NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2017
1.
THE COMPANY
The
accompanying unaudited consolidated financial statements of Manhattan Bridge Capital, Inc. (“MBC”), a New York corporation
founded in 1989, and its consolidated subsidiaries, DAG Funding Solutions, Inc. (dissolved in September 2016) (“DAG Funding”),
a New York corporation formed in May 2007, and MBC Funding II Corp. (“MBC Funding II”), a New York corporation formed
in December 2015 (collectively referred to herein as the “Company”) have been prepared by the Company in accordance
with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with instructions
to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.
However, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with
the Company’s audited consolidated financial statements for the year ended December 31, 2016 and the notes thereto included
in the Company’s Annual Report on Form 10-K. Results of consolidated operations for the interim period are not necessarily
indicative of the operating results to be attained in the entire fiscal year.
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during the reporting period. Actual amounts could differ
from those estimates.
The
consolidated financial statements include the accounts of MBC, DAG Funding (until its dissolution) and MBC Funding II. All significant
intercompany balances and transactions have been eliminated in consolidation.
The
Company offers short-term, secured, non–banking loans to real estate investors (also known as hard money) to fund their
acquisition, renovation, rehabilitation or development of residential or commercial properties located in the New York metropolitan
area.
The
Company recognizes revenues in accordance with Accounting Standards Codification (“ASC”) 605, “Revenue Recognition”,
which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. ASC 605 outlines the
basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies.
In general, the Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery of the product
has occurred or services have been rendered, (iii) the sales price charged is fixed or determinable, and (iv) collectability is
reasonably assured.
Interest
income from commercial loans is recognized, as earned, over the loan period.
Origination
fee revenue on commercial loans is amortized over the term of the respective note.
The
Company presents deferred financing costs, excluding those incurred in connection with its line of credit, in the balance sheet
as a direct reduction from the related debt liability rather than an asset, in accordance with Accounting Standards Update (“ASU”)
2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”.
These costs, incurred in connection with the issuance of the Company’s senior secured notes, are being amortized over ten
years, using the straight-line method.
Deferred
financing costs in connection with the Company’s Credit and Security Agreement with Webster Business Credit Corporation
(“Webster”) pursuant to which it may borrow up to $14 million until February 27, 2018 (the “Webster Credit Line”),
as discussed in Note 7, are presented as an asset in the balance sheet, in accordance with ASU 2015-15, “Interest –
Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated With Line
of Credit Arrangements”. These costs are being amortized over three years, using the straight-line method.
2.
RECENT TECHNICAL ACCOUNTING PRONOUNCEMENTS
In
June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, “Financial Instruments - Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The ASU requires an organization to measure
all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions,
as well as reasonable and supportable forecasts. For public companies that file with the Securities and Exchange Commission (the
“SEC”) the ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those
fiscal years. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial
statements.
In
August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments - a consensus of the Emerging Issues Task Force.” The ASU amends ASC 230 to add or clarify guidance on
the classification of certain cash receipts and payments in the statement of cash flows. For public companies that file with the
SEC, the standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years. Early adoption is permitted, provided that all of the amendments are adopted in the same period.
The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In
November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash - a consensus of the FASB
Emerging Issues Task Force.” The ASU requires that restricted cash and restricted cash equivalents be included as components
of total cash and cash equivalents as presented on the statement of cash flows. For public companies that file with the SEC, the
standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated
financial statements.
Management
does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a
material effect on the Company’s consolidated financial statements.
3.
CASH – RESTRICTED
Restricted
cash represents collections received, pending clearance, from the Company’s commercial loans and is primarily dedicated
to the reduction of the Webster Credit Line (see Note 7).
4.
COMMERCIAL LOANS
Short
Term Loans Receivable
The
Company offers short-term secured non–banking loans to real estate investors (also known as hard money) to fund their acquisition
and construction of properties located in the New York Metropolitan area. The loans are principally secured by collateral consisting
of real estate and, generally, accompanied by personal guarantees from the principals of the borrowers. The loans are generally
for a term of one year. The short term loans are initially recorded, and carried thereafter, in the financial statements at cost.
Most of the loans provide for receipt of interest only during the term of the loan and a balloon payment at the end of the term.
At
March 31, 2017, we were committed to $4,666,500 in construction loans that can be drawn by the borrower when certain conditions
are met.
At
March 31, 2017, no one entity has loans outstanding representing more than 10% of the total balance of the loans outstanding.
