after meeting the criteria for held for sale classification if the disposition represents a strategic shift that has (or will have) a major effect on the entity's operations and financial results. While the Company intends to continue to remain active in the hospitality industry through continued management of the two hotels located in Sedona, Arizona (“Sedona hotels”), the pursuit of additional hotels to manage, and the active pursuit of hospitality acquisition opportunities, the Company determined that the disposal of the Sedona hotels is required to be treated as discontinued operations accounting presentation under GAAP. As such, the historical financial results of the Sedona hotels and the related income tax effects have been presented as discontinued operations for all periods presented of the disposal group and is reported in the balance sheet as assets of discontinued operations, liabilities of discontinued operations and net income (loss) of discontinued operations in the condensed consolidated statements of operations through the date of sale (February 28, 2017).

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


10

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 1 – BUSINESS, BASIS OF PRESENTATION AND LIQUIDITY - continued

Liquidity

As of June 30, 2017, our accumulated deficit aggregated $679.9 million primarily as a result of previous provisions for credit losses recorded relating to the decrease in the fair value of the collateral securing our legacy loan portfolio and impairment charges relating to the value of real estate owned (“REO”) assets acquired primarily through foreclosure, as well as on-going net operating losses resulting from the lack of income-producing assets, and the high cost of our previous debt financing. Beginning in 2008, we experienced significant defaults and foreclosures in our mortgage loan portfolio due primarily to the erosion of the U.S. and global real estate and credit markets during those periods. As a result, since that time we have been focused on enforcing our rights under our loan documents, working to repossess the collateral properties underlying those loans for purposes of disposing of or developing such assets, and pursuing recovery from guarantors under such loans.

Our liquidity plan has included obtaining additional financing, selling mortgage loans, and selling the majority of our legacy real estate assets. We secured various financings between 2011 and 2016 which, along with proceeds from asset sales, have been our primary sources of working capital. In February 2017, we sold our Sedona hotels, generating net cash of $42.2 million after payment of expenses and related debt.

As of June 30, 2017, we had (i) cash and cash equivalents of $39.7 million and (ii) held for sale REO assets with a carrying value of $14.6 million. We continue to evaluate potential disposition strategies for our remaining REO assets.

We require liquidity and capital resources for our general working capital needs, including maintenance, development costs and capital expenditures for our operating properties and non-operating REO assets, professional fees, general and administrative operating costs, loan enforcement costs, financing costs, debt service payments, dividends to our preferred shareholders, as well as to acquire our target assets. We expect our primary sources of liquidity over the next twelve months to consist of our current cash, mortgage loan interest income from anticipated originations, revenues from remaining operating properties, revenues from management of the Sedona hotels, proceeds from borrowings, and proceeds from the disposition of our existing loan and REO assets held for sale. We believe that our cash and cash equivalents coupled with our operating and investing revenues, as well as proceeds that we anticipate from the disposition of our loans and real estate held for sale will be sufficient to allow us to fund our operations for a period of at least one year from the date these condensed consolidated financial statements are issued.

While we have been successful in securing financing through June 30, 2017 to provide adequate funding for working capital purposes, which has been supplemented by proceeds from the sale of certain REO assets and mortgage receivable collections, there is no assurance that we will be successful in selling our remaining loan and REO assets in a timely manner or in obtaining additional or replacement financing, if needed, to sufficiently fund future operations, repay existing debt or to implement our investment strategy. Our failure to generate sustainable earning assets, and successfully liquidate a sufficient number of our loans and REO assets may have a material adverse effect on our business, results of operations and financial position.

11

IMH FINANCIAL CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
 
Use of Estimates
 
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. The Company evaluates its estimates and assumptions on a regular basis. The Company uses historical experience and various other assumptions that are believed to be reasonable under the circumstances to form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates and assumptions used in preparation of the condensed consolidated financial statements.

Comprehensive income

Comprehensive income includes items that impact changes in shareholders’ equity but are not recorded in earnings. The Company did not have any such items during the three and six months ended June 30, 2017 and 2016. Accordingly, comprehensive income (loss) is equal to net income (loss) for those periods.

Funds Held by Lender and Restricted Cash

In February 2017, the senior lender-controlled reserve accounts held at December 31, 2016 were released to us upon sale of the Sedona hotels which were the underlying collateral. However, as an accommodation to the buyer of the hotels and in order to provide for a smooth transition, we established certain operating accounts in our capacity as property manager, in our name for the benefit of the buyer, until such time that new accounts could be established in the name of the buyer. Upon opening of the buyer’s new accounts, these temporary accounts will be closed. Since these accounts are legally in the name of the Company, we have presented the balances of these accounts, totaling $0.6 million at June 30, 2017, in restricted cash with an offsetting liability to funds held for others.

Management Fee Revenue Recognition

Our revenues include base management and incentive management fees from management of hotels. Management fees are typically composed of a base fee, which is a percentage of the revenues of hotels, and an incentive fee, which is generally based on hotel profitability. We recognize base management fees as revenue when we earn them under the contracts. In interim periods and at year-end, we recognize incentive management fees that would be due as if the contracts were to terminate at that date, exclusive of any termination fees payable or receivable by us.

Mortgage Investment Revenue Recognition

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


12

IMH FINANCIAL CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued

We do not typically remove a loan from non-accrual status until (a) the borrower has brought the respective loan current as to the payment of past due interest, and (b) we are reasonably assured as to the collection of all contractual amounts due under the loan based on the value of the underlying collateral of the loan, the receipt of additional collateral required and the financial ability of the borrower to service our loan.

We do not generally reverse accrued interest on loans once they are deemed to be impaired and placed in non-accrual status. In conducting our periodic valuation analysis, we consider the total recorded investment for a particular loan, including outstanding principal, accrued interest, anticipated protective advances for estimated outstanding property taxes for the related property and estimated foreclosure costs, when computing the amount of valuation allowance required. As a result, our valuation allowance may increase based on interest income recognized in prior periods, but subsequently deemed to be uncollectible as a result of our valuation analysis.

We generally allocate cash receipts first to interest, except when such payments are specifically designated by the terms of the loan as a principal reduction. Loans with a principal or interest payment one or more days delinquent are in technical default and are subject to various fees and charges including default interest rates, penalty fees and reinstatement fees. Often these fees are negotiated in the normal course of business and, therefore, not subject to estimation. Accordingly, revenue for such fees is recognized over the remaining life of the loan as an adjustment to the interest income yield.

We defer fees for loan originations, processing and modifications, net of direct origination costs, at origination and amortize such fees as an adjustment to interest income using the effective interest method. Revenue for non-refundable commitment fees is recognized over the remaining life of the loan as an adjustment to the interest income yield.

We defer premiums or discounts arising from acquired loans at acquisition and amortize such premiums or discounts as an adjustment to interest income over the contractual term of the related loan using the effective interest method. We include the unamortized portion of the premium or discount as a part of the net carrying value of the loan on the condensed consolidated balance sheets. Costs not directly paid to the seller of the loan are expensed as incurred and not amortized, except for any fees paid directly to the seller.

