Pillarstone Capital REIT (the “Company,” “Pillarstone,” “we,” “our,” or “us”) is a Maryland real estate investment trust ("REIT") engaged in investing in, owning and operating commercial properties. We own 18.6% of Pillarstone Capital REIT Operating Partnership LP (“Pillarstone OP”) and serve as its general partner. Substantially all of our operations and activities are conducted for the benefit of and through Pillarstone OP. As the general partner of Pillarstone OP, we have the exclusive power to manage and conduct the business of Pillarstone OP, subject to certain customary exceptions. Pillarstone OP owns two office buildings in the Dallas metropolitan area and six office/warehouse and retail locations in the Houston metropolitan area having approximately 927 thousand square feet of gross leasable area.  

On December 8, 2016, we and Pillarstone OP, entered into a Contribution Agreement (the “Contribution Agreement”) with Whitestone REIT Operating Partnership, L.P. (“Whitestone OP”), a subsidiary and the operating partnership of Whitestone REIT, both of which were related parties to Pillarstone and Pillarstone OP. Pursuant to the terms of the Contribution Agreement, Whitestone OP contributed to Pillarstone OP all of the equity interests in four of its wholly-owned subsidiaries (the “Subsidiaries”): Whitestone CP Woodland Ph. 2, LLC, a Delaware limited liability company; Whitestone Industrial-Office, LLC, a Texas limited liability company; Whitestone Offices, LLC, a Texas limited liability company; and Whitestone Uptown Tower, LLC, a Delaware limited liability company (“Uptown Tower”) that owned 14 real estate assets (the “Real Estate Assets” and, together with the Subsidiaries (the “Property”), for aggregate consideration of approximately $84 million, consisting of (1) approximately $18.1 million of Class A units representing limited partnership interests in Pillarstone OP (“OP Units”), issued at a price of $1.331 per OP Unit; and (2) the assumption of approximately $65.9 million of liabilities by Pillarstone OP. Pursuant to the Contribution Agreement, Pillarstone became the general partner of Pillarstone OP with an equity ownership interest in Pillarstone OP totaling approximately 18.6% valued at $4.1 million as of the date of the Contribution Agreement.

Pursuant to the Contribution Agreement, Pillarstone agreed to file with the SEC on or prior to June 8, 2018, a shelf registration statement to register for sale under the Securities Act of 1933, as amended, the issuance of the common shares in the Company that may be issued upon redemption of the OP Units issued pursuant to the Contribution Agreement and the offer and resale of such common shares by the holders thereof. In addition, pursuant to the Contribution Agreement, in the event of a Change of Control (as defined therein), Pillarstone OP shall have the right, but not the obligation, to repurchase the OP Units issued thereunder from Whitestone OP at their initial issue price of $1.331 per OP Unit. Pillarstone and Whitestone agreed to extend the filing of the shelf registration statement to the date that the Company closes a public equity offering.

In connection with the Contribution Agreement, (1) with respect to each Real Estate Asset (other than the Real Property Asset owned by Uptown Tower), Whitestone TRS, Inc. (“Whitestone TRS”), a subsidiary of Whitestone, entered into a Management Agreement with Pillarstone OP who owns such Real Estate Asset and (2) with respect to Uptown Tower, Whitestone TRS entered into a Management Agreement with Pillarstone OP (collectively, the “Management Agreements”). Pursuant to the Management Agreements with respect to each Real Estate Asset (other than Uptown Tower), Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to such Real Estate Asset in exchange for (x) a monthly property management fee equal to 5.0% of the monthly revenues of such Real Estate Asset and (y) a monthly asset management fee equal to 0.125% of gross asset value ("GAV") (as defined in each Management Agreement as, generally, the purchase price of the respective Real Estate Asset based upon the purchase price allocations determined pursuant to the Contribution Agreement, excluding all indebtedness, liabilities or claims of any nature) of such Real Estate Asset. Pursuant to the Management Agreement with respect to Uptown Tower, Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to Pillarstone OP in exchange for (x) a monthly property management fee equal to 3.0% of the monthly revenues of Uptown Tower and (y) a monthly asset management fee equal to 0.125% of GAV of Uptown Tower. These activities were conducted by Whitestone TRS and Whitestone REIT using their own employees, processes, and systems and in some cases, third-party providers for services they sub-contracted to perform.

