FHRT First Hartford Corp (PK)

See accompanying notes.

See accompanying notes.

See accompanying notes.

See accompanying notes.

See accompanying notes.

See accompanying notes.

FIRST HARTFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.        Business and Significant Accounting Policies:

Business

First Hartford Corporation, which was incorporated in Maine in 1909, and its subsidiaries (the Company), is engaged in two business segments: 1) the purchase, development, ownership, management and sale of real estate and 2) providing preferred developer services for two corporate franchise operators (i.e., “Fee for Service”).

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and all other entities in which the Company has a controlling financial interest, including those where the Company has been determined to be a primary beneficiary of a variable interest entity or meets certain criteria as a sole general partner or managing member in accordance with the consolidation guidance of the Financial Accounting Standards Board Accounting Standards Codification.  As such, included in the unaudited condensed consolidated financial statements are the accounts of Rockland Place Apartments Limited Partnership and Clarendon Hill Somerville Limited Partnership, in which the Company is the sole general partner.  The Company’s ownership percentage in these variable interest entity partnerships is nominal.  All significant intercompany balances and transactions have been eliminated.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8.03 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation have been included.  Operating results for the interim periods are not necessarily indicative of the results that may be expected for the entire year.  The condensed consolidated balance sheet as of April 30, 2018 was derived from the audited financial statements for the year then ended.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended April 30, 2018.

Because the Company is engaged in the development and sale of real estate at various stages of construction, the operating cycle may extend beyond one year.  Accordingly, following the usual practice of the real estate industry, the accompanying condensed consolidated balance sheets are unclassified.

FIRST HARTFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.        Business and Significant Accounting Policies (continued):

Revenue Recognition

We account for revenue in accordance with Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers” (Topic 606). We adopted new revenue recognition guidance on May 1, 2018, using the full retrospective method (see Note 2).  Revenue is recognized when or as control of the promised services or goods is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

The following is a description of our revenue recognition policies, updated for the effects of Topic 606, for the Company’s principal activities, separated by our reportable segments as discussed further within this Note 1.

Real Estate Operations Segment

Rental Income – Rental income is recognized on a straight-line basis over the terms of the respective leases and consists of base rent and reimbursements for certain costs such as real estate taxes, utilities, insurance, common maintenance and other recoverable costs as provided in the lease agreements.  There are no contingent rents. If conditions of rent are not met, certain tenants may have rights to pay percentage rent not to exceed stated rent. Currently, there are a very limited number of tenants on percentage rent.

Management Services – The Company provides management and maintenance services to third parties, primarily the Company’s unconsolidated Claymont, DE and Bronx, NY properties.  The Company is compensated for such services through a monthly management fee earned based on a specified percentage of the monthly rental income generated from the property under management. Property management services represent a series of distinct daily services rendered over time.

Sales of Real Estate – The Company recognizes sales of real estate as revenue at a point in time when control is transferred and the Company has satisfied its performance obligation.  

Development Services – The Company typically satisfies its performance obligation as services are rendered over time, measured by the ratio of costs incurred up to a given date to estimated total costs for each contract. This cost to cost measure is used because management considers it to be the best available measure of progress on these contracts.

FIRST HARTFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.        Business and Significant Accounting Policies (continued):

Construction Income – Construction revenues are recognized as performance obligations are satisfied over time (formerly known as percentage-of-completion method), measured by the ratio of costs incurred up to a given date to estimated total costs for each contract. This cost to cost measure is used because management considers it to be the best available measure of progress on these contracts.

Other Revenues – Other revenues represents retail sales at the Company’s three retail establishments it owns at its shopping centers. The Company recognizes these revenues at a point in time when control of the goods is transferred to its customers.

Fee for Service Segment :

Preferred Developer Services – The Company is party to preferred developer agreements with CVS and Cumberland Farms.  Under these agreements, the Company satisfies its performance obligation over time as services are provided. Fees are typically payable upon contractually defined events, like project milestones.

Accounts Receivable and Allowance for Doubtful Accounts

We record accounts receivable for our unconditional rights to consideration arising from our performance under contracts with customers. The carrying value of such receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value. We estimate our allowance for doubtful accounts for specific accounts receivable balances based on historical collection trends, the age of outstanding accounts receivables and existing economic conditions associated with the receivables. Past-due accounts receivable balances are written off when our internal collection efforts have been unsuccessful. As a practical expedient, we do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised service to a customer and when the customer pays for that service will be one year or less. We do not typically include extended payment terms in our contracts with customers.

Remaining Performance Obligations

Remaining performance obligations represent the aggregate transaction prices for contracts where our performance obligations have not yet been satisfied. On July 31, 2018, we had $4,950,557 of remaining performance obligations relating to construction projects.  We expect to recognize approximately 100% of our remaining performance obligation as revenue during the remainder of fiscal 2019.

