Item
1. CONSOLIDATED FINANCIAL STATEMENTS
MANHATTAN
BRIDGE CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
Assets
|
|
|
|
|
|
|
Loans receivable
|
|
$
|
58,511,236
|
|
|
$
|
45,124,000
|
|
Interest receivable on loans
|
|
|
642,133
|
|
|
|
535,045
|
|
Cash
|
|
|
140,716
|
|
|
|
136,441
|
|
Cash - restricted
|
|
|
1,719,542
|
|
|
|
—
|
|
Deferred financing costs
|
|
|
46,891
|
|
|
|
45,269
|
|
Other assets
|
|
|
100,705
|
|
|
|
55,941
|
|
Total assets
|
|
$
|
61,161,223
|
|
|
$
|
45,896,696
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
21,717,346
|
|
|
$
|
16,914,594
|
|
Senior secured notes (net of deferred financing costs of $566,270 and $622,584)
|
|
|
5,433,730
|
|
|
|
5,377,416
|
|
Deferred origination fees
|
|
|
497,852
|
|
|
|
298,471
|
|
Accounts payable and accrued expenses
|
|
|
152,394
|
|
|
|
167,559
|
|
Dividends payable
|
|
|
—
|
|
|
|
891,983
|
|
Total liabilities
|
|
|
27,801,322
|
|
|
|
23,650,023
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred shares - $.01 par value; 5,000,000 shares authorized; none issued
|
|
|
—
|
|
|
|
—
|
|
Common shares - $.001 par value; 25,000,000 shares authorized; 9,873,703 and 8,319,036 issued, respectively; 9,663,601 and 8,108,934 outstanding, respectively
|
|
|
9,874
|
|
|
|
8,319
|
|
Additional paid-in capital
|
|
|
33,107,269
|
|
|
|
23,167,511
|
|
Treasury stock, at cost - 210,102 shares
|
|
|
(541,491
|
)
|
|
|
(541,491
|
)
|
Retained earnings (accumulated deficit)
|
|
|
784,249
|
|
|
|
(387,666
|
)
|
Total stockholders’ equity
|
|
|
33,359,901
|
|
|
|
22,246,673
|
|
Total liabilities and stockholders’ equity
|
|
$
|
61,161,223
|
|
|
$
|
45,896,696
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
MANHATTAN
BRIDGE CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
(unaudited)
|
|
Three Months
Ended September 30,
|
|
|
Nine Months
Ended September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from loans
|
|
$
|
1,616,518
|
|
|
$
|
1,351,788
|
|
|
$
|
4,469,118
|
|
|
$
|
3,646,535
|
|
Origination fees
|
|
|
274,936
|
|
|
|
239,675
|
|
|
|
754,510
|
|
|
|
675,434
|
|
Total revenue
|
|
|
1,891,454
|
|
|
|
1,591,463
|
|
|
|
5,223,628
|
|
|
|
4,321,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and amortization of debt service costs
|
|
|
429,421
|
|
|
|
352,359
|
|
|
|
1,240,199
|
|
|
|
861,591
|
|
Referral fees
|
|
|
250
|
|
|
|
750
|
|
|
|
667
|
|
|
|
2,951
|
|
General and administrative expenses
|
|
|
272,321
|
|
|
|
266,534
|
|
|
|
862,994
|
|
|
|
842,520
|
|
Total operating costs and expenses
|
|
|
701,992
|
|
|
|
619,643
|
|
|
|
2,103,860
|
|
|
|
1,707,062
|
|
Income from operations
|
|
|
1,189,462
|
|
|
|
971,820
|
|
|
|
3,119,768
|
|
|
|
2,614,907
|
|
Loss on write-down of investment in privately held company
|
|
|
—
|
|
|
|
(10,000
|
)
|
|
|
—
|
|
|
|
(20,000
|
)
|
Income before income tax expense
|
|
|
1,189,462
|
|
|
|
961,820
|
|
|
|
3,119,768
|
|
|
|
2,594,907
|
|
Income tax expense
|
|
|
(642
|
)
|
|
|
(1,099
|
)
|
|
|
(642
|
)
|
|
|
(2,971
|
)
|
Net income
|
|
$
|
1,188,820
|
|
|
$
|
960,721
|
|
|
$
|
3,119,126
|
|
|
$
|
2,591,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income per common share outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—Basic
|
|
$
|
0.13
|
|
|
$
|
0.12
|
|
|
$
|
0.37
|
|
|
$
|
0.32
|
|
—Diluted
|
|
$
|
0.13
|
|
|
$
|
0.12
|
|
|
$
|
0.37
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—Basic
|
|
|
9,266,962
|
|
|
|
8,106,499
|
|
|
|
8,499,967
|
|
|
|
8,120,091
|
|
—Diluted
|
|
|
9,274,822
|
|
|
|
8,117,151
|
|
|
|
8,507,724
|
|
|
|
8,131,400
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
MANHATTAN
BRIDGE CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
|
|
Nine Months
Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
3,119,126
|
|
|
$
|
2,591,936
|
|
Adjustments to reconcile net income to net cash provided by operating activities -
|
|
|
|
|
|
|
|
|
Amortization of deferred financing costs
|
|
|
