|
|
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, 2018. The balance
sheet as of December 31, 2018 was derived from audited consolidated financial statements as of that date. The results of operations
for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for 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
|
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts
with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer
of promised goods or services to customers when it satisfies performance obligations. In February 2017, the FASB issued ASU No.
2017-05, Other Income: Gains and Losses from the Derecognition of Nonfinancial Assets, which amends ASC Topic 610-20. ASU No. 2017-05
provides guidance on how entities recognize sales, including partial sales, of nonfinancial assets (and in-substance nonfinancial
assets) to non-customers. ASU No. 2017-05 requires the seller to recognize a full gain or loss in a partial sale of nonfinancial
assets, to the extent control is not retained. Any noncontrolling interest retained by the seller would, accordingly, be measured
at fair value. This guidance became effective January 1, 2018 and did not have a material impact on the Company’s consolidated
financial statements.
In June 2018, the FASB issued ASU 2018-07, “Compensation
– Stock Compensation (Topic 718).” ASU 2018-07 simplifies the accounting for nonemployee stock-based payment transactions.
This ASU is effective for public entities for interim and annual reporting periods beginning after December 15, 2018, and early
application is permitted. The Company has adopted the guidance as of January 1, 2019 and there was no impact on the Company’s
consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases,” which created a new Topic, ASC Topic
842 and established the core principle that a lessee should recognize the assets, representing rights-of-use, and liabilities
to make lease payments that arise from leases. For leases with a term of 12 months or less, a lessee is permitted to make an election
under which such assets and liabilities would not be recognized, and lease expense would be recognized generally on a straight-line
basis over the lease term. This ASU is effective for public entities for interim and annual reporting periods beginning after
December 15, 2018, and early application is permitted. The adoption of this guidance on January 1, 2019 did not have an impact
on the Company’s consolidated financial statements.
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 market 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. Accordingly, all unrealized gains (losses) on this portfolio are recorded in income. Included
in investments in marketable securities is approximately $1.91 million and $1.76 million of large capital real estate investment
trusts (REITs) as of March 31, 2019 and December 31, 2018, respectively.
Net realized and unrealized gain from investments in marketable
securities for the three months ended March 31, 2019 and 2018 is summarized below:
|
|
|
Three Months Ended March 31,
|
|
|
Description
|
|
2019
|
|
|
2018
|
|
|
Net realized loss from sales of securities
|
|
$
|
(28,000
|
)
|
|
$
|
(8,000
|
)
|
|
Unrealized net gain (loss) securities
|
|
|
208,000
|
|
|
|
(13,000
|
)
|
|
Total net gain (loss) from investments in marketable securities
|
|
$
|
180,000
|
|
|
$
|
(21,000
|
)
|
For the three months ended March 31, 2019, net realized losses
from sales of marketable securities of approximately $28,000 consisted of approximately $31,000 of gross losses net of $3,000 of
gross gains. For the three months ended March 31, 2018, net realized losses from sales of marketable securities of approximately
$8,000 consisted of approximately $29,000 of gross losses net of $21,000 of gross gains.
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.
As of March 31, 2019, the Company’s portfolio of other
investments had an aggregate carrying value of approximately $6.0 million and we have committed to fund approximately $911,000
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 three months ended March 31, 2019, we made cash contributions
to other investments of approximately $328,000. This consisted $200,000 in a new investment which holds residential mortgages acquired
from a bank at discount and follow on contributions to existing investments of $128,000.
During the three months ended March 31, 2019, we received cash
distributions from other investments of approximately $175,000. This consisted of distributions from existing investments (primarily
real estate related). Also, in the first quarter of 2019 the Company’s $300,000 investments in a private insurance company
publicly registered all shares and began trading on the NASDAQ on March 29, 2019. Accordingly, we have transferred this investment
to marketable securities. As of March 31, 2019, this investment had an unrealized loss of approximately $99,000.
Net income from other investments for the three months ended
March 31, 2019 and 2018, is summarized below:
|
|
|
2019
|
|
|
2018
|
|
|
Partnerships owning real estate & related
|
|
$
|
42,000
|
|
|
$
|
132,000
|
|
|
Partnerships owning diversified businesses
|
|
|
28,000
|
|
|
|
15,000
|
|
|
Investment in other (private bank)
|
|
|
-
|
|
|
|
32,000
|
|
|
Income from investment in affiliate T.G.I.F. Texas, Inc.