FIRST HARTFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.        Business and Significant Accounting Policies (continued):

Contract Assets and Contract Liabilities

Contract assets represent assets for revenue that has been recognized in advance of billing the customer and for which the right to bill is contingent upon something other than the passage of time. Included in contract assets are costs and estimated earnings in excess of billings, uninstalled materials, and other costs related to long-term construction contracts.

When we receive consideration, or such consideration is unconditionally due, from a customer prior to transferring services to the customer under the terms of the services contract, we record a contract liability. Included in contract liabilities are billings in excess of costs and estimated earnings and deferred revenue. Such deferred revenue typically results from milestone payments pertaining to future services not yet rendered. We recognize the contract liability as revenue once we have transferred control of service to the customer and all revenue recognition criteria are met.

Contract assets and contract liabilities are determined for each contract on a net basis.  As of July 31, 2018, contract liabilities of $343,050 are included in deferred income in the accompanying consolidated balance sheets.

Contract Costs 

Contract costs include all direct material, direct labor and benefits, materials unique to or installed in the project, subcontract costs and allocations of indirect construction costs. Provisions for estimated losses on contracts in progress are made in the period in which such losses are determined.

As long-term contracts extend over one or more years, revisions in estimates of costs and earnings during the course of the contract are reflected in the accounting period in which the facts, which require the revision, become known.

Applying the contract cost practical expedient, we recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less.

Net Income (Loss) Per Common Share

FIRST HARTFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.        Business and Significant Accounting Policies (concluded):

Financial Instruments and Fair Value

The Company’s financial instruments include cash and cash equivalents, accounts receivable, marketable securities, accounts payable, accrued expenses, and debt.  The fair values of accounts receivable, accounts payable and accrued expenses are estimated to approximate their carrying amounts because of their relative short-term nature.  In general, the carrying amount of variable rate debt approximates its fair value.  Further, the carrying amount of fixed rate debt approximates fair value since the interest rates on the debt approximates the Company’s current incremental borrowing rate.  Marketable securities consist of equity securities and are stated at fair value based on the last sale of the period obtained from recognized stock exchanges (i.e. Level 1). Accumulated other comprehensive (loss) income consists solely of unrealized gains (losses) on marketable securities.

Segment Information

The factors used by the Company to identify reportable segments include differences in products and services and segregated operations within the Company. The first segment, “Real Estate Operations” participates in the purchase, development, management, ownership and sale of real estate. Within its second segment, “Fee for Service”, the Company provides preferred developer services to CVS and Cumberland Farms Inc. in certain geographic areas.  Summary financial information for the two reportable segments is as follows:

All costs after operating expenses are costs of the real estate operation.

The only assets in the balance sheet belonging to the Fee for Service segment is restricted cash of $334,147 on July 31, 2018 and $375,501 on April 30, 2018 and receivables of $3,319,079 on July 31, 2018 and $4,516,807 on April 30, 2018.

FIRST HARTFORD CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2.        New Accounting Pronouncements

The FASB previously issued five ASUs related to revenue recognition (“new revenue recognition guidance”). The ASUs issued were: (1) in May 2014, ASU 2014-09, “Revenue from Contracts with Customers (Topic 606);” (2) in March 2016, ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net);” (3) in April 2016, ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing;” (4) in May 2016, ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-scope Improvements and Practical Expedients;” and (5) in December 2016, ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue From Contracts with Customers.” As mentioned in Note 1, we adopted the new revenue recognition guidance in the first quarter of fiscal 2019 using the full retrospective transition method. This resulted in a cumulative adjustment of $129,097 to the accumulated deficit balance reflected in the accompanying consolidated balance sheet at April 30, 2018, which represents the impact from restating the statement of operations for the year ended April 30, 2018. There was no impact on the Company’s consolidated balance sheet as of April 30, 2017. The impact of the application of the new revenue recognition guidance resulted in a deceleration of revenues and a corresponding deferral of project costs related to an agreement that did not meet the criteria for a contract under the scope of Topic 606. Under the new revenue guidance, because this agreement does not meet the criteria for a contract, revenue cannot be recognized until the Company has satisfied all performance obligations. In addition, the deceleration of these revenues and expenses resulted in an increase in total assets and liabilities to reflect contract assets and liabilities.

The following table presents the effects of the adoption of the new revenue recognition guidance on our consolidated balance sheet as of April 30, 2018:

The adoption of the new revenue recognition guidance did not have an effect on the Company’s condensed consolidated statements of income or cash flows for the three months ended July 31, 2017.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.”  This ASU addressed eight specific cash flow issues with the objective of reducing the existing diversity in practice. We adopted ASU 2016-15 in the first quarter of fiscal 2019. 

FIRST HARTFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2.        New Accounting Pronouncements (concluded):

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.”  This ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash. We adopted ASU 2016-18 in the first quarter of fiscal 2019 and, as a result, restricted cash has been included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.

