NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1.
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Organization and Summary of Significant Accounting Policies
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Organization
Presidential Realty Corporation (“Presidential”
or the “Company”) is operated as a self-administrated, self-managed Real Estate Investment Trust (“REIT”).
The Company is engaged principally in the ownership of income producing real estate. Presidential operates in a single business
segment, investments in real estate related assets.
Basis of Presentation and Going Concern
Considerations
For the three months ended March 31, 2016,
the Company had a loss from operations. This combined with a history of operating losses and working capital deficiency, has been
detrimental to our operations and could potentially affect our ability to meet our obligations and continue as a going concern.
Our ability to continue as a going concern is dependent upon the successful execution of strategies to achieve profitability, and
increase working capital by raising debt and/or equity. The accompanying financial statements do not include any adjustments that
may result from this uncertainty.
The financial statements have been prepared
in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the requirements
of the Securities and Exchange Commission (“SEC”). The financial statements include all normal and recurring adjustments
that are necessary for a fair presentation of the Company’s financial position and operating results.
The accompanying unaudited consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”) and the requirements of the Securities and Exchange Commission (“SEC”) for interim financial information.
The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of the Company’s
financial position and operating results. The results for such interim periods are not necessarily indicative of the results to
be expected for the year. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered
necessary for a fair presentation of the results for the respective periods have been reflected. These consolidated financial statements
and accompanying notes should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2015 filed
on April 12, 2016.
Real Estate
Real estate is stated at cost. Generally,
depreciation is provided on the straight-line method over the assets’ estimated useful lives, which range from twenty to
thirty-nine years for buildings and improvements and from three to ten years for furniture and equipment. Maintenance and repairs
are charged to operations as incurred and renewals and replacements are capitalized. The Company reviews each of its property investments
for possible impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment
of properties is determined to exist when estimated amounts recoverable through future operations on an undiscounted basis are
below the properties carrying value. If a property is determined to be impaired, it is written down to its estimated fair value.
Sale of Real Estate
Presidential follows the guidance of the
Property, Plant and Equipment Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) as it pertains to sales of real estate. Accordingly, the gains on certain transactions maybe deferred and recognized
on the installment method until such transactions comply with the criteria for full profit recognition. At March 31, 2016 and 2015,
the Company had no deferred gains.
Principles of Consolidation
The consolidated financial statements include
the accounts of Presidential Realty Corporation and its wholly owned subsidiaries. All significant intercompany balances and transactions
have been eliminated.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1.
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Organization and Summary of Significant Accounting Policies (Continued)
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Rental Revenue Recognition
The Company acts as lessor under operating
leases. Rental revenue is recorded on the straight-line basis from the later of the date of the commencement of the lease or the
date of acquisition of the property subject to existing leases, which averages minimum rents over the terms of the leases. Certain
leases require the tenants to reimburse a pro rata share of real estate taxes, utilities and maintenance costs. Recognition of
rental revenue is generally discontinued when the rental is delinquent for ninety days or more, or earlier if management determines
that collection is doubtful.
Allowance for Doubtful Accounts
The Company assesses the
collectability of amounts due from tenants and other receivables, using indicators such as past-due accounts, the nature and
age of the receivable, the payment history and the ability of the tenant or debtor to meet its payment obligations.
Management’s estimate of allowances for doubtful accounts is subject to revision as these factors change. Rental
revenue is recorded on the accrual method and rental revenue recognition is generally discontinued when the tenant in
occupancy is delinquent for ninety days or more. Bad debt expense is charged for vacated tenant accounts and subsequent
receipts collected for those receivables will reduce bad debt expense. For the three months ended March 31, 2016 and December
31, 2015, allowance for doubtful accounts relating to tenant obligations was $1,148 and $790,
respectively.
Net Loss Per Share
Basic net loss per share data is computed
by dividing net loss by the weighted average number of shares of Class A and Class B common stock outstanding (excluding non-vested
shares) during each period. Diluted net income per share is computed by dividing net income by the weighted average shares outstanding,
including the dilutive effect, if any, of non-vested shares. For the three months ended March 31, 2016 and 2015, the weighted average
shares outstanding as used in the calculation of diluted loss per share do not include 740,000 of outstanding stock options and
1,700,000 of outstanding warrants, as their inclusion would be antidilutive.
Cash
Cash includes cash on hand, cash in banks
and cash in money market funds.
