UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

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

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019

 

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: 001-37726

 

MBC FUNDING II CORP.

(Exact name of registrant as specified in its charter)

 

New York		81-0758358
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)

 

60 Cutter Mill Road, Great Neck, New York		11021
(Address of principal executive offices)		(Zip code)

 

(516) 444-3400

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol		Name of each exchange on which registered
6% Senior Secured Notes, due April 22, 2026		LOAN/26		NYSE American

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 

Yes [  ] No [X]

 

Indicate by a 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 checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

 

Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ]	Accelerated filer [  ]
Non-accelerated filer [X]	Smaller reporting company [X]
Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

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

 

Yes [  ] No [X]

 

There is no public trading market for the shares of common stock of MBC Funding II Corp. As a result, the aggregate market value of the common units held by non-affiliates of MBC Funding II Corp cannot be determined.

 

As of March 17, 2020, the Registrant had outstanding 100 shares of Common Stock, par value $0.001 per share, all of which are owned by Manhattan Bridge Capital, Inc.

 

 

 

MBC FUNDING II CORP.

FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

 

		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	4
Item 1B.	Unresolved Staff Comments	6
Item 2.	Properties	6
Item 3.	Legal Proceedings	7
Item 4.	Mine Safety Disclosure	7
PART II
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	7
Item 6.	Selected Financial Data	7
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	9
Item 8.	Financial Statements and Supplementary Data	9
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	9
Item 9A.	Controls and Procedures	9
Item 9B.	Other Information	10
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	11
Item 11.	Executive Compensation	12
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholders Matters	12
Item 13.	Certain Relationships and Related Transactions and Director Independence	13
Item 14.	Principal Accountant Fees and Services	13
PART IV
Item 15.	Exhibits and Financial Statement Schedules	14
Item 16.	Form 10-K Summary	14
SIGNATURES		15

 

 

PART I

 

ITEM 1.

BUSINESS.

 

We are a wholly-owned subsidiary of Manhattan Bridge Capital, Inc., a New York corporation (“MBC”), formed in December 2015, specifically for the purpose of the public offering of the Notes (described below). On April 25, 2016, we sold $6,000,000 aggregate principal amount of our 6% Senior Secured Notes, due April 22, 2026 (the “Notes”), in our initial public offering (“IPO”).

 

The Notes are 6% senior secured notes, due April 22, 2026, and have a principal amount of $1,000 each. On April 25, 2016, we issued the Notes in the IPO in the aggregate principal amount of $6,000,000 under the Indenture, dated April 25, 2016, among ourselves, as the issuer, MBC, as guarantor, and Worldwide Stock Transfer LLC, as Indenture Trustee (the “Indenture”). Interest accrues on the Notes commencing on May 16, 2016. The accrued interest is payable monthly in cash, in arrears, on the 15^th day of each calendar month commencing June 2016. The Notes are listed on the NYSE American and trade under the symbol “LOAN/26”.

 

Under the terms of the Indenture, the aggregate outstanding principal balance of the mortgage loans held by us, together with our cash on hand, must always equal at least 120% of the aggregate outstanding principal amount of the Notes at all times. To the extent the aggregate principal amount of the mortgage loans owned by us plus our cash on hand is less than 120% of the aggregate outstanding principal balance of the Notes, we are required to repay, on a monthly basis, the principal amount of the Notes equal to the amount necessary such that, after giving effect to such repayment, the aggregate principal amount of all mortgage loans owned by us plus, our cash on hand at such time is equal to or greater than 120% of the outstanding principal amount of the Notes. For this purpose, each mortgage loan is deemed to have a value equal to its outstanding principal balance, unless the borrower is in default of its obligations.

 

We may redeem the Notes, in whole or in part, at any time after April 22, 2019 upon at least 30 days prior written notice to any party holding a Note (each referred to as a “Noteholder” and collectively, the “Noteholders”). The redemption price will be equal to the outstanding principal amount of the Notes redeemed plus the accrued but unpaid interest thereon up to, but not including, the date of redemption, without penalty or premium; provided that (i) if the Notes are redeemed on or after April 22, 2019 but prior to April 22, 2020, the redemption price will be 103% of the principal amount of the Notes redeemed and (ii) if the Notes are redeemed on or after April 22, 2020 but prior to April 22, 2021, the redemption price will be 101.5% of the principal amount of the Notes redeemed plus, in either case, the accrued but unpaid interest on the Notes redeemed up to, but not including, the date of redemption.

 

Each Noteholder has the right to cause us to redeem his, her or its Notes on April 22, 2021. The redemption price will be equal to the outstanding principal amount of the Notes redeemed plus the accrued but unpaid interest up to, but not including, the date of redemption, without penalty or premium. In order to exercise this right, the Noteholder must notify us, in writing, no earlier than November 22, 2020 and no later than January 22, 2021. All Notes that are subject to a proper and timely notice will be redeemed on April 22, 2021. Any Noteholder who fails to make a proper and timely election will be deemed to have waived his, her or its right to have his, her or its Notes redeemed prior to the maturity date.

 

We are obligated to offer to redeem the Notes if there occurs a “change of control” with respect to us or MBC or if we or MBC sell any assets unless, in the case of an asset sale, the proceeds are reinvested in the business of the seller. The redemption price in connection with a “change of control” will be 101% of the principal amount of the Notes redeemed plus accrued but unpaid interest thereon up to, but not including, the date of redemption. The redemption price in connection with an asset sale will be the outstanding principal amount of the Notes redeemed plus accrued but unpaid interest thereon up to, but not including, the date of redemption.

