NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
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, 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 in the New York metropolitan
area, including New Jersey and Connecticut, and in Florida.
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.
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 did 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
June 2018, the FASB issued ASU 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting.” This ASU supersedes Accounting Standards Codification (“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.
In
May 2019, the FASB issued ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief.”
This ASU allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized
cost upon adoption of ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” The Company plans to adopt
both ASU 2016-13 and ASU 2019-05 effective January 1, 2020. The adoption of this guidance is not expected to have a material impact
on the Company’s consolidated financial statements.
Management
does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a
material effect on the Company’s consolidated financial statements.
3.
COMMERCIAL LOANS
Loans
Receivable
The
Company offers short-term secured non–banking loans to real estate investors (also known as hard money) to fund their acquisition
and construction of properties located in the New York metropolitan area, including New Jersey and Connecticut, and in Florida.
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
June 30, 2019, the Company was committed to $7,349,035 in construction loans that can be drawn by the borrowers when certain conditions
are met.
At
June 30, 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 June 30, 2019 and December 31, 2018:
Performing loans
|
|
Developers-
Residential
|
|
|
Developers-
Commercial
|
|
|
Developers-
Mixed Used
|
|
|
Total outstanding
loans
|
|
June 30, 2019
|
|
$
|
49,441,967
|
|
|
$
|
3,060,000
|
|
|
$
|
3,410,000
|
|
|
$
|
55,911,967
|
|
December 31, 2018
|
|
$
|
47,301,127
|
|
|
$
|
3,660,000
|
|
|
$
|
3,875,000
|
|
|
$
|
54,836,127
|
|
At
June 30, 2019, the Company’s loans receivable includes loans in the amount of $360,000, $3,960,000 and $4,607,000 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 June 30, 2019, no loan impairments exist
and there are no provisions for impairments of loans or recoveries thereof.
Subsequent
to the balance sheet date, approximately $1,916,000 of the loans receivable at June 30, 2019 were paid off, including $245,000
originally due on or before December 31, 2018.
4.
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 Amended Credit Agreement (see Note 5).
5.
LINE OF CREDIT
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 6.40% as of June 30, 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 six months ended June 30, 2019 and 2018 were $9,702 and $13,908, 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 June 30, 2019. At June 30, 2019, the
outstanding amount under the Amended Credit Agreement was $17,737,803. The interest rate on the amount outstanding fluctuates
daily. The rate, including a 0.5% Agency Fee, at June 30, 2019, was approximately 6.40%.
6.
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.
7.
EARNINGS PER SHARE OF COMMON STOCK
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 June 30,
|
|
|
Six Months
Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Basic weighted average common shares outstanding
|
|
|
9,659,317
|
|
|
|
8,111,276
|
|
|
|
9,657,557
|
|
|
|
8,110,112
|
|
Incremental shares for assumed exercise of options and warrants
|
|
|
2,303
|
|
|
|
8,708
|
|
|
|
2,340
|
|
|
|
7,705
|
|
Diluted weighted average common shares outstanding
|
|
|
9,661,620
|
|
|
|
8,119,984
|
|
|
|
9,659,897
|
|
|
|
8,117,817
|
|
For
the three and six months ended June 30, 2019, 43,959 and 43,922 stock warrants were not included in the diluted earnings per share
calculation, respectively, because their effect would have been anti-dilutive. For the three and six months ended June 30, 2018,
46,054 and 47,057 vested stock options and warrants were not included in the diluted earnings per share calculation, 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.
Share
based compensation expense recognized under ASC 718 for each of the six months ended June 30, 2019 and 2018 of $6,532 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 June 30, 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 June 30, 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 June 30, 2019, all of the August 2016 Representative Warrants were
outstanding.
********