75,073
|
|
|
|
95,378
|
|
Depreciation
|
|
|
3,287
|
|
|
|
3,398
|
|
Non cash compensation expense
|
|
|
9,798
|
|
|
|
9,798
|
|
Loss on write-down of investment in privately held company
|
|
|
—
|
|
|
|
20,000
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Interest receivable on loans
|
|
|
(107,088
|
)
|
|
|
(161,823
|
)
|
Other assets
|
|
|
(48,052
|
)
|
|
|
(15,922
|
)
|
Accounts payable and accrued expenses
|
|
|
(15,166
|
)
|
|
|
24,730
|
|
Deferred origination fees
|
|
|
199,381
|
|
|
|
75,332
|
|
Net cash provided by operating activities
|
|
|
3,236,359
|
|
|
|
2,642,827
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Issuance of short term loans
|
|
|
(42,417,500
|
)
|
|
|
(30,314,500
|
)
|
Collections received from loans
|
|
|
29,030,264
|
|
|
|
20,649,870
|
|
Purchase of fixed assets
|
|
|
—
|
|
|
|
(1,666
|
)
|
Net cash used in investing activities
|
|
|
(13,387,236
|
)
|
|
|
(9,666,296
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from line of credit, net
|
|
|
4,802,752
|
|
|
|
9,691,647
|
|
Proceeds from public offering, net
|
|
|
9,882,780
|
|
|
|
—
|
|
Proceeds from exercise of stock options and warrants
|
|
|
48,735
|
|
|
|
20,440
|
|
Dividends paid
|
|
|
(2,839,193
|
)
|
|
|
(2,457,455
|
)
|
Cash restricted for reduction of line of credit
|
|
|
(1,719,542
|
)
|
|
|
—
|
|
Deferred financing costs
|
|
|
(20,380
|
)
|
|
|
(43,122
|
)
|
Purchase of treasury shares
|
|
|
—
|
|
|
|
(172,156
|
)
|
Net cash provided by financing activities
|
|
|
10,155,152
|
|
|
|
7,039,354
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
4,275
|
|
|
|
15,885
|
|
Cash, beginning of period
|
|
|
136,441
|
|
|
|
96,299
|
|
Cash, end of period
|
|
$
|
140,716
|
|
|
$
|
112,184
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
Taxes paid during the period
|
|
$
|
642
|
|
|
$
|
2,971
|
|
Interest paid during the period
|
|
$
|
1,142,341
|
|
|
$
|
713,428
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
MANHATTAN
BRIDGE CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
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 subsidiary, 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, 2017 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 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 around the New York metropolitan
area.
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, as the difference between use of the effective interest method is not material.
Deferred
financing costs in connection with the Company’s Credit and Security Agreement with Webster Business Credit Corporation
(“Webster”), as amended, as well as the Amended and Restated Credit and Security Agreement, as amended, with Webster
and Flushing Bank (“Flushing”), 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 the term of the respective
agreement, using the straight-line method.
2.
RECENT TECHNICAL ACCOUNTING PRONOUNCEMENTS
In
May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09, “Revenue from Contracts
with Customers,” which is effective for fiscal years, and interim periods within those years, beginning on or after December
15, 2017. This ASU outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts
with customers and supersedes most current revenue recognition guidance, including industry specific guidance. Several ASUs expanding
and clarifying the initial guidance issued in ASU 2014-09 have been released since May 2014. Exclusions from the scope of this
guidance include revenue resulting from loans, investment securities (available-for-sale and trading), investments in unconsolidated
entities and leases. The Company adopted the ASU effective January 1, 2018. The Company evaluated the applicability of this guidance,
considering the scope exceptions, and concluded that the adoption does not have an effect on its consolidated financial statements,
primarily due to the new guidance not applying to revenue resulting from loans and lease contracts.
