Part II- Offering Circular

 

As submitted to the Securities and Exchange Commission on December 5, 2024

 

AN OFFERING STATEMENT PURSUANT TO REGULATION A RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. INFORMATION CONTAINED IN THIS PRELIMINARY OFFERING CIRCULAR IS SUBJECT TO COMPLETION OR AMENDMENT. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED BEFORE THE OFFERING STATEMENT FILED WITH THE COMMISSION IS QUALIFIED. THIS PRELIMINARY OFFERING CIRCULAR SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR MAY THERE BE ANY SALES OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL BEFORE REGISTRATION OR QUALIFICATION UNDER THE LAWS OF ANY SUCH STATE. WE MAY ELECT TO SATISFY OUR OBLIGATION TO DELIVER A FINAL OFFERING CIRCULAR BY SENDING YOU A NOTICE WITHIN TWO BUSINESS DAYS AFTER THE COMPLETION OF OUR SALE TO YOU THAT CONTAINS THE URL WHERE THE OFFERING CIRCULAR WAS FILED MAY BE OBTAINED.

 

Preliminary Offering Circular, Dated December 5, 2024

 

CaliberCos Inc. 

8901 E. Mountain View Rd. Ste. 150 

Scottsdale, AZ 85258 

(480) 295-7600

www.calibercos.com

 

UP TO 800,000 SHARES OF 

SERIES AA CUMULATIVE REDEEMABLE PREFERRED STOCK

 

CaliberCos Inc. (which we refer to as “we,” “us,” “our”, “Caliber” or “our company”) is offering up to 800,000 shares of Series AA Cumulative Redeemable Preferred Stock, which we refer to as the Series AA Preferred Stock, at an offering price of $25.00 per share, for a maximum offering amount of $20,000,000.

 

The Series AA Preferred Stock being offered will rank, as to dividend rights and rights upon our liquidation, dissolution, or winding up, senior to our Common Stock and pari passu with our Series A Preferred Stock. Each share of Series AA Preferred Stock will have an initial stated value equal to $25.00, subject to appropriate adjustment for certain events. Holders of our Series AA Preferred Stock will be entitled to receive cumulative monthly cash dividends at a per annum rate of 9.5% of the stated value (or $0.198 per share each month based on the initial stated value). Upon a liquidation, dissolution or winding up of our company, holders of shares of our Series AA Preferred Stock will be entitled to receive, before any payment or distribution is made to the holders of our Common Stock, a liquidation preference equal to the stated value per share, plus accrued but unpaid dividends thereon. Shares of Series AA Preferred Stock will be redeemable by us or by the holders under certain circumstances described elsewhere in this offering circular. The Series AA Preferred Stock will have no voting rights (except for certain matters). At the third anniversary of the issuance date of a share of Series AA Preferred Stock, a holder may elect, with the prior written consent of the Company, which consent may be unreasonably withheld, to convert all or any portion of such then outstanding shares of Series AA Preferred Stock held by it into that number of shares of our Class A Common Stock determined by dividing the then Stated Value of such shares by the closing price of our Class A Common Stock as quoted on the Nasdaq Capital Market (the “NCM”) on the day prior to such date but in no event less than the closing price of our Class A Common Stock as quoted on the NCM on the day prior to the initial Closing Date. See “Description of Securities” beginning on page 93 for additional details.

 

There is no existing public trading market for the Series AA Preferred Stock, and we do not anticipate that a secondary market for the stock will develop. We do not intend to apply for listing of the Series AA Preferred Stock on any securities exchange or for quotation in any automated dealer quotation system or other over-the-counter market. Our Common Stock is quoted on the Nasdaq Capital Market under the symbol “CWD.”

 

 

 

 

This offering will begin as soon as practicable after this offering circular has been qualified by the United States Securities and Exchange Commission (the “SEC” or the “Commission”).

 

Investing in our securities is highly speculative and involves a high degree of risk. You should carefully consider the information set forth in the “Risk Factors” section beginning on page 10 before deciding to invest in our securities.

 

    Per Share    Maximum Offering
Public offering price  $  $
Sales commissions (1)(2)  $  $
Managing dealer fee (1)(2)  $  $
Proceeds to us, before expenses (2)  $  $

 

(1)

Retail commissions and the managing dealer fee, each of which is payable to the managing dealer, will equal in the aggregate up to 7% of aggregate gross proceeds. However, we expect the managing dealer to authorize other broker-dealers that are members of the Financial Industry Regulatory Authority, or FINRA, which we refer to as participating broker-dealers, to sell our Series AA Preferred Stock. The managing dealer may reallow all or a portion of its retail commissions attributable to a participating broker-dealer. In addition, Caliber will pay the managing dealer an amount of up to 1.0% of aggregate gross proceeds as a non-accountable marketing and due diligence allowance, which the managing dealer may reallow to a participating broker-dealer. The amount of the reallowance to any participating broker-dealer will be determined by the managing dealer in its sole discretion. 

(2) The combined retail commissions, managing dealer fee and additional compensation paid to the managing dealer for this offering will not exceed 8% of the aggregate gross proceeds of this offering.

 

The managing dealer of this offering is ARKap Markets, LLC. The managing dealer is not required to sell any specific number or dollar amount of shares but will use its “reasonable best efforts” to sell the shares offered. The minimum permitted purchase is generally $5,000 but purchases of less than $5,000 may be made at the discretion of the managing dealer.

 

This offering is being conducted pursuant to Regulation A of Section 3(6) of the Securities Act of 1933, as amended, or the Securities Act, for Tier 2 offerings. This offering will terminate at the earlier of: (1) the date at which the maximum amount of offered Series AA Preferred Stock has been sold, (2) the date which is one year after the offering statement of which this offering circular forms a part is originally qualified by the U.S. Securities and Exchange Commission, or the SEC, subject to an extension of up to an additional one year at the discretion of our company and the managing dealer, or (3) the date on which this offering is earlier terminated by us in our sole discretion.

 

Generally, no sale may be made to you in this offering if the aggregate purchase price you pay is more than 10% of the greater of your annual income or your net worth. Different rules apply to accredited investors and non-natural persons. Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(C) of Regulation A. For general information on investing, we encourage you to refer to www.investor.gov.

 

THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION DOES NOT PASS UPON THE MERITS OR GIVE ITS APPROVAL OF ANY SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR OTHER SOLICITATION MATERIALS. THESE SECURITIES ARE OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE COMMISSION; HOWEVER, THE COMMISSION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE SECURITIES OFFERED ARE EXEMPT FROM REGISTRATION.

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and have elected not to comply with certain reduced public company reporting requirements. In addition, as a “smaller reporting company” within the meaning of Rule 405, we are following the Form S-1 disclosure requirements for smaller reporting companies. This offering circular follows the disclosure format of Part I of Form S-1 pursuant to the general instructions of Part II(a)(1)(ii) of Form 1-A.

 

ARKap Markets, LLC, 

as Managing Dealer

 

The approximate date of commencement of proposed sale to the public is [*], 2024.

 

 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This offering circular and the documents included herein contain, in addition to historical information, certain “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation and availability of resources. These forward-looking statements include, without limitation: statements concerning projections, predictions, expectations, estimates or forecasts for our business, financial and operating results and future economic performance; statements of management’s goals and objectives; trends affecting our financial condition, results of operations or future prospects; statements regarding our financing plans or growth strategies; statements concerning litigation or other matters; and other similar expressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes” and “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements.

 

Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times, or by which, that performance or those results will be achieved. Forward-looking statements are based on information available at the time they are made and/or management’s good faith beliefs as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause these differences include, but are not limited to:

 

·estimates of our expenses, future revenues, capital requirements and our needs for additional financing;

 

·our estimates of the size of our market opportunities;

 

·our ability to effectively manage our growth;

 

·our ability to successfully enter new markets, manage our growth expansion and comply with any applicable laws and regulations;

 

·the effects of increased competition from our market competitors;

 

·significant disruption in, or breach in security of, our information technology systems and resultant interruptions in service and any related impact on our reputation;

 

·the attraction and retention of qualified employees and key personnel;

 

·the effectiveness of our internal controls;

 

·changes in laws and government regulation affecting our business;

 

·the impact of adverse economic conditions;

 

·the sufficiency of our cash and cash equivalents to meet our liquidity needs and service our indebtedness;

 

·outcomes of legal or administrative proceedings; and

 

·those risks and uncertainties referenced under the caption “Risk Factors” contained in this offering circular.

 

Potential investors should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason. Potential investors should not make an investment decision based solely on our company’s projections, estimates or expectations.

 

The specific discussions herein about our company include financial projections and future estimates and expectations about our company’s business. The projections, estimates and expectations are presented in this offering circular only as a guide about future possibilities and do not represent actual amounts or assured events. All the projections and estimates are based exclusively on our company management’s own assessment of its business, the industry in which it works and the economy at large and other operational factors, including capital resources and liquidity, financial condition, fulfillment of contracts and opportunities. The actual results may differ significantly from the projections.

 

 

 

 

TABLE OF CONTENTS

 

  Page
SUMMARY 2
THE OFFERING 8
SUMMARY OF FINANCIAL DATA 12
RISK FACTORS 14
USE OF PROCEEDS 36
DETERMINING OF OFFERING PRICE 40
DIVIDEND POLICY 40
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 42
BUSINESS 73
MANAGEMENT 78
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 86
TRANSACTIONS WITH RELATED PERSONS 88
DESCRIPTION OF SECURITIES 93
PLAN OF DISTRIBUTION 103
LEGAL MATTERS 111
EXPERTS 111
WHERE YOU CAN FIND MORE INFORMATION 111
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1

 

Please read this offering circular carefully. It describes our business, our financial condition and results of operations. We have prepared this offering circular so that you will have the information necessary to make an informed investment decision.

 

You should rely only on the information contained in this offering circular. We have not, and the managing dealer has not, authorized anyone to provide you with any information other than that contained in this offering circular. We are offering to sell, and seeking offers to buy, the securities covered hereby only in jurisdictions where offers and sales are permitted. The information in this offering circular is accurate only as of the date of this offering circular, regardless of the time of delivery of this offering circular or any sale of the securities covered hereby. Our business, financial condition, results of operations and prospects may have changed since that date. We are not, and the managing dealer is not, making an offer of these securities in any jurisdiction where the offer is not permitted.

 

For investors outside the United States: We have not, and the managing dealer has not, taken any action that would permit this offering or possession or distribution of this offering circular in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this offering circular must inform themselves about, and observe any restrictions relating to, the offering of the securities covered hereby or the distribution of this offering circular outside the United States.

 

This offering circular includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. We believe that the data obtained from these industry publications and third-party research, surveys and studies are reliable.

 

WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE ANY INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THIS OFFERING CIRCULAR. YOU SHOULD NOT RELY ON ANY UNAUTHORIZED INFORMATION. THIS OFFERING CIRCULAR IS NOT AN OFFER TO SELL OR BUY ANY SECURITIES IN ANY STATE OR OTHER JURISDICTION IN WHICH IT IS UNLAWFUL. THE INFORMATION IN THIS OFFERING CIRCULAR IS CURRENT AS OF THE DATE ON THE COVER. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS OFFERING CIRCULAR.

 

1

 

SUMMARY

 

This summary highlights selected information contained elsewhere in this offering circular. This summary is not complete and does not contain all the information that you should consider before deciding whether to invest in our securities. You should carefully read the entire offering circular, including the risks associated with an investment in our company discussed in the “Risk Factors” section of this offering circular, before making an investment decision.

 

OUR COMPANY

 

General

 

Over the past 15 years, Caliber has grown into a leading diversified alternative asset management firm, managing more than $2.9 billion in assets under management (“AUM”) and assets under development (“AUD”). Caliber’s primary goal is to enhance the wealth of accredited investors seeking to make investments in middle-market assets. We strive to build wealth for our clients by creating, managing, and servicing middle-market investment funds, private syndications, and direct investments. Through our funds, we invest primarily in real estate, private equity, and debt facilities. We market and fundraise to private investors, family offices, and institutions (“Direct Channel”) and to registered investment advisers and independent broker-dealers (“Wholesale Channel”).

 

We believe that we provide investors attractive risk-adjusted returns by offering a balance of (i) structured offerings and ease of ownership, (ii) a pipeline of investment opportunities, primarily projects that range in value between $5.0 million and $50.0 million, and (iii) an integrated execution and processing platform. Our investment strategy leverages the local market intelligence and real-time data we gain from our operations to evaluate current investments, generate proprietary transaction flow, and implement various asset management strategies.

 

As an alternative asset manager, we offer a full suite of support services and employ a vertically integrated approach to investment management. Our asset management activities are complemented with transaction and advisory services, including development and construction management, acquisition and disposition expertise, and fund formation, which we believe differentiate us from other asset management firms. We earn the following fees from providing these services under our asset management platform (the “Platform”):

 

·Fund set-up fees are a one-time fee for the initial formation, administration, and set-up of the private equity real estate fund. These fees are recognized at the point in time when the performance under the contract is complete.

 

·Fund management fees are generally based on 1.0% to 1.5% of the unreturned capital contributions in a particular fund and include reimbursement for costs incurred on behalf of the fund, including an allocation of certain overhead costs. These customer contracts require the Company to provide management services, representing a performance obligation that the Company satisfies over time. With respect to the Caliber Hospitality Trust, the Company earns a fund management fee of 0.7% of the Caliber Hospitality Trust’s enterprise value and is reimbursed for certain costs incurred on behalf of the Caliber Hospitality Trust.

 

·Financing fees are earned for services the Company performs in securing third-party financing on behalf of our private equity real estate funds. These fees are recognized at the point in time when the performance under the contract is complete, which is essentially upon closing of a loan. In addition, the Company earns fees for guaranteeing certain loans, representing a performance obligation that the Company satisfies over time.

 

2

 

·Real estate development revenues are generally based on 4.0% of the total expected costs of the development or 4.0% of the total expected costs of the construction project for services performed as the principal developer, which include managing and supervising third party developers and general contractors with respect to the development of the properties owned by the funds. Prior to the commencement of construction, development fee revenue is recognized at a point in time as the related performance obligations are satisfied and the customer obtains control of the promised service, including negotiation, due diligence, entitlements, planning, and design activities. During the construction period, development fee revenue is recognized over time as the performance obligations are satisfied.

 

·Brokerage fees are earned at a point in time at fixed rates for services performed related to acquisitions, dispositions, leasing, and financing transaction.

 

·Performance allocations are an arrangement in which we are entitled to an allocation of investment returns, generated within the investment funds which we manage, based on a contractual formula. We typically receive 15.0% to 35.0% of all cash distributions from (i) the operating cash flow of each fund, after payment to the related fund investors of any accumulated and unpaid priority preferred returns and repayment of preferred capital contributions; and (ii) the cash flow resulting from the sale or refinance of any real estate assets held by each fund, after payment to the related fund investors of any accumulated and unpaid priority preferred returns and repayment of initial preferred capital contributions. Our funds’ preferred returns range from 6.0% to 12.0%, typically 6.0% for common equity or 10.0% to 12.0% for preferred equity, which does not participate in profits. Performance allocations are related to services which have been provided and are recognized when it is determined that they are no longer probable of significant reversal, which is generally satisfied when an underlying fund investment is realized or sold.

 

We have a number of development, redevelopment, construction, and entitlement projects that are underway or are in the planning stages, which we define as AUD. This category includes projects to be built on undeveloped land and projects to be built and constructed on undeveloped lands, which are not yet owned by our funds. Completing these development activities may ultimately result in income-producing assets, assets we may sell to third parties, or both. As of September 30, 2024, we are involved in the development of 1,796 multifamily units, 697 single family units, 3.7 million square feet of commercial and industrial, and 3.5 million square feet of office and retail. If all of these projects are brought to completion, the total cost capitalized to these projects, which represents total current estimated costs to complete the development and construction of such projects by us or a third party, is $2.1 billion, which we expect would be funded through a combination of undeployed fund cash, third-party equity, project sales, tax credit financing and similar incentives, and secured debt financing. We are under no obligation to complete these projects and may dispose of any such assets at any time. There can be no assurance that AUD will ultimately be developed or constructed because of the nature of the cost of the approval and development process and market demand for a particular use. In addition, the mix of residential and commercial assets under development may change prior to final development. The development of these assets will require significant additional financing or other sources of funding, which may not be available.

 

Recent Developments

 

The accompanying consolidated financial statements included within the offering circular are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

 

At September 30, 2024, the Company had a portfolio of corporate notes, whose composition and characteristics are similar to those reported in prior periods. At September 30, 2024, the portfolio consists of 211 unsecured notes with an aggregate principal balance of $33.0 million, of which $32.4 million mature within the 12-month period subsequent to November 13, 2024. Each note generally has a 12-month term with an option to extend for an additional 12-months.

 

Because the Company incurred operating losses and negative cash flow from operations for the nine months ended September 30, 2024, and could experience additional future operating losses and negative cash flow in the near term, combined with the fact that the Company does not have sufficient cash on hand to satisfy the total of the notes that mature within the next 12 months, these conditions and events raise substantial doubt about the Company’s ability to continue as a going concern. In response to these conditions, management considered the impact of these near-term maturities on the Company.

 

3

 

Since the note program began, these notes have demonstrated a high rate of extension of their terms. Subsequent to the issuance of its 2023 Form 10-K, the Company has continued its discussions with various lenders in pursuit of extending or refinancing its unsecured loans. Through September 30, 2024, the rate of extension of the current notes is consistent with or greater than reported in prior periods. Management plans to continue seeking and granting extensions on an ongoing basis consistent with prior periods.

 

Additionally, management evaluated the impact a default of one or many of these notes might have on the Company. As these notes are unsecured, the terms in the agreements do not afford the note holder avenues of recourse in a default that could or would impact the Company adversely in the normal course of business, as the terms lack provisions for rights or claims against the Company’s assets, nor is there a scenario where a default could force liquidation of the Company. Management believes that even in the event of default of one or many of these notes, the Company would be able to negotiate a waiver of the default either through an extension of the maturity or principal repayment schedule.

 

In addition, management has implemented various plans to address operating losses and near-term maturities or demands for repayment of its notes. Consistent with reported actions taken in prior fiscal periods, management plans to continue to i) negotiate extensions of such loans or refinance such debt, ii) obtain new financing, iii) reduce operating costs, iv) collect all or part of its $13.3 million in receivables, v) collect all or part of its $19.7 million in investments from its managed funds, vi) increase capital raise through continued expansion of fundraising channels, vii) sell or accept investment into its corporate headquarters, viii) place debt on unencumbered assets, and/or ix) generate planned cash from operations.

 

In the execution of our aforementioned plans, during the nine months ended September 30, 2024, we collected $8.2 million of notes receivable and $2.7 million of accounts receivable. The Company also executed a reduction in force of approximately 10% of its employees in May 2024, with an expected annual compensation and benefits expense savings of $4.0 million. The Company has also executed on cost reduction plans with estimated annual savings of $2.5 million.

 

After consideration of the implemented and planned actions, in particular continuing to renew maturing unsecured corporate notes, there are no assurances that management’s actions will alleviate substantial doubt about the company’s ability to continue as a going concern beyond one year from the date that the consolidated financial statements are issued.

 

On November 26, 2024, the Company filed a Certificate of Designations, Preferences and Rights (the “Series A Certificate of Designation”) with the Secretary of State of the State of Delaware to establish the preferences, voting powers, limitations as to dividends or other distributions, qualifications, terms and conditions of redemption and other terms and conditions of the Company’s Series A Convertible Preferred Stock, par value $0.001 (the “Series A Preferred Stock”). The Series A Preferred Stock is subject to certain rights, preferences, privileges, and obligations, including voluntary and mandatory conversion provisions, as well as beneficial ownership restrictions and share cap limitations, as set forth in the Series A Certificate of Designation and as more fully described under “Description of Securities” below. Additionally, on November 26, 2024, the Company issued and sold 100,000 shares of Series A Preferred Stock for gross proceeds of $2,000,000.

 

Our Risks and Challenges

 

Our prospects should be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by similar companies. Our ability to realize our business objectives and execute our strategies is subject to risks and uncertainties, including, among others, the following:

 

Risks Related to Our Business

 

·Our business depends in large part on our ability to raise capital for our funds from investors. If we were unable to raise such capital, we may be unable to grow our asset management revenues. The inability to deploy such capital into investments may materially reduce our revenues and cash flows and adversely affect our financial condition.

 

4

 

·Changes in prevailing interest rates may reduce our profitability, and we may not be able to adequately anticipate and respond to changes in market interest rates.

 

·Inflation can have an adverse impact on our business and on our customers.

 

·Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults, or non-performance by financial institutions or transactional counterparties, could adversely affect our current and projected business operations and our financial condition and results of operations.

 

·A decline in the pace of growth or size of investment made by our funds may adversely affect our revenues.

 

·Our revenue, earnings, net income, and cash flows can all vary materially, which may make it difficult for us to achieve steady earnings growth on a quarterly basis and may cause the price of our Class A Common Stock to decline.

 

·We could lose part or all of our investments, which could have a material adverse effect on our financial condition and results of operations.

 

·We have an amount of total liabilities which may be considered significant for a company of our size which could adversely affect our financial condition and our ability to react to changes in our business.

 

·We may not be able to generate sufficient cash to service all of our debt or refinance our obligations and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful.

 

·The historical returns attributable to our funds should not be considered as indicative of the future results of our funds or of our future results or of any returns expected on an investment in our Class A Common Stock.

 

·We may be subject to litigation risks and may face liabilities and damage to our professional reputation as a result of investment decisions on behalf of investors in our funds.

 

·The actions of any joint venture partners that we may have could reduce the returns on joint venture investments.

 

·Our reliance on third parties to operate and to develop certain of our properties may harm our business.

 

·Changes in relevant tax laws, regulations, treaties, or an adverse interpretation of these items by tax authorities could adversely impact our effective tax rate and tax liability.

 

·Conflicts of interest exist between our Company and related parties.

 

·Risk management activities may adversely affect the return on our funds’ investments.

 

·Our real estate funds are subject to the risks inherent in the ownership, development, and operation of real estate.

 

·Investments by our investment funds may rank junior to investments made by others.

 

·Rapid growth of our businesses may be difficult to sustain and may place significant demands on our administrative, operational, and financial resources.

 

·We depend on our founders, senior professionals, and other key personnel, and our ability to retain them and attract additional qualified personnel is critical to our success and our growth prospects.

 

5

 

·We may expand into new investment strategies, geographic markets and businesses, each of which may result in additional risks and uncertainties in our businesses.

 

·We may not be successful in competing with companies in the asset management industry and alternative investment industries, some of which may have substantially greater resources than we do.

 

·If we are unable to maintain and protect our intellectual property, or if third parties assert that we infringe their intellectual property rights, our business could suffer.

 

·Security risks and attacks are common, increasing globally, and may result in significant liabilities.

 

·Our failure to sufficiently secure our business and services may result in unauthorized access to investor data, a negative impact on our investor attraction and retention, and significant liabilities.

 

·We depend on various cloud service providers operated by third parties, and any service outages, delays, or disruptions in these operations could harm our business and operating results.

 

·If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A Common Stock may decline.

 

·The consolidation of investment funds or operating businesses of our portfolio companies could make it more difficult to understand the operating performance of our Platform and could create operational risks for the Company.

 

·Our Bylaws have an exclusive forum for adjudication of disputes provision which limits the forum to the Delaware Court of Chancery for certain stockholder litigation matters actions against the Company, which may limit an investor’s ability to seek what they regard as a favorable judicial forum for disputes with the Company or its directors, officers, employees, or stockholders.

 

·If we were deemed to be an “investment company” under the Investment Company Act, applicable restrictions could make it impractical for us to continue our business as conducted and could have a material adverse effect on our businesses.

 

·Extensive regulation of our businesses affects our activities and creates the potential for significant liabilities and penalties. The possibility of increased regulatory focus could result in additional burdens on our business. Changes in tax law and other legislative or regulatory changes could adversely affect us.

 

·There is no present market for the Series AA Preferred Stock, and we have arbitrarily set the price.

 

·We cannot assure you that we will be able to pay dividends.

 

·We may issue additional debt and equity securities, which are senior to our Series AA Preferred Stock as to distributions and in liquidation, which could materially adversely affect the value of the Series AA Preferred Stock.

 

·You will not have a vote or influence on the management of our company.

 

·The dual-class structure of our common stock has the effect of concentrating voting control with our executive officers, which will limit your ability to influence the outcome of important transactions.

 

·We may not be able to maintain a listing of our Class A Common Stock on Nasdaq.

 

·Our share price has in the past and may in the future fluctuate substantially.

 

6

 

·Future sales and issuances of our Class A Common Stock or rights to purchase Class A Common Stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause the stock price of our Class A Common Stock to decline.

 

·Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

 

·If we fail to implement and maintain an effective system of internal control, we may be unable to accurately report our operating results, meet our reporting obligations, or prevent fraud.

 

·We are an emerging growth company, and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our Class A Common Stock less attractive to investors.

 

·We are a “controlled company” within the meaning of the listing rules of Nasdaq and, as a result, can rely on exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.

 

·If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.