Reclassifications

Certain reclassifications have been made to 2016 amounts to conform to the current year presentation. See “Note 8 – Segment Information” for additional information regarding these reclassifications. In February 2017, the Company entered into an agreement to sell the Sedona hotels to a third party, at which time such assets met the criteria for held for sale classification. Due to the material nature of the Sedona hotel operations, the disposition of this asset group was deemed to represent a strategic shift that will have a major effect on our current operations and financial results under GAAP. Accordingly, this also caused the reclassification of the respective assets, liabilities, revenues and expenses related to the Sedona hotels to be presented as Assets from discontinued operations and Liabilities from discontinued operations in the condensed consolidated balance sheets, and Income (Loss) from discontinued operations, net of tax in the condensed consolidated statements of operations, respectively. See Note 12 for a summary of discontinued operations. The balance of Mortgage Loans Held for Sale, Net as of December 31, 2016 was reclassified to Mortgage Loans, Net in the condensed consolidated balance sheets to conform with the Company’s determination that such assets did not meet the applicable accounting criteria of held for sale as of that date.

Discontinued Operations

In determining whether a group of assets disposed (or to be disposed) of should be presented as a discontinued operation, the Company makes a determination of whether the criteria for held-for-sale classification is met and whether the disposition represents a strategic shift that has (or will have) a major effect on our operations and financial results. If these determinations can be made affirmatively, the results of operations of the group of assets being disposed of (as well as any gain or loss on the disposal transaction) are aggregated for separate presentation apart from continuing operating results of the Company in the condensed consolidated financial statements.


13

IMH FINANCIAL CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued

Recent Accounting Pronouncements

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

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606. This update applies to entities that enter into contracts with customers to transfer goods or services or for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards. The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to illustrate the transfer of 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. The new guidance also includes a cohesive set of disclosure requirements that will provide users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a reporting organization’s contracts with customers. In 2015, the FASB voted to defer ASU 2014-09. Under the new guidance, companies will recognize revenue when the seller satisfies a performance obligation, which would be when the buyer takes control of the good or service. This new guidance could result in different amounts of revenue being recognized and could result in revenue being recognized in different reporting periods than under the current guidance. The standard specifically excludes revenue associated with lease contracts. The guidance is effective for periods beginning after December 15, 2017, with early adoption permitted for periods beginning after December 15, 2016. We expect to adopt this guidance effective January 1, 2018 using the modified retrospective application. As a result of the sale of the Sedona hotels in February 2017, the Company no longer owns any assets giving rise to significant hospitality revenues. As such, unless and until we acquire other hotel assets, we do not expect to record direct revenues for hotel operations.  Simultaneously with the sale, the Company entered into a hotel management agreement with the buyer to manage the day-to-day operations of the hotels which will generate a new revenue source for the Company. The Company is in the initial stages of evaluating the impact that ASU 2014-09 will have on its consolidated financial statements of operations resulting from this new revenue source.  We will continue our evaluation of the standards update through the date of adoption.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10), which requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this update also require an entity to present separately in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument­ specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this update require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases. This new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvement to Employee Share Based Payment Accounting (“ASU 2016-09”), which affects entities that issue share based payment awards to their employees. ASU 2016-09 is designed to simplify several aspects of accounting for share based payment award transactions including the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. The Company elected to change our policy surrounding forfeitures, and beginning January 1, 2017, the Company no longer estimates the number of awards expected to be forfeited but rather accounts for them as they occur. The adoption of ASU 2016-09 has been evaluated and did not have a material impact on the Company’s condensed consolidated financial statements.

14

IMH FINANCIAL CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued


In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public companies, ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those periods. We have not yet determined the impact the adoption of ASU 2017-01 will have on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019. We have not yet determined the impact the adoption of ASU 2016-13 will have on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which is intended to address diversity in practice related to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in ASU 2016-15 address eight specific cash flow issues as well as application of the predominance principle (dependence on predominant source or use of receipt or payment) and are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. ASU 2016-15 requires retrospective adoption unless it is impracticable to apply, in which case it is to be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. In accordance with ASU 2016-18, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning­ of­ period and end­ of­ period amounts shown on the statements of cash flows. The amendments of ASU 2016-18 are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact this amendment will have on its consolidated financial statements.

15

IMH FINANCIAL CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3 — MORTGAGE LOANS, NET

Lending Activities

The Company did not originate any loans during the six months ended June 30, 2017 or 2016. During the six months ended June 30, 2017, the Company purchased one new mezzanine loan from a related party (fully described in Note 11) at a discount for $7.0 million, with a face value of $7.6 million and incurred and expensed costs related to underwriting the loan of $0.2 million. The loan is collateralized by a pledge of 100% of the direct equity interests in the owner of an office building located in St. Louis, Missouri. The loan had an original maturity date of September 9, 2016 with three one-year extensions, the second of which was exercised by the borrower subsequent to June 30, 2017. The loan has an annual interest rate of 9.5% plus one-month LIBOR. The discount is being amortized over the term of the loan using the effective interest method.

As of June 30, 2017, the Company had four loans outstanding with an aggregate average principal and interest balance of $5.2 million, two of which were performing loans with an average outstanding principal and accrued interest balance of $4.0 million and bearing a weighted average interest rate of 10.6%. As of December 31, 2016, the Company had three loans with an aggregate average principal and interest balance of $4.4 million, one of which was performing with an outstanding principal and accrued interest balance of $0.4 million and bearing an interest rate of 11%. As of June 30, 2017 and December 31, 2016, the Company had two non-performing loans which have been fully reserved and have a zero carrying value. During the six months ended June 30, 2017 and 2016, we recorded mortgage interest income of $0.1 million and $0.3 million, respectively. During the three months ended June 30, 2017 and 2016 we recorded mortgage interest income of $44.0 thousand and $0.1 million, respectively. As of June 30, 2017 and December 31, 2016, the valuation allowance was $12.7 million and represented 63.0% and 97.1%, respectively, of the total outstanding loan principal and interest balances.

Loan Sales and Payoffs

We did not sell any mortgage loans during the six months ended June 30, 2017. During the six months ended June 30, 2016, the Company sold one loan with a carrying value of $3.1 million for a net loss of $0.1 million.

During the six months ended June 30, 2017, we did not collect any mortgage payments. During the six months ended June 30, 2016, we collected mortgage loan payoffs totaling $7.6 million.

Given the non-performing status of our legacy loans, we do not expect to receive any loan payoffs on loans that are past their respective maturity dates. We may find it necessary to foreclose, modify, extend, make protective advances, or sell such loans in order to protect collateral, maximize return, or generate additional liquidity.



16

IMH FINANCIAL CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 4 — REAL ESTATE HELD FOR SALE AND OTHER REAL ESTATE OWNED

At June 30, 2017, we held total REO assets of $34.0 million, of which $14.6 million were held for sale and $19.4 million were classified as other real estate owned. At December 31, 2016, we held total REO assets of $122.1 million, of which $17.8 million was held for sale, $88.7 million were held as operating properties (which have been reclassified as assets of discontinued operations on the accompanying condensed consolidated balance sheets), and $15.5 million were classified as other real estate owned.

