STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE

Our capital structure consisted of the following at December 31, 2018 and 2017:



		December 31,
		2018		2017
	Authorized	Total Issued		Total Issued
Common Stock
Common Stock	150,208,500	1,772,894		1,255,642
Class B Common Stock:
Class B-1	4,023,400	3,811,342		3,811,342
Class B-2	4,023,400	3,811,342		3,811,342
Class B-3	8,165,700	7,735,169		7,735,169
Class B-4	781,644	627,579		627,579
Total Class B Common Stock	16,994,144	15,985,432		15,985,432
Class C Common Stock	15,803,212	838,448		838,448
Class D Common Stock	16,994,144	—		—
Total Common Stock	200,000,000	18,596,774		18,079,522
Preferred Stock
Series B Cumulative Convertible	100,000,000	10,552,941		8,200,000
Series A Redeemable	—	22,000		—
Total Preferred Stock	100,000,000	10,574,941		8,200,000
Total	300,000,000	29,171,715		26,279,522
Less: Treasury Stock		(1,870,164	)	(1,826,096	)
Total issued and outstanding		27,301,551		24,453,426

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 December 31, 2018 or 2017.

Class B, C, and D Common Stock

Holders of our Common Stock generally have the same relative powers and preferences, except for certain transfer restrictions, as follows:

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Class B Common Stock - The Class B common stock, which was issued in exchange for membership units of the Fund, the stock of the Manager or membership units of Holdings, is held by a custodian and divided into four separate series of Class B common stock. The Class B-1, B-2 and B-3 common stock are not eligible for conversion into common stock until, and subject to transfer restrictions that lapse upon, predetermined intervals of six, nine or 12 months following the earlier of (1) consummation of an initial public offering or (2) the 90th day following notice given by the board of directors not to pursue an initial public offering, in the case of each of the Class B-1, Class B-2 and Class B-3 common stock, respectively. If, at any time after the five-month anniversary of the consummation of an initial public offering, the closing price of the Company’s common stock is greater than 125% of the offering price in an initial public offering for 20 consecutive trading days, all shares of Class B-1, Class B-2 and Class B-3 common stock will be convertible into shares of our common stock and will not be subject to restrictions on transfer under the Company’s certificate of incorporation. Each share of Class B-4 common stock will be convertible to one share of Common Stock upon the four-year anniversary of the consummation of the Conversion Transactions. The transfer restrictions will terminate earlier if (1) any time after five months from the first day of trading on a national securities exchange, either the market capitalization (based on the closing price of the Company’s common stock) or the Company’s book value will have exceeded $730.4 million (subject to upward adjustment by the amount of any net proceeds from new capital raised in an initial public offering or otherwise, and to downward adjustment by the amount of any dividends or distributions paid on membership units of the Fund or the Company’s securities after the Conversion Transactions), or (2) after entering into an employment agreement approved by the Company’s compensation committee, the holder of Class B common stock is terminated without cause, as this term is defined in their employment agreements as approved by the Company’s compensation committee. In addition, unless the Company has both (i) raised an aggregate of at least $50 million in one or more transactions through the issuance of new equity securities, new indebtedness with a maturity of no less than one year, or any combination thereof, and (ii) completed a listing on a national securities exchange, then, in the event of a liquidation of the Company, no portion of the proceeds from the liquidation will be payable to the shares of Class B-4 common stock until such proceeds exceed $730.4 million. All shares of Class B common stock automatically convert into Common Stock upon consummation of a change of control as defined in the certificate of incorporation. To provide additional incentive for holders of Class B common stock to remain longer-term investors, we agreed to pay, subject to the availability of legally distributable funds, a Special Dividend to Class B stockholders of $0.95 a share to all stockholders who have retained continuous ownership of their shares through the 12 month period following an initial public offering.