As a result of the Contribution Agreement, Whitestone OP owns approximately 81.4% and Pillarstone owns approximately 18.6% of the outstanding equity in Pillarstone OP, which is fully consolidated on Pillarstone's financial statements.

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Liquidity and Financial Resources.

On July 19, 2022, we received written notice that Whitestone TRS, Inc. confirmed termination of the management agreements for our Real Estate Assets. We had previously communicated to Whitestone our plan to internalize the management of the Real Estate Assets, but we had not made efforts to terminate the management agreements. However, Whitestone TRS stated in its notice letter that while it had not received written notice of the termination of the management agreements, it “confirms receipt of your intent to terminate, and hereby confirms termination of the Agreements effective 30 days from” July 19, 2022. The management agreements provided that “Unless otherwise terminated pursuant to the provisions hereof, the term of this Agreement shall automatically renew on a month to month basis at the end of the term unless either of the Parties has notified the other in writing not less than thirty (30) days prior to the expiration of the term, as the same may be extended.”

Prior to receiving the termination notice, we had anticipated an orderly transition of the management of the Real Estate Assets over an appropriate timeframe. The management agreements provided for Whitestone TRS to provide such services, or in certain cases contracting with other providers to perform such services, as:

We worked diligently to restore normal operations and leasing activities following Whitestone’s unanticipated termination of its managerial services. Many of Pillarstone’s actions were affected by a lack of usable information being made available to it by Whitestone on a timely basis. Prior to receiving the termination notice, we had anticipated an orderly transition of the management of the Real Estate Assets over an appropriate timeframe, particularly as Whitestone OP owns 81.4% of Pillarstone OP as a non-controlling limited partner.

During this 30-day notice period, Whitestone did not provide the operation and financial database of our information, nor did Whitestone cooperate to provide for an orderly transition of its contracted responsibilities. The services under the management agreements were extensive and material to the operation of Pillarstone’s business and our accounting and financial reporting. The management functions, as operated by Whitestone, were deeply co-mingled with Whitestone’s management functions for its own business and have been difficult, expensive and time-consuming to separate. As a result, Pillarstone was materially and adversely affected by Whitestone’s abrupt termination of the management agreements, incomplete and inadequate delivery of books and records and other materials required to be delivered under the Management Agreements, and the failure to provide for an appropriate transition. We had no way to continue our accounting and financial reporting responsibilities as a public company. Further, for several months following the abrupt termination of services by Whitestone, we were unable to systematically invoice our tenants and pursue collection of delinquent accounts as an independent, internally managed company. In addition, several vendor service contracts were tied to Whitestone and the pricing of services was based on the combination of Pillarstone and Whitestone. The transition caused us to obtain separate services, which caused disruption to our business and higher costs. In other cases, Whitestone obligated us to long-term contracts for essential services that we cannot easily replace.

On July 12, 2022, we were named as a defendant in a lawsuit by Whitestone OP in a lawsuit styled Whitestone REIT Operating Partnership, L.P. v. Pillarstone Capital REIT, C.A. No. 2022-0607-LWW, in the Court of Chancery of the State of Delaware. The suit challenges our rights agreement, dated as of December 27, 2021 (as the same may be amended from time to time, the “Rights Agreement”), between us and American Stock Transfer & Trust Company, LLC, as rights agent, and claims that our adoption of the Rights Agreement breached the Pillarstone OP Amended and Restated Agreement of Limited Partnership, and that we breached our fiduciary duties as general partner of Pillarstone OP to Whitestone OP and breached the implied covenant of good faith and fair dealing under the Amended and Restated Agreement of Limited Partnership.

Based upon various issues, including those discussed in this report, we filed a lawsuit on September 16, 2022, in district court in Harris County, Texas, against Whitestone and related parties alleging, among other things, breach of the Pillarstone OP Amended and Restated Agreement of Limited Partnership and fiduciary duty and breach of the management agreements.