Management Estimates
The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing the consolidated
financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities as of the date of the consolidated balance sheets and the reported amounts
of income and expense for the reporting period. Actual results could differ from those estimates.
Accounting for Stock Awards
The Company follows the guidance of ASC
Topic 718 in accounting for stock-based compensation. Shares of Class B common stock granted are fully vested upon the grant date.
The Company recorded the market value of any grants that were earned and vested in 2016 and 2015 to expense in each period.
Accounting for Uncertainty in Income
Taxes
The Company follows the guidance of the
recognition of current and deferred income tax accounts, including accrued interest and penalties, in accordance with ASC 740-10-25.
Under this guidance, if the Company’s tax positions in relation to certain transactions were examined and were not ultimately
upheld, the Company would be required to pay an income tax assessment and related interest. Alternatively, the Company could elect
to pay a deficiency dividend to its shareholders in order to continue to qualify as a REIT and the related interest assessment
to the taxing authorities.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1.
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Organization and Summary of Significant Accounting Policies (Continued)
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Recent Accounting Pronouncements
In
April 2015, the FASB issued ASU 2015-3, to simplify the presentation of debt issuance costs. This update requires that debt issuance
costs be presented in the balance sheet as a direct deduction from the carrying amount of the associated debt liability, consistent
with the required presentation for debt discounts. This update is effective for interim and annual periods beginning after December 15,
2015. The Company adopted ASU 2015-03 January 1, 2016. The adoption of this standard resulted in the reclassification of $150,438
of unamortized debt issuance costs related to the Company’s mortgage loan (see Note 4b) from other assets to Mortgage payable
within its consolidated balance sheets as of March 31, 2016 and December 31, 2015. Other than this reclassification, the adoption
of ASU 2015-03 did not have an impact on the Company’s consolidated financial statements.
Accumulated amortization as of March
31, 2016 and December 31, 2015 was $10,817 and $6,884, respectively.
Amortization expense of mortgage cost
was $3,933 and $1,420 for the three months ended March 31, 2016 and 2015, respectively, which is included in interest expense.
In
February 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-02, Leases
(Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure
of leases for both parties to a contract. The new standard requires lessees to apply a dual approach, classifying leases as either
finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee.
This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line
basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases
with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted
for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an
approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.
ASU 2016-02 supersedes the previous leases standard, Leases (Topic 840). The standard is effective on January 1, 2019, with early
adoption permitted. The Company is currently in the process of evaluating the impact the adoption of ASU 2016-02 will have on
the Company’s financial position or results of operations
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Real estate is comprised of the following:
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March 31, 2016
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December 31, 2015
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Land
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$
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79,100
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$
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79,100
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Buildings
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1,001,984
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995,215
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Furniture and equipment
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44,030
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44,030
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Total
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$
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1,125,114
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$
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1,118,345
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Rental revenue from the Maple Tree property
constituted all of the rental revenue for the Company for the three months ended March 31, 2016 and 2015.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
3.
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Investments in Partnership
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We received distributions from Broadway
Partners Fund II in the amount of $0 and $2,750 during the three months ended March 31, 2016 and 2015, respectively. This amount
is reported as investment income on the statement of operations. This investment was previously written off. The Company recognizes
income received on the cash basis
.
The Broadway Partners Fund II was closed at the end of 2014
and we do not expect any meaningful income from this investment in the future.
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a.
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On June 8, 2012, we closed on a mortgage and line of credit for a combined total of $1,000,000 with Country Bank for Savings on the Mapletree Industrial Center (the “Mapletree Property”). The mortgage was for $500,000 at a 5% interest rate, for a term of 5 years. Thereafter the interest adjusted monthly equal to the bank’s Prime Rate, plus 1% with an interest rate floor of 5%, for a term of 15 years. We received $459,620 of net proceeds. The line of credit was for $500,000, with an interest rate of 1% over the bank’s Prime Rate. The line of credit was due on demand. Both the mortgage and the line of credit were secured by the Mapletree Property.
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b.
