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Gadsden Properties, Inc. – ‘10-Q’ for 6/30/19

On:  Wednesday, 11/6/19, at 7:35am ET   ·   For:  6/30/19   ·   Accession #:  1213900-19-22140   ·   File #:  0-11635

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

11/06/19  Gadsden Properties, Inc.          10-Q        6/30/19   60:4.5M                                   Edgar Agents LLC/FA

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10−Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2019

☐ 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: 000-11635

GADSDEN PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

15150 North Hayden Road, Suite 235, Scottsdale, AZ 85260

(Address of principal executive offices, including zip code)

480-750-8700

(Issuer’s telephone number, including area code)

FC Global Realty Incorporated

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (i) 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 (ii) has been subject to such filing requirements for the past 90 days.   Yes ☐   No ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes ☒   No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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 Rule 12b-2 of the Exchange Act).  Yes ☐ No ☒

Securities registered under Section 12(b) of the Exchange Act: None

As of November 4, 2019, the number of shares outstanding of our common stock was 365,354,561

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

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

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(unaudited)

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

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(unaudited)

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

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY(DEFICIT)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019

(In thousands, except share and per share amounts)

(unaudited)

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

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY(DEFICIT)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018

(In thousands, except share and per share amounts)

(unaudited)

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

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

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

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(unaudited)

Note 1

Background:

Gadsden Properties, Inc. and its subsidiaries (the “Company”), formerly FC Global Realty Incorporated (“FC Global”), re-incorporated in Nevada on December 30, 2010, originally formed in Delaware in 1980, is, since earlier in 2017, a real estate development and asset management company concentrated primarily on investments in high quality income producing assets, residential developments and other opportunistic commercial properties.

On March 13, 2019, the Company entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Gadsden Growth Properties, Inc., a Maryland corporation (“Gadsden”), pursuant to which Gadsden agreed to transfer and assign to the Company all of its general partnership interests and Class A limited partnership interests in Gadsden Growth Properties, L.P., a Delaware limited partnership (“OPCO”), the operating partnership of Gadsden that holds all of its assets and liabilities, in exchange for shares of the Company’s common stock and newly designated 7% Series A Cumulative Redeemable Convertible Perpetual Preferred Stock (the “7% Series A Preferred Stock”), newly designated Series B Non-Voting Convertible Preferred Stock (the “Non-Voting Series B Preferred Stock”) and newly designated 10% Series C Cumulative Convertible Preferred Stock (the “10% Series C Preferred Stock”) that is equal to the number of shares of Gadsden’s 7% Series A Cumulative Redeemable Convertible Perpetual Preferred Stock, Series B Non-Voting Convertible Preferred Stock and the 10% Series C Cumulative Convertible Preferred Stock, respectively.

The Stock Purchase Agreement provided that certain shares (the “Holdback Shares”) of the Company’s common stock issuable to Gadsden would be subject to forfeiture based on the reconciliation and adjustment of the future net asset value of the sum of: (i) Gadsden’s assets as of the date of the Stock Purchase Agreement and (ii) Gadsden's proposed real estate investments that had not closed as of the date of the closing date of Stock Purchase Agreement (together the “Transaction Assets").  On or before April 15, 2021, the Company will recalculate the net asset value of the Transaction Assets that have been acquired by Gadsden or the Company on or prior to May 15, 2019, as at December 31, 2019 or December 31, 2020, with the year of determination being at the option of Gadsden. On April 5, 2019 and May 2, 2019, the Company and Gadsden entered into Amendment No. 1 (“Amendment No. 1”) and Amendment No. 2 (“Amendment No. 2”) to Stock Purchase Agreement, respectively to amend certain provisions of the Stock Purchase Agreement as agreed upon by the parties. The closing of the transaction contemplated by the Purchase Agreement, as amended, was completed April 5, 2019. The transaction has been accounted for as a reverse capitalization as described in Note 3.

Liquidity and Going Concern

As of June 30, 2019, the Company had an accumulated deficit of $30,775 and the Company incurred a loss attributable to common stockholders for the six months ended June 30, 2019 of $3,625. Additionally, the OID notes became due on June 30, 2019, which are currently in default and remain outstanding. These matters and other matters including the cash position of the Company raise substantial doubt about the Company’s ability to continue as a going concern.

During the periods presented, the operations of the Company have been funded primarily through the issuance of notes payable and private placements of equity securities. The Company will attempt to secure additional equity or debt financing until such time as its operations are self-sufficient. The Company cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that the Company raises additional funds by issuing equity securities, the Company’s stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact the Company’s ability to conduct business. If the Company is not able to raise additional capital when required or on acceptable terms, the Company may have to significantly delay the purchase of income producing assets which is the Company’s core business strategy. The Company does not have sufficient cash for the next 12 months of operations without raising additional capital.

Management has determined that there is substantial doubt about the Company’s ability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty. 

Related Party

The Company is a party to several transactions with related parties. Members of the Company's board of directors and its management hold stock and options in the Company, and several members of its board of directors hold OID Notes (see Note 6) with Gadsden Growth Properties, Inc., the Company's majority shareholder. Additionally, the Company is the parent and owner of a number of subsidiaries, some of which are active and hold the Company's real estate and other assets, and some of which are inactive and were involved in the Company’s former lines of business. The Company has in the past been a guarantor for certain activities and contracts involving one or more of these subsidiaries. 

