Notes to Condensed Financial Statements
June 30, 2012
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Note 1
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Organization and Summary of Significant Accounting Policies
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Organization
Orpheum Property, Inc. (the “Company”) was organized under the laws of the State of Delaware on February 14, 2003 as Back Channel Investments, Inc. The Company has elected a fiscal year end of March 31
st
. The Company was originally organized for the purpose of the research and development of tropical plantation plants, to own and sell real and personal property and to sell products. Currently, the Company is involved in the development and renovation of commercial property.
On May 20, 2003, the Company combined with Back Channel Investments, Inc., in a reverse merger pursuant to an Agreement and Plan of Reorganization. Back Channel acquired all the outstanding shares of common stock of the Company in exchange for 7,000,000 shares of Back Channel’s common stock. The surviving entity was the Company. Upon completion of the reverse merger, the combined Company was re-capitalized to have 10,000,000 shares outstanding. No change in net book value or goodwill was recognized. Subsequently, in August, 2007, these shares were reduced to 3,333,332 shares through a reverse stock split. The pre-merger financial statements of Orpheum Property, Inc. are now the historical financial statements of the Company.
Seeking to redirect its activities, on June 28, 2010, the Company acquired 129 University Place whose sole asset was the Orpheum Theater with the intention of restoring the historic commercial property. The transaction involved the issuance of 42,260 shares of a new class of Preferred Stock (B) with a par value of $2.00 per share and convertible into 2,000 shares of common stock for each share of preferred. The purchase price of the property was $6,172,360 with the Company assuming an existing liability on the property of $2,698,360 and an obligation to issue Company stock valued at $3,474,000.
The Company is considered a development stage company as defined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 915. The Company has at the present time, not paid any dividends and any dividends that may be paid in the future will depend upon the financial requirements of the Company and other relevant factors.
Basis of Presentation
The accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Security and Exchange Commission (“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report filed with the SEC on Form 10K. In the opinion of management all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented have been reflected herein.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s March 31, 2012 audited financial statements. The results of operations for the three months ended June 30, 2012, are not necessarily indicative of the results of operations to be expected for the full fiscal year.
Income Taxes
The Company applies the provisions of FASB ASC Topic 740,
Income Taxes
. Topic 740 requires an asset and liability approach for financial accounting and reporting for income taxes, and the recognition of deferred tax assets and liabilities for the temporary differences between the financial reporting basis and tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. Due to a loss from inception, the Company has no tax liability. Deferred income tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with Accounting Principles Generally Accepted in the United States 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 amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Basic Loss per Common Share
The Company computes basic loss per common share in accordance with FASB ASC Topic 260-10,
Earnings Per Share
. Net loss is divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using weighted average number of common shares plus dilutive common shares equivalents outstanding during the period using the treasury stock method. Because the Company incurred losses for the three months ended June 30, 2012 and 2011, the effect of any equivalent shares for each period would be excluded from the loss per share computation since the impact would be antidilutive. There were no common stock equivalents outstanding as June 30, 2012 and 2011.
Revenue Recognition
Revenues of the Company will be recognized as earned in accordance with the nature of the income as it occurs. Anticipated revenues in future periods is expected from event receipts earned at the renovated theater, operating income from commercial properties invested into, and gains from the sale of properties that may be purchased. Revenues will not be recognized until such time as the service has been completed or escrows have closed.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the useful lives of the related assets. Expenditures for maintenance and repairs are charged to expenses as incurred.
Impairment of Long-lived Assets
Long-lived tangible assets, including property, plant and equipment, and finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset or asset groups may not be recoverable. The Company evaluates, regularly, whether events and circumstances have occurred that indicate possible impairment and relies on a number of factors, including operating results, business plans, economic projections, and anticipated future cash flows. The Company uses an estimate of the future undiscounted net cash flows of the related asset or asset group over the remaining life in measuring whether the assets are recoverable. Measurement of the amount of impairment, if any, is based upon the difference between the asset’s carrying value and estimated fair value.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Recently Issued Accounting Standard
In June 2009, the FASB changed the accounting guidance for the consolidation of variable interest entities. The current quantitative-based risks and rewards calculation for determining which enterprise is the primary beneficiary of the variable interest entity will be replaced with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. The new guidance became effective for the Company on April 1, 2010 with no impact on its financial statements.
In June 2009, the FASB changed the accounting guidance for transfers of financial assets. The new guidance increases the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its statement of financial condition, financial performance and cash flows; and a continuing interest in transferred financial assets. In addition, the guidance amends various concepts associated with the accounting for transfers and servicing of financial assets and extinguishments of liabilities including removing the concept of qualified special purpose entities. This new guidance was adopted by the Company on April 1, 2010 with no impact on its financial statements.
