UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

 

x

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

 

For the quarterly period ended: June 30, 2014

 

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 Number: 001-08594

 

PRESIDENTIAL REALTY CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware		13-1954619
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

  

1430 Broadway, Suite 503

New York, NY 10018

(Address of Principal Executive Office)

 

Registrant’s Telephone Number, Including Area Code:  (914) 948-1300

 

N/A

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer ¨	Accelerated filer  ¨
Non-accelerated filer ¨	Smaller reporting company x
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

As of August 10, 2014, there were 442,533 shares of Class A common stock and 3,846,147 shares of Class B common stock outstanding.

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

  

Index to Form 10-Q

For the Quarterly Period Ended

June 30, 2014

 

				Page
Part I		Financial Information (Unaudited)
Item 1.		Financial Statements
		Consolidated Balance Sheets (Unaudited)			1
		Consolidated Statements of Operations (Unaudited)			2
		Consolidated Statements of Cash Flows (Unaudited)			3
		Notes to Consolidated Financial Statements (Unaudited)			4-12
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			17
Item 4.		Controls and Procedures			17
Part II		Other Information
Item 6.		Exhibits			18

 

  

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		June 30,				December 31,
		2014				2013
		(Unaudited)
Assets
Real estate (Note 2)		$	1,119,909			$	1,116,815
Less: accumulated depreciation			539,960				514,699
Net real estate			579,949				602,116
Net mortgage portfolio			1,689				2,024
Prepaid expenses			132,932				184,500
Other receivables (net of valuation allowance of $6,249 in 2014 and  $5,485 in 2013 )			27,352				18,394
Cash and cash equivalents			589,780				477,077
Assets related to discontinued operations			-				45,793
Other assets			33,051				94,420
Total Assets		$	1,364,753			$	1,424,324
Liabilities and Equity
Liabilities:
Liabilities related to discontinued operations		$	-			$	48,368
Mortgage payable			453,106				465,309
Line of credit			500,000				500,000
Accrued liabilities			242,564				588,467
Other liabilities			645,911				652,502
Total Liabilities			1,841,581				2,254,646
Presidential Stockholders' Deficit:
Common stock: par value $.00001 per share

		June 30, 2014				December 31, 2013
Class A
Authorized:			700,000				700,000
Issued:			442,533				442,533				5				5
Class B
Authorized:			999,300,000				999,300,000
Issued:			3,846,147				3,231,147				44				38

Additional paid-in capital			2,922,975				2,374,981
Accumulated deficit			(2,882,870	)			(2,688,364	)
Total Presidential stockholders' deficit			40,154				(313,340	)
Non-controlling interest			(516,982	)			(516,982	)
Total Deficit			(476,828	)			(830,322	)
Total Liabilities and Stockholders' Deficit		$	1,364,753			$	1,424,324

 

See notes to consolidated financial statements.

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Revenues:
Rental		$	220,002			$	214,757			$	439,266			$	427,673
Interest on mortgages - notes receivable			728				1,045				1,121				2,234
Total			220,730				215,802				440,387				429,907
Costs and Expenses:
General and administrative			269,429				345,433				517,940				616,684
Stock Based Compensation (Note 10)			-				-				123,000				-
Rental property:
Operating expenses			123,065				146,974				274,604				273,974
Interest and fees on mortgage debt			11,272				6,767				21,450				12,233
Real estate taxes			10,188				9,471				17,386				18,942
Depreciation on real estate			12,743				11,992				25,261				24,390
Amortization of mortgage costs			1,420				1,420				2,839				2,839
Total			428,117				522,057				982,480				949,062
Other Income:
Other Income (Note 8)			259,851				-				259,851				-
Investment income			17,932				1,694				87,736				2,499
Income (loss) from continuing operations			70,396				(304,561	)			(194,506	)			(516,656	)
Discontinued Operations (Note 4):
Loss from discontinued operations			-				(349,775	)			-				(679,695	)
Net income (loss)			70,396				(654,336	)			(194,506	)			(1,196,351	)
Net loss from non-controlling interest (Note 4) and (Note 6)			-				139,910				-				271,878
Net income (loss) attributable to Presidential		$	70,396			$	(514,426	)		$	(194,506	)		$	(924,473	)
Earnings per Common Share attributable to Presidential (basic and diluted):
Income (Loss) from continuing operations		$	0.02			$	(0.08	)		$	(0.05	)		$	(0.14	)
Discontinued Operations:
Loss from discontinued operations			-				(0.10	)			-				(0.19	)
Net Income (Loss) per Common Share - basic and diluted		$	0.02			$	(0.18	)		$	(0.05	)		$	(0.33	)
Weighted Average Number of Shares Outstanding - basic and diluted			4,288,680				3,669,680				4,241,111				3,669,680

 

See notes to consolidated financial statements.

