UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 September 30, 2017
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 1-7865
| HMG/COURTLAND PROPERTIES, INC. |
| (Exact name of small business issuer as specified in its charter) |
| Delaware | 59-1914299 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
| 1870 S. Bayshore Drive, Coconut Grove, Florida | 33133 |
| (Address of principal executive offices) | (Zip Code) |
| 305-854-6803 |
| (Registrant’s telephone number, including area code) |
| Not Applicable |
| (Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Sections 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
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date. 1,002,392 Common shares were outstanding as of November 13, 2017.
HMG/COURTLAND PROPERTIES, INC.
Index
Cautionary Statement. This Form 10-Q contains certain statements relating to future results of the Company that are considered “forward-looking statements” within the meaning of the Private Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, changes in political and economic conditions; interest rate fluctuation; competitive pricing pressures within the Company’s market; equity and fixed income market fluctuation; technological change; changes in law; changes in fiscal, monetary, regulatory and tax policies; monetary fluctuations as well as other risks and uncertainties detailed elsewhere in this Form 10-Q or from time-to-time in the filings of the Company with the Securities and Exchange Commission. Such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.
| HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES |
| CONDENSED CONSOLIDATED BALANCE SHEETS |
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| (UNAUDITED) | ||||||||
| ASSETS | ||||||||
| Investment properties, net of accumulated depreciation: | ||||||||
| Office building and other commercial property | $ | 852,950 | $ | 864,349 | ||||
| Total investment properties, net | 852,950 | 864,349 | ||||||
| Cash and cash equivalents | 4,774,382 | 3,019,463 | ||||||
| Investments in marketable securities | 5,102,738 | 7,750,661 | ||||||
| Other investments | 6,203,824 | 5,307,765 | ||||||
| Investment in affiliate | 1,732,860 | 1,880,854 | ||||||
| Loans, notes and other receivables | 1,533,034 | 1,623,151 | ||||||
| Investment in residential real estate partnership | 1,743,095 | 2,039,714 | ||||||
| Other assets | 180,929 | 291,464 | ||||||
| TOTAL ASSETS | $ | 22,123,812 | $ | 22,777,421 | ||||
| LIABILITIES | ||||||||
| Note payable to affiliate | $ | 1,550,000 | $ | 1,600,000 | ||||
| Margin payable | 68,410 | 48,803 | ||||||
| Accounts payable, accrued expenses and other liabilities | 172,325 | 87,536 | ||||||
| Due to adviser | - | 65,959 | ||||||
| Dividend payable | - | 501,196 | ||||||
| Deferred income taxes | 76,327 | 76,327 | ||||||
| TOTAL LIABILITIES | 1,867,062 | 2,379,821 | ||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Excess common stock, $1 par value; 100,000 shares authorized: no shares issued | - | - | ||||||
| Common stock, $1 par value; 1,050,000 shares authorized, 1,035,493 issued and 1,002,392 shares outstanding | 1,035,493 | 1,035,493 | ||||||
| Additional paid-in capital | 24,076,991 | 24,076,991 | ||||||
| Less: 33,101 treasury shares | (340,281 | ) | (340,281 | ) | ||||
| Undistributed gains from sales of properties, net of losses | 52,208,753 | 52,208,753 | ||||||
| Undistributed losses from operations | (56,957,551 | ) | (56,806,766 | ) | ||||
| Total stockholders’ equity | 20,023,405 | 20,174,190 | ||||||
| Non controlling interest | 233,345 | 223,410 | ||||||
| TOTAL STOCKHOLDERS’ EQUITY | 20,256,750 | 20,397,600 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 22,123,812 | $ | 22,777,421 | ||||
See notes to the condensed consolidated financial statements
| 1 |
| HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES |
| CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) |
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| REVENUES | ||||||||||||||||
| Real estate rentals and related revenue | $ | 16,030 | $ | 16,000 | $ | 51,870 | $ | 49,200 | ||||||||
