In August 2014, the Company closed on a private placement offering of its mandatorily redeemable Series B Preferred Stock (“Series B Preferred Stock”). The financing was funded in installments and completed on December 24, 2015. As of December 31, 2015, the Company had issued 35,000 shares of its Series B Preferred Stock. As of June 30, 2019 and December 31, 2018, the outstanding number of shares was 16,000 and 16,900, respectively. The Company has classified the Series B Preferred Stock as a liability in accordance with ASC Topic No. 480, “Distinguishing Liabilities from Equity,” which states that mandatorily redeemable financial instruments should be classified as liabilities and therefore the related dividend payments are treated as a component of interest expense in the accompanying consolidated statements of operations.

The Series B Preferred Stock has a $0.01 par value and a $1,000 liquidation preference. The Series B Preferred Stock shall be redeemed through a cash payment of the face value of the shares outstanding at redemption. The preferred return on the funds invested is 14% and shall be paid on a monthly basis. The Series B Preferred Stock was scheduled to be redeemed on August 1, 2017; however, the Company had two one-year options to extend the redemption date. On June 30, 2017, the Company exercised its option to extend the redemption date to August 1, 2018 and paid an extension fee of $153,500. The Company paid an additional $153,500 to exercise its option to extend the redemption date to August 1, 2019 in July 2018. The Company incurred approximately $3.1 million in legal and underwriting costs related to this offering. These costs have been recorded as deferred financing costs on the accompanying consolidated balance sheets as a direct deduction from the carrying amount of that debt liability and are being amortized over the term of the agreement. Amortization expense totaling approximately $61,000 and $19,000 was included in interest expense for the three months ended June 30, 2019 and 2018, respectively and approximately $122,000 and $254,000 was included in interest expense for the six months ended June 30, 2019 and 2018, respectively in the accompanying condensed consolidated statements of operations. The unamortized deferred costs totaled $0 and $122,000 as of June 30, 2019 and December 31, 2018, respectively.

During the six months ended June 30, 2019, the Company redeemed 900 shares of its Series B Preferred Stock for $900,000. During the year ended December 31, 2018, the Company redeemed 13,800 shares of its Series B Preferred Stock for $13.8 million. As of June 30, 2019 and December 31, 2018, the outstanding number of shares was 16,000 and 16,900, respectively, which are redeemable for $16 million and $16.9 million in cash, respectively.

The Company’s 16,000 shares of its Series B Preferred Stock are mandatorily redeemable by the Company on August 1, 2019 (“Mandatory Redemption Date”) for $16.0 million in cash. On August 2, 2019, the Company received a notice from PFP III Sub II, LLC (“Prime”), the sole holder of the Company’s Series B Preferred Stock, that an event of default occurred when the Company failed to redeem the Series B Preferred Stock on its Mandatory Redemption Date pursuant to the terms of the Investor Agreement dated August 4, 2014 and the corresponding Articles Supplementary. This event of default triggered an annual cash dividend payable per share equal to 24% of the liquidation preference of $1,000 per share, effective as of the Mandatory Redemption Date.

Prime demanded immediate payment of all amounts due and reiterated the Company’s recourse obligation for costs and expenses in connection with Prime’s enforcement of its rights and remedies. Prime has not waived the event of default and has expressly reserved its rights and remedies. Prime has certain rights and remedies following the occurrence and during the continuation of an event of default and additional rights and remedies that commence on the Mandatory Redemption Date. Subject to certain limitations under certain agreements (including mortgage loan documents), the Maryland General Corporation Law and/or the Company’s charter, Prime’s right to take unilateral action to, or cause the Company to, among other rights, include the following:

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Replace property managers and leasing agents;

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Terminate contracts between the Company and/or any of its subsidiaries and any affiliate of the Company to the extent that such contracts relate to the ownership, leasing, management, or use of the Company’s real property:

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Replace any managing member or general partner;

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Following 180 days after the Mandatory Redemption Date, sell any real property;

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Sell any property (in addition to real property);

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Implement Major Decisions (as defined in the Investor Agreement), including the suspension of dividend payments to common stockholders;

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Refinance, repay or prepay any indebtedness, including existing mortgage loans secured by real property;

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Cure any default under any indebtedness, including mortgages; and

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Elect six individuals to serve as members of the Board of Directors of the Company.

Except for the annual cash dividend rate of 24%, which is 10% in excess of the 14% dividend rate that the Company had been accruing and paying, the Company has not received any notice or other communication from Prime that it intends to exercise any of the rights or remedies available to it in connection with the event of default. The exercise of additional rights and remedies by Prime, including its right to replace a majority of the Company’s board of directors (and, in effect, take control of the Company) and its right to sell real property, may have a material adverse effect on the Company, including its business, results of operations and financial condition.

The foregoing descriptions of Prime’s rights and remedies and the Company’s recourse obligations in an event of default are only summaries and are qualified in their entirety by reference to the Investor Agreement and Articles Supplementary (which designates the preferences, powers, rights and other terms of the Series B Preferred Stock), copies of which were filed as exhibits to the Form 8-K filed on August 8, 2014.

On August 14, 2019, the Company redeemed 2,000 shares of its Series B Preferred Stock for $2.0 million and 14,000 shares of Series B Preferred Stock remaining outstanding.

The Company is pursuing financing alternatives to redeem the outstanding shares of Series B Preferred Stock, and the Company expects such financing and redemption to be completed before the end of the Company’s third fiscal quarter, September 30, 2019. The Company also continues to review its portfolio of real property to determine which properties to sell in order to generate sufficient net proceeds to redeem its Series B Preferred Stock. However, there is no guarantee that the Company will be able to obtain the financing necessary to redeem any or all Series B Preferred Stock outstanding or sell real property on terms favorable to the Company or on any terms.