Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2008, for Apple REIT Nine, Inc. (the "Company"). The Company is a Virginia corporation formed to qualify as a Real Estate Investment Trust (REIT) and intends to invest in hotels and residential apartment communities. As of the reporting date, the Company owns no properties and has no operating history. It is currently in a pre-operational stage, focused on raising capital through a "best-efforts" offering.
Key Financial Metrics
| Metric | Value (Three Months Ended Mar 31, 2008) |
|---|---|
| Revenue | $0 |
| Net Loss | $(19,852) |
| Net Loss Per Common Share | $(1,985.20) |
| Cash and Cash Equivalents | $9,618 |
| Total Assets | $504,498 |
| Total Liabilities | $493,086 |
| Shareholders' Equity | $11,412 |
| Debt (Note Payable) | $200,500 |
| Prepaid Offering Costs | $494,880 |
Capital Structure: The Company has 10 shares of common stock and 10 shares of Series A preferred stock outstanding. Additionally, 480,000 shares of Series B convertible preferred stock are held by the Chairman, CEO, and President, Glade M. Knight.
Material Changes vs. Prior Period
- Assets: Total assets increased from $336,764 (Dec 31, 2007) to $504,498 (Mar 31, 2008), primarily driven by an increase in prepaid offering costs ($316,860 to $494,880).
- Liabilities: Total liabilities rose from $305,500 to $493,086. The Note Payable increased by $50,000 (from $150,500 to $200,500) due to draws on a line of credit. Accrued expenses increased by approximately $137,586.
- Equity: Shareholders' equity decreased from $31,264 to $11,412 due to the net loss for the quarter.
- Cash Flow: The Company utilized $18,766 in operating activities and generated $8,480 in financing activities (net of offering costs paid), resulting in a net decrease in cash of $10,286.
Outlook, Risks, and Management Commentary
- Capital Raising: The Company intends to raise up to $2 billion through a "best-efforts" offering managed by David Lerner Associates, Inc. Proceeds are intended to fund property acquisitions and repay the existing line of credit.
- Liquidity: Liquidity is currently dependent on the success of the offering and a $400,000 unsecured line of credit from Wachovia Bank, N.A. The line of credit is personally guaranteed by Glade M. Knight and matures in November 2008.
- Related Party Transactions: Significant transactions are expected with related parties, including Apple Suites Realty Group, Inc. (ASRG) for property acquisition/disposition and Apple Nine Advisors, Inc. (A9A) for management. Both are 100% owned by Glade M. Knight. Reimbursable expenses to A9A totaled $16,086 for the quarter.
- Series B Preferred Stock Risk: The 480,000 Series B shares held by Mr. Knight are convertible into common stock based on gross proceeds raised. If the maximum offering is achieved, the expense recognized upon conversion could range from $0 to over $127 million, resulting in significant dilution to common shareholders.
- Market Risk: The Company has minimal exposure to market risk due to its small cash balance ($9,618) and variable rate debt ($200,500). A 100 basis point change in interest rates would impact annual net income by approximately $2,005 regarding debt and $96 regarding cash.
Investor Verification Checklist
- Verify the status and progress of the $2 billion "best-efforts" offering, as the Company has no revenue and relies entirely on this capital to acquire assets.
- Confirm the terms of the $400,000 line of credit and the personal guarantee provided by Glade M. Knight, noting the maturity date of November 2008.
- Review the conversion formula for the Series B convertible preferred stock to understand the potential dilution impact on common shareholders if the offering succeeds.
- Assess the extent of related party fees and reimbursable expenses to ASRG and A9A, which are controlled by the Company's CEO.
- Monitor the Company's cash burn rate, as it currently holds less than $10,000 in cash while incurring ongoing administrative and interest expenses.