RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

In November 2017, the Company and Whitestone each received a comment letter from the Staff (the “Staff”) of the Division of Corporation Finance of the SEC relating to the Company’s and Whitestone’s Annual Reports on Form 10-K for the year ended December 31, 2016. In the respective letters, the Staff requested that the Company and Whitestone provide them with an analysis to support the determination that the Operating Partnership is a VIE of which Whitestone is the primary beneficiary. In response to the Staff’s comment, Whitestone, on its own behalf and on behalf of the Company, provided the Staff with its analysis of Whitestone’s accounting and financial reporting obligations relating to its interest in the Operating Partnership. After communicating its analysis and conclusions to the Staff and responding to additional questions from the Staff relating to this matter, the Staff did not object to or otherwise take exception to the initial determinations at the time of the consummation of the Acquisition in December 2016 but provided a verbal reminder in that the determination of the primary beneficiary of a VIE should be continually reassessed, and recommended that Whitestone consider pre-clearing future accounting treatment of the Operating Partnership with the Staff of the Office of the Chief Accountant (“OCA”).

In connection with the preparation and review of its financial statements for the quarter ended March 31, 2018, Whitestone concluded, in accordance with the Staff’s recommendation, and after consultation with its outside accounting advisors, that it would be prudent to seek pre-clearance from the OCA of Whitestone's proposed treatment of the Operating Partnership in its financial statements for such quarter. Accordingly, in April 2018, Whitestone submitted a letter to the OCA seeking their concurrence with its determinations that Whitestone maintained its status as the primary beneficiary of the Operating Partnership and, accordingly, should continue to consolidate the Operating Partnership in its financial statements for the quarter ended March 31, 2018 in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). After further correspondence, including telephonic meetings between Whitestone, its advisors and the OCA, the OCA informed Whitestone that it objected to Whitestone’s and the Company’s conclusions that Whitestone was the primary beneficiary of the Operating Partnership since the Acquisition in December 2016 and during the subsequent periods. Whitestone and the Company respectfully disagreed with the OCA’s determination and Whitestone, on its own behalf and on behalf of the Company, made a formal appeal to the Chief Accountant of the SEC in June 2018.

In July 2018, Whitestone and its advisory team of accounting and legal professionals met with the Chief Accountant, members of the OCA and Division of Corporate Finance. On July 30, 2018, the Chief Accountant of the SEC informed Whitestone that its formal appeal was denied and that the OCA objected to Whitestone’s and the Company’s presentation of their investments in the Operating Partnership under the VIE accounting guidance since the consummation of the Acquisition in December 2016. As a result, the Company’s management has determined that the Company should not have used the equity method of accounting to present its investment in the Operating Partnership in its audited consolidated financial statements for the years ended December 31, 2016 and December 31, 2017 and unaudited consolidated financial statements for the quarters ended March 31, 2017, June 30, 2017, September 30, 2017 and March 31, 2018 (collectively, the “Prior Period Financial Statements”). After consideration of the OCA’s objection to Whitestone’s original accounting, the Company evaluated its original accounting of the equity method and the materiality of the error quantitatively and qualitatively and concluded that it was material to the Prior Period Financial Statements. The Company revised its original accounting treatment accordingly in the amended filings. The Company determined that it is the primary beneficiary of the Operating Partnership through the Company's power to direct the activities that most significantly impact the Operating Partnership’s economic performance and the Company's right to receive benefits based on its ownership percentage in the Operating Partnership. Accordingly, the Company accounts for the Operating Partnership as a VIE and fully consolidates it in the Company's financial statements. Whitestone OP’s 81.4% interest in the Operating Partnership is accounted for as a non-controlling interest and is deducted from the Company’s share of net income and equity in the Operating Partnership.

The following table presents the effects of the restatement on the consolidated balance sheet as of March 31, 2017 (in thousands):



	March 31, 2017
	As Reported			Adjustment			As Restated
Real estate assets, at cost
Property	$	—		$	81,170		$	81,170
Accumulated depreciation	—			(761		)	(761		)
Total real estate assets	—			80,409			80,409
Cash and cash equivalents	3			1,300			1,303
Equity investment in Pillarstone Capital REIT Operating Partnership LP	38			(38		)	—
Dividend receivable	41			(41		)	—
Escrows and acquisition deposits	—			778			778
Accrued rents and accounts receivable, net of allowance for doubtful accounts	—			526			526
Receivable due from related party	—			2,943			2,943
Unamortized lease commissions and deferred legal costs, net	—			1,100			1,100
Prepaid expenses and other assets	6			320			326
Total assets	$	88		$	87,297		$	87,385

Notes payable	$	—		$	65,186		$	65,186
Accounts payable and accrued expenses	162			1,646			1,808
Payable due to related party	316			649			965
Convertible notes payable - related parties	198			—			198
Accrued interest payable	27			—			27
Tenants' security deposits	—			1,056			1,056
Total liabilities	703			68,537			69,240

Commitments and contingencies	—			—			—
Shareholders' Equity:
Preferred A Shares - $0.01 par value, 1,518,000 authorized: 256,636 Class A cumulative convertible shares issued and outstanding at March 31, 2017 and December 31, 2016, $10.00 per share liquidation preference	3			—			3
Preferred C Shares - $0.01 par value, 300,000 authorized: 244,444 Class C cumulative convertible shares issued and outstanding, $10.00 per share liquidation preference at March 31, 2017 and December 31, 2016	2			—			2
Common Shares - $0.01 par value, 400,000,000 authorized: 443,299 shares issued and 405,169 outstanding at March 31, 2017 and December 31, 2016	4			—			4
Additional paid-in capital	28,147			—			28,147
Accumulated deficit	(27,970		)	94			(27,876		)
Treasury stock, at cost, 38,130 shares	(801		)	—			(801		)
Total Pillarstone Capital REIT shareholders' deficit	(615		)	94			(521		)
Noncontrolling interest in subsidiary	—			18,666			18,666
Total equity (deficit)	(615		)	18,760			18,145
Total liabilities and equity	$	88		$	87,297		$	87,385

The following table presents the effects of the restatement on the consolidated statement of operations for the three months ended March 31, 2017 (in thousands):



	Three Months Ended March 31, 2017
	As Reported			Adjustment			As Restated
Property revenues
Rental revenues	$	—		$	3,536		$	3,536
Other revenues	—			628			628
Total property revenues	—			4,164			4,164

Property expenses
Property operation and maintenance	—			1,287			1,287
Real estate taxes	—			648			648
Total property expenses	—			1,935			1,935

Other expenses
General and administrative	148			133			281
Depreciation and amortization	—			716			716
Interest expense	4			671			675
Total other expense	152			1,520			1,672

Income (loss) before loss on disposal of assets and income taxes	(152		)	709			557

Loss on sale or disposal of assets	—			(6		)	(6		)
Equity in income of Pillarstone Capital REIT Operating Partnership LP	64			(64		)	—
Provision for income taxes	—			(25		)	(25		)

Net income (loss)	(88		)	614			526

Less: non-controlling interest in subsidiary	—			553			553

Net loss attributable to Common Shareholders	$	(88	)	$	61		$	(27	)

Net loss attributable to Common Shareholders per Common Share: Basic and Diluted	$	(0.22	)	$	0.15		$	(0.07	)