Acquisition

12 Months Ended

Dec. 31, 2018

Business Combinations [Abstract]

Acquisition

Note 4

 Acquisitions:

Contributed Properties

On March 31, 2017, the Company and the Acquiror entered into the Contribution Agreement with FCOP and FCREIT under which FCOP contributed mostly certain real estate assets (the “Contributed Properties”) to the Acquiror. In exchange, FCOP received shares of the Company’s common stock and/or newly designated Series A Convertible Preferred Stock. The first installment of contributed assets (the “First Contribution”) closed on May 17, 2017 (the “Initial Closing”).

First Contribution

In the Initial Closing, FCOP transferred certain assets comprising the Contributed Properties to the Company. On the Initial Closing date, FCOP transferred to the Acquiror four unoccupied land sites set for development into gas stations, which are located in Atwater and Merced, Northern California, and which had an agreed upon value of approximately $2.6 million. One of these unoccupied land sites was contributed through the transfer of a 75% membership interest in a limited liability company that owns the unoccupied land site located in Northern California, in which profits and losses are allocated 75% to the Company and 25% to the non-controlling member subject to a preferred equity split in which the non-controlling member earns the first 10% of net profits and the balance of the 90% is to be paid along the terms of the 75% split to the Company and 25% to the non-controlling member. FCOP then completed the transfer to the Acquiror of its 17.9% passive interest in a limited liability company that is constructing a single family residential development located in Los Lunas, New Mexico (the “Avalon Property”) on June 26, 2017.

This residential development in New Mexico consisted of 251, non-contiguous, single family residential lots and a 10,000 square-foot club house. 37 of the lots had been finished, and the remaining 214 were platted and engineered lots. The agreed upon value of its share of this property was approximately $7.4 million.

In return for the Contributed Properties, the Company issued to FCOP 879,234 duly authorized, fully paid and non-assessable shares of the Company’s common stock, which represented approximately 19.9% of the Company’s issued and outstanding common stock immediately prior to the Initial Closing, at an agreed upon Per Share Value (defined below) of $2.5183, or $2,214 in the aggregate. These shares of common stock are restricted and unregistered. The Company issued the remaining $7,786 of the approximately $10 million agreed upon consideration to FCOP in the form of 123,668 shares of the Company’s then newly designated non-voting Series A Convertible Preferred Stock, par value $0.01 per share (the “Series A Stock” or “Convertible Series A Preferred Stock”). Each share of the Series A Stock was convertible into 25 shares of the Company’s common stock, subject to the satisfaction of certain conditions, including stockholder approval in accordance with the rules of The Nasdaq Stock Market (“Nasdaq”), which was obtained on October 12, 2017. The shares of Series A Stock did not have voting rights and are restricted and unregistered. The number of shares of Common Stock issued to FCOP and to be issued upon conversion of the Series A Stock was determined by dividing the $10 million agreed upon value of the Contributed Assets by $2.5183, a specified price per share value which represents a 7.5% premium above the volume-weighted average price of all on-exchange transactions in the Company’s common stock executed on Nasdaq during the forty-three trading days prior to the trading day immediately prior to the public announcement of the transaction by the Company and FCREIT, as reported by Bloomberg L.P. (the “Per Share Value”). The shares of common stock both issued to FCOP and issuable upon the conversion of the Series A Stock carried certain registration rights as specified in a Registration Rights Agreement dated May 17, 2017.

At the Initial Closing, the Company assumed the liabilities associated with the Contributed Properties, except that it did not assume any liabilities with respect to the Avalon Property until that property’s contribution was completed on June 26, 2017. The obligations that the Acquiror assumed at the Initial Closing include the following: Obligations of FCOP and its affiliates under certain agreements covering the contributed properties, including an Operating Agreement of Central Valley Gas Station Development, LLC, a Delaware limited liability company, dated January 28, 2013, and all amendments thereto; and a Construction Contract dated November 19, 2014 between Central Valley Gas Stations Development, LLC, as owner and First Capital Builders, LLC, as Contractor, with respect to the project known commonly as Green Sands and Buhach Rd., Atwater, CA. Once the full interest in the Avalon Property was contributed to the Company, the Company also assumed the Operating Agreement of Avalon Jubilee, LLC, a New Mexico limited liability company dated as of May 16, 2012, and all amendments thereto; and a Development Services Agreement dated September 15, 2015 by and between UR-FC Contributed Assets, LLC, a Delaware limited liability company, as Owner, and Land Strategies, LLC, a Nevada limited liability company, as Developer, with respect to real property owned by Avalon Jubilee, LLC. As of the Initial Closing, the Company also assumed an installment note dated April 7, 2015 made by First Capital Real Estate Investments, LLC (“FCREI”) in favor of George Zambelli in the original principal amount of $470 and a Long Form Deed of Trust and Assignment of Rents dated April 7, 2015 between FCREI, as trustor, Fidelity National Title Company, as trustee, and George Zambelli, as beneficiary, which secures the note (see also Note 10).