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Class C Common Stock – There is one series of Class C common stock which is also held by the custodian and will either be redeemed for cash or converted into shares of Class B common stock. Following the consummation of an initial public offering, we may, in our sole discretion, use up to 30% of the net proceeds from the offering (up to an aggregate of $50 million) to effect a pro rata redemption of Class C common stock (based upon the number of shares of Class C common stock held by each stockholder) at the initial public offering price, less selling commissions and discounts paid or allowed to the underwriters in the initial public offering. It is expected that the amount the stockholders of Class C common stock will receive per share will be less than the amount of their original investment in the Fund per unit. Any shares of Class C common stock that are not so redeemed will automatically convert into shares of Class B common stock as follows: 25% of the outstanding shares of Class C common stock will convert into shares of Class B-1 common stock, 25% will convert into shares of Class B-2 common stock and 50% will convert into shares of Class B-3 common stock.

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Class D Common Stock – If any holder of Class B common stock submits a notice of conversion to the custodian, but represents to the custodian that the holder has not complied with the applicable transfer restrictions, all shares of Class B common stock held by the holder will be automatically converted into Class D common stock and will not be entitled to the Special Dividend and will not be convertible into common stock until the 12-month anniversary of an IPO and, then, only if the holder submits a representation to the custodian that the applicable holder has complied with the applicable transfer restrictions in the 90 days prior to such representation and is not currently in violation. If any shares of Class B common stock owned by a particular holder are automatically converted into shares of Class D common stock, as discussed above, then each share of Class C common stock owned by the holder will convert into one share of Class D common stock.

Preferred Stock

In 2014, the Company issued a total of 8.2 million shares of the Company’s Series B-1 and B-2 Cumulative Convertible Preferred Stock (“Series B-1 and B-2 Preferred Stock”) to certain investor groups in exchange for $26.4 million (the “Preferred Investment”).

In February 2018, the Company entered into a Series B-3 Cumulative Convertible Preferred Stock Subscription Agreement (the “B-3 Preferred Subscription Agreement”) with Chase Funding. Pursuant to the B-3 Preferred Subscription Agreement, Chase Funding purchased 2,352,941 shares (the “JPM Series B-3 Shares”) of Series B-3 Cumulative Convertible Preferred Stock, $0.01 par value per share, of the Company (the “Series B-3 Preferred Stock”), at a purchase price of $3.40 per share, for a total purchase price of $8.0 million. The B-3 Preferred Subscription Agreement contains various representations, warranties and other obligations and terms that are commonly contained in a subscription agreement of this nature.

The Series B-1 and B-2 Preferred Stock and the Series B-3 Preferred Stock are collectively referred to herein as the “Series B Preferred Stock”, and current holders of Series B Preferred Stock are collectively referred to herein as the “Series B Investors.” Except for certain voting and transfer rights, and different dividend and redemption provisions of the Series B-3 Preferred Stock described below, the rights and obligations of the Series B Preferred Stock are substantially the same.

The description below provides a summary of certain material terms of the Series B Preferred Stock:

•

Dividends. Dividends on the Series B Preferred Stock are cumulative and accrue from the issue date and compound quarterly at the rate of 8% for the Series B-1 and B-2 Preferred Stock and 5.65% for the Series B-3 Preferred Stock, of the issue price per year, payable quarterly in arrears. Subject to certain dividend rights and restrictions, no dividend may be paid on any capital stock of the Company during any fiscal year unless all accrued dividends on the Series B Preferred Stock have been paid in full, except for dividends on shares of voting Common Stock. In the event that any dividends are declared with respect to the voting Common Stock or any junior ranking securities, the holders of the Series B Preferred Stock are entitled to receive additional dividends over the stated 8% dividend rate - see additional descriptions below. During year ended December 31, 2018 and 2017, we recorded Preferred Investment dividends on Series B-1 and B-2 Preferred Stock of $2.1 million and $2.1 million, respectively, or $0.26 and $0.26 per preferred share, respectively and there were no arrearages at December 31, 2018. During year ended December 31, 2018, we recorded Preferred Investment dividends on Series B-3 Preferred Stock of $0.4 million or $0.17 per preferred share.

