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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:  September 30, 2012

OR

[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the transition period from: ________ to ________.

Commission File No.: 1-7986

Kent Financial Services, Inc.
(Exact name of registrant as specified in its charter)

Nevada
75-1695953
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

7501 Tillman Hill Road, Colleyville, Texas 76034
(Address of principal executive offices)

(682) 738-8011
(Registrant's telephone number)

Indicate by check mark whether the registrant(1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    X      No  _____

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  Yes    X      No  _____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)
Large accelerated filer             Accelerated filer             Non-accelerated filer             Smaller reporting company   X

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes                 No    X

State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date:  As of October 31, 2012, the issuer had 2,693,941 shares of its common stock, par value $.10 per share, outstanding.


 
 

 

KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
For The Quarterly Period Ended September 30, 2012
Table of Contents

 
Page
 
Number
   
PART I. FINANCIAL INFORMATION
 
   
Item 1.  Financial Statements
 
   
Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011
3
   
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011
4
   
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011
5
   
Notes to Consolidated Financial Statements
6
   
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
11
   
Item 3.  Quantitative and Qualitative Disclosure About Market Risk
15
   
Item 4.  Controls and Procedures
15
   
PART II. OTHER INFORMATION
 
   
Item 1.  Legal Proceedings
16
   
Item 1a.  Risk Factors
16
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
16
   
Item 3.  Defaults Upon Senior Securities
16
   
Item 4.  Mine Safety Disclosures
16
   
Item 5.  Other Information
17
   
Item 6.  Exhibits
17
   
Signatures
18

 
 
2

 

PART I   -FINANCIAL INFORMATION
 
Item 1.  -  Financial Statements

KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

 
   
September 30,
2012
(Unaudited)
   
December 31,
2011
ASSETS
         
           
Cash and cash equivalents
  $ 1,414,010     $ 1,560,021
Marketable securities
    481       8,835
Accounts receivable
    106,971       116,855
Prepaid expenses and other current assets
    15,352       18,432
Real estate assets:
             
  Land
    1,280,000       1,280,000
  Building and improvements (net of accumulated depreciation of $202,225 and $103,103)
    1,457,454       1,556,577
  Intangible assets (net of accumulated amortization of $422,695 and $215,506)
    1,731,801       1,938,990
Other assets
    21,000       21,000
               
    Total assets
  $ 6,027,069     $ 6,500,710
               
LIABILITIES
             
               
Accounts payable and accrued expenses
  $ 210,760     $ 255,025
Below market lease value acquired (net of accumulated amortization of $98,099 and $50,015)
    671,076       719,160
Accrued post employment obligations
    864,000       864,000
               
    Total liabilities
    1,745,836       1,838,185
               
EQUITY
             
               
Kent Financial Services shareholders' equity
             
   Preferred stock without par value; 500,000 shares authorized; none outstanding
    -       -
   Common stock, $.10 par value; 8,000,000 shares authorized; 2,697,008 and 2,750,700 shares issued and outstanding
    269,394       275,070
  Additional paid-in capital
    12,380,775       12,440,796
  Accumulated deficit
    (8,364,608 )     (8,030,367
  Accumulated other comprehensive loss
    (4,328 )     (22,974
               
    Total equity
    4,281,233       4,662,525
               
    Total liabilities and equity
  $ 6,027,069     $ 6,500,710

 
See accompanying notes to consolidated financial statements
 

 
3

 
 
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues:
                       
  Rental Income
  $ 202,761     $ 202,761     $ 607,933     $ 426,911  
  Tenant reimbursement
    15,494       2,157       46,282       4,803  
  Interest on mortgage loan
            4,641               10,531  
  Other income
    8,224       6,977       55,145       24,085  
                                 
    Total revenues
    226,479       216,536       709,360       466,330  
                                 
Expenses:
                               
  Operating and maintenance expenses
    62,083       66,515       187,951       133,809  
  Property taxes and insurance
    31,231       18,776       93,717       39,613  
  General and administrative
    142,817       226,483       439,715       735,407  
  Depreciation and amortization
    102,850       102,850       306,312       215,760  
                                 
    Total expenses
    338,981       414,624       1,027,695       1,124,589  
                                 
Loss from operations
    (112,502 )     (198,088 )     (318,335 )     (658,259 )
                                 
