Item
1.
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
MANHATTAN
BRIDGE CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
Assets
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$
|
41,241,820
|
|
|
$
|
34,755,320
|
|
Interest receivable on loans
|
|
|
457,118
|
|
|
|
346,519
|
|
Cash and cash equivalents
|
|
|
125,030
|
|
|
|
96,299
|
|
Deferred financing costs
|
|
|
32,110
|
|
|
|
56,193
|
|
Investment in privately held company
|
|
|
25,000
|
|
|
|
35,000
|
|
Other assets
|
|
|
78,783
|
|
|
|
44,193
|
|
Total
assets
|
|
$
|
41,959,861
|
|
|
$
|
35,333,524
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
13,165,999
|
|
|
$
|
6,482,848
|
|
Senior secured notes (net of deferred
financing costs of $660,127 and $697,669, respectively)
|
|
|
5,339,873
|
|
|
|
5,302,331
|
|
Deferred origination fees
|
|
|
361,523
|
|
|
|
315,411
|
|
Accounts payable and accrued expenses
|
|
|
101,488
|
|
|
|
105,541
|
|
Other liabilities
|
|
|
25,000
|
|
|
|
—
|
|
Dividends payable
|
|
|
—
|
|
|
|
813,503
|
|
Total
liabilities
|
|
|
18,993,883
|
|
|
|
13,019,634
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred shares - $.01 par value; 5,000,000 shares authorized;
no shares issued
|
|
|
—
|
|
|
|
—
|
|
Common shares - $.001 par value; 25,000,000
authorized; 8,312,036 issued; 8,101,934 and 8,135,036 outstanding, respectively
|
|
|
8,312
|
|
|
|
8,312
|
|
Additional paid-in capital
|
|
|
23,140,546
|
|
|
|
23,134,013
|
|
Treasury stock, at cost – 210,102
and 177,000
|
|
|
(541,491
|
)
|
|
|
(369,335
|
)
|
Retained earnings
(Accumulated deficit)
|
|
|
358,611
|
|
|
|
(459,100
|
)
|
Total
stockholders’ equity
|
|
|
22,965,978
|
|
|
|
22,313,890
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
41,959,861
|
|
|
$
|
35,333,524
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
MANHATTAN
BRIDGE CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(unaudited)
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Interest income from loans
|
|
$
|
1,188,567
|
|
|
$
|
973,934
|
|
|
$
|
2,294,748
|
|
|
$
|
1,888,243
|
|
Origination fees
|
|
|
212,334
|
|
|
|
191,959
|
|
|
|
435,759
|
|
|
|
382,240
|
|
Total
Revenue
|
|
|
1,400,901
|
|
|
|
1,165,893
|
|
|
|
2,730,507
|
|
|
|
2,270,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and amortization of debt service
costs
|
|
|
277,651
|
|
|
|
208,750
|
|
|
|
509,233
|
|
|
|
388,300
|
|
Referral fees
|
|
|
841
|
|
|
|
1,894
|
|
|
|
2,201
|
|
|
|
3,262
|
|
General and administrative
expenses
|
|
|
270,471
|
|
|
|
233,545
|
|
|
|
575,986
|
|
|
|
461,385
|
|
Total
operating costs and expenses
|
|
|
548,963
|
|
|
|
444,189
|
|
|
|
1,087,420
|
|
|
|
852,947
|
|
Income from operations
|
|
|
851,938
|
|
|
|
721,704
|
|
|
|
1,643,087
|
|
|
|
1,417,536
|
|
Loss on write-down
of investment in privately held company (Note 4)
|
|
|
(10,000
|
)
|
|
|
(10,000
|
)
|
|
|
(10,000
|
)
|
|
|
(10,000
|
)
|
Income before income tax expense
|
|
|
841,938
|
|
|
|
711,704
|
|
|
|
1,633,087
|
|
|
|
1,407,536
|
|
Income tax expense
|
|
|
(1,872
|
)
|
|
|
(1,639
|
)
|
|
|
(1,872
|
)
|
|
|
(2,146
|
)
|
Net income
|
|
$
|
840,066
|
|
|
$
|
710,065
|
|
|
$
|
1,631,215
|
|
|
$
|
1,405,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income per common
share outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—Basic
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
$
|
0.20
|
|
|
$
|
0.19
|
|
—Diluted
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
$
|
0.20
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—Basic
|
|
|
8,119,052
|
|
|
|
7,279,332
|
|
|
|
8,127,000
|
|
|
|
7,271,685
|
|
—Diluted
|
|
|
8,131,752
|
|
|
|
7,307,710
|
|
|
|
8,142,157
|
|
|
|
7,298,185
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
MANHATTAN