•

Redemption upon Demand. Prior to the amendment discussed below, at any time after July 24, 2019 in the case of Series B-1 and B-2 Preferred Stock, and any time after February 9, 2023 in the case of Series B-3 Preferred Stock, or at any time in the event certain defaults have occurred if at least 85% of the holders choose, each holder of Series B Preferred Stock may require the Company to redeem, out of legally available funds, the shares of Series B Preferred Stock held by such holder at the a price (the “Redemption Price”) equal to the greater of (i) 150% of the sum of the original price per share in the case of Series B-1 and B-2 Preferred Stock, and 145% in the case of Series B-3 Preferred Stock, plus all accrued and unpaid dividends or (ii) the sum of the tangible book value of the Company per share of voting Common Stock plus all accrued and unpaid dividends, as of the date of redemption. Such events of default may include default on debt or non-appealable judgments against the Company in excess of certain balances, failure to comply timely with the Company’s reporting obligations under the Exchange Act, or proceedings or investigations against the Company relating to any alleged noncompliance with certain regulations.

Based on the initial Series B-1 and B-2 Preferred Investment of $26.4 million, the Redemption Price would presently be $39.6 million, resulting in a redemption premium of $13.2 million. Based on the initial Series B-3 Preferred Investment of $8.0 million, the Redemption Price would presently be $11.6 million, resulting in a redemption premium of $3.6 million. In accordance with applicable accounting standards, Series B preferred stock is classified as temporary equity on the balance sheet and we have elected to amortize the redemption premium using the effective interest method as an imputed dividend over the five years holding term of the preferred stock. During years ended December 31, 2018 and 2017, we recorded amortization of the redemption premium of $3.5 million and $2.7 million, respectively, as deemed dividends to preferred shareholders. As described in Note 20, subsequent to December 31, 2018, we entered into an agreement with the holders of the Series B-1 and B-2 Preferred Stock to extend the redemption period for one year, or to July 24, 2020, to allow the Company additional time to attempt to restructure the terms of the existing securities and/or to generate the liquidity necessary for such repayment. In exchange for this extension, the Company agreed to increase the Redemption Price described above from 150% of the sum of the original price per share of the Series B-1 and B-2 Preferred Stock plus all accrued and unpaid dividends to 160% plus all accrued and unpaid dividends.

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Optional Redemption. If at any time a holder holds less than 15% of the number of shares of Series B Preferred Stock originally issued to it (subject to adjustment), the Company may elect to redeem all shares of Series B Preferred Stock held by such holder at a price equal to the greater of (i) 160% and 145% of the sum of original issue price for the Series B-1 and B-2 Preferred Stock and the Series B-3 Preferred Stock, respectively, of (x) the original price per share, plus (y) any accrued and unpaid dividends, whether or not declared, until redeemed, and (ii) the sum of (x) the per share book value per share as of the date of such redemption, plus (y) any accrued and unpaid dividends, whether or not declared, until redeemed, with a 30-day notice given by the Company.

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Liquidation Preference. Upon a “deemed liquidation event” of the Company, before any payment or distribution is made to or set apart for the holders of any junior ranking securities, the holders of shares of Series B Preferred Stock will be entitled to receive a liquidation preference of 150% and 145% of the sum of original issue price for the Series B-1 and B-2 Preferred Stock and the Series B-3 Preferred Stock, respectively, plus all accrued and unpaid dividends, subject to other provisions. As described above, the Company agreed to increase the Redemption Price described above from 150% of the sum of the original price per share of the Series B-1 and B-2 Preferred Stock plus all accrued and unpaid dividends to 160% plus all accrued and unpaid dividends.

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Conversion. Each share of Series B Preferred Stock is convertible at any time by any holder thereof into a number of shares of Common Stock initially equal to the sum of the original price per share of Series B Preferred Stock plus all accrued and unpaid dividends, divided by the conversion price then in effect. The initial conversion price is equal to the original price per share of Series B Preferred Stock, subject to adjustment. However, all issued and outstanding shares of Series B Preferred Stock will automatically convert into shares of Common Stock at the conversion price then in effect upon the closing of a sale of shares of Common Stock at a price equal to or greater than 2.25 times the original price per share of the Series B Preferred Stock, subject to adjustment, in a firm commitment underwritten public offering and the listing of the Common Stock on a national securities exchange resulting in at least $75.0 million of gross proceeds. At December 31, 2018, the 8.2 million shares of Series B-1 and B-2 Preferred Stock are convertible into 8.2 million shares of Common Stock and 2.4 million of the Series B-3 Preferred Stock are convertible into shares of Common Stock.