Other income
                               
  Interest and dividend revenue
    1,003       261       1,003       4,160  
  Investing gains (losses)
    (16,562 )             (16,562 )        
  Gain on repayment of mortgage
            3,608               3,608  
                                 
Loss before income taxes
    (128,061 )     (194,219 )     (333,894 )     (650,491 )
Provision for income tax expense
                    (347 )     (398 )
                                 
Net loss
    (128,061 )     (194,219 )     (334,241 )     (650,889 )
                                 
Add: net loss attributable to noncontrolling interest
            63,566               176,856  
                                 
Net loss attributable to Kent Financial Services shareholders'
    (128,061 )     (130,653 )     (334,241 )     (474,033 )
                                 
Other comprehensive income (loss):
                               
  Unrealized gain (loss) on available for sale securities
    (69 )     160       46       (582 )
  Reclassification adjustment for losses included in net loss
    22,200               18,600          
                                 
Comprehensive loss
  $ (105,930 )   $ (130,493 )   $ (315,595 )   $ (474,615 )
                                 
                                 
Basic and diluted net loss per common share:
  $ (0.05 )   $ (0.05 )   $ (0.12 )   $ (0.17 )
                                 
Weighted average number of common shares outstanding
    2,696,294       2,759,074       2,709,258       2,759,074  
 
 
See accompanying notes to consolidated financial statements

 
 
4

 
 
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

   
Nine Months Ended
 
   
September 30,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
  Net loss
  $ (334,241 )   $ (474,033 )
  Adjustments to reconcile net loss to net  cash used in operating activities:
               
    Depreciation and amortization
    306,312       215,760  
    Amortization of below market rate lease
    (48,084 )     (33,870 )
    Minority interest in subsidiaries losses
            (176,856 )
    Net loss on sale of marketable securities
    16,562          
  Changes to operating assets and liabilities:
               
    Change in accounts receivable
    9,884       (63,426 )
    Change in prepaid expenses and other current assets
    3,080       (16,053 )
    Change in accounts payable and accrued expenses
    (44,265 )     89,738  
                 
     Net cash used in operating activities
    (90,752 )     (458,740 )
                 
Cash flows from investing activities:
               
  Mortgage loan made
            (321,290 )
  Repayment of mortgage loan
            321,290  
  Purchases of marketable securities
    (59,001 )        
  Sales of marketable securities
    69,439          
   Acquisition of land, buildings and improvements including intangible assets, and net of below market leases acquired
            (4,325,000 )
                 
     Net cash provided by (used in) investing activities
    10,438       (4,325,000 )
                 
Cash flows from financing activities:
               
  Repurchase of common stock
    (65,697 )        
                 
     Net cash used in financing activities
    (65,697 )     -  
                 
Net decrease in cash and cash equivalents
    (146,011 )     (4,783,740 )
Cash and cash equivalents at beginning of period
    1,560,021       10,514,981  
                 
Cash and cash equivalents at end of period
  $ 1,414,010     $ 5,731,241  
                 
Supplemental disclosure of cash flow information:
               
  Cash paid for:
               
    Taxes
  $ 347     $ 398  


See accompanying notes to consolidated financial statements.

 
5

 

KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 

NOTE 1 - Basis of Presentation

The accompanying unaudited consolidated financial statements of Kent Financial Services, Inc. and subsidiaries (the "Company") reflect all material adjustments consisting of only normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of results for the interim periods.  Certain information and footnote disclosures required under accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company believes that the disclosures are adequate to make the information presented not misleading.  These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Estimates that are particularly susceptible to change include assumptions used in determining the fair value of securities owned and non-readily marketable securities.

The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the entire year or for any other period.

NOTE 2 - Principles of Consolidation

The consolidated financial statements include the accounts of Kent Financial Services, Inc. (the “Company”, “Kent”, “we” or “our”) and the consolidated accounts of Kent’s wholly owned subsidiary, Kent International Holdings, Inc., (“Kent International”) and its subsidiaries Kent Capital, Inc. (“Kent Capital”) and Kent Texas Properties, LLC (“KTP”).  Intercompany balances and transactions between the Company and its subsidiaries have been eliminated.

NOTE 3Business

The Company’s business is operating as a real estate corporation through its wholly owned subsidiary, Kent International.

Kent International is operating as a full service real estate corporation that owns and operates an income producing property.  We will look to opportunistically acquire additional properties, primarily in the Dallas/Fort Worth area; however, we will not limit our search to that market.  Alternatively, management will also continue to pursue other acquisition opportunities that offer potentially profitable uses for the Company’s available capital.