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

		Six Months Ended June 30,
		2014				2013
Net loss		$	(194,506	)		$	(1,196,351	)
Adjustments to reconcile net loss to net  cash used in operating activities:
Depreciation and amortization			26,680				27,229
Amortization of discounts on notes and fees			(308	)			1,670
Stock Based compensation			123,000				-
Changes in assets and liabilities:
(Increase) decrease in:
Other receivables			(8,958	)			1,289
Discontinued operations assets			45,793				(81,575	)
Prepaid expenses			50,149				98,782
Other assets			61,369				(5,680	)
Increase in:
Accounts payable and accrued liabilities			79,097				135,407
Discontinued operations liabilities			(48,368	)			689,301
Other liabilities			(6,591	)			5,685
Total adjustments			321,863				872,108
Net cash provided by (used in) operating activities			127,357				(324,243	)
Cash Flows from Investing Activities:
Payments received on notes receivable			643				5,966
Payments disbursed for capital improvements			(3,094	)			(2,879	)
Net cash provided by (used in) investing activities			(2,451	)			3,087
Cash Flows from Financing Activities:
Proceeds of Line of credit			-				200,000
Principal payments on mortgage debt			(12,203	)			(11,605	)
Net cash provided by (used in) financing activities			(12,203	)			188,395
Net increase (decrease) in Cash and Cash Equivalents			112,703				(132,761	)
Cash and Cash Equivalents, Beginning of period			477,077				852,674
Cash and Cash Equivalents, End of period		$	589,780			$	719,913
Supplemental cash flow information:
Interest paid in cash		$	21,450			$	12,233

 

See notes to consolidated financial statements.

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.

Organization and Summary of Significant Accounting Policies

 

Organization

 

Presidential Realty Corporation (“Presidential” or the “Company”), is operated as a self-administrated, self-managed Real Estate Investment Trust (“REIT”). The Company is engaged principally in the ownership of income producing real estate. Presidential operates in a single business segment, investments in real estate related assets.

 

Basis of Presentation and Going Concern Considerations

 

For the six months ended June 30, 2014, the Company had a loss from operations. This, combined with a history of operating losses and working capital deficiency, has been detrimental to our operations and could potentially affect our ability to meet our obligations and continue as a going concern. Our ability to continue as a going concern is dependent upon the successful execution of our business plan to achieve profitability, and to increase working capital by raising capital through debt and/or equity. The accompanying financial statements do not include any adjustments that may result from this uncertainty.

 

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the requirements of the Securities and Exchange Commission (“SEC”). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of the Company’s financial position and operating results.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. The results for such interim periods are not necessarily indicative of the results to be expected for the year. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the results for the respective periods have been reflected. These consolidated financial statements and accompanying notes should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2013 filed on March 28, 2014.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Presidential Realty Corporation and its wholly owned subsidiaries. Additionally, the consolidated financial statements include 100% of the account balances of PDL, Inc. and Associates Limited Co-Partnership (the “Hato Rey Partnership”) through January 1, 2014. PDL, Inc. (a wholly owned subsidiary of Presidential and the general partner of the Hato Rey Partnership) and Presidential owned an aggregate 60% general and limited partnership interest in the Hato Rey Partnership. These partnerships are being reported as discontinued operations (see Note 4). All significant intercompany balances and transactions have been eliminated.

 

Rental Revenue Recognition

 

The Company acts as lessor under operating leases. Rental revenue is recorded on the straight-line basis from the later of the date of the commencement of the lease or the date of acquisition of the property subject to existing leases, which averages minimum rents over the terms of the leases. Certain leases require the tenants to reimburse a pro rata share of real estate taxes, utilities and maintenance costs. Recognition of rental revenue is generally discontinued when the rental is delinquent for ninety days or more, or earlier if management determines that collection is doubtful.

  

  

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.

Organization and Summary of Significant Accounting Policies (Continued)

 

Allowance for Doubtful Accounts

 

The Company assesses the collectability of amounts due from tenants and other receivables, using indicators such as past-due accounts, the nature and age of the receivable, the payment history and the ability of the tenant or debtor to meet its payment obligations. Management’s estimate of allowances for doubtful accounts is subject to revision as these factors change. Rental revenue is recorded on the accrual method and rental revenue recognition is generally discontinued when the tenant in occupancy is delinquent for ninety days or more. Bad debt expense is charged for vacated tenant accounts and subsequent receipts collected for those receivables will reduce bad debt expense. At June 30, 2014 and December 31, 2013, allowance for doubtful accounts for continuing operations relating to tenant obligations was $6,249 and $5,485, respectively.

 

Net Income ( Loss) Per Share

 

Basic net income (loss) per share data is computed by dividing net income (loss) by the weighted average number of shares of Class A and Class B common stock outstanding during each year. Diluted net income per share is computed by dividing net income by the weighted average shares outstanding, including the dilutive effect, if any, of non-vested shares. Diluted earnings per share calculation exclude the effect of stock options and warrants when the options and warrant assumed proceeds exceed the average market price of the common shares during the period. For the three months ended June 30, 2014, 2,440,000 of outstanding stock warrants were not included. Diluted loss per share for the six months ended June 30, 2014 and the three and six months ended June 30, 2013, exclude common stock equivalents, of outstanding options and warrants as their inclusion would be anti-dilutive.

 

Cash

 

Cash includes cash on hand, cash in banks and cash in money market funds.

 

Management Estimates

 

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated balance sheets and the reported amounts of income and expense for the reporting period. Actual results could differ from those estimates.