The
Company generally grants loans for a term of one year. When a performing loan reaches its maturity, and the borrower requests
an extension, we may extend the term of the loan beyond one year and reclassify it as part of long term loans receivable. Prior
to granting an extension of any loan, we reevaluate the underlying collateral.
Long
Term Loans Receivable
Long
term loans receivable is comprised of the loans that were extended beyond the original maturity dates, unless it is clear that
the loan will be paid back by March 31, 2018. At March 31, 2017, the Company’s loan portfolio consists of $26,699,500 short
term loans receivable and $8,504,820 long term loans receivable.
Credit
Risk
Credit
risk profile based on loan activity as of March 31, 2017 and 2016:
Performing
loans
|
|
Developers-
Residential
|
|
|
Developers-
Commercial
|
|
|
Developers
Mixed Used
|
|
|
Total
outstanding
loans
|
|
March 31,
2017
|
|
$
|
32,614,320
|
|
|
$
|
500,000
|
|
|
$
|
2,090,000
|
|
|
$
|
35,204,320
|
|
March 31, 2016
|
|
$
|
26,141,050
|
|
|
$
|
1,000,000
|
|
|
$
|
1,867,500
|
|
|
$
|
29,008,550
|
|
At
March 31, 2017, the Company’s long term loans receivable includes loans in the amount of $225,000, $345,000, $1,027,320
and $5,032,500 originally due in 2013, 2014, 2015 and 2016, respectively. In all instances the borrowers are currently paying
their interest and, generally, the Company receives a fee in connection with the extension of the loans. Accordingly, at March
31, 2017, no loan impairments exist and there were no provisions for impairments of loans or recoveries thereof included in operations.
Subsequent
to the balance sheet date, $1,260,000 of the loans receivable at March 31, 2017 were paid off.
5.
EARNINGS PER SHARE OF COMMON STOCK
Basic
and diluted earnings per share are calculated in accordance with ASC 260 “Earnings Per Share”. Under ASC 260, basic
earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares
outstanding for the period. The computation of diluted earnings per share is similar to basic earnings per share, except that
the denominator is increased to include the potential dilution from the exercise of stock options and warrants for common shares
using the treasury stock method. The numerator in calculating both basic and diluted earnings per common share for each period
is the reported net income.
The
denominator is based on the following weighted average number of common shares:
|
|
Three
Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Basic weighted average common
shares outstanding
|
|
|
8,135,036
|
|
|
|
7,264,039
|
|
Incremental shares for assumed exercise of options
|
|
|
23,280
|
|
|
|
28,333
|
|
Diluted weighted average common shares outstanding
|
|
|
8,158,316
|
|
|
|
7,292,372
|
|
27,751
and 76,836 vested options were not included in the diluted earnings per share calculation for the three month periods ended March
31, 2017 and 2016, respectively, because their effect would have been anti-dilutive.
6.
STOCK – BASED COMPENSATION
The
Company measures and recognizes compensation awards for all stock option grants made to employees and directors, based on their
fair value in accordance with ASC 718 “Compensation - Stock Compensation”, which establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for goods or services. A key provision of this statement
is to measure the cost of employee services received in exchange for an award of equity instruments (including stock options)
based on the grant-date fair value of the award. The cost will be recognized over the service period during which an employee
is required to provide service in exchange for the award (i.e., the requisite service period or vesting period). The Company accounts
for equity instruments issued to non-employees in accordance with the provisions of ASC 718 and ASC 505-50, “Equity Based
Payment to Non-Employees”. All transactions with non-employees, in which goods or services are the consideration received
for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value
of the equity instrument issued, whichever is more appropriately measurable.
The
exercise price of options granted under the Company’s stock option plan (the “Plan”) may not be less than the
fair market value on the date of grant. Stock options under the Plan may be awarded to officers, key employees, consultants and
non-employee directors of the Company. Generally, options outstanding vest over periods not exceeding four years and are exercisable
for up to five years from the grant date.
Share
based compensation expense recognized under ASC 718 for the three month periods ended March 31, 2017 and 2016 was $3,266 and $3,397,
respectively, primarily representing the amortization of the fair value of 1,000,000 restricted shares granted to the Company’s
Chief Executive Officer on September 9, 2011 of $195,968, after adjusting for the effect on the fair value of the stock options
related to this transaction. The fair value will be amortized over 15 years.