In
August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for
Hedging Activities.” This ASU expands the activities that qualify for hedge accounting and simplifies the rules for reporting
hedging transactions. For public companies that file with the Securities Exchange Commission (“SEC”), the standard
is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those
fiscal years. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s
consolidated financial statements.
In
February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU amends Accounting Standards Codification (“ASC”)
220, “Income Statement – Reporting Comprehensive Income,” to allow a reclassification from accumulated other
comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. In addition, under
this ASU, an entity will be required to provide certain disclosures regarding stranded tax effects. For all entities, the standard
is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those
fiscal years. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s
consolidated financial statements.
In
June 2018, the FASB issued ASU 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting.” This ASU supersedes ASC 505-50, “Equity Based Payment to Non-Employees,” (“ASC
505-50”) and expands the scope of ASC 718, “Compensation – Stock Compensation,” to include all share-based
payment arrangements related to the acquisition of goods and services from both nonemployees and employees. For public companies
that file with the SEC, the standard is effective for financial statements issued for fiscal years beginning after December 15,
2018, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than an entity’s adoption
date of ASC 606, “Revenue from Contracts with Customers.” The adoption of this guidance is not expected to have a
material impact on the Company’s consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements
for fair value measurements as part of its disclosure framework project. The standard is effective for all entities for financial
statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption
is permitted. 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 mainly represents collections received, pending check clearance, from the Company’s commercial loans and is primarily
dedicated to the reduction of the Company’s credit line established pursuant to the Company’s Credit and Security
Agreement with Webster, dated February 27, 2015 (the “Webster Credit Line”) (see Note 7).
4.
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 around the New York Metropolitan area. The loans are principally secured by collateral
consisting of first mortgage positions on 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
September 30, 2018, the Company was committed to $7,641,500 in construction loans that can be drawn by the borrowers
when certain conditions are met.
At
September 30, 2018, 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, the Company may extend the term of the loan beyond one year. Prior to granting an extension of any loan, the Company
reevaluates the underlying collateral.
Credit
Risk
Credit
risk profile based on loan activity as of September 30, 2018 and December 31, 2017:
Performing loans
|
|
Developers-
Residential
|
|
|
Developers-
Commercial
|
|
|
Developers-
Mixed Used
|
|
|
Total
outstanding
loans
|
|
September 30, 2018
|
|
$
|
51,496,236
|
|
|
$
|
3,660,000
|
|
|
$
|
3,355,000
|
|
|
$
|
58,511,236
|
|
December 31, 2017
|
|
$
|
41,739,000
|
|
|
$
|
900,000
|
|
|
$
|
2,485,000
|
|
|
$
|
45,124,000
|
|
At
September 30, 2018, the Company’s loans receivable includes loans in the amount of $2,060,000 and $6,447,500 originally
due in 2016 and 2017, 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 September 30, 2018, no loan impairments exist and
there are no provisions for impairments of loans or recoveries thereof.
Subsequent
to the balance sheet date, $954,000 of the loans receivable at September 30, 2018 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 September 30,
|
|
Nine
Months
Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Basic
|
|
|
9,266,962
|
|
|
|
8,106,499
|
|
|
|
8,499,967
|
|
|
|
8,120,091
|
|
Incremental
shares for assumed exercise of options
|
|
|
7,860
|
|
|
|
10,652
|
|
|
|
7,757
|
|
|
|
11,309
|
|
Diluted
|
|
|
9,274,822
|
|
|
|
8,117,151
|
|
|
|
8,507,724
|
|
|
|
8,131,400
|
|
For
the three and nine month periods ended September 30, 2018, 46,902 and 47,005, exercisable 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 nine month periods ended September 30, 2017, 59,991 and 59,334, exercisable 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. 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 each of the nine month periods ended September 30, 2018 and 2017 of $9,798
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 nine month period ended September 30, 2018:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2017
|
|
|
14,000
|
|
|
$
|
2.23
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(7,000
|
)
|
|
|
1.53
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018 (all vested and exercisable)
|
|
|
7,000
|
|
|
$
|
2.92
|
|
|
|
0.75
|
|
|
$
|
5,034
|
|
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 September 30, 2018, 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 Representative 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 September 30, 2018, May 2015 Representative Warrants to purchase up to
10,150 common shares were outstanding.