 

Discontinued Operations

 

The Company follows the guidance of the Presentation and Property, Plant, and Equipment Topics of the ASC, with respect to long-lived assets classified as held for sale. The ASC requires that the results of operations, including impairment, gains and losses related to the properties that have been sold or properties that are intended to be sold, be presented as discontinued operations in the statements of operations for all periods presented and the assets and liabilities of properties intended to be sold are to be separately classified on the balance sheet. Properties designated as held for sale are carried at the lower of cost or fair value less costs to sell and are not depreciated.

 

Accounting for Uncertainty in Income Taxes

 

The Company follows the guidance of the recognition of current and deferred income tax accounts, including accrued interest and penalties, in accordance with ASC 740-10-25. Under this guidance, if the Company’s tax positions in relation to certain transactions were examined and were not ultimately upheld, the Company would be required to pay an income tax assessment and related interest. Alternatively, the Company could elect to pay a deficiency dividend to its shareholders in order to continue to qualify as a REIT and the related interest assessment to the taxing authorities.

 

  

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.

Organization and Summary of Significant Accounting Policies (Continued)

 

Recent Accounting Pronouncements

 

The Company has considered all new accounting pronouncements and has concluded that there are no new pronouncements that may have a material impact on results of operations, financial condition or cash flows based on current information.

 

2.

Real Estate

 

Real estate is comprised of the following:

 

		June 30, 2014				December 31, 2013
Land		$	79,100			$	79,100
Buildings			989,340				987,689
Furniture and equipment			51,469				50,026
Total		$	1,119,909			$	1,116,815

 

Rental revenue from the Maple Tree property constituted all of the rental revenue for the Company during the three and six months ended June 30, 2014 and 2013.

 

3.

Investments in Joint Ventures and Partnerships

 

In March and June 2014 we received distributions from Broadway Partners Fund II in the total amount of $86,245. This amount is reported as investment income on the statement of operations. This investment was previously written off. The Company recognizes income received on the cash basis.

 

4.

Discontinued Operations

 

During the quarter ended March 31, 2012, the Company designated PDL, Inc. & Associates, Limited co-partnership, Presidential Matmor Corp. and PDL, Inc. as discontinued operations. All amounts have been adjusted retrospectively for the change through the date of foreclosure.

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

4.

Discontinued Operations (Continued)

 

The following table summarizes for the property discontinued:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Revenues:
Rental		$	-			$	902,928			$	-			$	1,798,580
Rental property expenses:
Operating			-				618,879				-				1,204,460
Interest on mortgage debt			-				555,783				-				1,117,825
Real estate taxes			-				78,742				-				157,380
Total rental property expense			-				1,253,404				-				2,479,665
Other income:
Investment income			-				701				-				1,390
Net loss from discontinued operations		$	-			$	(349,775	)		$	-			$	(679,695	)

 

		June 30, 2014				December 31, 2013
Assets related to discontinued operations:
Other assets		$	-			$	45,793
Liabilities related to discontinued operations:
Other liabilities		$	-			$	48,368

 

5.

Mortgage Debt

 

On June 8, 2012, we closed on a mortgage and line of credit for a combined total of $1,000,000 with Country Bank for Savings on the Mapletree Industrial Center. The mortgage is for $500,000 at a 5% interest rate, for a term of 5 years. Thereafter the interest will adjust monthly equal to the bank’s Prime Rate, plus 1% with an interest rate floor of 5%, for a term of 15 years. We received $459,620 of net proceeds. The outstanding balance at June 30, 2014 and December 31, 2013 was $453,106 and $465,309, respectively. The line of credit is for $500,000, with an interest rate of 1% over the bank’s Prime Rate (3.25% at June 30, 2014). The balance outstanding at June 30, 2014 and December 31, 2013 was $500,000. The line of credit is due on demand. Both the mortgage and the line of credit are secured by the Mapletree Industrial Center, in Palmer, Massachusetts.

  

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

6.

Hato Rey Partnership

 

PDL, Inc. (a wholly owned subsidiary of Presidential) was the general partner of the Hato Rey Partnership. Presidential and PDL, Inc. had an aggregate 60% general and limited partner interest in the Hato Rey Partnership. The Company exercised effective control over the partnership through its ability to manage the affairs of the partnership in the ordinary course of business. Accordingly, the Company consolidated the Hato Rey Partnership in the accompanying consolidated financial statements. From March 2012 through September 23, 2013 (date of foreclosure), the Company had reported the partnership as a discontinued operation.

 

The Company advanced $2,670,000 to the partnership to be used for building improvements and for operations. The loan, which was advanced to the partnership, as needed, earned interest at the rate of 13% per annum, with interest and principal to be paid out of the positive cash flow from the property or upon a refinancing of the First Mortgage on the property. On November 12, 2013 we contributed the entire loan balance of $2,670,000 and accrued interest of $1,614,941 to the Hato Rey Partnership.

 

7.

Income Taxes

 

Presidential has elected to qualify as a Real Estate Investment Trust under the Internal Revenue Code. A REIT which distributes at least 90% of its real estate investment trust taxable income to its shareholders each year by the end of the following year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders.

 

ASC 740 prescribes a more likely than not recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken. If the Company’s tax position in relation to a transaction was not likely to be upheld, the Company would be required to record the accrual for the tax and interest thereon. As of June 30, 2014, the tax years that remain open to examination by the federal, state and local taxing authorities are the 2010 – 2013 tax years and the Company was not required to accrue any liability for those tax years.