Kent International’s general investment strategy shall be to make investments in real properties that offer attractive current yields with, in some cases, potential for capital appreciation.  We may buy these properties directly, through joint ventures, or as general partner in limited partnerships utilizing funds raised from accredited investors.

 
6

 
 
In 2009 Kent International’s subsidiary, Kent Capital, Inc., registered with the Financial Industry Regulatory Authority (FINRA), as a securities broker-dealer.  To date, Kent Capital, Inc. has not produced any revenue.

The Company does not expect that these activities will generate any significant revenues for an indefinite period as these efforts are in their early stages.  As a result, these programs may produce significant losses until such time as meaningful revenues are achieved.

NOTE 4 – Summary of Significant Accounting Policies

Acquisitions

Upon acquisition of wholly-owned properties or joint venture investments that are less than wholly-owned, but which we control or for which we are the primary beneficiary, the assets and liabilities purchased are recorded at their fair market value at the date of the acquisition using the acquisition method in accordance with FASB ASC Topic 805 Business Combinations.  We recognize the net tangible and identified intangible assets based on fair values (including land, buildings, tenant improvements, acquired above and below market leases and the origination cost of acquired in-place leases) and acquired liabilities. The intangible assets recorded are amortized over the weighted average lease lives. We identify any above or below market leases or customer relationship intangibles that exist at the acquisition date. We recognize mortgages and other liabilities at fair market value at the date of the acquisition. We utilize an independent appraiser to assess fair value based on estimated cash flow projections for the tangible assets acquired that utilize discount and capitalization rates deemed appropriate and available market information. We expense acquisition costs as incurred.

Revenue Recognition

Rental income is recognized when earned.  As our lease with the General Services Administration provides for the payment of monthly rental in arrears, a receivable is recorded at the end of each month for the previous month’s rent.  Any above or below market leases acquired are amortized over the lease lives and recorded as an increase or decrease to rental revenue.

Repairs and Maintenance

Repairs and maintenance costs are expensed as incurred.  Significant improvements, renovations and replacements are capitalized.

Property and Depreciation

Land, buildings and amenities are stated at cost.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are generally 5-30 years for land improvements, 7-30 years for buildings and improvements and 5-30 years for amenities.  Tenant improvements are generally depreciated over the life of the initial or renewal term of the respective tenant lease.

FASB ASC Topic 360 Property, Plant and Equipment specifies circumstances in which certain long-lived assets must be reviewed for impairment.  If the carrying amount of an asset exceeds the sum of its expected future cash flows, the asset’s carrying value must be written down to fair value.  In determining the value of an investment property and whether the investment property is impaired, management considers several factors such as projected rental and vacancy rates, property operating expenses, capital expenditures and interest rates.  The capitalization rate used to determine property valuation is based on the market in which the investment property is located, length of leases, tenant financial strength, the economy in general, demographics, environment, property location, visibility, age and physical condition among others.  All of these factors are considered by management in determining the value of any particular investment property.  The value of any particular investment property is sensitive to the actual results of any of these factors, either individually or taken as a whole. If the actual results differ from management’s judgment, the valuation could be negatively or positively affected.  

 
7

 
 
NOTE 5 - Securities Owned

Marketable securities owned as of September 30, 2012 and December 31, 2011, comprised mainly of portfolio positions (equity securities) held for capital appreciation, consisted of the following:

         
September 30, 2012
   
December 31, 2011
 
   
Percent Owned
 
Estimated
 Fair Value
   
Losses in Accumulated Other Comprehensive Income
 
Estimated
Fair Value
   
Losses in Accumulated Other Comprehensive Income
 
                               
GolfRounds.com, Inc.
                    $ 8,400     $ 18,600  
All other equity securities
    N/A     $ 481     $ 4,328       435       4,374  
                                         
            $ 481     $ 4,328     $ 8,835     $ 22,974  
 
In 2011, an unrealized loss of $18,600 was included in the Company’s financial statements related to its ownership of shares in GolfRounds.com, Inc.  In August 2012, the Company sold its GolfRounds.com, Inc. shares and incurred a realized loss of $17,607.  Related reclassification adjustments were made to other comprehensive income (loss) of $22,200 and $18,600 for the three and nine month periods ending September 30, 2012, respectively, to avoid double counting.