On
August 15, 2016, in connection with a public offering of the Company’s Common Stock, 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 Representative 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 September 30, 2018, all of the August 2016 Representative Warrants
were outstanding.
7.
LOANS AND LINE OF CREDIT
Line
of Credit
Currently,
we have a $25 million credit line with Webster and Flushing. On February 27, 2015, the Company entered into the Webster Credit
Line with Webster pursuant to which it could borrow up to $14 million against assignments of mortgages and other collateral. The
Webster Credit Line was initially in effect until February 27, 2018. The Webster Credit Line initially 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, had personally guaranteed all of the Company’s obligations to Webster.
Effective
July 7, 2017, the Company entered into an Amendment of the Webster Credit Line (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 equaled (i) LIBOR plus 3.75% plus a 0.5% Agency Fee (as hereinafter defined) or (ii) a Base Rate (as defined in the Webster
Credit Line) plus 2.25% plus a 0.5% Agency Fee, as chosen by the Company for each drawdown. Finally, the Amendment provided 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.
On
August 8, 2017, the Company entered into the Amended and Restated Credit Agreement (“Amended Credit Agreement”) with
Webster and Flushing. In conjunction with the execution of the Amended Credit Agreement, the Company also entered into a Revolving
Credit Note in the principal aggregate amount of $5 million with Flushing (the “Flushing Note”) and an Amended and
Restated Fee Letter (the “Amended Fee Letter”) with Webster, each dated August 8, 2017. Pursuant to the terms of the
Amended Credit Agreement, the Company’s existing Webster Credit Line was amended to include Flushing as an additional lender,
as well as increased the funds available under the Webster Credit Line by $5 million, to $20 million in the aggregate. The Amended
Credit Agreement also incorporated and restated previously reported amendments. In addition, Mr. Ran executed an Amended and Restated
Guaranty, which was restated to include previously reported amendments. Finally, the Company executed the Amended Fee Letter which
incorporated and restated previously reported amendments.
Effective
July 11, 2018, the Company entered into a Waiver and Amendment No. 1 to the Amended Credit Agreement (“Amendment II”)
with Webster, Flushing and Mr. Ran, as guarantor. In conjunction with the execution of Amendment II, the Company also entered
into an Amended and Restated Revolving Credit Note in the principal aggregate amount of $10,000,000 with Flushing (the “Amended
Flushing Note”) and a Second Amended and Restated Fee Letter with Webster and Flushing, each dated July 11, 2018. Pursuant
to the terms of Amendment II, the Company’s existing Webster Credit Line was further increased by $5,000,000 to $25,000,000
in the aggregate. In addition, the interest rates relating to the Webster Credit Line were amended such that the interest rates
now equal (i) LIBOR plus a premium, which rate aggregated approximately 6% as of July 11, 2018, or (ii) a Base Rate (as defined
in the Amended Credit Agreement) plus 2.25% plus a 0.5% agency fee, as chosen by the Company for each drawdown. The Amendment
II also permits the Company to repurchase, redeem or otherwise retire its equity securities in an amount not to exceed ten percent
of its annual net income from the prior fiscal year.
Total
costs to establish the Webster Credit Line were approximately $144,000, and the total costs to amend the Webster Credit Line were
approximately $64,000. These costs are being amortized over the term of the respective agreement, using the straight-line method.
The amortization costs for the nine month periods ended September 30, 2018 and 2017 were $18,759 and $39,064, respectively.
The
Company was in compliance with all covenants of the Amended Credit Agreement as of September 30, 2018. At September 30, 2018,
the outstanding amount under the Amended Credit Agreement was $21,717,346. The interest rate on the amount outstanding fluctuates
daily. The rate, including a 0.5% Agency Fee, for September 30, 2018 was 6.24%.