Second Contribution

Under the Agreement, FCREIT was also required to contribute two additional property interests valued at the agreed upon value amount of $20 million. if certain conditions as set forth in the Contribution Agreement were satisfied by December 31, 2017. In exchange for each of these properties, the agreement stated the Company would issue to FCOP a number of duly authorized, fully paid and non-assessable shares of the Company’s common stock or Series A Convertible Preferred Stock, determined by dividing the $20 million agreed upon value of that contribution by the Per Share Value. The agreement stated that shares would be comprised entirely of shares of common stock if the issuance had been approved by the Company’s stockholders prior to the issuance thereof and would be comprised entirely of shares of Series A Convertible Preferred Stock if such approval had not yet been obtained.

Neither of these contributions were made as of December 31, 2017, at which time the Agreement was terminated.

The Company had determined in accordance with the updated guidance of ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business that the Amarillo property (an operating hotel) represented a business as it included an organized workforce with the necessary skills, knowledge and experience to perform the acquired process and an input that the workforce could develop or convert into output. However, it was determined that the Antigua property (a proposed resort) did not represent a business. Based on the above conclusion it was determined that the Amarillo property component was not required to be analyzed under the provisions of ASC 815-10 “Derivatives and Hedging” since such contract between an acquirer and a seller to enter into a business combination are scoped out from its provisions. As for the Antigua property it was determined that such future transaction did not constitute a derivative instrument in accordance with ASC 815-10 - Derivatives and Hedging as the net settlement criteria was not met. Further, the Company considered the provisions of Subtopic ASC 815-40 “Contracts in the Entity’s Own Equity” and determined that such contractual obligations cannot be considered as indexed to an entity’s own stock, as its settlement provisions are not based on a fixed monetary amount or a fixed amount of a debt instrument issued by the entity but rather on the fair value of the Antigua property which represents a real estate asset. Based on the terms of this component, (i.e. the fair value of the Antigua property and the fair value of the shares that the Company is obligated to issue for this asset), it was determined that such freestanding financial instrument represented a financial asset required to be measured upon initial recognition of at fair value. Subsequent to initial recognition the financial instrument (which might be a financial asset or a financial liability depending on the fair value of its settlement terms) is required to be re-measured at fair value, with changes in fair value reported in earnings (within the line item “Revaluation of asset contribution related financial instrument, net”).

Optional Contribution

FCREIT had the option to contribute either or both of two additional property interests valued at the agreed upon value of $66.5 million if certain conditions as set forth in the Contribution Agreement were satisfied by December 31, 2017. This third installment was optional in FCREIT’s sole discretion. As discussed below, the Contribution Agreement was terminated and this optional contribution did not take place.

In exchange for each of these properties, the Company would issue to FCOP a number of duly authorized, fully paid and non-assessable shares of the Company’s common stock or Series A Convertible Preferred Stock, determined by dividing an agreed upon value of $86,450 (130% of the value of the agreed upon value of $66,500) by the Per Share Value. The shares would be comprised entirely of shares of common stock if the issuance had been approved by the Company’s stockholders prior to the issuance thereof and would be comprised entirely of shares of Series A Convertible Preferred Stock if such approval had not yet been obtained. In addition, the Company would issue to FCOP a five year warrant (the “Warrant”) to purchase up to 25,000,000 shares of the Company’s common stock at an exercise price of $3.00 per share that would vest with respect to the number of underlying shares upon the achievement of the milestone specified in the Contribution Agreement. These optional contributions represented a potential liability to the Company as the number of shares and Warrants to be issued was fixed but the market value of the shares fluctuates. It is possible that the share price could have risen to a level that upon contribution of the properties causing the Company to give consideration that exceeded the fair value of the assets acquired. This would represent a potential liability to the Company and to quantify the liability the Company has used the Black Scholes formula. The Warrants also represented a potential liability in that the Company may be required to issues shares at $3 when the share price was significantly higher.

To estimate the fair value of the liability associated with optionality granted to FCOP as well as the warrant liability, management has used the Black Scholes option pricing formula. The key input in the calculation is the assumption of how volatile the Company stock was to be over the life of the option. The more volatile the Company is expected to be, the greater its potential liability. Future volatility is unknown, as such management had used a volatility proxy of 39.45% which equaled the average volatility of stocks in the Company’s forward looking peer group of real estate development at that time. After the calculation is performed, additional factors must be considered. It is possible that despite being economically rational to contribute the properties based on the Company stock price relative to the value of the optional properties, FCOP may not have the ability to contribute. Therefore a 50% discount was applied to the option value produced by the Black Scholes formula to arrive at final liability value for the optionality component. The Warrants received a further 50% discount as they contained a vesting schedule with milestones that must be achieved by FCOP once the property was contributed. With the expiration of the Contribution Agreement on December 31, 2017, the fair value of the liability was $0.