The Company’s Board of Directors approved the compensation plan for service on the board for non-employee members; Mr. Hartman, as Chief Executive Officer, will not receive fees for his service on the Board. Each board member will receive $50.0 in compensation, payable at a quarterly rate of $12.5. The chairmen of the Board committees will receive additional payments; the chairman of the Audit Committee will receive an additional $10.0, or $2.5 per quarter; and the chairmen of the Compensation Committee and Nominations and Corporate Governance Committee will each receive an additional $5.0, or $1.25 per quarter. The Board also voted to receive its fees for the first year of service in the form of the Company’s stock, with the strike price being set at $0.25 per share, the trading price at the time of approval. The usual restrictions on trading in stock by company insiders would apply to these grants. These fees are accrued in other accrued liabilities on the accompanying condensed consolidated balance sheet.

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(unaudited)

Note 2

Summary of Significant Accounting Policies:

Accounting Principles

The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the Company’s consolidated financial statements and related notes contained in its Annual Report on Form 8-K for the fiscal year ended December 31, 2018 filed on July 3, 2019 and the FC Global Realty Incorporated 10 -K for the fiscal year ended December 31, 2018 filed on April 1, 2019. The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) related to interim financial statements. As permitted under those rules, certain information and footnote disclosures normally required or included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted. The financial information contained herein is unaudited; however, management believes all adjustments have been made that are considered necessary to present fairly the results of the Company’s financial position and operating results for the interim periods. All such adjustments are of a normal recurring nature. The accompanying condensed consolidated balance sheet as of December 31, 2018 has been derived from the consolidated financial statements of Gadsden Growth Properties, Inc. as filed in the 8K on July 3, 2019.

The results for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other interim period in the future.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly and majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Entities in which the Company directly or indirectly owns more than 50% of the outstanding voting securities, and for which other interest holders do not possess the right to affect significant management decisions, are generally accounted for under the voting interest consolidation method of accounting. Participation of other interest holders in the net assets and in the earnings or losses of a consolidated subsidiary is reflected in the line items “Non-controlling Interest” in the Company’s unaudited condensed consolidated balance sheets and “net income (loss) attributable to the non-controlling interest” in the Company’s unaudited condensed consolidated statements of operations and comprehensive loss. Non-controlling interest adjusts the Company’s consolidated results of operations to reflect only the Company’s share of the earnings or losses of the consolidated subsidiary.

Any changes in the Company’s ownership interest in a consolidated subsidiary, through additional equity issuances by the consolidated subsidiary or from the Company acquiring the shares from existing shareholders, in which the Company maintains control is recognized as an equity transaction, with appropriate adjustments to both the Company’s additional paid-in capital and the corresponding non-controlling interest.

Use of Estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates and be based on events different from those assumptions. As part of these financial statements, the more significant estimates include (1) identification of and measurement of instruments in equity transactions; (2) impairment of investment properties and assets and liabilities held for sale; (3) evaluation of going concern; and (4) contingencies.

Non-Controlling Interest

Non-controlling interest consists of Series B OPCO Units that were issued as part of the Mission Hills acquisition; and Series B OPCO Units that were issued as a deposit on the Carson City property. As part of the reverse capitalization (see Note 3), the Company assumed an investment property in California (the “Highway 59” property) in which the Company has a 75% ownership and a net asset value of $279 which is recorded in held for sale assets. See Note 5 - held for sale assets. See Note 8 – Convertible Redeemable Preferred Stock and Stockholders’ Equity (Deficit) for terms for non-controlling interest or OPCO and see Note 9 – Non-controlling interest.

Revenue recognition

As part of the reverse recapitalization, the Company acquired a 7,738 square-foot medical office building in Dayton, Ohio for a $326 purchase price, paid in cash consideration. The building’s former owner, and its only current tenant, a medical practice, has entered into a lease with the Company to continue its occupancy through April 2022, with the option to renew that lease for two additional five-year terms. The Company is accounting for the arrangement as an operating lease under ASC 842, “Leases” by recording rental revenues from operating leases, as a lessor, on a straight-line basis under which contractual rent increases are recognized evenly over the lease term. Certain properties have leases that provide for tenant occupancy during periods where no rent is due or where minimum rent payments change during the term of the lease. Accordingly, receivables from tenants that the Company expects to collect over the remaining lease term are recorded on the balance sheet as straight-line rent receivables.

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(unaudited)

In 2018, the Company derived revenue from temporary consulting services for certain property management and accounting services which is presented in other income in the unaudited condensed consolidated statements of operations as this is not the primary source of revenue expected from operations. Consulting income is recorded in the period in which the services are rendered. Consulting income is recorded net of any applicable taxes collected and remitted to governmental agencies.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date. US GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:

Fair value measurements discussed herein are based upon certain market assumptions and pertinent information available to management as of and during the six months ended June 30, 2019. The carrying values of cash and cash equivalents, prepaid expenses and other current assets, accounts payable and other accrued liabilities approximate their fair values given their short-term nature. At June 30, 2019, the carrying value of all outstanding notes payable and OID notes payable approximates the estimated aggregate fair value given their short-term nature.

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(unaudited)

Real Estate Under Development

Project costs directly associated with the development and construction of a real estate project are capitalized as real estate under development. In addition, interest, real estate taxes and other expenses that are directly associated with the Company’s development activities are capitalized until the property is placed in service. Interest expense is capitalized using the Company’s weighted average interest rate. Internal direct costs are capitalized to projects in which qualifying expenditures are being incurred. Capitalized real estate costs totaled $112,954 as of June 30, 2019.

Impairment or Disposal of Long-Lived Assets

All of the Company’s long-lived assets are monitored for potential impairment when circumstances indicate that the carrying value of an asset may not be recoverable and exceeds its fair value. If there is an indication of impairment the Company will use the undiscounted cashflows to determine if the assets needs to be impaired.