 

For the six months ended June 30, 2014, the Company had a tax loss of approximately $80,000 ($0.02 per share) which was all ordinary loss. For the six months ended June 30, 2013, the Company had a tax loss of approximately $812,000 ($0.22 per share), which was all ordinary loss.

 

8.

Other Income

 

During the three months ended June 30, 2014, the Company sold environmental tax credits from the state of Massachusetts for approximately $260,000 less expenses of approximately $19,500.

 

9.

Commitments, Contingencies and Related Parties

 

A.

Commitments and Contingencies

 

1)

Presidential is not a party to any material legal proceedings. The Company may, from time to time, be a party to routine litigation incidental to the ordinary course of its business.

 

2)

In the opinion of management, the Company’s Mapletree property is adequately covered by insurance in accordance with normal insurance practices.

  

  

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

9.

Commitments, Contingencies and Related Parties (Continued)

 

B.

Related Parties

 

1)

Executive Employment Agreements

 

a.

Nickolas W. Jekogian –On January 8, 2014, the Company and Mr. Nickolas W. Jekogian, Chairman and Chief Executive Officer of the Company, entered into an amendment to Mr. Jekogian’s employment agreement dated November 8, 2011. The amendment provides for (i) the extension of the employment term from May 3, 2013 to December 31, 2015, (ii) continuation of Mr. Jekogian’s base salary through the balance of the term at the rate of $225,000 per annum (subject to the continued deferral of the payment of the base salary until a Capital Event), (iii) removal of the $200,000 cap on the amount of any annual bonus that might be awarded Mr. Jekogian, (iv) the issuance to Mr. Jekogian of a “Warrant” (as described below) to purchase 1,700,000 shares of the Company’s Class B Common Stock in exchange for the complete cancellation of $425,000 of the deferred compensation accrued under Mr. Jekogian’s employment agreement, (v) the issuance of a “Transaction Warrant” (as described below) to Mr. Jekogian upon the occurrence of a Capital Event, and (vi) an increase in severance benefits from three months to six months in the event of a termination of Mr. Jekogian’s employment following a change of control or a termination for “good reason” as defined in the employment agreement. The payment of any bonus and base salary will continue to be deferred until a “Capital Event” occurs, which is defined as the receipt by the Company of at least $20,000,000 in cash or property from capital-raising activities.

 

The Transaction Warrant is a warrant to purchase shares of the Company’s Class B Common Stock to be issued to Mr. Jekogian upon the closing of each acquisition transaction by the Company of cash or property (including capital commitments for the purchase of assets). A copy of the form of Transaction Warrant is annexed as an Exhibit to the amendment to Mr. Jekogian’s employment agreement. Each Transaction Warrant, when issued, will entitle Mr. Jekogian to purchase the number of shares of Class B Common Stock determined by multiplying the total value of the transaction for which the Transaction Warrant is being issued times 4.75% and dividing the amount thereby obtained by the “Transaction Price”. The exercise price of the Transaction Warrant will be the Transaction Price. The Transaction Price is the price at which owners of assets or third party investors providing capital or capital commitments have the right to acquire or are issued shares of Class B Common Stock (a) in exchange for interests in real estate assets or (b) in exchange for interests or investments in operating partnerships or other vehicles in which the Company has an interest and which own or are acquiring real estate assets or (c) in exchange for providing capital and/or capital commitments. Each Transaction Warrant will become exercisable six months after issuance. The Transaction Warrant will not be exercisable for any shares that would be deemed “Excess Shares” as that term is defined in the Company’s certificate of incorporation. Mr. Jekogian agreed not to exercise or attempt to exercise any Transaction Warrant for a number of shares which, when taken together with his other ownership of the Company’s securities, would result in the issuance of any Excess Shares.

  

  

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

9.

Commitments, Contingencies and Related parties (Continued)

 

The Transaction Warrant contains a cashless exercise feature. The Transaction Warrant also contains registration rights which permit Mr. Jekogian to demand one resale registration statement on Form S-3 at any time six months following the completion of a registered offering by the Company and unlimited piggyback registration rights, subject to customary cutbacks.

 

As provided in the amendment to Mr. Jekogian’s employment agreement, on January 8, 2014 the Company issued to Mr. Jekogian a Warrant to purchase 1,700,000 shares of the Company’s Class B Common Stock in exchange for the complete cancellation of $425,000 of the deferred compensation accrued under Mr. Jekogian’s employment agreement. The Warrant becomes exercisable only upon the expiration of six (6) months from the date of the Company’s consummation of a Capital Event and will expire five and one half years following the date it first becomes exercisable. The Warrant will also terminate if Mr. Jekogian terminates his employment and/or resigns as a director of the Company without “Good Reason” or without the consent of the Company prior to the date the Warrant becomes exercisable. The Company’s certificate of incorporation contains limitations on the ownership of shares of the Company’s common stock. Those restrictions limit, among other things, any person from owning more than 9.2% of the Company’s outstanding common stock as more particularly set forth in the Company’s certificate of incorporation. The Warrant is not exercisable for any shares that would be deemed “Excess Shares” as that term is defined in the certificate of incorporation. Mr. Jekogian agreed not to exercise or attempt to exercise the Warrant for a number of shares which, when taken together with his other ownership of the Company’s securities, would result in the issuance of any Excess Shares. The Warrant contains a cashless exercise feature. The Warrant also contains registration rights which permit Mr. Jekogian to demand one resale registration statement on Form S-3 at any time six months following the completion of a registered offering by the Company and unlimited piggyback registration rights, subject to customary cutbacks.