| EXPENSES | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Rental and other properties | 34,042 | 31,664 | 88,402 | 80,755 | ||||||||||||
| Adviser’s base fee | 165,000 | 165,000 | 495,000 | 495,000 | ||||||||||||
| General and administrative | 117,950 | 81,248 | 235,454 | 246,288 | ||||||||||||
| Professional fees and expenses | 22,696 | 56,150 | 129,869 | 173,785 | ||||||||||||
| Directors’ fees and expenses | 21,809 | 16,000 | 58,299 | 58,532 | ||||||||||||
| Depreciation and amortization | 3,849 | 3,849 | 11,548 | 11,548 | ||||||||||||
| Interest expense | 18,335 | 17,728 | 49,888 | 59,617 | ||||||||||||
| Total expenses | 383,681 | 371,639 | 1,068,460 | 1,125,525 | ||||||||||||
| Loss before other income | (367,651 | ) | (355,639 | ) | (1,016,590 | ) | (1,076,325 | ) | ||||||||
| Net realized and unrealized gains from investments in marketable securities | 10,418 | 61,367 | 241,071 | 615,954 | ||||||||||||
| Equity loss in residential real estate partnership | (14,103 | ) | (52,000 | ) | (166,619 | ) | (52,000 | ) | ||||||||
| Net income from other investments | 79,824 | 157,459 | 428,029 | 273,867 | ||||||||||||
| Interest, dividend and other income | 109,378 | 147,659 | 373,260 | 451,813 | ||||||||||||
| Total other income | 185,517 | 314,485 | 875,741 | 1,289,634 | ||||||||||||
| (Loss) gain before taxes | (182,134 | ) | (41,154 | ) | (140,849 | ) | 213,309 | |||||||||
| Provision for income taxes | 0 | 5,697 | 0 | 25,752 | ||||||||||||
| Net (loss) income | (182,134 | ) | (46,851 | ) | (140,849 | ) | 187,557 | |||||||||
| Noncontrolling interests | (5 | ) | (2,671 | ) | (9,936 | ) | (6,671 | ) | ||||||||
| Net (loss) income attributable to the Company | $ | (182,139 | ) | $ | (49,522 | ) | $ | (150,785 | ) | $ | 180,886 | |||||
| Weighted average common shares outstanding-basic and diluted | 1,002,392 | 1,018,361 | 1,002,392 | 1,026,024 | ||||||||||||
| Net (loss) income per common share: | ||||||||||||||||
| Basic and diluted | $ | (0.18 | ) | $ | (0.05 | ) | $ | (0.15 | ) | $ | 0.18 | |||||
See notes to the condensed consolidated financial statements
| 2 |
| HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES |
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) |
| For the nine months ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (loss) income attributable to the Company | $ | (150,785 | ) | $ | 180,886 | |||
| Adjustments to reconcile net (loss) income attributable to the Company to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 11,548 | 11,548 | ||||||
| Non-employee stock compensation expense | - | 26,742 | ||||||
| Net income from other investments | (428,029 | ) | (273,867 | ) | ||||
| Equity loss from resident real estate partnership | 166,619 | 52,000 | ||||||
| Net gain from investments in marketable securities | (241,071 | ) | (615,954 | ) | ||||
| Net income attributable to non controlling interest | 9,936 | 6,671 | ||||||
| Gain on sale of property | (10,970 | ) | - | |||||
| Changes in assets and liabilities: | ||||||||
| Other assets and other receivables | 122,652 | (168,538 | ) | |||||
| Accounts payable, accrued expenses and other liabilities | 18,829 | 84,575 | ||||||
| Total adjustments | (350,486 | ) | (876,823 | ) | ||||
| Net cash used in operating activities | (501,271 | ) | (695,937 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Net proceeds from sales and redemptions of securities | 5,610,942 | 5,829,476 | ||||||
| Purchase of marketable securities | (2,721,948 | ) | (2,974,329 | ) | ||||
| Distribution from investment in residential real estate partnership | 130,000 | - | ||||||
| Distributions from other investments | 1,173,232 | 829,767 | ||||||
| Contributions to other investments | (1,686,552 | ) | (1,666,225 | ) | ||||
| Distribution from affiliate | 193,286 | - | ||||||
| Additions in mortgage loans and notes receivable | - | (500,000 | ) | |||||
| Proceeds from collections of mortgage loans and notes receivable | 78,000 | 50,000 | ||||||
| Proceeds from sale of property | 37,327 | - | ||||||
| Purchases and improvements of properties | (26,508 | ) | (40,148 | ) | ||||