BRIDGE CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
|
|
Six
Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
1,631,215
|
|
|
$
|
1,405,390
|
|
Adjustments to reconcile
net income to net cash provided by operating activities -
|
|
|
|
|
|
|
|
|
Amortization of
deferred financing costs
|
|
|
61,625
|
|
|
|
39,433
|
|
Depreciation
|
|
|
2,186
|
|
|
|
1,778
|
|
Non cash compensation
expense
|
|
|
6,532
|
|
|
|
6,794
|
|
Loss on write-down
of investment in privately held company (Note 4)
|
|
|
10,000
|
|
|
|
10,000
|
|
Changes in operating
assets and liabilities:
|
|
|
|
|
|
|
|
|
Interest receivable
on loans
|
|
|
(110,599
|
)
|
|
|
82,207
|
|
Other assets
|
|
|
(35,109
|
)
|
|
|
(26,730
|
)
|
Accounts payable
and accrued expenses
|
|
|
(4,053
|
)
|
|
|
(10,057
|
)
|
Deferred origination
fees
|
|
|
46,112
|
|
|
|
31,729
|
|
Other
liabilities
|
|
|
25,000
|
|
|
|
—
|
|
Net
cash provided by operating activities
|
|
|
1,632,909
|
|
|
|
1,540,544
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Issuance of short
term loans
|
|
|
(20,599,500
|
)
|
|
|
(14,869,500
|
)
|
Collections received
from loans
|
|
|
14,113,000
|
|
|
|
13,639,670
|
|
Purchase
of fixed assets
|
|
|
(1,666
|
)
|
|
|
(1,499
|
)
|
Net
cash used in investing activities
|
|
|
(6,488,166
|
)
|
|
|
(1,231,329
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from (Repayments
of) lines of credit, net
|
|
|
6,683,151
|
|
|
|
(2,351,510
|
)
|
Dividend paid
|
|
|
(1,627,007
|
)
|
|
|
(1,235,503
|
)
|
Purchase of treasury shares
|
|
|
(172,156
|
)
|
|
|
—
|
|
Repayments of short-term
loans, net
|
|
|
—
|
|
|
|
(1,095,620
|
)
|
Cash restricted
for reduction of line of credit
|
|
|
—
|
|
|
|
(1,408,592
|
)
|
Amount collected
payable to joint venture partners
|
|
|
—
|
|
|
|
378,875
|
|
Proceeds from public
offering, net
|
|
|
—
|
|
|
|
5,323,336
|
|
Proceeds
from exercise of stock options and warrants
|
|
|
—
|
|
|
|
100,463
|
|
Net
cash provided by (used in) financing activities
|
|
|
4,883,988
|
|
|
|
(288,551
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
28,731
|
|
|
|
20,664
|
|
Cash and cash
equivalents, beginning of year
|
|
|
96,299
|
|
|
|
106,836
|
|
Cash and cash
equivalents, end of period
|
|
$
|
125,030
|
|
|
$
|
127,500
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
Taxes paid during
the period
|
|
$
|
1,872
|
|
|
$
|
1,948
|
|
Interest paid
during the period
|
|
$
|
415,273
|
|
|
$
|
348,443
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
MANHATTAN
BRIDGE CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 $15 million until February 27, 2022 (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
August 2016, the Financial Accounting Standards Board (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.
In
May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.”
The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity
would be required to apply modification accounting under ASC 718. Under the new guidance, modification accounting is required
only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms
or conditions. For all entities, 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, including adoption in any interim period.
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.
COMMERCIAL LOANS
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 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
June 30, 2017, we were committed to an additional $3,830,500 in construction loans that can be drawn by the borrowers when certain
conditions are met.
At
June 30, 2017, no one entity has loans outstanding representing more than 10% of the total balance of the loans outstanding. In
addition, at June 30, 2017, the Company did not have any loans outstanding that were joint ventured with partners.