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On July 28, 2015, Palmer-Mapletree LLC, a wholly-owned subsidiary of the Company entered into a Loan Agreement (the “Loan Agreement”) with Natixis Real Estate Capital LLC providing for a mortgage loan in the principal amount of $1,750,000 (the “Loan”) at an interest rate of 6.031%. $934,794 of the loan proceeds were used to repay the prior mortgage loan and line of credit with Country Bank for Savings. The Loan replaced Palmer-Mapletree’s prior loan agreement and mortgage on the Mapletree Property which was entered into on June 8, 2012 with Country Bank for Savings (see Note 4a). $123,757 of the Loan proceeds was set aside for capital improvements and reserves for the property. We received net proceeds of $585,125. The Loan matures on August 5, 2025 and requires monthly payments of $11,308. The outstanding balance of the loan and mortgage costs at March 31, 2016 and December 31, 2015 was $1,733,037 and $146,505, respectively and $1,740,462 and $150,438, respectively. The Company is required to maintain certain Financial Covenants. The Company was in compliance with the covenants at March 31, 2016.
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Presidential has elected to qualify as
a Real Estate Investment Trust under the Internal Revenue Code. A REIT which distributes at least 90% of its real estate investment
trust taxable income to its shareholders each year by the end of the following year and which meets certain other conditions will
not be taxed on that portion of its taxable income which is distributed to its shareholders.
ASC 740 prescribes a more likely than not
recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken.
If the Company’s tax position in relation to a transaction was not likely to be upheld, the Company would be required to
record the accrual for the tax and interest thereon. As of March 31, 2016, the tax years that remain open to examination by the
federal, state and local taxing authorities are the 2012 – 2016 tax years and the Company was not required to accrue any
liability for those tax years.
The Company has accumulated a net operating
loss carry forward of approximately $20,000,000 expiring from 2028 through 2034.
For the three months ended March 31, 2016,
the Company had a tax loss of approximately $114,000 ($.03 per share), which was all ordinary loss.
For the three months ended March 31, 2015,
the Company had a tax loss of approximately $103,000 ($.02 per share), which was all ordinary loss.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
6.
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Commitments, Contingencies and Related parties
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A.
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Commitments and Contingencies
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1)
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Presidential is not a party to any material legal proceedings. The Company may from time to time be a party to routine litigation incidental to the ordinary course of its business.
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2)
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In the opinion of management, the Company’s Mapletree Property is adequately covered by insurance in accordance with normal insurance practices.
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1)
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Executive Employment Agreements
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a.
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Nickolas
W. Jekogian
– On January 8, 2014, the Company and Mr. Nicholas W. Jekogian, Chairman and Chief Executive Officer
of the Company, entered into an amendment to Mr. Jekogian’s employment agreement dated November 8, 2011. The amendment
provides for (i) the extension of the employment term from May 3, 2013 to December 31, 2015, (ii) continuation of Mr. Jekogian’s
base salary through the balance of the term at the rate of $225,000 per annum (subject to the continued deferral of the payment
of the base salary until a Capital Event), (iii) removal of the $200,000 cap on the amount of any annual bonus that might
be awarded Mr. Jekogian, (iv) the issuance to Mr. Jekogian of a “Warrant” to purchase 1,700,000 shares of the
Company’s Class B Common Stock in exchange for the complete cancellation of $425,000 of the deferred compensation accrued
under Mr. Jekogian’s employment agreement.
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Mr. Jekogian’s employment agreement, as amended, expired at December 31, 2015 but the board agreed to continue Mr. Jekogian’s employment on the same terms as the agreement until otherwise terminated by the board.
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Alexander Ludwig
– On January 8, 2014, the Company and Mr. Alexander Ludwig, a Director, President, Chief Operating Officer and Principal
Financial Officer of the Company entered into an amendment to Mr. Ludwig’s employment agreement dated November 8, 2011.
The amendment provides for (i) the extension of the employment term from May 3, 2013 to December 31, 2015, (ii) continuation
of Mr. Ludwig’s base salary through the balance of the term at the rate of $225,000 per annum, (iii) removal of the
$200,000 cap on the amount of any annual bonus that might be awarded Mr. Ludwig.
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Mr. Ludwig’s employment agreement, as amended, expired at December 31, 2015 but the board agreed to continue Mr. Ludwig’s employment on the same terms as the agreement until otherwise terminated by the board.
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On May 12, 2015 the Company and three former officers
entered into agreements that if the Company were to refinance the Mapletree Property, then they would accept, in lieu of the deferred
compensation owed to them in the amount of $563,750 a cash payment of $50,000 each for a total of $150,000 from the proceeds of
the refinancing and the balance in options of restricted stock vesting upon a registered public offering of the Company’s
Class B Common Stock.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
6.