 

Alexander Ludwig –On January 8, 2014, the Company and Mr. Alexander Ludwig, a Director, President, Chief Operating Officer and Principal Financial Officer of the Company entered into an amendment to Mr. Ludwig’s employment agreement dated November 8, 2011. The amendment provides for (i) the extension of the employment term from May 3, 2013 to December 31, 2015, (ii) continuation of Mr. Ludwig’s base salary through the balance of the term at the rate of $225,000 per annum, (iii) removal of the $200,000 cap on the amount of any annual bonus that might be awarded Mr. Ludwig, (iv) the issuance of a “Transaction Warrant” to Mr. Ludwig upon the occurrence of a Capital Event, and (v) an increase in severance benefits from three months to six months in the event of a termination of Mr. Ludwig’s employment following a change of control or a termination for “good reason” as defined in the employment agreement.

 

  

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

9.

Commitments, Contingencies and Related parties (Continued)

 

The Transaction Warrant is a warrant to purchase shares of the Company’s Class B Common Stock to be issued to Mr. Ludwig upon the closing of each acquisition transaction by the Company of cash or property (including capital commitments for the purchase of assets). A copy of the form of Transaction Warrant is annexed as an Exhibit to the amendment to Mr. Ludwig’s employment agreement. The Transaction Warrant, when issued, would entitle Mr. Ludwig to purchase the number of shares of Class B Common Stock determined by multiplying the total value of the transaction for which the Transaction Warrant is being issued times 4.75% and dividing the amount thereby obtained by the “Transaction Price”. The exercise price of the Transaction Warrant will be the Transaction Price. The “Transaction Price is the price per share at which owners of assets or third party investors providing capital or capital commitments have the right to acquire or are issued shares of Class B Common Stock (a) in exchange for their interests in real estate assets or in exchange for their interests or investments in operating partnerships or other vehicles in which the Company has an interest and which vehicles own or are acquiring real estate assets or (b) in exchange for providing capital and/or capital commitments. Each Transaction Warrant will become exercisable six months after issuance. The Transaction Warrant will not be exercisable for any shares that would be deemed “Excess Shares” as that term is defined in the Company’s certificate of incorporation. Mr. Ludwig agreed not to exercise or attempt to exercise the Transaction Warrant for a number of shares which, when taken together with his other ownership of the Company’s securities, would result in the issuance of any Excess Shares. The Transaction Warrant contains a cashless exercise feature. The Transaction Warrant also contains registration rights which permit Mr. Ludwig to demand one resale registration statement on Form S-3 at any time six months following the completion of a registered offering by the Company and unlimited piggyback registration rights, subject to customary cutbacks.

 

2)

Other liabilities

 

Included in other liabilities is $593,750 owed to former officers of the Company in connection with their amended employment agreements. These amounts are payable November 8, 2014.

 

C.

Property Management Agreement

 

On November 8, 2011, the Company and Signature Commnity Management, (an affiliated entity owned by Nickolas W. Jekogian CEO,) entered into a Property Management Agreement pursuant to which the Company retained Signature as the exclusive managing and leasing agent for the Company’s Mapletree Industrial Center property in Palmer, Massachusetts (the “Mapletree Property”). Signature manages the Mapletree Property in accordance with specific management guidelines and leasing guidelines and meets specific reporting requirements and vendor insurance requirements. Signature receives compensation of 5% of monthly rental income actually received from tenants at the Mapletree Property. The Company reimburses Signature for all reasonable expenses incurred by Signature in performance of its duties under the Property Management Agreement that are either in accordance with the annual budget or which have been approved in writing by the Company. Such expense shall include, but not be limited to, Signature’s costs of the salaries, benefits and appropriate and prudent training for Signature’s employees who are engaged solely in management or operation of the Mapletree Property, but excluding certain expenses that will be borne by Signature, as specified in the Property Management Agreement. The property Management Agreement renewed for a one year term on November 8, 2013 and will be automatically renewable for one year terms until it is terminated by either party upon written notice. For the three months ended June 30, 2014 and 2013, the Company incurred management fees of approximately $9,400 and 9,300, respectively. For the six months ended June 30, 2014 and 2013, the Company incurred management fees of approximately $18,600 and $18,600, respectively.

 

D.

Asset Management Agreement

 

On November 8, 2011, the Company entered into an Asset Management Agreement with Signature pursuant to which the Company engaged Signature to oversee the Mapletree property and our Hato Rey center in Hato Rey, Puerto Rico. Signature’s duties include leasing, marketing and advertising, financing, construction and dispositions of the properties. Signature will receive a construction fee for any major renovations or capital projects, subject to the approval of our Board of Directors, an asset management fee of 1.5% of the monthly gross rental revenues collected for the properties, a finance fee of 1% on any debt placement, and a disposition fee of 1% on the sale of any assets, as specified in the Asset Management Agreement. The Asset Management Agreement renewed for a one year term on November 8, 2013 and will be automatically renewable for one year terms until it is terminated by either party upon written notice. On September 23, 2013 the Asset Management agreement associated with the Hato Rey Center was terminated due to the foreclosure and loss of the property. No additional fees are due for the Hato Rey Center. The Company incurred asset management fees of approximately $2,600 and $12,200 for the three months ended June 30, 2014 and 2013, respectively. The Company incurred asset management fees of approximately $5,600 and $26,000 for the six months ended June 30, 2014 and 2013, respectively.