 

·We have never paid dividends on our common stock, and we do not intend to pay dividends for the foreseeable future. Consequently, any gains from an investment in our Class A Common Stock will likely depend on whether the price of our Class A Common Stock increases.

 

·Our charter documents and Delaware law and the voting control exercised by our founders could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.

 

·Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.

 

Corporate Information

 

Our principal executive offices are located at 8901 E. Mountain View Rd. Ste. 150, Scottsdale, AZ 85258 and our telephone number is (602) 295-7600. We maintain a website at www.calibercos.com. Information available on our website is not incorporated by reference in and is not deemed a part of this offering circular.

 

7

 

THE OFFERING

 

Securities being offered:   Up to 800,000 shares of Series AA Preferred Stock at an offering price of $25.00 per share for a maximum offering amount of $20,000,000.
     
  · Ranking. The Series AA Preferred Stock will rank, as to dividend rights and rights upon our liquidation, dissolution, or winding up, senior to our Common Stock and pari passu with our Series A Preferred Stock.
     
  · Stated Value. Each share of Series AA Preferred Stock will have an initial stated value of $25.00, which is equal to the offering price per share, subject to appropriate adjustment in relation to certain events, such as recapitalizations, stock dividends, stock splits, stock combinations, reclassifications or similar events affecting our Series AA Preferred Stock.
     
  · Dividend Rate and Payment Date. Holders of our Series AA Preferred Stock will be entitled to receive cumulative monthly cash dividends at a per annum rate of 9.5% of the stated value (or $0.198 per share each month based on the initial stated value). Dividends on each share will begin accruing on, and will be cumulative from, the date of issuance and regardless of whether our board of directors declares and pays such dividends.  Dividends on the Series AA Preferred Stock will continue to accumulate whether or not (i) any of our agreements prohibit the current payment of dividends, (ii) we have earnings or funds legally available to pay the dividends, or (iii) our board of directors does not declare the payment of the dividends. In the event the monthly payment of dividends is not made within 30 days of the due date, dividends will accrue from the due date of such monthly payment at the rate of 18% per annum until such default is cured.
     
  · Liquidation Preference. Upon liquidation, dissolution or winding up of our company, holders of shares of our Series AA Preferred Stock will be entitled to receive, before any payment or distribution is made to the holders of our Common Stock, a liquidation preference equal to the stated value per share, plus accrued but unpaid dividends thereon.
     
  · Redemption Request at the Option of a Holder. Once per calendar quarter, a holder will have the opportunity to request that we redeem that holder’s Series AA Preferred Stock. Our board of directors may, however, suspend cash redemptions at any time in its discretion if it determines that it would not be in the best interests of our company to effectuate cash redemptions at a given time because we do not have sufficient cash, including because our board believes that our cash on hand should be utilized for other business purposes. Redemptions will be limited to four percent (4%) of the total outstanding Series AA Preferred Stock per quarter and any redemptions in excess of such limit or to the extent suspended, shall be redeemed in subsequent quarters on a first come, first served, basis. We will redeem shares at a redemption price equal to the stated value of such redeemed shares, plus any accrued but unpaid dividends thereon, less the applicable redemption fee (if any). As a percentage of the aggregate redemption price of a holder’s shares to be redeemed, the redemption fee shall be:
     
    ·  10% if the redemption is requested on or before the first anniversary of the original issuance of such shares;
     
    ·  8% if the redemption is requested after the first anniversary and on or before the second anniversary of the original issuance of such shares; and

 

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    ·  6% if the redemption is requested after the second anniversary and on or before the third anniversary of the original issuance of such shares.
     
  · Optional Redemption by our Company. We will have the right (but not the obligation) to redeem shares of Series AA Preferred Stock at a redemption price equal to the stated value of such redeemed shares, plus any accrued but unpaid dividends thereon.
     
  · Mandatory Redemption by our Company. We are required to redeem the outstanding shares of Series AA Preferred Stock on the third (3rd) anniversary of their issuance at a redemption price equal to the stated value of such redeemed shares, plus any accrued but unpaid dividends thereon.
     
  · Optional Repurchase Upon Death, Disability or Bankruptcy of a Holder. Subject to certain restrictions and conditions, we will also repurchase shares of Series AA Preferred Stock of a holder who is a natural person (including an individual beneficial holder who holds shares through a custodian or nominee, such as a broker-dealer) upon his or her death, total disability or bankruptcy, within sixty (60) days of our receipt of a written request from the holder or the holder’s estate at a repurchase price equal to the stated value, plus accrued and unpaid dividends thereon. A “total disability” means a determination by a physician approved by us that a holder, who was gainfully employed and working at least forty (40) hours per week as of the date on which his or her shares were purchased, has been unable to work forty (40) or more hours per week for at least twenty-four (24) consecutive months.
     
  · Restrictions on Redemption and Repurchase. We will not be obligated to redeem or repurchase shares of Series AA Preferred Stock if we are restricted by applicable law or our articles of incorporation from making such redemption or repurchase or to the extent any such redemption or repurchase would cause or constitute a default under any borrowing agreements to which we or any of our subsidiaries are a party or otherwise bound. In addition, we will have no obligation to redeem shares in connection with a redemption request made by a holder if we determine, as of the redemption date, that we do not have sufficient funds available to fund that redemption. In this regard, we will have complete discretion under the certificate of designation for the Series AA Preferred Stock to determine whether we are in possession of “sufficient funds” to fund a redemption request. To the extent we are unable to complete redemptions we may have earlier agreed to make, we will complete those redemptions promptly after we become able to do so, with all such deferred redemptions being satisfied on a first come, first served, basis.
     
  · Voting Rights. The Series AA Preferred Stock will have no voting rights relative to matters submitted to a vote of our stockholders (other than as required by law). However, we may not, without the affirmative vote or written consent of the holders of a majority of the then issued and outstanding Series AA Preferred Stock: (i) amend or waive any provision of the certificate of designation or otherwise take any action that modifies any powers, rights, preferences, privileges or restrictions of the Series AA Preferred Stock (other than an amendment solely for the purpose of changing the number of shares of Series AA Preferred Stock designated for issuance as provided in the certificate of designation); (ii) authorize, create or issue shares of any class of stock having rights, preferences or privileges as to dividends or distributions upon a liquidation that are superior to the Series AA Preferred Stock; or (iii) amend our articles of incorporation in a manner that adversely and materially affects the rights of the Series AA Preferred Stock.

 

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  · Conversion Right. At the third anniversary of the issuance date of a share of Series AA Preferred Stock, a holder may elect, with the prior written consent of the Company, which consent may be unreasonably withheld, to convert all or any portion of such then outstanding shares of Series AA Preferred Stock held by it into that number of shares of our Class A Common Stock determined by dividing the then Stated Value of such shares by the closing price of our Class A Common Stock as quoted on the Nasdaq Capital Market (the “NCM”) on the day prior to such date but in no event less than the closing price of our Class A Common Stock as quoted on the NCM on the day prior to the initial Closing Date.
     
Best efforts offering:   The managing dealer is selling the shares of Series AA Preferred Stock offered in this offering circular on a “best efforts” basis and is not required to sell any specific number or dollar amount of shares of Series AA Preferred Stock offered by this offering circular but will use its best efforts to sell such shares.
     
Securities issued and outstanding before this offering:  

15,056,356 shares of Class A Common Stock, 7,416,414 shares of Class B Common Stock and 100,000 shares of Series A Convertible Preferred Stock

     
Minimum subscription price:   The minimum initial investment is at least $5,000 and any additional purchases must be investments of at least $5,000; provided that purchases of less than $5,000 may be made in the discretion of the managing dealer.
     
Use of proceeds:   We estimate our net proceeds from this offering will be approximately $18.6 million if the maximum number of shares being offered are sold based upon the public offering price of $25.00 per share and after deducting the sales commissions, managing dealer fees and estimating offering expenses payable by us.
     
    We currently intend that we may use up to $10.0 million of the net proceeds from this offering to retire outstanding promissory notes; to the extent a lesser amount of such notes are retired, the remaining amount will be used for general and working capital purposes. We intend to use the balance of net proceeds, if any, for general and working capital purposes. For a discussion, see “Use of Proceeds.”
     
Termination of the offering:   This offering will terminate at the earlier of: (1) the date at which the maximum amount of offered Series AA Preferred Stock has been sold, (2) the date which is one year after the offering statement of which this offering circular forms a part is originally qualified by the SEC, subject to an extension of up to an additional one year at the discretion of our company and the managing dealer, or (3) the date on which this offering is earlier terminated by us in our sole discretion.
     
Closings of the offering:   We may undertake one or more closings on a rolling basis.

 

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    You may not subscribe to this offering prior to the date of this offering statement, of which this offering circular forms a part is qualified by the SEC. Before such date, you may only make non-binding indications of your interest to purchase securities in the offering. For any subscription agreement received after such date, we have the right to review the subscription for completeness, complete anti-money laundering, know your client and similar background checks and accept the subscription if it is complete and passes such checks or reject the subscription if it fails any of such checks. If rejected, we will return all funds to the rejected investor within ten business days.
     
    Following the initial closing of this offering, we expect to have several subsequent closings of this offering until the maximum offering amount is raised or the offering is terminated. We expect to have closings monthly and expect that we will accept all funds subscribed for each month subject to our working capital and other needs consistent with the use of proceeds described in this offering circular.  Investors should expect to wait approximately one month and no longer than forty-five days before we accept their subscriptions and they receive the securities for which they have subscribed.  An investor’s subscription is binding and irrevocable and investors will not have the right to withdraw their subscription or receive a return of funds prior to the next closing unless we reject the investor’s subscription. You will receive a confirmation of your purchase promptly following the closing in which you participate.
     
Restrictions on investment amount:   Generally, no sale may be made to you in this offering if the aggregate purchase price you pay is more than 10% of the greater of your annual income or net worth. Different rules apply to accredited investors and non-natural persons. Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(c) of Regulation A. For general information on investing, we encourage you to refer to www.investor.gov.
     
No market for Series AA Preferred Stock; transferability:   There is no existing public trading market for the Series AA Preferred Stock and we do not anticipate that a secondary market for the stock will develop. We do not intend to apply for listing of the Series AA Preferred Stock on any securities exchange or for quotation in any automated dealer quotation system or other over-the-counter market. Nevertheless, you will be able to freely transfer or pledge your shares subject to the availability of applicable exemptions from the registration requirements of the Securities Act of 1933, as amended.
     
Current symbol:   Our Class A Common Stock is quoted on the Nasdaq Capital Market under the symbol “CWD.”
     
Risk factors:   Investing in our securities is highly speculative and involves a high degree of risk. You should carefully consider the information set forth in the “Risk Factors” section beginning on page 13 before deciding to invest in our securities.

 

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SUMMARY OF FINANCIAL DATA

 

The summary consolidated financial data set forth below should be read together with our consolidated financial statements and the related notes to those statements, as well as the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus. The summary consolidated financial data as of December 31, 2023 and 2022 and for the years then ended for our company are derived from our audited consolidated financial statements included elsewhere in this offering circular. The consolidated statements of operations data for the nine months ended September 30, 2024 and 2023 and the consolidated balance sheet data as of September 30, 2024, have been derived from our unaudited interim financial statements included elsewhere in this offering circular. The unaudited interim financial statements were prepared on a basis consistent with our audited financial statements and include in management’s opinion, all adjustments, consisting of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that may be expected in any future period, and our interim results are not necessarily indicative of our expected results for the year ending December 31, 2024.

 

Consolidated Statements of Operations (Amounts in thousands, except per share data) 

 

   Nine Months Ended September 30,   Years Ended December 31, 
   2024   2023   2023   2022 
Revenue  $13,283   $8,720   $14,210   $17,887 
Consolidated funds revenue   29,149    58,272    76,727    66,069 
Operating costs   15,389    16,205    21,311    14,609 
General and administrative   5,460    4,914    6,770    6,679 
Marketing and advertising   507    888    1,052    1,179 
Depreciation and amortization   439    409    550    58 
Consolidated funds expenses   28,596    66,433    89,831    69,880 
Consolidated funds - gain on real estate investments           4,976    21,530 
Other income, net   1,015    1,479    374    326 
Gain on extinguishment of debt               1,421 
Interest income   325    279    350    178 
Interest expense   (3,958)   (3,408)   (4,717)   (1,055)
Net (loss) income attributable to noncontrolling interests   (2,188)   (13,165)   (14,891)   11,931 
Net (loss) income attributable to CaliberCos Inc.   (8,389)   (10,342)   (12,703)   2,020 
Basic net (loss) income per share  $(0.38)  $(0.53)  $(0.63)  $0.11 
Weighted average shares outstanding   21,828    19,688    20,087    18,003 
Pro forma basic net (loss) income per share (1)  $(0.38)  $(0.53)  $(0.63)  $0.11 
Pro forma weighted average shares outstanding (1)   21,828    19,688    20,087    18,003 

 

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Consolidated Balance Sheets (Amounts in thousands)

 

   As of September 30, 2024 
   Actual   As Adjusted (1) 
Cash  $516   $19,116 
Restricted cash   2,534    2,534 
Real estate investments, net   21,515    21,515 
Due from related parties   12,305    12,305 
Investments in unconsolidated entities   12,723    12,723 
Operating lease – right of use assets   159    159 
Prepaid and other assets   2,808    2,808 
Assets of consolidated funds   106,023    106,023 
Total assets   158,583    177,183 
Notes payable   49,673    49,673 
Series AA Cumulative Redeemable Preferred Stock       18,600 
Accounts payable and accrued expenses   8,638    8,638 
Due to related parties   210    210 
Operating lease liabilities   100    100 
Other liabilities   763    763 
Liabilities of consolidated funds   35,918    35,918 
Total liabilities   95,302    113,902 
Stockholders’ (deficit) equity attributable to CaliberCos Inc.   (3,849)   (3,849)
Stockholders’ equity attributable to noncontrolling interests   67,130    67,130 
Total stockholders’ equity   63,281    63,281 

 

(1)

As adjusted consolidated balance sheet data gives the effect to 800,000 shares of Series AA Cumulative Redeemable Preferred Stock in this offering at the assumed offering price of $25.00 per share and after deducting sales commissions and the managing dealer fee. The shares of Series AA Cumulative Redeemable Preferred stock are classified as temporary equity due to redemption feature upon certain events that are outside the Company’s control.  

 

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RISK FACTORS

 

An investment in our securities involves a high degree of risk. You should carefully read and consider all the risks described below, together with all of the other information contained or referred to in this offering circular, before making an investment decision with respect to our securities. If any of the following events occur, our financial condition, business, and results of operations (including cash flows) may be materially adversely affected. In that event, the value of your Series AA Preferred Stock could decline, and you could lose all or part of your investment.

 

Risks Related to Our Business

 

Our business depends in large part on our ability to raise capital for our funds from investors. If we were unable to raise such capital, we may be unable to grow our asset management revenues. The inability to deploy such capital into investments, may materially reduce our revenues and cash flows and adversely affect our financial condition.

 

We depend on the capital markets to grow our assets under management, (“AUM”) and we depend on third-party equity and debt financings to acquire properties for our funds. We intend to continue to raise a significant amount of equity and debt to acquire various alternative investments for our funds in the ordinary course of our business. Our debt financing depends on a combination of seller financing, the assumption of existing loans, government agencies, and financial institutions. We depend on equity financing from equity partners, which may include public or private companies, pension funds, family offices, financial institutions, endowments, high net worth individuals, and money managers. Our access to capital funding for our funds is uncertain. Our inability to raise additional capital for our funds on terms reasonably acceptable to us could jeopardize the future growth of our business.

 

Our ability to raise capital from investors in our funds depends on several factors, including many that are outside our control. Investors may downsize their investment allocations to alternative asset managers, including private funds and hedge funds, to rebalance a disproportionate weighting of their overall investment portfolio among asset classes. Poor performance of our funds could also make it more difficult for us to raise new capital. Our investors and potential investors continually assess our funds’ performance independently and relative to market benchmarks and our competitors, and our ability to raise capital for existing and future funds depends on our funds’ performance. The financial markets are affected by many factors, such as U.S. and foreign economic conditions and general trends in business and finance that are beyond our control, which could be adversely affected by changes in the equity or debt marketplaces, unanticipated changes in currency exchange rates, interest rates, inflation rates, the yield curve, financial crises, changes in regulation, war, terrorism, natural disasters and other factors that are difficult to predict. The markets continue to be affected by inflation in the United States, global health pandemics, the imposition of sanctions and the escalation of hostilities between Russia and Ukraine, the Israel-Hamas conflict, and the recession in the United Kingdom. In the event that the U.S. or international financial markets suffer a severe or prolonged downturn or increased volatility, our funds’ investments may lose value and investors may choose to withdraw assets from our funds and use the assets to pay expenses or transfer them to investments that they perceive to be more secure, such as bank deposits and Treasury securities. If economic and market conditions deteriorate, we may be unable to raise sufficient capital to support the investment activities of future funds. If we are unable to successfully raise capital, our revenues and cash flows would be reduced, and our financial condition would be adversely affected.

 

Changes in prevailing interest rates may reduce our profitability, and we may not be able to adequately anticipate and respond to changes in market interest rates.

 

The majority of our funds’ assets are subject to risk from changes in interest rates. Our earnings and cash flows depend to a great extent upon the difference between the interest our funds pay on loans and borrowings and the value of fixed-rate debt investments made by our funds. Depending on the terms and maturities of our assets and liabilities, a significant change in interest rates could have a material adverse effect on our profitability. In addition, rising interest rates, coupled with periods of significant equity and credit market volatility may potentially make it more difficult for us to find attractive opportunities for our funds to exit and realize value from their existing investments.

 

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Interest rates remained at relatively low levels on a historical basis and the U.S. Federal Reserve maintained the federal funds target range at 0.0% to 0.25% for much of 2020 and 2021. The Federal Reserve raised interest rates by an aggregate of 525 basis points from January 1, 2022 through September 18, 2024, but subsequently, on September 19, 2024, the Federal Reserve decreased the federal funds rate by 50 basis points. Additionally, the current geopolitical environment in Europe provides yet another layer of uncertainty around the actions that the Federal Reserve might take. Market interest rates are affected by many factors outside of our control, including governmental monetary policies, domestic and international economic conditions, inflation, deflation, recession, changes in unemployment, the money supply, international disorder, and instability in domestic and foreign financial markets. Rising interest rates create downward pressure on the price of real estate, increase the cost and reduce the availability of debt financing for the transactions our funds pursue and decrease the value of fixed-rate debt investments made by our funds, each of which may have an adverse impact on our business.

 

Increased costs of borrowing could also cause us to reconsider the purchase of certain real estate assets, the terms of any such purchase or the mix of debt and equity we employ in connection with such purchase. Such issues are expected to be more prevalent in a continued rising interest rate environment. A higher interest rate environment may lead to a significant contraction or weakening in the market for debt financing or have other adverse changes relating to the terms of debt financing (such as, for example, higher equity requirements and/or more restrictive covenants), particularly in the area of acquisition financings for private equity and real estate transactions, which could have a material adverse impact on our business. In a rising interest rate environment, the financing of acquisitions or the operations of our funds’ portfolio companies with debt may also become less attractive due to the cost of capital or limitations on the deductibility of corporate interest expense. If our funds are unable to obtain committed debt financing for potential acquisitions, can only obtain debt financing at an increased interest rate or on unfavorable terms, or the ability to deduct corporate interest expense is substantially limited, our funds may face increased competition from strategic buyers of assets who may have an overall lower cost of capital or the ability to benefit from a higher amount of cost savings following an acquisition, or may have difficulty completing otherwise profitable acquisitions or may generate profits that are lower than would otherwise be the case, each of which could lead to a decrease in our revenues.

 

In addition, if our funds are unable to obtain committed debt financing for potential acquisitions or can only obtain debt financing at an increased interest rate or on unfavorable terms, this would require us to employ a higher mix of equity to acquire real estate assets. The cost of equity in a rising interest rate environment may also become more expensive, and we may be required to offer a higher rate of return on equity in order to finance such assets. This in turn would adversely affect our profitability from such assets. While to date our funds’ borrowing costs have not substantially increased, as rates continue to increase, our ability to use leverage as a financing tool or to pass along any increased costs of borrowing or financing will become more difficult, all of which could have an adverse effect on our profitability.

 

Inflation can have an adverse impact on our business and on our customers.

 

Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the purchasing power of money. The annual inflation rate in the United States increased to 9.1% in June 2022, the highest rate since November 1981, but decreased to 2.4% in September 2024. As a result, from January 1, 2022 through September 18, 2024, the Federal Reserve increased the federal funds rate by 525 basis points, but subsequently, on September 19, 2024, the Federal Reserve decreased the federal funds rate by 50 basis points. For project execution, inflation has increased the cost of nearly all building materials and labor types, increasing the cost of construction and renovation of our funds’ assets. Furthermore, third parties we do business with, such as developers and contractors, are also affected by inflation and the rising costs of goods and services used in their businesses. A significant and continued increase in interest rates and inflation would be expected to have a negative impact on their ability to do business with us, which would affect our profitability.

 

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Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults, or non-performance by financial institutions or transactional counterparties, could adversely affect our current and projected business operations and our financial condition and results of operations.

 

Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems. For example, on March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver. Similarly, on March 12, 2023, Signature Bank and Silvergate Capital Corp. (“Silvergate Capital”), and then on May 1, 2023, First Republic Bank, were each swept into receivership. Although a statement by the Department of the Treasury, the Federal Reserve and the FDIC indicated that all depositors of SVB would have access to all of their money after only one business day of closure, including funds held in uninsured deposit accounts, borrowers under credit agreements, letters of credit and certain other financial instruments with any financial institution that is placed into receivership by the FDIC may be unable to access undrawn amounts thereunder. Although we are not a borrower or party to any such instruments with SVB, Signature Bank, First Republic Bank or any other financial institution currently in receivership, if any of our lenders or counterparties to any such instruments were to be placed into receivership, we may be unable to access such funds. In addition, if any of our customers, suppliers or other parties with whom we conduct business are unable to access funds pursuant to such instruments or lending arrangements with such a financial institution, such parties’ ability to pay their obligations to us or to enter into new commercial arrangements requiring additional payments to us could be adversely affected. In this regard, counterparties to SVB, Signature Bank or First Republic Bank credit agreements and arrangements, and third parties such as beneficiaries of letters of credit (among others), may experience direct impacts from the closures of SVB, Signature Bank and First Republic Bank and uncertainty remains over liquidity concerns in the broader financial services industry. Similar impacts have occurred in the past, such as during the 2008-2010 financial crisis. We hold no deposits or securities with SVB, Signature Bank, First Republic Bank or Silvergate Capital.

 

A decline in the pace of growth or size of investment made by our funds may adversely affect our revenues.

 

Revenues we derive from our asset management and related services are driven in part by the pace at which our funds make investments and the size of those investments. A decline in the pace or the size of such investments may reduce our revenues. The pace of our investments could decline due to, among other factors, the market environment for private equity transactions, which has at times been characterized by relatively high prices, and such market changes make the deployment of capital more difficult. In addition, many other factors could cause a decline in the pace of investment, including the inability of our investment professionals to identify attractive investment opportunities, competition for such opportunities among other potential acquirers, decreased availability of capital on attractive terms, and our failure to consummate identified investment opportunities because of business, regulatory or legal complexities or uncertainty and adverse developments in the U.S. or global economy or financial markets. In addition, if our funds are unable to deploy capital at a pace that is sufficient to offset the pace of realizations, our fee revenues could decrease.

 

Our revenue, earnings, net income, and cash flows can all vary materially, which may make it difficult for us to achieve steady earnings growth on a quarterly basis and may cause the price of our Class A Common Stock to decline.

 

We have in the past and may in the future experience fluctuations in our consolidated results, including our consolidated revenues and net income, from quarter to quarter due to increases or decreases in the number of funds included in our consolidated financial statements. Additional factors include the timing of realizations, changes in the amount of distributions or interest paid in respect of investments, changes in our operating expenses, the degree to which we encounter competition and general economic and market conditions. These additional factors also impact our Platform results. Achieving steady growth in Platform net income and cash flows on a quarterly basis may be difficult, which could in turn lead to large adverse movements or general increased volatility in the price of our Class A Common Stock. We also do not provide any guidance regarding our expected quarterly and annual operating results. The lack of near-term guidance may affect the expectations of public market analysts and could cause increased volatility in our Class A Common Stock price.

 

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We have incurred operating losses and negative operating cash flows for the year ended December 31, 2023, and may incur operating losses and negative cash flows in future periods. In response to these conditions, and the absence of sufficient cash to satisfy the debt obligations referenced below under “- We have an amount of total liabilities which may be considered significant for a company of our size which could adversely affect our financial condition and our ability to react to changes in our business”, management plans to i) negotiate extensions of such loans or refinance such debt, ii) obtain new financing, iii) reduce operating costs, iv) collect receivables and return investments from our funds, and/or v) increase capital raise through continued expansion of fundraising channels.