 

Prior to the consummation of the IPO on April 25, 2016, we did not have any material operations. As of April 2016, we collect payments of interest on the mortgages we hold and use those funds to make the required interest payments to the holders of the Notes and certain operating expenses. Any excess cash will be distributed to MBC or held by us, to be used for working capital and general corporate purposes. We currently maintain minimal operations and have no plans to commence any material business operations in the near or long term.

 

 

Our principal executive officers consist of Assaf Ran, who serves as our Chief Executive Officer and President, and Vanessa Kao, who serves as our Chief Financial Officer. Each of Mr. Ran and Ms. Kao serve in similar functions with our parent, MBC.

 

Available information

 

Our principal executive offices are located at 60 Cutter Mill Road, Great Neck, New York, 11021 and our telephone number is (516) 444-3400. We do not currently maintain a website. You may also review and download a copy of this Annual Report on Form 10-K, including any exhibits and any schedules filed therewith, and our other periodic and current reports, proxy and information statements, and other information that we file with the Securities and Exchange Commission, without charge, by visiting the Securities and Exchange Commission’s website (http://www.sec.gov). In addition, we will voluntarily provide copies of all such reports free of charge upon request.

 

ITEM 1A.

RISK FACTORS.

 

The following risk factors, among others, could affect our actual results of operations and could cause our actual results to differ materially from those expressed in forward-looking statements made by us. These forward-looking statements are based on current expectations and except as required by law we assume no obligation to update this information. You should carefully consider the risks described below and elsewhere in this Report before making an investment decision. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. Our Notes are considered speculative and the trading price of our Notes could decline due to any of these risks, and you may lose all or part of your investment. The following risk factors are not the only risk factors facing our Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business.

 

We are controlled by our parent, MBC, which in turn is controlled by our Chief Executive Officer, Assaf Ran, whose interest may not always be aligned with the interests of the Noteholders.

 

Noteholders will not have any voting rights with respect to us or the right to influence management or day-to-day operations of our business. The interests of MBC’s shareholders who vote may be different or even in opposition of those of creditors such as the Noteholders. As of the date of this Report, 100% of our issued and outstanding shares are owned by our parent, MBC. In addition, Assaf Ran is the majority owner of the outstanding shares of common stock of MBC. Mr. Ran is also our Chief Executive Officer and our sole director. Thus, Mr. Ran currently has and will continue to exercise effective control over all of our corporate actions.

 

An active public trading market for the Notes may not develop.

 

The Notes are currently listed on the NYSE American and trade under the symbol “LOAN/26”. However, we cannot assure you that a more active trading market for the Notes will develop. If a more active trading market does not develop you may not be able to sell your Notes for the price you want at the time you want. The liquidity of any such market will depend upon various factors, including:

 

	●	the number of Noteholders;
	●	the interest of securities dealers in making a market for the Notes;
	●	the overall market for debt securities;
	●	our financial performance and prospects; and
	●	the prospects for companies in our industry generally.

 

We cannot assure you that you will be able to sell the Notes if you wish to do so or, even if you can sell your Notes that you will recover your entire investment.

 

The Indenture contains restrictive covenants that may limit our operating flexibility and could adversely affect our financial condition.

 

 

The Indenture contains restrictive covenants that could adversely affect our operating flexibility as well as our financial condition. For example, the Indenture requires us to maintain a specific debt coverage ratio at all times, specifically providing that the aggregate outstanding principal balance of the mortgage loans held by us, together with our cash on hand, must always equal at least 120% of the aggregate outstanding principal amount of the Notes at all times, as well as limits or prohibits our ability to:

 

	●	acquire or dispose of assets;
	●	merge with another corporation; and
	●	incur additional secured and unsecured indebtedness.

 

Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of the indebtedness evidenced by the Notes. For example, defaults under the mortgage loans held by us could result in a violation of the debt coverage ratio covenant. In that case, we are required to make monthly payments of principal on the Notes until such debt coverage ratio covenant is in compliance. We cannot assure you that in that event we will be able to repay all the Notes in full, or at all.

 

The limited covenants in the Indenture and the terms of the Notes will not provide protection against significant events that could adversely impact our obligations under the Notes.

 

Neither the Indenture nor the Notes require us to maintain any financial ratios or specific levels of net worth, revenues, income, cash flow or liquidity and, accordingly, do not protect the Noteholders in the event that we experience significant adverse changes in our financial condition or results of operations or protect the interest of Noteholders. For example, during the term of the Notes, the true value of the mortgage loans held by us may fluctuate based on a number of factors including interest rates on the loans relative to prevailing market rates, as well as the solvency and credit-worthiness of the borrower. However, as long as the borrowers are not in default of their obligations, we will not be deemed to be in default of the debt coverage ratio covenant in the Indenture.

 

We may not be able to make the required payments of interest and principal on the Notes.

 

Our ability to make payments of principal and interest on the Notes is subject to general economic conditions and financial, business and other factors affecting our mortgage loan portfolio, many of which are beyond our control. We cannot assure you that we will have sufficient funds available when necessary to make any required payments of interest or principal under the Notes, including payments in connection with a redemption of Notes, whether upon a change of control or upon the exercise by Noteholders of their redemption rights. Our failure to make payments of interest or principal when due could result in an event of default and would give the Indenture Trustee and the Noteholders certain rights against us. Our sole source of revenue and cash flow will be payments of interest and principal we receive with respect to our mortgage loan portfolio. To the extent the interest payments received by us exceed the payments required to be made to the Noteholders, and both prior to and after giving effect to the distribution of funds to MBC, we are in compliance with the debt coverage ratio and no default or event of default exists or would occur as a result of such distribution, we plan to distribute those excess funds to MBC. If we are unable to generate sufficient cash flow to service the debt evidenced by the Notes, we will be in default of its obligations under the Notes.