| Net cash provided by investing activities | 2,787,779 | 1,528,541 | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Margin borrowings (repayments) | 19,607 | (7,999,166 | ) | |||||
| Dividend paid | (501,196 | ) | (517,747 | ) | ||||
| Repayment of note payable to affiliate | (50,000 | ) | - | |||||
| Purchase of treasury stock | - | (340,281 | ) | |||||
| Contribution from non-controlling interest | - | 7,029 | ||||||
| Net cash used in financing activities | (531,589 | ) | (8,850,165 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | 1,754,919 | (8,017,561 | ) | |||||
| Cash and cash equivalents at beginning of the period | 3,019,463 | 11,213,385 | ||||||
| Cash and cash equivalents at end of the period | $ | 4,774,382 | $ | 3,195,824 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid during the period for interest | $ | 50,000 | $ | 60,000 | ||||
| Cash paid during the period for income taxes | $ | 3,000 | $ | 26,000 | ||||
See notes to the condensed consolidated financial statements
| 3 |
HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements prepared in accordance with instructions for Form 10-Q, include all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the results for the periods presented. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company’s Annual Report for the year ended December 31, 2016. The balance sheet as of December 31, 2016 was derived from audited consolidated financial statements as of that date. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for future periods or the full year.
The condensed consolidated financial statements include the accounts of HMG/Courtland Properties, Inc. (the “Company”) and entities in which the Company owns a majority voting interest or controlling financial interest. All material transactions and balances with consolidated and unconsolidated entities have been eliminated in consolidation or as required under the equity method.
| 2. | RECENT ACCOUNTING PRONOUNCEMENTS |
Refer to the consolidated financial statements and footnotes thereto included in the HMG/Courtland Properties, Inc. Annual Report on Form 10-K for the year ended December 31, 2016 for recent accounting pronouncements. The Company does not believe that any recently issued, but not yet effective accounting standards, if currently adopted, will have a material effect on the Company’s consolidated financial position, results of operations and cash flows.
| 3. | INVESTMENTS IN MARKETABLE SECURITIES |
Investments in marketable securities consist primarily of large capital corporate equity and debt securities in varying industries or issued by government agencies with readily determinable fair values. These securities are stated at fair value, as determined by the most recent traded price of each security at the balance sheet date. Consistent with the Company’s overall current investment objectives and activities its entire marketable securities portfolio is classified as trading. Included in investments in marketable securities is approximately $3.2 million and $6.2 million, of large capital real estate investment trusts (REITs) as of September 30, 2017 and December 31, 2016, respectively.
Net realized and unrealized (loss) gain from investments in marketable securities for the three and nine months ended September 30, 2017 and 2016 is summarized below:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| Description | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Net realized gain from sales of securities | $ | 115,000 | $ | 318,000 | $ | 26,000 | $ | 301,000 | ||||||||
| Unrealized net gain (loss) in trading securities | (105,000 | ) | (257,000 | ) | 215,000 | 315,000 | ||||||||||
| Total net gain from investments in marketable securities | $ | 10,000 | $ | 61,000 | $ | 241,000 | $ | 616,000 | ||||||||
For the three months ended September 30, 2017, net realized gain from sales of marketable securities was approximately $115,000, and consisted of approximately $221,000 of gross gains and $105,000 of gross losses. For the nine months ended September 30, 2017, net realized gains from sales of marketable securities was approximately $26,000, and consisted of approximately $313,000 of gross gains net of $287,000 of gross losses.