Assets and Liabilities Held for Sale

The Company generally considers assets to be “held for sale” when the transaction has been approved by its Board of Trustees, or by officers vested with authority to approve the transaction, and there are no known significant contingencies relating to the sale of the property within one year of the consideration date and the consummation of the transaction is otherwise considered probable. When a property is designated as held for sale, the Company stops depreciating the property and estimates the property’s fair value, net of selling costs. If the determination is made that the estimated fair value, net of selling costs, is less than the net carrying value of the property, an impairment loss is recognized, reducing the net carrying value of the property to estimated fair value less selling costs. For periods in which a property is classified as held for sale, the Company classifies the assets and liabilities, as applicable, of the property as “held for sale” on the consolidated balance sheet for such periods. Several of the investment properties held for sale were either sold or are in escrow at purchase prices lower than the value recorded. Thus, the Company recorded total asset impairments of $318 during the three and six months ended June 30, 2019.

Income Taxes

The Company provides for income taxes using the asset and liability approach. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. As of June 30, 2019 and December 31, 2018, the Company had a full valuation allowance against deferred tax assets. With the historical change in ownership, the Company is subject to certain NOL limitations under Section 382 of the Internal Revenue Code.

Loss per Share

The Company computes net loss per share in accordance with ASC 260, “Earnings per share”. Basic loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period, net of the weighted average number of treasury shares (if any). Securities that may participate in dividends with the common stock (such as the Convertible Redeemable Series A Preferred Stock and Convertible Series C Preferred Stock) are considered in the computation of basic loss per share using the two-class method. However, in periods of net loss, participating securities are included only if the holders of such securities have a contractual obligation to share the losses of the Company.

Diluted loss per common share is computed similar to basic loss per share, except that the denominator is increased to include the number of additional potential common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Potential common shares are excluded from the computation for a period in which a net loss is reported or if their effect is anti-dilutive. The Company’s potential common shares consist of stock warrants and restricted stock awards issued under the Company’s stock incentive plans and their potential dilutive effect is considered using the treasury method, and of Convertible Redeemable Series A Preferred Stock, Convertible Series B Preferred Stock and Convertible Series C Preferred Stock which their potential dilutive effect is considered using the “if-converted method”.

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(unaudited)

The following table shows outstanding fully dilutive shares excluded from the loss per share calculation at the Stock Purchase Agreement exchange ratio for the six months ended June 30, 2019 and twelve months ended December 31, 2018.

The net loss from operations and the weighted average number of shares used in computing basic and diluted net loss per share from operations for the three months ended June 30, 2019 and 2018, is as follows:

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(unaudited)

The net loss from operations and the weighted average number of shares used in computing basic and diluted net loss per share from operations for the six months ended June 30, 2019 and 2018, is as follows:

Recently Adopted Accounting Pronouncements

Commencing January 1, 2019, the Company adopted ASU No. 2016-02 (Topic 842) “Leases”, which supersedes the lease requirements in ASC Topic 840, “Leases”. Under Topic 842, lessees are required to recognize assets and liabilities on the balance sheet for most leases and provide enhanced disclosures. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. In July 2018, the FASB issued amendments in ASU 2018-11, which provide a transition election to not restate comparative periods for the effects of applying the new standard. This transition election permits entities to change the date of initial application to the beginning of the earliest comparative period presented, or retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment. The guidance was adopted in the first interim period in 2019 and had no material impact on the Company’s unaudited condensed consolidated financial statements.

In January 2017, the FASB issued an ASU 2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business.” The amendments in this Update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance was effective for the Company beginning January 1, 2018. Adoption is prospectively applied to any business development transaction. The adoption of this pronouncement did not have a significant impact on the Company’s consolidated financial position, results of operations and cash flows.
 

Recent Accounting Pronouncements

The Company has reviewed the recent accounting pronouncements and determined there are no current pronouncements that will significantly impact the Company’s consolidated financial position, results of operations and cash flows.

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(unaudited)

Note 3

Reverse Capitalization:

On March 13, 2019, the Company entered into a Stock Purchase Agreement, as amended, with Gadsden, pursuant to which Gadsden agreed to transfer and assign to the Company all of its general partnership interests and Class A limited partnership interests in OPCO, the operating partnership of Gadsden that holds all of its assets and liabilities, in exchange for shares of the Company’s common stock and 7% Series A Preferred Stock, Non-Voting Series B Preferred Stock and 10% Series C Preferred Stock that is equal to the number of shares of Gadsden’s 7% Series A Cumulative Convertible Perpetual Preferred Stock, Series B Non-Voting Convertible Preferred Stock and the 10% Series C Cumulative Convertible Preferred Stock, respectively. Upon an effective S-4 filing, Gadsden will exchange and push down shares to its shareholders effectively completing the merger.

The Stock Purchase Agreement provided that certain shares (“the Holdback Shares”) of the Company’s common stock issuable to Gadsden would be subject to forfeiture based on the reconciliation and adjustment of the future net asset value of the Transaction Assets. On or before April 15, 2021, the Company will recalculate the net value of the Transaction Assets that have been acquired by Gadsden or the Company on or prior to May 15, 2019, as at December 31, 2019 or December 31, 2020, with the year of determination being at the option of Gadsden.

On April 5, 2019, the Company and Gadsden entered into Amendment No. 1 to Stock Purchase Agreement (“Amendment No. 1”) to amend certain provisions of the Stock Purchase Agreement. The closing of the transactions contemplated by the Stock Purchase Agreement, as amended by this Amendment No. 1, were completed the same day.