In January 2010, the FASB issued ASU 2010-06, “
Fair Value Measurements and Disclosures” (Topic 820)
that requires new disclosures related to fair value measurements and clarifies existing disclosure requirements about the level of disaggregation, inputs and valuation techniques. Specifically, reporting entities now must disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In addition, in the reconciliation for Level 3 fair value measurements, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities for disclosure of fair value measurement, considering the level of disaggregated information required by other applicable U.S. GAAP guidance and should also provide disclosures about the valuation techniques and inputs used to measure fair value for each class of assets and liabilities. The guidance was effective for financial statements issued for periods ending after December 15, 2009, except for disclosures about purchases, sales, issuances and settlements in reconciliation for Level 3 fair value measurements, which was effective for fiscal years beginning after December 15, 2010. The adoption of this guidance affects only the disclosure requirements and had no impact on the Company’s statements of operations and condition.
Recently Issued Accounting Standards (Continued)
In December 2010, the FASB issued authoritative guidance that modified Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This new authoritative guidance was effective April 1, 2011 and did not have any impact on the Company’s financial statements.
In April 2011, the FASB issued ASU 2011-02, which amends the guidance for evaluating whether the restructuring of a receivable by a creditor is a troubled debt restructuring (TDR). In evaluating whether a restructuring constitutes a TDR both for purposes of recording an impairment loss and for disclosure purposes, a creditor must separately conclude that both of the following exist: (
a
) the restructuring constitutes a concession; and (
b
) the debtor is experiencing financial difficulties. For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the annual period of adoption. However, an entity should apply prospectively changes in the method used to calculate impairment. At the same time a public entity adopts ASU 2011-02, it is required to disclose the activity based information that was previously deferred by ASU No. 2011-01. The adoption of this ASU is not expected to have a material impact on Company’s financial statements.
In May 2011, the FASB issued ASU 2011-04, “
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”
. The ASU contains guidance on the application of the highest and best use and valuation premise concepts, the measurement of fair values of instruments classified in shareholders’ equity, the measurement of fair values of financial instruments that are managed within a portfolio, and the application of premiums and discounts in a fair value measurement. It also requires additional disclosures about fair value measurements, including information about the unobservable inputs used in fair value measurements within Level 3 of the fair value hierarchy, the sensitivity of recurring fair value measurements within Level 3 to changes in unobservable inputs and the interrelationships between those inputs, and the categorization by level of the fair value hierarchy for items that are not measured at fair value but for which the fair value is required to be disclosed. These amendments are to be applied prospectively for interim and annual periods beginning after December 15, 2011. The adoption of this guidance is not expected to have a significant effect on the Company’s financial statements.
In June 2011, the FASB issued ASU 2011-05,
“Presentation of Comprehensive Income”
. The ASU increases the prominence of other comprehensive income in financial statements by requiring comprehensive income to be reported in either a single statement or in two consecutive statements which report both net income and other comprehensive income. It eliminates the option to report other comprehensive income and its components in the statement of changes in equity. The ASU is effective for periods beginning after December 15, 2011 and requires retrospective application. The ASU does not change the components of other comprehensive income, the timing of items reclassified to net income, or the net income basis for income per share calculations. As this ASU is disclosure related only, the adoption of this ASU will not impact reported financial position or results of operations.
In September 2011, the FASB amended guidance pertaining to goodwill impairment testing. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. An entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The guidance is effective January 1, 2012 with no significant impact expected on the Company’s financial statements.
In December 2011, the FASB issued guidance which relates to deconsolidation events. Under this amendment, when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of the default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20,
Property, Plant and Equipment - Real Estate Sales,
to determine whether it should derecognize the in substance real estate. This guidance is effective for the fiscal year ending December 31, 2013 and is not expected to have a significant impact on the Company’s financial statements.
Also, in December 2011, The FASB issued authoritative guidance to provide enhanced disclosures in the financial statements about offsetting and netting arrangements. The new guidance requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting agreement. This guidance was issued to facilitate comparison between financial statements prepared on a U.S. GAAP and IFRS reporting. The new guidance will be effective January 1, 2013 and is not expected to have a significant impact on the Company’s financial statements.
The Company has limited operating capital with limited revenue from operations. Realization of a major portion of the assets is dependent upon the Company’s ability to meet its future financing requirements, and the success of future operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustment that might result from the outcome of this uncertainty.
The Company is developing its operations from renovated theater property and from purchase/development of other commercial properties. The Company is planning on obtaining additional funds through equity financing. Should the Company fail to acquire these funds, expanding operations will be limited. Management has agreed to advance additional funds to cover the Company’s current operations. If the Company is unsuccessful in these efforts and cannot attain sufficient cash flows to permit profitable operations or if it cannot obtain a source of funding or investment, it may substantially curtail or terminate its operations.