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Commitments, Contingencies and Related parties (Continued)
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On July 28, 2015 the Company successfully refinanced
the Mapletree Property and made payments of $50,000 each and issued the option agreements to each of the three former officers.
The options call for the issuance of a number of shares of restricted stock based on the value at the public offering price equal
to the balance due of $413,750. The options vest upon the consummation of an underwritten registered public offering of the Company’s
Class B Common Stock with gross proceeds of not less than $20,000,000. The options expire 5 years from the grant date. The underlying
shares of the exercised options must be held for a period of 180 days, therefore a discount for lack of marketability was applied.
The Company recorded an extinguishment of debt gain of $228,261 based on the carrying value of the deferred compensation of $413,750
and the fair value of the options issued of $185,489.
These options were valued using a monte carlo model
valuation methodology. The model embodies relevant assumptions that address the features underlying these instruments. Significant
assumption used in the monte carlo model to value these options were, the following: Exercises price - $1.00; Term - 5 years; Discount
for lack of marketability - 29.19%; Volatility - 108.6%; Risk-free interest rate - 1.61%; Dividend rate - 0%.
During 2014 we paid the former officers of the
Company $10,000 each or $30,000 in total in order to extend the due date of the payment from November 8, 2014 to November 8,
2016. The balance owed at March 31, 2016 and December 31, 2015 was $0.
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C.
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Property Management Agreement
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On November 8, 2011, the Company
and Signature Community Management (“Signature”), (an entity owned by our CEO) entered into a Property Management Agreement
pursuant to which the Company retained Signature as the exclusive, managing and leasing agent for the Company’s Mapletree
Property. Signature receives compensation of 5% of monthly rental income actually received from tenants at the Mapletree Property.
The property Management Agreement renewed for a one year term on November 8, 2015 and will automatically renew for one year terms
until it is terminated by either party upon written notice. The Company incurred management fees of approximately $10,330 and $10,000
for the three months ended March 31, 2016 and 2015, respectively.
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D.
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Asset Management Agreement
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On November 8, 2011, the Company
entered into an Asset Management Agreement with Signature pursuant to which the Company engaged Signature to oversee the Mapletree
Property. Signature will receive an asset management fee of 1.5% of the monthly gross rental revenues collected for the Mapletree
Property. The Asset Management Agreement renewed for a one year term on November 8, 2015 and will automatically renew for one year
terms until it is terminated by either party upon written notice. The Company incurred asset management fees of $3,099 and $3,000
for the three months ended March 31, 2016 and 2015, respectively.
The Company subleases their executive
office space under a month to month lease with Signature for a monthly rental payment of $1,100 or $13,200 per year. Either party
may terminate the sublease upon 30 days prior written notice. For the three months ended March 31, 2016 and 2015, respectively.
The Company incurred $3,300 in rent expense each period.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
7.
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Concentration
of Credit Risk
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Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist principally of cash.
The Company generally maintains its cash
in money market funds with financial institutions. Although the Company may maintain balances at these institutions in excess of
the FDIC insurance limit, the Company does not anticipate and has not experienced any losses.
The Class A and Class B common stock of
Presidential have identical rights except that the holders of Class A common stock are entitled to elect two-thirds of the Board
of Directors and the holders of the Class B common stock are entitled to elect one-third of the Board of Directors.
Other than as described in Note 9, no shares
of common stock of Presidential are reserved.
On November 8, 2011, the Company issued
740,000 options at an exercise price of $1.25. A total of 148,000 shares vest six months after the grant date. The aggregate intrinsic
value was $0.00. The remaining options vest upon the achievement of performance milestones. Options vesting on the achievement
of performance milestones will not be recognized as compensation until such milestones are deemed probable of achievement. The
Company has approximately $592,000 of unrecognized compensation expense respectively, related to unvested share-based compensation
awards. For the three months ended March 31, 2016 and 2015 compensation expense was $0. Approximately $592,000 will vest upon the
achievement of performance milestones.
10.
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Estimated Fair Value of Financial Instruments
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At March 31, 2016 and December 31, 2015,
the carrying amounts of the Company’s financial instruments, which include cash, accounts receivable, approximate their fair value due to their generally short maturities.