On May 2, 2019, the parties entered into Amendment No. 2 to the Stock Purchase Agreement (“Amendment No. 2”), to (i) decrease the number of shares of common stock and Holdback Shares issued to Gadsden, and increase the number of shares of Non-Voting Series B Preferred Stock issued, as the result of an error in the original calculation of the shares to be issued; (ii) provide for the issuance of the Holdback Shares on the closing date, rather than the Charter Amendment Date; and (iii) provide for the issuance of certain of the shares of the Non-Voting Series B Preferred Stock and 10% Series C Preferred Stock to FHDC Group, LLC, or FHDC, a stockholder of Gadsden, in exchange for the equivalent number of shares of Gadsden held by it.

On July 1, 2019, the parties entered into Amendment No. 3 to the Stock Purchase Agreement (“Amendment No. 3), to clarify that the Company assumed all accrued liabilities of Gadsden and agreed to pay and discharge those accrued liabilities as well as any future liabilities of Gadsden through the date that Gadsden is merged with and into the Company or one of its subsidiaries, and Gadsden transferred to the Company all of Gadsden’s right, title and interest, legal or equitable, to all of its assets other than the securities of the Company held by Gadsden.

As a result of Amendment No. 1, Amendment No. 2 and Amendment No. 3, the final number of shares of the Company’s stock issued pursuant to the Stock Purchase Agreement, as amended, to Gadsden and its stockholders were: (i) 331,033,280 shares of the Company’s common stock; (ii) 110,477,220 Holdback Shares; (iii) 889,075 shares of 7% Series A Preferred Stock; (iii) 3,000,000 shares of Non-Voting Series B Preferred Stock; (iv) 2,498,682 shares of 10% Series C Preferred Stock.

On October 11, 2019, the Company cancelled 105,946,701 shares of common stock issued to Gadsden with an effective date of June 30, 2019. Under the Stock Purchase Agreement, the 105,946,701 shares of common stock were characterized as “Holdback Shares” and were issued to Gadsden contingent upon the contribution by Gadsden of additional properties to the Company. The last date for any contribution was May 20, 2019. No additional contributions were made, and therefore the shares were cancelled.

If the estimated net asset value of Gadsden pursuant to the Stock Purchase Agreement (the “Contract NAV”) is more than the Gadsden final net asset value as recalculated by the Company on or before April 15, 2021, then the difference, or the Shortfall, will be settled by the transfer of shares of the Company’s common stock, at a value equal to 3.771023733 shares of common stock for each $1.00 of Shortfall. If the Gadsden final net asset value is $80 million or less, the shortfall will be settled by the transfer of shares of the Company’s common stock, at a value equal to 2.860407207 for each $1.00 of Shortfall.

Based on the accounting rules as applied to the terms of the Stock Purchase Agreement, OPCO is deemed to be the acquiring company for accounting purposes. Management has concluded the Stock Purchase Agreement is an asset acquisition and not a business combination. The Company is not acquiring employees, processes or outputs, other than a negligible amount of revenue. Management is in the process of disposing of all of the historical FC Global assets and liabilities and these assets and liabilities are classified as “held for sale” on the unaudited condensed consolidated balance sheets. One small single-tenant building that is not classified as “held for sale” is currently being considered for disposal by the Company’s management. Accordingly, the transaction is accounted for as a reverse recapitalization, and therefore, the financial statements of OPCO will be treated as the historical financial statements of the Company, with the results of the entities defined as Pre-merged of the Company being included only from April 6, 2019 and thereafter.

As stated above, OPCO is deemed to be the acquiring company for accounting purposes. As a result, the net assets acquired from the Company on April 5, 2019 including working capital, a small single-tenant building, land held for development, and a passive noncontrolling interest in an entity that owns undeveloped land were exchanged for: (i) all of the Class A limited partnership interests in OPCO, and all of the general partnership interests in OPCO, which is the operating partnership of Gadsden and (ii) OPCO’s assets and liabilities. The initial measurement of the assets acquired from FC Global will be the fair value of the Company’s OPCO Units, on the closing date, or the fair value of the assets acquired, whichever is more clearly evident and, thus, more reliably measurable. In this case, management determined the fair value of the assets acquired from FC Global the more reliable measurement.

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(unaudited)

The final determination of these estimated fair values was based on the actual net tangible assets of FC Global that exist as of April 5, 2019, the date of completion of the transaction.

The consolidated results of operations will not include any revenues or expenses related to the FC Global’s business on or prior to April 5, 2019, the consummation date of the Stock Purchase Agreement. The Company’s unaudited pro-forma results for the three and six months ended June 30, 2019 and 2018 summarize the combined results of the combined companies in the following table, assuming the reverse acquisition had occurred on January 1, 2018 and after giving effect to the reverse acquisition adjustments:

These unaudited pro-forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have actually resulted had the reverse acquisition occurred on January 1, 2018, nor to be indicative of future results of operations.

Note 4

Asset Acquisitions:

Sacramento Home Lots

Roseville Road is a 9.63-acre, approximately 65 home, small lot single family detached development located in Sacramento County. Jessie Avenue is a 13.68-acre, 94 home, small lot single family detached development located in Sacramento County. On June 30, 2018, Gadsden purchased Jessie Avenue and Roseville Road located in Sacramento California that are entitled for development for $3,408. Gadsden paid the following consideration for such properties: 47,482 shares of its Series A Preferred Stock (based on a valuation of $25.00 per share) and assumed debt and certain liabilities of $2,121. Included in the cost of acquiring the Sacramento Home Lots was $99 of warrants for investment advisory fees and $1 in other closing fees that are recorded in accrued expenses at June 30, 2018 and issued on July 10, 2018. 