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Voting Rights. Holders of Series B Preferred Stock are entitled to vote on an as-converted basis on all matters on which holders of voting Common Stock are entitled to vote. For so long as each initial purchaser of the Series B Preferred Stock holds 50% or more of the number of shares of Series B Preferred Stock it was issued on the original issuance date of the Series B Preferred Stock, the holders of such stock, each voting as a single class, are each entitled to vote for the election of one member of the board of directors (Series B Directors). In addition, for so long as either of the initial purchaser of the Series B Preferred Stock holds 50% or more of the number of shares of Series B-1 Preferred Stock or Series B-2 Preferred Stock, respectively, issued to such person on the original issuance date of the Series B Preferred Stock, the holders of the Series B-1 Preferred Stock and Series B-2 Preferred Stock, by majority vote of the holders of each such series of Series B Preferred Stock, are entitled to vote for the election of one additional independent member of the board of directors.


•	Investment Committee. The Series B Directors, along with the Company’s Chief Executive Officer (if then serving as a director of the Company), serve as members of the Investment Committee of the Company’s board of directors (the "Investment Committee"). The Investment Committee assists the board of directors with the evaluation of the Company’s investment policies and strategies.

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Required Liquidation. Under the Second and Amended and Restated Certificate of Designation authorizing the Series B Preferred Stock (the “Restated Certificate of Designation”), if at any time we are not in compliance with certain of our obligations to the holders of the Series B Preferred Stock and we fail to pay (i) full dividends on the Series B Preferred Stock for two consecutive fiscal quarters or (ii) the Redemption Price within 180 days following the later of (x) demand therefore resulting from such non-compliance and (y) July 24, 2020 in the case of the Series B-1 and B-2 Preferred Stock and February 9, 2023 in the case of the Series B-3 Preferred Stock, unless a certain percentage of the holders of the Series B Preferred Stock elect otherwise, we will be required to use our best efforts to commence a liquidation of the Company.

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Other Restrictive Covenants. The Second and Amended and Restated Certificate of Designation also contains certain restrictive covenants, which require the consent of a certain percentage of the holders of the Series B Preferred Stock as a condition to us taking certain actions, including without limitation the following: limit the amount of our operating expense or capital expenditure in excess of budgeted amounts; sell, encumber or otherwise transfer certain assets, unless approved in our annual budget subject to certain exceptions; dissolve, liquidate or consolidate our business; enter into any agreement or plan of merger or consolidation; engage in any business activity not related to the ownership and operation of mortgage loans or real property; hire or terminate certain key personnel or consultants; bankruptcy of a subsidiary; default on debt over certain thresholds that entitle the creditor to accelerate repayment; judgments against the Company over $2.0 million that are not timely cured or appealed; failure to file timely with the SEC; or commencement of legal proceedings or investigations in conjunction with noncompliance with regulations. Under the Second and Amended and Restated Certificate of Designation for the Series B Preferred Shares, we cannot exceed 103% of the aggregate line item expenditures in our annual operating budget approved by the Series B Investors without their prior written approval. We were in breach of this covenant for the year ended December 31, 2018 for certain expenses that exceeded the approved budget by more than 103%. However, subsequent to December 31, 2018, we obtained a waiver of this breach from the Series B Investors.

On April 11, 2017, Chase Funding 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, under the Series B-2 Purchase Agreement, the Company was obligated not to 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 JPM Funding determines, in its sole discretion, that the Company violates any of the above covenants, and that violation is not cured within the period of time specified in the Investment Agreement, the Preferred Stock Investors 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 Preferred Series B 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.