 

Our revenue, net income, and cash flows can all vary materially due to performance allocations (income earned with respect to our carried interest is recorded as performance allocations) in any fiscal period. Performance allocations depend on our funds’ performance and opportunities for realizing gains, which may be limited. Our cash flow may fluctuate significantly due to the fact that we receive performance allocations from our carry funds only when portfolio companies make distributions in excess of preferred return hurdles, or when investments are realized and achieve a minimum preferred return. It takes a substantial period of time to identify attractive investment opportunities, to raise all the funds needed to make an investment, to manage the performance of the investment, and then to realize the cash value (or other proceeds) of an investment through a sale, public offering, recapitalization or other exit. Even if an investment proves to be profitable, it may be several years before any profits can be realized in cash (or other proceeds). We cannot predict with certainty exactly when, or if, any performance allocations will or may occur.

 

In addition, upon the realization of a profitable investment by any of our funds and prior to our receiving any performance allocations in respect of that investment, 100% of the net proceeds from such realization must generally be paid to the investors in that fund until they have achieved a certain return on all realized investments by that fund. A particular realization event may have a significant impact on our results for that particular quarter that may not be replicated in subsequent quarters. We recognize revenue on investments in our investment funds based on our allocable share of realized gains (or losses) reported by such investment funds, and a decline in gains, or an increase in losses, would adversely affect our revenue and possibly cash flow, which could further increase the volatility of our quarterly results. Because our carry funds have preferred return thresholds to investors that need to be met prior to our receiving any performance allocations, substantial declines in the carrying value of the investment portfolios of a fund can significantly delay or eliminate any performance allocations paid to us in respect of that fund since the value of the assets in the fund would need to recover to their aggregate cost basis plus the preferred return over time before we would be entitled to receive any performance allocations from that fund.

 

The timing and receipt of performance allocations also varies with the life cycle of our funds. During periods in which a relatively large portion of our assets under management are attributable to funds and investments in their “optimized” period, our funds would make larger distributions than in the fundraising or investment periods that precede the optimized period. During periods in which a significant portion of our assets under management is attributable to funds that are not in their optimized periods, we may receive substantially lower performance allocations.

 

We could lose part or all of our investments, which could have a material adverse effect on our financial condition and results of operations.

 

There is an inherent risk that we could lose all or part of our investment in certain assets. Our investments are generally illiquid, which may affect our ability to change our asset mix in response to changes in economic and other conditions. The value of our investments can also be diminished by:

 

·civil unrest, acts of war and terrorism and acts of God, including earthquakes, hurricanes, and other natural disasters (which may result in uninsured or underinsured losses);

 

·the impact of present or future legislation (including environmental regulation, changes in laws concerning foreign ownership of property, changes in tax rates, changes in zoning laws and laws requiring upgrades to accommodate disabled persons) and the cost of compliance with these types of legislation; and

 

·liabilities relating to claims, to the extent insurance is not available or is inadequate.

 

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We have an amount of total liabilities which may be considered significant for a company of our size which could adversely affect our financial condition and our ability to react to changes in our business.

 

The Company had individual corporate notes aggregating $36.4 million at December 31, 2023 for which the maturity dates of the majority of these notes are within the 12-month period subsequent to when the financial statements for the year ended December 31, 2023 were issued. We currently do not have sufficient cash on hand to satisfy such obligations.

 

We believe this is an amount of total liabilities which may be considered significant for a company of our size and current revenue base. Our substantial total liabilities could have important consequences to us. For example, it could:

 

·require us to dedicate a substantial portion of our cash flows from operations to make payments on our debt, which would reduce the availability of our cash flows from operations to fund working capital, capital expenditures or other general corporate purposes;

 

·increase our vulnerability to general adverse economic and industry conditions, including interest rate fluctuations;

 

·place us at a competitive disadvantage to our competitors with proportionately less debt for their size;

 

·limit our ability to refinance our existing debt or borrow additional funds in the future;

 

·limit our flexibility in planning for, or reacting to, changing conditions in our business; and

 

·limit our ability to react to competitive pressures or make it difficult for us to carry out capital spending that is necessary or important to our growth strategy.

 

Any of the foregoing impacts of our substantial total liabilities could have a material adverse effect on our business, financial condition and results of operations.

 

We may not be able to generate sufficient cash to service all of our debt or refinance our obligations and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful.

 

We require cash to (a) provide capital to facilitate the growth of our existing businesses, (b) co-investment into our funds, if any, (c) service our debt and (d) pay operating expenses and other obligations as they arise. There is no guarantee that in the future we will generate enough working capital to support our business. Our ability to repay our total liabilities, including our ability to make scheduled payments on our debt or to refinance our obligations under our debt agreements, will depend on our financial and operating performance, which, in turn, will be subject to prevailing economic and competitive conditions and to the financial and business risk factors we face as described in this section, many of which may be beyond our control. If the global economy and conditions in the financing markets worsen, our fund investment performance could suffer, resulting in, for example, the payment of less or no performance allocations to us. This could materially and adversely affect the amount of cash we have on hand.

 

If our cash flows and capital resources are insufficient to repay our total liabilities, including the ability to fund our debt service obligations, we may be forced to reduce or delay capital expenditures or planned growth objectives, seek to obtain additional equity capital or restructure our debt. We may also need additional cash resources in the future if we find and wish to pursue opportunities for investment, acquisition, capital expenditures or similar actions. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have on hand at the time, we may seek to issue additional equity or debt securities or obtain credit facilities. If we issue additional equity securities to raise funds, whether to existing investors or others, the ownership percentage of our existing stockholders would be reduced. New investors may demand rights, preferences, or privileges senior to those of existing holders of common stock. We may also be limited as to the amount of funds we can raise pursuant to SEC rules and the continued listing requirements of Nasdaq. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

 

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In the future, our cash flows and capital resources may not be sufficient for payments of interest on and principal of our debt, and such alternative measures may not be successful and may not permit us to meet scheduled debt service obligations. In addition, the recent worldwide credit crisis could make it more difficult for us to repay our total liabilities, including the ability to refinance our debt on favorable terms, or at all. In the absence of positive operating results and/or sufficient cash resources, we may be required to dispose of material assets to repay our total liabilities, including the ability to meet our debt service obligations. We may not be able to consummate those sales, or, if we do, we will not control the timing of the sales or whether the proceeds that we realize will be adequate to repay our total liabilities, including the ability to meet debt service obligations when due.

 

The historical returns attributable to our funds should not be considered as indicative of the future results of our funds or of our future results or of any returns expected on an investment in our Class A Common Stock.

 

An investment in our Class A Common Stock is not an investment in any of our funds. You should not conclude that positive performance of our funds will necessarily result in positive returns on an investment in our Class A Common Stock. The historical performance of our funds is relevant to us primarily insofar as it is indicative of asset management revenues and performance allocations we have earned in the past and may earn in the future and our reputation and ability to raise new funds.

 

In addition, the historical returns of our funds may not be indicative of any future returns of these or from any future funds we may raise due to several factors including:

 

·market conditions during previous periods may have been more favorable for generating positive performance than the market conditions we may experience in the future; and

 

·our funds’ returns may have previously benefited from investment opportunities and general market conditions that may not recur, and we may not be able to achieve the same returns or profitable investment opportunities or deploy capital as quickly.

 

We may be subject to litigation risks and may face liabilities and damage to our professional reputation as a result of investment decisions on behalf of investors in our funds.

 

We make investment decisions on behalf of investors in our funds that could result in substantial losses. This may subject us to the risk of legal liabilities or actions alleging negligent misconduct, breach of fiduciary duty, or breach of contract. Further, we may be subject to third-party litigation arising from allegations that we improperly exercised control or influence over portfolio investments.

 

These and other legal liabilities could have a material adverse effect on our businesses, financial condition, our results of operations, or cause reputational harm to us, which could harm our businesses. We depend, to a large extent, on our business relationships and our reputation for integrity and professional services to attract and retain investors and to pursue investment opportunities for our funds. As a result, allegations of improper conduct by private litigants or regulators, whether the ultimate outcome is favorable or unfavorable to us, as well as negative publicity and press speculation about us, our investment activities, or the investment industry in general, whether or not valid, may harm our reputation, which may be damaging to our businesses.

 

Actions of any joint venture partners that we may have could reduce the returns on joint venture investments.

 

At times we enter joint ventures or partnerships to acquire and develop properties. Such investments may involve risks not otherwise present with other methods of investment, including:

 

·that our co-venturer, or partner in an investment could become insolvent or bankrupt;

 

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·that such co-venturer, or partner may at any time have economic or business interests or goals that are or that become inconsistent with our business interests or goals;

 

·that such co-venturer, or partner may be in a position to take action contrary to our instructions, requests or our policies or objectives; or

 

·that disputes between us and our co-venturer, or partner, may result in litigation or arbitration that would increase expenses.

 

Any of the above might subject a property to liabilities in excess of those contemplated and thus reduce our returns on that investment.

 

Our reliance on third parties to operate and to develop certain of our properties may harm our business.

 

In some instances, we rely on third-party property managers and hotel operators to manage our properties. These third parties are directly responsible for the day-to-day operation of our properties with limited supervision by us, and they often have potentially significant decision-making authority with respect to those properties. These third parties may fail to manage our properties effectively or in accordance with their agreements with us, may be negligent in their performance and may engage in criminal or fraudulent activity. If any of these events occur, we could incur losses or face liabilities from the loss or injury to our property or to persons at our properties. In addition, disputes may arise between us and these third-party managers and operators, and we may incur significant expenses to resolve those disputes or terminate the relevant agreement with these third parties and locate and engage competent and cost-effective service providers to operate and manage the relevant properties.

 

In addition, we are also parties to hotel management agreements. If any of these events occur, our relationships with any franchisors may be damaged, we may be in breach of our franchise agreement, and we could incur liabilities resulting from loss or injury to our property or to persons at our properties. From time to time, disputes may arise between us and our third-party managers regarding their performance or compliance with the terms of the hotel management agreements, which in turn could adversely affect us. If we are unable to resolve such disputes through discussions and negotiations, we may choose to terminate our management agreement, litigate the dispute or submit the matter to third-party dispute resolution, the expense of which may be material and the outcome of which may harm our business, operating results or prospects.

 

Changes in relevant tax laws, regulations, treaties, or an adverse interpretation of these items by tax authorities could adversely impact our effective tax rate and tax liability.

 

Our effective tax rate and tax liability is based on the application of current income tax laws, regulations and treaties. These laws, regulations and treaties are complex, and the manner which they apply to us and our funds is sometimes open to interpretation. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. Although management believes its application of current laws, regulations and treaties to be correct and sustainable upon examination by the tax authorities, the tax authorities could challenge our interpretation resulting in additional tax liability or adjustment to our income tax provision that could increase our effective tax rate. In particular, changes in legislation or regulation relating to opportunity zones could adversely affect our ability to form new opportunity zone funds or to acquire assets for our existing opportunity zone funds, thereby diminishing our ability to generate revenue from those activities.

 

Conflicts of interest exist between our Company and related parties.

 

Conflicts of interest exist and may arise in the future as a result of the relationships between our Company and its affiliates and divisions and our officers, directors and owners, on the one hand, and our funds and its investors, on the other hand. We earn fees from our funds, including our carried interest which value is a direct result from the performance of our funds. There may be instances where the interests of our funds and the investors in such funds diverge from those of our Company which could result in conflicts of interest. In resolving these conflicts, our board of directors and executive officers have a fiduciary duty to our stockholders. In addition, as we operate as a fund manager through a wholly owned subsidiary, our Company has a fiduciary duty to investors in the funds we manage. Unless the resolution of a conflict is specifically provided for in the operating agreements of such funds, our board of directors may consider a wide range of factors they determine to be in good faith when resolving a conflict. An independent third party is not required to evaluate the resolution. As a result of the foregoing, there may be instances where any such conflicts are resolved in a manner which favors the interests of our funds and their investors over our stockholders.

 

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Risk management activities may adversely affect the return on our funds’ investments.

 

When managing our exposure to market risks, we may (on our own behalf or on behalf of our funds) from time to time use forward contracts, options, swaps, caps, collars and floors, or pursue other strategies or use other forms of derivative instruments to limit our exposure to changes in the relative values of investments that may result from market developments, including changes in prevailing interest rates, currency exchange rates and commodity prices. The success of any hedging or other derivative transactions generally will depend on our ability to correctly predict market changes, the degree of correlation between price movements of a derivative instrument, the position being hedged, the creditworthiness of the counterparty and other factors. As a result, while we may enter into a transaction in order to reduce our exposure to market risks, the transaction may result in poorer overall investment performance than if it had not been executed. Such transactions may also limit the opportunity for gain if the value of a hedged position increases.

 

While such hedging arrangements may reduce certain risks, such arrangements themselves may entail certain other risks. These arrangements may require the posting of cash collateral at a time when a fund has insufficient cash or illiquid assets such that the posting of the cash is either impossible or requires the sale of assets at prices that do not reflect their underlying value. Moreover, these hedging arrangements may generate significant transaction costs, including potential tax costs, that reduce the returns generated by a fund. Finally, the Commodity Futures Trading Commission (the “CFTC”) may in the future require certain foreign exchange products to be subject to mandatory clearing, which could increase the cost of entering into currency hedges.

 

Our real estate funds are subject to the risks inherent in the ownership, development, and operation of real estate.

 

Investments in our real estate funds will be subject to the risks inherent in the ownership and operation of real estate and real estate-related businesses and assets, including the deterioration of real estate fundamentals. These risks include, but are not limited to, those associated with the burdens of ownership of real property, general and local economic conditions, changes in supply of and demand for competing properties in an area (as a result, for instance, of overbuilding), fluctuations in the average occupancy and room rates for hotel properties, operating income, the financial resources of tenants, changes in building, environmental, zoning and other laws, casualty or condemnation losses, energy and supply shortages, various uninsured or uninsurable risks, natural disasters, climate change related risks (including climate-related transition risks and acute and chronic physical risks), changes in government regulations (such as rent control), changes in real property tax rates, changes in income tax rates, changes in interest rates, the reduced availability of mortgage funds which may render the sale or refinancing of properties difficult or impracticable, increased mortgage defaults, increases in borrowing rates, changes to the taxation of business entities and the deductibility of corporate interest expense, negative developments in the economy that depress travel activity, environmental liabilities, contingent liabilities on disposition of assets, acts of god, terrorist attacks, war and other factors that are beyond our control. In addition, if our real estate funds acquire direct or indirect interests in undeveloped land or underdeveloped real property, which may often be non-income producing, they will be subject to the risks normally associated with such assets and development activities, including risks relating to the availability and timely receipt of zoning and other regulatory or environmental approvals, the cost and timely completion of construction (including risks beyond the control of our fund, such as weather, labor conditions, or material shortages), and the availability of both construction and permanent financing with favorable terms. In addition, our real estate funds may also make investments in residential real estate projects and/or otherwise participate in financing opportunities relating to residential real estate assets or portfolios thereof from time to time, which may be more susceptible to adverse changes in prevailing economic and/or market conditions and present additional risks relative to the ownership and operation of commercial real estate assets.

 

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Investments by our investment funds may rank junior to investments made by others.

 

In most cases, the companies in which our investment funds invest will have indebtedness or equity securities or may be permitted to incur indebtedness or to issue equity securities that rank senior to our investment. By their terms, such instruments may provide that their holders are entitled to receive payments of dividends, interest or principal on or before the dates on which payments are to be made in respect of our investment. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a company in which an investment is made, holders of securities ranking senior to our investment would typically be entitled to receive payment in full before distributions could be made in respect of our investment. After repaying senior security holders, the company may not have any remaining assets to use for repaying amounts owed in respect of our investment. To the extent that any assets remain, holders of claims that rank equally with our investment would be entitled to share on an equal and ratable basis in distributions that are made out of those assets. Also, during periods of financial distress or following an insolvency, the ability of our investment funds to influence a company’s affairs and to take actions to protect their investments may be substantially less than that of the senior creditors.

 

Rapid growth of our businesses may be difficult to sustain and may place significant demands on our administrative, operational, and financial resources.

 

Our assets under management have grown significantly in the past, and we are pursuing further growth in the near future, both organically and through acquisitions. Our rapid growth has placed, and planned growth, if successful, will continue to place, significant demands on our legal, accounting and operational infrastructure, and has increased expenses. The complexity of these demands, and the expense required to address them, is a function not simply of the amount by which our assets under management has grown, but of the growth in the variety and complexity of, as well as the differences in strategy between, our different funds. In addition, we are required to continuously develop our systems and infrastructure in response to the increasing sophistication of the investment management market and legal, accounting, regulatory, and tax developments.

 

Our future growth will depend in part on our ability to maintain an operating platform and management system sufficient to address our growth and will require us to incur significant additional expenses and to commit additional senior management and operational resources.

 

We depend on our founders, senior professionals, and other key personnel, and our ability to retain them and attract additional qualified personnel is critical to our success and our growth prospects.

 

We depend on the diligence, skill, judgment, business contacts and personal reputations of our founders, senior professionals and other key personnel. Our future success will depend upon our ability to attract and retain senior professionals and other personnel. Our executives have built highly regarded reputations in the alternative investment industry. Our executives attract business opportunities and assist both in negotiations with lenders and potential joint venture partners and in the representation of large and institutional clients. If we lost their services, our relationships with lenders, joint ventures, and clients would diminish significantly.

 

In addition, some of our officers have strong regional reputations, and they aid in attracting business, identifying opportunities, and negotiating for us and on behalf of our clients. As we continue to grow, our success will largely depend on our ability to attract and retain qualified personnel in all areas of business. We may be unable to continue to hire and retain a sufficient number of qualified personnel to support or keep pace with our planned growth.

 

We may expand into new investment strategies, geographic markets and businesses, each of which may result in additional risks and uncertainties in our businesses.

 

We intend, if market conditions warrant, to grow our businesses by increasing assets under management in existing businesses and expanding into new investment strategies, geographic markets and businesses. We may pursue growth through acquisitions of critical business partners or other strategic initiatives, which may include entering into new lines of business.

 

Attempts to expand our businesses involve a number of special risks, including some or all of the following:

 

·the required investment of capital and other resources;

 

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·the diversion of management’s attention from our core businesses;

 

·the assumption of liabilities in any acquired business;

 

·the disruption of our ongoing businesses;

 

·entry into markets or lines of business in which we may have limited or no experience;

 

·increasing demands on our operational and management systems and controls;

 

·compliance with additional regulatory requirements;

 

·potential increase in investor concentration; and

 

·the broadening of our geographic footprint, increasing the risks associated with conducting operations in certain jurisdictions where we currently have no experience.

 

Entry into certain lines of business may subject us to new laws and regulations with which we are not familiar, or from which we are currently exempt, and may lead to increased litigation and regulatory risk. If a new business does not generate sufficient revenues or if we are unable to efficiently manage our expanded operations, our results of operations will be adversely affected. Our strategic initiatives may include joint ventures, in which case we will be subject to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputational damage relating to systems, controls and personnel that are not under our control. Because we have not yet identified these potential new investment strategies, geographic markets or lines of business, we cannot identify all of the specific risks we may face and the potential adverse consequences on us and their investment that may result from any attempted expansion.

 

We may not be successful in competing with companies in the asset management industry and alternative investment industries, some of which may have substantially greater resources than we do.

 

The asset management industry and alternative investment industries are intensely competitive. We compete primarily on a regional, industry, and asset class basis.

 

We face competition both in the pursuit of fund investors and investment opportunities. Generally, our competition varies across business lines, geographies, and financial markets. We compete for outside investors based on a variety of factors, including investment performance, investor perception of investment managers’ drive, focus and alignment of interest, quality of service provided to and duration of relationship with investors, business reputation, and the level of fees and expenses charged for services.

 

We compete for investment opportunities based on a variety of factors, including breadth of market coverage and relationships, access to capital, transaction execution skills, the range of products and services offered, innovation, and price.

 

We compete with real estate funds, specialized funds, hedge fund sponsors, financial institutions, private equity funds, corporate buyers, and other parties. Many of these competitors are substantially larger and have considerably greater financial, technical, and marketing resources than are available to us. Many of these competitors have similar investment objectives to ours, which may create additional competition for investment opportunities. Some of these competitors may also have a lower cost of capital and access to funding sources that are not available to us, which may create competitive disadvantages for us with respect to investment opportunities. In addition, some of these competitors may have higher risk tolerances, different risk assessments or lower return thresholds, which could allow them to consider a wider variety of investments and to bid more aggressively than us for investments that we want to make. Corporate buyers may be able to achieve synergistic cost savings with regard to an investment that may provide them with a competitive advantage in bidding for an investment.

 

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If we are unable to maintain and protect our intellectual property, or if third parties assert that we infringe their intellectual property rights, our business could suffer.

 

Our business depends, in part, on our ability to identify and protect proprietary information and other intellectual property such as our client lists and information and business methods. We rely on a combination of trade secrets, confidentiality policies, non-disclosure and other contractual arrangements and copyright and trademark laws to protect our intellectual property rights. However, we may not adequately protect these rights, and their disclosure to, or use by, third parties may harm our competitive position. Our inability to detect unauthorized use of, or to take appropriate or timely steps to enforce, our intellectual property rights may harm our business.

 

Also, third parties may claim that our business operations infringe on their intellectual property rights. These claims may harm our reputation, cost us money to defend, distract the attention of our management and prevent us from offering some services.

 

Confidential intellectual property is increasingly stored or carried on mobile devices, such as laptop computers, which increases the risk of inadvertent disclosure where the mobile devices are lost or stolen and the information has not been adequately safeguarded or encrypted. This also makes it easier for someone with access to our systems, or someone who gains unauthorized access, to steal information and use it to our disadvantage. Advances in technology, which permit increasingly large amounts of information to be stored on mobile devices or on third-party “cloud” servers, may exacerbate these risks.

 

Security risks and attacks are common, increasing globally, and may result in significant liabilities.

 

Our business and our internal corporate information technology systems have in the past been, and will in the future be, subject to cybersecurity-attacks, credential stuffing, account takeover attacks, denial or degradation of service attacks, phishing attacks, ransomware attacks, malicious software programs, supply chain attacks, and other cybersecurity security risks (collectively, “cybersecurity risks”). Further, we engage service providers to store and otherwise process some of our and our investor’s data, including sensitive and personal information, and these service providers are also targets of cybersecurity risks.

 

Cybersecurity risks have been increasing in frequency and sophistication globally and may be accompanied by demands for payment in exchange for resolution, restoration of functionality, or return of data. Sources of cybersecurity risks range from individuals to sophisticated organizations, including state-sponsored actors and organizations. These attackers use a wide variety of methods to exploit vulnerabilities and gain access to corporate assets, including networks, information, or credentials. The types and methods of cybersecurity risks are constantly evolving and becoming more complex, and we may not be able to detect, combat, or successfully defend against all cybersecurity risks. Attackers initiating cybersecurity risks may gain access to our corporate assets. Vulnerabilities in our infrastructure or the success of any cybersecurity attacker against us may not be discovered in a timely fashion or at all, and the impact may be exacerbated the longer they remain undetected. While we utilize security measures and architecture designed to protect the integrity of our business and corporate information technology environment, we remain subject to ongoing and evolving cybersecurity risks, and we anticipate that we will need to continue expending resources in an effort to protect against cybersecurity risks. There is a risk that we may not be able to deploy, allocate, or retain sufficient resources to keep pace with the persistent and evolving Cybersecurity threat landscape.

 

Moreover, several of our employees work remotely, and many of our vendors and other third parties we engage utilize remote workers in various jurisdictions throughout the world, which may increase the risk of and susceptibility to cybersecurity risks. We cannot guarantee that remote work environments and electronic connections to our work environment and information technology systems have the same security profile as those deployed in our physical offices.

 

Further, our ability to monitor the data security of our vendors is limited, and bad actors may successfully circumvent our vendors’ security measures, resulting in the unauthorized access to, or misuse, disclosure, loss, or destruction of our Company and/or our investor’s data. Any actual or perceived failure by us or our vendors to prevent or defend against cybersecurity risks, actual or perceived vulnerabilities or unauthorized access to corporate data or systems may lead to claims against us and may result in significant data loss, significant costs and liabilities, and could reduce our revenue, harm our reputation, and compromise our competitive position.

 

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Our failure to sufficiently secure our business and services may result in unauthorized access to investor data, a negative impact on our investor attraction and retention, and significant liabilities.

 

Our business systems and services involve the storage, transmission, and processing of our Company and investors’ sensitive and proprietary information. Our failure to sufficiently secure our business and services may result in unauthorized access to investor data, a negative impact on our investor attraction and retention, and significant liabilities. Even if our security measures are appropriately engineered and implemented to secure our business and services against external risks, we may be subject to inadvertent disclosures because of inappropriate employee actions or system misconfigurations. Unauthorized use of or access to investor data could result in the loss and/or compromise of our or our investors’ sensitive information, which could lead to litigation, regulatory investigations and claims, indemnity obligations, reputational harm, and other liabilities.

 

Our agreements with third parties, including investors, contain contractual commitments related to our information security practices and data privacy compliance. If we experience an incident that triggers a breach of these contractual commitments, we could be exposed to significant liability or cancellation of service under these agreements. The damages payable to the counterparty could be substantial and create loss of business. There can be no assurance that any limitation of liability provisions in our contracts will be enforceable or adequate or will otherwise protect us from these liabilities or damages with respect to any claim.