Recent Accounting Pronouncements Pending Adoption

Currently, there are no Accounting Standards Updates that the Company is required to adopt that are likely to have a material effect on its financial statements that have not been previously discussed in the Company’s annual report on Form 10-K for the fiscal year ended April 30, 2018.

3.        Consolidated Variable Interest Entities and Investments in Affiliated Partnerships:

The Company has consolidated both Rockland and Clarendon based on the express legal rights and obligations provided to it by the underlying partnership agreements and its control of their business activity.  The assets of these partnerships that can only be used to settle their obligations and their liabilities for which creditors (or beneficial interest holders) do not have recourse to the general credit of the Company are shown parenthetically in the line items of the consolidated balance sheets.  A summary of the assets and liabilities of Rockland and Clarendon included in the Company’s condensed consolidated balance sheets follows:

  FIRST HARTFORD CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.        Consolidated Variable Interest Entities and Investments in Affiliated Partnerships (concluded):

The Company accounts for its 50% ownership interest in Dover Parkade, LLC under the equity method of accounting.  A summary of the operating results for this entity follows:

In August 2017, the Company finalized an agreement to invest in an affiliated limited liability company called Ware Seguin 1518, LLC.  The Company accounts for its 50% interest in Ware Seguin 1518, LLC under the equity method of accounting.  Ware Seguin 1518, LLC owns property in Schertz, TX that it plans to develop into approximately 285 single family residential lots and approximately 15 acres of commercial or other uses.  The operating and financial policies of Ware Seguin 1518, LLC are not controlled by the Company.  The Company’s initial investment was $326,498 and the Company committed to invest an additional amount up to $500,000, of which an additional $103,149 was made as of July 31, 2018.  Additional future investments may be required if agreed by the Members.  The Company is also a guarantor of 50% of a $1,000,000 bank loan obtained by Ware Sequin 1518, LLC that was used to purchase the property. There has been no income statement activity as of July 31, 2018.

4.        Revenue from Contracts with Customers:

FIRST HARTFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4.        Revenue from Contracts with Customers (concluded):

The adoption of the new revenue recognition guidance did not have an effect on the Company’s condensed consolidated statements of income for the three months ended July 31, 2017.

5.        Income Taxes:

The Company files a Federal consolidated tax return to report all income and deductions for its subsidiaries. The Company and its subsidiaries file income tax returns in several states. The tax returns are filed by the entity that owns the real estate or provides services in such state. Some states do not allow a consolidated or combined tax filing. This sometimes creates income taxes to be greater than expected as income for some subsidiaries cannot be offset by other subsidiaries with operating losses.

On October 26, 2017, the Company was informed that its fiscal year 2016 Federal tax return was selected for examination.  This examination is currently in process.

6.        Litigation:

There have been no significant changes in litigation since April 30, 2018.

FIRST HARTFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7.        Construction Loan:

Edinburg, TX – Construction Loan : On May 1, 2018, the Company obtained a $3,233,937 construction loan to finance construction of a commercial building at its Edinburg, TX property.  The initial construction draw was for $2,818,156 with another $415,781 available to draw as construction is completed.  The net cash received by the Company at closing was $455,737.  Of the initial construction draw, $2,310,000 was used to repay Protective Life against their remaining loan to release the lot the building is being constructed on.  The interest rate on the loan is the Prime Rate per Wall Street Journal plus 1.25% with a floor of 6.00% and a ceiling of 9.00%.  The monthly loan payments are interest only for the first twelve months then convert to monthly principal and interest payments calculated using a 20 year amortization period with a final balloon payment due on April 30, 2023.  The Company is also a guarantor on this loan.

8.        Purchases of Real Estate:

Katy, TX: On May 3, 2018, the Company purchased a parcel of land in Katy, TX for $2,386,648 including closing costs.  This purchase was financed with proceeds from a construction loan of $1,487,973, cash of $823,496, and working capital of $75,179. Key terms of the construction loan are as follows:  

Katy, TX (Cane Island): On July 25, 2018, the Company purchased a 5.32 acre parcel of land in Katy, TX for $2,977,851 including closing costs.  This purchase was primarily financed through utilization of the Company’s credit lines.  The Company expects to obtain a construction loan for this property in the near future.

9.        Subsequent Events:

The Company has evaluated for subsequent events through September 28, 2018, the date the financial statements were issued.

Wethersfield, CT – Sale of Condominium: On August 28, 2018, the Company sold its final condominium in Wethersfield, CT for $260,000 (cost of approximately $254,718). 

Houma, LA – Sale of Property: On September 20, 2018, the Company sold its single tenant property in Houma, LA for $7,895,000 (cost of approximately $6,405,114).  A construction loan with a balance of $4,563,084 and a line of credit with a balance of $285,695 were paid off with the proceeds.