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Note 3
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Investment in Unimproved Properties
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On June 10, 2011, the Company purchased undeveloped property in Arkansas for $19,200 by issuing 80,000 shares of common stock.
On July 26, 2011, the Company issued 14,596,153 shares of common stock for the purchase of two undeveloped land parcels appraised at $3,795,000 located in California and Nevada.
On November14, 2011, the Company issued 1,066,667 shares of common stock for the purchase of ten (10) undeveloped land parcels in Hot Springs, Arkansas. Total purchase price, including closing costs was $164,878.
On December 13, 2011, the Company purchased approximately 22.5 acres of undeveloped land in Oklahoma for a total of $3,000,000. Payment consisted of a cash payment of $10,000 towards an outstanding mortgage paid in January 2012, and issuance of 29,900,000 shares of common stock.
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Note 4
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Investment in Improved Properties
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On June 28, 2010, the Company acquired 129 University Place, LLC, whose sole asset was the Orpheum Theatre. The property is being held pending the completion of renovation activity.
On April 12, 2012, the Company acquired a commercial building at 1031 St. Phillips Street in the French
Quarter. It has 6,520 square feet of space intended for leasing to commercial interests.
The carrying value at June 30, 2012 and March 31, 2012 consists of the following:
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June 30,
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March 31,
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2012
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2012
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Orpheum Theater
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Acquisition Costs
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$
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6,172,360
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$
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6,172,360
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Renovation Costs
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242,701
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242,701
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Real Estate Commission
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610,000
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610,000
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Prepaid Development Fees
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944,498
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944,498
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Total Orpheum Theater
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7,969,559
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7,969,559
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1031 St. Phillips Street
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3,200,000
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-
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Total
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$
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11,169,559
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$
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7,969,559
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Note 5
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Investment in Contracts
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On February 21, 2012, the Company acquired two tax credit consulting contracts from Morris Kahn & Associates, owned by our CEO, Morris Kahn. These contracts entitle the Company to collect fees totaling $960,000 over a period of 20 years. The Present Value, calculated based on the expected dates of receipt, indicates that at March 31, 2012, the contracts have a value of $555,502 based on a 6.4% rate of return.
The mortgage on the Orpheum property which bears an interest rate of 13% per annum accrued monthly based on a 360 day per year calculation. The principal is due on demand. The principal balance at June 30, 2012 and at March 31, 2012, was $2,698,360. Accrued interest as of June 30, 2012, totaled $649,930.
The demand note consists of debentures that are held by numerous individuals. In February 2011, some of the debenture holders filed a lawsuit against the owners of the Orpheum Theater prior to its transfer to 129 University Place and against 129 University Place demanding either payment or release of the property. Terms of the agreement require that we participate in an arbitration process first. We are currently working with legal counsel, lending sources, and the debenture holders through arbitration to provide for a quick settlement of their claims and satisfaction of their complaint.
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Note 7
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Mortgage Obligation
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The commercial property at 1031 St. Phillips Street is subject to a mortgage in the amount of $1,200,000 that is in Morris Kahn’s personal name and cannot be transferred to the Company. As part of the purchase agreement, the Company is to either refinance the mortgage or pay off the mortgage. As of this report date the Company had not completed qualifying for a new mortgage, but is working with several lenders to finalize an agreement.
On June 6, 2011, the Company issued 40,000 shares of its Preferred Stock as compensation to a consultant that was owed $200,000.
On July 8, 2011, the Company issued 11,045,250 shares of stock to consultants and recipients of common stock in January 2011, as an anti-dilution measure after increasing authorized shares of common stock from 50 million shares to 500 million.
Also on July 8, 2011, the Company issued 38,250,000 shares of stock as an anti-dilution measure to the companies that had converted their shares of preferred stock in January 2011.
On July 21, 2011, the Company issued 450,000 shares to consultants and recipients of common stock in March 2011, also as an anti-dilution measure.
On July 26, 2011, the Company issued 14,596,153 shares of stock to purchase properties in California and Nevada for the appraised value of $3,795,000.
On August 3, 2011, the Company issued 3,185,595 shares to a company that had purchased shares in 2010, again as an anti-dilution measure.
On August 16, 2011, the Company issued 800,000 shares to an investor in the Orpheum Theater prior to the Company’s purchase of the property. The issuance reduced the amount in Stock To Be Issued by $125,000.
On September 21, 2011, the Company issued 80,000 shares as payment for the June 6, 2011, acquisition of the property in Arkansas valued at $19,200.
On October 4, 2011, the Company issued 25,531,915 shares as a down payment for a 50% share in a commercial property in Baja, Mexico. The purchase was concluded on January 14, 2012, at which time an additional 16,662,690 shares were issued.