A summary of operating properties and REO assets owned as of June 30, 2017 and December 31, 2016, respectively, by method of acquisition, is as follows (in thousands):
 
 
Acquired Through Foreclosure and/or Guarantor Settlement
 
Acquired Through Purchase and Costs Incurred
 
Accumulated Depreciation
 
Total
 
 
2017
2016
 
2017
2016
 
2017
2016
 
2017
2016
Real Estate Held for Sale
 
$
13,595

$
17,717

 
$
1,000

$
917

 
$

$
(797
)
 
$
14,595

$
17,837

Discontinued Operations
 

83,652

 

14,079

 

(8,997
)
 

88,734

Other Real Estate Owned
 
8,025

8,356

 
11,398

7,145

 


 
19,423

15,501

  Total
 
$
21,620

$
109,725

 
$
12,398

$
22,141


$

$
(9,794
)
 
$
34,018

$
122,072


Following is a roll-forward of REO activity from December 31, 2016 to June 30, 2017 (dollars in thousands):
 
Operating
Properties
 
# of
Projects
 
Held for
Sale
 
# of
Projects
 
Other Real Estate Owned
 
# of
Projects
 
Total Net
Carrying Value
Balances at December 31, 2016
$
88,734

 
2

 
$
17,837

 
10

 
$
15,501

 
7

 
$
122,072

Additions:
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital Costs Additions
649

 

 
230

 

 
190

 

 
1,069

Consolidation of Park City Development, LLC Interest in Lakeside JV

 

 

 

 
4,062

 
1

 
4,062

Transfer to held for sale
(89,115
)
 
(2
)
 
89,115

 
2

 

 

 

Reductions:
 
 
 
 
 
 
 
 
 
 
 
 

Cost of Properties Sold
10

 

 
(92,587
)
 
(4
)
 
(330
)
 

 
(92,907
)
Depreciation and Amortization
(278
)
 

 

 

 

 

 
(278
)
Balances at June 30, 2017
$

 

 
$
14,595

 
8

 
$
19,423

 
8

 
$
34,018


As discussed in Note 5, we acquired the remaining interest of Park City Development, LLC in Lakeside JV. Following the acquisition of that interest, we were deemed to control the entity and changed our accounting for the investment from an unconsolidated equity investment to a consolidated investment, at which time we recorded the related real estate, other assets and liabilities. During the six months ended June 30, 2017, the Company sold REO from four projects (in whole or portions thereof), for $97.1 million (net of transaction costs and other non-cash adjustments) resulting in a total net gain on sale of $8.5 million, of which $6.8 million is included as a component of discontinued operations in the unaudited condensed consolidated statement of operations. During the six months ended June 30, 2016, we sold five REO assets (or portions thereof) for $3.3 million (net of transaction costs and other non-cash adjustments), resulting in a total net gain of less than $0.1 million.

REO Planned Development and Operations

Costs and expenses related to operating, holding and maintaining our operating properties and REO assets are expensed as incurred and included in operating property direct expenses, and expenses for non-operating real estate owned in the accompanying condensed consolidated statements of operations. For the three months ended June 30, 2017 and 2016, these costs and expenses were $1.1 million ($0.3 million of which is included in income from discontinued operations) and $6.9 million ($6.0 million of which is included in loss from discontinued operations), respectively. For the six months ended June 30, 2017 and 2016, these costs and expenses were $5.8 million ($4.0 million of which is included in income from discontinued operations) and $12.6 million

17

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 4 — REAL ESTATE HELD FOR SALE AND OTHER REAL ESTATE OWNED – continued

($10.7 million of which is included in income from discontinued operations), respectively. Costs related to the development or improvements of the Company’s real estate assets are generally capitalized and costs relating to holding the assets are generally charged to expense. Cash outlays for capitalized development costs totaled $1.1 million and $8.3 million for the six months ended June 30, 2017 and 2016, respectively.

We continue to evaluate our use and disposition options with respect to our REO assets. REO assets that are classified as held for sale or as other real estate owned are measured at the lower of carrying amount or fair value, less estimated cost to sell, and are subject to fair value analysis on not less than a quarterly basis. REO assets that are classified as held for development or as operating properties are considered “held and used” and are evaluated for impairment when circumstances indicate that the carrying amount exceeds the sum of the un-discounted net cash flows expected to result from the development or operation and eventual disposition of the asset.

Reclassification of Assets from Operating Properties to REO Held for Sale

In the first quarter of 2017, we reclassified our two Sedona hotel operating properties to REO held for sale as a result of management’s decision and actions to dispose of such assets. The properties were sold in February 2017.

As of December 31, 2016, the Sedona hotel assets represented 60.6% of the Company’s total assets and constituted an individually significant component of the Company’s business. The Sedona assets contributed pretax loss of $0.2 million for the three months ended June 30, 2017, and $40.0 thousand in pretax income for the three months ended June 30, 2016.

Based on material nature of the hotel assets, the operations and gain on sale of the Sedona hotels is reported as discontinued operations on the financial statements. See Note 12, Discontinued Operations, for additional information.

18

IMH FINANCIAL CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 5 - INVESTMENTS
Park City, Utah Lakeside Investment

In January 2017, Lakeside DV Holdings, LLC (“LDV Holdings”), a wholly-owned subsidiary of the Company, purchased the interest held in Lakeside JV by Park City Development, LLC (“PCD”) for $0.7 million and terminated PCD as manager. Upon purchase of PCD’s interest, LDV Holdings became the sole owner of Lakeside JV. As a result, Lakeside JV became a consolidated entity of the Company. The Company’s investment in Lakeside JV was previously accounted for under the equity method.

Equity Interests Acquired through Guarantor Recoveries

The Company has acquired certain real estate assets and equity interests in a number of limited liability companies and limited partnerships with various real estate holdings and related assets as a result of enforcement and collection efforts. Certain of these entities have been consolidated in the accompanying condensed consolidated financial statements while others have been accounted for under the equity method of accounting, depending on the extent of the Company’s financial interest in each such entity.

The Company’s ownership interests in these entities range from 2.4% to 48.0% and, collectively, the Company’s net investment in these entities totals $4.1 million and $3.1 million at June 30, 2017 and December 31, 2016, respectively.

In addition, during the six months ended June 30, 2017, the Company advanced a total of $0.6 million to five partnerships under the terms of certain note agreements secured by the assets of the respective partnerships. The outstanding principal of such notes totaled $1.0 million at June 30, 2017, had interest rates ranging from the JP Morgan Chase Prime rate plus 2.0% (6.25% at June 30, 2017) to 8% and mature no later than July 31, 2018.

During the three months ended June 30, 2017, the general partner of one of the five partnerships made a capital call of all partners to fund various operating and capital requirements. While the Company met its obligation under this request, none of the remaining partners did so, at which point the Company funded those portions as well totaling $1.1 million. As a result of the other partners’ failure to make the required contributions, the general partner declared a default by such limited partners under the terms of the partnership agreement and assigned those interests to the Company’s limited partner subsidiary. The assignment is being contested by one of the limited partners. As a result of the legal contingency of this matter, while we have recorded the contributions made by the Company in our investment in unconsolidated entities in the accompanying condensed consolidated balance sheets, we have not recorded the possible effects of recording those additional limited partner interests as of June 30, 2017.