  

  

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

9.

Commitments, Contingencies and Related parties (Continued)

 

E.

Sublease

 

The Company subleases their executive office space under a month to month lease with Signature for a monthly rental payment of $433 or $5,200 per year. Either party may terminate the sublease upon 30 days prior written notice. On July 1, 2013 the Company moved their executive offices and amended its lease agreement with Signature for a monthly rental payment of $1,100 or $13,200 per year. All other terms of the sublease remained the same. For the three months ended June 30, 2014 and 2013, the Company incurred approximately $3,300 and $1,300, respectively, in rent expense. For the six months ended June 30, 2014 and 2013, the Company incurred approximately $6,600 and $2,600, respectively, in rent expense.

 

10.

Stock Compensation

 

During January 2014, the Company issued 615,000 shares of Class B common stock, valued at $123,000 for director’s fees and other professional fees in lieu of cash payments, which is included in stock base compensation expense.

 

11.

Stock Options and Warrants

 

On November 8, 2011, the Company issued 740,000 options at an exercise price of $1.25. A total of 148,000 shares vested six months after the grant date. The aggregate intrinsic value was $0.00. The remaining options vest upon the achievement of performance milestones. Options vesting on the achievement of performance milestones will not be recognized as compensation until such milestones are deemed probable of achievement. The Company has approximately $592,000 of unrecognized compensation expense respectively, related to unvested share-based compensation awards. For the three and six months ended June 30, 2014 and 2013, compensation expense was $0. Approximately $592,000 will vest upon the achievement of performance milestones.

 

On January 8, 2014, the Company issued a warrant to purchase 1,700,000 shares at an exercise price of $0.10 per share of the Company’s Class B Common Stock in exchange for the complete cancellation of $425,000 of the deferred compensation accrued under Mr. Jekogian’s prior employment agreement. The Warrant becomes exercisable only upon the expiration of six (6) months from the date of the Company’s consummation of a Capital Event and will expire five and one half years following the date it first becomes exercisable. The Warrant will also terminate if Mr. Jekogian terminates his employment and/or resigns as a director of the Company without “Good Reason” or without the consent of the Company prior to the date the Warrant becomes exercisable.

 

12.

Estimated Fair Value of Financial Instruments

 

Estimated fair values of the Company’s financial instruments as of June 30, 2014 and 2013 were determined using available market information and various valuation estimation methodologies. Considerable judgment was required to interpret the effects on fair value of such items as future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. The estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. Also, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair values. However, we believe reported amounts approximate fair value.

 

 

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

 

Forward-Looking Statements

 

This report contains statements that do not relate to historical facts, but are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable. These statements may also relate to future events or trends, our future prospects and proposed development or business strategies, among other things. These statements can generally (although not always) be identified by their use of terms and phrases such as anticipate, appear, believe, continue, could, estimate, expect, indicate, intend, may, plan, possible, predict, project, pursue, will, would and other similar terms and phrases, as well as the use of the future tense. Forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date hereof, and forward looking statements in documents incorporated by reference speak only as of the date of those documents. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

 

Examples of forward-looking statements in this report include, but are not limited to, the following categories of expectations about:

 

·

Our ability to implement plans for growth;

·

Our ability to finance the acquisition of new real estate assets;

·

Our ability to manage growth;

·

Our ability to generate operating liquidity;

·

Our ability to attract and maintain tenants for our rental properties;

·

The demand for rental properties and the creditworthiness of tenants;

·

Governmental actions and initiatives;

·

Financial results for 2014 and beyond;

·

Environmental and safety requirements;

·

The form, timing and/or amount of dividend distributions in future periods.

 

Overview

 

Presidential is a Delaware corporation organized in 1983 to succeed to the business of a company of the same name which was organized in 1961 to succeed to the business of a closely held real estate business founded in 1911. Since 1982, we have elected to be treated as a real estate investment trust (“REIT”) for Federal and State income tax purposes. We own, directly or indirectly, interests in real estate and interests in entities which own real estate.

  

We outsource the management of the Mapletree Industrial Center to Signature Community Management (an affiliated entity owned by Nickolas W. Jekogian, CEO).

 

We obtain funds for working capital and investment from our available cash, operating activities and refinancing of mortgage loans on our real estate.

 

On June 8, 2012, we closed on a mortgage and line of credit for a combined total of $1,000,000 with Country Bank for Savings on the Mapletree Industrial Center. The mortgage is for $500,000 at a 5% interest rate, for a term of 5 years. Thereafter, the interest will adjust monthly equal to the bank’s Prime Rate, plus 1% with an interest rate floor of 5%, for a term of 15 years. We received $459,620 of net proceeds. The outstanding balance at June 30, 2014 and December 31, 2013 was $453,106 and $465,309, respectively. The line of credit is for $500,000, with an interest rate of 1% over the bank’s Prime Rate (3.25% at June 30, 2014). The balance outstanding at June 30, 2014 and December 31, 2013 was $500,000. The line of credit is due on demand. Both the mortgage and the line of credit are secured by the Mapletree Industrial Center, in Palmer, Massachusetts.

