Intergroup Corp: Form 10-Q for the period ended Mar 31, 2025

FORWARD-LOOKING STATEMENTS AND PROJECTIONS

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Forward-looking statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources, including anticipated repayment of certain of the Company’s indebtedness, the impact to our business and financial condition, the effects of competition and the effects of future legislation or regulations and other non-historical statements, the impact from macroeconomic factors (including inflation, increases in interest rates, potential economic slowdown or a recession and geopolitical conflicts). Forward-looking statements include all statements that are not historical facts, and in some cases, can be identified by the use of forward-looking terminology such as the words “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect our results of operations, financial condition, cash flows, performance or future achievements or events.

Such statements are subject to certain risks and uncertainties. These risks and uncertainties include, but are not limited to, the following: national and worldwide economic conditions, including the impact of recessionary conditions on tourism, travel and the lodging industry; the impact of terrorism and war on the national and international economies, including tourism, securities markets, energy and fuel costs; natural disasters; general economic conditions and competition in the hotel industry in the San Francisco area; seasonality, labor relations and labor disruptions; actual and threatened pandemics such as swine flu or the outbreak of COVID-19 or similar outbreaks; the ability to obtain financing at favorable interest rates and terms; securities markets, regulatory factors, litigation and other factors discussed below in this Report and in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2024. These risks and uncertainties could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

RESULTS OF OPERATIONS

As of March 31, 2025, the Company owned approximately 75.9% of the common shares of Portsmouth Square, Inc. The Company’s principal sources of revenue are revenues from the hotel owned by Portsmouth, rental income from its investments in multi-family and commercial real estate properties, and income received from investment of its cash and securities assets.

Portsmouth’s primary asset is a 544-room hotel property located at 750 Kearny Street, San Francisco, California 94108, known as the “Hilton San Francisco Financial District” (the “Hotel” or the “Property”) and related facilities, including a five-level underground parking garage. The financial statements of Portsmouth have been consolidated with those of the Company.

In addition to the operations of the Hotel, the Company also generates income from the ownership and management of its real estate. Properties include sixteen apartment complexes, one commercial real estate property, and three single-family houses as strategic investments. The properties are located throughout the United States but are concentrated in Texas and Southern California. The Company also has an investment in unimproved real property in Hawaii.

The Company acquires its investments in real estate and other investments utilizing cash, securities or debt, subject to approval or guidelines of the Board of Directors. The Company also invests in income-producing instruments, equity and debt securities and will consider other investments if such investments offer growth or profit potential.

Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024

The Company had net income of $750,000 for the three months ended March 31, 2025 compared to net loss of $3,861,000 for the three months ended March 31, 2024. The decrease in loss is primarily attributable to the refinance waiver of default interest and forbearance fee.

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Hotel Operations

The Company had net income from Hotel operations of $583,000 for the three months ended March 31, 2025 compared to net loss of $1,958,000 for the three months ended March 31, 2024. The decrease in loss is primarily attributable to the refinance waiver of default interest and forbearance fee by the mezzanine lender and increased room revenues.

The following table sets forth a more detailed presentation of Hotel operations for the three months ended March 31, 2025 and 2024:

For the three months ended March 31, 2025, the Hotel had operating income of $2,525,000 before mortgage interest expense, depreciation, and amortization on total operating revenues of $12,210,000 compared to operating income of $1,519,000 before mortgage interest expense, depreciation and amortization on total operating revenues of $10,758,000 for the three months ended March 31, 2024.

For the three months ended March 31, 2025, room revenues increased by $1,516,000, food and beverage revenue decreased by $196,000 and garage increased by $50,000 compared to the three months ended March 31, 2024. Total operating expenses increased by $446,000 due to increases in union salaries and wages, Hilton marketing and guest loyalty fees, travel agent and group commissions.

The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the three months ended March 31, 2025 and 2024:

The Hotel’s revenues increased by 13% this quarter as compared to the previous comparable quarter. Average daily rate increased by $9, average occupancy increased by 11%, and RevPAR increased by $33 for the three months ended March 31, 2025 compared to the three months ended March 31, 2024.

Real Estate Operations

Revenue from real estate operations increased to $4,614,000 for the three months ended March 31, 2025 from $4,125,000 for the three months ended March 31, 2024 primarily due to decrease in vacancy at its Missouri property which is rebranding and was undergoing renovation. Real estate operating expenses decreased to $2,431,000 from $2,612,000 year over year primarily due to decreased repairs and maintenance. Management continues to review and analyze the Company’s real estate operations to improve occupancy and rental rates and to reduce expenses and improve efficiencies.