Summarized Financial Information of Unconsolidated Entities (unaudited)

The following presents certain summarized financial information of the entities in which the Company holds investments that are recorded on the equity method as of June 30, 2017 and December 31, 2016 (in thousands):
 
 
June 30, 2017
 
December 31, 2016
Total assets
 
$
15,578

 
$
19,456

Total liabilities
 
7,078

 
6,269


During both the six months ended June 30, 2017 and 2016, the equity loss recorded on these equity method investments in the accompanying condensed consolidated statements of operations was $0.2 million. During the three months ended June 30, 2017 and 2016, the equity loss recorded on these equity method investments in the accompanying condensed consolidated statements of operations was $0.1 million and $46.0 thousand, respectively.

19

IMH FINANCIAL CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 6 — FAIR VALUE
 
Valuation Allowance and Fair Value Measurement of Loans and Real Estate Held for Sale
 
Our valuation analysis process and procedures are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. We perform a valuation analysis of our loans, REO held for sale, Other REO and equity investments not less frequently than on a quarterly basis. We consider all relevant, material circumstances to determine if, and the extent to which, a valuation allowance is required.

Impairment for collateral dependent loans is measured at the balance sheet date based on the then fair value of the collateral in relation to contractual amounts due under the terms of the applicable loan if foreclosure is probable. Substantially all of our loans in default are deemed to be collateral dependent.
 
REO assets that are classified as held for sale and Other REO are measured at the lower of carrying amount or fair value, less estimated cost to sell. If an asset is considered impaired, an impairment loss is recognized for the difference between the asset’s carrying amount and its fair value, less estimated cost to sell. If we elect to change the disposition strategy for our other real estate owned, and such assets were deemed to be held for sale, we may record additional impairment charges, and the amounts could be significant.
 
We assess the extent, reliability and quality of market participant inputs such as sales pricing, cost data, absorption, discount rates, and other assumptions, as well as the significance of such assumptions in deriving the valuation. We generally employ one of five valuation approaches (as applicable), or a combination of such approaches, in determining the fair value of the underlying collateral of each loan, REO held for sale and Other REO asset: (i) the development approach; (ii) the income capitalization approach; (iii) the sales comparison approach; or (iv) the receipt of recent offers on specific properties. The development, income capitalization, and sales comparison approach use significant unobservable inputs and are therefore classified as Level 3 inputs. A recent offer is an observable input and is therefore considered a Level 2 input. The valuation approach taken depends on several factors including:

the type of property;
the current status of entitlement and level of development (horizontal or vertical improvements) of the respective project;
the likelihood of a bulk sale as opposed to individual unit sales;
whether the property is currently or near ready to produce income;
the current sales price of property in relation to cost of development;
the availability and reliability of market participant data; and
the date of an offer received in relation to the reporting period.

With respect to properties or loans for which we (or the borrower) have received a bona fide written third-party offer (or entered into a purchase and sale agreement) to buy the related property, we generally utilize the offer or agreement amount even where the amount is outside our current valuation range, as offers and purchase agreements are considered lower (Level 2) inputs. An offer or agreement is only considered for valuation purposes if we deem it to be valid, reasonable, negotiable, and we believe the counterparty has the financial wherewithal to execute the transaction. When deemed appropriate, the offers received may be discounted to allow for potential changes in our on-going negotiations.

Factors Affecting Valuation
 
The underlying collateral of our loans, REO held for sale and Other REO assets vary by stage of completion, which consists of either raw land (also referred to as pre-entitled land), entitled land, partially developed land, or mostly developed/completed lots or projects. While we continue to utilize third party valuations for selected assets on a periodic basis as circumstances warrant, we rely primarily on our outside asset management consultants and internal staff to gather available market participant data from independent sources to establish assumptions used to derive fair value of the collateral supporting our loans and real estate owned for a majority of our loan and REO assets.


20

IMH FINANCIAL CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 — FAIR VALUE – continued

Our fair value measurement is based on the highest and best use of each property which is generally consistent with our current use for such property. In addition, our assumptions are based on assumptions that we believe market participants for those assets would also use. During the three months ended June 30, 2017, we performed both a macro analysis of market trends and economic estimates, as well as a detailed analysis on selected significant REO assets. In addition, our fair value analysis included a consideration of management’s pricing strategy in disposing of such assets.

The following is a summary of the procedures performed in connection with our fair value analysis as of and for the three and six months ended June 30, 2017:

1.
We reviewed the status of each of our loans to ascertain the likelihood of collecting or recovering all amounts due under the terms of the loans at maturity based on current real estate and credit market conditions.

2.
We reviewed the status of each of our REO assets to determine whether such assets continue to be properly classified as held for sale, held for development, operating properties or other REO as of the reporting date.

3.
For the three and six months ended June 30, 2017, given the lack of significant change in overall general market conditions, we performed an internal analysis to evaluate fair value for the balance of the portfolio not covered by third-party valuation reports or existing offers or purchase and sale agreements. Our internal analysis of fair value included a review and update of current market participant activity, overall market conditions, the current status of the property, our direct knowledge of local market activity affecting the property, as well as other market indicators obtained through our asset management group and various third parties to determine whether there were any indications of a material increase or decrease in the value of the underlying collateral or REO asset since the last complete third party valuation for such assets. Our asset-specific analysis focused on the higher valued assets of our total loan collateral and REO portfolio. We considered the results of our analysis and the potential valuation implication to the balance of the portfolio based on similar asset types and geographic location.
 
Based on our analysis, the valuation approach taken and assumptions utilized with respect to each asset at December 31, 2016 remained generally applicable at June 30, 2017, except for those assets subject to a recent bona fide written third-party offer or executed purchase and sales agreements. See our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 for a summary of the key assumptions and valuation methodologies utilized to derive fair value.

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

Valuation Conclusions
 
Based on the results of our evaluation and analysis, we did not record any non-cash provision for credit losses on our loan portfolio during the three and six months ended June 30, 2017 and 2016. However, we recorded other net recoveries of credit losses totaling $0.3 million and $0.1 million for the three months ended June 30, 2017 and 2016, respectively, resulting from the collection of cash and other assets recovered from certain guarantors on certain legacy loans and insurance recoveries received during the period. We recorded $0.3 million and $0.1 million in other net recoveries of credit losses for the six months ended June 30, 2017 and 2016, respectively. We recorded no impairment charges for real estate owned during the three and six months ended June 30, 2017 and 2016.

As of June 30, 2017 and December 31, 2016, the valuation allowance totaled $12.7 million, representing 63.0% and 97.1%, respectively, of the total outstanding loan principal and accrued interest balances. With the existing valuation allowance recorded as of June 30, 2017, we believe that, as of that date, the fair value of our loans, REO assets held for sale, and other REO is adequate in relation to the net carrying value of the related assets and that no additional valuation allowance or impairment is considered necessary. While the above results reflect management’s assessment of fair value as of June 30, 2017 based on currently available

21

IMH FINANCIAL CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 — FAIR VALUE – continued

data, we will continue to evaluate our loans and REO assets to determine the appropriateness of the carrying value of such assets. Depending on market conditions, such updates may yield materially different values and potentially increase or decrease the valuation allowance for loans or impairment charges for REO assets.