The Company follows FASB accounting guidance for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis.  It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The guidance establishes a framework for measuring fair value and expands disclosures about fair value measurements.  The valuation techniques required are based upon observable and unobservable inputs.  Observable input reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions.  These two types of inputs create the following fair value hierarchy:

Level 1 - Quoted prices for identical instruments in active markets.

Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 
8

 
 
Level 3 - Significant inputs to the valuation model are unobservable.

All of the Company’s marketable securities are Level 2 type assets.  Among the observable inputs considered by management in determining fair value of thinly traded portfolio positions are the financial condition, asset composition and operating results of the issuer, the long-term business potential of the issuer and other factors generally pertinent to the valuation of investments, including the analysis of the valuation of comparable companies.

NOTE 6 – Real Estate and Related Assets

Real estate assets together with real estate related intangible assets and liabilities as of September 30, 2012 consisted of:

   
Cost
   
Useful Life
   
Accumulated Depreciation / Amortization
   
Net Book Value
 
                         
Land
  $ 1,280,000                 $ 1,280,000  
Buildings
    1,130,292       20     $ 86,493       1,043,799  
Improvements
    529,387       7       115,732       413,655  
                                 
Subtotal real estate assets
    2,939,679               202,225       2,737,454  
                                 
Real estate related intangible assets:
                               
  Leases in place value
    1,624,052       7       355,043       1,269,009  
  Unamortized tenant improvement allowances
    530,444       12       67,652       462,792  
                                 
      2,154,496               422,695       1,731,801  
                                 
    $ 5,094,175             $ 624,920     $ 4,469,255  
                                 
Below market lease value acquired
  $ (769,175 )     12     $ (98,099 )   $ (671,076 )
 
Depreciation and amortization expense was $102,850 and $306,312 for the three and nine months ended September 30, 2012, respectively. $16,145 and $48,084 in capitalized below market rents were amortized as an increase to rental income during the three and nine months ended September 30, 2012, respectively.

The Property is 100% leased to the General Services Administration (GSA) of the United States pursuant to a lease dated January 9, 2006.  The initial term of the GSA lease runs from January 18, 2008 until January 18, 2018 with an optional five year renewal period from January 2018 to January 2023.  The base rent during the initial term is $746,464 annually and includes a provision of $123,099 annually for the reimbursement of tenant improvement allowances.  The base rent during the renewal term is $623,365. Although the Company is responsible for Property operating expenses, the lease includes a provision for reimbursement of certain operating expenses that exceed a baseline.  This base is subject to annual adjustment on March 1st of each year based on the Cost of Living Index (COLI).  The operating expense base was adjusted on March 1, 2012 resulting in an annual increase to the provision for reimbursement in the amount of $6,281.

 
9

 

NOTE 7 - Capital Stock Activity

Dividends

No dividends were declared or paid during the three months ended September 30, 2012.

Common Stock Repurchases

In August 2004, the Board of Directors approved a plan to repurchase up to 200,000 shares of the Company’s common stock at prices deemed favorable in the open market or in privately negotiated transactions subject to market conditions, the Company’s financial position and other considerations.  In December 2011, the Board of Directors approved an increase in the amount of shares available to repurchase under the plan from 64,769 shares to 250,000 shares.  This program has no expiration date.  3,067 and 56,759 shares were repurchased in the three and nine month periods ending September 30, 2012, respectively.  No shares were repurchased during the three and nine month periods ending September 30, 2011.  As of September 30, 2012, 184,867 shares remained authorized for repurchase under the program.

NOTE 8 - Net Income (Loss) Per Share

Basic income (loss) per share includes the weighted average number of common shares outstanding during the year.  Diluted income (loss) per share includes the weighted average number of shares outstanding and dilutive potential common shares, such as warrants and options.  The Company had no common stock options or warrants outstanding at September 30, 2012 and 2011.

NOTE 9 - Stock Option Plans

On November 25, 2005, shareholders of the Company approved the 2005 Stock Option Plan making a total of 400,000 common stock options available for issuance.  The Company did not record stock-based compensation expense for the three and nine month periods ending September 30, 2012 and 2011, as no options were earned during these periods.  At September 30, 2012, the Company had no common stock options outstanding.

NOTE 10 - Related Party Transactions

The Company and its consolidated subsidiaries reimburse an affiliate, Bedminster Management Corp., for the allocated direct cost of group health insurance and office supplies.  These reimbursements were $22,350 and $62,388 for the three and nine months ended September 30, 2012, respectively and $17,825 and $59,151 in the three and nine months ended September 30, 2011, respectively.