Short-Term
Loans
During
the second quarter of 2018, Mr. Ran, the Chief Executive Officer of the Company, and entities he controls, made seven short term
loans to the Company in the aggregate amount of $2,741,227, at an interest rate of 6% per annum. Two of the loans in the aggregate
amount of $311,227 were repaid in full in May 2018. The remaining loans, in the aggregate amount of $2,430,000 were repaid in
full as of July 11, 2018. The Company also received a short-term loan from a third party lender in the amount of $1,000,000 at
the rate of 12% per annum, and such short term loan was repaid in full as of July 12, 2018. The aggregate interest expense for
these loans was approximately $19,000, of which approximately $9,000 was paid to Mr. Ran and entities he controls.
8.
SENIOR SECURED NOTES
On
April 25, 2016, in an initial public offering, MBC Funding 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, 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 American 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, together with
MBC Funding’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 plus MBC Funding’s cash
on hand is less than 120% of the aggregate outstanding principal balance of the Notes, MBC Funding 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 plus, MBC Funding’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 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 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, 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 is obligated to offer to redeem the Notes if there occurs a “change of control” with respect to MBC Funding
or the Company or if MBC Funding 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
On
July 24, 2018, the Company completed a public offering of 1,428,572 common shares at a public offering price of $7.00 per share
(the “Offering”). The gross proceeds raised by the Company from the Offering were approximately $10,821,000 (including
approximately $821,000 from the sale of 117,214 additional common shares upon the partial exercise of the over-allotment option
by the underwriter on August 1, 2018), before deducting underwriting discounts and commissions and other offering expenses. The
total net proceeds from the Offering were approximately $9,883,000.
10.
COMMITMENTS AND CONTINGENCIES
Operating
Lease
On
July 21, 2016, the Company amended its existing lease (the “Lease Amendment”) for its corporate headquarters located
at 60 Cutter Mill Road, Great Neck, New York, 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.
********
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 around 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 originated in the past seven years ranged from $30,000 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 and
bear interest at a fixed rate of 10% to 14% per year. In addition, we usually receive origination fees or “points”
ranging from 0% to 2% 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 700 loans valued at more than $233 million and never foreclosed on a property.
We currently manage approximately 150 loans. 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 and fund loans secured by first mortgages on residential real estate held for investment
located around the New York metropolitan area and to carefully manage and service our portfolio in a manner designed to generate
attractive risk-adjusted returns across a variety of market conditions and economic cycles. We believe that current market dynamics,
specifically the demand/supply imbalance for relatively small real estate loans, presents significant opportunities for us to
selectively originate high-quality first mortgage loans on attractive terms and we believe that these market conditions 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 and ability to structure loans that address the needs of our 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 nine month periods ended September 30, 2018 and 2017, the total amounts of $42,417,500 and $30,314,500 have been lent, respectively,
offset by collections received from borrowers, under our commercial loans in the amount of $29,030,264 and $20,649,870, respectively.
At
September 30, 2018, we were committed to $7,641,500 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 be taxed as a REIT and elected to be taxed as a REIT commencing with our taxable year ended
December 31, 2014. In order to maintain our qualification for taxation 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 REIT taxable income. 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 September 30, 2018 Compared to Three Months Ended September 30, 2017
Revenue
Total
revenues for the three month period ended September 30, 2018 were approximately $1,891,000 compared to approximately $1,591,000
for the three month period ended September 30, 2017, an increase of $300,000, or 18.9%. The increase in revenue represents an
increase in lending operations. For the three month periods ended September 30, 2018 and 2017, approximately $1,617,000 and $1,352,000,
respectively, of our revenues were attributable to interest income on the secured commercial loans that we offer to small businesses,
and approximately $275,000 and $240,000, respectively, of our revenues were attributable to origination fees on such loans. The
loans are principally secured by collateral consisting of real estate 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 September 30, 2018 were approximately $429,000 compared
to approximately $352,000 for the three month period ended September 30, 2017, an increase of $77,000, or 21.9%. The increase
is primarily attributable to the use of the Webster Credit Line (See Note 7 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 September 30, 2018 were approximately $272,000 compared to approximately
$267,000 for the three month period ended September 30, 2017, an increase of $5,000 or 1.9%. The increase is primarily attributable
to increases in insurance and payroll expenses, offset by decreases in travel and meals expenses.
Net
income
Net
income for the three month period ended September 30, 2018 was approximately $1,189,000 compared to approximately $961,000 for
the three month period ended September 30, 2017, an increase of $228,000, or 23.7%. The increase is primarily attributable to
the increase in revenue, offset by the increase in interest expenses.