 

Many U.S. and foreign laws and regulations require companies to provide notice of data security breaches or incidents involving certain types of personal data. Security compromises experienced by competitors and others may lead to public disclosures, leading to widespread negative publicity. Such a security compromise in our industry, whether actual or perceived, could harm our reputation; erode investor confidence and negatively affect our ability to attract new investors; cause existing investors to divest, any or all of which could adversely affect our business and operating results. Even the perception of inadequate security may damage our reputation and negatively impact our ability to win new investors and retain existing investors.

 

Additionally, we could be required to expend significant capital and other resources to investigate and address any actual or suspected data security incident or breach. We cannot be sure that insurers will not deny coverage as to any claim, and some security breaches may be outside the scope of our coverage, including if they are considered force majeure events. Security breaches may result in increased costs for cybersecurity insurance and could have an adverse effect on our business, operating results, and financial condition.

 

We depend on various cloud service providers operated by third parties, and any service outages, delays, or disruptions in these operations could harm our business and operating results.

 

In our business we use various cloud service providers (“Cloud Providers”) operated by third parties. As a result, we are vulnerable to service interruptions, delays, and outages attributable to their platforms. Our Cloud Providers may experience events such as natural disasters, fires, power loss, telecommunications failures, or similar events. The systems, infrastructure, and services of our Cloud Providers may also be subject to human or software errors, viruses, cybersecurity risks, fraud, spikes in usage, break-ins, sabotage, acts of vandalism, acts of terrorism, and other misconduct. The occurrence of any of the foregoing events could result in lengthy interruptions or delays in and may impact us via service outages and noncompliance with our contractual obligations or business requirements.

 

Further, we have experienced in the past, and may experience in the future, periodic interruptions, delays, and outages in service and availability with our Cloud Providers due to a variety of factors, including Internet connectivity failures, infrastructure changes, human or software errors, website hosting disruptions, and capacity constraints.

 

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If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A Common Stock may decline.

 

As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. In addition, in the future, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404(a) of the Sarbanes-Oxley Act beginning with our annual report on Form 10-K for the fiscal year ending December 31, 2024. We are in the process of designing, implementing, and testing our internal control over financial reporting required to comply with this obligation, which is time consuming, costly, and complicated. In addition, our independent registered public accounting firm may be required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 10-K following the date on which we are no longer an “emerging growth company,” which may be up to five full years following the date of our initial public offering. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is not effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A Common Stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the Securities and Exchange Commission, or other regulatory authorities, which could require additional financial and management resources.

 

Risks Related to Our Organizational Structure

 

The consolidation of investment funds or operating businesses of our portfolio companies could make it more difficult to understand the operating performance of the Company and could create operational risks for the Company.

 

Under applicable generally accepted accounting principles in the United States of America (“U.S. GAAP”), we may be required to consolidate certain of our funds, limited liability companies, partnerships or operating businesses if we determine that these entities are variable interest entities (“VIEs”) and where we determine that the Company is the primary beneficiary of the VIE. The consolidation of such entities could make it difficult for an investor to differentiate the assets, liabilities, and results of operations of the Company apart from the assets, liabilities, and results of operations of the consolidated VIEs. The assets of the consolidated VIEs are not available to meet our liquidity requirements. As of December 31, 2023 and 2022, total assets of our consolidated VIEs reflected in our consolidated balance sheets were $258.4 million and $254.8 million, respectively, and as of December 31, 2023 and 2022, total liabilities of our consolidated VIEs reflected in our consolidated balance sheets were $169.9 million and $166.0 million, respectively.

 

Our Bylaws have an exclusive forum for adjudication of disputes provision which limits the forum to the Delaware Court of Chancery for certain stockholder litigation matters actions against the Company, which may limit an investor’s ability to seek what they regard as a favorable judicial forum for disputes with the Company or its directors, officers, employees, or stockholders.

 

Section 7.06(a) of Article VII of our Bylaws dictates that, unless we consent in writing to the selection of an alternative forum, the Delaware Court of Chancery (or, if the Delaware Court of Chancery does not have jurisdiction, the federal district court for the State of Delaware) is, to the fullest extent permitted by law, the sole and exclusive forum for certain actions including derivative action or proceeding brought on behalf of the Company; an action asserting a breach of fiduciary duty owed by an officer, director, employee or to the stockholders of the Company; any claim arising under Delaware corporate law, our amended and restated certificate of incorporation or our amended and restated bylaws; and any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Company shall be deemed to have notice of and consented to the provisions of Section 7.06 of Article VII of our Bylaws.

 

However, Section 7.06(a) of Article VII of our Bylaws will not apply to suits brought to enforce any liability or duty created by the Securities Exchange Act of 1934 (the “Exchange Act”) or any other claim for which the federal courts have exclusive jurisdiction. To the extent that any such claims may be based upon federal law claims, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder.

 

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Furthermore, unless the Company consents in writing to the selection of an alternative forum, the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended (the “Securities Act”), or the rules and regulations promulgated thereunder. We note, however, that Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. There is uncertainty as to whether a court would enforce this provision and that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder.

 

A Delaware corporation is allowed to mandate in its corporate governance documents a chosen forum for the resolution of state law-based stockholder class actions, derivative suits and other intra-corporate disputes. With respect to such state law claims, the Company’s management believes limiting state law-based claims to Delaware will provide the most appropriate outcomes as the risk of another forum misapplying Delaware law is avoided, Delaware courts have a well-developed body of case law and limiting the forum will preclude costly and duplicative litigation and avoids the risk of inconsistent outcomes. Additionally, Delaware Chancery Courts can typically resolve disputes on an accelerated schedule when compared to other forums.

 

The choice of forum provisions contained in the Company’s Bylaws may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the Company or any of its directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims. Alternatively, the enforceability of a similar choice of forum provisions in other issuers’ bylaws and certificates of incorporation has been challenged in legal proceedings, and it is possible that in connection with any applicable action brought against the Company, a court could find the choice of forum provisions contained in the Company’s Bylaws to be inapplicable or unenforceable in such action. As a result, the Company could incur additional costs associated with resolving such actions in other jurisdictions, which could harm the Company’s business, operating results and financial condition.

 

If we were deemed to be an “investment company” under the Investment Company Act, applicable restrictions could make it impractical for us to continue our businesses as conducted and could have a material adverse effect on our businesses.

 

An entity will generally be deemed to be an “investment company” for purposes of the Investment Company Act if:

 

·it is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or

 

·absent an applicable exemption, it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis.

 

·Our exemptions from the registration requirements of an investment company under the Investment Company Act are threefold:

 

·Our parent company does not meet the asset test component of the definition of “investment company” under the Investment Company Act as summarized above;

 

·Our investment subsidiaries qualify under the exemption afforded by Section 3(c)(5)(C) of the Investment Company Act; and

 

·Our intermediate subsidiaries qualify under the exemption afforded by Section 3(c)(6) of the Investment Company Act.

 

We are engaged primarily in the business of investing in and providing services for real estate and real estate-related assets and not primarily in the business of investing, reinvesting, or trading in securities. We hold ourselves out as a vertically integrated alternative asset management firm and do not propose to engage primarily in the business of investing, reinvesting or trading in securities. Accordingly, we do not believe that we are required to register as an investment company for purposes of the Investment Company Act. Furthermore, we have no material assets other than interests in certain wholly owned subsidiaries (within the meaning of the Investment Company Act), which in turn will have either direct interests in real estate assets or limited liability company member or limited partner partnership interests in affiliated funds. We do not believe that, based on current rules and interpretations, the equity interests in our wholly owned subsidiaries or the limited liability company member interests consolidated, or unconsolidated affiliated funds qualify as investment securities under the Investment Company Act.

 

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The Investment Company Act and the rules thereunder contain detailed parameters for the organization and operation of investment companies. Among other things, the Investment Company Act and the rules thereunder limit or prohibit transactions with affiliates, impose limitations on the issuance of debt and equity securities, generally prohibit the issuance of options and impose certain governance requirements. We intend to conduct our operations so that we will not be deemed to be an investment company under the Investment Company Act. If anything were to happen that would cause us to be deemed to be an investment company under the Investment Company Act, requirements imposed by the Investment Company Act, including limitations on capital structure, the ability to transact business with affiliates and the ability to compensate senior employees, could make it impractical for us to continue our businesses as currently conducted, impair the agreements and arrangements between and among us, our funds and our senior management, or any combination thereof, and have a material adverse effect on our businesses, financial condition and results of operations. In addition, we may be required to limit the amount of investments that we make as a principal or otherwise conduct our businesses in a manner that does not subject us to the registration and other requirements of the Investment Company Act.

 

Extensive regulation of our businesses affects our activities and creates the potential for significant liabilities and penalties. The possibility of increased regulatory focus could result in additional burdens on our business. Changes in tax law and other legislative or regulatory changes could adversely affect us.

 

Our fund management and ancillary businesses are subject to extensive regulation. We are subject to regulation, including periodic examinations, by governmental and self-regulatory organizations in the jurisdictions in which we operate. Many of these regulators are empowered to conduct investigations and administrative proceedings that can result in fines, suspensions of personnel or other sanctions, including censure, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer or investment adviser from registration or membership. Even if an investigation or proceeding did not result in a sanction or the sanction imposed against us or our personnel by a regulator were small in monetary amount, the adverse publicity relating to the investigation, proceeding or imposition of these sanctions could harm our reputation and cause us to lose existing clients or fail to gain new fund management or financial advisory clients.

 

In addition, we regularly rely on exemptions from various requirements of the Securities Act, the Exchange Act, the U.S. Investment Company Act of 1940, as amended, or the Investment Company Act, and the U.S. Employee Retirement Income Security Act of 1974, as amended, in conducting our fund management activities. These exemptions are sometimes highly complex and may in certain circumstances depend on compliance by third parties whom we do not control. If for any reason these exemptions were to become unavailable to us, we could become subject to regulatory action or third-party claims and our business could be materially and adversely affected. If we were deemed an “investment company” under the Investment Company Act, applicable restrictions could make it impractical for us to continue our business as conducted and could have a material adverse effect on our business.

 

In addition, we may be adversely affected by new or revised legislation or regulations imposed by governmental regulatory authorities or self-regulatory organizations that supervise the financial markets. We also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become law. Compliance with any new laws or regulations could make compliance more difficult and expensive and affect the manner in which we conduct business.

 

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Risks Related to this Offering and Ownership of Our Series AA Preferred Stock

 

There is no present market for the Series AA Preferred Stock, and we have arbitrarily set the price.

 

We have arbitrarily set the price of the Series AA Preferred Stock with reference to the general status of the securities market and other relevant factors. The offering price for the Series AA Preferred Stock should not be considered an indication of the actual value of such securities and is not based on our net worth or prior earnings. Although our Common Stock is quoted on the Nasdaq Capital Market, our Series AA Preferred Stock will not be eligible for quotation on the over-the-counter market. Accordingly, it will be very difficult for you to liquidate your shares of Series AA Preferred Stock, and we cannot assure you that such securities could be resold by you at the price you paid for them or at any other price.

 

We are not required to raise any minimum amount in this offering before we may utilize the funds received in this offering. Investors should be aware that there is no assurance that any monies beside their own will be invested in this Offering.

 

Because there is no minimum amount of subscriptions which we must receive before accepting funds in the offering, you will not be assured that we will have sufficient funds to execute our business plan or satisfy its working capital requirements and will bear the risk that we will be unable to secure the funds necessary to meet our current and anticipated financial obligations.

 

This offering is being conducted on a “best efforts” basis without a minimum and we may not be able to execute our growth strategy if the $20.0 million maximum is not sold.

 

If you invest in our Series AA Preferred Stock and less than all of the offered shares of our Series AA Preferred Stock are sold, the risk of losing your entire investment will be increased. We are offering our Series AA Preferred Stock on a “best efforts” basis without a minimum, and we can give no assurance that all of the offered Series AA Preferred Stock will be sold. If less than $20.0 million of Series AA Preferred Stock shares offered are sold, we may be unable to fund all the intended uses described in this offering circular from the net proceeds anticipated from this offering without obtaining funds from alternative sources or using working capital that we generate. Alternative sources of funding may not be available to us at what we consider to be a reasonable cost, and the working capital generated by us may not be sufficient to fund any uses not financed by offering net proceeds. No assurance can be given to you that any funds will be invested in this offering other than your own.

 

We cannot assure you that we will be able to pay dividends.

 

Our ability to pay dividends on our Series AA Preferred Stock is dependent on our ability to operate profitably and to generate cash from our operations and the operations of our subsidiaries. We cannot guarantee that we will be able to pay dividends as required by the terms of our Series AA Preferred Stock.

 

We may not have sufficient cash from our operations to enable us to pay dividends on our Series AA Preferred Stock following the payment of expenses.

 

Although dividends on the Series AA Preferred Stock will be cumulative (but not compounding), our board of directors must approve the actual payment of the dividends. We will pay monthly dividends on our Series AA Preferred Stock from funds legally available for such purpose when, as and if declared by our board of directors or any authorized committee thereof. Our board of directors can elect at any time or from time to time, and for an indefinite duration, not to pay any or all accumulated dividends. Our board of directors could do so for any reason. We may not have sufficient cash available each quarter to pay dividends. The amount of dividends we can pay depends upon the amount of cash we generate from and use in our operations, which may fluctuate significantly based on, among other things:

 

·the level of our revenues and our results of operations;

 

·prevailing economic and political conditions;

 

·the effect of governmental regulations on the conduct of our business;

 

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·our ability to service and refinance any future indebtedness; and

 

·our ability to raise additional funds through future offerings of securities to satisfy our capital needs.

 

In addition, if payment of dividends on the Series AA Preferred Stock for any dividend period would cause us to fail to comply with any applicable law, including the requirement under the Delaware General Corporation Law that dividends be paid out of surplus or net profits, we will not declare or pay a dividend for such dividend period. Our ability to pay dividends on the Series AA Preferred Stock may also be restricted or prohibited by the terms of any senior equity securities or indebtedness. The instruments governing the terms or future financings or refinancing of any borrowings may contain covenants that restrict our ability to pay dividends on the Series AA Preferred Stock. In the event that the payment of a dividend on the Series AA Preferred Stock would cause us to fail to comply with any applicable law or would be restricted or prohibited by the terms of any senior equity securities or indebtedness, holders of the Series AA Preferred Stock will not be entitled to receive any dividend for that dividend period, and the unpaid dividend will cease to accrue or be payable.

 

We cannot assure you that we will be able to redeem our Series AA Preferred Stock.

 

Our ability to redeem on our Series AA Preferred Stock is dependent on our ability to operate profitably and to generate cash from our operations and the operations of our operating businesses or from raising additional capital. We cannot guarantee that we will be able to redeem our Series AA Preferred Stock and may only be able to offer investors the ability to convert shares of Series AA Preferred Stock into shares of our Class A Common Stock.

 

Our management team will have broad discretion over the use of the net proceeds from our sale of the units, if any, and you may not agree with how we use the proceeds and the proceeds may not be invested successfully.

 

Our management team will have broad discretion as to the use of the net proceeds from our sale of the shares of Series AA Preferred Stock, if any, and we could use such proceeds for purposes other than those contemplated at the time of commencement of this offering. Accordingly, you will be relying on the judgment of our management team with regard to the use of those net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. It is possible that, pending their use, we may invest those net proceeds in a way that does not yield a favorable, or any, return for us. The failure of our management team to use such funds effectively could have a material adverse effect on our business, financial condition, operating results and cash flows.

 

We may terminate this Offering at any time during the Offering period.

 

We reserve the right to terminate this Offering at any time, regardless of the number of shares sold. In the event that we terminate this Offering at any time prior to the sale of all of the shares offered hereby, whatever amount of capital that we have raised at that time will have already been utilized by our company and no funds will be returned to subscribers.

 

We may issue additional debt and equity securities, which are senior to our Series AA Preferred Stock as to distributions and in liquidation, which could materially adversely affect the value of the Series AA Preferred Stock.

 

In the future, we may attempt to increase our capital resources by entering into additional debt or debt-like financing that is secured by all or up to all of our assets, or issuing debt or equity securities, which could include issuances of commercial paper, medium-term notes, senior notes, subordinated notes or shares. In the event of our liquidation, our lenders and holders of our debt securities would receive a distribution of our available assets before distributions to our stockholders. Any preferred securities, if issued by our company, may have a preference with respect to distributions and upon liquidation that is senior to the preference of the Series AA Preferred Stock, which could further limit our ability to make distributions to our stockholders. Because our decision to incur debt and issue securities in our future offerings will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings and debt financing.

 

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Further, market conditions could require us to accept less favorable terms for the issuance of our securities in the future. Thus, you will bear the risk of our future offerings reducing the value of your Series AA Preferred Stock. In addition, we can change our leverage strategy from time to time without approval of holders of our Series AA Preferred Stock or Common Stock, which could materially and/or adversely affect the value of our Series AA Preferred Stock.

 

You will not have a vote or influence on the management of our company.

 

All decisions with respect to the management of our company will be made exclusively by the officers, directors, managers or employees of our company. You, as an investor in our Series AA Preferred Stock, have very limited voting rights and will have no ability to vote on issues of company management and will not have the right or power to take part in the management of our company and will not be represented on the board of directors of our company. Accordingly, no person should purchase our Series AA Preferred Stock unless he or she is willing to entrust all aspects of management to our company.

 

Risks Related to the Ownership of Our Class A Common Stock

 

The dual class structure of our common stock has the effect of concentrating voting control with our executive officers, which will limit your ability to influence the outcome of important transactions.

 

Our Class B common stock has 10 votes per share and our Class A Common Stock has one vote per share. John C. Loeffler, II, our Chief Executive Officer, and Jennifer Schrader, our President and Chief Operating Officer, own all of our outstanding shares of Class B common stock. Together Mr. Loeffler and Ms. Schrader currently exercise approximately 84.2% voting control over the Company as of December 31, 2023. As a result, if they act together, these stockholders will be able to exercise significant influence over all matters submitted to our stockholders for approval, including the election of directors and approval of significant corporate transactions, such as (i) making changes to our articles of incorporation whether to issue additional common stock and preferred stock, (ii) employment decisions, including compensation arrangements; and (iii) whether to enter into material transactions with related parties. This control may adversely affect the market price of our Class A Common Stock.

 

We may not be able to maintain a listing of our Class A Common Stock on Nasdaq.

 

Our Class A Common Stock is listed on Nasdaq, and we must meet certain financial and liquidity criteria to maintain such listing. If we violate Nasdaq’s listing requirements, or if we fail to meet any of Nasdaq’s listing standards, our Class A Common Stock may be delisted. In addition, our board of directors may determine that the cost of maintaining our listing on a national securities exchange outweighs the benefits of such listing. A delisting of our Class A Common Stock from Nasdaq may materially impair our stockholders’ ability to buy and sell our Class A Common Stock and could have an adverse effect on the market price of, and the efficiency of the trading market for, our Class A Common Stock. The delisting of our Class A Common Stock could significantly impair our ability to raise capital and the value of your investment.

 

Our share price has in the past and may in the future fluctuate substantially.

 

The market price of our Class A Common Stock has in the past and could in the future be extremely volatile. From the date of our initial public offering in May 2023 to September 30, 2024, the high and low prices of our common stock as quoted on the Nasdaq Capital Market was $13.00 and $0.52, respectively. The future market price of our common stock may be significantly affected by many risk factors listed in this section, and others beyond our control, including:

 

·actual or anticipated fluctuations in our financial condition and operating results, including fluctuations in our quarterly and annual results;

 

·overall conditions in our industry and the markets in which we operate or in the economy as a whole;

 

·changes in laws or regulations applicable to our operations;

 

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·actual or anticipated changes in our growth rate relative to our competitors;

 

·announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

 

·additions or departures of key personnel;

 

·issuance of new or updated research or reports by securities analysts;

 

·fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

·litigation matters;

 

·announcement or expectation of additional financing efforts;

 

·sales of our Class A Common Stock by us or our stockholders;

 

·share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

·the expiration of contractual lock-up agreements with our executive officers, directors and stockholders; and

 

·general economic and market conditions.

 

Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political, and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our Class A Common Stock. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

 

Future sales and issuances of our Class A Common Stock or rights to purchase Class A Common Stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause the stock price of our Class A Common Stock to decline.

 

In the future, we may sell Common Stock, convertible securities or other equity securities in one or more transactions at prices and in a manner that we determine. We also expect to issue Class A Common Stock to employees, consultants, and directors pursuant to our equity incentive plans. If we sell common stock, convertible securities or other equity securities in subsequent transactions, or Class A Common Stock is issued pursuant to equity incentive plans, investors may be materially diluted. New investors in such subsequent transactions could gain rights, preferences and privileges senior to those of holders of our Class A Common Stock.

 

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

 

As a public company, we are subject to the periodic reporting requirements of the Exchange Act. We designed our disclosure controls and procedures to provide reasonable assurance that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

 

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These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.

 

If we fail to implement and maintain an effective system of internal control, we may be unable to accurately report our operating results, meet our reporting obligations, or prevent fraud.

 

As a public company, Section 404 of the Sarbanes-Oxley Act of 2002 requires that we include a report of management on our internal control over financial reporting in our annual report on Form 10-K, beginning with our annual report for the fiscal year ending December 31, 2024. In addition, once we cease to be an “emerging growth company” as such term is defined under the JOBS Act, our independent registered public accounting firm may be required to attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, as a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

 

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented, or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Generally, if we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets and harm our results of operations. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations, and civil or criminal sanctions.

 

We are an emerging growth company, and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our Class A Common Stock less attractive to investors.

 

We are an emerging growth company, as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in proxy statements and exemptions from the requirements of holding nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company until 2028, although circumstances could cause us to lose that status earlier. We will remain an emerging growth company until the earlier of (i) the last day of the fiscal year (a) following the fifth anniversary of the completion of our initial public offering, (b) in which we have total annual gross revenue of at least $1.235 billion or (c) in which we are deemed to be a large accelerated filer, which requires the market value of our common stock that is held by non-affiliates to exceed $700.0 million as of the prior June 30th, and (ii) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

 

Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company” which would allow us to take advantage of many of the same exemptions from disclosure requirements including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile.

 

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Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption and, therefore, we are not subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result, changes in rules of U.S. generally accepted accounting principles or their interpretation, the adoption of new guidance or the application of existing guidance to changes in our business could significantly affect our financial position and results of operations.

 

We are a “controlled company” within the meaning of the listing rules of Nasdaq and, as a result, can rely on exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.

 

John C. Loeffler, II, our Chief Executive Officer, and Jennifer Schrader, our President and Chief Operating Officer, through ownership of all our outstanding shares of Class B common stock, control a majority of the voting power of our outstanding common stock. As a result, are a “controlled company” within the meaning of the corporate governance standards of Nasdaq. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” but may elect not to comply with certain corporate governance requirements, including:

 

·the requirement that a majority of our Board of Directors consist of “independent directors”;

 

·the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

·the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

 

Although we do not intend to rely on the “controlled company” exemptions to Nasdaq’s corporate governance rules, we could elect to rely on these exemptions in the future. If we elected to rely on the “controlled company” exemptions, a majority of the members of our board of directors might not be independent directors, our nominating and corporate governance and compensation committees might not consist entirely of independent directors, and you would not have the same protection afforded to shareholders of companies that are subject to Nasdaq’s corporate governance rules.

 

If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.

 

The trading market for our Class A Common Stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts ceases coverage of our Company or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if our operating results do not meet the expectations of the investor community, one or more of the analysts who cover our Company may change their recommendations regarding our Company, and our stock price could decline.

 

Our charter documents and Delaware law and the voting control exercised by our founders could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.

 

Our third amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that could delay or prevent a change in control of our Company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include:

 

·authorizing our board of directors to issue preferred stock with voting or other rights or preferences that could discourage a takeover attempt or delay changes in control;

 

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·prohibiting stockholder action by written consent;

 

·limiting the persons who may call special meetings of stockholders; and

 

·requiring advance notification of stockholder nominations and proposals.

 

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, the provisions of Section 203 of the Delaware General Corporate Law (“DGCL”) govern us. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time without the consent of our board of directors.

 

These and other provisions in our third amended and restated certificate of incorporation and our amended and restated bylaws and under Delaware law, together with the voting control possessed by our founders, could discourage potential takeover attempts, reduce the price investors might be willing to pay in the future for shares of our common stock and result in the market price of our common stock being lower than it would be without these provisions.

 

Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.

 

Our third amended and restated certificate of incorporation and amended and restated bylaws provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law.

 

In addition, as permitted by Section 145 of the DGCL, our amended and restated bylaws and our indemnification agreements that we have entered into with our directors and officers provide that:

 

·we will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by Delaware law. Delaware law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the registrant and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful;

 

·we may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law;

 

·we are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification;

 

·we will not be obligated pursuant to our amended and restated bylaws to indemnify a person with respect to proceedings initiated by that person against us or our other indemnitees, except with respect to proceedings authorized by our board of directors or brought to enforce a right to indemnification;

 

·the rights conferred in our amended and restated bylaws are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons; and

 

·we may not retroactively amend our amended and restated bylaw provisions to reduce our indemnification obligations to directors, officers, employees and agents.