There were no losses recorded during the three and six months ended June 30, 2017 or the three and six months ended June 30, 2016 in the categories for which net mortgage loans and REO held for sale were measured at fair value on a non-recurring basis based upon the lowest level of significant input to the valuation as of June 30, 2017 or 2016.

22

IMH FINANCIAL CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 7 — NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS
 
At June 30, 2017 and December 31, 2016, our debt, notes payable and special assessment obligations consisted of the following (in thousands): 
 
 
June 30,
 
December 31,
 
 
2017
 
2016
Note Payables, Net of Discount, Continuing Operations
 
 
 
 
$5.9 million note payable secured by real estate in New Mexico, annual interest only payments based on annual interest rate of prime plus 2.0% through December 31, 2017, and prime plus 3.0% thereafter (5.75% and 5.5% at June 30, 2017 and December 31, 2016, respectively), matures December 31, 2019.
 
$
5,940

 
$
5,940

Unsecured note payable under class action settlement, face amount of $10.2 million, net of discount of $1.7 million and $2.1 million at June 30, 2017 and December 31, 2016, respectively, 4% annual interest rate (14.6% effective yield), interest payable quarterly, matures April 28, 2019.
 
8,503

 
8,106

Total Notes Payable, Continuing Operations
 
14,443

 
14,046

Less: Deferred Financing Costs of Notes Payable, Continuing Operations
 
(100
)
 

Total Notes Payable, Continuing Operations, Net
 
$
14,343

 
$
14,046

 
 
 
 
 
Notes Payable and Special Assessment Obligations, Assets Held for Sale
 
 
 
 
$3.7 million community facility district bonds dated 2005, secured by residential land located in Buckeye, Arizona, annual interest rate ranging from 5%-6%, maturing various dates through April 30, 2030.
 
$
2,919

 
$
3,067

$2.3 million special assessment bonds dated between 2002 and 2007, secured by residential land located in Dakota County, Minnesota, annual interest rate ranging from 6%-7.5%, maturing various dates through 2022.
 
350

 
514

Total Notes Payable and Special Assessment Obligations, Held for Sale
 
$
3,269

 
$
3,581

 
 
 
 
 
Note Payables, Net of Discount, Discontinued Operations*
 
 
 
 
$50.0 million non-recourse note payable secured by first liens on operating hotel properties and related assets, bears annual interest at the greater of a) 7.25% or b) one-month LIBOR plus 6.75%, actual interest of 7.40% at December 31, 2016, original maturity of February 1, 2018, interest only payable monthly, principal due at maturity, subject to a carve-out guarantee by the Company. This note payable was repaid in February 2017 upon sale of the underlying collateral.
 
$

 
$
50,000

Total Notes Payable, Discontinued Operations
 

 
50,000

Less: Deferred Financing Costs of Notes Payable, Discontinued Operations
 

 
(447
)
Total Notes Payable, Discontinued Operations, Net
 
$

 
$
49,553

* This note was paid off in connection with the sale of the Sedona assets and has been reclassified into Liabilities of discontinued operations as of December 31, 2016 in the accompanying condensed consolidated balance sheet.
 
Interest expense for the three months ended June 30, 2017 and 2016 was $0.4 million and $2.3 million, respectively, of which none and $1.0 million, respectively, is included in income from discontinued operations in the accompanying condensed consolidated statements of operations. Interest expense for the six months ended June 30, 2017 and 2016 was $1.9 million and $4.4 million, respectively, of which $1.1 million and $2.1 million, respectively, is included in income from discontinued operations in the accompanying condensed consolidated statements of operations.

Senior Indebtedness

In January 2015, the Company, through various of its subsidiaries, entered into certain loan agreements, promissory notes and related agreements with Calmwater Capital 3, LLC (“Calmwater”), including a $50.0 million non-recourse loan secured by first liens on the Company’s Sedona hotels. This loan was repaid in full in February 2017 upon sale of the Sedona hotels.

23

IMH FINANCIAL CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 7 — NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS – continued


Land Purchase Financing

During 2015, the Company obtained seller-financing of $5.9 million in connection with the purchase of certain real estate located in New Mexico at a purchase price of $6.8 million. The note bears interest at the WSJ Prime Rate as of December 31, 2015 (recalculated annually) plus 2% through December 31, 2017, and the WSJ Prime Rate plus 3% thereafter. Interest only payments are due on December 31 of each year with the principal balance and any accrued unpaid interest due at maturity on December 31, 2019. The note may be prepaid in whole or in part without penalty.

Other Notes Payable Activity

During the fourth quarter of 2015, a wholly-owned subsidiary of the Company borrowed $5.4 million pursuant to a non-revolving credit facility with the Banc of California, National Association (the “BOC Facility”). The BOC Facility was secured by a $7.2 million mortgage receivable, guaranteed by the Company, was scheduled to mature on April 30, 2016, and bore interest at a per annum rate equal to the greater of (i) the prime rate as published by The Wall Street Journal (the “WSJ Prime Rate”) plus 1.25% or (ii) 4.5%. During the six months ended June 30, 2016, we repaid the BOC Facility in full upon collection of the mortgage receivable that served as collateral for that loan.
Note Payable to Related Party

In December 2014, the Company borrowed $5.0 million from SRE Monarch Lending, LLC (“SRE Monarch”) pursuant to an unsecured non-revolving credit facility (“SRE Note”). The Company used the loan proceeds to make a scheduled payment under the Company’s then-senior loan. SRE Monarch is a related party of Seth Singerman, one of the Company’s prior directors and an affiliate of one of our prior preferred equity holders.

During 2015 and 2016, the Company entered into a series of amendments to extend the SRE Note’s maturity date to December 22, 2016. The Company paid all accrued interest at the date of each amendment and paid various extension fees totaling $0.2 million during the six months ended June 30, 2016, which fees were amortized over the loan term. The SRE Note was repaid in full in December 2016.

Revolving Line of Credit with SRE Monarch Lending, LLC

In March 2016, a subsidiary of the Company executed an agreement with SRE Monarch for a $4.0 million secured revolving line of credit facility (“SRE Revolver”). The SRE Revolver bore interest at a per annum base rate of 5% and was to mature on the earliest to occur of: 1) December 22, 2016 (after entering into a series of loan amendments extending this date); 2) the sale of the land serving as collateral under the SRE Revolver, or 3) the sale of Gabella. The SRE Revolver was secured by certain land owned by a subsidiary of the Company and was guaranteed by the Company. The full amount of the SRE Revolver was drawn during 2016. For the year ended December 30, 2016, we incurred total fees of $0.5 million in connection with the SRE Revolver, which were amortized to interest expense using the effective interest method over the term of the line of credit. In December 2016, the Company paid all of the outstanding principal and unpaid accrued interest concurrent with the sale of Gabella.