In connection with the issuance of the Series B-3 Preferred Stock, on February 9, 2018, the Company issued to Chase Funding a warrant to acquire up to 600,000 shares of the Company’s common stock. The Chase Warrant is exercisable at any time on or after February 9, 2021 for a two (2) year period, and has an exercise price of $2.25 per share. The Chase Warrant provides for certain adjustments that may be made to the exercise price and the number of shares issuable upon exercise due to customary anti-dilution provisions based on future corporate events. The Chase Warrant is exercisable in cash, and subject to certain conditions may also be exercised on a cashless basis. The warrant is classified as stockholders’ equity under the applicable guidance and were recorded at relative fair value at issuance as is described in Note 8.

Series A Redeemable Preferred Stock Issuance

On May 31, 2018, the Company entered into a Series A Senior Redeemable Preferred Stock Subscription Agreement (the “Series A Subscription Agreement”) with Chase Funding. pursuant to which, Chase Funding purchased 22,000 shares of Series A Preferred Stock, at a purchase price of $1,000 per share (the “Face Value”), for a total purchase price of $22.0 million.

The Series A Preferred Stock ranks senior with respect to dividend and redemption rights and rights upon liquidation, dissolution or winding up of the Company to all other classes or series of shares of the Company’s preferred and common stock and to all other equity securities issued by the Company from time to time. The Series A Preferred Stock is non-voting stock. Holders of the Series A Preferred Stock are entitled to receive a liquidation preference equal to the sum of the Face Value of the Series A Preferred Stock plus all accrued and unpaid dividends.

Dividends on the Series A Preferred Stock are cumulative and accrue from the issue date at the rate of 7.5% of the issue price per year, payable quarterly in arrears on or before the last day of each calendar quarter. In addition, if any dividends or other amounts treated for U.S. federal tax income purposes as distributions with respect to the Series A Preferred Stock (“Distributions”) paid to a person treated as a corporation for U.S. federal income tax purposes that holds Series A Preferred Stock (a “Corporate Holder”) do not qualify in whole or in part for the benefit of the dividends received deduction (the “DRD”) under Section 243 of the Internal Revenue Code of 1986, as amended (the “Code”) because the Company does not have sufficient earnings and profits for U.S. federal income tax purposes with respect to all or a portion of such Distributions, then the Company shall make an additional distribution to such Corporate Holder as described in the Certificate of Designation of Series A Senior Redeemable Preferred Stock (the “Certificate of Designation”), but effectively in an amount equal to the tax benefit that would have otherwise been received by the Corporate Holder if the Distribution did qualify for the DRD (the “DRD Gross-Up Distribution”). If a Corporate Holder receives any dividend, Distribution (including any DRD Gross-Up Distribution) or other payment treated as a dividend under the Code that constitutes in whole or in part an “extraordinary dividend” under Section 1059(c)(1) of the Code or would otherwise be subject to Section 1059 of the Code (an “Extraordinary Dividend”), then the Company shall make an additional distribution to such Corporate Holder as described in the Certificate of Designation, but effectively in an amount equal to the tax benefit that would have otherwise been received by the Corporate Holder if the dividend, Distribution or other payment did not constitute an Extraordinary Dividend under Section 1059 of the Code (the “Section 1059 Gross-Up Distribution”). No Section 1059 Gross‑Up Distribution shall be payable with respect to any dividend or distribution paid after the second (2nd) anniversary of the initial issuance of the Series A Preferred Stock to any Corporate Holder other than Chase Funding. The Company may elect to pay a DRD Gross-Up Distribution or a Section 1059 Gross‑Up Distribution either in additional shares of Series A Preferred Stock having an aggregate Face Value equal to such DRD Gross-Up Distribution or Section 1059 Gross‑Up Distribution, respectively, or in cash, except that in connection with or following the disposition of the Series A Preferred Stock by such Corporate Holder, such payments shall be made in cash. For the year ended December 31, 2018, we recorded a DRD Gross-Up Distribution payable of $0.2 million and no Extraordinary Dividend or Section 1059 Gross-Up Distribution. During the year ended December 31, 2018, we recorded a total of $1.2 million of dividends related to Series A Preferred Stock.