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. Prior to granting an extension of any loan, we reevaluate the
underlying collateral.
Credit
Risk
Credit
risk profile based on loan activity as of June 30, 2017:
Performing
loans
|
|
Developers-
Residential
|
|
|
Developers-
Commercial
|
|
|
Developers-
Mixed Used
|
|
|
Total
outstanding loans
|
|
June 30, 2017
|
|
$
|
37,796,820
|
|
|
$
|
500,000
|
|
|
$
|
2,945,000
|
|
|
$
|
41,241,820
|
|
At
June 30, 2017, the Company’s loans receivable includes loans in the amount of $345,000, $766,320 and $5,032,500 originally
due in 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 June 30, 2017, no loan impairments exist
and there are no provisions for impairments of loans or recoveries thereof included in operations.
Subsequent
to the balance sheet date, $1,610,000 of the loans receivable at June 30, 2017 were paid off.
4.
Investment in Privately Held Company
The
Company had an original investment in a privately held Israeli-based company in the amount of $100,000. The privately held company
offers surgeons and radiologists the ability to detect cancer in real time. Due to the fact that the privately held company has
experienced delays in executing its business plan, the Company determined to write down the value of its investment to $65,000
at December 31, 2013, to $50,000 at June 30, 2015, and to $35,000 at December 31, 2016. The Company further wrote down the value
of its investment to $25,000 at June 30, 2017, resulting in a charge to the statement of operations of $10,000 for the three and
six month periods ended June 30, 2017.
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 June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Basic
|
|
|
|
8,119,052
|
|
|
|
7,279,332
|
|
|
|
8,127,000
|
|
|
|
7,271,685
|
|
Incremental
shares for assumed exercise of options
|
|
|
|
12,700
|
|
|
|
28,378
|
|
|
|
15,157
|
|
|
|
26,500
|
|
Diluted
|
|
|
|
8,131,752
|
|
|
|
7,307,710
|
|
|
|
8,142,157
|
|
|
|
7,298,185
|
|
For
the three and six month periods ended June 30, 2017, 31,331 and 28,874, stock options and warrants were not included in the diluted
earnings per share calculation, respectively, because their effect would have been anti-dilutive.
For
the three and six month periods ended June 30, 2016, 99,341 and 101,219, stock options and warrants were not included in the diluted
earnings per share calculation, 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 and six months ended June 30, 2017 was $3,266 and $6,532, respectively.
Share based compensation expense recognized under ASC 718 for the three and six months ended June 30, 2016 was $3,397 and $6,794,
respectively. The share based compensation expense primarily represents 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.
The
following summarizes stock option activity for the six month period ended June 30, 2017:
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (in years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at December 31, 2016
|
|
|
28,000
|
|
|
$
|
2.10
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(7,000
|
)
|
|
|
1.02
|
|
|
|
|
|
|
|
|
|
Outstanding at
June 30, 2017
|
|
|
21,000
|
|
|
$
|
2.46
|
|
|
|
1.67
|
|
|
$
|
15,547
|
|
Vested
and exercisable at June 30, 2017
|
|
|
21,000
|
|
|
$
|
2.46
|
|
|
|
1.67
|
|
|
$
|
15,547
|
|
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 June 30, 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 June 30, 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 June 30, 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 provided for
an interest rate (until amended – as described below) 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 six months ended June 30, 2017 and 2016 were $24,083.
At
June 30, 2017, the outstanding amount under the Webster Credit Line was $13,165,999. The interest rate on the amount outstanding
fluctuates daily. The rate for June 30, 2017 was 5.97611%.
Effective
July 7, 2017, the Company entered into Amendment No. 3 to Credit and Security Agreement and Amendment No. 1 to Guaranty Agreement
(the “Amendment”), with Webster. In conjunction with the execution of the Amendment, the Company also entered into
an Amended and Restated Revolving Credit Note (the “Amended Note”), and Amendment No. 3 Fee Letter (the “Fee
Letter”), each dated July 7, 2017, with Webster. Pursuant to the terms of the Amendment, the Webster Credit Line was increased
by $1 million to $15 million in the aggregate, with an option, at the discretion of Webster, to increase the Webster Credit Line
to $20 million in the aggregate. The term of the Webster Credit Line was extended to February 28, 2021, unless sooner terminated,
and contains a provision that permits a Company option for a further extension of the Webster Credit Line until February 28, 2022,
subject to Webster’s consent. Pursuant to the terms of the Amendment, the terms of the personal guaranty provided by Mr.