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Investment Transactions

The Company had a net loss on marketable securities of $1,097,000 for the three months ended March 31, 2025 compared to a net loss on marketable securities of $811,000 for the three months ended March 31, 2024. For the three months ended March 31, 2025, the Company had a net realized loss of $74,000 and a net unrealized loss of $1,023,000. For the three months ended March 31, 2024, the Company had a net realized gain of $9,000 and a net unrealized loss of $820,000. Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company’s results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company’s marketable securities see the Marketable Securities section below.

Nine Months Ended March 31, 2025 Compared to Nine Months Ended March 31, 2024

The Company had net loss of $5,299,000 for the nine months ended March 31, 2025 compared to net loss of $7,634,000 for the nine months ended March 31, 2024. The decrease in loss is primarily attributable to the refinance waiver of default interest and forbearance fee by the mezzanine lender and increased room revenues.

Hotel Operations

The Company had net loss from Hotel operations of $2,980,000 for the nine months ended March 31, 2025 compared to net loss of $4,242,000 for the nine months ended March 31, 2024. The decrease in loss is primarily attributable to the increase in rooms revenue and a decrease in operating expenses.

The following table sets forth a more detailed presentation of Hotel operations for the nine months ended March 31, 2025 and 2024:

For the nine months ended March 31, 2025, the Hotel had operating income of $6,463,000 before interest expense, depreciation, and amortization on total operating revenues of $33,995,000 compared to operating income of $4,151,000 before interest expense, depreciation, and amortization on total operating revenues of 32,076,000 for the nine months ended March 31, 2024.

For the nine months ended March 31, 2025, room revenues increased by $2,063,000, food and beverage revenue decreased by $408,000, garage revenue increased by $172,000 compared to the nine months ended March 31, 2024. Total operating expenses decreased by $393,000 due to decreased commissions, franchise fees, Hilton marketing fees, and salaries and wages.

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The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the nine months ended March 31, 2025 and 2024.

The Hotel’s revenues increased by 6% for the nine months ended March 31, 2025 as compared to the nine months ended March 31, 2024. Average daily rate decreased by $6, average occupancy increased by 9%, and RevPAR increased by $14 for the nine months ended March 31, 2025 compared to the nine months ended March 31, 2024.

Real Estate Operations

Revenue from real estate operations increased to $14,176,000 for the nine months ended March 31, 2025 from $12,638,000 for the nine months ended March 31, 2024. Real estate operating expenses decreased to $7,096,000 from $7,774,000 year over year primarily due to decrease in turn-over expenses, and maintenance and repair expenses. Management continues to review and analyze the Company’s real estate operations to improve occupancy and rental rates and to reduce expenses and improve efficiencies.

Investment Transactions

The Company had a net loss on marketable securities of $1,566,000 for the nine months ended March 31, 2025 compared to a net gain on marketable securities of $164,000 for the nine months ended March 31, 2024. For the nine months ended March 31, 2025, the Company had a net realized loss of $329,000 and a net unrealized loss of $1,237,000. For the nine months ended March 31, 2024, the Company had a net realized gain of $1,374,000 and a net unrealized loss of $1,210,000.

Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company’s results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company’s marketable securities see the Marketable Securities section below.

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MARKETABLE SECURITIES

The following table shows the composition of the Company’s marketable securities portfolio as of March 31, 2025 and June 30, 2024 by selected industry groups:

As of March 31, 2025, the Company’s investment portfolio is was comprised of 2 different equity positions. The portfolio is concentrated, with one investment accounting for a significant majority of the total equity value. Specifically, the Company held common stock of American Realty Investors, Inc. (NASDAQ: ARL), which represented approximately 99% of the total equity investment portfolio as of the reporting date. American Realty Investors, Inc. is included in the financial services industry group.

As of June 30, 2024, the Company’s investment portfolio was diversified with 24 different equity positions. The Company held two equity securities that comprised more than 10% of the equity value of the portfolio. The two largest security positions represent 28% and 22% of the portfolio and consists of the common stock of American Realty Investors, Inc. (NASDAQ: ARL) and Alphabet Inc. (NASDAQ: GOOG), which are included in the REITs and real estate companies and Communication Services, respectively.

The following table shows the net gain (loss) on the Company’s marketable securities and the associated margin interest and trading expenses for the respective periods:

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FINANCIAL CONDITION AND LIQUIDITY

As of March 31, 2025, the Company had total cash, cash equivalents, and restricted cash of $13,394,000, compared to $8,694,000 as of June 30, 2024. The Company also held marketable securities, net of margin balances, of $751,000, compared to $7,266,000 at June 30, 2024. These marketable securities are short-term and considered readily convertible to cash.