 

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USE OF PROCEEDS

 

We estimate that we will receive net proceeds of approximately $18,600,000 if the maximum number of shares of Series AA Preferred Stock being offered are sold after deducting the estimated sales commissions, managing dealer fees and offering expenses payable by us.

 

We currently intend that we may use up to $10.0 million of the net proceeds from this offering to retire outstanding promissory notes; to the extent a lesser amount of such notes are retired, the remaining amount will be used for general and working capital purposes. Such promissory notes bear interest at 12%, having due dates between December 2024 and April 2025.

 

We intend to use the remaining net proceeds from this offering, if any, for general corporate and working capital purposes.

 

Our managing dealer will receive (a) retail commissions of 5.0% of gross proceeds on the sale of the Series AA Preferred Stock, (b) a managing dealer fee of up to 2.0% of the gross proceeds of the offering, and (c) a fee of up to 1.0% of gross offering proceeds on the sale of the Series AA Preferred Stock as a non-accountable marketing and due diligence allowance, or, collectively, Selling Commissions and Expenses. All Selling Commissions and Expenses will be paid to ARKap Markets, LLC as our managing dealer, who may reallow all or any portion of the selling commissions and reallowance to Selling Group Members. Selling Commissions and Expenses will not exceed 8.0% of the gross proceeds of Series AA Preferred Stock. Total underwriting compensation to be received by or paid to participating FINRA member brokers or dealers, including commissions, managing dealer fee, and non-accountable marketing and due diligence fee will not exceed 8.0% of proceeds raised with the assistance of those participating FINRA member dealers.

 

The following table below sets forth the uses of proceeds assuming the sale of 25%, 50%, 75% and 100% of the securities offered for sale in this offering by us. For further discussion, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    25% of Offering
Sold
    50% of Offering
Sold
    75% of Offering
Sold
    100% of
Offering Sold
 
 
Offering Proceeds                                
Shares Sold     200,000       400,000       600,000       800,000  
Gross Proceeds   $ 5,000,000     $ 10,000,000     $ 15,000,000     $ 20,000,000  
Retail Commissions (%)   $ 250,000     $ 500,000     $ 750,000     $ 1,000,000  
Managing dealer Fee (%)   $ 100,000     $ 200,000     $ 300,000     $ 400,000  
Net Proceeds Before Expenses   $ 4,650,000     $ 9,300,000     $ 13,950,000     $ 18,600,000  
                                 
Offering Expenses                                
Managing dealer Expenses   $ 50,000     $ 100,000     $ 150,000     $ 200,000  
Legal & Accounting   $ 125,000     $ 125,000     $ 125,000     $ 125,000  
Publishing/EDGAR   $ 5,000     $ 5,000     $ 5,000     $ 5,000  
Transfer Agent   $ 5,000     $ 5,000     $ 5,000     $ 5,000  
Total Offering Expenses   $ 185,000     $ 235,000     $ 285,000     $ 335,000  
                                 
Amount of Offering Proceeds Available for Use   $ 4,465,000     $ 9,065,000     $ 13,665,000     $ 18,265,000  
                                 
Uses                                
Repayment of Outstanding Promissory Notes(1)   $

3,000,000

    $

7,000,000

    $

10,000,000

    $

10,000,000

 
General Corporate Purposes   $ 4,465,000     $ 9,065,000     $ 13,665,000     $ 18,265,000  
Total Expenditures   $ 4,465,000     $ 9,065,000     $ 13,665,000     $ 18,265,000  
                                 
Net Remaining Proceeds   $     $     $     $  

 

(1)We currently intend that we may use up to $10.0 million of the net proceeds from this offering to retire outstanding promissory notes; to the extent a lesser amount of such notes are retired, the remaining amount will be used for general and working capital purposes.

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As of the date of this offering circular and except as explicitly set forth herein, we cannot specify with certainty all of the particular uses of the net proceeds from this offering. Pending use of the net proceeds from this offering as described above, we may invest the net proceeds in short-term interest-bearing investment grade instruments.

 

The expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve and change. The amounts and timing of our actual expenditures, specifically with respect to working capital, may vary significantly depending on numerous factors. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.

 

The above description of the anticipated use of proceeds is not binding on us and is merely description of our current intentions. We reserve the right to change the above use of proceeds if management believes it is in the best interests of our company.

 

HOW TO INVEST

 

Who May Invest

 

Investors must comply with the 10% limitation on investment in the offering, as prescribed in Rule 251. The only investor in this offering exempt from this limitation is an accredited investor, an “Accredited Investor,” as defined under Rule 501 of Regulation D.

 

Determination of Suitability

 

The Selling Group Members and registered investment advisors recommending the purchase of Series AA Preferred Stock in this offering have the responsibility to make every reasonable effort to determine that your purchase of Series AA Preferred Stock in this offering is a suitable and appropriate investment for you based on information provided by you regarding your financial situation and investment objectives. In making this determination, these persons have the responsibility to ascertain that you:

 

·meet the minimum income and net worth standards set forth under “Plan of Distribution – Who May Invest ” above;

·can reasonably benefit from an investment in the Series AA Preferred Stock based on your overall investment objectives and portfolio structure;

·are able to bear the economic risk of the investment based on your overall financial situation;

·are in a financial position appropriate to enable you to realize to a significant extent the benefits described in this offering circular of an investment in the Series AA Preferred Stock; and

·have apparent understanding of:

·         the fundamental risks of the investment; 

·         the risk that you may lose your entire investment; 

·         the lack of liquidity of the Series AA Preferred Stock; 

·         the restrictions on transferability of the Series AA Preferred Stock; and

·         the tax consequences of your investment

 

Subscription Agreement

 

All investors will be required to complete and execute a subscription agreement or order form. The subscription agreement or order form is available from your registered representative or financial adviser. We will hold closings on the first and third Thursday of each month assuming there are funds to close.

 

Once a subscription has been submitted and accepted by the Company, an investor will not have the right to request the return of its subscription payment prior to the next closing date. If subscriptions are received on a closing date and accepted by the Company prior to such closing, any such subscriptions will be closed on that closing date. If subscriptions are received on a closing date but not accepted by the Company prior to such closing, any such subscriptions will be closed on the next closing date. It is expected that settlement will occur two business days following each closing date. Two business days after the closing date, offering proceeds for that closing will be disbursed to us and the Series AA Preferred Stock will be issued to the investors in the offering. If the Company is dissolved or liquidated after the acceptance of a subscription, the respective subscription payment will be returned to the subscriber.

 

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By completing and executing your subscription agreement you will also acknowledge and represent that you have received a copy of this offering circular, your rights and responsibilities regarding your Series AA Preferred Stock will be governed by the offering circular.

 

Book-Entry, Delivery and Form

 

The Series AA Preferred Stock purchased through a participant in the Depository Trust Company, or DTC, will be evidenced by global certificates deposited with a nominee holder, either DTC or its nominee Cede & Co.

 

We intend to gain eligibility for the Series AA Preferred Stock to be issued and held through the book-entry systems and procedures of DTC prior to the initial closing of the offering and intend for all Series AA Preferred Stock purchased through DTC participants to be held via DTC’s book-entry systems and to be represented by certificates registered in the name of Cede & Co. (DTC’s nominee).

 

So long as nominees, as described above, are the registered owners of the certificates representing the Series AA Preferred Stock, such nominees will be considered the sole owners and holders of the Series AA Preferred Stock for all purposes. Owners of beneficial interests in the Series AA Preferred Stock will not be entitled to have the certificates registered in their names.

 

Accordingly, each person owning a beneficial interest in a Series AA Preferred Stock registered to DTC or its nominee must rely on either the procedures of DTC or its nominee on the one hand, and, if such entity is not a participant, on the procedures of the participant through which such person owns its interest, in order to exercise any rights of a Series AA Preferred Stock holder.

 

As a result:

 

·all references in this offering circular to actions by Series AA Preferred Stock holders will refer to actions taken by DTC upon instructions from its direct participants; and

·all references in this offering circular to payments and notices to Series AA Preferred Stock holders will refer to payments and notices to DTC or Cede & Co. for distribution to you in accordance with DTC procedures.

 

The Depository Trust Company

 

We have obtained the information in this section concerning DTC and its book-entry systems and procedures from sources that we believe to be reliable. The description of the clearing system in this section reflects our understanding of the rules and procedures of DTC as they are currently in effect. DTC could change its rules and procedures at any time.

 

DTC will act as securities depositary for the VIP Bonds registered in the name of its nominee, Cede & Co. DTC is:

 

·a limited-purpose trust company organized under the New York Banking Law;

·a “banking organization” under the New York Banking Law;

·a member of the Federal Reserve System;

·a “clearing corporation” under the New York Uniform Commercial Code; and

·a “clearing agency” registered under the provisions of Section 17A of the Exchange Act.

 

DTC holds securities that its direct participants deposit with DTC. DTC facilitates the settlement among direct participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in direct participants’ accounts, thereby eliminating the need for physical movement of securities certificates. 

 

Direct participants of DTC include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is owned by a number of its direct participants. Indirect participants of DTC, such as securities brokers and dealers, banks, and trust companies, can also access the DTC system if they maintain a custodial relationship with a direct participant.

 

Purchases of Series AA Preferred Stock under DTC’s system must be made by or through direct participants, which will receive a credit for the Series AA Preferred Stock on DTC’s records. The ownership interest of each beneficial owner is in turn to be recorded on the records of direct participants and indirect participants. Beneficial owners will not receive written confirmation from DTC of their purchase, but beneficial owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the direct participants or indirect participants through which such beneficial owners entered into the transaction. Transfers of ownership interests in the Series AA Preferred Stock are to be accomplished by entries made on the books of participants acting on behalf of beneficial owners. Beneficial owners will not receive certificates representing their ownership interests in Series AA Preferred Stock. 

 

Conveyance of notices and other communications by DTC to direct participants, by direct participants to indirect participants and by direct participants and indirect participants to beneficial owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

 

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Book-Entry Format

 

Under the book-entry format, Continental Stock Transfer & Trust Company, as our paying agent, will pay dividends or principal payments to Cede & Co., as nominee of DTC.

 

DTC is required to make book-entry transfers on behalf of its direct participants and is required to receive and transmit payments of principal, premium, if any, and dividends on the Series AA Preferred Stock. Any direct participant or indirect participant with which you have an account is similarly required to make book-entry transfers and to receive and transmit payments with respect to the Series AA Preferred Stock on your behalf. We have no responsibility for any aspect of the actions of DTC or any of its direct or indirect participants. In addition, we have no responsibility or liability for any aspect of the records kept by DTC or any of its direct or indirect participants relating to or payments made on account of beneficial ownership interests in the Series AA Preferred Stock or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. We also do not supervise these systems in any way.

 

You can only exercise the rights of a Series AA Preferred Stock holder indirectly through DTC and its direct participants, as applicable. DTC has advised us that it will only take action regarding Series AA Preferred Stock if one or more of the direct participants to whom the Series AA Preferred Stock is credited directs DTC to take such action and only in respect of the portion of the aggregate amount of the Series AA Preferred Stock as to which that participant or participants has or have given that direction. DTC can only act on behalf of its direct participants. Your ability to pledge Series AA Preferred Stock, and to take other actions, may be limited because you will not possess a physical certificate that represents your Series AA Preferred Stock.

 

If the global shares certificate representing Series AA Preferred Stock is held by DTC, conveyance of notices and other communications to the beneficial owners, and vice versa, will occur via DTC. The issuer will communicate directly with DTC. DTC will then communicate to direct participants. The direct participants will communicate with the indirect participants, if any. Then, direct participants and indirect participants will communicate to beneficial owners. Such communications will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

 

Registrar and Paying Agent

 

We have designated Continental Stock Transfer & Trust Company as paying agent. Continental Stock Transfer & Trust Company will also act as registrar for the Series AA Preferred Stock. As such, Continental Stock Transfer & Trust Company will make payments on the Series AA Preferred Stock to DTC. The Series AA Preferred Stock will be issued in book-entry form only.

 

Arkadios Capital LLC (“Arkadios”)

 

Arkadios will serve as the trading agent for the offering. Arkadios is not making a market for, utilizing an ATS to trade, or engaging to distribute this offering. Arkadios will affect DTC trades for selling group members who choose to transact electronically through the DTC system. The Company or ARKap Markets LLC, as the managing dealer, will aggregate trading instructions (subscriptions) which will then be sent to Arkadios for execution. Arkadios will coordinate with Continental Stock Transfer & Trust Company to allocate the requested Series AA Preferred Stock for purchase by the selling group members and distribute accordingly. Arkadios will not take a position in the offering outside of the purposes of affecting trades, unless they themselves are participating in the selling group and have trade requests from their clients. As a trading agent, Arkadios’s role is entirely operational, and it is only compensated based on the volume transacted on the DTC platform; paid as a reallowance of the managing dealer fee.

 

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DETERMINATION OF OFFERING PRICE

 

There is no trading market for our Series AA Preferred Stock, and we do not expect any trading market to develop for the Series AA Preferred Stock. The Series AA Preferred Stock will be sold at $25.00 per share and it is expected that we will either redeem the Series AA Preferred Stock at a redemption price equal to 100% of such original issue price, plus accrued dividends thereon, or that holders of the Series AA Preferred Stock will exercise their right to request that we redeem or repurchase the Series AA Preferred Stock at a redemption or repurchase price equal to 100% of such original issue price, plus accrued dividends thereon, and less certain redemption fees payable if shares are redeemed in the first three years. Accordingly, the $25.00 price per share of Series AA Preferred Stock is arbitrary and represents the amount of investment made by an investor for purposes of determining the redemption and repurchase price. The principal factors considered in determining the initial public offering price include:

 

·the information set forth in this offering circular;

·our history and prospects and the history of and prospects for the industry in which we compete;

·our past and present financial performance;

·our prospects for the future earnings and the present state of our development;

·the general condition of the securities markets at the time of this offering;

·the recent market price of, and demand for, publicly traded common stock of generally comparable companies; and

·other factors deemed relevant by us.

 

DIVIDEND POLICY

 

Dividends on our Series AA Preferred Stock being offered will be cumulative and payable monthly in arrears to all holders of record on the applicable record date. Holders of our Series AA Preferred Stock will be entitled to receive cumulative monthly cash dividends at a per annum rate of 9.5% of the stated value of the Series AA Preferred Stock (or $0.198 per share each month based on the initial stated value). Dividends on each share of Series AA Preferred Stock will begin accruing on, and will be cumulative from, the date of issuance and regardless of whether our board of directors declares and pays such dividends. Holders of our Series A Preferred Stock as of the applicable record date will be entitled to receive non-cumulative dividends payable annually, at the Company’s option, (i) in cash or (ii) in shares of the Company’s Class A common stock, at a price per share of Class A Common Stock equal to the lower of (A) the average closing price of Class A Common Stock as quoted on the principal trading market, if any, in which the shares of Class A Common Stock then trade (“Principal Market”) for the five trading days immediately preceding the date of issuance, or (B) the closing price of the Class A Common Stock as quoted on the Principal Market on the trading day prior to the date of issuance, but in no event less than $1.00 per share. If our certificate of incorporation, provisions of Delaware law or our borrowing agreements prohibit us from paying dividends, unpaid dividends will accumulate.

 

Our anticipated source of funds to pay the cumulative dividends for our Series AA Preferred Stock and non-cumulative dividends for our Series A Preferred Stock will be from net operating income, retained earnings and the proceeds of the refinancing of our other indebtedness. We believe that our net operating income will increase as we deploy the funds raised in this offering in a manner consistent with the use of proceeds described in this offering circular. We expect that our retained earnings will increase as we increase net operating income, and we expect to refinance other indebtedness on our properties based upon our increased net operating income and then use the proceeds of such refinancings along with our retained earnings to repay investors.

 

See also “Risk Factors—Risks Related to this Offering and Ownership of Our Series AA Preferred Stock—We cannot assure you that we will be able to pay dividends.”

 

We have never declared dividends or paid cash dividends on our Common Stock. Our board of directors will make any future decisions regarding dividends. We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the near future. Our board of directors has complete discretion on whether to pay dividends. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

 

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MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Market Information

 

Our Class A Common Stock is quoted on the Nasdaq Capital Market under the symbol “CWD.” The following table sets forth, for the periods indicated, the high and low closing prices of our Class A Common Stock. These prices reflect inter-dealer prices, without retain mark-up or commission, and may not represent actual transactions.

 

      Closing Prices
      High     Low  
Fiscal Year Ending December 31, 2024              
1st Quarter   $ 1.46   $ 0.90  
2nd Quarter   $ 1.03   $ 0.79  
3rd Quarter   $ 0.86   $ 0.52  
4th Quarter (through December 3, 2024)   $ 0.71   $ 0.44  
               
Fiscal Year Ended December 31, 2023              
2nd Quarter   $ 7.70   $ 1.85  
3rd Quarter   $ 2.14   $ 1.25  
4th Quarter   $ 1.74   $ 1.29  

 

Holders

 

As of September 30, 2024, there were approximately 1,519 registered holders of our Class A Common Stock. This number excludes the shares owned by stockholders holding shares under nominee security position listings.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following management’s discussion and analysis of financial condition and results of operations provides information that management believes is relevant to an assessment and understanding of our plans and financial condition. The following selected financial information is derived from our historical financial statements should be read in conjunction with such financial statements and notes thereto set forth elsewhere herein and the “Cautionary Note Regarding Forward-Looking Statements” explanation included herein.

 

Overview

 

Over the past 15 years, Caliber has grown into a leading diversified alternative asset management firm, managing more than $2.9 billion in assets under management (“AUM”) and assets under development (“AUD”). Caliber’s primary goal is to enhance the wealth of accredited investors seeking to make investments in middle-market assets. We strive to build wealth for our clients by creating, managing, and servicing middle-market investment funds, private syndications, and direct investments. Through our funds, we invest primarily in real estate, private equity, and debt facilities. We market and fundraise to direct channels and to wholesale channels.

 

We believe that we provide investors attractive risk-adjusted returns by offering a balance of (i) structured offerings and ease of ownership, (ii) a pipeline of investment opportunities, primarily projects that range in value between $5.0 million and $50.0 million, and (iii) an integrated execution and processing platform. Our investment strategy leverages the local market intelligence and real-time data we gain from our operations to evaluate current investments, generate proprietary transaction flow, and implement various asset management strategies.

 

As an alternative asset manager, we offer a full suite of support services and employ a vertically integrated approach to investment management. Our asset management activities are complemented with transaction and advisory services including development and construction management, acquisition and disposition expertise, and fund formation, which we believe differentiate us from other asset management firms. We earn the following fees from providing these services under our asset management platform:

 

·Fund set-up fees are a one-time fee for the initial formation, administration, and set-up of fund products we distribute and manage. These fees are recognized at the point in time when the performance under the contract is complete.

 

·Fund management fees are generally based on 1.0% to 1.5% of the unreturned capital contributions in a particular fund and include reimbursement for costs incurred on behalf of the fund, including an allocation of certain overhead costs. These customer contracts require the Company to provide management services, representing a performance obligation that the Company satisfies over time. With respect to the Caliber Hospitality Trust, the Company earns a fund management fee of 0.70% of the Caliber Hospitality Trust’s enterprise value and is reimbursed for certain costs incurred on behalf of the Caliber Hospitality Trust.

 

·Financing fees are earned for services the Company performs in securing third-party financing on behalf of our private equity real estate funds. These fees are recognized at the point in time when the performance under the contract is complete, which is essentially upon closing of a loan. In addition, the Company earns fees for guaranteeing certain loans, representing a performance obligation that the Company satisfies over time.

 

·Real estate development revenues are generally based on 4.0% of the total expected costs of the development or 4.0% of the total expected costs of the construction project for services performed as the principal developer, which include managing and supervising third-party developers and general contractors with respect to the development of the properties owned by the funds. Prior to the commencement of construction, development fee revenue is recognized at a point in time as the related performance obligations are satisfied and the customer obtains control of the promised service, including negotiation, due diligence, entitlements, planning, and design activities. During the construction period, development fee revenue is recognized over time as the performance obligations are satisfied.

 

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·Brokerage fees are earned at a point in time at fixed rates for services performed related to acquisitions, dispositions, leasing, and financing transactions.

 

·Performance allocations are an arrangement in which we are entitled to an allocation of investment returns, generated within the investment funds which we manage, based on a contractual formula. We typically receive 15.0% to 35.0%, of all cash distributions from (i) the operating cash flow of each fund, after payment to the related fund investors of any accumulated and unpaid priority preferred returns and repayment of preferred capital contributions; and (ii) the cash flow resulting from the sale or refinance of any real estate assets held by each fund, after payment to the related fund investors of any accumulated and unpaid priority preferred returns and repayment of initial preferred capital contributions. Our funds’ preferred returns range from 6.0% to 12.0%, typically 6.0% for common equity or 10.0% to 12.0% for preferred equity, which does not participate in profits. Performance allocations are related to services which have been provided and are recognized when it is determined that they are no longer probable of significant reversal, which is generally satisfied when an underlying fund investment is realized or sold.

 

Historically, the Company’s operations were organized into three reportable segments: fund management, development, and brokerage. During the year ended December 31, 2023, the Company reevaluated its reportable segments, considering (i) the evolution of the Company after closing its initial public offering and how the Company’s chief operating decision maker (“CODM”), the Company’s Chief Executive Officer, assesses performance and allocates resources, (ii) changes to the budgeting process and in key personnel driven by the Company’s growth initiatives, and (iii) how management reports ongoing company performance to the Board of Directors. With the evolution and growth of the Company, the Company’s CODM assesses performance and resource allocation on an aggregate basis under the Company’s asset management platform, and no longer reviews operating results for development or brokerage activity separately. As such, management concluded that the Company operates through one operating segment.

 

The Company’s CODM assesses revenue, operating expenses and key operating statistics to evaluate performance and allocate resources on a basis that eliminates the impact of the consolidated investment funds (intercompany eliminations required by U.S. GAAP) and noncontrolling interests. Management concluded that the consolidated investment funds do not meet the requirements in ASC 280, Segment Reporting, of operating segments, as the Company’s CODM does not review the operating results of these investment funds for the purposes of allocating resources, assessing performance or determining whether additional investments or advances will be made to these funds. The investment funds are consolidated based on the requirement in ASC 810, Consolidation, as the Company was determined to be the primary beneficiary of each of these variable interest entities since it has the power to direct the activities of the entities and the right to absorb losses, generally in the form of guarantees of indebtedness that are significant to the individual investment funds.

 

Caliber was originally founded as Caliber Companies, LLC, an Arizona limited liability company, organized under the laws of Arizona, and commenced operations in January 2009. In November 2014, the Company was reorganized as a Nevada corporation and in June 2018, we reincorporated in the state of Delaware. On our website we make available, free of charge, information about the Company and its’ investments. None of the information on our website is deemed to be part of this report.

 

Trends Affecting Our Business

 

Our business is driven by trends which affect the following:

 

1)Capital formation: any trend which increases or decreases investors’ knowledge of alternative investments, desire to acquire them, access to acquire them, and knowledge and appreciation of Caliber as a potential provider, will affect our ability to attract and raise new capital. Capital formation also drives investment acquisitions, which contribute to Caliber’s revenues.

 

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2)Investment acquisition: any trend which increases or decreases the supply of middle-market real estate projects or loans, the accessibility of developments or development incentives, or enhances or detracts from Caliber’s ability to access those projects will affect our ability to generate revenue. Coincidentally, investment acquisitions, or the rights to acquire an investment, drive capital formation – creating a flywheel effect for Caliber.

 

3)Project execution: any trend which increases or decreases the costs of execution on a real estate project, including materials pricing, labor pricing, access to materials, delays due to governmental action, and the general labor market, will affect Caliber’s ability to generate revenues.

 

Our business depends in large part on our ability to raise capital for our funds from investors. Since our inception, we have continued to successfully raise capital into our funds with our total capital raised through September 30, 2024 of approximately $710.5 million. Our success at raising new capital into our funds is impacted by the extent to which new investors see alternative assets as a viable option for capital appreciation and/or income generation. Since our ability to raise new capital into our funds is dependent upon the availability and willingness of investors to direct their investment dollars into our products, our financial performance is sensitive in part to changes in overall economic conditions that affect investment behaviors. The demand from investors is dependent upon the type of asset, the type of return it will generate (current cash flow, long-term capital gains, or both) and the actual return earned by our fund investors relative to other comparable or substitute products. General economic factors and conditions, including the general interest rate environment and unemployment rates, may affect an investor’s ability and desire to invest in real estate. For example, a significant interest rate increase could cause a projected rate of return to be insufficient after considering other risk exposures. Additionally, if weakness in the economy emerges and actual or expected default rates increase, investors in our funds may delay or reduce their investments; however, we believe our approach to investing and the capabilities that Caliber manages throughout the deal cycle will continue to offer an attractive value proposition to investors.

 

In June 2023, the United States of America’s House of Representatives unanimously approved legislation that would increase the number of investors who can participate in private offerings of securities by expanding the accredited investor criteria. The Fair Investment Opportunities for Professional Experts Act would expand the definition of accredited investor to include people with certain licenses, education or professional experience. The Accredited Investor Definition Review Act would give the SEC discretion to determine the certifications, designations or credentials investors must possess to be accredited and directs the SEC to review the accredited investor definition every five years. We believe these government actions will increase the size of our potential investor base significantly, however we cannot yet assess the number of newly accredited investors that would have the ability or interest to invest in a Caliber fund.