 

We are not obligated to contribute to a sinking fund to retire the Notes and the Notes are not guaranteed by any governmental agency.

 

We are not obligated to contribute funds to a sinking fund to repay principal or interest on the Notes upon maturity or default. The Notes are not certificates of deposit or similar obligations of, or guaranteed by, any depositary institution. Further, no governmental entity insures or guarantees payment on the Notes if we do not have enough funds to make principal or interest payments.

 

The collateral granted as security for our obligations under the Notes may be insufficient to repay the indebtedness upon an event of default.

 

 

The Notes are secured by all of our assets, which consist primarily of mortgage loans and cash. Under the Indenture, the aggregate principal amount of the mortgage loans held by us plus our cash on hand must equal at least 120% of the outstanding principal amount of the Notes at all times. We cannot assure you that the value of the collateral will be sufficient to redeem the Notes in full should we be in default of our payment obligations under the Notes. Specifically, if the mortgage loans are in default, we cannot assure you that we will be able to sell those loans for an amount equal to or even approximately equal to the outstanding principal balance of the Notes or that the properties securing the loans in default can be sold for an amount sufficient to fully repay the mortgage loans. Finally, any foreclosure action is likely to take a considerable amount of time and involve significant costs, further eroding our ability to stay current on our obligations under the Notes. Because of the foregoing, Noteholders risk the possibility that the collateral securing our obligations under the Notes may be insufficient to repay those securities upon an event of default.

 

We have no obligation to redeem the Notes prior to their maturity date except in limited circumstances.

 

The entire outstanding principal balance of the Notes and all accrued but unpaid interest thereon will be due and payable in full on April 22, 2026, the tenth anniversary of the issue date of the Notes. Except for specifically enumerated circumstances, such as the right for the Noteholders to have their Notes redeemed on April 22, 2021, we have no obligation, and the Noteholders will have no right to require us, to redeem any Notes prior to their maturity date. For example, if either we or MBC enter into a transaction that constitutes a “change in control” or an “asset sale,” as such terms are defined under the Indenture, we may be obligated to offer to redeem the Notes at a redemption price equal to 101% of their principal amount, in the case of a “change in control” and 100% of their principal amount in the case of an “asset sale” plus, in either case, the accrued and unpaid interest up to, but not including, the date of redemption. The existence of a Noteholder’s right to require us to purchase his, her or its Notes upon a change of control may deter a third party from acquiring us in a transaction that constitutes a change of control. In addition, the Noteholders have a one-time right to cause us to redeem the notes on the fifth anniversary of the issue date of Notes and we have the right, but not the obligation, to redeem the Notes at any time beginning on the third anniversary of the issue date of the Notes. As a result, any investment in the Notes should be considered illiquid and unable to be redeemed until their stated maturity.

 

We may not be able to redeem the Notes when we are obligated to do so, which would constitute an event of default.

 

In connection with transactions constituting a change of control or an Asset Sale (as such terms defined in the Indenture), we may be obligated to offer to redeem the Notes at a price equal to 101% of their outstanding principal amount plus accrued and unpaid interest, if any, to, but not including, the date of repurchase, or if the Noteholders elect to have their Notes redeemed on April 22, 2021. We cannot assure you that we will have sufficient financial resources available to satisfy our obligations to redeem the Notes. If we cannot, such failure would constitute an event of default under the Indenture. In addition, we cannot assure that under such circumstances Noteholders will be able to seek payment from us under the terms of the guaranty or that Noteholders would be able to sell their Notes. Thus, Noteholders could lose all or a substantial portion of their investment.

 

Our Chief Executive Officer and Chief Financial Officer are each critical to our business and our future success may depend on our ability to retain them.

 

Our future success depends to a significant extent on the continued efforts of our founder, president and Chief Executive Officer, Assaf Ran, and our Chief Financial Officer, Vanessa Kao. If we are unable to retain qualified personnel in the future, our ability to continue to operate our business will be impaired.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS.

 

Not applicable.

 

ITEM 2.

PROPERTIES.

 

We do not currently own or lease any properties.

 

 

ITEM 3.

LEGAL PROCEEDINGS.

 

We are not currently a party to or subject to any material legal proceedings.

 

ITEM 4.

MINE SAFETY DISCLOSURES.

 

Not applicable.

 

PART II

 

ITEM 5.

MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

There is no established public trading market for our common stock and, as a wholly owned subsidiary of MBC, we have no plans for one to develop or to list our shares on a national securities exchange. Our Notes are listed on the NYSE American and trade under the symbol “LOAN/26”.

 

As of March 17, 2020, there was 1 holder of record of our common stock.

 

ITEM 6.

SELECTED FINANCIAL DATA.

 

Not applicable.

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our audited financial statements and notes thereto contained elsewhere in this report. This discussion contains forward-looking statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in such forward-looking statements.

