NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 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 with Webster and Flushing
Bank (“Flushing”), as discussed in Note 6, 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 2017, the Financial Accounting Standards Board (the “FASB”) issued ASU 2017-09, “Compensation - Stock Compensation
(Topic 718): Scope of Modification Accounting.” This ASU provides guidance on the types of changes to the terms or conditions
of share-based payment awards to which an entity would be required to apply modification accounting under Accounting Standards
Codification (“ASC”) 718, “Compensation – Stock Compensation.” Under the new guidance, modification
accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result
of the change in terms or conditions. For all entities, this standard is effective for financial statements issued for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this guidance did not
have a material impact on the Company’s consolidated financial statements.
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
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 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 the ASU, an entity will be required to provide
certain disclosures regarding stranded tax effects. For all entities, this ASU 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.
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 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, 2018, we were committed to $4,605,500 in construction loans that can be drawn by the borrowers when certain conditions
are met.
At
March 31, 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 March 31, 2018 and December 31, 2017:
Performing
loans
|
|
Developers-
Residential
|
|
|
Developers-
Commercial
|
|
|
Developers-
Mixed
Used
|
|
|
Total
outstanding loans
|
|
March
31, 2018
|
|
$
|
41,186,500
|
|
|
$
|
1,300,000
|
|
|
$
|
3,570,000
|
|
|
$
|
46,056,500
|
|
December
31, 2017
|
|
$
|
41,739,000
|
|
|
$
|
900,000
|
|
|
$
|
2,485,000
|
|
|
$
|
45,124,000
|
|
At
March 31, 2018, the Company’s loans receivable includes loans in the amount of $180,000, $2,210,000 and $8,137,500 originally
due in 2015, 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 March 31, 2018, no loan impairments exist
and there are no provisions for impairments of loans or recoveries thereof.
Subsequent
to the balance sheet date, $1,600,000 of the loans receivable at March 31, 2018 were paid off.
4.
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 March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Basic
weighted average common shares outstanding
|
|
|
8,108,934
|
|
|
|
8,135,036
|
|
Incremental
shares for assumed exercise of options
|
|
|
12,794
|
|
|
|
23,280
|
|
Diluted
weighted average common shares outstanding
|
|
|
8,121,728
|
|
|
|
8,158,316
|
|
57,849
and 27,751 vested options and warrants were not included in the diluted earnings per share calculation for the three month periods
ended March 31, 2018 and 2017, respectively, because their effect would have been anti-dilutive.
5.
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, “Compensation - Stock Compensation”, which establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for goods or services. A key provision of this statement
is to measure the cost of employee services received in exchange for an award of equity instruments (including stock options)
based on the grant-date fair value of the award. The cost will be recognized over the service period during which an employee
is required to provide service in exchange for the award (i.e., the requisite service period or vesting period). The Company accounts
for equity instruments issued to non-employees in accordance with the provisions of ASC 718 and ASC 505-50, “Equity Based
Payment to Non-Employees”. All transactions with non-employees, in which goods or services are the consideration received
for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value
of the equity instrument issued, whichever is more appropriately measurable.
The
exercise price of options granted under the Company’s stock option plan (the “Plan”) may not be less than the
fair market value on the date of grant. Stock options under the Plan may be awarded to officers, key employees, consultants and
non-employee directors of the Company. Generally, options outstanding vest over periods not exceeding four years and are exercisable
for up to five years from the grant date.
Share
based compensation expense recognized under ASC 718 for each of the three month periods ended March 31, 2018 and 2017 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.
No
share based compensation activity occurred during the three month period ended March 31, 2018. The following summarizes stock
options outstanding (all vested and exercisable) at March 31, 2018:
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in
years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at March 31, 2018
|
|
|
14,000
|
|
|
$
|
2.23
|
|
|
|
0.75
|
|
|
$
|
10,513
|
|
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, 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 March 31, 2018, May 2015 Representative Warrants to purchase up to 19,031
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 March 31, 2018, all of the August 2016 Representative Warrants were
outstanding.
6.
LINE OF CREDIT AND LOANS
Line
of Credit
Currently,
we have a $20 million credit line with Webster and Flushing. On February 27, 2015, the Company entered into a Credit and Security
Agreement (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 now equal (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 provides that the Company shall not
permit mortgage loans that are outstanding more than 24 months after their origination date to comprise more than 17.5% of their
total portfolio of mortgage loans at any time. Pursuant to the terms of the Fee Letter, the Company agreed to pay Webster an agency
fee equal to 0.5% per annum (the “Agency Fee”) on the actual principal amount of advances outstanding during any month,
as well as a $15,000 syndication fee.
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.
Total
costs to establish the Webster Credit Line were approximately $144,000, and the total costs to amend the Webster Credit Line were
approximately $43,000. These costs 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, 2018 and 2017 were $10,968 and $12,041, respectively.
The
Company was in compliance with all covenants of the Amended Credit Agreement as of March 31, 2018. At March 31, 2018, the outstanding
amount under the Amended Credit Agreement was $17,764,153. The interest rate on the amount outstanding fluctuates daily. The rate,
including a 0.5% Agency Fee, for March 31, 2018 was 6.13688%.
Short
Term Loans
In
the beginning of 2018, Mr. Ran, the Chief Executive Officer of the Company, made three short term bridge loans to the Company
in the aggregate amount of $950,000, at an interest rate of 6% per annum. All loans were repaid in full on February 9, 2018. The
aggregate interest expense for these loans was $1,533.
7.
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.
8.
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.