NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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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 nine months ended September 30, 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 September 30, 2016 and 2015, the Company
had no deferred gains.
PRESIDENTIAL
REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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1.
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Organization and Summary of Significant Accounting Policies (Continued)
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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.
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 straight-line basis 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.
As of September 30, 2016 and December 31, 2015, the allowance relating to tenant obligations was $1,098 and $790, respectively.
Net Income (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 and nine months ended September 30, 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.
PRESIDENTIAL
REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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1.
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Organization and Summary of Significant Accounting
Policies (Continued)
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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.
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 September 30, 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 September 30,
2016 and December 31, 2015 was $18,683 and $6,884, respectively.
Amortization expenses of mortgage costs was
$3,933 and $14,171 for the three months ended September 30, 2016 and 2015, respectively and $11,799 and $17,010 for the nine months
ended September 30, 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.
In March
2016, FASB issued ASU No. 2016-09, “Improvements to Employee Share-based Payment Accounting” (“ASU 2016-09”).
ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic
entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification
in the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2017, and interim periods
within annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the standard
and the impact on its consolidated financial statements and footnote disclosures
.
PRESIDENTIAL
REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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1.
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Organization and Summary of Significant Accounting Policies (Continued)
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In August 2014, the FASB issued ASU No. 2014-15,
“Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern” (ASU 2014-15), which provides
guidance on management’s responsibility in evaluating whether there is substantial doubt an entity’s ability to continue
as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for the annual period ending after December
15, 2016, and for annual and interim periods thereafter. The adoption of ASU 2014-15 is not expected to have a material impact
on our financial position, results of operations or cash flows.
Real estate is comprised of the following:
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September
30, 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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1,039,984
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995,215
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Furniture and equipment
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50,375
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44,030
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Total
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$
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1,169,459
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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 and nine months ended September 30, 2016 and 2015.
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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 nine months ended September 30, 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 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 September 30, 2016 and December 31, 2015 was $1,718,418 and $138,639, 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 September
30, 2016.
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PRESIDENTIAL
REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30, 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 $20,450,000 expiring from 2028 through 2034.
For the nine months ended September 30, 2016,
the Company had a tax loss of approximately $349,000 ($.08 per share), which was all ordinary loss.
For the nine months ended September 30, 2015,
the Company had a tax loss of approximately $310,000 ($.07 per share), which was all ordinary loss.
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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.
PRESIDENTIAL
REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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6.
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Commitments, Contingencies and Related parties (continued)
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b.
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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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2)
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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 $10,000 for the
three months ended September 30, 2016 and 2015, respectively and approximately $30,000 for the nine months ended September 30,
2016 and 2015, respectively.
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3)
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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 approximately $3,000
for the three months ended September 30, 2016 and 2015 and approximately $9,000 for the nine months ended September 30, 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. The Company incurred $3,300 and $9,900 in rent expense the three
and nine months ended September 30, 2016 and 2015, respectively.
On September 22, 2016 the Company
signed a new sublease for their executive office space under a month to month lease with Nexelus for a monthly rental payment of
$1,500 or $18,000 per year. Either party may terminate the sublease upon 30 days prior written notice.
PRESIDENTIAL
REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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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 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%.
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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.
PRESIDENTIAL
REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 and nine months ended September 30, 2016 and 2015 compensation expense was $0. Approximately $592,000 will
vest upon the achievement of performance milestones.
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10.
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Estimated Fair Value of Financial Instruments
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At September 30, 2016 and December 31, 2015,
the carrying amounts of the Company’s financial instruments, which include cash, accounts receivable and accounts payable
and accrued expenses, approximate their fair value due to their generally short maturities.