On July 21, 2022, Whitestone OP filed a Motion to Preserve the Status Quo in the Delaware lawsuit requesting broad restrictions on our ability to conduct our business, including buying properties, enforcing the Rights Agreement, incurring expenses, or engaging in transactions. The Status Quo Order also prevents Whitestone OP from exercising its right under the Pillarstone OP Amended and Restated Agreement of Limited Partnership to require Pillarstone OP to redeem its OP Units. Our amended petition in the Texas lawsuit argues that Whitestone’s material breaches of contract and fiduciary duty operate to discharge and/or excuse any obligation to perform under the redemption provisions of the Pillarstone OP Amended and Restated Agreement of Limited Partnership.

Representatives of our board of trustees attempted to initiate discussions to settle these matters in August 2022 with representatives of Whitestone’s board of trustees to avoid a prolonged, expensive legal fight. However, Whitestone was not open to settling these matters at that time or the other various times since August 2022 we attempted to initiate discussions to resolve these matters.

Whitestone indicated to us its intent to cause Whitestone OP to exercise its redemption right and stated publicly that it intends to monetize its investment in Pillarstone OP. We believed that if Whitestone were to be permitted to exercise its redemption right for cash amounts, we may not have the cash available to pay such amounts and may be required to sell one or more of our Real Estate Assets to satisfy this obligation, which may cause us to sell some or all of our Real Estate Assets at below fair market value and otherwise have a material adverse effect on our liquidity and financial condition and our ability to operate and improve our Real Estate Assets. We have stated that a redemption request would not trigger the Rights Agreement, and our board of trustees has the sole discretion to interpret the Rights Agreement. However, Whitestone OP indicated that the Rights Agreement caused them to not exercise their redemption rights and claimed damages based on the alleged decline in the value of the Real Estate Assets following their failure to exercise the redemption rights.

Based on Whitestone’s performance under the management agreements and their public statements regarding their intentions for their interest in Pillarstone, we did not believe that Whitestone’s actions in connection with the exercise of the redemption rights would respect the rights of the holders of our common shares. The Pillarstone OP Amended and Restated Agreement of Limited Partnership expressly provides that in the event of a conflict between the interests of the limited partners (Whitestone OP as the sole limited partner) and our shareholders, we shall act in the interests of our shareholders, and we shall not be liable for monetary or other losses sustained, liabilities incurred or benefits not derived by the limited partners in connection therewith.

Our executive management team worked to restore normal operations and leasing activities quickly after Whitestone REIT’s unanticipated termination of their managerial services. Many of our actions were affected by a lack of usable information being made available to us on a timely basis.

We discovered significant deferred maintenance and neglect of our assets had occurred under Whitestone REIT’s management. Our efforts to address these matters have in some cases been stymied by Whitestone REIT’s litigation against us in Delaware where the court has limited our ability to incur expenses above low threshold amounts for the types of expenses a company in our industry could expect to incur in the ordinary course of business. Our legal and professional fees have increased substantially as we address the internalization of management and the litigation matters discussed in this report.

On July 17, 2023 and July 18, 2023, trial was held in the Delaware lawsuit. Post-trial argument in the lawsuit was held on October 18, 2023. Whitestone has asked the Delaware court to award damages of approximately $51,200,600 and post-judgement interest of $6,820,000 in the filing of its post-trial opening brief on August 28, 2023. On January 25, 2024, the Delaware court issued its opinion and determined that we breached the implied covenant of good faith and fair dealing without resolving the breach of contract or breach of fiduciary duty claims. Although Whitestone asked for monetary damages of $51,200,600 plus interest, the Delaware court declined to award damages. We disagree with the Delaware court’s ruling and are considering our options for appeal, subject to a final order being entered in the case, the outcome of various proceedings in the jointly administered bankruptcy cases described below and the decision of the plan agent in the bankruptcy cases to pursue an appeal.

The Delaware court declared the Rights Agreement unenforceable against Whitestone, permitted Whitestone OP to tender a notice of redemption for its OP Units and determined that the Pillarstone OP limited partnership agreement should be followed whereby we would decide whether to assume Pillarstone OP’s redemption obligation and determine what value to attribute to Pillarstone OP’s assets. The Delaware court declared that any further relief must await future proceedings.

On January 25, 2024, Whitestone OP delivered its notice of redemption for all but one of its OP Units.