NOTE 11 – Net Operating Loss Carryforwards

As of December 31, 2011, the Company had approximately $3.348 million of net operating loss carryforwards (“NOL”) for income tax purposes.  In addition, Kent International had approximately $20.68 million of NOL and $67,432 of research and development and foreign tax credit carryforwards available to offset future federal income tax, subject to limitations for alternative minimum tax.  The NOL’s and tax credit carryforwards expire in various years from 2012 through 2025.  The Company’s and Kent International’s use of operating loss carryforwards and tax credit carryforwards is subject to limitations imposed by the Internal Revenue Code.  Management believes that the deferred tax assets as of September 30, 2012 do not satisfy the realization criteria and has recorded a valuation allowance for the entire net tax asset.  By recording a valuation allowance for the entire amount of future tax benefits, the Company has not recognized a deferred tax benefit for income taxes in its statements of operations.

 
10

 
 
NOTE 12 - Kent International Holdings Going Private Transaction

Until December 7, 2011, the Company’s wholly owned subsidiary, Kent International was a publicly traded company, trading on the OTC Pink Market under the ticker symbol “KNTH.PK”.  On August 22, 2011, Kent International filed a Schedule 14C Preliminary Information Statement with the United States Securities and Exchange Commission (the “SEC”) in connection with a “going private” transaction.  The transaction involved an amendment to Kent International’s Articles of Incorporation to affect a one-for-950,000 reverse stock split.  Fractional shares resulting from the reverse split were redeemed by Kent International for cash consideration of $2.50 per pre-split share.  The transaction, completed on December 7, 2011, resulted in Kent owning 100% of Kent International.  Kent International paid $4,138,720 to redeem the fractional shares owned by the minority shareholders as a result of the reverse split.

NOTE 13 – Subsequent Events

Subsequent events were evaluated through the date the financial statements were issued.

Item 2.  -   Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended December 31, 2011, of Kent Financial Services, Inc. (the “Company”, “Kent”, “we” or “our”) as well as the Company’s financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.  Statements in this report relating to future plans, projections, events or conditions are forward-looking statements.  Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those described.  The Company expressly disclaims any obligation or undertaking to update these statements in the future.

Business Activities

Kent Financial Services, Inc.’s (“Kent” or the “Company”) business is operating as a real estate corporation through its wholly owned subsidiary, Kent International Holdings, Inc. (“Kent International”).  Kent was formed in 1988 as a Delaware corporation and reincorporated in Nevada in 2006 by a merger into a newly formed, wholly owned Nevada subsidiary with the same name that was the surviving corporation of the merger.

Commencing with the purchase of the land and improvements located at 4211 Cedar Springs Road in Dallas, Texas (the “Property”), Kent International began operating as a full service real estate corporation that owns and operates an income producing property.  We will look to opportunistically acquire additional properties, primarily in the Dallas/Fort Worth area; however, we will not limit our search to that market.  We may compete for these opportunities with small private real estate companies and investors.  Alternatively, management will also continue to pursue other acquisition opportunities that offer potentially profitable uses for the Company’s available capital.

 
11

 
 
The Company’s general investment strategy shall be to make investments in real properties that offer attractive current yields with, in some cases, potential for capital appreciation.  We may buy these properties directly, through joint ventures, or as general partner in limited partnerships utilizing funds raised from accredited investors.  The current economic climate and Kent’s limited cash on hand together with a restriction in credit available to would be purchasers of commercial real estate may hinder Kent International’s efforts to acquire properties at favorable prices.

Additionally, the Kent International’s wholly owned subsidiary, Kent Capital, Inc. (“Kent Capital”), is a securities broker-dealer.  Kent Capital’s membership agreement with the Financial Industry Regulatory Authority (FINRA) allows it to operate under two business lines; Private Placements and Real Estate Syndication.  Kent Capital has not yet generated any revenue.

Results of Operations

The Company had a net loss of $128,061, or $.05 basic and fully diluted loss per share, for the quarter ended September 30, 2012, compared to a net loss of $130,653, or $0.05 basic and fully diluted loss per share, for the quarter ended September 30, 2011.  For the nine months ended September 30, 2012 the Company had a net loss of $334,241, or $.12 basic and fully diluted loss per share, compared to a net loss of $474,033, or $0.17 basic and fully diluted loss per share, for the nine months ended September 30, 2011.  The decreases in the net losses were caused by a combination of:

·
the reduction of general and administrative expenses,
·
increased gross profit from the Property, which was owned for the full nine months ended September 30, 2012 but only acquired on and owned after March 31, 2011, and
·
increase in other income attributable to administrative fees paid by an unaffiliated investment partnership.