 

We are a wholly-owned subsidiary of Manhattan Bridge Capital, Inc., a New York corporation (“MBC”), formed in December 2015, specifically for the purpose of the public offering of the Notes (described below). On April 25, 2016, we sold $6,000,000 aggregate principal amount of our 6% Senior Secured Notes, due April 22, 2026 (the “Notes”), in our initial public offering. The Notes are secured by a first priority lien on all of our assets, including, primarily, mortgage notes, mortgages and other transaction documents entered into in connection with first mortgage loans originated and funded by MBC, which we acquired from MBC pursuant to an asset purchase agreement. The aggregate principal amount of the mortgage loans owned by us plus our cash on hand always must be equal to at least 120% of the outstanding principal amount of the Notes until the Notes are paid in full. In addition, MBC has guaranteed our obligations under the Notes and has secured that guaranty with a pledge of all of our outstanding common shares.

 

The Notes are listed on the NYSE American and trade under the symbol “LOAN/26”.

 

To the extent any of the mortgages acquired from MBC are satisfied in full, such mortgages will be replaced with one or more mortgages with similar aggregate principal amount. At December 31, 2019, the pool of mortgage loans was comprised of 23 loans with an aggregate outstanding principal balance of $7,885,465.

 

 

We collect payments of interest on the mortgages we hold and use those funds to make the required interest payments to the holders of the Notes and certain operating expenses. Any excess cash will be distributed to MBC or held by us, to be used for working capital and general corporate purposes.

 

Critical Accounting Policies and Use of Estimates

 

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. Management will base the use of estimates on (a) a preset number of assumptions that consider past experience, (b) future projections, and (c) general financial market conditions. Actual amounts could differ from those estimates.

 

Interest income from mortgage loans held by us is recognized, as earned, over the loan period.

 

We present deferred financing costs in the balance sheet as a direct reduction from the related debt liability rather than an asset, in accordance with Accounting Standards Update 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. Costs incurred in connection with the issuance of the Notes are being amortized over ten years, using the straight-line method, as the difference between use of the effective interest method is not material.

 

There are also areas in which in management’s judgment in selecting any available alternative would not produce a materially different result. See our audited financial statements and notes thereto which begin on page F-1 of this Annual Report on Form 10-K, which contain accounting policies and other disclosures required by accounting principles generally accepted in the United States of America.

 

Results of Operations

 

Years Ended December 31, 2019 and 2018

 

Total Revenue

 

Total revenues for the years ended December 31, 2019 and 2018 of approximately $892,000 and $955,000, respectively, represent interest income on the secured commercial loans that we purchased from MBC. The decrease in revenue was primarily attributable to lower interest rates charged on such loans due to market conditions. Interest and amortization of deferred financing costs

 

Interest and amortization of deferred financing costs for each of the years ended December 31, 2019 and 2018 of approximately $435,000 are attributable to the issuance of the Notes.

 

General and administrative expenses

 

General and administrative expenses for the years ended December 31, 2019 and 2018 of approximately $14,000 and $16,000, respectively, are comprised of fees paid to the Indenture trustee and NYSE American LLC, as well as bank fees.

 

Liquidity and Capital Resources

 

At December 31, 2019, we had cash of approximately $53,000 compared to cash of approximately $68,000 at December 31, 2018.

 

Net cash provided by operating activities was approximately $524,000 for the year ended December 31, 2019, compared to approximately $576,000 for the year ended December 31, 2018. Net cash provided by operating activities for the years ended December 31, 2019 and 2018 primarily resulted from our interest income and amortization of deferred financing costs.

 

 

Net cash used in financing activities was approximately $538,000 for the year ended December 31, 2019, compared to approximately $557,000 for the year ended December 31, 2018. Net cash used in financing activities for the years ended December 31, 2019 and 2018 reflected the repayment of amounts due to MBC in connection with loans purchased from MBC.

 

We had no cash from, or used in, investing activities for the years ended December 31, 2019 or 2018.

 

Under the terms of the Indenture, the aggregate outstanding principal balance of the mortgage loans held by the Company, together with the Company’s cash on hand, must always equal at least 120% of the aggregate outstanding principal amount of the Notes at all times.

 

We anticipate that our current cash balances together with our cash flows from operations will be sufficient to fund our operations for the next 12 months.

 

Off-Balance Sheet Arrangements

 

We have not entered into any off-balance sheet transactions, arrangements or other relationships with unconsolidated entities or other persons that are likely to affect liquidity or the availability of our requirements for capital resources.

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

The Financial Statements and Notes thereto can be found beginning on page F-1, following Part III of this Annual Report on Form 10-K.

 

ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

ITEM 9A.   Controls and Procedures

 

1.

Disclosure Controls and Procedures

 

Our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2019 (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

2.

Internal Control over Financial Reporting

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the SEC, internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of our principal executive and principal financial officers and effected by the Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting is supported by written policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

 

Our internal control system was designed to provide reasonable assurances to our management and the Board regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations which may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this assessment, management used the framework set forth in the report entitled Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2019.

 

This Report does not include an attestation report by the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Report.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) that occurred during the fiscal quarter ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B.

OTHER INFORMATION.

 

None.

 

 

PART III

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.

 

Executive Officers and Directors

 

Our executive officers and directors and their respective ages as of March 17, 2020 are as follows:

 

	Name		Age		Position
	Assaf Ran		54		Chief Executive Officer, President and sole Director
	Vanessa Kao		42		Chief Financial Officer, Treasurer and Secretary

 

All directors hold office until the next annual meeting of shareholders and until their successors are duly elected and qualified. Officers are elected to serve subject to the discretion of the Board.