On September 16, 2022, we filed a lawsuit styled Pillarstone Capital REIT and Pillarstone Capital REIT Operating Partnership LP v. Whitestone TRS, Inc., Whitestone REIT, Whitestone REIT Operating Partnership, L.P., Cause No. 2022-59478, in the District Court, Harris County, Texas, 189th Judicial District alleging, among other things, breach of the Pillarstone OP limited partnership agreement and the management agreements for the Real Estate Assets by the Whitestone defendants and breach of fiduciary duties relating to Pillarstone OP by Whitestone OP going outside the role of limited partner and harming us and Pillarstone OP. A portion of the claims in this case were also brought as an adversary proceeding by Whitestone Uptown Tower, LLC in the Uptown Tower bankruptcy case described in “—Uptown Tower” below.

On March 4, 2024, bankruptcy cases were filed for us and Pillarstone OP, as well as Whitestone CP Woodland Ph. 2, LLC, Whitestone Industrial-Office, LLC and Whitestone Offices, LLC, the subsidiaries owning our Real Estate Assets other than Uptown Tower. The bankruptcy cases were consolidated into the jointly administered cases styled In re: Whitestone Industrial-Office, LLC, et. al., Case No. 24-30653-mvl-11, in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, the same court as the Whitestone Uptown Tower, LLC bankruptcy case described under “—Uptown Tower” below.

The joint plan of liquidation in the bankruptcy case providing for the sale of the Real Estate Assets other than Uptown Tower and treatment of claims was confirmed in November 2024. Those Real Estate Assets were sold between October 2024 and July 2025. The plan provided for a plan agent, and Frances A. Smith was appointed plan agent in the jointly administered bankruptcy cases. The plan agent was appointed for the purposes of administering all claims in the bankruptcy cases and making distributions to holders of allowed claims and equity interests under the plan of liquidation. The plan agent’s administration of the claims may include, without limitation, and pursuant to her reasonable business judgment, investigating, prosecuting, objecting to, resolving, reconciling, compromising, litigating, administering, and making distributions on account of, the claims.

The plan agent is not a trustee and does not participate in the management or operations of the debtors’ businesses, assets or financial affairs or the review and approval of the day-to-day operational expenses of the debtors’ business post-confirmation, unless the bankruptcy court determines cause exists for the plan agent to do so after notice and hearing.

The plan agent has the sole and exclusive authority to administer the claims, including the determination to compromise a claim involving Whitestone OP, any debtor or their affiliates or professionals, subject to notice and hearing and a party’s good-faith objection and the bankruptcy court’s final adjudication of the matter. The plan agent also has the authority to make demand on the debtors for funds necessary to satisfy allowed claims asserted against a debtor from that debtor’s funds (even if held by Pillarstone OP), which may include sales proceeds.

The plan agent is entitled to receive compensation as a flat fee the amount of $10,000.00 per month, plus reimbursement of actual, necessary expenses. If during any month the plan agent spends more than fifteen (15) hours in the performance of her duties, she will be entitled to compensation at a rate of $650.00 per hour for each additional hour of services.

Whitestone Uptown Tower, LLC, Pillarstone OP’s subsidiary that owned the Uptown Tower office building, was the borrower under a loan agreement. The Uptown Tower office building was subject to a mortgage under the loan agreement. The mortgage debt was guaranteed by Whitestone OP. This mortgage was an obligation of Whitestone Uptown Tower, LLC, a subsidiary included in our consolidated financial statements. Neither Pillarstone Capital REIT nor Pillarstone OP had any obligation or guarantee of this indebtedness nor did any of our other properties collateralize this indebtedness.

As of September 30, 2022, the borrower was not in compliance with loan covenants requiring timely filing of financial information to the lender for the mortgage loan.

In July 2023, Rialto Capital Advisors, LLC, the special servicer for the mortgage loan, implemented a cash sweep and began to seize the funds from the operations of the Uptown Tower property under the cash management agreement relating to the mortgage loan. Prior to Rialto Capital Advisors, LLC’s seizing the funds from those operations, those funds had been used for the operation and maintenance of the Uptown Tower property, with excess funds used for the operations of Pillarstone OP and the General Partner. We did not have an alternate source of funds for the operation of Uptown Tower.