Ran were amended such that the potential sums owed under Mr. Ran’s personal guaranty will not exceed the sum of $500,000
plus any costs relating to the enforcement of the personal guaranty.
In
addition, the interest rates relating to the Webster Credit Line were amended such that the interest rates now equal (i) LIBOR
plus 3.75% plus the 0.5% Agency Fee (as hereinafter defined) or (ii) a Base Rate (as defined in the Credit and Security Agreement)
plus 2.25% plus the 0.5% Agency Fee, as chosen by the Company for each drawdown. Finally, the Amendment provides that the Company
shall not permit mortgage loans that are outstanding more than 24 months after their origination date to comprise more than 17.5%
of their total portfolio of mortgage loans at any time. Pursuant to the terms of the Fee Letter, the Company agreed to pay Webster
an agency fee equal to 0.5% per annum (the “Agency Fee”) on the actual principal amount of advances outstanding during
any month, as well as a $15,000 syndication fee.
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 OFFERING
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.
11.
RECLASSIFICATIONS
During
the quarter ended June 30, 2017, management determined to adopt an unclassified balance sheet format for financial statement reporting
purposes in order to be consistent with common practice in the Real Estate Investment Trust (REIT) industry. Certain reclassifications
have been made to the classified balance sheet as of December 31, 2016 to conform to the current period’s presentation.
********
Item
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
unaudited consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q. The discussion and
analysis contains forward-looking statements based on current expectations that involve risks and uncertainties. Actual results
and the timing of certain events may differ significantly from those projected in such forward-looking statements.
We
are a New York-based real estate finance company that specializes in originating, servicing and managing a portfolio of first
mortgage loans. We offer short-term, secured, non-banking loans (sometimes referred to as “hard money” loans), which
we may renew or extend on, before or after their initial term expires, to real estate investors to fund their acquisition, renovation,
rehabilitation or development of residential or commercial properties located in the New York metropolitan area.
The
properties securing the loans are generally classified as residential or commercial real estate and, typically, are not income
producing. Each loan is secured by a first mortgage lien on real estate. In addition, each loan is personally guaranteed by the
principal(s) of the borrower, which guarantee may be collaterally secured by a pledge of the guarantor’s interest in the
borrower. The face amount of the loans we originate historically ranged from $14,000 to a maximum of $2 million. Our lending policy
limits the maximum amount of any loan to the lower of (i) 9.9% of the aggregate amount of our loan portfolio (not including the
loan under consideration) and (ii) $2 million. Our loans typically have a maximum initial term of 12 months bearing interest at
a fixed rate of 11% to 14% per year. In addition, we usually receive origination fees or “points” ranging from 0%
to 3% of the original principal amount of the loan as well as other fees relating to underwriting and funding the loan. Interest
is always payable monthly, in arrears. In the case of acquisition financing, the principal amount of the loan usually does not
exceed 75% of the value of the property (as determined by an independent appraiser) and in the case of construction financing,
it is typically up to 80% of construction costs.
Since
commencing this business in 2007, we have made over 550 loans and never foreclosed on a property. In addition, none of our loans
have ever gone into default, although sometimes we have renewed or extended our loans to enable the borrower to avoid premature
sale or refinancing of the property. When we renew or extend a loan we receive additional “points” and other fees.
Our
primary business objective is to grow our loan portfolio while protecting and preserving capital in a manner that provides for
attractive risk-adjusted returns to our shareholders over the long term through dividends. We intend to achieve this objective
by continuing to selectively originate loans and carefully manage our portfolio of first mortgage real estate loans in a manner
designed to generate attractive risk-adjusted returns across a variety of market conditions and economic cycles. We believe that
the demand for relatively small loans secured by residential and commercial real estate held for investment in the New York metropolitan
market is significant and growing and that traditional lenders, including banks and other financial institutions, that usually
address this market are unable to satisfy this demand. This demand/supply imbalance has created an opportunity for non-bank “hard
money” real estate lenders like us to selectively originate high-quality first mortgage loans on attractive terms and this
condition should persist for a number of years. We have built our business on a foundation of intimate knowledge of the New York
metropolitan area real estate market combined with a disciplined credit and due diligence culture that is designed to protect
and preserve capital. We believe that our flexibility in terms of meeting the needs of borrowers without compromising our standards
on credit risk, our expertise, our intimate knowledge of the New York metropolitan area real estate market and our focus on newly
originated first mortgage loans, has defined our success until now and should enable us to continue to achieve our objectives.