 

While we have had historical successes, there can be no assurance that fundraising for our new and existing funds will experience similar success. If we were unable to raise such capital, we would be unable to deploy such capital into investments, which would materially reduce our revenues and cash flow and adversely affect our financial condition.

 

We remain confident about our ability to find, identify, and source new investment opportunities that meet the requirements and return profile of our investment funds despite headwinds associated with increased asset valuations, competition and increased overall cost of credit. We continue to identify strategic acquisitions on off-market terms and anticipate that this trend will continue. We are at a point in our investment cycle where some of our funds have begun to exit significant parts of their portfolios while other are approaching a potential harvesting phase. We have complemented these cycles with other newer funds that will maintain management fees while providing continued sources of activity.

 

In February 2023, we expanded our access to institutional capital by entering into an agreement with Skyway Capital Markets to serve as a managing broker-dealer for our primary investment products. The agreement designates Skyway to assist us to raise capital primarily from third party broker-dealers and registered investment advisors, many of which have an existing business relationship with Skyway. Skyway will assist us in our efforts to hire, train and manage a national wholesaling team, secure selling agreements, and provide appropriate due diligence to advisors distributing our funds. Our current managing broker-dealer will remain engaged with us to supervise and manage our existing private client sales team and to join Skyway as a selling group member.

 

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Acquiring new assets includes being able to negotiate favorable loans on both a short and long-term basis. We strive to forecast and project our returns using assumptions about, among other things, the types of loans that we might expect the market to extend for a particular type of asset. This becomes more complex when the asset also requires construction financing. We may also need to refinance existing loans that are due to mature. Factors that affect these arrangements include the interest rate and economic environment, the estimated fair value of real property, and the profitability of the asset’s historical operations. These capital market conditions may affect the renewal or replacement of our credit agreements, some of which have maturity dates occurring within the next 12 months. Obtaining such financing is not guaranteed and is largely dependent on market conditions and other factors.

 

The advancement of real estate investment-oriented technology, sometimes referred to as “proptech” offers Caliber the benefit of new and innovative technologies to better execute on capital formation strategies, investment acquisition strategies, and investment management strategies. In recent years, Caliber has added to its technology stack with systems that we believe lead the market in their specific ability to enhance execution on our projects. Several of these technologies seek to incorporate investments in artificial intelligence, which we believe will be a prevailing trend in helping Caliber to enhance its project execution going forward.

 

Regional conflicts and instability, such as those in Israel and Ukraine, can have significant impacts on global markets and economies and investor perception and tolerance for risk. These conflicts could lead to increased volatility in financial markets, disrupt supply chains, and change investor appetite for investments in alternative assets.

 

Business Environment

 

Global markets are experiencing significant volatility driven by concerns over inflation, rising interest rates, slowing economic growth and geopolitical uncertainty. The annual inflation rate in the United States increased to 9.1% in June 2022, the highest rate since November 1981, but decreased to 2.4% in September 2024. As a result, from January 1, 2022 through September 18, 2024, the Federal Reserve increased the federal funds rate by 525 basis points, but subsequently, on September 19, 2024, the Federal Reserve decreased the federal funds rate by 50 basis points. The rising interest rates, coupled with periods of significant equity and credit market volatility may potentially make it more difficult for us to find attractive opportunities for our funds to exit and realize value from their existing investments. Historically, inflation has tended to favor new capital formation for Caliber’s funds, as investors seek opportunities that can hedge against rising costs, such as real estate investments. In addition, the increase in interest rates has put pressure on owners of existing real estate to sell assets as their loans mature. Combined with a shrinking pool of buyers, the commercial and residential real estate markets in our favored geographies are moving away from a seller’s market and closer to a buyer’s market. It remains to be seen if a stressed or distressed market may emerge, similar to Caliber’s early years of operations. In both a buyer’s market and a stressed or distressed market, Caliber expects its business model to outperform, as our direct access to investor capital and our ability to invest in a variety of asset classes allows Caliber to move with the market and take advantage of potentially attractive prices. For project execution, inflation has increased the cost of nearly all building materials and labor types, increasing the cost of construction and renovation of our funds’ assets.

 

Key Financial Measures and Indicators

 

Our key financial measures are discussed in the following pages. Additional information regarding these key financial measures and our other significant accounting policies can be found in Note 2 – Summary of Significant Accounting Policies in the notes to our accompanying consolidated financial statements included herein.

 

Total Revenue

 

We generate the majority of our revenue in the form of asset management fee revenues and performance allocations. Included within our consolidated results, are the related revenues of certain consolidated VIEs.

 

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Total Expenses

 

Total expenses include operating costs, general and administrative, marketing and advertising and depreciation and amortization. Included within our consolidated results, are the related expenses of consolidated VIEs.

 

Other Income (Expenses)

 

Other income (expenses) include interest expense and interest income.

 

Results of Operations

 

Comparison of the Consolidated Results of Operations for the Nine Months Ended September 30, 2024 and 2023

 

Our consolidated results of operations are impacted by the timing of consolidation, deconsolidation, and operating performance of our consolidated and previously consolidated funds. Periods presented may not be comparable due to the consolidation or deconsolidation certain funds. In particular, the Company deconsolidated Caliber Hospitality, LP, the Caliber Hospitality Trust, and their consolidated subsidiaries, Elliot, and DT Mesa during the nine months ended September 30, 2024. The following table and discussion provide insight into our consolidated results of operations for the nine months ended September 30, 2024 and 2023 (in thousands):

 

   Nine Months Ended September 30,         
   2024   2023   $ Change   % Change 
Revenues                    
Asset management revenues  $12,926   $6,246   $6,680    106.9%
Performance allocations   357    2,474    (2,117)   (85.6)%
Consolidated funds – hospitality revenues   23,533    52,008    (28,475)   (54.8)%
Consolidated funds – other revenues   5,616    6,264    (648)   (10.3)%
Total revenues   42,432    66,992    (24,560)   (36.7)%
                     
Expenses                    
Operating costs   15,389    16,205    (816)   (5.0)%
General and administrative   5,460    4,914    546    11.1%
Marketing and advertising   507    888    (381)   (42.9)%
Depreciation and amortization   439    409    30    7.3%
Consolidated funds – hospitality expenses   23,191    59,676    (36,485)   (61.1)%
Consolidated funds – other expenses   5,405    6,757    (1,352)   (20.0)%
Total expenses   50,391    88,849    (38,458)   (43.3)%
                     
Other income, net   1,015    1,479    (464)   (31.4)%
Interest income   325    279    46    16.5%
Interest expense   (3,958)   (3,408)   550   16.1%
Net loss before income taxes   (10,577)   (23,507)   12,930    (55.0)%
Benefit from income taxes               0.0%
Net loss   (10,577)   (23,507)   12,930    (55.0)%
Net loss attributable to noncontrolling interests   (2,188)   (13,165)   10,977    (83.4)%
Net loss attributable to CaliberCos Inc.  $(8,389)  $(10,342)  $(1,953)   (18.9)%

 

For the nine months ended September 30, 2024 and 2023, total revenues were $42.4 million and $67.0 million, respectively, representing a period-over-period decrease of 36.7%, which was primarily due to a decrease in consolidated fund revenues as a result of the deconsolidation of Caliber Hospitality, LP and the Caliber Hospitality Trust in March 2024. See the Segment Analysis section below in which revenues are presented on a basis that deconsolidates our consolidated funds. As a result, segment revenues are different than those presented on a consolidated basis in accordance with U.S. GAAP, because these fees are eliminated in consolidation when they are derived from a consolidated fund.

 

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For the nine months ended September 30, 2024 and 2023, total expenses were $50.4 million and $88.8 million, respectively, representing a period-over-period decrease of 43.3%. The increase was primarily due to a decrease in consolidated fund expenses which was primarily due to the deconsolidation of Caliber Hospitality, LP and Caliber Hospitality Trust in March 2024.

 

Comparison of the Unconsolidated Results of Operations for the Nine Months Ended September 30, 2024 and 2023

 

The following table and discussion provide insight into our unconsolidated results of operations of the asset management platform for the nine months ended September 30, 2024 and 2023 (in thousands).

 

   Nine Months Ended September 30,         
   2024   2023   $ Change   % Change 
Revenues                    
Asset management revenues  $15,976   $10,977   $4,999    45.5%
Performance allocations   378    2,474    (2,096)   (84.7)%
Total revenues   16,354    13,451    2,903    21.6%
                     
Expenses                    
Operating costs   15,971    15,912   $59    0.4%
General and administrative   5,490    4,659    831    17.8%
Marketing and advertising   508    887    (379)   (42.7)%
Depreciation and amortization   447    197    250    126.9%
Total expenses   22,416    21,655    761    3.5%
                     
Other income (loss), net   1,468    294   $1,174    399.3%
Interest income   514    1,479    (965)   (65.2)%
Interest expense   (3,958)   (3,409)   549   16.1%
Net (loss) income before income taxes   (8,038)   (9,840)   (1,802)   (18.3)%
Provision for income taxes               0.0%
Net (loss) income  $(8,038)  $(9,840)  $(1,802)   (18.3)%

 

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For the nine months ended September 30, 2024 and 2023, total revenues were $16.4 million and $13.5 million, respectively, representing a period-over-period increase of 21.6%. The table below (in thousands) compares the revenues earned for providing services under the Company’s asset management platform as described in the Revenue Recognition section of Note 2 – Summary of Significant Accounting Policies for the nine months ended September 30, 2024 to the revenues earned for the same period in 2023.

 

   Nine Months Ended September 30,         
   2024   2023   $ Change   % Change 
Fund set-up fees  $1,502   $470   $1,032    219.6%
Fund management fees   7,972    7,136    836    11.7%
Financing fees   616    631    (15)   (2.4)%
Development and construction fees   5,066    2,128    2,938    138.1%
Brokerage fees   820    612    208    34.0%
Total asset management   15,976    10,977    4,999    45.5%
Performance allocations   378    2,474    (2,096)   (84.7)%
Total unconsolidated revenue  $16,354   $13,451   $2,903    21.6%

 

The increase in fund set-up fees is due to capital raise fees earned related to an existing fund during the three months ended September 30,2024, as well as revenue earned from two new fund offerings during the nine months ended September 30, 2024, for which revenue was not recognized in 2023.

 

The increase in fund management fees is related to an increase of managed capital and fees earned from the Caliber Hospitality Trust related to the acquisition of one hotel property. Fund management fees were based on 1.0% to 1.5% of the unreturned capital contributions in each fund and a fund management fee of 0.7% of the Caliber Hospitality Trust’s enterprise value.

 

The decrease in performance allocations is due to the carried interest earned related to the contribution of the hospitality assets to Caliber Hospitality, LP in March 2023.

 

For the nine months ended September 30, 2024 and 2023, total expenses were $22.4 million and $21.7 million, respectively, representing a period-over-period increase of 3.5%. The increase was primarily due to an increase in general and administrative expenses related to accounting and consulting fees, and software expenses.

 

Other income, net was $1.5 million for the nine months ended September 30, 2024, as compared to $0.3 million for the nine months ended September 30, 2023. The increase is primarily due to an increase in rental and reimbursement revenue from space leased at the Company’s corporate headquarters.

 

For the nine months ended September 30, 2024 and 2023, interest expense was $4.0 million and $3.4 million, respectively. The increase was primarily due to the increase in the weighted average corporate notes outstanding during the nine months ended September 30, 2024, as compared to the same period in 2023.

 

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Comparison of the Consolidated Results of Operations for the Years Ended December 31, 2023 and 2022

 

The following table and discussion provide insight into our consolidated results of operations for the years ended December 31, 2023 and 2022 (in thousands):

 

   Years Ended December 31,         
   2023   2022   $ Change   % Change 
Revenues                    
Asset management revenues  $10,571   $15,344   $(4,773)   (31.1)%
Performance allocations   3,639    2,543    1,096    43.1%
Consolidated funds – hospitality revenues   68,905    59,564    9,341    15.7%
Consolidated funds – other revenues   7,822    6,505    1,317    20.2%
Total revenues   90,937    83,956    6,981    8.3%
                     
Expenses                    
Operating costs   21,311    14,609    6,702    45.9%
General and administrative   6,770    6,679    91    1.4%
Marketing and advertising   1,052    1,179    (127)   (10.8)%
Depreciation and amortization   550    58    492    848.3%
Consolidated funds – hospitality expenses   80,669    60,667    20,002    33.0%
Consolidated funds – other expenses   9,162    9,213    (51)   (0.6)%
Total expenses   119,514    92,405    27,109    29.3%
                     
Consolidated funds - gain on sale of real estate investments   4,976    21,530    (16,554)   (76.9)%
                     
Other income, net   374    326    48    14.7%
Gain on extinguishment of debt       1,421    (1,421)   (100.0)%
Interest income   350    178    172    96.6%
Interest expense   (4,717)   (1,055)   (3,662)   347.1%
Net (loss) income before income taxes   (27,594)   13,951    (41,545)   (297.8)%
Benefit from income taxes               0.0%
Net (loss) income   (27,594)   13,951    (41,545)   (297.8)%
Net (loss) income attributable to noncontrolling interests   (14,891)   11,931    (26,822)   (224.8)%
Net (loss) income attributable to CaliberCos Inc.  $(12,703)  $2,020   $(14,723)   (728.9)%

 

For the years ended December 31, 2023 and 2022, total revenues were $90.9 million and $84.0 million, respectively, representing a period-over-period increase of 8.3%. This increase was primarily due to an increase in revenues in our consolidated fund hotel assets resulting from increased occupancy rates and higher average daily rates and from revenues from Hilton Tucson East, which became a consolidated entity during the year ended December 31, 2023, offset by a decrease in asset management revenues. Asset management revenues consist of fees earned for fund set-up and formation, asset management, financing, development and construction, and brokerage services. The decrease in asset management revenues was primarily due to fund set-up fees earned for services performed in conjunction with the formation of Caliber Tax Advantaged Opportunity Zone Fund II, LLC during the year ended December 31, 2022.

 

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For the years ended December 31, 2023 and 2022, total expenses were $119.5 million and $92.4 million, respectively, representing a period-over-period increase of 29.3%. The increase was primarily due to an increase in consolidated fund related expenses due to rising labor costs and variable costs associated with increased revenue, such as management and franchise fees and loyalty program costs, and from operating expenses from Hilton Tucson East, which became a consolidated entity during the year ended December 31, 2023. In addition, there was an increase in operating costs from (i) additional payroll associated with increased headcount and cost of human capital driven by the Company’s growth initiatives, as the Company looks to enhance its capabilities across all lines of service, and (ii) an increase in stock compensation expense for restricted stock units that vested upon the closing of the Company’s initial public offering.

 

For the year ended December 31, 2023, consolidated funds – gain on sale of real estate investments includes the $5.0 million gain recognized on the sale of Northsight Crossing, a commercial property with a cost basis of $21.7 million. For the year ended December 31, 2022, consolidated funds – gain on sale of real estate investments includes the $21.5 million gain recognized on the sale of GC Square Apartments, a multi-family property with a cost basis of $9.1 million.

 

For the year ended December 31, 2023, other income, net includes rental income of $1.6 million related to space leased to third parties in Caliber’s headquarters office building, offset by a $1.3 million loss of estimated amounts due to investors of the Caliber Residential Advantage Fund, LP (“CRAF”) upon redemption of their investment and payment of any accrued and unpaid preferred return related to the disposal of the last single-family residential home owned by the fund (“Loss on CRAF Investment Redemption”). There was no comparable activity during the year ended December 31, 2022.

 

For the years ended December 31, 2023 and 2022, interest expense was $4.7 million and $1.1 million, respectively. The increase was primarily due to the increase in corporate notes outstanding during the year ended December 31, 2023, as compared to the same period in 2022. In addition, there was one real estate note outstanding during the year ended December 31, 2023 with no comparable real estate notes outstanding during the same period in 2022.

 

Comparison of the Unconsolidated Results of Operations for the Year Ended December 31, 2023 and 2022

 

The following table and discussion provide insight into our unconsolidated results of operations of the asset management platform for the year ended December 31, 2023 and 2022 (in thousands). Unconsolidated revenues and expenses are presented on a basis that deconsolidates our consolidated funds (intercompany eliminations) and eliminates noncontrolling interest. As a result, unconsolidated revenues are different than those presented on a consolidated basis in accordance with U.S. GAAP because fee revenue is eliminated in consolidation when it is derived from a consolidated fund and due to the exclusion of the fund revenue recognized by the consolidated funds. Furthermore, unconsolidated expenses are also different than those presented on a consolidated U.S. GAAP basis due to the exclusion of fund expenses that are paid by the consolidated funds. See the Non-GAAP Measures section below for reconciliations of the unconsolidated results to the most comparable U.S. GAAP measure.

 

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   Year Ended December 31,         
   2023   2022   $ Change   % Change 
Revenues                
Asset management revenues  $16,982   $21,575   $(4,593)   (21.3)%
Performance allocations   3,656    2,543    1,113    43.8%
Total revenues   20,638    24,118    (3,480)   (14.4)%
                     
Expenses                    
Operating costs   21,808    14,609   $7,199    49.3%
General and administrative   6,807    6,742    65    1.0%
Marketing and advertising   1,053    1,179    (126)   (10.7)%
Depreciation and amortization   551    44    507    1,152.3%
Total expenses   30,219    22,574    7,645    33.9%
                     
Other income (loss), net   649    256   $393    153.5%
Gain on extinguishment of debt       1,421    (1,421)   (100.0)%
Interest income   1,863    177    1,686    952.5%
Interest expense   (4,716)   (1,056)   (3,660)   346.6%
Net (loss) income before income taxes   (11,785)   2,342    (14,127)   (603.2)%
Provision for income taxes               0.0%
Net (loss) income  $(11,785)  $2,342   $(14,127)   (603.2)%

 

For the years ended December 31, 2023 and 2022, total revenues were $20.6 million and $24.1 million, respectively, representing a period-over-period decrease of 14.4%. The table below compares the revenues earned for providing services under the Company’s asset management platform as described in the Revenue Recognition section of Note 2 – Summary of Significant Accounting Policies for the year ended December 31, 2023 to the revenues earned for the year ended December 31, 2022.

 

   Year Ended December 31,         
   2023   2022   $ Change   % Change 
Fund set-up fees  $523   $6,160   $(5,637)   (91.5)%
Fund management fees   9,597    8,347    1,250    15.0%
Financing fees   629    1,128    (499)   (44.2)%
Development and construction fees   4,984    3,492    1,492    42.7%
Brokerage fees   1,249    2,448    (1,199)   (49.0)%
Total asset management   16,982    21,575    (4,593)   (21.3)%
Performance allocations   3,656    2,543    1,113    43.8%
Total unconsolidated revenue  $20,638   $24,118   $(3,480)   (14.4)%

 

The decrease in fund set-up fees relates to services performed in conjunction with the formation of Caliber Tax Advantaged Opportunity Zone Fund II, LLC during the year ended December 31, 2022. In addition, the Company is transitioning from fund formation fees that are recognized as capital is raised into a fund to fund set-up fees that are a one-time fee not conditional on capital raise, resulting in a decrease in fund set-up fees of $0.9 million from the year ended December 31, 2022 to the year ended December 31, 2023.

 

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The increase in development and construction fees is primarily due the execution of development agreements related to eight projects, partially offset by completing construction at three projects during the year ended December 31, 2023.

 

The decrease in brokerage fees is primarily due to a decrease in brokerage transactions, which were $57.8 million during the year ended December 31, 2023, as compared to $117.5 million in the same period in 2022.

 

For the year ended December 31, 2023 performance allocations were $3.7 million, which represents the carried interest earned related to the contribution of the hospitality assets to Caliber Hospitality, LP in March 2023, the disposition of one commercial property located in Scottsdale, Arizona, and 80 acres of land located in Johnstown, Colorado. For the year ended December 31, 2022 performance allocations were $2.5 million, which represents the carried interest earned related to the sale of the GC Square Apartments multi-family property in March 2022.

 

For the years ended December 31, 2023 and 2022, total expenses were $30.2 million and $22.6 million, respectively, representing a period-over-period increase of 33.9%. The increase was primarily due to an increase in operating costs from (i) additional payroll associated with increased headcount and cost of human capital driven by the Company’s growth initiatives, as the Company looks to enhance its capabilities across all lines of service, and (ii) an increase in stock compensation expense for restricted stock units that vested upon the closing of the Company’s initial public offering. The increase in depreciation and amortization was primarily due to the acquisition of the Company’s headquarters office building during the year ended December 31, 2023.

 

For the year ended December 31, 2023, other income, net includes rental income of $1.6 million related to space leased to third parties in Caliber’s headquarters office building, offset by a $1.3 million loss of estimated amounts due to investors of the Caliber Residential Advantage Fund, LP upon redemption of their investment and payment of any accrued and unpaid preferred return related to the disposal of the last single-family residential home owned by the fund. There was no comparable activity during the year ended December 31, 2022.

 

For the years ended December 31, 2023 and 2022, interest expense was $4.7 million and $1.1 million, respectively. The increase was primarily due to the increase in corporate notes outstanding during the year ended December 31, 2023, as compared to the same period in 2022. In addition, there was one real estate note outstanding during the year ended December 31, 2023 with no comparable real estate notes outstanding during the same period in 2022.

 

Investment Valuations

 

The investments that are held by our funds are generally considered to be illiquid and have no readily ascertainable market value. We value these investments based on our estimate of their fair value as of the date of determination. We estimate the fair value of our fund’s investments based on several inputs built within forecasting models. The models generally rely on discounted cash flow analysis and other techniques and may include independently sourced market parameters. The material estimates and assumptions used in these models include the timing and expected amounts of cash flows, income and expenses for the property, the appropriateness of discount rates used, overall capitalization rate, and, in some cases, the ability to execute, estimated proceeds and timing of expected sales and financings. Most of our assets utilize the income approach to value the property. Where appropriate, management may obtain additional supporting evidence of values from methods generally utilized in the real estate investment industry, such as appraisal reports and broker price opinion reports.

 

With respect to the underlying factors that led to the change in fair value in the current year, we identify assets that are undervalued and/or underperforming as part of our acquisition strategy. Such assets generally undergo some form of repositioning soon after our acquisition to help drive increased appreciation and operating performance. Once the repositioning is complete, we focus on increasing the asset’s net operating income, thereby further increasing the value of the asset. By making these below-market acquisitions, adding value through development activities, and increasing free cash flow with proper management all represent a material component to our core business model.

 

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A unique feature of Caliber’s funds is the discretion given to Caliber’s management team to decide when to sell assets and when to hold them. We believe this discretion allows Caliber to avoid selling properties that, while their business plan may have matured, the market will not pay an attractive price in the current environment. Avoiding selling at a time of disruption, such as all of 2020, is critical to preserving the value of our assets, our carried interest, our ongoing revenues, and our clients’ capital. While this is management’s expectation, there can be no assurance these outcomes will occur.

 

Assets Under Management

 

AUM refers to the assets we manage or sponsor. We monitor two types of information regarding our AUM:

 

i.Managed Capital – we define this as the total capital we fundraise from our customers as investments in our funds. It also includes fundraising into our corporate note program, the proceeds of which were used, in part, to invest in or loan to our funds. We use this information to monitor, among other things, the amount of ‘preferred return’ that would be paid at the time of a distribution and the potential to earn a performance fee over and above the preferred return at the time of the distribution. Our fund management fees are based on a percentage of managed capital or a percentage of assets under management, and monitoring the change and composition of managed capital provides relevant data points for Caliber management to further calculate and predict future earnings.

 

ii.Fair Value (“FV”) AUM – we define this as the aggregate fair value of the real estate assets we manage and from which we derive management fees, performance revenues and other fees and expense reimbursements. We estimate the value of these assets quarterly to help make sale and hold decisions and to evaluate whether an existing asset would benefit from refinancing or recapitalization. This also gives us insight into the value of our carried interest at any point in time. We also utilize FV AUM to predict the percentage of our portfolio which may need development services in a given year, fund management services (such as refinance), and brokerage services. As we control the decision to hire for these services, our service income is generally predictable based upon our current portfolio AUM and our expectations for AUM growth in the year forecasted. As of September 30, 2024, we had total FV AUM of approximately $807.0 million.

 

Although we believe we are utilizing generally accepted methodologies for our calculation of managed capital and FV AUM, it may differ from our competitors, thereby making these metrics non-comparable to our competitors.

 

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Managed Capital

 

The table below summarizes the activity of the managed capital for the year ended September 30, 2024 (in thousands):

 

   Managed Capital 
Balances as of December 31, 2022  $383,189 
Originations   74,857 
Redemptions   (22,962)
Other (1)   2,541 
Balances as of December 31, 2023  $437,625 
Originations   19,099 
Redemptions   (2,819)
Balances as of March 31, 2024  $453,905 
Originations   18,936 
Redemptions   (3,041)
Balances as of June 30, 2024  $469,800 
Originations   23,372 
Redemptions   (7,900)
Balances as of September 30, 2024  $485,272 

 

(1)Other represents the inclusion of an investment of one of our funds upon the completion of an equity swap during the year ended December 31, 2023.