No
activity occurred during the three month period ended March 31, 2017. The following summarizes stock options outstanding (all
vested and exercisable) at March 31, 2017:
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (in years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at March 31,
2017
|
|
|
28,000
|
|
|
$
|
2.10
|
|
|
|
1.50
|
|
|
$
|
19,851
|
|
On
July 31, 2014, in connection with the Company’s public offering in July 2014, the Company issued warrants to purchase up
to 87,719 common shares, with an exercise price of $3.5625 per common share, to the representative of the underwriters of the
offering (the “July 2014 Representative Warrants”). These warrants are exercisable at any time, and from time to time,
in whole or in part, commencing on July 28, 2015 and expire on July 28, 2019. The fair value of these warrants, using the Black-Scholes
option pricing model, on the date of issuance was $42,224. At March 31, 2017, July 2014 Representative Warrants to purchase up
to 4,000 common shares were outstanding.
On
May 29, 2015, in connection with the Company’s public offering in May 2015, the Company issued warrants to purchase up to
50,750 common shares, with an exercise price of $5.4875 per common share, to the representative of the underwriters of the offering
(the “May 2015 Rep Warrants”). These warrants are exercisable at any time, and from time to time, in whole or in part,
commencing on May 22, 2016 and expire on May 22, 2020. The fair value of these warrants, using the Black-Scholes option pricing
model, on the date of issuance was $54,928. At March 31, 2017, May 2015 Rep Warrants to purchase up to 19,031 common shares were
outstanding.
On
August 15, 2016, in connection with the Shelf Takedown (defined below), the Company issued warrants to purchase up to 33,612 common
shares, with an exercise price of $7.4375 per common share, to the representative of the underwriters of the offering (the “August
2016 Rep Warrants”). The warrants are exercisable at any time, and from time to time, in whole or in part, commencing on
August 9, 2017 and expire on August 9, 2021. The fair value of these warrants, using the Black-Scholes option pricing model, on
the date of issuance was $47,020. At March 31, 2017, all of the August 2016 Rep Warrants were outstanding.
7.
LINE OF CREDIT
On
February 27, 2015, the Company entered into the Credit and Security Agreement with Webster. The Webster Credit Line provides for
an interest rate of either LIBOR plus 4.75% or the base commercial lending rate of Webster plus 3.25% as chosen by the Company
for each drawdown. The Webster Credit Line contains various covenants and restrictions including, among other covenants and restrictions,
limiting the amount that the Company can borrow relative to the value of the underlying collateral, maintaining various financial
ratios and limitations on the terms of loans the Company makes to its customers, limiting the Company’s ability to pay dividends
under certain circumstances, and limiting the Company’s ability to repurchase its common shares, sell assets, engage in
mergers or consolidations, grant liens, and enter into transactions with affiliates. In addition, the Webster Credit Line also
contains a cross default provision which will deem any default under any indebtedness owed by us or our subsidiary, MBC Funding
II, as a default under the credit line. Mr. Assaf Ran, the Company’s President and Chief Executive Officer, has personally
guaranteed all of the Company’s obligations to Webster.
Total
costs to establish the Webster Credit Line were approximately $144,000. These costs are being amortized over three years, using
the straight-line method. The amortization costs for each of the three months ended March 31, 2017 and 2016 were $12,041.
At
March 31, 2017, the outstanding amount under the Webster Credit Line was $7,217,047. The interest rate on the amount outstanding
fluctuates daily. The rate at March 31, 2017 was 5.73222%.
8.
SENIOR SECURED NOTES
On
April 25, 2016, in an initial public offering, MBC Funding II issued 6% senior secured notes, due April 22, 2026 (the “Notes”)
in the aggregate principal amount of $6,000,000 under the Indenture, dated April 25, 2016, among MBC Funding II, as Issuer, the
Company, as Guarantor, and Worldwide Stock Transfer LLC, as Indenture Trustee (the “Indenture”). The Notes, having
a principal amount of $1,000 each, are listed on the NYSE MKT and trade under the symbol “LOAN/26”. Interest accrues
on the Notes commencing on May 16, 2016. The accrued interest is payable monthly in cash, in arrears, on the 15th day of each
calendar month commencing June 2016.
Under
the terms of the Indenture, the aggregate outstanding principal balance of the mortgage loans held by MBC Funding II, together
with MBC Funding II’s cash on hand, must always equal at least 120% of the aggregate outstanding principal amount of the
Notes at all times. To the extent the aggregate principal amount of the mortgage loans owned by MBC Funding II plus MBC Funding
II’s cash on hand is less than 120% of the aggregate outstanding principal balance of the Notes, MBC Funding II is required
to repay, on a monthly basis, the principal amount of the Notes equal to the amount necessary such that, after giving effect to
such repayment, the aggregate principal amount of all mortgage loans owned by MBC Funding II plus MBC Funding II’s cash
on hand at such time is equal to or greater than 120% of the outstanding principal amount of the Notes. For this purpose, each
mortgage loan is deemed to have a value equal to its outstanding principal balance, unless the borrower is in default of its obligations.