A
principal source of new transactions has been repeat business from prior customers and their referral of new business. We also
receive leads for new business from banks, brokers and a limited amount of advertising. Finally, our chief executive officer also
spends a significant portion of his time on new business development. We rely on our own employees, independent legal counsel,
and other independent professionals to verify titles and ownership, to file liens and to consummate the transactions. Outside
appraisers are used to assist us in evaluating the worth of collateral, when deemed necessary by management. We also use construction
inspectors.
For
the six month periods ended June 30, 2017 and 2016, the total amounts of $20,599,500 and $14,869,500, respectively, have been
lent, offset by collections received from borrowers, under our commercial loans of $14,113,000 and $13,639,670, respectively.
At
June 30, 2017, we were committed to an additional $3,830,500 in construction loans that can be drawn by the borrowers when certain
conditions are met.
To
date, we have not experienced any defaults and none of the loans previously made have been non-collectable, although no assurances
can be given that existing or future loans may not go into default or prove to be non-collectible in the future.
We
satisfied all of the requirements to qualify as a REIT for federal income tax purposes and we qualified to be taxed as a REIT
commencing with our taxable year ended December 31, 2014. In order to maintain our qualification as a REIT and avoid any excise
tax on our net taxable income, we are required to distribute each year at least 90% of our taxable income to our shareholders
on an annual basis. If we distribute less than 100% of our taxable income (but more than 90%), the undistributed portion will
be taxed at the regular corporate income tax rates. As a REIT, we may also be subject to federal excise taxes and minimum state
taxes.
Results
of Operations
Three
Months Ended June 30, 2017 compared to Three Months Ended June 30, 2016
Revenue
Total
revenues for the three month period ended June 30, 2017 were approximately $1,401,000 compared to approximately $1,166,000 for
the three month period ended June 30, 2016, an increase of $235,000, or 20.2%. The increase in revenue represents an increase
in lending operations. For the three month periods ended June 30, 2017 and 2016, approximately $1,189,000 and $974,000, respectively,
of our revenues were attributable to interest income on the secured commercial loans that we offer to small businesses, and approximately
$212,000 and $192,000, respectively, of our revenues were attributable to origination fees on such loans. Our loans are principally
secured by collateral consisting of real property and, generally, accompanied by personal guarantees from the principals of the
borrowers.
Interest
and amortization of debt service costs
Interest
and amortization of debt service costs for the three month period ended June 30, 2017 were approximately $278,000 compared to
approximately $209,000 for the three month period ended June 30, 2016, an increase of $69,000, or 33.0%. The increase in interest
and amortization of debt service costs was primarily attributable to the use of the Webster Credit Line and the issuance of the
senior secured Notes (See Notes 7 and 8 to the financial statements included elsewhere in this report) in order to increase our
ability to make loans.
General
and administrative expenses
General
and administrative expenses for the three month period ended June 30, 2017 were approximately $270,000 compared to approximately
$234,000 for the three month period ended June 30, 2016, an increase of $36,000, or 15.4%. The increase is primarily attributable
to increases in payroll expenses and bank fees.
Write-down
of investment in privately held company
Write-down
of investment in privately held company for each of the three month periods ended June 30, 2017 and 2016 was $10,000. We wrote
down the value of our investment in a privately held company due to the fact that it has experienced delays in executing its business
plan (See Note 4 to the financial statements included elsewhere in this report).
Net
income
Net
income for the three month period ended June 30, 2017 was approximately $840,000 compared to approximately $710,000 for the three
month period ended June 30, 2016, an increase of $130,000, or 18.3%. The increase is primarily attributable to the increase in
revenue, offset by the increase in operating expenses.