 

The following table summarizes managed capital for our investment fund portfolios as of September 30, 2024 and December 31, 2023 (in thousands):

 

   September 30, 2024   December 31, 2023   December 31, 2022 
Real Estate               
Hospitality  $47,560   $43,660   $102,071 
Caliber Hospitality Trust (1)   96,879    70,747     
Residential   92,683    74,224    62,819 
Commercial   167,989    155,004    128,210 
Total Real Estate (2)    405,111    343,635    293,100 
Credit (3)    70,541    84,588    74,766 
Other (4)    9,620    9,402    15,323 
Total  $485,272   $437,625   $383,189 

 

 

(1)The Company earns a fund management fee of 0.70% of the Caliber Hospitality Trust’s enterprise value and is reimbursed for certain costs incurred on behalf of the Caliber Hospitality Trust.

(2)  Beginning during the year ended December 31, 2023, the Company includes capital raised from investors in CaliberCos Inc. through corporate note issuances that was further invested in our funds in Managed Capital. As of September 30, 2024 and December 31, 2023, the Company had invested $19.7 million and $18.3 million, respectively, in our funds.

(3)  Credit managed capital represents loans made to Caliber’s investment funds by the Company and our diversified funds. As of September 30, 2024 and December 31, 2023, the Company had loaned $0.3 million and $8.5 million to our funds.

(4)  Other managed capital represents undeployed capital held in our diversified funds.

 

Managed capital for our hospitality investment funds increased by $3.9 million during the nine months ended September 30, 2024, due to a $3.9 million related party note receivable bearing 12.0% interest, issued to Caliber Hospitality Trust.

 

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Managed capital for our hospitality funds increased by $12.3 million during the year ended December 31, 2023, representing: (i) the $6.7 million purchase of Caliber Hospitality Trust’s Class A non-voting preferred stock and (ii) $1.2 million purchase of Caliber Hospitality Trust’s Class B non-voting preferred stock, which was offset by (iii) a $6.0 million decrease when hotel operations ceased at the Four Points by Sheraton hotel, as the Company is converting the property into a multi-family residential asset. The Company also invested $10.4 million into our hospitality funds through corporate notes.

 

Managed capital for the Caliber Hospitality Trust increased by $26.1 million during the nine months ended September 30, 2024, primarily due to the issuance of $9.6 million of Caliber Hospitality, LP operating partnership units in exchange for the contribution of a hotel from L.T.D. on March 7, 2024 (the first of nine committed hotels from L.T.D.’s portfolio) and $16.6 million of investments in Caliber Hospitality Trusts’ non-voting preferred stock.

 

Managed capital for our residential investment funds increased by $18.5 million during the nine months ended September 30, 2024, due to: (i) $13.0 million in capital raised into our residential assets offset by $6.8 million of redemptions, and (ii) $12.3 million contributed by our diversified funds.

 

Managed capital for our residential investment funds increased by $11.4 million during the year ended December 31, 2023: representing (i) $7.1 million in capital raised into our residential assets offset by $4.3 million of redemptions, and (ii) $5.1 million contributed by our diversified funds offset by $2.5 million of redemptions by diversified funds. Additionally, there was an additional $6.0 million due to the planned conversion of the Four Points by Sheraton hotel discussed above.

 

Managed capital for our commercial investment funds increased $13.0 million during the nine months ended September 30, 2024, due to: (i) $8.8 million in capital raised into our commercial assets, offset by $3.2 million of redemptions, and (ii) $9.9 million contributed by our diversified funds offset by $2.5 million return of capital. The scope of investments included tenant improvements, land development, and acquiring existing operating commercial properties.

 

Managed capital for our commercial investment funds increased $26.8 million during the year ended December 31, 2023, representing: (i) $10.7 million in capital raised into our commercial assets offset by $9.8 million of redemptions, (ii) $2.5 million due to the inclusion of an investment of one of our funds upon the completion of an equity swap, and (iii) $25.7 million contributed by our diversified funds offset by $2.3 million of redemptions, to support four commercial ground-up builds and acquisitions in Arizona and one commercial ground-up build and acquisition in Colorado. The scope of investments included tenant improvements, land development, and acquiring existing operating commercial properties.

 

During the nine months ended September 30, 2024, our diversified funds deployed $13.5 million into our various real estate investments, which was offset by $20.0 million of repayments of outstanding notes receivable. The Company deployed $0.1 million directly into real estate investments in the form of notes receivable, which was offset by $7.5 million of repayments of outstanding notes receivable.

 

During the year ended December 31, 2023, we raised $21.0 million of new capital into Caliber Fixed Income Fund III, LP (“CFIF III”) and deployed it into our various real estate investments, which was offset by $19.4 million of repayments of the notes receivable. We also deployed $24.8 million directly into new investments in the form of notes receivable, which was offset by $16.6 million of repayments of the notes receivable.

 

As of September 30, 2024, we held $9.6 million of other managed capital, which included a $3.2 million private equity investment in a local start-up business and $6.4 million of undeployed cash and pursuit costs.

 

As of December 31, 2023, we held $9.4 million of other managed capital, which included a $3.2 million private equity investment in a local start-up business and $5.3 million of undeployed cash and pursuit costs, compared to $15.3 million of other managed capital, which included a $6.2 million private equity investment in a local start-up business and $12.1 million of undeployed cash and pursuit costs held as of December 31, 2022.

 

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FV AUM

 

Our FV AUM increased primarily due to the L.T.D. hotel contribution into the Caliber Hospitality Trust. The table below details the activities that had an impact on our FV AUM, during the nine months ended September 30, 2024 (in thousands).

 

Balances as of December 31, 2022  $745,514 
Assets acquired (4)    29,384 
Construction and net market appreciation   9,129 
Assets sold or disposed (1)   (52,710)
Credit (2)   9,822 
Other (3)   51 
Balances as of December 31, 2023  $741,190 
CHT contribution   29,900 
Construction and net market appreciation   10,971 
Assets sold (1)   (12,771)
Credit (2)   (781)
Other (3)   (1,771)
Balances as of March 31, 2024  $766,738 
Assets acquired (4)    14,000 
Construction and net market appreciation   27,994 
Assets sold or disposed (1)   (22,994)
Credit (2)   (12,835)
Other (3)    310 
Balances as of June 30, 2024  $773,213 
Assets acquired (4)    20,590 
Construction and net market appreciation   11,910 
Credit (2)   (431)
Other (3)    1,679 
Balances as of September 30, 2024  $806,961 

 

The following table summarizes FV AUM of our investment fund portfolios as of September 30, 2024 and December 31, 2023 (in thousands):

 

   September 30, 2024   December 31, 2023   December 31, 2022 
Real Estate               
Hospitality  $68,800   $67,200   $319,300 
Caliber Hospitality Trust   240,300    201,600     
Residential   162,100    138,000    86,900 
Commercial   255,600    240,400    255,197 
Total Real Estate   726,800    647,200    661,397 
Credit (3)   70,541    84,588    74,766 
Other (4)   9,620    9,402    9,351 
Total  $806,961   $741,190   $745,514 

 

 

(1)Assets sold during the nine months ended September 30, 2024 include a commercial asset, lot sales related to two development assets in Colorado, and one home from our residential fund. Assets sold during the year ended December 31, 2023 include lot sales related to a development asset in Colorado, one development asset in Colorado, nine homes from our residential fund, and one commercial asset in Arizona.

(2)  Credit FV AUM represents loans made to Caliber’s investment funds by our diversified credit fund.

(3)  Other FV AUM represents undeployed capital held in our diversified funds.

(4)  Assets acquired during the nine months ended September 30, 2024 include land for one commercial asset in Colorado. Assets acquired during the year ended December 31, 2023 include one development asset in Colorado, our headquarters office building, and two multi-family residential assets in Arizona.

 

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Assets Under Development

 

We have a number of development, redevelopment, construction, and entitlement projects that are underway or are in the planning stages, which we define as AUD. This category includes projects to be built on undeveloped land and projects to be built and constructed on undeveloped lands, which are not yet owned by our funds. Completing these development activities may ultimately result in income-producing assets, assets we may sell to third parties, or both. As of September 30, 2024, we are actively developing 1,796 multifamily units, 697 single family units, 3.7 million square feet of commercial and industrial, and 3.5 million square feet of office and retail. If all of these projects are brought to completion, the total cost capitalized to these projects, which represents total current estimated costs to complete the development and construction of such projects by us or a third party, is $2.1 billion, which we expect would be funded through a combination of undeployed fund cash, third-party equity, project sales, tax credit financing and similar incentives, and secured debt financing. We are under no obligation to complete these projects and may dispose of any such assets at any time. There can be no assurance that AUD will ultimately be developed or constructed because of the nature of the cost of the approval and development process and market demand for a particular use. In addition, the mix of residential and commercial assets under development may change prior to final development. The development of these assets will require significant additional financing or other sources of funding, which may not be available.

 

Non-GAAP Measures

 

We use non-GAAP financial measures to evaluate operating performance, identify trends, formulate financial projections, make strategic decisions, and for other discretionary purposes. We believe that these measures enhance the understanding of ongoing operations and comparability of current results to prior periods and may be useful for investors to analyze our financial performance because they provides investors a view of the performance attributable to CaliberCos Inc. When analyzing our operating performance, investors should use these measures in addition to, and not as an alternative for, their most directly comparable financial measure calculated and presented in accordance with U.S. GAAP. Our presentation of non-GAAP measures may not be comparable to similarly identified measures of other companies because not all companies use the same calculations. These measures may also differ from the amounts calculated under similarly titled definitions in our debt instruments, which amounts are further adjusted to reflect certain other cash and non-cash charges and are used by us to determine compliance with financial covenants therein and our ability to engage in certain activities, such as incurring additional debt and making certain restricted payments.

 

Fee-Related Earnings and Related Components

 

Fee-Related Earnings is a supplemental non-GAAP performance measure used to assess our ability to generate profits from fee-based revenues, focusing on whether our core revenue streams, are sufficient to cover our core operating expenses. Fee-Related Earnings represents the Company’s net income (loss) before income taxes adjusted to exclude depreciation and amortization, stock-based compensation, interest expense and extraordinary or non-recurring revenue and expenses, including performance allocation revenue and gain (loss) on extinguishment of debt, public registration direct costs related to aborted or delayed offerings and our Reg A+ offering, the share repurchase costs related to the Company’s Buyback Program, litigation settlements, and expenses recorded to earnings relating to investment deals which were abandoned or closed. Fee-Related Earnings is presented on a basis that deconsolidates our consolidated funds (intercompany eliminations) and eliminates noncontrolling interest. Eliminating the impact of consolidated funds and noncontrolling interest provides investors a view of the performance attributable to CaliberCos Inc. and is consistent with performance models and analysis used by management.

 

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Distributable Earnings

 

Distributable Earnings is a supplemental non-GAAP performance measure equal to Fee-Related Earnings plus performance allocation revenue and less interest expenses and provision for income taxes. We believe that Distributable Earnings can be useful as a supplemental performance measure to our GAAP results assessing the amount of earnings available for distribution.

 

Platform Adjusted EBITDA

 

Platform Adjusted EBITDA represents the Company’s Distributable Earnings adjusted for interest expense, the share repurchase costs related to the Company’s Buyback Program, other income (expense), and provision for income taxes on a basis that deconsolidates our consolidated funds (intercompany eliminations) and eliminates noncontrolling interest. Eliminating the impact of consolidated funds and noncontrolling interest provides investors a view of the performance attributable to CaliberCos Inc. and is consistent with performance models and analysis used by management.

 

Consolidated Adjusted EBITDA

 

Consolidated Adjusted EBITDA represents the Company’s and the consolidated funds’ earnings before net interest expense, income taxes, depreciation and amortization, further adjusted to exclude stock-based compensation, transaction fees, expenses and other public registration direct costs related to aborted or delayed offerings and our Reg A+ offering, the share repurchase costs related to the Company’s Buyback Program, litigation settlements, expenses recorded to earnings relating to investment deals which were abandoned or closed, any other non-cash expenses or losses, as further adjusted for extraordinary or non-recurring items.

 

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The following table presents a reconciliation of net (loss) income attributable to CaliberCos Inc. to Fee-Related Earnings, Distributable Earnings, Platform Adjusted EBITDA, and Consolidated Adjusted EBITDA for the nine months ended September 30, 2024 and 2023 (in thousands):

 

   Nine Months Ended September 30, 
   2024   2023 
Net loss attributable to CaliberCos Inc.  $(8,389)  $(10,342)
Net loss attributable to noncontrolling interests   (2,188)   (13,165)
Net loss   (10,577)   (23,507)
Provision for income taxes        
Net loss before income taxes   (10,577)   (23,507)
Depreciation and amortization   447    409 
Consolidated funds’ impact on fee-related earnings   1,897    13,653 
Stock-based compensation   1,722    3,017 
Severance   203    19 
Performance allocations   (357)   (2,474)
Other income, net   (1,015)   (1,479)
Interest expense, net   3,444    1,930 
Fee-Related Earnings   (4,236)   (8,432)
Performance allocations   357    2,474 
Interest expense, net   (3,444)   (1,930)
Distributable Earnings   (7,323)   (7,888)
Interest expense   3,958    3,408 
Share buy-back       183 
Other income, net   1,015    1,479 
Consolidated funds’ impact on Caliber Adjusted EBITDA   642    14 
Platform Adjusted EBITDA   (1,708)   (2,804)
Consolidated funds' EBITDA Adjustments   7,177    6,475 
Consolidated Adjusted EBITDA  $5,469   $3,671 

 

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The following tables present a reconciliation of platform revenues, expenses and net income to the most comparable GAAP measure for the nine months ended September 30, 2024 and 2023 (in thousands):

 

   Nine Months Ended September 30, 2024 
   Platform   Impact of
Consolidated
Funds
   Consolidated 
Revenues            
Asset management  $15,976   $(3,050)  $12,926 
Performance allocations   378    (21)   357 
Consolidated funds – hospitality revenue       23,533    23,533 
Consolidated funds – other revenue       5,616    5,616 
Total revenues   16,354    26,078    42,432 
                
Expenses               
Operating costs   15,971    (582)   15,389 
General and administrative   5,490    (30)   5,460 
Marketing and advertising   508    (1)   507 
Depreciation and amortization   447    (8)   439 
Consolidated funds – hospitality expenses       23,191    23,191 
Consolidated funds – other expenses       5,405    5,405 
Total expenses   22,416    27,975    50,391 
                
Other income, net   1,468    (453)   1,015 
Interest income   514    (189)   325 
Interest expense   (3,958)       (3,958)
Net loss before income taxes   (8,038)   (2,539)   (10,577)
Provision for income taxes            
Net loss   (8,038)   (2,539)   (10,577)
Net loss attributable to noncontrolling interests       (2,188)   (2,188)
Net loss attributable to CaliberCos Inc.  $(8,038)  $(351)  $(8,389)

 

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   Nine Months Ended September 30, 2023 
   Platform   Impact of
Consolidated
Funds
   Consolidated 
Revenues            
Asset management  $10,977   $(4,731)  $6,246 
Performance allocations   2,474        2,474 
Consolidated funds – hospitality revenue       52,008    52,008 
Consolidated funds – other revenue       6,264    6,264 
Total revenues   13,451    53,541    66,992 
                
Expenses               
Operating costs   15,912    293    16,205 
General and administrative   4,659    255    4,914 
Marketing and advertising   887    1    888 
Depreciation and amortization   197    212    409 
Consolidated funds – hospitality expenses       59,676    59,676 
Consolidated funds – other expenses       6,757    6,757 
Total expenses   21,655    67,194    88,849 
                
Other income, net   294    1,185    1,479 
Interest income   1,479    (1,200)   279 
Interest expense   (3,409)   1    (3,408)
Net loss before income taxes   (9,840)   (13,667)   (23,507)
Provision for income taxes            
Net loss   (9,840)   (13,667)   (23,507)
Net loss attributable to noncontrolling interests       (13,165)   (13,165)
Net loss attributable to CaliberCos Inc.  $(9,840)  $(502)  $(10,342)

 

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The following table presents a reconciliation of net (loss) income attributable to CaliberCos Inc. to Fee-Related Earnings, Distributable Earnings, Platform Adjusted EBITDA, and Consolidated Adjusted EBITDA for the years ended December 31, 2023 and 2022 (in thousands):

 

   Years Ended December 31, 
   2023   2022 
Net (loss) income attributable to CaliberCos Inc.  $(12,703)  $2,020 
Net (loss) income attributable to noncontrolling interests   (14,891)   11,931 
Net (loss) income   (27,594)   13,951 
Provision for income taxes        
Net (loss) income before income taxes   (27,594)   13,951 
Depreciation and amortization   551    58 
Consolidated funds’ impact on fee-related earnings   14,020    (11,551)
Stock-based compensation   3,726    460 
Severance   19     
Legal costs       525 
Public registration costs       779 
Performance allocations   (3,639)   (2,543)
Other income, net   (374)   (326)
Gain on extinguishment of debt       (1,421)
Interest expense, net   4,367    877 
Fee-Related Earnings   (8,924)   809 
Performance allocations   3,639    2,543 
Interest expense, net   (4,367)   (877)
Distributable Earnings   (9,652)   2,475 
Interest expense   4,717    1,055 
Share buy-back   183    313 
Other income, net   374    326 
Loss on CRAF Investment Redemption   1,339     
Gain on extinguishment of Payroll Protection Programs loans       1,421 
Consolidated funds’ impact on Caliber Adjusted EBITDA   1,788    (71)
Platform Adjusted EBITDA   (1,251)   5,519 
Consolidated funds' EBITDA Adjustments   11,419    31,220 
Consolidated Adjusted EBITDA  $10,168   $36,739 

 

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The following tables present a reconciliation of platform revenues, expenses and net income to the most comparable GAAP measure for the years ended December 31, 2023 and 2022 (in thousands):

 

   Years Ended December 31, 2023 
   Platform   Impact of
Consolidated
Funds
   Consolidated 
Revenues            
Asset management  $16,982   $(6,411)  $10,571 
Performance allocations   3,656    (17)   3,639 
Consolidated funds – hospitality revenue       68,905    68,905 
Consolidated funds – other revenue       7,822    7,822 
Total revenues   20,638    70,299    90,937 
                
Expenses               
Operating costs   21,808    (497)   21,311 
General and administrative   6,807    (37)   6,770 
Marketing and advertising   1,053    (1)   1,052 
Depreciation and amortization   551    (1)   550 
Consolidated funds – hospitality expenses       80,669    80,669 
Consolidated funds – other expenses       9,162    9,162 
Total expenses   30,219    89,295    119,514 
                
Consolidated funds – gain on sale of real estate investments       4,976    4,976 
                
Other income (loss), net   649    (275)   374 
Interest income   1,863    (1,513)   350 
Interest expense   (4,716)   (1)   (4,717)
Net loss before income taxes   (11,785)   (15,809)   (27,594)
Provision for income taxes            
Net loss   (11,785)   (15,809)   (27,594)
Net loss attributable to noncontrolling interests       (14,891)   (14,891)
Net loss attributable to CaliberCos Inc.  $(11,785)  $(918)  $(12,703)

 

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   Years Ended December 31, 2022 
   Platform   Impact of Consolidated Funds   Consolidated 
Revenues            
Asset management  $21,575   $(6,231)  $15,344 
Performance allocations   2,543        2,543 
Consolidated funds – hospitality revenue       59,564    59,564 
Consolidated funds – other revenue       6,505    6,505 
Total revenues   24,118    59,838    83,956 
                
Expenses               
Operating costs   14,609        14,609 
General and administrative   6,742    (63)   6,679 
Marketing and advertising   1,179        1,179 
Depreciation and amortization   44    14    58 
Consolidated funds – hospitality expenses       60,667    60,667 
Consolidated funds – other expenses       9,213    9,213 
Total expenses   22,574    69,831    92,405 
                
Consolidated funds – gain on sale of real estate investments       21,530    21,530 
                
Other income, net   256    70    326 
Gain on extinguishment of debt   1,421        1,421 
Interest income   177    1    178 
Interest expense   (1,056)   1    (1,055)
Net income before income taxes   2,342    11,609    13,951 
Provision for income taxes            
Net income   2,342    11,609    13,951 
Net income attributable to noncontrolling interests       11,931    11,931 
Net income (loss) attributable to CaliberCos Inc.  $2,342   $(322)  $2,020 

 

Liquidity and Capital Resources

 

At September 30, 2024, the Company had a portfolio of corporate notes, whose composition and characteristics are similar to those reported in prior fiscal periods. At September 30, 2024, the portfolio consists of 211 unsecured notes with an aggregate principal balance of $33.0 million, of which $32.4 million mature within the 12-month period subsequent to November 12, 2024. Each note generally has a 12-month term with an option to extend for an additional 12-month term.

 

On November 26, 2024, the Company filed a Certificate of Designations, Preferences and Rights (the “Series A Certificate of Designation”) with the Secretary of State of the State of Delaware to establish the preferences, voting powers, limitations as to dividends or other distributions, qualifications, terms and conditions of redemption and other terms and conditions of the Company’s Series A Convertible Preferred Stock, par value $0.001 (the “Series A Preferred Stock”). The Series A Preferred Stock is subject to certain rights, preferences, privileges, and obligations, including voluntary and mandatory conversion provisions, as well as beneficial ownership restrictions and share cap limitations, as set forth in the Series A Certificate of Designation and as more fully described under “Description of Securities” below. Additionally, on November 26, 2024, the Company issued and sold 100,000 shares of Series A Preferred Stock for gross proceeds of $2,000,000.

 

Because the Company incurred operating losses and negative cash flow from operations for the nine months ended September 30, 2024, and could experience additional future operating losses and negative cash flow in the near term, combined with the fact that the Company does not have sufficient cash on hand to satisfy the total of the notes that mature within the next 12 months, these conditions and events raise substantial doubt about the Company’s ability to continue as a going concern. In response to these conditions, management considered the impact of these near-term maturities on the Company.

 

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Since the note program began, these notes have demonstrated a high rate of extension of their terms. Subsequent to the issuance of its 2023 10-K, the Company has continued its discussions with various lenders in pursuit of extending or refinancing its unsecured loans. Through September 30, 2024, the rate of extension of the current notes is consistent with or greater than prior reported fiscal periods. Management plans to continue seeking and granting extensions on an ongoing basis consistent with prior reported fiscal periods.

 

Additionally, management evaluated the impact a default of one or many of these notes might have on the Company. As these notes are unsecured, the terms in the agreements do not afford the note holder avenues of recourse in a default that could or would impact the Company adversely in the normal course of business, as the terms lack provisions for rights or claims against the Company’s assets, nor is there a scenario where a default could force liquidation of the Company. Management believes that even in the event of default of one or many of these notes, the Company would be able to negotiate a waiver of the default either through an extension of the maturity or principal repayment schedule.

 

In addition, management has implemented various plans to address operating losses and near-term maturities or demands for repayment of its notes. Consistent with reported actions taken in prior fiscal periods, management plans to continue to i) negotiate extensions of such loans or refinance such debt, ii) obtain new financing, iii) reduce operating costs, iv) collect all or part of its $13.3 million in receivables, v) collect all or part of its $19.7 million investments from its managed funds, vi) increase capital raise through continued expansion of fundraising channels, vii) sell or accept investment into its corporate headquarters, viii) place debt on unencumbered assets, and/or ix) generate planned cash from operations.

 

In the execution of our aforementioned plans, during the nine months ended September 30, 2024, we collected $8.2 million of notes receivable and $2.7 million of accounts receivable. The Company also executed a reduction in force of approximately 10% of its employees in May 2024, with an expected annual saving of compensation and benefits expenses of $4.0 million. The Company has also executed on cost reduction plans with estimated annual savings of $2.5 million.

 

After consideration of the implemented and planned actions, in particular continuing to renew maturing unsecured corporate notes, there are no assurances that management’s actions will alleviate substantial doubt about the company’s ability to continue as a going concern beyond one year from the date that the consolidated financial statements are issued.

 

Each of our funds and the related assets that are acquired or own equity interest in those funds are established as separate legal entities with limited liability. Therefore, the cash flows generated by these entities, whether through operations or financing, are unavailable for general corporate purposes, except as payment to the Company for services performed by the Company.

 

We have historically financed our operations primarily through a combination of operating cash flows, private offerings of our equity securities, and secured and unsecured debt. In addition, due to the consolidation of CFIF III, we recognize a revolving line of credit with a maximum borrowing amount of $4.5 million.

 

We hold our excess unrestricted cash in bank accounts with several high-quality financial institutions.

 

Corporate Debt

 

As of September 30, 2024, we have issued and outstanding unsecured promissory notes of $33.0 million with an average outstanding principal balance of $0.2 million, a weighted average interest rate of 11.41%, and maturity dates ranging from January 2024 to April 2026. The purpose of this financing program is to provide the Company with flexible, short-term capital to be used to grow its assets under management and assist funds in a fast-moving acquisition or investment, as well as general corporate purposes. Additionally, the program provides customers of Caliber’s funds access to a short-term lending opportunity. Management actively manages each relationship to determine if the respective customer would like to redeem upon maturity or extend for an additional period of time. Management has historically been successful at extending these note programs and, as a result, continues to expect similar outcomes. This outstanding debt resulted in $1.0 million and $3.0 million of interest expense for the three and nine months ended September 30, 2024, respectively, and $1.2 million and $2.9 million of interest expense for the three and nine months ended September 30, 2023, respectively. The Company is in compliance with its financial covenants and we expect to remain in compliance for the 12-month period subsequent to the date of this offering.