 

Set forth below is a brief description of the background and business experience of our executive officers and directors:

 

Assaf Ran. Mr. Ran has served as our Chief Executive Officer, President and sole Director since our inception in 2015. In addition, Mr. Ran is the founder, Chief Executive Officer and president of MBC since its inception in 1989. Mr. Ran has 31 years of senior management experience leading public and private directories businesses. Mr. Ran started several yellow page businesses from the ground up and managed to make each one of them successful.

 

Mr. Ran’s professional experience and background with MBC, as its director since March 1999, have given him the expertise needed to serve as our director.

 

Vanessa Kao. Ms. Kao has served as our Chief Financial Officer, Secretary and treasurer since our inception in 2015. Additionally, Ms. Kao has served as the Chief Financial Officer, vice president, treasurer and secretary of MBC since rejoining MBC in June 2011. From July 2004 through April 2006 she served as MBC’s assistant chief financial officer. From April 2006 through December 2013, she was the chief financial officer of DAG Jewish Directories, Inc. From January 2014 through April 2016, she was also the chief financial officer of Jewish Marketing Solutions LLC. Since April 2016, she has been serving as a consultant to Jewish Marketing Solutions LLC. Ms. Kao holds a M.B.A. in Finance and MIS/E-Commerce from the University of Missouri and a Bachelor degree of Business Administration in Finance from the National Taipei University in Taiwan.

 

CODE OF ETHICS

 

We are governed by the code of ethics adopted by MBC that applies to our Chief Executive Officer and Chief Financial Officer. MBC’s code of ethics is posted on its web site at www.manhattanbridgecapital.com. The information on MBC’s website is not incorporated by reference into this Annual Report. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of MBC’s code of ethics by posting such information on the website address specified above.

 

CORPORATE GOVERNANCE

 

Due to the fact that we are a controlled company as defined by the NYSE American corporate governance rules, we are not subject to the corporate governance standards of the NYSE American.

 

Audit Committee. We do not have a standing audit committee. Currently, our Board of Directors (the “Board”) recommends to retain or terminate the services of our independent accountants, reviews annual financial statements, considers matters relating to accounting policy and internal controls and reviews the scope of annual audits. We do not currently have any audit committee financial expert on our Board.

 

 

Compensation Committee. We do not have a standing Compensation Committee. The Board has not established a compensation committee primarily because we do not pay our executive officers and directors separate compensation from MBC.

 

Nominating Committee. We do not have a standing nominating committee. The Board has not established a nominating committee primarily because we are a wholly owned subsidiary of MBC. Our Board currently operates as the nominating committee for us. There is no formal process or policy that governs the manner in which we identify potential candidates for the Board. We do not have a formal policy with respect to our consideration of Board nominees recommended by our stockholders.

 

ITEM 11.

EXECUTIVE COMPENSATION.

 

We did not pay or accrue any compensation to our executive officers in 2019.

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

Our executive officers do not have any currently outstanding equity awards.

 

During 2019, we did not grant any stock options to our executive officers or directors.

 

DIRECTOR COMPENSATION

 

The Company’s director does not presently receive any compensation for his services rendered to the Company, and no remuneration was paid for or on account of services rendered by our director in such capacity in 2019.

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

The following table sets forth certain information as of March 17, 2020 concerning the beneficial ownership of our voting securities of (i) the current member of the Board, (ii) our executive officers, (iii) our director and executive officers as a group, and (iv) each beneficial owner of more than 5% of the outstanding shares of any class of our voting securities.

 

As of March 17, 2020, we had 100 shares of common stock outstanding.

 

		AMOUNT OF SHARES BENEFICIALLY OWNED				PERCENTAGE OWNED
DIRECTORS AND EXECUTIVE OFFICERS
Assaf Ran			0				0	%
Vanessa Kao			0				0	%
TOTAL			0				0	%
5% STOCKHOLDERS*
Manhattan Bridge Capital, Inc.			100				100	%

 

*	The address of this beneficial owner is 60 Cutter Mill Road, Great Neck, New York 11021.

 

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

TRANSACTIONS WITH RELATED PERSONS

 

There are no related person transactions that would be required to be reported pursuant to Item 404 of Regulation S-K.

 

DIRECTOR INDEPENDENCE

 

Assaf Ran, our Chief Executive Officer, president and sole director, is not deemed independent pursuant to the NYSE American rules.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

The aggregate fees billed by our principal accounting firm, Hoberman & Lesser CPA’s, LLP for the fiscal years ended December 31, 2019 and 2018 are as follows:

 

(a) Audit Fees

 

2019

 

The aggregate fees incurred during 2019 for our principal accountant covering the audit of our annual financial statements and the review of our financial statements for the first, second and third quarters of 2019 are included in the fees for our parent company, MBC.

 

2018

 

The aggregate fees incurred during 2018 for our principal accountant covering the audit of our annual financial statements and the review of our financial statements for the first, second and third quarters of 2018 are included in the fees for our parent company, MBC.

 

(b) Audit-Related Fees

 

There were no audit-related fees billed by our principal accountant during 2019 or 2018.

 

(c) Tax Fees

 

There were no tax fees billed by our principal accountant during 2019 or 2018.

 

(d) All Other Fees

 

No other fees, beyond those disclosed in this Item 14, were billed during 2019 or 2018.

 

Pre-Approval, Policies and Procedures

 

Prior to engagement, the Board pre-approves these services by category of service. The fees are budgeted and the Board requires the independent registered public accounting firm and management to report actual fees versus the budget periodically throughout the year by category of service. During the year, circumstances may arise when it may become necessary to engage the independent registered public accounting firm for additional services not contemplated in the original pre-approval. In those instances, the Board approves these services before engaging the independent registered public accounting firm.