For the three months ended September 30, 2016, net realized gain from sales of marketable securities was approximately $318,000, and consisted of approximately $408,000 of gross gains and $90,000 of gross losses. For the nine months ended September 30, 2016, net realized gain from sales of marketable securities was approximately $301,000, and consisted of approximately $620,000 of gross gains net of $319,000 of gross losses.
| 4 |
Investment gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company’s net earnings. However, the amount of investment gains or losses on marketable securities for any given period has no predictive value and variations in amount from period to period have no practical analytical value.
| 4. | INVESTMENT IN RESIDENTIAL REAL ESTATE PARTNERSHIP |
In September 2014, the Company, through a wholly owned subsidiary (HMG Orlando LLC, a Delaware limited liability company), acquired a one-third equity membership interest in JY-TV Associates, LLC a Florida limited liability company (“JY-TV”) and entered into the Amended and Restated Operating Agreement of JY-TV (the “Agreement”). On May 19, 2015, pursuant to the terms of a Construction Loan Agreement, between JY-TV Associates LLC (“JY-TV” or the “Borrower”, which is one-third owned by a wholly-owned subsidiary of the Company) and Wells Fargo Bank (“Lender”), Lender loaned to the Borrower the principal sum of $27 million pursuant to a senior secured construction loan (“Loan”). The proceeds of the Loan were used to finance the previously reported construction of multi-family residential apartments containing 240 units totaling approximately 239,000 net rentable square feet on a 9.5-acre site located in Orlando, Florida (“Project”). The Project is approximately 97% leased. For the nine months ended September 30, 2017 JY-TV reported a net loss of approximately $500,000, which includes depreciation and amortization expense of $1.2 million and interest expense of $845,000. The Company’s portion of that loss for the nine months ended September 30, 2017 is approximately $167,000.
The Company and certain affiliates of the other two members of the Borrower (“Guarantors”) entered into a Completion Guaranty Agreement (“Completion Guaranty”) and a Repayment Guaranty Agreement (“Repayment Guaranty”) (collectively, the “Guaranties”) with the Lender. Under the Completion Guaranty, Guarantors shall unconditionally guaranty, on a joint and several bases, lien free completion of all improvements with respect to the Project and any construction or completion obligations required to be made by the Borrower pursuant to any approved leases. Under the Repayment Guaranty, Guarantors shall provide an unconditional guaranty including the repayment of $11.5 million of the principal balance of the Loan, repayment of all accrued but unpaid interest and payment of any other sums payable under any of the Loan Agreement. Each Guarantor is required to maintain compliance at all times with certain financial covenants, as defined. As of September 30, 2017, the Company was in compliance with all debt covenants. The construction loan matures on May 19, 2018.
| 5. | OTHER INVESTMENTS |
As of September 30, 2017, the Company’s portfolio of other investments had an aggregate carrying value of approximately $6.2 million and we have committed to further fund approximately $2.5 million as required by agreements with the investees. The carrying value of these investments is equal to contributions less distributions and loss valuation adjustments, if any.
During the nine months ended September 30, 2017, we made contributions to other investments of approximately $1.7 million, including five new investments totaling approximately $1.1 million in contributions plus $600,000 in follow on contributions to existing investments. The new investments consist of an investment in a partnership owning multi-family residential real estate in Atlanta, Georgia for $400,000, $250,000 in a partnership owning a mortgage secured by property being developed in Hollywood, Florida, $300,000 in a pool of mortgage loans secured by property located near the west coast of Florida, $75,000 co-investment with current investee in a partnership owning one stock, and $75,000 in a seed capital fund.
During the nine months ended September 30, 2017, we received distributions from other investments of approximately $1.2 million. Such distributions included $368,000 from one investment in a partnership owning one stock which was sold in March 2017, a $260,000 distribution from an investment in a pool of mortgages sold back to the seller bank in July 2017, and various other distributions primarily from real estate and related investments.