On August 3, 2023, we received a notice of the default of the mortgage loan from counsel for the lender and Rialto Capital Advisors, LLC. The default notice asserted non-monetary defaults resulting from Whitestone’s failure to comply with the loan agreement in connection with the Contribution Agreement in 2016. The default notice also alleged a non-monetary default caused by Whitestone’s termination of its management agreement for Uptown Tower in August 2022.

In the default notice, the lender and special servicer noted that the borrower, prior to the Contribution Agreement and while it was controlled by Whitestone OP, represented, warranted, and covenanted that “[F]following the Transfer, Sponsor [Whitestone REIT] through its ownership of Guarantor [Whitestone OP] [. . .] shall continue to Control Borrower [Whitestone Uptown Tower, LLC], and shall continue to control the day-to-day operation of the Property.” The lender and special servicer contend that this representation was false because Pillarstone OP and the borrower are controlled by the general partner (Pillarstone Capital REIT, the sole general partner of Pillarstone OP) and not Whitestone REIT.

As the 2016 alleged defaults occurred while Whitestone was in control of all loan parties and we believe Whitestone caused the 2022 default through its unilateral termination of the management agreement for Uptown Tower, we are not in a position to agree with or dispute the determination of the alleged defaults or Whitestone OP’s liability under its guaranty, or any further effect they may have on the borrower or the Uptown Tower property.

The borrower had requested disbursements of capital and operating expenditures from Rialto Capital Advisors, LLC under the terms of the loan agreement in August 2023 and September 2023, but Rialto Capital Advisors, LLC did not release the funds and indicated that it did not intend to release funds or reverse the cash sweep to permit the funding of the operations and leasing of Uptown Tower.

The mortgage loan matured on October 1, 2023. The registrant and the borrower had been working to extend the maturity date and to find new financing or a buyer for the Uptown Tower property. When Whitestone learned of our negotiations with Rialto Capital Advisors, LLC to attempt to resolve this issue and believing we were intending to abandon the building, it filed a motion with the Delaware Court of Chancery asking the court for an order declaring that we shall not (a) stop managing the Uptown Tower, (b) “hand the keys” to Uptown Tower to the lender, or (c) otherwise abandon the Uptown Tower, which the court granted on a temporary basis on September 22, 2023. On October 19, 2023, Whitestone objected to a proposed sale of the Uptown Tower property under the Status Quo Order issued by the court in the previously disclosed lawsuit Whitestone OP instituted against us in the Delaware Court of Chancery.

On October 24, 2023, the lender delivered a notice of foreclosure sale to the borrower providing notice that, among other things, as of the maturity date, the borrower failed to repay all amounts due under the note, and making a demand on (1) the borrower and all persons and entities obligated on the promissory note evidencing the mortgage loan (except to the extent that the obligation is expressly limited by written contract or applicable law) for payment in full of the entire indebtedness, and on (2) the borrower for payment of rents and proceeds of any rents to which the lender is entitled under the mortgage loan documents and Texas Property Code chapter 64, Assignment of Rents to Lienholder. The notice of foreclosure sale also included a notice regarding the planned foreclosure sale of Uptown Tower on December 5, 2023.

On December 1, 2023, Whitestone Uptown Tower, LLC filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas in the case styled In re: Whitestone Uptown Tower, LLC a/a/ Pillarstone Capital REIT Operating Partnership, Case No. 23-32832-mvl-11, in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division. The filing of the petition constituted an event of default under the mortgage loan. Prior to the filing of the bankruptcy petition in November 2023, representatives of our board of trustees attempted to initiate discussions with representatives of Whitestone REIT’s board of trustees to address these matters and to approach Rialto Capital Advisors, LLC jointly. However, without the borrower’s knowledge or consent, Whitestone attempted to pay off the loan and grant broad releases to the lender and special servicer on behalf of the borrower, including the application of the trapped cash, escrows and reserves to the indebtedness. No Whitestone REIT entity had the authority to make such agreements on behalf of the borrower, and we have been informed that the agreement was not consummated, but Whitestone did send approximately $13.6 million to Rialto Capital Advisors, LLC pursuant to this arrangement.