 

 

The Board may delegate pre-approval authority to one or more of its members. If applicable, the member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Board at its next scheduled meeting. The Board pre-approved all the above listed fees in accordance with its policy.

 

PART IV

 

ITEM 15. Exhibits, Financial Statement Schedules

 

(a)

1. Financial Statements - See Index to Financial Statements on page F-1.

 

2.

Financial Statement Schedules – See (c) below.

 

3.

Exhibits – See (b) below.

 

(b)

Exhibits.

 

	Exhibit No.		Description
	3.1		Certificate of Incorporation (1)
	3.2		Bylaws (1)
	4.1		Indenture, dated as of April 25, 2016, among Manhattan Bridge Capital, Inc., MBC Funding II Corp and Worldwide Stock Transfer, LLC, including form of note (2)
	4.2		Description of Securities (3)
	10.1		Asset Purchase Agreement, dated as of April 25, 2016, between Manhattan Bridge Capital, Inc. and MBC Funding II Corp.(2)
	10.2		Continuing Guaranty of Manhattan Bridge Capital Inc. dated April 25, 2016 (2)
	10.3		Pledge Agreement, dated as of April 25, 2016, between Manhattan Bridge Capital and Worldwide Stock Transfer, LLC (2)
	10.4		Amendment No. 2 to Credit Agreement, dated April 25, 2016, among Manhattan Bridge Capital, Inc., DAG Funding Solutions Inc. and Webster Business Credit Corporation (2)
	10.6		Intercreditor Agreement, dated as of April 25, 2016, between Webster Business Credit Corp and Worldwide Stock Transfer, LLC (2)
	31.1		Chief Executive Officer Certification under Rule 13a-14 (3)
	31.2		Chief Financial Officer Certification under Rule 13a-14 (3)
	32.1		Chief Executive Officer Certification pursuant to 18 U.S.C. section 1350 (4)
	32.2		Chief Financial Officer Certification pursuant to 18 U.S.C. section 1350 (4)
	101.INS		XBRL Instance Document
	101.CAL		XBRL Taxonomy Extension Schema Document
	101.SCH		XBRL Taxonomy Extension Calculation Linkbase Document
	101.LAB		XBRL Taxonomy Extension Label Linkbase Document
	101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document
	101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

 

	(1)	Previously filed as an exhibit to our Registration Statement on Form S-11 filed with the Securities and Exchange Commission on January 26, 2016 and incorporated herein by reference.
	(2)	Previously filed as an exhibit to our Current Report Form 8-K filed with the Securities and Exchange Commission on April 27, 2016 and incorporated herein by reference
	(3)	Filed herewith.
	(4)	Furnished herewith.

 

(c)

No financial statement schedules are included because the information is either provided in the financial statements or is not required under the related instructions or is inapplicable and such schedules therefore have been omitted.

 

ITEM 16. 10-K Summary

 

None.

 

 

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.

 

	MBC FUNDING II CORP.
	By:	/s/ Assaf Ran
		Assaf Ran, President, Chief Executive Officer and Director

 

Date: March 17, 2020

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 17, 2020:

 

Signature		Title
/s/ Assaf Ran		President, Chief Executive Officer and
Assaf Ran		Director (Principal Executive Officer)
/s/ Vanessa Kao		Chief Financial Officer (Principal
Vanessa Kao		Financial and Accounting Officer)

 

 

 

MBC FUNDING II CORP.

 

Index to Financial Statements

 

	Page Number
Report of Independent Registered Public Accounting Firm	F-2
Financial Statements:
Balance Sheets at December 31, 2019 and 2018	F-3
Statements of Operations for the years ended December 31, 2019 and 2018	F-4
Statements of Changes in Stockholder’s Equity for the years ended December 31, 2019 and 2018	F-5
Statements of Cash Flows for the years ended December 31, 2019 and 2018	F-6
Notes to Financial Statements	F-7

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholder and Director

MBC Funding II Corp.

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheets of MBC Funding II Corp. (the “Company”) as of December 31, 2019 and 2018, and the related statements of operations, changes in stockholder’s equity, and cash flows for each of the years in the two-year period ended December 31, 2019, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Basis of Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

We have served as the Company’s auditors since 2016.

 

New York, New York

March 16, 2020

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

MBC FUNDING II CORP.

BALANCE SHEETS

DECEMBER 31, 2019 AND 2018

 

		2019				2018
Assets
Loans receivable		$	7,885,465			$	7,705,000
Cash			53,122				67,706
Interest receivable on loans			60,902				66,629
Total assets		$	7,999,489			$	7,839,335
Liabilities and Stockholder’s Equity
Liabilities:
Senior secured notes (net of deferred financing costs of $472,413 and $547,499, respectively)		$	5,527,587			$	5,452,501
Due to parent company			641,515				999,168
Accrued interest payable			15,000				15,000
Total liabilities			6,184,102				6,466,669
Stockholder’s equity:
Common shares - $.001 par value; 100 authorized, issued and outstanding			—				—
Additional paid-in capital			100				100
Retained earnings			1,815,287				1,372,566
Total stockholder’s equity			1,815,387				1,372,666
Total liabilities and stockholder’s equity		$	7,999,489			$	7,839,335

 

The accompanying notes are an integral part of these financial statements.

 

 

MBC FUNDING II CORP.