MBC
Funding II may redeem the Notes, in whole or in part, at any time after April 22, 2019 upon at least 30 days prior written notice
to the Noteholders. The redemption price will be equal to the outstanding principal amount of the Notes redeemed plus the accrued
but unpaid interest thereon up to, but not including, the date of redemption, without penalty or premium; provided that (i) if
the Notes are redeemed on or after April 22, 2019 but prior to April 22, 2020, the redemption price will be 103% of the principal
amount of the Notes redeemed and (ii) if the Notes are redeemed on or after April 22, 2020 but prior to April 22, 2021, the redemption
price will be 101.5% of the principal amount of the Notes redeemed plus, in either case, the accrued but unpaid interest on the
Notes redeemed up to, but not including, the date of redemption.
Each
noteholder has the right to cause MBC Funding II to redeem his, her, or its Notes on April 22, 2021. The redemption price will
be equal to the outstanding principal amount of the Notes redeemed plus the accrued but unpaid interest up to, but not including,
the date of redemption, without penalty or premium. In order to exercise this right, the Noteholder must notify MBC Funding II,
in writing, no earlier than November 22, 2020 and no later than January 22, 2021. All notes that are subject to a properly and
timely notice will be redeemed on April 22, 2021. Any noteholder who fails to make a proper and timely election will be deemed
to have waived his, her or its right to have his, her or its Notes redeemed prior to the maturity date.
MBC
Funding II is obligated to offer to redeem the Notes if there occurs a “change of control” with respect to MBC Funding
II or the Company or if MBC Funding II or the Company sell any assets unless, in the case of an asset sale, the proceeds are reinvested
in the business of the seller. The redemption price in connection with a “change of control” will be 101% of the principal
amount of the Notes redeemed plus accrued but unpaid interest thereon up to, but not including, the date of redemption. The redemption
price in connection with an asset sale will be the outstanding principal amount of the Notes redeemed plus accrued but unpaid
interest thereon up to, but not including, the date of redemption.
9.
PUBLIC OFFERINGS
As
mentioned above, on April 25, 2016, MBC Funding II completed a firm commitment underwritten public offering of the Notes. The
Company guaranteed MBC Funding II’s obligations under the Notes, which are secured by a pledge by the Company of 100% of
the outstanding common shares of MBC Funding II it owns. The gross proceeds to MBC Funding II from this offering were $6,000,000,
and the net proceeds were approximately $5,200,000, after deducting the underwriting discounts and commissions and other offering
expenses. MBC Funding II utilized the proceeds to purchase a pool of mortgage loans from MBC, which the Company in turn used to
pay down the Webster Credit Line (see Note 7). The Company’s Chief Executive Officer and Chief Financial Officer also serve
as the Chief Executive Officer and Chief Financial Officer, respectively, of MBC Funding II. In connection with the initial public
offering of MBC Funding II, MBC Funding II’s Chief Executive Officer purchased approximately $594,000 of the senior secured
Notes and MBC Funding II’s Chief Financial Officer purchased approximately $38,000 of the senior secured Notes. Subsequent
to the offering, MBC Funding II’s Chief Financial Officer purchased an additional $57,000 of the senior secured Notes.
On
August 15, 2016, the Company completed a public offering of 672,269 common shares at an offering price of $5.95 per share (the
“Shelf Takedown”). The gross proceeds raised by the Company from the Shelf Takedown were approximately $4,600,000
(including approximately $600,000 from the sale of 100,840 additional common shares upon the exercise of the over-allotment option
by the underwriter) before deducting underwriting discounts and commissions and other offering expenses. The total net proceeds
from the Shelf Takedown were approximately $4,200,000.
10.
COMMITMENTS AND CONTINGENCIES
Operating
Lease
On
June 9, 2011, the Company entered into a new lease agreement (the “Lease’) to relocate its corporate headquarters
to 60 Cutter Mill Road, Great Neck, New York. The Lease was for a term of five years and two months commencing June 2011 and ending
August 2016. The rent increased annually during the term and ranged from approximately $2,800 per month during the first year
to approximately $3,200 per month during the fifth year.
On
July 21, 2016, the Company amended the Lease (the “Lease Amendment”) to extend the term of the Lease for an additional
five years, through September 30, 2021. Among other things, the Lease Amendment provides for gradual annual rent increases from
approximately $3,500 per month during the first year to $3,900 per month during the fifth year of the extension term.