| 5 |
Net income from other investments for the three and nine months ended September 30, 2017 and 2016, is summarized below:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| Description | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Partnerships owning diversified businesses | $ | 17,000 | $ | 58,000 | $ | 196,000 | $ | 103,000 | ||||||||
| Partnerships owning real estate and related | 59,000 | 84,000 | 187,000 | 148,000 | ||||||||||||
| Income from investment in 49% owned affiliate (T.G.I.F. Texas, Inc.) | 4,000 | 15,000 | 45,000 | 24,000 | ||||||||||||
| Total net income from other investments | $ | 80,000 | $ | 157,000 | $ | 428,000 | $ | 274,000 | ||||||||
The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of September 30, 2017 and December 31, 2016, aggregated by investment category and the length of time that investments have been in a continuous loss position:
| As of September 30, 2017 | ||||||||||||||||||||||||
| 12 Months or Less | Greater than 12 Months | Total | ||||||||||||||||||||||
| Investment Description | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||||||||
| Partnerships owning investments in technology related industries | $ | 140,000 | $ | (23,000 | ) | $ | - | $ | - | $ | 140,000 | $ | (23,000 | ) | ||||||||||
| Partnerships owning diversified businesses investments | 132,000 | (6,000 | ) | - | - | 132,000 | (6,000 | ) | ||||||||||||||||
| Total | $ | 272,000 | $ | (29,000 | ) | $ | - | $ | - | $ | 272,000 | $ | (29,000 | ) | ||||||||||
| As of December 31, 2016 | ||||||||||||||||||||||||
| 12 Months or Less | Greater than 12 Months | Total | ||||||||||||||||||||||
| Investment Description | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||||||||
| Partnerships owning investments in technology related industries | $ | 151,000 | $ | (11,000 | ) | $ | - | $ | - | $ | 151,000 | $ | (11,000 | ) | ||||||||||
| Partnerships owning diversified businesses investments | 498,000 | (30,000 | ) | - | - | 498,000 | (30,000 | ) | ||||||||||||||||
| Total | $ | 649,000 | $ | (41,000 | ) | $ | - | $ | - | $ | 649,000 | $ | (41,000 | ) | ||||||||||
When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis.
In accordance with ASC Topic 320-10-65, Recognition and Presentation of Other-Than-Temporary Impairments there were no impairment valuation adjustments for the three and nine months ended September 30, 2017 and 2016.
| 6. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
In accordance with ASC Topic 820, the Company measures cash and cash equivalents, marketable debt and equity securities at fair value on a recurring basis. Other investments are measured at fair value on a nonrecurring basis.
The following are the major categories of assets and liabilities measured at fair value on a recurring basis during as of September 30, 2017 and December 31, 2016, using quoted prices in active markets for identical assets (Level 1) and significant other observable inputs (Level 2). For the periods presented, there were no major assets measured at fair value on a recurring basis which uses significant unobservable inputs (Level 3):
| 6 |
Assets and liabilities measured at fair value on a recurring basis are summarized below:
| Fair value measurement at reporting date using | ||||||||||||||||
| Description | Total September 30, 2017 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Assets: | ||||||||||||||||
| Cash equivalents: | ||||||||||||||||
| Time deposits | $ | 352,000 | - | $ | 352,000 | $ | - | |||||||||
| Money market mutual funds | 1,213,000 | 1,213,000 | - | - | ||||||||||||
| U.S. T-Bills | 2,935,000 | 2,935,000 | ||||||||||||||
| Marketable securities: | ||||||||||||||||
| Corporate debt securities | 746,000 | - | 746,000 | - | ||||||||||||
| Marketable equity securities | 4,357,000 | 4,357,000 | - | - | ||||||||||||
| Total assets | $ | 9,603,000 | $ | 8,505,000 | $ | 1,098,000 | $ | - | ||||||||
| Fair value measurement at reporting date using | ||||||||||||||||
| Description | Total December 31, 2016 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Assets: | ||||||||||||||||
| Cash equivalents: | ||||||||||||||||
| Time deposits | $ | 350,000 | $ | - | $ | 350,000 | $ | - | ||||||||
| Money market mutual funds | 2,182,000 | 2,182,000 | - | - | ||||||||||||
| Marketable securities: | ||||||||||||||||
| Corporate debt securities | 714,000 | - | 714,000 | - | ||||||||||||
| Marketable equity securities | 7,037,000 | 7,037,000 | - | - | ||||||||||||
| Total assets | $ | 10,283,000 | $ | 9,219,000 | $ | 1,064,000 | $ | - | ||||||||
Carrying amount is the estimated fair value for corporate debt securities and time deposits based on a market-based approach using observable (Level 2) inputs such as prices of similar assets in active markets.
| 7. | INCOME TAXES |
The Company as a qualifying real estate investment trust (“REIT”) distributes its taxable ordinary income to stockholders in conformity with requirements of the Internal Revenue Code and is not required to report deferred items due to its ability to distribute all taxable income. In addition, net operating losses can be carried forward to reduce future taxable income but cannot be carried back.