On January 3, 2024, Rialto Capital Advisors, LLC provided a preliminary estimate of the payoff amounts for the Uptown Loan as of December 4, 2023. The estimated total amount due was listed as approximately $21.5 million, which included an outstanding principal balance of approximately $14.4 million, note interest of approximately $242,000 and default interest of approximately $6.6 million. In addition, Rialto was also holding approximately $2.6 million of trapped cash, escrows and reserves under the mortgage loan, which the borrower needed to operate the Uptown Tower property and pay its obligations, including then-upcoming property taxes. On January 31, 2024, the lender sued Whitestone OP to enforce Whitestone OP’s guaranty of the mortgage loan.

In June 2024, Whitestone Uptown Tower, LLC and Whitestone OP each settled with the lender. Whitestone Uptown Tower entered into a loan agreement with American Bank, N.A. for a loan amount of up to $1,500,000, secured by Uptown Tower and all of the other assets of Whitestone Uptown Tower. Whitestone Uptown Tower paid approximately $1.1 million to the prior lender, and the prior lender retained approximately $2.2 million of trapped cash and escrows from the cash sweep and the approximately $13.6 million mistakenly sent to it by Whitestone OP in satisfaction of the prior mortgage loan.

The plan of reorganization in the bankruptcy case, providing for the sale of Uptown Tower and treatment of claims, was confirmed in July 2024. We sold Uptown Tower in July 2025 for a purchase price of $20 million, or $17.3 million after deductions, closing costs and commissions and paid off the American Bank, N.A. indebtedness. We are holding approximately $13.6 million of the sale proceeds representing funds Whitestone OP mistakenly paid to the prior mortgage lender for Uptown Tower when it attempted to pay off the mortgage loan without informing us and without authority to do so on Whitestone Uptown Tower, LLC’s behalf. We are currently disputing the treatment and timing of repayment of the $13.6 million to Whitestone OP in the Whitestone Uptown Tower bankruptcy case.

This litigation has been and is expected to continue to be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of these proceedings are difficult to predict. The registrant believes that the allegations in the Delaware lawsuit are without merit and intends to continue to vigorously defend against them. In addition, we intend to vigorously pursue the Texas action to seek damages from Whitestone due to its violations of the management agreements and fiduciary duties and to protect our shareholders from the further harms that Whitestone has indicated it intends to inflict on us and our shareholders. However, the outcomes of these lawsuits, including the timing of the final disposition of the lawsuits, is unpredictable and could result in substantial costs to us. As a result, future adverse rulings, settlements, or unfavorable developments could result in charges that could have a material adverse effect on the registrant’s business, results of operations or financial condition.

Following the period covered by this report, we sold Real Estate Assets under the Whitestone Uptown Tower, LLC plan of reorganization and the plan of liquidation for the other Pillarstone entities.

In October 2024, we sold 9101 LBJ Freeway for a purchase price of $5,753,000, or approximately $5.1 million after deductions, closing costs and commissions.

In October 2024, we sold Interstate 10 Warehouse for a purchase price of $8,400,000, or approximately $8.1 million after deductions, closing costs and commissions.

In February 2025, we sold Corporate Park Woodland II for a purchase price of $1,650,000, or approximately $1.56 million after deductions, closing costs and commissions.

In July 2025, we sold Uptown Tower for a purchase price of $20,000,000, or approximately $17.3 million after deductions, closing costs and commissions.

In July 2025, in a series of related transactions, we sold:

The accompanying financial statements have been prepared assuming that we will continue as a going concern. In addition to the events described above, we have incurred significant losses since the year ended December 31, 2020 and have an accumulated deficit of approximately $23.3 million as of September 30, 2022 and need to raise substantial amounts of additional funds to meet our obligations and afford us time to implement our business plan and resume profitable operations.