 

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Cash Flows Analysis

 

The section below discusses in more detail the Company’s primary sources and uses of cash and primary drivers of cash flows within the Company’s consolidated statements of cash flows (in thousands).

 

   Nine Months Ended September 30,     
   2024   2023   $ Change 
Net cash provided by (used in):               
Operating activities  $(199)  $(11,142)  $10,943 
Investing activities   (14,364)   (43,955)   29,591 
Financing activities   1,026    57,580    (56,554)
Net change in cash and cash equivalents  $(13,537)  $2,483   $(16,020)

 

   Years Ended December 31,     
   2023   2022   $ Change 
Net cash provided by (used in):            
Operating activities  $(18,720)  $(7,429)  $(11,291)
Investing activities   (5,364)   (31,752)   26,388 
Financing activities   25,790    38,583    (12,793)
Net change in cash and cash equivalents  $1,706   $(598)  $2,304 

 

The assets of our consolidated funds, on a gross basis, can be substantially larger than the assets of our core business and, accordingly could have a substantial effect on the accompanying statements of cash flows. The table below summarizes our consolidated statements of cash flow by activity attributable to the Company and to our consolidated funds (in thousands).

 

   Nine Months Ended September 30,     
   2024   2023   $ Change 
Net cash used in the Company's operating activities  $(6,643)  $(4,098)  $(2,545)
Net cash provided by (used in) the consolidated funds' operating activities   6,444    (7,044)   13,488 
Net cash used in the Company's operating activities   (199)   (11,142)   10,943 
Net cash provided by (used in) the Company's investing activities   6,628    (19,880)   26,508 
Net cash used in the consolidated funds' investing activities   (20,992)   (24,075)   3,083 
Net cash used in the Company's investing activities   (14,364)   (43,955)   29,591 
Net cash (used in) provided by the Company's financing activities   (4,173)   41,627    (45,800)
Net cash provided by the consolidated funds' financing activities   5,199    15,953    (10,754)
Net cash provided by the Company's financing activities   1,026    57,580    (56,554)
Net change in cash and cash equivalents  $(13,537)  $2,483   $(16,020)

 

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   Years Ended December 31,     
   2023   2022   $ Change 
Net cash used in the Company's operating activities  $(7,153)  $(5,435)  $(1,718)
Net cash used in the consolidated funds' operating activities   (11,567)   (1,994)   (9,573)
Net cash used in the Company's operating activities   (18,720)   (7,429)   (11,291)
Net cash used in the Company's investing activities   (3,487)   (810)   (2,677)
Net cash used in the consolidated funds' investing activities   (1,877)   (30,942)   29,065 
Net cash used in the Company's investing activities   (5,364)   (31,752)   26,388 
Net cash provided by the Company's financing activities   24,706    8,452    16,254 
Net cash provided by the consolidated funds' financing activities   1,084    30,131    (29,047)
Net cash provided by the Company's financing activities   25,790    38,583    (12,793)
Net change in cash and cash equivalents  $1,706   $(598)  $2,304 

 

Operating Activities

 

Our net cash flows from operating activities are generally comprised of asset management revenues and performance allocations, less cash used for operating expenses, including interest paid on our debt obligations. Net cash flows used in operating activities of the Company increased during the nine months ended September 30, 2024 as compared to the same period in 2023. The increase primarily related to increased interest payments related to the Company’s corporate notes during the nine months ended September 30, 2024, as compared to the same period in 2023. Net cash flows provided by operating activities of the consolidated funds increased from the nine months ended September 30, 2024, as compared to net cash flows used in operating activities of the consolidated funds during the same period in 2023. The increase was primarily due to increased interest payments related to the consolidated funds notes payable and the deconsolidation of VIEs.

 

The increase in net cash flows used in operating activities of the Company during the year ended December 31, 2023, as compared to the same period in 2022, was primarily related to increased interest payments related to the Company’s corporate notes. The increase in net cash flows used in operating activities of the consolidated funds during the year ended December 31, 2023, as compared to the net cash flows provided by operating activities during the same period in 2022, was primarily due to increased interest payments related to the consolidated funds notes payable.

 

Investing Activities

 

Net cash flows provided by investing activities of the Company increased during the nine months ended September 30, 2024 as compared to the net cash flows used in investing activities of the Company for the same period in 2023. The increase primarily relates to an decrease in the acquisition of real estate assets. The decrease in net cash flows used in investing activities of the consolidated funds during the nine months ended September 30, 2024 as compared to the same period in 2023 is primarily due to the deconsolidation of VIEs, offset by a decrease in the acquisition of and investment in real estate assets and an increase in the net proceeds from notes receivable - related parties.

 

The increase in net cash flows used in investing activities of the Company for the year ended December 31, 2023, as compared to the same period in 2022, primarily relates to an increase in the acquisition of real estate assets. The decrease in net cash flows used in investing activities of the consolidated funds is primarily due to the decrease in the acquisition of real estate assets and the net impact of the consolidation and deconsolidation of VIEs, offset by a decrease in proceeds from the sale of real estate investments.

 

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Financing Activities

 

Net cash flows used in financing activities of the Company increased during the nine months ended September 30, 2024 as compared to the net cash flows provided by financing activities of the Company for the same period in 2023. The increase was primarily due to an decrease of $41.6 million of proceeds on notes payable. The decrease in net cash flows provided by financing activities of the consolidated funds during the nine months ended September 30, 2024 as compared to the same period in 2023 is primarily due to a decrease in contributions from noncontrolling interest holders of $6.4 million during the nine months ended September 30, 2024 as compared to the same period in 2023.

 

The increase in net cash flows provided by financing activities of the Company for the year ended December 31, 2023, as compared to the same period in 2022, was primarily due to an increase of $13.7 million of net proceeds on notes payable and an increase of $2.6 million in proceeds from the issuance of common stock, net of equity issuance costs during the year ended December 31, 2023 as compared to the same period in 2022. The decrease in net cash flows provided by financing activities of the consolidated funds is primarily due to a decrease in the net proceeds from notes payable and notes payable – related parties of our consolidated funds of $12.9 million, an increase in deferred financing costs paid of $2.3 million, and an increase in distributions to noncontrolling interest holders of $5.7 million during the year ended December 31, 2023 as compared to the same period in 2022.

 

Subsequent Events

 

On November 14, 2024, we filed our Form 10-Q for the quarterly period ended September 30, 2024. Subsequently, we filed a Certificate of Designations, Preferences and Rights (the “Certificate of Designation”) with the Secretary of State of the State of Delaware on November 26, 2024. The Certificate of Designation establishes the preferences, voting powers, limitations as to dividends or other distributions, qualifications, terms and conditions of redemption and other terms and conditions of the Company’s Series A Convertible Preferred Stock, par value $0.001 (the “Series A Preferred Stock”).

 

There were seven hundred fifty thousand (750,000) shares of the Series A Preferred Stock designated by this Certificate of Designation, of which we subsequently sold 100,000 shares for total proceeds of $2.0 million. As of the date of this filing, 650,000 shares of our Series A Preferred Stock designated on November 26, 2024, are available to issue by the Company.

 

Critical Accounting Estimates

 

The preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates are made and evaluated on an ongoing basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances. Actual results could differ from those estimates, perhaps in adverse ways, and those estimates could be different under different assumptions or conditions.

 

Accounting Estimates of the Company

 

We believe the following critical accounting policies affect the Company’s more significant estimates and judgements used in the preparation of our consolidated financial statements.

 

Revenue Recognition

 

In accordance with the Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), management applies the five-step framework in determining the timing and amount of revenue to recognize. This framework requires an entity to: (i) identify the contract(s) with customers, (ii) identify the performance obligations within the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations within the contract, and (v) recognize revenue when or as the entity satisfies a performance obligation.

 

Revenues from contracts with customers includes fixed fee arrangements with related party affiliates to provide certain associated activities which are ancillary to and generally add value to the assets we manage, such as set-up and fund formation services associated with marketing, soliciting, and selling member interests in the affiliated limited partnerships, brokerage services, construction and development management services, loan placement and guarantees. The recognition and measurement of revenue is based on the assessment of individual contract terms. For performance obligations satisfied at a point in time, there are no significant judgments made in evaluating when the customer obtains control of the promised service.

 

For performance obligations satisfied over time, significant judgment is required to determine how to allocate transaction prices where multiple performance obligations are identified; when to recognize revenue based on appropriate measurement of the Company’s progress under the contract; and whether constraints on variable consideration should be applied due to uncertain future events. Transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Variable consideration is included in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in transaction price are based largely on an assessment of its anticipated performance and all information that is reasonably available to the Company. Revenues are recognized when control of the promised services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.

 

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The following describes revenue recognition for the fees the Company earns from providing services under its asset management platform:

 

Fund set-up fees are a one-time fee for the initial formation, administration, and set-up of the private equity real estate fund. These fees are recognized at the point in time when the performance under the contract is complete and are included in asset management revenues in the accompanying consolidated statements of operations. Fund set-up fees replaced fund formation fees that are earned at a point in time at a fixed rate based on the amount of capital raised into certain managed funds.

 

Fund management fees are generally based on 1.0% to 1.5% of the unreturned capital contributions in a particular fund and include reimbursement for costs incurred on behalf of the fund, including an allocation of certain overhead costs. These customer contracts require the Company to provide management services, representing a performance obligation that the Company satisfies over time. With respect to the Caliber Hospitality Trust, the Company earns a fund management fee of 0.7% of the Caliber Hospitality Trust’s enterprise value and is reimbursed for certain costs incurred on behalf of the Caliber Hospitality Trust. These revenues are included in asset management revenues in the accompanying consolidated statements of operations.

 

Financing fees are earned for services the Company performs in securing third-party financing on behalf of our private equity real estate funds. These fees are recognized at the point in time when the performance under the contract is complete, which is essentially upon closing of a loan. In addition, the Company earns fees for guaranteeing certain loans, representing a performance obligation that the Company satisfies over time. These revenues are included in asset management revenues in the accompanying consolidated statements of operations.

 

Development and construction revenues from contracts with customers include fixed fee arrangements with related party affiliates to provide real estate development services as their principal developer, which include managing and supervising third-party developers and general contractors with respect to the development of the properties owned by the funds. Revenues are generally based on 4.0% of the total expected costs of the development or 4.0% of the total expected costs of the construction project. Prior to the commencement of construction, development fee revenue is recognized at a point in time as the related performance obligations are satisfied and the customer obtains control of the promised service, including negotiation, due diligence, entitlements, planning, and design activities. During the construction period, development fee revenue is recognized over time as the performance obligations are satisfied. These revenues are included in asset management revenues in the accompanying consolidated statements of operations.

 

Brokerage fees are earned at a point in time at fixed rates for services performed related to acquisitions, dispositions, leasing, and financing transaction, and are included in asset management revenues in the accompanying consolidated statements of operations.

 

Performance allocations are an arrangement in which we are entitled to an allocation of investment returns, generated within the investment funds which we manage, based on a contractual formula. We typically receive 15.0% to 35.0% of all cash distributions from (i) the operating cash flow of each fund, after payment to the related fund investors of any accumulated and unpaid priority preferred returns and repayment of preferred capital contributions; and (ii) the cash flow resulting from the sale or refinance of any real estate assets held by each fund, after payment to the related fund investors of any accumulated and unpaid priority preferred returns and repayment of initial preferred capital contributions. Our funds’ preferred returns range from 6.0% to 12.0%, typically 6.0% for common equity or 10.0% to 12.0% for preferred equity, which does not participate in profits. Performance allocations are related to services which have been provided and are recognized when it is determined that they are no longer probable of significant reversal, which is generally satisfied when an underlying fund investment is realized or sold. These revenues are included in performance allocations in the accompanying consolidated statements of operations.

 

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Income Taxes

 

The Company accounts for income taxes under the asset and liability method in accordance with ASC 740, Accounting for Income Taxes. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax basis of assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured by applying enacted tax rates and laws and are released in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are provided against deferred tax assets when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized.

 

A valuation allowance is required to reduce the balance of a deferred tax asset if it is determined that it is more-likely-than-not that all or some portion of the deferred tax asset will not be realized due to the lack of sufficient taxable income or other limitation on the Company’s ability to utilize the loss carryforward.

 

We recognize the impact of an income tax position, if that position is more-likely-than-not of being sustained on audit, based on the technical merits of the position. Related interest and penalties are classified as income taxes in the financial statements.

 

Accounting Estimates of Consolidated Funds

 

We believe the following critical accounting policies affect the consolidated funds’ more significant estimates and judgements used in the preparation of our consolidated financial statements.

 

Consolidated Fund Revenues

 

In accordance with ASC 606, our consolidated funds apply the five-step framework in determining the timing and amount of revenue to recognize. This framework requires an entity to: (i) identify the contract(s) with customers, (ii) identify the performance obligations within the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations within the contract, and (v) recognize revenue when or as the entity satisfies a performance obligation. Our consolidated funds’ revenues primarily consist of hospitality revenues, rental income and interest income.

 

Consolidated funds – hospitality revenue

 

Hospitality revenues are comprised of charges for room rentals, food and beverage sales, and other hotel operating activities. Revenues are recognized as earned, which is defined as the date upon which a guest occupies a room or utilizes the hotel’s services. Revenues are recorded net of sales tax.

 

Our consolidated funds have performance obligations to provide accommodations and other ancillary services to hotel guests. As compensation for such goods and services, the consolidated funds are typically entitled to a fixed nightly fee for an agreed upon period and additional fixed fees for any ancillary services purchased. These fees are generally payable at the time the hotel guest checks out of the hotel. The consolidated funds generally satisfy the performance obligations over time and recognize the revenue from room sales and from other ancillary guest services on a daily basis, as the rooms are occupied, and the services have been rendered.

 

For food and beverage, revenue is recognized upon transfer of promised products or services to customers in an amount that reflects the consideration the consolidated funds received in exchange for those services, which is generally when payment is tendered at the time of sale.

 

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The consolidated funds receive deposits for events and rooms. Such deposits are deferred and included in other liabilities on the accompanying consolidated balance sheets. The deposits are credited to consolidated funds – hospitality revenue when the specific event takes place.

 

Consolidated funds – other revenue

 

Consolidated funds – other revenue primarily consists of rental revenue of $0.4 million and $1.3 million for the three and nine months ended September 30, 2024, respectively, and $1.2 million and $3.5 million for the three and nine months ended September 30, 2023, respectively. Rental revenue includes the revenues generated primarily by the rental operations of the residential (multi-family and single-family) and commercial properties of our consolidated funds.

 

Consolidated funds – other revenue primarily consists of rental revenue of $4.0 million and $3.6 million for the years ended December 31, 2023 and 2022, respectively. Rental revenue includes the revenues generated primarily by the rental operations of the residential (multi-family and single-family) and commercial properties of our consolidated funds.

 

Consolidated Fund Expenses

 

Consolidated fund expenses consist primarily of costs, expenses and fees that are incurred by, or arise out of the operation and activities of or otherwise related to, our consolidated funds, including, without limitation, operating costs, depreciation and amortization, interest expense on debt held by our consolidated funds, gain on extinguishment of debt, gain on derivative instruments, insurance expenses, professional fees and other costs associated with administering and supporting those funds.

 

Fair Value of Financial Instruments

 

The fair value of financial instruments is disclosed in accordance with ASC 825, Financial Instruments. The fair value of our financial instruments is estimated using available market information and established valuation methodologies. The estimates of fair value are not necessarily indicative of the amounts the consolidated funds could realize on disposition of the financial instruments. The use of different market assumptions and/or valuation methodologies may have a material effect on the estimated fair value amounts.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Market Risk

 

The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our market risk arises primarily from interest rate risk relating to variable-rate borrowings. To meet our short and long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to manage our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, caps, collars, treasury locks, options and forwards in order to mitigate our interest rate risk with respect to various debt instruments. We would not hold or issue these derivative contracts for trading or speculative purposes.

 

Interest Rate Risk

 

As of September 30, 2024, our debt included fixed-rate debt with a fair value and carrying value of $53.6 million and $61.0 million, respectively. Changes in market interest rates on our fixed rate debt impact the fair value of the debt, but they have no impact on interest incurred or cash flow. For instance, if interest rates rise 100 basis points, and the fixed rate debt balance remains constant, we expect the fair value of our debt to decrease, the same way the price of a bond declines as interest rates rise.

 

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As of September 30, 2024, our debt included variable-rate debt with a fair value and carrying value of $22.6 million. The sensitivity analysis related to our variable-rate debt assumes an immediate 100 basis point move in interest rates from their September 30, 2024 levels, with all other variables held constant. A 100 basis point increase or decrease in variable interest rates on our variable-rate debt would increase or decrease our interest expense by $0.2 million annually.

 

Credit Risk

 

Substantially all of the Company’s revenues are generated from the management, ownership and/or operations of real estate assets located in Alaska, Arizona, Colorado, and Texas. The Company mitigates the associated risk by:

 

·diversifying our investments in real estate assets across multiple asset types, including hospitality, commercial, single-family, multi-family, and self-storage properties;

 

·diversifying our investments in real estate assets across multiple geographic locations including different markets and sub-markets in which our real estate assets are located;

 

·diversifying our investments in real estate assets across assets at differing points of stabilization, and in varying states of cash flow optimization; and

 

·maintaining financing relationships with a diversified mix of lenders (differing size and type), including large national banks, local community banks, private equity lenders, and insurance companies.

 

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BUSINESS

 

Over the past 15 years, Caliber has grown into a leading diversified alternative asset management firm, managing more than $2.9 billion in assets under management (“AUM”) and assets under development (“AUD”). Caliber’s primary goal is to enhance the wealth of accredited investors seeking to make investments in middle-market assets. We strive to build wealth for our clients by creating, managing, and servicing middle-market investment funds, private syndications, and direct investments. Through our funds, we invest primarily in real estate, private equity, and debt facilities. We market and fundraise to private investors, family offices, and institutions (“Direct Channel”) and to registered investment advisers and independent broker-dealers (“Wholesale Channel”).

 

We believe that we provide investors attractive risk-adjusted returns by offering a balance of (i) structured offerings and ease of ownership, (ii) a pipeline of investment opportunities, primarily projects that range in value between $5.0 million and $50.0 million, and (iii) an integrated execution and processing platform. Our investment strategy leverages the local market intelligence and real-time data we gain from our operations to evaluate current investments, generate proprietary transaction flow, and implement various asset management strategies.

 

As an alternative asset manager, we offer a full suite of support services and employ a vertically integrated approach to investment management. Our asset management activities are complemented with transaction and advisory services, including development and construction management, acquisition and disposition expertise, and fund formation, which we believe differentiate us from other asset management firms. We earn the following fees from providing these services under our asset management platform:

 

·Fund set-up fees are a one-time fee for the initial formation, administration, and set-up of fund products we distribute and manage. These fees are recognized at the point in time when the performance under the contract is complete.

 

·Fund management fees are generally based on 1.0% to 1.5% of the unreturned capital contributions in a particular fund and include reimbursement for costs incurred on behalf of the fund, including an allocation of certain overhead costs. These customer contracts require the Company to provide management services, representing a performance obligation that the Company satisfies over time. With respect to the Caliber Hospitality Trust (as defined in Note 3 – VIEs), the Company earns an fund management fee of 0.70% of the Caliber Hospitality Trust’s enterprise value and is reimbursed for certain costs incurred on behalf of the Caliber Hospitality Trust.

 

·Financing fees are earned for services the Company performs in securing third-party financing on behalf of our private equity real estate funds. These fees are recognized at the point in time when the performance under the contract is complete, which is essentially upon closing of a loan. In addition, the Company earns fees for guarantying certain loans, representing a performance obligation that the Company satisfies over time.

 

·Real estate development revenues are generally based on 4.0% of the total expected costs of the development or 4.0% of the total expected costs of the construction project for services performed as the principal developer, which include managing and supervising third-party developers and general contractors with respect to the development of the properties owned by the funds. Prior to the commencement of construction, development fee revenue is recognized at a point in time as the related performance obligations are satisfied and the customer obtains control of the promised service, including negotiation, due diligence, entitlements, planning, and design activities. During the construction period, development fee revenue is recognized over time as the performance obligations are satisfied.

 

·Brokerage fees are earned at a point in time at fixed rates for services performed related to acquisitions, dispositions, leasing, and financing transactions.

 

·Performance allocations are an arrangement in which we are entitled to an allocation of investment returns, generated within the investment funds which we manage, based on a contractual formula. We typically receive 15.0% to 35.0% of all cash distributions from (i) the operating cash flow of each fund, after payment to the related fund investors of any accumulated and unpaid priority preferred returns and repayment of preferred capital contributions; and (ii) the cash flow resulting from the sale or refinance of any real estate assets held by each fund, after payment to the related fund investors of any accumulated and unpaid priority preferred returns and repayment of initial preferred capital contributions. Our funds’ preferred returns range from 6.0% to 12.0%, typically 6.0% for common equity or 10.0% to 12.0% for preferred equity, which does not participate in profits. Performance allocations are related to services which have been provided and are recognized when it is determined that they are no longer probable of significant reversal, which is generally satisfied when an underlying fund investment is realized or sold.

 

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We have a number of development, redevelopment, construction, and entitlement projects that are underway or are in the planning stages, which we define as AUD. This category includes projects to be built on undeveloped land and projects to be built and constructed on undeveloped lands, which are not yet owned by our funds but are under contract to purchase. Completing these development activities may ultimately result in income-producing assets, assets we may sell to third parties, or both. As of September 30, 2024, we are involved in the development of 1,796 multifamily units, 697 single family units, 3.7 million square feet of commercial and industrial, and 3.5 million square feet of office and retail. If all of these projects are brought to completion, the total cost capitalized to these projects, which represents total current estimated costs to complete the development and construction of such projects by us or a third party, is $2.1 billion, which we expect would be funded through a combination of undeployed fund cash, third-party equity, project sales, tax credit financing and similar incentives, and secured debt financing. We are under no obligation to complete these projects and may dispose of any such assets at any time. There can be no assurance that AUD will ultimately be developed or constructed because of the nature of the cost of the approval and development process and market demand for a particular use. In addition, the mix of residential and commercial assets under development may change prior to final development. The development of these assets will require significant additional financing or other sources of funding, which may not be available.

 

Investment Process and Risk Management

 

We maintain a rigorous investment process across all our funds. Each fund has investment policies and procedures that generally contain investment parameters and requirements, such as limitations relating to the types of assets, industries or geographic regions in which the fund will invest. An investment committee reviews and evaluates investment opportunities in a framework that includes a qualitative and quantitative assessment of the key opportunities and risks of investments.

 

Our investment professionals are responsible for the full life cycle of an investment, from evaluation, through execution, to exit. Investment professionals generally submit investment opportunities for review and approval by our investment committee. The investment committee is comprised of executives and senior leaders of the Company. When evaluating investment opportunities, the investment committee may consider, without limitation and depending on the nature of the investment and its strategy, the quality of the asset in which the fund proposes to invest, likely exit strategies, factors that could reduce the value of the asset at exit, and a range of economic and interest rate environments, macroeconomic trends in the relevant geographic region or industry and the quality of the asset’s business operations. Our investment committee also incorporates, to the extent appropriate, environmental, social and governance (“ESG”) factors into the investment decision-making process.

 

Existing investments are reviewed and monitored on a regular basis by investment and asset management professionals. In addition, our investment professionals and asset managers work directly with our portfolio companies’ directors, executives and managers to drive operational efficiencies and growth.

 

Capital Invested In and Alongside Our Investment Funds

 

To further align our interests with those of investors in our investment funds, we have invested our own capital and that of certain of our personnel in the investment funds that we sponsor and manage. Minimum general partner capital commitments to our investment funds are determined separately with respect to each of our investment funds and, generally, are less than 5% of the limited partner commitments of any particular fund. We determine whether to make general partner capital commitments to our funds in excess of the minimum required commitments based on, among other things, our anticipated liquidity, working capital and other capital needs.

 

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Investors in many of our funds also receive the opportunity to make additional “co-investments” with the investment funds. Our employees, as well as Caliber itself, also have the opportunity to make investments, in or alongside our funds and other vehicles we manage, in some instances without being subject to management fees, carried interest or incentive fees. In certain cases, limited partner investors may pay additional management fees or carried interest in connection with such co-investments.

 

Competition

 

The asset management industry is intensely competitive. We compete primarily on a regional, industry and asset class basis.

 

We face competition both in the pursuit of fund investors and investment opportunities. Generally, our competition varies across business lines, geographies, and financial markets. We compete for outside investors based on a variety of factors, including investment performance, investor perception of investment managers’ drive, focus and alignment of interest, quality of service provided to and duration of relationship with investors, business reputation, and the level of fees and