Related Party Credit Facility – InterGroup

Portsmouth continues to rely on a related party revolving credit facility with its parent company, InterGroup to support hotel operations and liquidity needs. This unsecured facility, originally entered into in 2014 and subsequently modified, has undergone several amendments over time.

Key modifications include:

• December 2021: Portsmouth assumed $11.35 million in outstanding debt upon the dissolution of Justice Investors L.P.
• July 2023: Increased available borrowings to $20,000,000 and extended maturity to July 31, 2025 with a 0.5% loan modification fee.
• March 2024: Increased available borrowings to $30,000,000 with a 0.5% loan modification fee
• March 2025: Further increased available borrowing capacity to $40,000,000 and extended the maturity to July 31, 2027.

The facility bears 12% annual interest, is interest-only, and may be prepaid at any time without penalty. During the nine months ended March 31, 2025, Portsmouth borrowed an additional $11,615,000 to fund Hotel refinancing and Hotel operations. As of that date, the outstanding balance was $38,108,000, and Portsmouth had not made any principal repayments. This facility remains a critical source of liquidity and flexibility for Portsmouth. See also Note 11 – Related Party and Other Financing Transactions. Portsmouth has not made any paid-downs to its note payable to InterGroup. All material intercompany accounts and transactions have been eliminated in consolidation.

Real Estate

In December 2024, the Company refinanced mortgage on its 157-unit apartment located in Florence, Kentucky in the amount of $9,800,000. The term of the loan is approximately 10 years with an interest rate at 5.40%. The loan matures in January 2035.

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Liquidity Requirements

The Company’s short-term liquidity needs include:

• Hotel operating costs, including payroll, utilities, franchise and management fees,
• Corporate overhead and tax obligations,
• Interest payments and required loan maintenance under both senior and mezzanine debt agreements, and
• Routine repair and maintenance capital expenditures at the Hotel.

Long-term liquidity requirements include:

• Scheduled debt maturities, including those disclosed in Note 11, and
• Capital improvements to maintain the competitiveness and operational standards of the Hotel under its Hilton franchise agreement.

The Company intends to meet these obligations using a combination of:

• Available cash on hand,
• Operating cash flows,
• Draws under the InterGroup credit facility, and
• Other potential financing or equity alternatives.

Management’s Liquidity Assessment

As further discussed in Note 2 – Liquidity, the Company has taken proactive steps to stabilize its liquidity profile, including:

• Completion of a refinancing of its senior and mezzanine debt in March 2025,
• Continuing cost controls and selective capital expenditure deferrals,
• Strategic use of related party financing, and
• Maintenance of a lender-controlled lockbox cash management system.

While management believes that current liquidity sources and available borrowing capacity will be sufficient to support near-term working capital needs—even in the event of continued pressure on hotel performance indicators such as occupancy and RevPAR—there can be no assurance that unforeseen market or operational conditions will not adversely affect the Company’s liquidity position.

The Company continues to evaluate strategic alternatives and operational adjustments in response to ongoing macroeconomic and market-specific challenges in San Francisco’s hospitality sector.

Going Concern

The condensed consolidated financial statements of Portsmouth for the quarter ended March 31, 2025, have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the ordinary course of business. However, as described below, certain conditions and events raise substantial doubt about Portsmouth’s ability to continue as a going concern within one year following the issuance of these financial statements.

As of March 31, 2025, Portsmouth had outstanding obligations under a senior mortgage loan and mezzanine loan that had previously matured on January 1, 2024, with an aggregate principal balance of $100.3 million. Following the maturity date, Portsmouth received default notices from both the senior loan servicer, LNR Partners, LLC, and the mezzanine lender, CRED Reit Holdco LLC, in January 2024. In response, Portsmouth entered into forbearance agreements with both lenders on April 29, 2024, which temporarily extended the loan maturity dates to January 1, 2025, allowing time to pursue long-term refinancing.

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Despite Portsmouth’s continued efforts, including active negotiations and timely debt service payments, the forbearance periods expired without full repayment. As a result, the senior loan servicer issued a Notice of Termination on January 3, 2025, and the mezzanine lender issued a subsequent Notice of Default on January 14, 2025. These notices reinstated the lenders’ full rights and remedies, including acceleration and foreclosure actions.