The Company has certain call rights with respect to the Series A Preferred Stock and the holders of Series A Preferred Stock can put the instrument for cash at any time on or after May 31, 2023 or in the event certain events or defaults occur, each as set forth in the Series A Certificate of Designation. The provisions described above relating to the Real Estate Exemption are also applicable to the Series A Preferred Stock. Accordingly, a violation of that provision would result in an acceleration of the put rights of the holder of Series A Preferred Stock.

Series B and Series A Preferred stock are classified as mezzanine equity on the balance sheets at December 31, 2018 and 2017, respectively.

Treasury Stock

During the year ended December 31, 2018, an aggregate of 44,068 shares of Class C common stock were relinquished to the Company for no consideration to the shareholder. During the year ended December 31, 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 our Chief Executive Officer under Section 83(b) of 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.

Share-Based Compensation

Our First Amended and Restated 2010 IMH Financial Corporation Employee Stock Incentive Plan (“Equity Incentive Plan”) provides for awards of stock options, stock appreciation rights, restricted stock units and other performance based awards to our officers, employees, directors and certain consultants. The maximum number of shares of common stock available to be issued under such awards was not to exceed 2,700,000 common shares, subject to increase to 3,300,000 shares after an initial public offering.

The 2014 IMH Financial Corporation Non-Employee Director Compensation Plan (the “Director Plan”) provides for the issuance of up to 300,000 shares of common stock. Pursuant to the Director Plan, eligible directors are entitled to the compensation set forth below for their service as a member of the board of directors and its committees. The Director Plan provides for, among other things, an annual grant of restricted common stock in an amount equal to $20,000 based on the fair market value of such shares as determined under the Director Plan. These annual awards vest in full over twelve months and are issuable following the annual appointment of the board position. Only those directors who meet the independence standards under the rules of the New York Stock Exchange and the Securities and Exchange Commission are eligible to participate. Unless sooner terminated by the board of directors, the Director Plan will terminate on August 6, 2024.

During the year ended December 31, 2018, the Company issued 517,252 shares of common stock pursuant to previous restricted stock awards. During the year ended December 31, 2018, the Company granted 114,865 shares of restricted stock to certain executives of the Company, net of certain elections made by the executives under Section 83(b) of the Code and the award agreements, vesting in three equal parts on each of January 1, 2019, January 1, 2020, and January 1, 2021. We granted 110,979 options to employees pursuant to our Equity Incentive Plan during the year ended December 31, 2018. 30,000 of those options have an exercise price of $1.81 per share and have an estimated fair value of $0.73 per option. 80,979 of those options have an exercise price of $2.65 and have an estimated fair value of $1.06 per option and all options vest over a three year term. During the year ended December 31, 2018, 63,849 options were forfeited.

In addition, during the year ended December 31, 2018, the Company issued a total of 74,136 shares of restricted common stock to our non-employee independent directors pursuant to the 2014 Non-Employee Director Compensation Plan for fiscal year 2017. 44,132 of those shares have a fair value of $1.81 upon issuance and vested on June 29, 2018. 30,004 shares had a fair value upon issuance of $2.67 and vest on June 30, 2019.

During the year ended December 31, 2017, the Company issued 527,383 shares of common stock pursuant to previous restricted stock awards. During the year ended December 31, 2017, the Company granted 262,309 shares of restricted stock to certain executives of the Company, net of certain elections made by the executives under Section 83(b) of the Code and the award agreements, vesting in three equal parts on each of January 1, 2018, January 1, 2019, and January 1, 2020. We granted 116,830 options to employees pursuant to our Equity Incentive Plan during the year ended December 31, 2017. Those 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 year ended December 31, 2017, no options were forfeited.

During the second quarter of 2017, we approved the issuance of 73,128 shares of previously approved restricted common stock to our employees pursuant to the Equity Incentive Plan, of which 22,279 were issued during the year ended December 31, 2017. 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 3,137 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 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 79,324 shares in order to satisfy the tax withholding requirements associated with the stock award.