Six
Months Ended June 30, 2017 compared to Six Months Ended June 30, 2016
Revenue
Total
revenues for the six month period ended June 30, 2017 were approximately $2,731,000 compared to approximately $2,270,000 for the
six month period ended June 30, 2016, an increase of $461,000, or 20.3%. The increase in revenue represents an increase in lending
operations. For the six month periods ended June 30, 2017 and 2016, revenues of approximately $2,295,000 and $1,888,000, respectively,
were attributable to interest income on secured commercial loans that we offer to small businesses, and approximately $436,000
and $382,000, respectively, were attributable to origination fees on such loans. Our loans are principally secured by collateral
consisting of real property and, generally, accompanied by personal guarantees from the principals of the borrowers.
Interest
and amortization of debt service costs
Interest
and amortization of debt service costs for the six month period ended June 30, 2017 were approximately $509,000 compared to approximately
$388,000 for the six month period ended June 30, 2016, an increase of $121,000, or 31.2%. The increase in interest and amortization
of debt service costs was primarily attributable to the use of the Webster Credit Line and the issuance of the senior secured
Notes (See Notes 7 and 8 to the financial statements included elsewhere in this report) in order to increase our ability to make
loans.
General
and administrative expense
General
and administrative expenses for the six month period ended June 30, 2017 were approximately $576,000 compared to approximately
$461,000 for the six month period ended June 30, 2016, an increase of $115,000, or 24.9%. The increase is primarily attributable
to a special bonus to officers as well as increases in payroll and travel expenses.
Write-down
of investment in privately held company
Write-down
of investment in privately held company for each of the six month periods ended June 30, 2017 and 2016 was $10,000. We wrote down
the value of our investment in a privately held company due to the fact that it has experienced delays in executing its business
plan (See Note 4 to the financial statements included elsewhere in this report).
Net
income
Net
income for the six month period ended June 30, 2017 was approximately $1,631,000 compared to approximately $1,405,000 for the
six month period ended June 30, 2016, an increase of $226,000, or 16.1%. The increase is primarily attributable to the increase
in revenue, offset by the increase in operating expenses.
Liquidity
and Capital Resources
At
June 30, 2017, we had cash and cash equivalents of approximately $125,000 compared to cash and cash equivalents of approximately
$96,000 at December 31, 2016.
For
the six month periods ended June 30, 2017 and 2016, net cash provided by operating activities was approximately $1.6 million and
$1.5 million, respectively. The increase in net cash provided by operating activities primarily results from an increase in net
income and amortization of deferred financing costs, offset by an increase in interest receivable on loans.
Net
cash used in investing activities was approximately $6.5 million for the six month period ended June 30, 2017, compared to approximately
$1.2 million for the same period ended June 30, 2016. Net cash used in investing activities for the six month period ended June
30, 2017 consisted of the issuance of our short term commercial loans of approximately $20.6 million, offset by collection of
these loans of approximately $14.1 million. In the period ended June 30, 2016, net cash used in investing activities consisted
of the issuance of our short term commercial loans of approximately $14.9 million, offset by collection of these loans of approximately
$13.6 million.
Net
cash provided by financing activities for the six month period ended June 30, 2017 was approximately $4.9 million, compared to
approximately $289,000 used in financing activities for the six month period ended June 30, 2016. Net cash provided by financing
activities for the six month period ended June 30, 2017 reflects the proceeds from the Webster Credit Line of approximately $6.7
million, offset by the dividend payment of approximately $1.6 million and the purchase of treasury shares of approximately $172,000.
In the period ended June 30, 2016, net cash used in financing activities reflects the repayment of the Webster Credit Line of
approximately of $2.4 million, cash restricted for reduction of the Webster Credit Line in the amount of approximately $1.4 million,
the dividend payment of approximately $1.2 million and the repayment of short term loans of approximately $1.1 million, offset
by the net proceeds from the public offering of approximately $5.3 million, the payable to our joint venture partners of approximately
$379,000 and the proceeds from the exercise of warrants of approximately $100,000.