Nine
Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Revenue
Total
revenues for the nine month period ended September 30, 2018 were approximately $5,224,000 compared to approximately $4,322,000
for the nine month period ended September 30, 2017, an increase of $902,000, or 20.9%. The increase in revenue represents an increase
in lending operations. For the nine month periods ended September 30, 2018 and 2017, revenues of approximately $4,469,000 and
$3,647,000, respectively, were attributable to interest income on the secured commercial loans that we offer to small businesses,
and approximately $755,000 and $675,000, respectively, of our revenues were attributable to origination fees on such loans. The
loans are principally secured by collateral consisting of real estate 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 nine month period ended September 30, 2018 were approximately $1,240,000 compared
to approximately $862,000 for the nine month period ended September 30, 2017, an increase of $378,000, or 43.9%. The increase
is primarily attributable to the use of the Webster Credit Line (See Note 7 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 nine month period ended September 30, 2018 were approximately $863,000 compared to approximately
$843,000 for the nine month period ended September 30, 2017, an increase of $20,000, or 2.4%. The increase is primarily attributable
to increases in Nasdaq Capital Market fees as well as in payroll, insurance, appraisal and advertising expenses, offset by a special
bonus to officers in 2017, which was not repeated in 2018, and decreases in travel and meals expenses.
Net
Income
Net
income for the nine month period ended September 30, 2018 was approximately $3,119,000 compared to approximately $2,592,000 for
the nine month period ended September 30, 2017, an increase of $527,000, or 20.3%. The increase is primarily attributable to the
increase in revenue, offset by the increase in interest expenses.
Liquidity
and Capital Resources
At
September 30, 2018, we had cash of approximately $141,000 compared to cash of approximately $136,000 at December 31, 2017.
For
the nine month period ended September 30, 2018, net cash provided by operating activities was approximately $3,236,000, compared
to approximately $2,643,000 for the nine month period ended September 30, 2017. The increase in net cash provided by operating
activities primarily results from increases in net income and in deferred origination fees, offset by an increase in interest
receivable on loans.
For
the nine month period ended September 30, 2018, net cash used in investing activities was approximately $13,387,000, compared
to approximately $9,666,000 for the nine month period ended September 30, 2017. Net cash used in investing activities for the
nine month period ended September 30, 2018 consisted of the issuance of commercial loans of approximately $42,418,000, offset
by collection of our commercial loans of approximately $29,030,000. In the period ended September 30, 2017, net cash used in investing
activities primarily consisted of the issuance of commercial loans of approximately $30,315,000, offset by collection of our commercial
loans of approximately $20,650,000.
For
the nine month period ended September 30, 2018, net cash provided by financing activities was approximately $10,155,000, compared
to approximately $7,039,000 for the nine month period ended September 30, 2017. Net cash provided by financing activities for
the nine month period ended September 30, 2018 reflects the net proceeds from the Webster Credit Line of approximately $4,803,000,
the net proceeds from the public offering, as described below, of approximately $9,883,000, and proceeds from the exercise of
warrants of approximately $49,000, offset by the dividend payments of approximately $2,839,000, the restricted cash used for the
reduction of Webster Credit Line of approximately $1,720,000 (See Note 3 to the financial statements included elsewhere in this
report), and deferred financing costs of approximately $20,000. Restricted cash mainly represents collections received, pending
check clearance, from the Company’s commercial loans and is primarily dedicated to the reduction of the Webster Credit Line.
Net cash provided by financing activities for the nine month period ended September 30, 2017 reflects the proceeds from the
Webster Credit Line of approximately $9,692,000 and proceeds from the exercise of options of approximately $20,000, offset by
dividend payments of approximately $2,457,000, the purchase of treasury shares of approximately $172,000, and deferred financing
costs of approximately $43,000.
On
February 27, 2015, we entered into the Webster Credit Line with Webster pursuant to which we could initially borrow up to $14,000,000
against assignments of mortgages and other collateral. The Webster Credit Line was initially in effect until February 27, 2018.
Until July 7, 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. 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, had personally guaranteed all of our obligations to Webster.