The Company’s 95%-owned taxable REIT subsidiary, CII, files a separate income tax return and its operations are not included in the REIT’s income tax return.
The Company accounts for income taxes in accordance with ASC Topic 740, “Accounting for Income Taxes.” ASC Topic 740 requires a Company to use the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred taxes only pertain to CII. As of September 30, 2017, and December 31, 2016, the Company has recorded a net deferred tax liability of $76,000 as a result of timing differences associated with the carrying value of the investment in affiliate (TGIF) and other investments. CII’s NOL carryover to 2018 is estimated at $1 million expiring beginning in 2028 and has been fully reserved due to CII historically having tax losses.
The provision for income taxes in the consolidated statements of comprehensive income consists of the following:
| Nine months ended September 30, | 2017 | 2016 | ||||||
| Current: | ||||||||
| Federal | $ | - | $ | 20,000 | ||||
| State | - | - | ||||||
| - | 20,000 | |||||||
| Deferred: | ||||||||
| Federal | $ | 34,000 | $ | 42,000 | ||||
| State | 4,000 | 5,000 | ||||||
| 38,000 | 47,000 | |||||||
| Decreased valuation allowance | (38,000 | ) | (47,000 | ) | ||||
| Total | $ | - | $ | 20,000 | ||||
| 7 |
The Company follows the provisions of ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with ASC Topic 740, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This topic also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our consolidated financial statements. Our evaluation was performed for the tax years ended December 31, 2016. The Company’s federal income tax returns since 2013 are subject to examination by the Internal Revenue Service, generally for a period of three years after the returns were filed.
We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in the consolidated financial statements as selling, general and administrative expense.
| 8. | STOCK OPTIONS |
Stock based compensation expense is recognized using the fair-value method for all awards. During the nine months ended September 30, 2017 there were no options granted, exercised, expired or forfeited.
The following table summarizes information concerning outstanding and exercisable options as of September 30, 2017:
| Number Outstanding and exercisable | Weighted Average Strike Price | |||||
| 12,500 | $ | 9.31 | ||||
As of September 30, 2017, the options outstanding and exercisable had an intrinsic value of approximately $13,000.
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
RESULTS OF OPERATIONS
The Company reported a net loss of approximately $182,000 ($0.18 per share) and $151,000 ($0.15 per share) for the three and nine months ended September 30, 2017, respectively. For the three months ended September 30, 2016, we reported a net loss of $49,000 ($0.05 per share), and for the nine months ended September 30, 2016 we reported net income of $181,000 ($0.18 per share).
REVENUES
Rentals and related revenues for the three and nine months ended September 30, 2017 were approximately $16,000 and $52,000, respectively and primarily consists of rent from the Advisor to CII for its corporate office. For the three and nine months ended September 30, 2016 rental and related revenues were $16,000 and $49,000, respectively.
Net realized and unrealized gain from investments in marketable securities:
Net realized gain from sales of marketable securities for the three and nine months ended September 30, 2017 was approximately $115,000 and $26,000, respectively. Net realized gain from sales of marketable securities for the three and nine months ended September 30, 2016 was approximately $318,000 and $301,000, respectively. Net unrealized loss from investments in marketable securities for the three months ended September 30, 2017 and 2016 was approximately $105,000 and $257,000, respectively. Net unrealized gain from investments in marketable securities for the nine months ended September 30, 2017 and 2016 was approximately $215,000 and $315,000, respectively. For further details refer to Note 3 to Condensed Consolidated Financial Statements (unaudited).
Equity loss in residential real estate partnership:
Equity loss in residential real estate partnership for the three and nine months ended September 30, 2017 was approximately $14,000 and $167,000, respectively. This is as compared with equity loss of $52,000 for the three and nine months ended September 30, 2016. For further details, refer to Note 4 to Condensed Consolidated Financial Statements (unaudited).
Net income from other investments:
Net income from other investments for the three and nine months ended September 30, 2017 was approximately $80,000 and $428,000, respectively. This is as compared with net income from other investments for the three and nine months ended September 30, 2016 of approximately $157,000 and $274,000, respectively. For further details refer to Note 5 to Condensed Consolidated Financial Statements (unaudited).