During the year ended December 31, 2017, the Company approved the issuance of 425,453 shares of restricted Company common stock pursuant to restricted stock award agreements, net of certain election made under Section 83(b) of the Code and the award agreement. All shares are scheduled to vest upon the earlier of a) ratably over the three year period of the related employment contracts; b) a change in control; or c) termination without cause or death. The holders of the restricted shares will have the voting and dividend rights of common stockholders as of the award date.

In addition, during 2017, the Company approved and issued 116,772 shares of restricted common stock to our non-employee independent directors pursuant to the Director Plan, all of which vested in 2017 since these were grants for 2015 and 2016. The fair value of the restricted stock on the date it was issuable was estimated at $1.74 per share as of June 30, 2015 and $1.13 per share as of June 30, 2016, based on stock valuations obtained for those periods. The value of such stock was recorded as compensation expense ratably over the respective service periods. There were 45,976 shares granted for the 2015 service period and 70,796 shares granted for the 2016 service period.

We account for the issuance of common stock, stock options and warrants in accordance with applicable accounting guidance. The compensation expense for such awards are determined based on the fair value of a share of the common stock, as determined by an independent consultant as our stock is not traded on an open exchange, and using valuation models and techniques, as appropriate. The options generally have a contractual term of ten years. Certain stock option grants vested ratably on the first, second and third anniversaries of the date of grant, while other stock options vested ratably on a monthly basis over three years from the date of grant. The fair value of stock-based awards is estimated on the date of grant using the Black-Scholes valuation model. For employee options, we use the simplified method to estimate the period of time that options granted are expected to be outstanding. Expected volatility is based on the historical volatility of our peer companies’ stock for the length of time corresponding to the expected term of the option. The expected dividend yield is based on our historical and projected dividend payments. The risk-free interest rate is based on the U.S. treasury yield curve on the grant date for the expected term of the option.

In order to estimate the fair value of the securities subject to these transactions pursuant to applicable accounting standards, we utilize information provided by an independent third-party valuation firm incorporating financial and other information, including prospective financial information, provided by us, as well as information obtained from various public, financial, and industry sources. Based on this analysis, management estimated the fair value of the restricted stock awards issued or granted for the years ended December 31, 2018 and 2017 was $2.67 and $1.13 per share, respectively.

For stock options issued during the years ended December 31, 2018 and 2017, the fair value was estimated at the date of grant using the Black-Scholes option-pricing model based on the exercise price of the award and other assumptions relating to expected dividend yield, expected stock price volatility, risk-free interest rate, and expected life of options granted which were as follows:



	December 31,
	2018		2017
Expected stock price volatility	40	%	69	%
Risk-free interest rate	2	%	2	%
Expected life of options (years)	5.5		6
Expected dividend yield	0		0
Discount for lack of marketability	25	%	35	%

A summary of stock option and restricted stock activity as of and for the years ended December 31, 2018 and 2017, is presented below:



	Stock Options								Restricted Stock
Outstanding At	Shares		Exercise Price Per Share			Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)		Time-Based Restricted Shares
December 31, 2016	938,667		$	6.10		3.1	$	—	889,456
Granted	116,830		1.13			—	—		469,097
Exercised or vested	—		—			—	—		(567,043	)
Forfeited or expired	—		—			—	—		—
December 31, 2017	1,055,497		6.74			0.3	—		791,510
Granted	110,979		2.42			—	—		249,496
Exercised or vested	—		—			—	—		(517,252	)
Forfeited or expired	(63,849	)	(6.52		)	—	—		—
December 31, 2018	1,102,627		$	5.25		1.63	$	—	523,754

As of December 31, 2018, there were 1,102,627 stock options outstanding, of which 932,994 were fully vested, 2,600,000 fully vested stock warrants outstanding and 523,754 of unvested restricted stock grants outstanding. Vested restricted stock grants have been issued and are included in outstanding common stock.

Net stock-based compensation expense relating to the stock-based awards was $0.4 million and $0.7 million for the years ended December 31, 2018 and 2017, respectively, net of the effect for Section 83(b) elections. No stock options or warrants were exercised and we did not receive any cash from option or warrant exercises during the years ended December 31, 2018 or 2017. As of December 31, 2018, there was $0.5 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 1.63 years.