 

 

Critical Accounting Policies

 

For the six months ended June 30, 2014, the Company had a loss from operations. This, combined with a history of operating losses and working capital deficiency, has been detrimental to our operations and could potentially affect our ability to meet our obligations and continue as a going concern. Our ability to continue as a going concern is dependent upon management’s successful execution of our business plan to achieve profitability, and to increase working capital by raising capital through debt and or equity. The accompanying financial statements do not include any adjustments that may result from this uncertainty.

 

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), management is required to make estimates and assumptions that affect the financial statements and disclosures. These estimates require difficult, complex and subjective judgments. Management has discussed with the Audit Committee the implementation of the critical accounting policies described below and the estimates required with respect to such policies.

 

Real Estate

 

Real estate is carried at cost, net of accumulated depreciation and amortization. Additions and improvements are capitalized and repairs and maintenance are charged to rental property operating expenses as incurred. Depreciation is generally provided on the straight-line method over the estimated useful life of the asset. The useful life of each property, as well as the allocation of the costs associated with a property to its various components, requires estimates by management. If management incorrectly estimates the allocation of those costs or incorrectly estimates the useful lives of its real estate, depreciation expense may be miscalculated.

 

The Company reviews each of its properties for impairment if events or changes in circumstances warrant. If impairment were to occur, the property would be written down to its estimated fair value. The Company assesses the recoverability of its investment in real estate based on undiscounted cash flow estimates. The future estimated cash flows of a property are based on current rental revenues and operating expenses, as well as the current local economic climate affecting the property. Considerable judgment is required in making these estimates and changes in these estimates could cause the estimated cash flows to change and impairment could occur. As of June 30, 2014, the Company’s net real estate was carried at approximately $580,000.

 

Rental Revenue Recognition

 

The Company recognizes rental revenue on the straight-line basis from the later of the date of the commencement of the lease or the date of acquisition of the property subject to existing leases, which averages minimum rents over the terms of the leases. Certain leases require the tenants to reimburse a pro rata share of real estate taxes, utilities and maintenance costs.

 

Income Taxes

 

We operate in a manner intended to enable us to continue to qualify as a Real Estate Investment Trust under Sections 856 to 860 of the Code. Under those sections, a REIT which meets certain requirements is not subject to Federal income tax on that portion of its taxable income which is distributed to its shareholders, if at least 90% of its REIT taxable income (exclusive of capital gains) is so distributed. As a result of our ordinary tax loss for the six months ended June 30, 2014, there is no requirement to make a distribution for the second quarter of 2014. In addition, no provision for income taxes was required at June 30, 2014.

 

 

Results of Operations

 

Results of operations for the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Revenue		$	220,730			$	215,802			$	440,387			$	429,907
Operating expenses			428,117				522,057				982,480				949,062
Income (loss) from continuing operations			70,396				(304,561	)			(194,506	)			(516,656	)
Discontinued operations:
Loss from discontinued operations			-				(349,775	)			-				(679,695	)
Net income (loss)			70,396				(654,336	)			(194,506	)			(1,196,351	)
Net loss from non-controlling interest							139,910				-				271,878
Net income (loss) attributable to Presidential
Realty Corporation		$	70,396			$	(514,426	)		$	(194,506	)		$	(924,473	)

 

Continuing Operations:

 

Revenues increased by $4,928 and $10,480 for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013, as a result of increased rental occupancy at the Mapletree Industrial Center. Management has successfully increased occupancy to 95%.

 

Income from continuing operations for the three months ended June 30, 2014 was $70,396 as compared to a loss of $304,561 for the three months ended June 30, 2013. The increase in income was primarily due to the sale of environmental tax credits, in the state of Massachusetts, in connection with the environmental cleanup on our Mapletree Industrial Center in the amount of $259,851. In addition, we recorded $17,248 of investment income from our investment in Broadway Partners Fund II. Operating costs decreased by approximately $24,000 at the Mapletree Industrial Center, due to decreases in repairs and maintenance of $7,500, insurance cost of $14,000 and bad debt expense of $7,000. This was offset by a decrease in reimbursed expense of $11,000 for management salaries that had been reimbursed from the Hato Rey Center property prior to its foreclosure in September 2013. General and administrative expenses decreased approximately $76,000 primarily due to the issuance of stock compensation for board of director’s fees and other professional fees instead of cash recorded during the first quarter of 2014, and reductions in other professional fees. Mortgage interest increased approximately $4,500 due to additional borrowing on the line of credit during 2013.