Property Revenues

The Property located at 4211 Cedar Springs Road generated $202,761 in rental income and $15,494 in expense reimbursements during the three months ended September 30, 2012, compared to $202,761 in rental income and $2,157 in expense reimbursements for the three months ended September 30, 2011.  For the nine months ended September 30, 2012, the Property generated $607,933 in rental income and $46,282 in expense reimbursements.  During the period from March 22, 2011, when we acquired the Property, to September 30, 2011 the Property generated $426,911 in rental income and $4,803 in expense reimbursements.  The initial term of the GSA lease runs until January 18, 2018 with an optional five year renewal period from January 2018 to January 2023.  The base rent during the initial term is $746,464 annually and includes a provision of $123,099 annually for the reimbursement of tenant improvement allowances.  The base rent during the renewal term is $623,365.

The lease rate includes an operating expense base of $187,206 annually (excluding property taxes) and a real estate tax base of $70,189.  The base year operating expenses are adjusted annually via the Cost of Living Index (COLI) and the GSA is responsible for any increases over the adjusted base year expenses.  The bulk of the $44,125 increase in expense reimbursements for the nine month period reflects the increase in property taxes which are subject to reimbursement.  Based upon 2012 actual property taxes and the operating expense base adjustment on March 1, 2012, this calculation is expected to generate an expense reimbursement of approximately $61,000 in 2012, compared to $54,028 in 2011.
 
 
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Interest on Mortgage Loan

The Company recorded $4,641 and $10,531 in interest on mortgage loans receivable in the three and nine months ended September 30, 2011, respectively.  The real estate note was for a maximum term of twenty-six (26) months and was structured as an interest only, participating mortgage with no prepayment penalty.  The stated interest rate was ten percent (10%) for the first fourteen (14) months and twelve percent (12%) for the final twelve (12) months of the term.

On August 19, 2011 the mortgage was repaid in full and the lien released.

Other Revenues

For the three months ended September 30, 2012, other income increased to $8,224 from $6,977 for the three months ended September 30, 2011.  Other income increased to $55,145 for the nine months ended September 30, 2012, from $24,085 for the nine months ended September 30, 2011, caused primarily by the increase in administrative fees paid by an un-affiliated investment partnership.  These administrative fees fluctuate based on the performance of the investment partnership and; therefore, are unpredictable

Interest and dividend income increased to $1,003 for the three months ended September 30, 2012, from $261 for the three months ended September 30, 2011.  Interest and dividend income decreased to $1,003 for the nine months ended September 30, 2012, from $4,160 for the nine months ended September 30, 2011.  The fluctuations for the periods were caused primarily by the decrease in cash and cash equivalents available for investment after the acquisition of the Property and to a lesser extent by the low interest rates on 90 day U.S. Treasury Bills.

General and Administrative Expenses

General and administrative expenses were $142,817 and $439,715 in the three and nine months ended September 30, 2012, respectively, compared to $226,483 and $735,407 in the three and nine months ended September 30, 2011, respectively. The amounts represented decreases of $83,666 and $295,692 or 37% and 40%, respectively for the three and nine month periods.  Significant decreases included $50,873 in salaries and related payroll expenses, $28,000 in combined directors’ fees for both Kent and Kent International, $10,000 in audit and review fees, $20,625 in amortized NASDAQ listing fees, and $43,200 related to the 2011 increase in the accrual for post-employment obligations.  The Company also incurred approximately $13,329 in travel, consulting and due diligence expenses related to the exploration of other potential transactions during the current year to date, as compared to the approximately $77,552 in consulting, due diligence and closing expenses related to the acquisition of the Property and the exploration of other potential transactions incurred in the nine months ended September 30, 2011.