Interest, dividend and other income:
Interest, dividend and other income for the three and nine months ended September 30, 2017 was approximately $109,000 and $373,000, respectively. This is as compared with interest, dividend and other income for the three and nine months ended September 30, 2016 was approximately $148,000 and $452,000, respectively. The decreases in the three and nine-month prior year comparable periods was primarily due to decreased dividend income as a result of increased sale of marketable securities.
EXPENSES
General and administrative expenses for the three months ended September 30, 2017 as compared with the same period in 2016 increased by approximately $37,000 (45%). The increase was due primarily to $26,000 in expenses relating to a prospective real estate transaction in Orlando, Florida which did not close.
Professional fees and expenses for the three and nine months ended September 30, 2017 decreased by approximately $33,000 (60%) and $44,000 (25%), respectively as compared with the prior year comparable periods. The decreases were primarily from decreased shareholder relations legal fees and decreased tax consulting fees.
EFFECT OF INFLATION:
Inflation affects the costs of holding the Company’s investments. Increased inflation would decrease the purchasing power of our mainly liquid investments.
LIQUIDITY, CAPITAL EXPENDITURE REQUIREMENTS AND CAPITAL RESOURCES
The Company’s material commitments primarily consist of a note payable to the Company’s 49% owned affiliate, T.G.I.F. Texas, Inc. (“TGIF”) of approximately $1.55 million due on demand, contributions committed to other investments of approximately $2.5 million due upon demand. The funds necessary to meet these obligations are expected from the proceeds from the sales of investments, distributions from investments and available cash.
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MATERIAL COMPONENTS OF CASH FLOWS
For the nine months ended September 30, 2017, net cash used in operating activities was approximately $501,000, primarily consisting of operating expenses.
For the nine months ended September 30, 2017, net cash provided by investing activities was approximately $2.8 million. This consisted primarily of proceeds from sales of marketable securities of $5.6 million, distributions from other investments of $1.2 million, distributions from investment in residential partnership of $130,000 and distribution from TGIF of $193,000. These sources of funds were partially offset by uses including $2.7 million in purchases of marketable securities and $1.7 million of contributions to other investments
For the nine months ended September 30, 2017, net cash used in financing activities was $532,000, consisting of dividends paid of $501,000 and $50,000 principal repayment on loan due to TGIF. This is partially offset by increased margin borrowings of $20,000.
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Not applicable
| Item 4. | Controls and Procedures |
| (a) | Evaluation of Disclosure Controls and Procedures. |
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q have concluded that, based on such evaluation, our disclosure controls and procedures were effective and designed to ensure that material information relating to us and our consolidated subsidiaries, which we are required to disclose in the reports we file or submit under the Securities Exchange Act of 1934, was made known to them by others within those entities and reported within the time periods specified in the SEC’s rules and forms.
| (b) | Changes in Internal Control Over Financial Reporting. |
There were no changes in the Company’s internal controls over financial reporting identified in connection with the evaluation of such internal control over financial reporting that occurred during our last fiscal quarter which have materially affected, or reasonably likely to materially affect, our internal control over financial reporting.
| Item 1. | Legal Proceedings: None |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds: |
The Company has one current program to repurchase up to $600,000 of outstanding shares of our common stock from time to time in the open market at prevailing market prices or in privately negotiated transactions. This program was approved by our Board of Directors on June 30, 2016 and expires on June 29, 2021. As of September 30, 2017, the maximum dollar value of shares that may yet be purchased under the program is $259,719. During the nine months ended September 30, 2017, there were no shares purchased as part of this publicly announced program.
| Item 3. | Defaults Upon Senior Securities: None. |
| Item 4. | Mine Safety Disclosures: Not applicable. |
| Item 5. | Other Information: None |
| Item 6. | Exhibits: |
| (a) | Certifications pursuant to 18 USC Section 1350-Sarbanes-Oxley Act of 2002. Filed herewith. |
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Pursuant to the requirements 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.
| HMG/COURTLAND PROPERTIES, INC. | |
| Dated: November 13, 2017 | /s/ Maurice Wiener |
| CEO and President | |
| Dated: November 13, 2017 | /s/Carlos Camarotti |
| CFO and Vice President |
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