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(unaudited)

On June 6, 2019, the Company entered into a letter of intent, and on August 23, 2019 closed on the transaction with an independent third party, to sell the land parcel located at Roseville Road & Elkhorn Blvd, Sacramento, CA 95842. The sales price is $1,500 cash, net of delinquent property taxes, liens, mortgage debt, accrued interest and customary sales commissions and closing costs. Net proceeds to the Company were $277. The property is included in Assets and Liabilities held for sale, in the accompanying unaudited condensed consolidated balance sheet as of June 30, 2019 and in land as of December 31, 2018. 

T9 Property Acquisition and Subsequent Foreclosure 

On July 10, 2018, the Company acquired all the interests in T9, a debtor in bankruptcy, which through its wholly owned subsidiaries, owns a property, the T9 Property, which is a 65-acre, mixed-use, transit-oriented master planned community. Gadsden purchased the limited liability company interests in T9 for an enterprise value of approximately $88,000, less the senior mortgage debt at the closing of approximately $55,587. The purchase price for the T9 LLC Interests was $32,413, which was paid by the issuance of (i) $8,407 in value of Gadsden Series A Preferred Stock (336,284 shares); (ii) $18,146 in value of Gadsden Series B Preferred Stock (1,814,573 shares); and (ii) $5,860 in value of Gadsden common stock (586,004 shares). Gadsden Series B Preferred Stock was subsequently reduced by $15,693 (1,569,308 shares) reflecting final closing adjustments as allowed for in the purchase and sale agreement and an additional $1,325 (132,500 shares) due to a share exchange to Series A preferred. There was a DIP (“debtor in possession”) financing facility of $10,000 in the bankruptcy case, of which $2,000 was assumed and an additional $3,000 was drawn through December 28, 2018. The interest on such DIP financing was 10% per annum, compounded annually. 

On September 30, 2018 the Company recognized an impairment of the value on the T9 Property adjusting it to its fair value. The impairment adjusted the value of the asset downward by $15,593 for the year ended December 31, 2018. The planned sale of the T9 Property under Section 363 of the Bankruptcy Code was unsuccessful. Multiple bids were received that did not meet the minimum bid requirements under court sale procedures. Accordingly, per the terms of the T9 Stipulation, the Secured Creditor in the Bankruptcy Case foreclosed on the T9 Property on December 28, 2018 as result of the Trustee Sale of the T9 Property. 

Mission Hills Square

Mission Hills Square is a new mixed-use development located in Fremont, California and slated for completion in the fourth quarter of 2020. Situated in the foothills of the San Francisco Bay Area along Highway 680, Mission Hills Square will offer 158 residential apartment units and more than 53,900 square feet of commercial retail space. Mission Hills future commercial tenants are anticipated to include retail stores, sit-down restaurants, and casual eateries. 

On January 31, 2019, Gadsden acquired from FHDC, LLC (the “Seller”) all of the outstanding shares of Fremont Hills Development Corporation, a California corporation (“Fremont”), which owned a property known as Mission Hills Square which is under development. The fair value of the asset at January 31, 2019 was $124,757 of which $15,400 was allocate to land and $109,358 was real estate under development. The current value of the asset in development is recorded at $128,354 on the Company’s unaudited condensed consolidated balance sheet as of June 30, 2019, which is comprised of $15,400 allocated to land and $112,954 allocated to real estate under development. In the acquisition of Fremont by Gadsden from the Seller, Gadsden escrowed part of the purchase consideration, in the form of 2,500,000 Series B OPCO Units and 2,901,835 Series B preferred shares of Gadsden securities, that was issued to the Seller.

The following table lists the relative fair values of assets purchased January 31, 2019.

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(unaudited)

Fremont entered into a Construction Loan Agreement, dated January 31, 2018, with Parkview Financial Fund 2015, LP and Trez Capital Corporation (the “Loan Agreement”) for a loan of up to $65,000 for construction of this project. As of June 30, 2019, Fremont had borrowed $37,721 under the Loan Agreement, which was extended to November 15, 2019, so the seller could refinance the construction loan. The Seller is responsible for the completion of the Mission Hills Square project and the Seller and its principals continue to have personal and other guarantees of the Loan Agreement. There can be no assurance that the Seller will be able to refinance the loan. Should the refinancing not be completed timely, the project may not be completed on time, or at all.

As part of the asset purchase agreement, Gadsden agreed to certain tag along rights in which the seller could participate in the sale of any shares of common stock by the Company not to exceed 5,000,000 shares when net proceeds from any offering of the Company that exceeds $25,000. The agreement also provides for additional consideration of 50% up to $1,000 of any offering that exceeds $5,000 is raised within one year of asset acquisition closing.

The Company issued warrants to its financial advisor in connection with the Company’s acquisition of the Sacramento Home Lots, 9,900 warrants with a value of $99, the T9 Property, 225,000 warrants with a value of $225 and Mission Hills Square, 245,100 warrants with a value of $245 of which 217,110 of these warrants were recorded in deferred acquisition costs as of December 31, 2018 and the remaining 27,990 warrants with a value of $280 for the advisory fee were issued for the Mission Hills acquisition when it closed on January 31, 2019.

Note 5

Held for Sale:

Net assets held for sale represent land, buildings and land improvements for locations that have met the criteria of “held for sale” accounting, as specified by Accounting Standards Codification (“ASC”) 360, “Property, Plant, and Equipment.” As of June 30, 2019, there were six land assets that are recorded as assets and liabilities held for sale and none as of December 31, 2018. As the assets are land there is no depreciation to suspend. The net assets held for sale are being marketed for sale and it is the Company’s intention to complete the sales of these assets within the upcoming year. The assets held for sale are as follows:

In May 2019, the Company entered into a definitive sales contract for the sale of the land parcel located at 1039 Atwater Blvd, Atwater, CA which is comprised of four parcels equaling .89 acres zoned CC, Central Commercial, permitting a wide variety of commercial uses. The contracted sales price is $430 in cash, net of delinquent property taxes, liens, customary sales commissions and closing costs. The property closed in September 2019.