The Company has determined that the Company’s contractual obligations under the optional contributions does not constitute a derivative instrument in accordance with ASC 815-10 - Derivatives and Hedging as the net settlement criteria is not met. Further, the Company considered the provisions of Subtopic ASC 815-40 Contracts in the Entity’s Own Equity and determined that such contractual obligations cannot be considered as indexed to an entity’s own stock, as its settlement provisions are not based on a fixed monetary amount or a fixed amount of a debt instrument issued by the entity but rather on the fair value of certain real estate assets. Thus, such freestanding financial instrument were classified as financial liabilities and were measured upon initial recognition at fair value. Subsequent to initial recognition the financial liabilities are remeasured at fair value, with changes in fair value reported in earnings (within the line item “Revaluation of asset contribution related financial instruments, net”).

The Company elected to early adopt ASU 2017-01 Business Combinations (Topic 805) Clarifying the Definition of a Business. Accordingly, the determination whether the asset contribution transaction represents a business combination was evaluated by applying the ASU 2017-01 guidance. The Company has determined that the group of assets assumed in the First Contribution does not (and also, none of them on a stand-alone basis) include, an input and a substantive process that together significantly contribute to the ability to create output and thus it was determined that the First Contribution represents an acquisition of assets rather than a business combination. Accordingly, the total sum of the fair value of consideration given (i.e. the fair value of the equity interests issued) together with the transaction costs and the fair value of financial assets was allocated to the individual assets acquired and liabilities assumed in the first contribution based on their relative fair values at the date of acquisition. Such allocation did not give rise to goodwill.

The consideration for the asset acquisition as of the Initial Date consists of the following:

Fair value of 879,234 shares of common stock (*)	$	1,275
Fair value of 123,668 shares of Series A preferred stock (*)		4,483
Fair value of financial liability related to Optional contribution (**)		857
Fair value of Warrant (***)		1,925
Fair value of asset related to future mandatory asset contribution (***)		(4,175	)
Fair value of assumed note payable on acquired asset		470
Transaction costs		283
Total consideration	$	5,118

(*) Fair value of Common shares based on quoted market price on date of transaction and fair value of preferred shares based on the number of Common shares to which they can be converted on the transaction date

(**) Related to Optional Contribution

(***) Related to Second Contribution

The fair value of the assets acquired, and liabilities assumed were based on management estimates and values, including estimates based on historical sales of similar parcels. Adjustments were applied to such historical sales and assumptions were applied to other attributes of the assets in order to estimate market value. The following table summarizes the allocation of the consideration to the assets acquired in the transaction.

The allocation of aforesaid total consideration is as follows:

Investment properties	$	2,055
Investment in other company		3,245
Less: Non-controlling interest (*)		(182	)
Total assets acquired at fair value	$	5,118

(*) Attributable to the 25% non-controlling membership interest in a limited liability company that owns a vacant land site located in Northern California.

The following table presents the combined activity in the Investment Properties and Investment in Other Company line items during the years ended December 31, 2018 and 2017:

Opening balance, January 1, 2017	$	—
Purchasing of investment properties and investment in other company		5,118
Non-controlling interest		182
Impairment of investment in other company		(1,439	)
Closing balance, December 31, 2017	$	3,861
Purchase of investment property (*)		326
Depreciation of investment properties		(5	)
Impairment of investment properties		(326	)
Impairment of investment in other company		(1,455	)
Closing balance, December 31, 2018	$	2,401

(*) See also Ohio Medical Office building below.

During the years ended December 31, 2018 and 2017, depreciation expenses were $5 and $0, respectively.

The fair value of options, warrants and asset related to future mandatory asset contribution granted was estimated at the Initial Date by using the Black-Scholes option pricing model. The following are the data and assumptions used:

Options Value:

	May 17, 2017
Dividend yield (%)	0
Expected volatility (%)	39.45
Risk free interest rate (%)	1.25
Strike price	1.93
Stock price	1.45
Probability (%)	50
Expected term of options (years)	0.62

Warrants Value:

	May 17, 2017
Dividend yield (%)	0
Expected volatility (%)	39.45
Risk free interest rate (%)	1.25
Strike price	3
Stock price	1.45
Probability (%)	50
Expected term of options (years)	5

Asset related to future mandatory asset contribution:

	May 17, 2017
Dividend yield (%)	0
Stock price	1.45
Probability (%)	70

As of December 31, 2017, neither the Second Contribution nor the Optional Contribution were made and the Contribution Agreement was terminated at that date. Consequently, as of December 31, 2017, the fair value of the asset contribution related to aforementioned financial instruments was reduced to $0. During the period from the closing of the Initial Date and until December 31, 2017, the Company has recognized a net loss as revaluation of the fair value of asset contribution related financial instruments in the total amount of $1,392.

Ohio Medical Office Building

In 2018, the Company’s subsidiary, RETPROP I, LLC, completed the acquisition, in cash, for $326, of a 7,738 square foot medical office building in Dayton, Ohio. The building’s former owner, and 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.