Property Expenses

Kent International incurred $196,164 in expenses related to the operations of the Property during the quarter ended September 30, 2012.  These expenses included $31,231 in property taxes and insurance and $102,850 in depreciation and amortization expense.  During the nine months ended September 30, 2012, Kent International incurred $597,980 in expenses related to the operations of the Property including $93,717 in property taxes and insurance and $306,312 in depreciation and amortization expense.  Other major expense categories include utilities (electricity, water, sewer, trash removal, and telephone), building maintenance (HVAC, plumbing, window washing, elevator and janitorial), and grounds maintenance (landscaping and irrigation).  We cannot be certain that the expenses we incur in operating the Property will not increase.  Kent International incurred $188,141 in expenses related to the operations of the Property during the quarter ended September 30, 2011 including $18,776 in property taxes and insurance and $102,850 in depreciation and amortization expense.  During the period from March 22, 2011, when we acquired the Property, to September 30, 2011, Kent International incurred $389,182 in expenses related to the operations of the Property including $39,613 in property taxes and insurance and $215,760 in depreciation and amortization expense.

 
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The GSA lease includes provisions for expense reimbursements of baseline expenses as adjusted by the COLI.  Significant expenses that are not explicitly subject to reimbursement by the GSA are property insurance, alarm monitoring, telephone, and management fees.  As the provision of all of these services is subject to intense competition, we do not anticipate meaningful increases.

Expenses such as electricity, water, cleaning, trash removal and landscaping are subject to GSA reimbursement to the extent that they increase, in the aggregate, above the baseline of $187,206 fixed in the GSA lease.  Although most of these expenses have not materially increased in recent years, electricity billing rates are very volatile and may increase well in excess of the COLI in any given year.  This base is subject to annual adjustment on March 1st of each year based on the Cost of Living Index (COLI).  The operating expense base was adjusted on March 1, 2012 resulting in an annual increase to the provision for reimbursement in the amount of $6,281.

Kent International has entered into various service contracts in conjunction with the acquisition of the Property including a temporary management contract, elevator, landscaping and HVAC maintenance, janitorial services, alarm monitoring, and waste removal.  These contracts include termination provisions and are not considered long term obligations.

Liquidity and Capital Resources

At September 30, 2012, the Company had cash and cash equivalents of $1,414,010.  Cash and cash equivalents consist of cash held in banks and brokerage firms and U.S. Treasury bills with a maturity of 3 months or less.  Working capital at September 30, 2012 was approximately $1.326 million. Although the Company does not have any established banking relationships or other sources of liquidity, management believes its cash and cash equivalents are sufficient for its business activities for at least the next 12 months.

Net cash of $90,752 was used in operations for the nine months ended September 30, 2012, a decrease of $367,988 from the $458,740 used in operations for the nine months ended September 30, 2011.  Net cash used in operations for the periods was the result of the net losses for the periods coupled with the changes in operating assets and liabilities.  The decrease in net cash used in operations was largely the result of the decrease in our net loss together with cash flow generated by the operation of the Property.

$10,438 was generated by the net purchases and sales of marketable securities during the nine months ended September 30, 2012.  The Company utilized $4,325,000 during the nine months ending September 30, 2011 for the acquisition of the Property (exclusive of due diligence and closing costs) located at 4211 Cedar Springs Road, Dallas, Texas.  Additionally, the Company utilized $321,290 during the nine months ending September 30, 2011 to provide a first mortgage loan to a non-affiliated real estate investor secured by residential real estate.  The Company received $321,290 during the nine months ended September 30, 2011 representing the repayment of the first mortgage loan.  As of September 30, 2012, the Company had no commitments for capital expenditures.

 
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$65,697 was utilized for the repurchase of 56,759 shares of common stock during the nine months ended September 30, 2012.  There were no cash flows from financing activities reported during the nine month period ending September 30, 2011.

Other Disclosures

On August 4, 2012, Kent Capital, Inc. entered into an amended membership agreement with the Financial Industry Regulatory Authority (FINRA).  The amendment removed “Trading Securities for Our Own Account” from the authorized lines of business and reduced the Company’s net capital requirement from $100,000 to $5,000.

ITEM 3.   Quantitative and Qualitative Disclosure About Market Risk.

Not Applicable.

ITEM 4. -   Controls and Procedures

As of the end of the period covered by this report, the Company carried out, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) in ensuring that information required to be disclosed by the Company in its reports is recorded, processed, summarized and reported within the required time periods.  In carrying out that evaluation, management identified a material weakness (as defined in Public Company Accounting Oversight Board Standard No. 2) in our internal control over financial reporting.