In April 2019, the Company entered into a definitive sales contract for the sale of the land parcel located at 715 Atwater Blvd, Atwater, CA which is comprised of 0.45 acres zoned RT permitting both commercial and residential uses. The contracted sales price is $225 in cash, net of delinquent property taxes, liens, customary sales commissions and closing costs. The property closed in September 2019.

In August 2019, the Company entered into a definitive sales contract for the sale of the land parcel located at 2434 N. State Highway 59, Atwater, CA which is comprised of 2.60 acres zoned R-3-1.5 permitting residential uses. The contracted sales price is $200 in cash, net of delinquent property taxes, liens, customary sales commissions and closing costs. The property closed in October 2019.

In 2017, the Company acquired an unoccupied land site intended for development in Atwater, California commonly referred to as “Green Sands II”. The site consists of a single parcel 1.05 acres in size zoned for industrial use. In connection with the closing, the Company assumed an installment note, dated April 7, 2015, with a balance due of $453. The note carries a per annum interest rate of 8% which is payable on a monthly basis and has a maturity date of April 10, 2020. The Company determined the value of the property was less than the note and delinquent taxes and returned the property to the note holder in August 2019.

In July 2019, the Company entered into a definitive sales contract for the sale of the land parcel located at the intersection of Roseville Rd. and Elkhorn Blvd Sacramento, CA which is comprised of 9.90 acres zoned RD10 permitting residential uses. The contracted sales price is $1,500 in cash, net of delinquent property taxes, liens, customary sales commissions and closing costs. The property closed in August 2019.

The Jessie property is located on Jessie Avenue in Sacramento, CA and is an approximately 13.6-acre parcel that is entitled for the development of 94 small lot single family detached homes. The Company is currently marketing the single purpose entity owning 100% of the property for sale. The property was acquired by assuming a $773 loan (See Note 6) and is encumbered by liens, delinquent property taxes, unpaid interest and loan fees totaling $672.

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(unaudited)

Note 6

Debt:

The Company’s debt consisted of the following as of June 30, 2019 (unaudited) and December 31, 2018:

Trez Capital and Parkview Financial Fund 2015, LP

On January 31, 2019, the Company assumed a construction loan collateralized by the property (Mission Hills Square) to Trez Capital and Parkview Financial Fund 2015, LP as part of the acquisition of the Mission Hills (see Note 4). The principal amount assumed was $34,417 and has a 9.49% per annum interest rate. Interest accrues and is capitalized with the principal. The loan was extended through November 15, 2019 so the Sellers can complete refinancing the loan. The Seller has agreed to complete construction of the Mission Hills Square project and the Seller and its principals continue to have personal and other guarantees of the Loan Agreement.

GCA Loan

On June 30, 2018, the Company assumed a loan to GCA Financial as part of the acquisition of the Sacramento home lots (see Note 4). The principal amount assumed was $1,223 and has a 12% per annum interest rate. Interest accrues and is payable with the principal upon a liquidity event of the Company in which the Company raises sufficient capital. The Company recorded $1,100 and $1,200 of interest expense mostly related to exit fees for the three and six months ended June 30, 2019, respectively. As part of the acquired property, there was unpaid interest assumed of $362 which is recorded in accrued expenses. The Company is actively marketing the single purpose entity which owns 100% of the Jesse Property for sale. The total liabilities held for sale relating to the Jesse Property at June 30, 2019 was $2,170 which consists of $773 of the GCA loan above and $1,397 that was previously reported in accrued liabilities. (see Note 5).

Note payable with previous vendor

As part of the reverse capitalization, the Company assumed a note with a previous vendor for payment of its outstanding liabilities. The note carries a per annum interest rate of 10% and is currently in default. Due to its reduced cash flow, the Company has agreed to make installment payments with the vendor in the amount of $9 per month against the outstanding balance with the initial installment payment on October 15, 2019. The note is past due and therefore is reported in current liabilities.

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(unaudited)

OID Note Payable

In June 2017, the Company issued a zero coupon note payable with an aggregate principal balance of $58 for aggregate gross proceeds of $50, resulting in an original issue discount of $8 to the initial principal balance of the notes (the “OID Note Payable”). The OID Note Payable was due the earlier of the closing of the Company’s IPO or December 31, 2018. The discount was amortized to interest expense over the term of the debt using the effective interest method. The Company amortized $1 to interest expense for the three and six months ended June 30, 2018, respectively. The note was extended to June 30, 2019 and is currently in default. A 1% extension fee was expensed as interest in six months ended June 30, 2019.

OID Notes Payable to Related Parties

Starting in May through September 2017, the Company issued zero coupon notes payable to certain related parties with an aggregate principal balance of $719 for aggregate gross proceeds of $625, resulting in an original issue discount of $94 to the initial principal balance of the notes (the “OID Notes Payable – Related Parties”). The OID Notes Payable – Related Parties were due the earlier of the closing of the Company’s IPO or December 31, 2018. The discount was amortized to interest expense over the term of the note using the effective interest method. The Company amortized $7 to interest expense for the three and six months ended June 30, 2018, respectively. The note was extended to June 30, 2019 and is currently in default. A 1% extension fee of $7 was expensed as interest in the six months ended June 30, 2019.

Note 7

Commitments and Contingencies:

Litigation

Suneet Singal

On September 21, 2018, Suneet Singal, the Company’s former Chief Executive Officer filed a suit against the Company and its transfer agent, Broadridge Corporate Issuer Solutions Inc., in the Supreme Court of New York for the County of New York. The suit alleges breach of contract, breach of good faith and, with regard to Broadridge, a violation of UCC Article 8-401, and demands the issuance and release to Mr. Singal of 1,000,000 shares of the Company’s common stock, as well as other unspecified damages.

