The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
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, 2018 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 she
et
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.
The
Company initially established a credit line pursuant to the Credit and Security Agreement with Webster Business Credit Corporation
(“Webster”) dated February 27, 2015 (the “Webster Credit Line”), which was subsequently amended and restated
on August 8, 2017 (“Amended Credit Agreement”) with Webster and Flushing Bank (“Flushing”). Deferred financing
costs in connection with
the Webster Credit Line
and the Amended Credit Agreement, as discussed
in Note 5, 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” (“ASU
2014-09”), which outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts
with customers and supersedes the 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
and concluded that the adoption does not have an effect on its consolidated financial statements.
In February 2016, the FASB
issued ASU 2016-02, “Leases (Topic 842),” which amends the existing accounting standards for leases. This ASU
requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet for the obligation to
make payments for all leases, with the exception of those leases with a term of 12 months or less. This ASU also requires
expanded disclosures regarding leasing arrangements. The Company adopted the ASU effective January 1, 2019, and concluded
that the adoption did not have a material impact on its consolidated financial statements.
In November 2016, the FASB
issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” The amendments in this ASU require that
a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described
as restricted cash or restricted cash equivalents. The adoption of this guidance required the Company to reconcile changes in cash,
cash equivalents, and restricted cash on the consolidated statement of cash flows. As a result, the Company no longer presents
transfers between cash and cash equivalents and restricted cash in the statement of cash flows. The Company adopted this ASU in
2018, and applied the guidance retrospectively to the 2017 consolidated statement of cash flows.
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. The adoption of this guidance
did not 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” (“ASC 718”), to include all share-based payment
arrangements related to the acquisition of goods and services from both nonemployees and employees. The adoption of this guidance
did not 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.
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 March 31, 2019, the
Company was committed to $8,219,035 in construction loans that can be drawn by the borrowers when certain conditions are met.
At March 31, 2019, 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 March 31, 2019 and December 31, 2018:
Performing loans
|
|
Developers-Residential
|
|
|
Developers-Commercial
|
|
|
Developers-Mixed Used
|
|
|
Total outstanding loans
|
|
March 31, 2019
|
|
$
|
47,743,194
|
|
|
$
|
3,410,000
|
|
|
$
|
3,640,000
|
|
|
$
|
54,793,194
|
|
December 31, 2018
|
|
$
|
47,301,127
|
|
|
$
|
3,660,000
|
|
|
$
|
3,875,000
|
|
|
$
|
54,836,127
|
|
At March 31, 2019, the
Company’s loans receivable includes loans in the amount of $360,000, $4,320,000 and $5,577,000 originally due in 2016, 2017
and 2018, respectively. In all instances the borrowers are currently paying their interest and, generally, the Company receives
a fee in connection with the extension of the loans. Accordingly, at March 31, 2019, no loan impairments exist and there are no
provisions for impairments of loans or recoveries thereof.
Subsequent
to the balance sheet date, approximately $1,548,000 of the loans receivable at March 31, 2019 were paid off, including
$370,000 originally due on or before December 31, 2018.
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 Amended Credit Agreement (see Note 5).
The Company maintains the
Webster Credit Line which currently provides it with a credit line of $25 million in the aggregate secured by assignments of mortgages
and other collateral. 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 contains a cross default provision which will deem any default under any indebtedness owed by us or our subsidiary, MBC Funding,
as a default under the credit line.
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 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 6.49% as of March 31, 2019, 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. In addition, Mr. Ran has provided a personal guaranty to the Webster Credit Line, which shall not exceed
the sum of $500,000 plus any costs relating to the enforcement of the personal guaranty.
The costs to establish
and to amend the Webster Credit Line are being amortized over the term of the respective agreement, using the straight-line method.
The amortization costs for the three months ended March 31, 2019 and 2018 were $4,851 and $10,968, respectively. The Webster Credit
Line expires February 28, 2021, unless sooner terminated, and contains a provision that permits a Company option for a further
extension until February 28, 2022, subject to Webster’s consent.
The Company was in compliance
with all covenants of the Webster Credit Line, as amended, as of March 31, 2019. At March 31, 2019, the outstanding amount under
the Amended Credit Agreement was $16,417,161. The interest rate on the amount outstanding fluctuates daily. The rate, including
a 0.5% Agency Fee, for March 31, 2019 was 6.49%.
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.
7.
|
EARNINGS PER COMMON SHARE
|
Basic and diluted earnings
per share are calculated in accordance with ASC 260, “Earnings Per Share” (“ASC 260”). Under ASC 260, basic
earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares
outstanding for the period. The computation of diluted earnings per share is similar to basic earnings per share, except that the
denominator is increased to include the potential dilution from the exercise of stock options and warrants for common shares using
the treasury stock method. The numerator in calculating both basic and diluted earnings per common share for each period is the
reported net income.
The denominator is based
on the following weighted average number of common shares:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Basic weighted average common shares outstanding
|
|
|
9,655,781
|
|
|
|
8,108,934
|
|
Incremental shares for assumed exercise of options
|
|
|
2,379
|
|
|
|
12,794
|
|
Diluted weighted average common shares outstanding
|
|
|
9,658,160
|
|
|
|
8,121,728
|
|
43,883 and 57,849 vested
options and warrants were not included in the diluted earnings per share calculation for the three month periods ended March 31,
2019 and 2018, respectively, because their effect would have been anti-dilutive.
8.
|
SHARE – 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, which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments
for goods or services. A key provision of ASC 718 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. At March 31, 2019, all granted stock options were exercised or expired.
Share based compensation
expense recognized under ASC 718 for each of the three month periods ended March 31, 2019 and 2018 of $3,266 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.
On
July 31, 2014, in connection with the Company’s public offering in July 2014, the Company issued warrants to purchase up
to 87,719 common shares, with an exercise price of $3.5625 per common share, to the representative of the underwriters of the
offering (the “July 2014 Representative Warrants”). These warrants are exercisable at any time, and from time to time,
in whole or in part, commencing on July 28, 2015 and expire on July 28, 2019. The fair value of these warrants, using the Black-Scholes
option pricing model, on the date of issuance was $42,224. At March 31, 2019, July 2014 Representative Warrants to purchase up
to 3,000 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 March 31, 2019, May 2015 Representative Warrants to purchase up to 9,650
common shares were outstanding.
On
August 15, 2016, in connection with a public offering of the Company’s common shares, 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 March 31, 2019, all of the August 2016 Representative Warrants were
outstanding.