On March 28, 2025, Portsmouth completed a refinancing of its senior debt through a new $67.0 million mortgage loan with PRIME Finance. The mortgage loan bears interest at a floating rate equal to 30-day SOFR plus 4.75%, subject to an interest rate cap that limits SOFR to 4.50%. The loan has a two-year initial term with three one-year extension options, subject to meeting certain financial and operational covenants.

Simultaneously, Portsmouth modified its mezzanine loan agreement with CRED Reit Holdco LLC, restructuring the outstanding mezzanine balance into a $36.3 million fixed-rate facility bearing interest at 7.25% per annum. The mezzanine loan shares the same maturity profile and extension structure as the senior mortgage loan.

Management believes that the successful refinancing materially improves Portsmouth’s near-term liquidity position and provides a stable capital structure to support ongoing operations. Nevertheless, Portsmouth continues to face adverse macroeconomic and industry-specific conditions, including persistently high interest rates, suppressed business travel demand in the San Francisco market, and elevated labor costs. These factors, combined with uncertainty regarding future refinancing at maturity, create significant risks to Portsmouth’s cash flows and financial flexibility.

While Portsmouth has maintained compliance with debt service requirements and completed major renovations to enhance asset competitiveness, including the ongoing lobby renovation and restoration of 14 guest rooms expected to return to inventory by June 30, 2025, management cannot provide assurance that operating cash flows will be sufficient to meet all future obligations or that refinancing or extension options will be available on favorable terms, if at all.

As a result, management has concluded that substantial doubt exists about Portsmouth’s ability to continue as a going concern for the twelve-month period following the issuance of these financial statements. Portsmouth continues to evaluate strategic options to improve liquidity and financial performance and is committed to executing its business plan under the current market conditions.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements.

MATERIAL CONTRACTUAL OBLIGATIONS

The following table provides a summary as of March 31, 2025, the Company’s material financial obligations which also includes interest payments.

IMPACT OF INFLATION

Hotel room rates are typically impacted by supply and demand factors, not inflation, since rental of a hotel room is usually for a limited number of nights. Room rates can be, and usually are, adjusted to account for inflationary cost increases. Since Aimbridge has the power and ability under the terms of its management agreement to adjust hotel room rates on an ongoing basis, there should be minimal impact on Hotel’s revenues due to inflation. The Company’s revenues are also subject to interest rate risks, which may be influenced by inflation. For the two most recent fiscal years, the impact of inflation on the Company’s income is not viewed by management as material.

The Company’s residential rental properties provide income from short-term operating leases and no lease extends beyond one year. Rental increases are expected to offset anticipated increased property operating expenses.

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CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

Critical accounting policies are those that are most significant to the portrayal of our financial position and results of operations and require judgments by management in order to make estimates about the effect of matters that are inherently uncertain. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an ongoing basis, including those related to the consolidation of our subsidiaries, to our revenues, allowances for bad debts, accruals, asset impairments, other investments, income taxes and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions. There have been no material changes to the Company’s critical accounting policies during the nine months ended March 31, 2025.

INCOME TAXES

Judgment is required in addressing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns (e.g., realization of deferred tax assets, changes in tax laws, or interpretations thereof). In addition, we are subject to examination of our income tax returns by the IRS and other tax authorities. A change in the assessment of the outcomes of such matters could materially impact our consolidated financial statements. We evaluate tax positions taken or expected to be taken on a tax return to determine whether they are more likely than not of being sustained, assuming that the tax reporting positions will be examined by taxing authorities with full knowledge of all relevant information, prior to recording the related tax benefit in our consolidated financial statements. If a position does not meet the more likely than not standard, the benefit cannot be recognized. Assumptions, judgment, and the use of estimates are required in determining if the “more likely than not” standard has been met when developing the provision for income taxes. A change in the assessment of the “more likely than not” standard with respect to a position could materially impact our consolidated financial statements.

The Company and its subsidiary Portsmouth, compute and file income tax returns and prepare discrete income tax provisions for financial reporting. The income tax benefit during the three months ended March 31, 2025 and 2024 represents primarily the combined income tax effect of Portsmouth’s pretax loss which includes the net loss from the Hotel and the pre-tax loss from InterGroup (standalone). InterGroup and Portsmouth file their respective income tax returns on a calendar year basis.