We worked diligently to restore normal operations and leasing activities following Whitestone’s unanticipated termination of its managerial services. Many of Pillarstone’s actions were affected by a lack of usable information being made available to us by Whitestone on a timely basis. Prior to receiving the termination notice, we had anticipated an orderly transition of the management of the Real Estate Assets over an appropriate timeframe, particularly as Whitestone OP owns 81.4% of Pillarstone OP as a non-controlling limited partner. We believe the management functions as operated by Whitestone were deeply integrated with Whitestone’s management functions for its own business and have been difficult, expensive, and time-consuming to separate, causing material adverse effects on our business, income, cash flow, results of operations, financial condition, liquidity and prospects. As a result, Whitestone did significant damage to us by its intentional actions. In addition, our litigation with Whitestone has been and is expected to continue to be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of these proceedings are difficult to predict. As a result, future adverse rulings, settlements, or unfavorable developments could result in charges that could have a material adverse effect on our business, results of operations or financial condition.

We were dependent on cash generated by our ownership of the eight Real Estate Assets to meet our liquidity needs. Historically, we have financed our long-term capital needs, including acquisitions, as follows:

Our ability to access the capital markets will be dependent on a number of factors, including general market conditions and market perceptions about our Company. There can be no assurance that we will be able to raise capital, obtain debt financing, or improve operating results sufficiently to continue as a going concern, if at all. The consolidated financial statements included in this report do not include any adjustments that might result from the outcome of this uncertainty.

At September 31, 2022, the reported net equity in Whitestone Uptown Tower, LLC was $4.9 million.

In addition to the mortgage loan, we have approximately $198,000 of convertible notes payable and corresponding accrued interest of approximately $128,000. The convertible notes payable can be converted by the noteholders into common shares at the rate of $1.331 per common share at any time. At maturity or when the Company chooses to call the convertible notes payable, the noteholders have the option to receive cash plus accrued interest or convert the convertible notes payable into common shares at $1.331 per common share. The commencement of our bankruptcy case constituted an event of default under the notes, pursuant to which all principal and accrued interest became automatically and immediately due and payable. Any repayment of the convertible notes will be determined under our plan of liquidation and bankruptcy court proceedings.

Basis of presentation. These consolidated financial statements present the Company’s consolidated financial condition and results of operations including those of a wholly owned subsidiary, operations of which were discontinued in 2002, and variable interest entities (“VIEs”) for which we are the primary beneficiary.

Noncontrolling interest in the accompanying consolidated financial statements represents the share of equity and earnings of Pillarstone OP allocable to holders of partnership interests other than us.

Interim financial statements. These unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all disclosures required U.S. GAAP. The unaudited consolidated financial statements include all material adjustments of a normal recurring nature that, in the opinion of management, are necessary for a fair presentation of the results of operations for the interim periods presented. These interim financial statements should be read together with the consolidated financial statements and notes thereto included in our audited financial statements for the year ended December 31, 2021.

Use of estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the estimated fair value of properties acquired, allowance for doubtful accounts, impairment, the estimated useful lives for depreciable and amortizable assets and costs, and deferred taxes and the related valuation allowance for deferred taxes.

Revenue recognition. All leases on our properties are classified as noncancelable operating leases, and the related rental income is recognized on a straight-line basis over the terms of the related leases. Differences between rental income earned and amounts due per the respective lease agreements are capitalized or charged, as applicable, to accrued rents and accounts receivable. Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the corresponding costs are incurred. We combine lease and non-lease components in lease contracts, which includes combining base rent and recoveries into a single line item, Rental, within the consolidated statements of operations. We recognize lease termination fees in the year that the lease is terminated, and collection of the fee is reasonably assured.

Cash and cash equivalents. We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Real estate.  Land, buildings and improvements are recorded at cost. Expenditures related to the development of real estate are carried at cost.

Depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for improvements and buildings. Tenant improvements are depreciated using the straight-line method over the life of the improvement or remaining term of the lease, whichever is shorter.

Impairment. We review our properties for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value. There was no impairment of our Real Estate Assets during the periods presented.

Accrued Rents and Accounts Receivable. Included in accrued rent and accounts receivable are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. We review the collectability of charges under our tenant operating leases on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area where the property is located. We recognize an adjustment to rental revenue if we deem it probable that the receivable will not be collected. Our review of collectability under our operating leases includes any accrued rental revenues related to the straight-line method of reporting rental revenue.