On
February 27, 2015, we entered into a Credit and Security Agreement with Webster pursuant to which we could initially borrow up
to $14 million until February 27, 2018 against assignments of mortgages and other collateral. Until July 17, 2017, the Webster
Credit Line provided for an interest rate of either LIBOR plus 4.75% or the base commercial lending rate of Webster plus 3.25%
as chosen by us for each drawdown. The Webster Credit Line contains various covenants and restrictions, including limiting the
amount that we can borrow relative to the value of the underlying collateral, maintaining various financial ratios and limitations
on the terms of loans we make to our customers. We were in compliance with all covenants of the Webster Credit Line as of June
30, 2017. 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, our Chief Executive Officer,
has personally guaranteed all of our obligations to Webster. At June 30, 2017, the outstanding amount under the Webster Credit
Line was $13,165,999. The interest rate on the amount outstanding fluctuates daily. The rate for June 30, 2017 was 5.97611%.
Effective
July 7, 2017, we entered into the Amendment with Webster. In conjunction with the execution of the Amendment, the Company also
entered into Restated Note and the Fee Letter, each dated July 7, 2017, with Webster. Pursuant to the terms of the Amendment,
the Webster Credit Line was increased by $1 million to $15 million in the aggregate, with an option, at the discretion of Webster,
to increase the Webster Credit Line to $20 million in the aggregate. The term of the Webster Credit Line was extended to February
28, 2021, unless sooner terminated, and contains a provision that permits a Company option for a further extension of the Webster
Credit Line until February 28, 2022, subject to Webster’s consent. Pursuant to the terms of the Amendment, the terms of
the personal guaranty provided by Mr. Ran were amended such that the potential sums owed under Mr. Ran’s personal guaranty
will not exceed the sum of $500,000 plus any costs relating to the enforcement of the personal guaranty.
In
addition, the interest rates relating to the Webster Credit Line were amended such that the interest rates now equal (i) LIBOR
plus 3.75% plus the 0.5% Agency Fee or (ii) a Base Rate (as defined in the Credit and Security Agreement) plus 2.25% plus the
0.5% Agency Fee, as chosen by the Company for each drawdown. Finally, the Amendment provides that the Company shall not permit
mortgage loans that are outstanding more than 24 months after their origination date to comprise more than 17.5% of their total
portfolio of mortgage loans at any time. Pursuant to the terms of the Fee Letter, the Company agreed to pay Webster an agency
fee equal to 0.5% per annum on the actual principal amount of advances outstanding during any month, as well as a $15,000 syndication
fee.
On
April 25, 2016, MBC Funding II, our wholly owned subsidiary, completed an underwritten public offering of the Notes. We guaranteed
MBC Funding II’s obligations under the Notes, which are secured by our pledge of 100% of the outstanding common shares of
MBC Funding II we own. The gross proceeds to MBC Funding II from this offering were $6.0 million, and the net proceeds were approximately
$5.2 million, after deducting the underwriting discounts and commissions and other offering expenses (See Notes 8 and 9 to the
financial statements included elsewhere in this report). MBC Funding II utilized the proceeds to purchase a pool of mortgage loans
from us, which we in turn used to pay down the Webster Credit Line.
On
August 15, 2016, we completed a public offering of 672,269 common shares. In addition, the underwriter fully exercised its over-allotment
option for an additional 100,840 common shares. The gross proceeds from the offering, including the exercise of the over-allotment
option, were approximately $4.6 million and the net proceeds were approximately $4.2 million, after deducting our underwriting
discounts and commissions and offering expenses. Net proceeds from this offering were used to increase our loan portfolio and
for working capital and general corporate purposes.
On
March 14, 2017, our Board of Directors authorized a share buy back program (the “Share Buy Back Program”), pursuant
to which we may, from time to time, purchase up to 100,000 shares of our common stock. The Share Buy Back Program does not obligate
the Company to purchase any shares and expires in 12 months. The authorization for the Share Buy Back Program may be terminated,
increased or decreased by the Company’s Board of Directors in its discretion at any time. To date, we have purchased 33,102
shares of the Company’s common stock for an aggregate of $172,156 pursuant to the Share Buy Back Program.
We
anticipate that our current cash balances and the Webster Credit Line, as described above, together with our cash flows from operations
will be sufficient to fund our operations for the next 12 months. However, we expect our working capital requirements to increase
over the next 12 months as we continue to strive for growth.
Changes
to Critical Accounting Policies and Estimates
Our
critical accounting policies and estimates are set forth in our Annual Report on Form 10-K for the fiscal year ended December
31, 2016.