Effective
July 7, 2017, we entered into an amendment of the Webster Credit Line (the “Amendment”). In conjunction with the execution
of the Amendment, we also entered into an Amended Note and 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 equaled
(i) LIBOR plus 3.75% plus a 0.5% agency fee or (ii) a Base Rate (as defined in the Webster Credit Line) plus 2.25% plus a 0.5%
agency fee, as chosen by the Company for each drawdown. Finally, the Amendment provided 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
August 8, 2017, we entered into an amendment and restatement of the Webster Credit Line (the “Amended Credit Agreement”)
with Webster and Flushing Bank (“Flushing”). In conjunction with the execution of the Amended Credit Agreement, we
also entered into a note with Flushing (the “Flushing Note”) in the principal aggregate amount of $5 million and an
amended fee letter with Webster, each dated August 8, 2017. Pursuant to the terms of the Amended Credit Agreement, the Company’s
existing Webster Credit Line was amended to include Flushing as an additional lender, as well as increased the funds available
under the original Webster Credit Line by $5 million, to $20 million in the aggregate. The Amended Credit Agreement also incorporated
and restated previously reported amendments. In addition, Mr. Ran executed an Amended and Restated Guaranty, which was restated
to include previously reported amendments. Finally, the Company executed the Amended Fee Letter which incorporated previously
reported amendments.
Effective
July 11, 2018, we entered into a Waiver and Amendment No. 1 to the Amended Credit Agreement (“Amendment II”) with
Webster, Flushing and Mr. Ran, as guarantor. In conjunction with the execution of Amendment II, we also entered into an Amended
and Restated Revolving Credit Note in the principal aggregate amount of $10,000,000 with Flushing (the “Amended Flushing
Note”) and a Second Amended and Restated Fee Letter with Webster and Flushing, each dated July 11, 2018. Pursuant to the
terms of Amendment II, the Company’s existing Webster Credit Line was further increased by $5 million to $25 million in
the aggregate. In addition, the interest rates relating to Webster Credit Line were amended such that the interest rates now equal
(i) LIBOR plus a premium, which rate aggregated approximately 6% as of July 11, 2018, or (ii) a Base Rate (as defined in the Amended
Credit Agreement) plus 2.25% plus a 0.5% agency fee, as chosen by the Company for each drawdown. Amendment II also permits the
Company to repurchase, redeem or otherwise retire its equity securities in an amount not to exceed ten percent of our annual net
income from the prior fiscal year.
We
were in compliance with all covenants of the Amended Credit Agreement as of September 30, 2018. At September 30, 2018, the outstanding
amount under the Amended Credit Agreement was $21,717,346. The interest rate on the amount outstanding fluctuates daily. The rate,
including a 0.5% Agency Fee, for September 30, 2018 was 6.24%.
During
the second quarter of 2018, Mr. Ran, and entities he controls, made several short term loans to the Company in the aggregate amount
of approximately $2,741,000, at an interest rate of 6% per annum. Two of the loans in the aggregate amount of approximately
$311,000 were repaid in full in May 2018. The remaining loans, in the aggregate amount of approximately $2,430,000 were
repaid in full as of July 11, 2018. The Company also received a short-term loan from a third party lender in the amount of $1,000,000
at the rate of 12% per annum, and such short term loan was repaid in full as of July 12, 2018. The aggregate interest expense
for these loans was approximately $19,000, of which approximately $9,000 was paid to Mr. Ran and entities he controls.
On
July 24, 2018, we completed a public offering of 1,428,572 common shares at a public offering price of $7.00 per share (the “Offering”).
The gross proceeds raised by the Company from the Offering were approximately $10,821,000 (including approximately $821,000 from
the sale of 117,214 additional common shares upon the partial exercise of the over-allotment option by the underwriter on August
1, 2018), before deducting underwriting discounts and commissions and other offering expenses. The total net proceeds from the
Offering were approximately $9,883,000.
We
anticipate that our current cash balances, the proceeds of the Offering, and the Amended Credit Agreement, as described above,
together with our cash flows from operations will be sufficient to fund our operations for the next 12 months. In addition, from
time to time, we receive short term unsecured loans from our executive officers, such as the loans we received from Mr. Ran during
the first and second quarters of 2018, and others in order to provide us with the flexibility necessary to maintain a steady deployment
of capital. However, we expect our working capital requirements to increase over the next 12 months as we continue to strive for
growth.
Off-Balance
Sheet Arrangements
We
have not entered into any off-balance sheet transactions, arrangements or other relationships with unconsolidated entities or
other persons that are likely to affect liquidity or the availability of our requirements for capital resources.
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, 2017.