Under terms of the SRE Revolver, the Company was obligated to pay SRE Monarch an amount equal to five percent (5%) of the net sale proceeds upon sale of the land that served as collateral under the SRE Revolver prior to March 31, 2017 ("Facility Exit Date"). In the event that no sale of the collateral occurred or was expected to occur prior to the Facility Exit Date, we were obligated to pay SRE Monarch an amount equal to five percent (5%) of the presumed net sales proceeds based on the appraised value of the collateral. In the first quarter of 2017, we paid SRE Monarch $0.2 million to settle this obligation, at which time the lien on the collateral was removed.

Notes Payable and Special Assessment Obligations, Assets Held for Sale

As of June 30, 2017 and December 31, 2016, obligations arising from our allocated share of certain community facilities district special revenue bonds and special assessments had remaining balances of $3.3 million and $3.6 million, respectively. These obligations are described below.
 

24

IMH FINANCIAL CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 7 — NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS – continued

One of the special assessment obligations had an outstanding balance of $2.9 million and $3.1 million as of June 30, 2017 and December 31, 2016, respectively, and has an amortization period that extends through April 30, 2030, with an annual interest rate ranging from 5% to 6%. This special assessment obligation is secured by certain real estate held for sale consisting of 171 acres of unentitled land located in Buckeye, Arizona which had a carrying value of $5.4 million at June 30, 2017. We made principal payments of $0.1 million on this special assessment obligation during the six months ended June 30, 2017.

The other special assessment obligations are comprised of a series of special assessments that collectively had an outstanding balance of and $0.3 million and $0.5 million as of June 30, 2017 and December 31, 2016, respectively. These special assessment obligations have amortization periods that extend through 2022, with annual interest rates ranging from 6% to 7.5% and secured by certain real estate classified as REO held for sale consisting of 3.9 acres of unentitled land located in Dakota County, Minnesota which had a carrying value of $1.2 million at June 30, 2017. We made principal payments of $0.1 million on this special assessment obligation during the six months ended June 30, 2017. During the six months ended June 30, 2017, a portion of the property was sold. In conjunction with the sale, the buyer agreed to assume and additional $0.1 million of the special assessment obligation.

The responsibility for the repayment of each of the foregoing special assessment obligations rests with the owner of the property and will transfer to the buyer of the related real estate upon sale. Accordingly, if the assets to which these obligations arise from are sold before the full amortization period of such obligations, the Company would be relieved of any further liability since the buyer would assume the remaining obligations. Nevertheless, these special assessment obligations are deemed to be obligations of the Company in accordance with GAAP because they are fixed in amount and for a fixed period of time.


Our notes payable and special assessment obligations have the following scheduled maturities as of June 30, 2017 (in thousands):
Year
 
Amount
2017
 
$
38

2018
 
231

2019
 
14,683

2020
 
245

2021
 
255

Thereafter
 
2,260

Total
 
$
17,712


25

IMH FINANCIAL CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 8 – SEGMENT INFORMATION

Operating segments are defined as components of an enterprise that engage in business activity from which revenues are earned and expenses incurred for which discrete financial information is available that is evaluated regularly by our chief operating decision makers in deciding how to allocate resources and in assessing performance. The Company intends to expand its hospitality footprint and the use of the L’Auberge brand through the acquisition and/or management of other luxury and boutique hotels.

The information presented in our reportable segments tables that follow are based in part on internal allocations which involve management judgment. Substantially all revenues recorded are from external customers. There is no material intersegment activity.

Condensed consolidated financial information for our reportable operating segments as of June 30, 2017 and December 31, 2016 and for the three and six months ended June 30, 2017 and 2016 is summarized as follows (in thousands):
 
 
June 30,
 
December 31,
Balance Sheet Items
 
2017
 
2016
Total Assets
 
 

 
 

Mortgage and REO - Legacy Portfolio and Other Operations
 
$
49,111

 
$
41,071

Hospitality and Entertainment Operations
 
150

 
2,092

Corporate and Other
 
39,632

 
8,991

Consolidated Total
 
$
88,893

 
$
52,154


26

IMH FINANCIAL CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 8 – SEGMENT INFORMATION - continued


 
Three Months Ended June 30, 2017
Income Statement Items
Mortgage and REO - Legacy Portfolio and Other Operations
 
Hospitality and Entertainment Operations
 
Corporate and Other
 
Consolidated
 
 
 
 
 
 
 
 
Revenues
$
101

 
$
884

 
$
73

 
$
1,058

 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
Operating Property Direct Expenses (exclusive of interest and depreciation)

 
620

 

 
620

Expenses for Non-Operating Real Estate Owned
170

 

 

 
170

Professional Fees
663

 
42

 
488

 
1,193

General and Administrative Expense
107

 
47

 
2,459

 
2,613

Interest Expense
133

 

 
308

 
441

Depreciation and Amortization Expense

 

 
49

 
49

Total Operating Expenses
1,073

 
709

 
3,304

 
5,086

 
 
 
 
 
 
 
 
Other Expenses
 
 
 
 
 
 
 
Gain on Disposal of Assets, Net
(1,514
)
 
(169
)
 

 
(1,683
)
Recovery of Credit Losses, Net
(212
)
 

 
(60
)
 
(272
)
Equity Loss from Unconsolidated Entities, Net
52

 

 

 
52

Total Other Expenses
(1,674
)
 
(169
)
 
(60
)
 
(1,903
)
 
 
 
 
 
 
 
 
Total Costs and Expenses, net
(601
)
 
540

 
3,244

 
3,183

Income (Loss) from Continuing Operations before Income Taxes
702

 
344

 
(3,171
)
 
(2,125
)
Provision for Income Taxes

 

 

 

Loss from Discontinued Operations, Net of Tax

 
(240
)
 

 
(240
)
Net Income (Loss)
$
702

 
$
104

 
$
(3,171
)
 
$
(2,365
)


27

IMH FINANCIAL CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 8 – SEGMENT INFORMATION - continued


 
Three Months Ended June 30, 2016
Income Statement Items
Mortgage and REO - Legacy Portfolio and Other Operations
 
Hospitality and Entertainment Operations
 
Corporate and Other
 
Consolidated
 
 
 
 
 
 
 
 
Revenues
$
620

 
$
708

 
$

 
$
1,328

 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
Operating Property Direct Expenses (exclusive of interest and depreciation)
239

 
520

 

 
759

Expenses for Non-Operating Real Estate Owned
131

 

 
2

 
133

Professional Fees
791

 

 
471

 
1,262

General and Administrative Expense
16

 

 
1,931

 
1,947

Interest Expense
669

 

 
587

 
1,256

Depreciation and Amortization Expense
307

 
28

 
49

 
384

Total Operating Expenses
2,153

 
548

 
3,040

 
5,741

 
 
 
 
 
 
 
 
Other Expenses
 
 
 
 
 
 
 
Loss on Disposal of Assets, Net
226

 

 

 
226

Recovery of Credit Losses, Net
(120
)
 

 

 
(120
)
Equity Loss from Unconsolidated Entities, Net
46

 

 

 
46

Total Other Expenses
152

 

 

 
152

 
 
 
 
 
 
 
 
Total Costs and Expenses, Net
2,305

 
548

 
3,040

 
5,893

Income (Loss) from Continuing Operations before Income Taxes
(1,685
)
 