The material weakness identified by Management consisted of inadequate staffing and supervision within the bookkeeping and accounting operations of our company.  The relatively small number of employees who have bookkeeping and accounting functions prevents us from segregating duties within our internal control system.  The inadequate segregation of duties is a weakness because it could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews.  However, as there has been no instance in which the company failed to identify or resolve a disclosure matter or failed to perform a timely and effective review, management determined that the addition of personnel to our bookkeeping and accounting operations is not an efficient use of our resources at this time.

Accordingly, based on his evaluation of our disclosure controls and procedures as of September 30, 2012, the Company’s Chief Executive and Financial Officer concluded that, as of that date, the Company’s controls and procedures were not effective for the purposes described above.

There was no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended September 30, 2012 that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.
 
 
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PART II  -  OTHER INFORMATION

ITEM 1. -   Legal Proceedings

None.

ITEM 1A.   Risk Factors

There has been no material change from the risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011.

ITEM 2. -  Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES
(COMMON STOCK-AUGUST 2004 REPURCHASE PLAN) (1)
 

 
 
 
 
 
Period
 
 
 
Total Number of
Shares Purchased
 
 
 
Average Price
 Paid per Share
Total Number of
 Shares Purchased
 as Part of Publicly
Announced Plans
 or Programs
Maximum Number
 of Shares that
May Yet Be
Purchased Under
 the Plans or Programs
July 1, 2012 -       July 31, 2012
 
                   -
           187,934
August 1, 2012 -      August 31, 2012
           903
 $    1.23
                 903
           187,031
September 1, 2012 -      September 30, 2012
        2,164
 $    1.21
              2,164
           184,867
Total
        3,067
 $    1.22
              3,067
           184,867
 
 
(1)
In August 2004, the Board of Directors approved a plan to repurchase up to 200,000 shares of the Company’s common stock. In December 2011, the Board of Directors approved an increase in the amount of shares available to repurchase under the plan from 64,769 shares to 250,000 shares.  This plan has no expiration date.

ITEM 3. -  Defaults Upon Senior Securities

None.

ITEM 4. -  Mine Safety Disclosures

Not Applicable


 
16

 


ITEM 5. -   Other Information

None.

ITEM 6. -   Exhibits

(a)
Exhibits
 
     
 
3.1
Bylaws of the Registrant, as amended. (l)
     
 
3.2(a)
Articles of Incorporation of Registrant, as amended (including certificate of stock designation for $2.575 Cumulative Convertible Exchangeable Preferred Stock). (2)
     
 
3.2(b)
Certificate of Amendment to Certificate of Incorporation. (3)
     
 
3.2(c)
Certificate of Amendment to Certificate of Incorporation dated September 26, 1991. (4)
     
 
10.1
Employment Agreement dated June 13, 2011 by and between Kent Financial Services, Inc. and Paul O. Koether. (5) **
     
 
10.2
Employment Agreement dated June 13, 2011 by and between Kent Financial Services, Inc. and Bryan P. Healey. (6) **
     
 
10.3
Membership agreement between Kent Capital, Inc. and the Financial Industry Regulatory Authority
     
 
31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
 
32
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
 
101.INS
XBRL Instance*
     
 
101.SCH
XBRL Schema*
     
 
101.CAL
XBRL Calculation*
     
 
101.DEF
XBRL Definition*
     
 
101.LAB
XBRL Label*
     
 
101.PRE
XBRL Presentation*
     
(1)
Incorporated by reference to Texas American Energy Corporation Registration Statement, as amended, on Form S-l, No. 33-11109.
(2)
Incorporated by reference to Texas American Energy Corporation Form 10-K, for the fiscal year ended December 31, 1984.
(3)
Incorporated by reference to Texas American Energy Corporation Form 10-K for the fiscal year ended December 31, 1987.
(4)
Incorporated by reference to Kent Financial Services, Inc. Form 10-Q for the quarter ended September 30, 1991.
(5)
Incorporated by reference to Kent Financial Services, Inc. Form 8-K filed on December 7, 2011.
(6)
Incorporated by reference to Kent Financial Services, Inc. Form 8-K filed on June 14, 2011.
     
*
The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
   
**
Compensatory Plan

 
17

 
 

SIGNATURES

In accordance with the requirements of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


 


  KENT FINANCIAL SERVICES, INC.
   
Dated: November 9, 2012
By: /s/ Bryan P. Healey
 
Bryan P. Healey
 
Chairman of the Board
 
(Principal Executive Officer, Principal Financial
 
and Accounting Officer)




18