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

 

		2019				2018
Interest income from loans		$	892,249			$	955,408
Total Revenue			892,249				955,408
Operating costs and expenses:
Interest and amortization of deferred financing costs			435,086				435,085
General and administrative expenses			13,870				15,524
Total operating costs and expenses			448,956				450,609
Income before income tax expense			443,293				504,799
Income tax expense			(572	)			(642	)
Net income		$	442,721			$	504,157

 

The accompanying notes are an integral part of these financial statements.

 

 

MBC FUNDING II CORP.

STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

 

		Common Stock								Additional Paid-in				Retained
		Shares				Amount				Capital				Earnings				Totals
Balance, January 1, 2018			100			$	—			$	100			$	868,409			$	868,509
Net income for the year ended December 31, 2018															504,157				504,157
Balance, December 31, 2018			100				—				100				1,372,566				1,372,666
Net income for the year ended December 31, 2019															442,721				442,721
Balance, December 31, 2019			100			$	—			$	100			$	1,815,287			$	1,815,387

 

The accompanying notes are an integral part of these financial statements.

 

 

MBC FUNDING II CORP.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

 

		2019				2018
Cash flows from operating activities:
Net Income		$	442,721			$	504,157
Adjustment to reconcile net income to net cash provided by operating activities -
Amortization of deferred financing costs			75,086				75,085
Changes in operating assets and liabilities:
Interest receivable on loans			5,727				(3,590	)
Net cash provided by operating activities			523,534				575,652
Cash flows from financing activities:
Repayment of amounts due to parent company			(538,118	)			(556,744	)
Net cash used in financing activities			(538,118	)			(556,744	)
Net (decrease) increase in cash			(14,584	)			18,908
Cash, beginning of year			67,706				48,798
Cash, end of year		$	53,122			$	67,706
Supplemental Cash Flow Information:
Taxes paid during the year		$	572			$	642
Interest paid during the year		$	360,000			$	360,000
Noncash Financing and Investing Activities:
Assignments of loans from parent company		$	7,040,465			$	5,720,000
Assigned loans repaid to parent company by borrowers		$	6,860,000			$	5,561,000

 

The accompanying notes are an integral part of these financial statements.

 

 

MBC FUNDING II CORP.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

 

1.	THE COMPANY

 

MBC Funding II Corp. (“the Company”), a New York corporation formed in December 2015 as a wholly-owned subsidiary of Manhattan Bridge Capital, Inc. (“MBC”), was organized specifically for the purpose of conducting an initial public offering (“IPO”) of certain notes. On April 25, 2016, the Company completed the IPO of its 6% senior secured notes due April 22, 2026 (the “Notes”). Prior to the consummation of the IPO, the Company did not have any material operations. As of April 2016, the Company collects payments of interest on the mortgages it holds and uses those funds to make the required interest payments to the holders of the Notes (the “Noteholders”) and certain operating expenses.

 

2.	Significant Accounting Policies

 

Use of Estimates

 

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. Management will base the use of estimates on (a) a preset number of assumptions that consider past experience, (b) future projections, and (c) general financial market conditions. Actual amounts could differ from those estimates.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash. The Company maintains its cash with one major financial institution. Accounts at the financial institution are insured by the Federal Deposit Insurance Corporation up to $250,000.

 

Credit risks associated with short term commercial loans the Company makes to small businesses and related interest receivable are described in Note 4.

 

Allowance for Loan Loss

 

MBC reviews each loan on a quarterly basis and evaluates the borrower’s ability to pay the monthly interest, the borrower’s likelihood of executing the original exit strategy, as well as the loan-to-value (LTV) ratio. Based on the analysis, management determines if any provisions for impairment of loans should be made and whether any loan loss reserves are required. At December 31, 2019 and 2018, no loan impairments exist and no provisions for impairment of loans were required for the years then ended.

 

Income Taxes

 

The Company follows Accounting Standards Codification (“ASC”) 740-10, “Accounting for Uncertainty in Income Taxes”, which prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. As of December 31, 2019, the Company has no material uncertain tax positions to be accounted for in the financial statements. The Company recognizes interest and penalties related to uncertain tax positions, if any, as part of income tax expense.

 

The Company is treated as a “qualified REIT subsidiary” for federal income tax purposes, and is not required to pay federal income tax. As such, the Company is not treated as a separate corporation for purposes of determining whether the Company qualifies and operates as a REIT for U.S. federal income tax purposes.

 

 

Revenue Recognition

 

Interest income from mortgage loans held by the Company is recognized, as earned, over the loan period.

 

Deferred Financing Costs

 

Costs incurred in connection with the issuance of senior secured notes are being amortized over ten years, using the straight-line method, as the difference between use of the effective interest method is not material.

 

The Company presents deferred financing costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset.

 

Fair Value of Financial Instruments

 

For interest bearing commercial loans held by the Company, the carrying amount approximates fair value due to the relative short-term nature of such instruments. The Company determines the fair value of its senior secured notes using market prices which currently approximate their carrying amount.

 

Recent Accounting Pronouncements

 

In May 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief.” This ASU allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” The Company plans to adopt both ASU 2016-13 and ASU 2019-05 effective January 1, 2020. The Company believes that the adoption of this guidance will not have a material impact on its financial statements.

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU modifies ASC 740 to remove certain exceptions and also add guidance to reduce complexity in certain areas. For companies that file with the Securities and Exchange Commission, the standard is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted but requires simultaneous adoption of all provisions of the new standard. The Company believes that the adoption of this guidance will not have a material impact on the Company’s financial statements.