160

 
(3,040
)
 
(4,565
)
Provision for Income Taxes

 

 


 

Income from Discontinued Operations, Net of Tax
 
 
40

 
 
 
40

Net Income (Loss)
$
(1,685
)
 
$
200

 
$
(3,040
)
 
$
(4,525
)




28

IMH FINANCIAL CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 8 – SEGMENT INFORMATION - continued

 
Six Months Ended June 30, 2017
Income Statement Items
Mortgage and REO - Legacy Portfolio and Other Operations
 
Hospitality and Entertainment Operations
 
Corporate and Other
 
Consolidated
 
 
 
 
 
 
 
 
Revenues
$
128

 
$
1,995

 
$
119

 
$
2,242

 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
Operating Property Direct Expenses (exclusive of interest and depreciation)

 
1,439

 

 
1,439

Expenses for Non-Operating Real Estate Owned
336

 

 

 
336

Professional Fees
1,684

 
30

 
408

 
2,122

General and Administrative Expense
115

 
35

 
4,208

 
4,358

Interest Expense
265

 

 
609

 
874

Depreciation and Amortization Expense

 

 
93

 
93

Total Operating Expenses
2,400

 
1,504

 
5,318

 
9,222

 
 
 
 
 
 
 
 
Other Expenses
 
 
 
 
 
 
 
Gain on Disposal of Assets, Net
(1,546
)
 
(169
)
 

 
(1,715
)
Recovery of Credit Losses, Net
(278
)
 

 
(60
)
 
(338
)
Equity Loss from Unconsolidated Entities, Net
171

 

 

 
171

Total Other Expenses
(1,653
)
 
(169
)
 
(60
)
 
(1,882
)
 
 
 
 
 
 
 
 
Total Costs and Expenses, Net
747

 
1,335

 
5,258

 
7,340

Income (Loss) from Continuing Operations before Income Taxes
(619
)
 
660

 
(5,139
)
 
(5,098
)
Provision for Income Taxes

 

 

 

Income from Discontinued Operations, Net of Tax

 
4,736

 

 
4,736

Net Income (Loss)
$
(619
)
 
$
5,396

 
$
(5,139
)
 
$
(362
)



29

IMH FINANCIAL CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 8 – SEGMENT INFORMATION - continued

 
Six Months Ended June 30, 2016
Income Statement Items
Mortgage and REO - Legacy Portfolio and Other Operations
 
Hospitality and Entertainment Operations
 
Corporate and Other
 
Consolidated
 
 
 
 
 
 
 
 
Revenues
$
1,137

 
$
1,685

 
$
23

 
$
2,845

 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
Operating Property Direct Expenses (exclusive of interest and depreciation)
476

 
1,155

 

 
1,631

Expenses for Non-Operating Real Estate Owned
291

 

 

 
291

Professional Fees
1,286

 

 
937

 
2,223

General and Administrative Expense
42

 

 
3,820

 
3,862

Interest Expense
1,075

 

 
1,189

 
2,264

Depreciation and Amortization Expense
506

 
55

 
98

 
659

Total Operating Expenses
3,676

 
1,210

 
6,044

 
10,930

 
 
 
 
 
 
 
 
Other Expenses
 
 
 
 
 
 
 
Gain on Disposal of Assets, Net
(22
)
 

 

 
(22
)
Recovery of Credit Losses, Net
(120
)
 

 

 
(120
)
Equity Loss from Unconsolidated Entities, Net
190

 

 

 
190

Total Other Expenses
48

 

 

 
48

 
 
 
 
 
 
 
 
Total Costs and Expenses, Net
3,724

 
1,210

 
6,044

 
10,978

Income (Loss) from Continuing Operations before Income Taxes
(2,587
)
 
475

 
(6,021
)
 
(8,133
)
Provision for Income Taxes

 

 
(2
)
 
(2
)
Loss from Discontinued Operations, Net of Tax

 
(1,157
)
 

 
(1,157
)
Net Loss
$
(2,587
)
 
$
(682
)
 
$
(6,023
)
 
$
(9,292
)


30

IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE
 
Common Stock

Shares of Common Stock, Class B Common Stock, Class C Common Stock, and Class D Common Stock share proportionately in our earnings and losses attributable to common shareholders. There are no shares of Class D Common Stock outstanding as of June 30, 2017 or December 31, 2016.

Preferred Stock

In 2014, the Company issued a total of 8.2 million shares of the Company’s newly-designated Series B-1 and B-2 Cumulative Convertible Preferred Stock (“Series B Preferred Stock”) to certain investor groups in exchange for $26.4 million (the “Preferred Investment”). The current holders of Series B Preferred Stock are collectively referred to herein as the “Series B Investors.” Except for certain voting and transfer rights, the rights and obligations of the Series B-1 Preferred Stock and Series B-2 Preferred Stock are substantially the same.

On April 11, 2017, JPMorgan Chase Funding Inc., a Delaware corporation (“Chase Funding”), an affiliate of JPMorgan Chase & Co., purchased all of the Company’s outstanding Series B-2 Preferred Shares from SRE Monarch pursuant to a Preferred Stock Purchase Agreement among the Company, Chase Funding and SRE Monarch (“Series B-2 Purchase Agreement”). Pursuant to the Series B-2 Purchase Agreement, the Company paid SRE Monarch all accrued and unpaid dividends on the Series B-2 Preferred Shares and $0.3 million in expenses. In connection with this transaction, the Company’s board of directors approved for filing with Secretary of State of the State of Delaware, an Amended and Restated Certificate of Designation of the Cumulative Convertible Series B-1 Preferred Stock and Cumulative Convertible Series B-2 Preferred Stock (“Restated Certificate of Designation”) pursuant to which Chase Funding replaced SRE Monarch as the holder of the Series B-2 Preferred Stock and, in general, succeeded to the rights of SRE Monarch thereunder. Concurrent with the execution of the Series B-2 Purchase Agreement, the Company, JCP Realty Partners, LLC, Juniper NVM, LLC, and Chase Funding entered into an Investment Agreement (“Series B Investment Agreement”) pursuant to which the Company made certain representations and covenants, including, but not limited to, a covenant that the Company take all commercially reasonable actions as are reasonably necessary for the Company to be eligible to rely on the exemption provided by Section 3(c)(5)(C) of the Investment Company Act of 1940, as amended, commonly referred to as the “Real Estate Exemption,” and to remain eligible to rely on that exemption at all times thereafter. Furthermore, the Company may not take any action, the result of which would reasonably be expected to cause the Company to become ineligible for the Real Estate Exemption without the prior written consent of Chase Funding. In the event that the Company violates any of the above covenants, and such violation is not cured within 60 days of the violation, the holders of our Series B Preferred Shares have the right to demand that the Company purchase all of their Series B Preferred Shares at the Required Redemption Price as set forth in the Restated Certificate of Designation. The Amended and Restated Certificate of Designation contains numerous provisions relating to dividend preferences, redemption rights, liquidation preferences and requirements, conversion rights, voting rights, investment committee participation and other restrictive covenants with respect to the Series B Preferred Stock.