On December 18, 2018, the Company filed a counterclaim regarding several matters undertaken by Mr. Singal while he served in leadership roles with the Company. The Company filed a Motion to Dismiss the suit.

On October 14, 2019, the Company was notified that the Court had dismissed Mr. Singal’s suit, with prejudice.

Fremont Litigation

On October 18, 2018, the Securities and Exchange Commission (the “SEC”) commenced a civil action (the “Civil Action”) against Jean Danhong Chen, Tony Jianyun Ye, Kai Hao Robinson, Kuansheng Chen, the Law offices of Jean D. Chen, A Professional Corporation, Tree Lined Holdings, LLC, and Golden State Regional Center, LLC all unrelated to the Company.

The defendants are accused of several unlawful activities. The complaint also alleges that the named defendants used Fremont, the property acquired by the Company in 2019, during 2014 - 2016 for their unlawful activities giving rise to the complaint.

Neither the Company, Gadsden, nor any of their respective subsidiaries are named as defendants in the Civil Action, and no legal claim has been asserted in the Civil Action against the Mission Hills Square property or Fremont. Additionally, FDHC (“the Seller”) is also not a defendant in the Civil Action. None of the defendants in the Civil Action are directors, officers, or affiliates of the Company, or any owner of 5% or more of the Company’s voting securities or, based upon current knowledge, any associate of any director, officer or affiliate of the Company. Although the individual defendants in the Civil Action are alleged by the SEC to have used Fremont in connection with the actions described in the Civil Action, there are no claims in the Civil Action that Gadsden, Fremont, or the Seller participated in the actions described since they acquired Fremont in 2018.

On March 7, 2019, Jean Danhong Chen and Tony Jianyun Ye were indicted by a Federal Grand Jury for Visa Fraud, Obstruction of Justice, Identity and Aggravated Identity Theft and Criminal Forfeiture. This indictment was unsealed on March 25, 2019. On March 25, 2019 Gadsden was informed it was a subject of a criminal investigation by the US Department of Justice.

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(unaudited)

In the acquisition of Fremont by Gadsden from the Seller, Gadsden escrowed part of the purchase consideration, in the form of Gadsden securities, that was issued to the Seller, which had at that time an estimated value of approximately $55,000. The Civil Action alleges that at least $40,000 was loaned by Bay Area Investment Fund I to Fremont. This loan has been assumed by the Seller, is currently being paid by the Seller and is not in default. Gadsden has not reserved any amounts in its financial statements and may use the escrowed securities for any undisclosed liabilities, including any liabilities related to the Civil Action. Gadsden is not able to determine if there is any liability of Fremont in the Civil Action, of Gadsden in the criminal investigation, or related matters, or if any such liability will be in excess of the escrowed amount. Gadsden believes that, if there is any liability to the Company, it is not in excess of the escrowed amount, and intends to vigorously defend itself against any such allegations if made, although such defenses can be expensive and there can be no guarantee that such defenses will be successful.

Nevertheless, as described above, Gadsden agreed to indemnify and hold the Company harmless from all losses of Gadsden or any of its subsidiaries arising from or related to the Civil Action, the facts described therein and all civil or other actions arising from or related to such Civil Action.

Gadsden does not believe that there will be any negative consequences to its ownership of Mission Hills as a result of this action, and therefore cannot at this time make any provision for any contingency in this matter. Nevertheless, the Company will continue to monitor this matter and intends to defend its rights in this matter to the fullest extent possible.

DSKX litigation

On February 16, 2016, the Company and certain of its subsidiaries entered into two Merger Agreements (the “Merger Agreements”) with DS Healthcare Group, Inc. (“DSKX”). Those mergers failed to occur and the Company alleged that the failure was due to certain actions by DSKX, and that as a result of those actions the Company was entitled to certain break-up fees under the terms of the Merger Agreements. DSKX disputed those claims and asserted its own claims against the Company. On June 23, 2017, the Company and DSKX entered into a Confidential Settlement and Mutual Release Agreement (the “Settlement Agreement”) to resolve that litigation, under which DSKX agreed to make certain payments to the Company, including a minimum payment of at least $800 within ten business days of the resolution of DSKX’s legal malpractice lawsuit against Fox Rothschild, LLP. The Fox Rothschild lawsuit was resolved on April 26, 2019, yet DSKX did not make any payments to the Company. Therefore, on June 24, 2019, the Company served a summons and Complaint for breach of contract on DSKX seeking payment by DSKX of the amounts owed under that settlement agreement.

On September 13, 2019, the Company entered into a Settlement and Mutual Release Agreement (the “Agreement”) with DSKX, under which DSKX will pay to the Company the original settlement sum of $800 plus applicable interest of 6% per annum. The Agreement took effect upon the Company’s receipt of an initial payment of $80 from DSKX on September 13, 2019. Under the Agreement, DSKX will pay the remainder of the original settlement amount to the Company over a period of not more than 48 months, with an option to prepay. In exchange, the Company received a security interest in DSKX’s future accounts receivable and it dismissed its current suit against DSKX, although the Florida state court in which that suit was filed will retain jurisdiction over the settlement arrangement. Pursuant to the terms of the Agreement, if DSKX fails to make payments, the settlement amount may be accelerated and becomes immediately payable. Each party agreed to a mutual release of claims against the other and paid its own legal fees and costs in connection with the Agreement. The receivable was fully reserved as of June 30, 2019.