 

Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the Company’s financial statements.

 

3.	SENIOR SECURED NOTES

 

The Notes are 6% senior secured notes, due April 22, 2026, and have a principal amount of $1,000 each. On April 25, 2016, the Company issued Notes in the IPO in the aggregate principal amount of $6,000,000 under the Indenture, dated April 25, 2016, among the Company, as Issuer, MBC, as Guarantor, and Worldwide Stock Transfer LLC (“Worldwide”), as Indenture Trustee (the “Indenture”). The Notes are listed on the NYSE American and trade under the symbol “LOAN/26”. Interest accrues on the Notes commencing on May 16, 2016. The accrued interest is payable monthly in cash, in arrears, on the 15^th day of each calendar month commencing June 2016.

 

Under the terms of the Indenture, the aggregate outstanding principal balance of the mortgage loans held by the Company, together with the Company’s cash on hand, must always equal at least 120% of the aggregate outstanding principal amount of the Notes at all times. To the extent the aggregate principal amount of the mortgage loans owned by the Company plus the Company’s cash on hand is less than 120% of the aggregate outstanding principal balance of the Notes, the Company is required to repay, on a monthly basis, the principal amount of the Notes equal to the amount necessary such that, after giving effect to such repayment, the aggregate principal amount of all mortgage loans owned by the Company plus, the Company’s cash on hand at such time is equal to or greater than 120% of the outstanding principal amount of the Notes. For this purpose, each mortgage loan is deemed to have a value equal to its outstanding principal balance, unless the borrower is in default of its obligations.

 

The Company may redeem the Notes, in whole or in part, at any time after April 22, 2019 upon at least 30 days prior written notice to the Noteholders. The redemption price will be equal to the outstanding principal amount of the Notes redeemed plus the accrued but unpaid interest thereon up to, but not including, the date of redemption, without penalty or premium; provided that (i) if the Notes are redeemed on or after April 22, 2019 but prior to April 22, 2020, the redemption price will be 103% of the principal amount of the Notes redeemed and (ii) if the Notes are redeemed on or after April 22, 2020 but prior to April 22, 2021, the redemption price will be 101.5% of the principal amount of the Notes redeemed plus, in either case, the accrued but unpaid interest on the Notes redeemed up to, but not including, the date of redemption.

 

 

Each Noteholder has the right to cause the Company to redeem his, her or its Notes on April 22, 2021. The redemption price will be equal to the outstanding principal amount of the Notes redeemed plus the accrued but unpaid interest up to, but not including, the date of redemption, without penalty or premium. In order to exercise this right, the Noteholder must notify the Company, in writing, no earlier than November 22, 2020 and no later than January 22, 2021. All Notes that are subject to a proper and timely notice will be redeemed on April 22, 2021. Any Noteholder who fails to make a proper and timely election will be deemed to have waived his, her or its right to have his, her or its Notes redeemed prior to the maturity date.

 

The Company is obligated to offer to redeem the Notes if there occurs a “change of control” with respect to the Company or MBC or if the Company or MBC sell any assets unless, in the case of an asset sale, the proceeds are reinvested in the business of the seller. The redemption price in connection with a “change of control” will be 101% of the principal amount of the Notes redeemed plus accrued but unpaid interest thereon up to, but not including, the date of redemption. The redemption price in connection with an asset sale will be the outstanding principal amount of the Notes redeemed plus accrued but unpaid interest thereon up to, but not including, the date of redemption.

 

4.	COMMERCIAL LOANS

 

The Company purchased from MBC a pool of mortgage loans, originated and funded by MBC, each of which is secured by first priority liens on real property, free and clear of all liens and other security interests (see Note 3). To the extent any of the mortgages are satisfied in full, such mortgages will be replaced with one or more mortgages with similar aggregate principal amount. At December 31, 2019, the pool of mortgage loans was comprised of 23 loans with an aggregate outstanding principal balance of $7,885,465. At December 31, 2018, the pool of mortgage loans was comprised of 17 loans with an aggregate outstanding principal balance of $7,705,000.

 

The loans typically have a maximum initial term of 12 months, and bear interest at a fixed rate of 10% to 14% per year, and provide for receipt of interest only during the term of the loan and a balloon payment at the end of the term.

 

Credit risk profile as of December 31, 2019 and 2018:

 

Performing loans		Developers- Residential				Developers- Commercial				Developers-Mixed Used				Total outstanding loans
December 31, 2019		$	5,595,465			$	1,825,000			$	465,000			$	7,885,465
December 31, 2018		$	5,505,000			$	2,200,000			$	—			$	7,705,000

 

At December 31, 2019, loans receivable from one borrower represented 10.1% of total loans receivable. At December 31, 2018, loans receivable from two borrowers represented 36.3% of total loans receivable.

 

5.	DUE TO PARENT COMPANY

 

The Company utilized the net proceeds from the IPO to purchase a pool of mortgage loans from MBC. Under the Indenture, the aggregate principal amount of the mortgage loans owned by the Company, plus the Company’s cash on hand, must always be equal to at least 120% of the outstanding principal amount of the Notes until the Notes are paid in full. The amount due to MBC principally represents the costs paid by MBC on behalf of the Company in connection with the Notes issuance plus the additional 20% of the required security. The Company collects payments of interest on the mortgages the Company holds and uses those funds to make the required interest payments to the Noteholders and certain operating expenses. Any excess cash will be distributed to MBC or held by the Company, to be used for working capital and general corporate purposes.

 

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