On April 11, 2017, in connection with the consummation of the transactions contemplated by the Series B-2 Purchase Agreement, Seth Singerman resigned as our Series B-2 Director (as such term is defined in the Restated Certificate of Designation), and was replaced, effective April 24, 2017, with Chad Parson.

Treasury Stock

During the six months ended June 30, 2017, we redeemed 196,278 shares of the common stock of the Company, which were part of an 850,000 restricted share grant awarded to the Company’s Chief Executive Officer pursuant to a restricted stock award agreement entered into in 2015 (the “Award Agreement”). The shares were redeemed by the Company pursuant to an election made by the Chief Executive Officer under Section 83(b) of the Internal Revenue Code of 1986, as amended (the “Code”) and the Award Agreement pursuant to which the parties agreed to make arrangements for the satisfaction of tax withholding requirements associated with the stock award. The Company paid $0.3 million for the redeemed shares, of which $0.2 million was determined to represent the fair value of the stock redeemed, with the difference of $0.1 million treated as compensation expense.


31

IMH FINANCIAL CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 9 — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE – continued

Share-Based Compensation

During the six months ended June 30, 2017, the Company issued 527,383 shares of common stock pursuant to previous restricted stock awards. During the six months ended June 30, 2017, the Company granted 322,262 shares of restricted stock to certain executives of the Company. Such granted restricted stock vests in three approximately equal parts on each of January 1, 2018, January 1, 2019, and January 1, 2020. There were 116,830 options to employees pursuant to our 2010 Employee Stock Incentive Plan granted during the six months ended June 30, 2017. Such options have an exercise price of $1.13 per share, vest over a three year term, and have an estimated fair value of $0.70 per option. During the six months ended June 30, 2017, no options were forfeited.

As of June 30, 2017, there were 854,667 fully vested stock options outstanding, 2,000,000 fully vested stock warrants outstanding and 2,499,254 restricted stock grants outstanding, of which 974,364 were vested.

Net stock-based compensation expense relating to the stock-based awards was $0.4 million and $0.6 million for the three and six months ended June 30, 2017, respectively, and $0.2 million and $0.5 million for the three and six months ended June 30, 2016, respectively. No stock options or warrants were exercised and we did not receive any cash from option or warrant exercises during the three and six months ended June 30, 2017 or 2016. As of June 30, 2017, there was $0.8 million of unrecognized compensation cost related to the time-based restricted stock that is expected to be recognized as a charge to earnings over a weighted-average vesting period of 0.78 years.

During the second quarter of 2017, we issued 73,128 shares of previously granted restricted common stock to our employees pursuant to the Company’s First Amended and Restated 2010 Employee Stock Incentive Plan. These restricted shares were included in the Company’s board approved grant of 86,207 restricted shares for the year ended December 31, 2016. Of the 86,207 shares authorized, 9,942 shares were forfeited due to subsequent employee terminations, and 3,136 shares were withheld by the Company pursuant to an election made by certain employees under Section 83(b) of the Code.

During the second quarter of 2017, the Company issued 100,000 shares of previously granted restricted common stock as part of the Executive Employment Agreement with Samuel Montes, the Company’s Chief Financial Officer. The agreement provides for the issuance of 50,000 shares upon the execution of the employment agreement and an additional 50,000 shares upon the filing of the Company’s 2016 Form 10-K. The restricted shares vest ratably on each anniversary of the Montes Employment Agreement over a three year period beginning on April 1, 2017. Pursuant to an election made by Mr. Montes under Section 83(b) of the Code and the award agreement, the Company reduced the issuance to 79,323 shares in order to satisfy the tax withholding requirements associated with the stock award.

In addition, during the second quarter of 2017, the Company issued a total of 116,772 shares of restricted common stock to our non-employee independent directors pursuant to the 2014 Non-Employee Director Compensation Plan for fiscal years 2015 and 2016 (“Director Compensation Plan”), of which 45,976 shares immediately vested and the balance vested on June 29, 2017.

Net Income (Loss) Per Share
 
The Company has adopted the two-class computation method, and thus includes all participating securities in the computation of basic shares for the periods in which the Company has net income available to common shareholders. A participating security is defined as an unvested share-based payment award containing non-forfeitable rights to dividends regardless of whether or not the awards ultimately vest or expire. Net losses are not allocated to participating securities unless the holder has a contractual obligation to share in the losses.

The following table presents a reconciliation of net loss to net loss attributable to common shareholders used in the basic and diluted earnings per share calculations for the three and six months ended June 30, 2017 and 2016, (amounts in thousands, except for per share data):

32

IMH FINANCIAL CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 9 — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE – continued

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Earnings allocable to common shares:
 
 
 
 
 
 
 
 
Numerator - Loss Attributable to Common Shareholders:
 
 
 
 
 
 
 
 
Net Loss from Continuing Operations
 
$
(2,125
)
 
$
(4,565
)
 
$
(5,098
)
 
$
(8,133
)
Provision for Income Taxes
 

 

 

 
(2
)
(Income) Loss attributable to noncontrolling interest loss allocation
 
(755
)
 
18

 
(734
)
 
73

Preferred dividends - cash and deemed
 
(1,205
)
 
(1,153
)
 
(2,392
)
 
(2,294
)
Net Loss from Continuing Operations attributable to common shareholders
 
(4,085
)
 
(5,700
)

(8,224
)

(10,356
)
Net Income (Loss) from Discontinued Operations attributable to common shareholders
 
(240
)
 
40

 
4,736

 
(1,157
)
Net Loss attributable to common shareholders
 
$
(4,325
)
 
$
(5,660
)

$
(3,488
)

$
(11,513
)
 
 
 
 
 
 
 
 
 
Denominator - Weighted average shares:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding for basic and diluted earnings per common share
 
16,154,341

 
15,922,321

 
16,121,992

 
15,910,197

Basic and diluted earnings per common share:
 
 
 
 
 
 
 
 
Net loss per share, Continuing Operations
 
$
(0.18
)

$
(0.29
)

$
(0.36
)

$
(0.51
)
Preferred dividends per share
 
(0.07
)

(0.07
)

(0.15
)

(0.14
)
Net loss per share, Continuing Operations, net
 
(0.25
)
 
(0.36
)

(0.51
)

(0.65
)
Net income (loss) per share, Discontinued Operations
 
(0.01
)



0.29


(0.07
)
Net loss attributable to common shareholders per share
 
$
(0.26
)
 
$
(0.36
)

$
(0.22
)

$
(0.72
)

The following securities were not included in the computation of diluted net loss per share as their effect would have been anti-dilutive (presented on a weighted average balance):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Options to purchase common stock
 
939,951

 
980,563

 
939,312

 
954,833

Restricted stock
 
916,492

 
843,334

 
789,197

 
855,458

Warrants to purchase common stock
 
2,000,000

 
2,000,000

 
2,000,000

 
2,000,000

Convertible preferred stock
 
8,200,000

 
8,200,000

 
8,200,000

 
8,200,000

  Total
 
12,056,443

 
12,023,897

 
11,928,509

 
12,010,291



33

IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10 — COMMITMENTS AND CONTINGENCIES

Guarantor Recovery