 

Loss from continuing operations for the six months ended June 30, 2014 was $194,506 as compared to a loss of $516,656 for the six months ended June 30, 2013, a decrease of $322,150. The decrease in the loss was primarily due to the sale of environmental tax credits, in the state of Massachusetts, in connection with the environmental cleanup on our Mapletree Industrial Center in the amount of $259,851. In addition, we recorded $86,245 of investment income from our investment in Broadway Partners Fund II. Operating costs at our Mapletree Industrial Center were consistent with the prior year even though we had a decrease in reimbursed expense of $24,000 for management salaries that had been reimbursed from the Hato Rey Center property prior to its foreclosure in September 2013. General and administrative expenses decreased approximately $98,000 primarily due to the issuance of stock compensation for board of director’s fees and other professional fees instead of cash recorded during the first quarter of 2014. Mortgage interest increased approximately $9,000 due to additional borrowing on the line of credit during 2013.

 

 

Balance Sheet

 

June 30, 2014 compared to December 31, 2013

 

Net real estate decreased by $22,167 primarily as a result of depreciation expense recorded during the six months ended June 30, 2014 on the MapleTree Industrial Center.

 

Net mortgage portfolio decreased by $335 as a result of mortgage amortization and payments received during the six months ended June 30, 2014.

 

Assets related to discontinued operations decreased by $45,793 due to a decrease in prepaid expenses related to the Hato Ray Center foreclosure.

 

Prepaid expenses decreased by $51,568 primarily due to accretion of the directors and officers tail policy purchased in 2011.

 

Other assets decreased $61,369 primarily due to the receipt of $77,642 of accrued investment income received from Broadway Partners Fund II during 2014.

 

Accrued liabilities decreased by $345,903 primarily as a result of Nicholas W. Jekogian’s exchange of accrued officer salary of $425,000 for 1,700,000 warrants (see Note 10 to the consolidated financial statements)

 

Liabilities related to discontinued operations decreased by $48,368 due to payments made related to the Hato Ray Center foreclosure.

 

Other liabilities remained consistent from period to period.

 

Liquidity and Capital Resources

 

We obtain funds for working capital and investment from our available cash.

 

For the six months ended June 30, 2014, the Company had a loss from operations. This, combined with a history of operating losses and working capital deficiency, has been detrimental to our operations and could potentially affect our ability to meet our obligations and continue as a going concern. Our ability to continue as a going concern is dependent upon the successful execution of our business plan to achieve profitability, and to increase working capital, raising debt and/or equity. The accompanying financial statements do not include any adjustments that may result from this uncertainty.

  

At June 30, 2014, we had $589,780 in available cash, an increase of $112,703 from $477,077 available at December 31, 2013. This increase in cash and cash equivalents was due to cash provided in operating activities of $127,357 offset by $2,451 used in investing activities and $12,203 of principal payments made on the Mapletree Industrial Center mortgage.

 

Operating Activities

 

Cash from operating activities includes interest on the Company’s mortgage portfolio and net cash received from rental property operations. For the six months ended June 30, 2014, cash received from interest and amortization on the Company’s mortgage portfolio was $1,456. Net cash received from rental property operations was approximately $90,000. Net cash received from rental property operations is before additions and improvements and mortgage amortization. Cash received from investment activities was approximately $70,000 from Broadway Partners Fund II. Other income of approximately $260,000 was received in connection with the sale of environmental tax credits.

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

  

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

While we are not required, as a smaller reporting company, to comply with this Item 3, we are providing the following general discussion of qualitative market risk.

 

Our financial instruments consist primarily of notes receivable and mortgage notes payable. Substantially all of these instruments bear interest at fixed rates, so our cash flows from them are not directly impacted by changes in market rates of interest. However, changes in market rates of interest impact the fair values of these fixed rate assets and liabilities. We generally hold our notes receivable until maturity or prepayment and repay our notes payable at maturity or upon sale of the related properties, and, accordingly, any fluctuations in values do not impact our earnings, balance sheet or cash flows. We also have investments in securities available for sale, which are reported at fair value. We evaluate these instruments for other-than-temporary declines in value, and, if such declines were other than temporary, would record a loss on the investments. We do not own any derivative financial instruments or engage in hedging activities.

 

Item 4. Controls and Procedures

 

(a)

Evaluation of Disclosure Controls and Procedures

 

The Company, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, herein referred to as the Exchange Act) as of the end of the period covered by this report. The purpose of disclosure controls is to ensure that information required to be disclosed in our reports filed with or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings and ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms.

 

(b)

Changes in Internal Control over Financial Reporting

 

The principal executive officer and principal financial officer also conducted an evaluation of internal control over financial reporting, herein referred to as internal control, to determine whether any changes in internal control occurred during the six months ended June 30, 2014 that may have materially affected or which are reasonably likely to materially affect internal control. Based on that evaluation, there has been no change in the Company’s internal control during the six months ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None

 

 

Item 6. Exhibits

 

31.1	Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of Principal Financial Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 .INS	XBRL Instance Document
101 .SCH	XBRL Taxonomy Schema
101 .CAL	XBRL Taxonomy Calculation Linkbase
101 .DEF	XBRL Definition Linkbase
101 .LAB	Taxonomy Label Linkbase
101 .PRE	XBRL Taxonomy Presentation Linkbase

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 14th day of August 2014.

 

	PRESIDENTIAL REALTY CORPORATION
	By:	/s/ Nickolas W. Jekogian
		Nickolas Jekogian Chief Executive Officer and Chairman of the Board
	By:	/s/ Alexander Ludwig
		Alexander Ludwig
		President, Chief Operating Officer and Principal Financial Officer