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 years ended December 31, 2018 and 2017 (amounts in thousands, except for per share data):



	Years Ended December 31,
	2018			2017
Earnings allocable to common shares:
Numerator - Loss Attributable to Common Shareholders:
Net loss	$	(12,197	)	$	(4,626	)
Net income (loss) attributable to non-controlling interest	(1,144		)	798
Preferred dividends	(7,229		)	(4,856		)
Net loss from continuing operations attributable to common shareholders	(20,570		)	(8,684		)
Net income from discontinued operations	—			3,071
Net loss attributable to common shareholders	$	(20,570	)	$	(5,613	)

Denominator - Weighted average shares:
Weighted average common shares outstanding for basic and diluted earnings per common share	16,703,866			16,188,250

Basic and diluted earnings per common share:
Net loss per share	(0.80		)	(0.24		)
Preferred dividends per share	(0.43		)	(0.30		)
Net loss per share, continuing operations, net	(1.23		)	(0.54		)
Net loss per share, discontinued operations	—			0.19
Net loss attributable to common shareholder per share	(1.23		)	(0.35		)

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):



	Years Ended December 31,
	2018	2017
Options to purchase common stock	1,085,497	993,401
Restricted stock	318,390	640,668
Warrants to purchase common stock	2,600,000	2,000,000
Convertible preferred stock	10,552,941	8,200,000
Total	14,556,828	11,834,069

Dividends

During the years ended December 31, 2018 and 2017, we did not declare or pay any common dividends. As described above, for each of the years ended December 31, 2018 and 2017, we recorded Preferred Investment cash dividends of $2.5 million and $2.1 million on our Series B Preferred Stock, respectively. During the year ended December 31, 2018, we recorded Preferred Stock cash dividends of $1.2 million on our Series A Preferred Stock. For the years ended December 31, 2018 and 2017, we recorded the amortization of the Preferred Investment redemption premium of $3.5 million and $2.7 million, respectively, as a deemed dividend. We have not established a minimum dividend level and we may not be able to make dividend payments in the future. All dividends will be made at the discretion of our board of directors and will depend on our earnings, our financial condition and such other factors as our board of directors may deem relevant from time to time, subject to the availability of legally available funds.

Under the Second Amended and Restated Certificate of Designation, all shares of capital stock of the Corporation must be junior in rank to all shares of Series B Preferred Stock with respect to the preferences as to dividends, distributions and payments upon liquidation. In the event that any dividends are declared with respect to the voting Common Stock or any junior stock, the holders of the Series B Preferred Stock as of the record date established by the board of directors for such dividends are entitled to receive as additional dividends (in each case, the “Additional Dividends”) an amount (whether in the form of cash, securities or other property) equal to the amount (and in the same form) of the dividends that such holder would have received had the Series B Preferred Stock been converted into Common Stock as of the date immediately prior to the record date of such dividend, such Additional Dividends to be payable, out of funds legally available therefor, on the payment date of the dividend established by the board of directors. The record date for any such Additional Dividends will be the record date for the applicable dividend, and any such Additional Dividends will be payable to the persons in whose name the Series B Preferred Stock is registered at the close of business on the applicable record date. In the event we are obligated to pay a one-time special dividend on our Class B common stock, the holders of the Series B Preferred Stock as of the record date established by the board of directors therefor will be entitled to receive as additional dividends (the “Special Preferred Class B Dividends”) for each share of Common Stock that it would hold if it had converted all of its shares of Series B Preferred Stock into Common Stock the same amount that is received by holders of Class B Common Stock with respect to each share of Class B Common Stock (in each case, with respect to the Common Stock and Class B Common Stock, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar reorganization event affecting such shares), such Special Preferred Class B Dividends to be payable, out of funds legally available therefor, on the payment date for the Special Dividend (the “Special Preferred Class B Payment Date”). The record date for any Special Preferred Class B Dividends will be the record date for the Special Dividend, and any such Special Preferred Class B Dividends will be payable to the persons in whose name the Series B Preferred Stock is registered at the close of business on the applicable record date.