On November 5, 2011, the Company issued 805,000 shares to a consultant for services rendered and to be rendered per a service contract.
On November 9, 2011, the Company issued 1,066,667 shares to purchase ten vacant residential lots in Hot Springs, Arkansas. The purchase price and closing costs totaled $164,878.
On December 14, 2011, the Company issued 4,450,000 shares to three of the parties owed stock pursuant to the purchase of the Orpheum Theater. This reduced the Stock To Be Issued by $1,075,000.
On December 19, 2011, the Company issued 10,547,969 shares to the remaining parties owed stock pursuant to the purchase of the Orpheum Theater. This represented the balance of all amounts due to Orpheum Theater investors who were due stock due to that purchase.
On January 18, 2012, the Company issued 700,000 shares of common stock to an investor for $50,000 cash.
On January 19, 2012, the Company issued 14,134,615 shares of common stock as payment of commissions to a related company owned in part by the Company’s Chairman, Andrew Reid, as compensation for commissions earned on several of the Company’s asset purchases.
On January 23, 2012, the Company issued 416,538 shares of common stock to its Corporate Secretary as payment for services rendered during the 2012 fiscal year.
On January 27, 2012, the Company issued 1,000,000 shares of common stock as recognition to a newly appointed member of its Board of Directors.
On March 5, 2012, the Company issued 28,000,000 shares of common stock that had been set aside to complete the purchase of the Oklahoma property. An additional 1,900,000 shares of common stock remain to be issued and are classed in Stock to Be Issued.
On April 12, 2012, the Company issued 15,000,000 shares of common stock to our CEO, Morris Kahn, as payment for certain contracts purchased from Morris Kahn & Associates and for the prepaid commission on the tax credits related to the Orpheum Theater.
Also, on April 12, 2012, the Company issued 20,000,000 shares of common stock to our CEO, Morris Kahn, as agreed upon with the purchase of commercial real estate.
On April 19, 2012, the Company issued 166,667 shares of common stock as payment for services rendered to the Company.
Note 10
Stock To Be Issued
At June 30, 2012 and March 31, 2012, the Company had the following commitments to issue Common Stock:
Shares valued at $190,000 are due to EAH, LLC, as of June 30, 2012 and March 31, 2012, for funds provided on the purchase of the Oklahoma property.
Shares valued at $75,000 and $60,000, are due to our CEO, Morris Kahn, as of June 30, 2012 and March 31, 2012, respectively, as payment due for services per his consulting contract for his services as the Company’s CEO.
For the purchase of certain tax-credit consulting contracts as well as for the prepayment of tax-credit consulting services associated with the Orpheum Theatre from Morris Kahn & Associates, the Company has an obligation to issue 15,000,000 shares of stock valued $1,500,000, as of March 31, 2012. These shares were issued on April 12, 2012.
Shares valued at $2,000 are due to a cash investor at June 30, 2012, and March 31, 2012.
Note 11
Related Party Transactions
On February 21, 2012, the Company purchased two tax credit consulting contracts from its CEO’s company, Morris Kahn & Associates. These contracts were recorded at their estimated fair value of $555,502. Cash inflows associated with the contracts are expected to begin in late 2012, and continue through 2032. In addition, the Company prepaid the estimated tax credit consulting fees pertaining to the contract it had with Morris Kahn & Associates for the Orpheum Theatre project. In exchange, Mr. Kahn agreed to accept 15,000,000 shares of the Company’s common stock valued at approximately $1.5 million.
On April 12, 2012, the Company issued 20,000,000 shares to its CEO, Morris Kahn to purchase a commercial property. As of the date of this report, there has been a delay in obtaining the required loan agreed to per the contract, however, Morris Kahn has authorized the Company to use the building in the interim.
For the three months ended June 30, 2012, and for the year ended March 31, 2012, the Company’s majority shareholder has advanced a total of $2,800 and $229,996, respectively, to the Company for renovation costs to the Orpheum Theater and for operating costs.
Note 12
Significant Concentration of Credit Risk
The Company has a significant concentration of activities currently in commercial real estate primarily in the City of New Orleans. Any natural disasters or acts of vandalism or terrorism could prove detrimental to the holdings of the Company. During and subsequent to the year ended March 31, 2012, the Company has begun to diversify its geographic locations to other areas of the country.
Note 13
Subsequent Events
In accordance with FASB ASC Topic 855, Subsequent Events, the Company evaluates events and transactions that occur after the balance sheet date for potential recognition in the financial statements. The effects of all subsequent events that provide additional evidence of conditions that existed at the balance sheet date are recognized in the financial statements as of June 30, 2012. In preparing these financial statements, the Company evaluated the events and transactions that occurred through the date these financial statements were issued. The Company determined that there were no events requiring disclosure.