Other litigation

The Company and certain subsidiaries are, have been and may be, involved in other miscellaneous litigation and legal actions, including product liability, consumer, commercial, tax and governmental matters, which can arise from time to time in the ordinary course of the Company’s business. The Company believes that these other litigation and claims will likely be resolved without a material effect on the Company’s consolidated financial position, results of operations or liquidity. However, litigation and legal actions are inherently unpredictable, and excessive verdicts can result in such situations. Although the Company believes it has or will have substantial defenses in these matters, it may, in the future, incur judgments or enter into settlements of claims that could have a material adverse effect on results of operations in a particular period.

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(unaudited)

Purchase Contracts

On December 4, 2018, the Company entered into a definitive purchase agreement for the acquisition of a 14.75-acre land parcel located in Carson City, Nevada (the “Carson City Property”) which the Company intends to net lease under a build to suit strategy. The purchase price for this property is $5,500 as adjusted for customary apportionments. The purchase price is payable by a new first mortgage loan of $2,300 with the remaining $3,200 being paid by the Company’s operating partnership issuing Series B OPCO Units that are valued at $10.00 per unit (or share of the Company’s common stock). The Company had a closing deadline of June 30, 2019 which was extended to July 31, 2019. On January 16, 2019, the Company provided a non-refundable deposit of $55 in the form of Series B OPCO Units. Due to not closing or extending the purchase agreement, the Company wrote-off this non-refundable deposit during the three and six months ended June 30, 2019 and is included in the results on the unaudited condensed consolidated statements of operations and comprehensive loss.

Commitments

On June 4, 2018, we entered into a Loan and Security Agreement with The Pigman Companies, LLC, as the administrative agent, and investors under such agreement (the “Secured Bridge Loan Agreement”). From such date to September 30, 2018, we raised approximately $1,855 of secured loans (the “Bridge Loans”) that were due September 30, 2018. The Bridge Loans are the direct obligations of OPCO and fully guaranteed by the Company. The Company pledged all its assets as security under the Secured Bridge Loan Agreement. The Bridge Loans incur interest at 10% per annum, determined based on a 360-day year, and provide an additional 5% per annum during the period that the Bridge Loans are in default. The interest on the Bridge Loans is payable on the maturity date. Common shares will be issued for the bridge loan equity bonus fee 30 days after the date the Company is listed on a public exchange (after the registration statement becomes effective) and will be equal to the principal balance of the bridge loan on October 31, 2018. On October 31, 2018, the aggregate amount of principal and interest of $1,936 was paid. As principal and interest was paid in full, the equity bonus fee is the only remaining obligation and will be recorded on the Company’s financial statements 30 days after an approved registration statement is effective and will be paid in common stock of the Company in the amount of $1,855. On April 15, 2019, Kris Pigman was nominated and accepted a position as a board director of the Company.

Employment and Severance Commitments

Under their employment agreements, the Chief Executive Officer (“CEO”), Chief Operating Officer (“COO”), Chief Financial Officer (“CFO”) and Chief Accounting Officer (“CAO”) are entitled an annual base compensation of $350, $250, $250 and $175, respectively for a three year term after which the employment agreements will automatically renew for successive one year terms. Upon filing of an effective registration statement and merger completion, the CEO, COO, CFO and CAO are entitled to a bonus of $250, $150, $125 and $25, respectively.

With respect to any separation of employment, (i) if the executive is terminated without “cause” (as defined in the employment agreement) or resigns for “good reason” (as defined in the employment agreement), then, in addition to the amount of base salary earned and benefits accrued as of such separation date, the executive will be entitled to receive a lump sum payment equal to 100% for the CAO, 150% for the COO and CFO and 299% for the CEO of his annual base salary payable within 30 days of the termination of his employment, and (ii) if the executive is terminated for cause or resigns without good reason, then he will be entitled to receive the amount of any base salary earned and benefits accrued as of the date of such separation and the Company will have no further obligation to the executive. In addition, if, within six months of a “change of control” (as defined in the employment agreement), the executive is terminated without cause or resigns for good reason, then, in addition to the amount of base salary earned and benefits accrued as of such separation date, the executive will be entitled to receive a lump sum payment equal to 150% for the COO and CFO, 200% for the CAO and 299% for the CEO of his annual base salary payable within 30 days of the termination of his employment.

Note 8

Convertible Redeemable Preferred Stock and Stockholders’ Equity (Deficit):

Common Stock

The Company’s common stock confers upon their holders the following rights:

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(unaudited)

Convertible Redeemable Series A Preferred Stock

The terms of the 7% Series A Preferred Stock are governed by a certificate of designation (the “Series A Certificate of Designation”) filed by the Company with the Nevada Secretary of State on April 5, 2019. Pursuant to the Series A Certificate of Designation, the Company designated 1,600,000 shares of its preferred stock as 7% Series A Preferred Stock. Following is a summary of the material terms of the 7% Series A Preferred Stock:

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(unaudited)

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(unaudited)

GADSDEN PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(unaudited)

Class B OPCO Units

As part of the Mission Hills acquisition described above in Note 4 Asset Acquisitions, the Company issued $3,000 (300 thousand units) of Class B OPCO Units in Gadsden’s operating partnership which are convertible to Series A preferred stock based on a specified 2.5 to 1 exchange ratio. The Class B OPCO Units have the same terms as the Series A preferred stock and are convertible into Series A preferred stock when all Series C preferred stock has been converted to common and there are no more restrictions as to the number of Series A preferred shares outstanding. The Class B OPCO Units are classified at temporary equity on the accompanying unaudited condensed consolidated balance sheet.

Dividends for the three months and six months ended June 30, 2019 were $52 and $80, respectively. Dividends per share for the three months and six months ended June 30, 2019 were $0.17 and $0.27, respectively.