Unamortized Lease Commissions and Deferred Legal Cost. Leasing commissions and deferred legal cost are amortized using the straight-line method over the terms of the related lease agreements. Costs allocated to in-place leases whose terms differ from market terms related to acquired properties are amortized over the remaining life of the respective leases.

Prepaid expenses and other assets. Prepaid expenses and other assets include escrows established pursuant to certain mortgage financing arrangements for real estate taxes and property improvements.

Stock-based compensation. We account for employee stock-based compensation using the fair value method. Compensation cost for equity incentive awards is based on the fair value of the equity instrument generally on the date of grant and is recognized over the requisite service period. Forfeitures are recognized as they occur. The Company uses the Black-Scholes option pricing model to estimate the fair value of option awards. The Black-Scholes option pricing model requires the input of highly subjective assumptions including the expected stock price volatility of the Company’s common stock, the risk-free interest rate at the date of grant, the expected vesting term of the grant, expected dividends, and an assumption related to forfeitures of such grants. Changes in these subjective input assumptions can materially affect the estimated fair value of the option awards.

Income taxes. We have not elected to be taxed as a REIT for federal income tax purposes. As such, we account for income taxes using the asset and liability method under which deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the period in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. We are also subject to certain state and local income, excise and franchise taxes. The provision for state and local taxes has been reflected in the provision for income taxes in the consolidated statements of operations and has not been separately stated due to its insignificance.

We file tax returns federally and in the state of Texas. Our returns for periods prior to 2018 are no longer subject to examination by tax authorities in these jurisdictions. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. If a tax position meets the “more likely than not” recognition criteria, accounting guidance requires the tax position be measured at the largest amount of benefit greater than 50% likely of being realized upon ultimate settlement. We record income tax related interest and penalties, if any, as a component in the provision for income tax expense.

Earnings (loss) per share – Basic earnings (loss) per share amounts are calculated by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per share amounts are calculated by dividing income (loss) available to common shareholders by the weighted average number of common shares and common stock equivalents outstanding which are not antidilutive. Common stock equivalents represent shares issuable upon the assumed conversion of outstanding convertible notes and preferred shares and the assumed exercise of outstanding options.

Fair Value Measurements.  We measure the fair value of financial instruments based on assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. In accordance with the fair value hierarchy, Level 1 assets/liabilities are valued based on quoted prices for identical instruments in active markets, Level 2 assets/liabilities are valued based on quoted prices in active markets for similar instruments, on quoted prices in less active or inactive markets or on other “observable” market inputs, and Level 3 assets/liabilities are valued based significantly on “unobservable” market inputs.

Our financial instruments consist primarily of cash, cash equivalents, accounts receivable, accounts and notes payable.  The carrying value of cash, cash equivalents, accounts receivable and accounts payable are representative of their respective fair values due to their short-term nature.  The fair value of our long-term debt instrument, consisting of a fixed rate secured note, approximated its carrying amounts due to the near-term maturity of the instrument.

Concentration of Risk. Substantially all of our revenues are obtained from office and warehouse locations in the Dallas and Houston metropolitan areas.

We maintain cash accounts in major U.S. financial institutions. The terms of these deposits are on demand to minimize risk. The balances of these accounts sometimes exceed the federally insured limits, although no losses have been incurred in connection with these deposits.

Segment information. Our management historically has not differentiated by property types and therefore does not present segment information.

Recent accounting pronouncements. In April 2020, the Financial Accounting Standards Board ("FASB") issued guidance on the application of Topic 842, relating to concessions being made by lessors in response to the COVID-19 pandemic. The guidance notes that it would be acceptable for entities to make an election to account for lease concessions relating to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under Topic 842 as though enforceable rights and obligations for those concessions existed, even if such enforceable rights and obligations are not explicitly contained in the lease contract. Thus, for concessions relating to COVID-19, an entity would not have to analyze each contract to determine whether enforceable rights and obligations for concessions exist in the contract, and would have the option to apply, or not to apply, the general lease modification guidance in Topic 842 as it stands. We have elected this option to account for lease concessions relating to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under Topic 842 as though enforceable rights and obligations for those concessions existed. Therefore, such concessions are not accounted for as a lease modification under Topic 842. We did not make any significant concessions in response to COVID-19 during the three or nine months ended September 30, 2022 or 2021.