DEFERRED INCOME TAXES – VALUATION ALLOWANCE

We assess the realizability of our deferred tax assets quarterly and recognize a valuation allowance when it is more likely than not that some or all of our deferred tax assets are not realizable. This assessment is completed by tax jurisdiction and relies on the weight of both positive and negative evidence available, with significant weight placed on recent financial results. Cumulative pre-tax losses for the three-year period are considered significant objective negative evidence that some or all of our deferred tax assets may not be realizable. Cumulative reported pre-tax income is considered objectively verifiable positive evidence of our ability to generate positive pre-tax income in the future. In accordance with GAAP, when there is a recent history of pre-tax losses, there is little or no weight placed on forecasts for purposes of assessing the recoverability of our deferred tax assets. When necessary, we use systematic and logical methods to estimate when deferred tax liabilities will reverse and generate taxable income and when deferred tax assets will reverse and generate tax deductions. Assumptions, judgment, and the use of estimates are required when scheduling the reversal of deferred tax assets and liabilities, and the exercise is inherently complex and subjective. However, significant judgment will be required to determine the timing and amount of any reversal of the valuation allowance in future periods.

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HOTEL ASSETS AND DEFINITE-LIVED INTANGIBLE ASSETS

We evaluate property and equipment, and definite-lived intangible assets for impairment quarterly, and when events or circumstances indicate the carrying value may not be recoverable, we evaluate the net book value of the assets by comparing to the projected undiscounted cash flows of the assets. We use judgment to determine whether indications of impairment exist and consider our knowledge of the hospitality industry, historical experience, location of the property, market conditions, and property-specific information available at the time of the assessment. The results of our analysis could vary from period to period depending on how our judgment is applied and the facts and circumstances available at the time of the analysis. When an indicator of impairment exists, judgment is also required in determining the assumptions and estimates to use within the recoverability analysis and when calculating the fair value of the asset or asset group, if applicable. Changes in economic and operating conditions impacting the judgments used could result in impairments to our long-lived assets in future periods. Historically, changes in estimates used in the property and equipment and definite-lived intangible assets impairment assessment process have not resulted in material impairment charges in subsequent periods as a result of changes made to those estimates. There were no indicators of impairment on its hotel investments or intangible assets and accordingly no impairment losses recorded during the nine months ended March 31, 2025 and 2024, respectively.

STOCK-BASED COMPENSATION

We account for stock-based compensation by measuring and recognizing as compensation expense the fair value of all share-based payment awards made to employees, including employee stock options, restricted stock awards and employee stock purchases related to the Employee Stock Purchase Plan, or ESPP, based on estimated grant date fair values. The determination of fair value involves a number of significant estimates. We use the Black Scholes option pricing model to estimate the value of employee stock options which requires a number of assumptions to determine the model inputs. These include the expected volatility of our stock and employee exercise behavior which are based on historical data as well as expectations of future developments over the term of the options.

We are a smaller reporting company and therefore, we are not required to provide information required by this Item of Form 10-Q.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Company’s Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective because of a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Specifically, the Company’s management has concluded that our control around the interpretation and accounting for the stock-based compensation was not effectively designed or maintained. In light of this material weakness, we performed additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with GAAP. Accordingly, management believes that the financial statements included in this Quarterly Report on Form 10-Q present fairly in all material respects our financial position, results of operations and cash flows for the period presented.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in the Company’s internal control over financial reporting during the last quarterly period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

OTHER INFORMATION

On November 21, 2024, the Company received a Staff Deficiency Letter from the Nasdaq Stock Market Listing Qualifications Department indicating that the Company did not maintain minimum Market Value of Listed Securities (“MVLS”) of $35 million from October 7, 2024 to November 20, 2024 and thus no longer complied with the requirements pursuant to Listing Rules 550(b)(1) and 5550(b)(3). The Company was given until May 20, 2025, to regain compliance with all continued listing requirements of the Nasdaq Capital Market by at anytime during this compliance period the Company’s MVLS closing at $35 million or more for a minimum of ten consecutive business days. The Company has been unable to meet this criterion, and it also faces the same deficiency as a result of the continued negative stockholders equity as of March 31, 2025. The Company expects to receive an additional deficiency letter with respect thereto upon filing of this Form 10-Q. As a result of this additional deficiency and the Company's inability to remedy the initial deficiency in a timely manner, it will likely have to appeal these deficiencies to a Nasdaq Hearing Panel. If the Company does not appeal to the Hearings Panel, or if its appeal is unsuccessful, then its stock would be delisted from Nasdaq and trade on the OTC Pinksheets and starting in July, the new basic OTCID (or the OTCQB or OTCQX upon application if made). Stocks trading on the over the counter markets face numerous incremental risks, including, but not limited to, decreased liquidity which can result in lowered stock prices and potential litigation. Also, over the counter stocks face additional challenges in obtaining financing at favorable terms, if at all.