|
|
|
8,000
|
|
|
|
39,000
|
|
|
Total net income from other investments
|
|
$
|
78,000
|
|
|
$
|
218,000
|
|
The following tables present gross unrealized losses and fair
values for those investments that were in an unrealized loss position as of March 31, 2019 and December 31, 2018, aggregated
by investment category and the length of time that investments have been in a continuous loss position:
|
|
|
As of March 31, 2019
|
|
|
|
|
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
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
132,000
|
|
|
$
|
(18,000
|
)
|
|
$
|
132,000
|
|
|
$
|
(18,000
|
)
|
|
Partnerships owning diversified businesses investments
|
|
|
215,000
|
|
|
|
(17,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
215,000
|
|
|
|
(17,000
|
)
|
|
Total
|
|
$
|
215,000
|
|
|
$
|
(17,000
|
)
|
|
$
|
132,000
|
|
|
$
|
(18,000
|
)
|
|
$
|
347,000
|
|
|
$
|
(35,000
|
)
|
|
|
|
As of December 31, 2018
|
|
|
|
|
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
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
132,000
|
|
|
$
|
(18,000
|
)
|
|
$
|
132,000
|
|
|
$
|
(18,000
|
)
|
|
Partnerships owning diversified businesses investments
|
|
|
273,000
|
|
|
|
(27,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
273,000
|
|
|
|
(27,000
|
)
|
|
Total
|
|
$
|
273,000
|
|
|
$
|
(27,000
|
)
|
|
$
|
132,000
|
|
|
$
|
(18,000
|
)
|
|
$
|
405,000
|
|
|
$
|
(45,000
|
)
|
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 OTTI impairment valuation adjustments for the three months ended March 31, 2019
and 2018.
|
|
5.
|
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 as of March 31, 2019 and December 31, 2018, 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):
Assets and liabilities measured at fair value on a recurring
basis are summarized below:
|
|
|
Fair value measurement at reporting date using
|
|
|
Description
|
|
Total
March 31,
2019
|
|
|
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
|
|
$
|
50,000
|
|
|
$
|
-
|
|
|
$
|
50,000
|
|
|
$
|
-
|
|
|
Money market mutual funds
|
|
|
659,000
|
|
|
|
659,000
|
|
|
|
-
|
|
|
|
-
|
|
|
US T-bills
|
|
|
17,529,000
|
|
|
|
17,529,000
|
|
|
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
562,000
|
|
|
|
-
|
|
|
|
562,000
|
|
|
|
-
|
|
|
Marketable equity securities
|
|
|
3,045,000
|
|
|
|
3,045,000
|
|
|
|
-
|
|
|
|
-
|
|
|
Total assets
|
|
$
|
21,845,000
|
|
|
$
|
21,233,000
|
|
|
$
|
612,000
|
|
|
$
|
-
|
|
|
|
|
Fair value measurement at reporting date using
|
|
|
Description
|
|
Total
December 31,
2018
|
|
|
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
|
|
$
|
355,000
|
|
|
$
|
-
|
|
|
$
|
355,000
|
|
|
$
|
-
|
|
|
Money market mutual funds
|
|
|
1,594,000
|
|
|
|
1,594,000
|
|
|
|
-
|
|
|
|
-
|
|
|
US T-bills
|
|
|
17,429,000
|
|
|
|
17,429,000
|
|
|
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
502,000
|
|
|
|
-
|
|
|
|
502,000
|
|
|
|
-
|
|
|
Marketable equity securities
|
|
|
2,574,000
|
|
|
|
2,574,000
|
|
|
|
-
|
|
|
|
-
|
|
|
Total assets
|
|
$
|
22,454,000
|
|
|
$
|
21,597,000
|
|
|
$
|
857,000
|
|
|
$
|
-
|
|
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.
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.
Distributed capital gains on sales of real estate as they relate
to REIT activities are not subject to taxes; however, undistributed capital gains may be subject to corporate tax.
On December 14, 2018 the Company declared a capital gain dividend
of $0.50 per share which was payable on January 9, 2019 to all shareholders of record as of December 28, 2018.
On March 7, 2018 the Company declared a capital gain dividend
of $2.50 per share which is payable on March 30, 2018 to all shareholders of record as of March 21, 2018.
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 basis 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 March 31, 2019,
and December 31, 2018, the Company has recorded a net deferred tax liability of $43,000 and $48,000, respectively, primarily 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 2019 is estimated at $854,000 and has been fully reserved due to CII historically having tax losses.
The (benefit from) provision for income
taxes in the consolidated statements of income consists of the following:
|
Three months ended March 31,
|
|
2019
|
|
|
2018
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(3,000
|
)
|
|
$
|
32,000
|
|
|
State
|
|
|
(1,000
|
)
|
|
|
5,000
|
|
|
|
|
|
(4,000
|
)
|
|
|
37,000
|
|
|
Decreased valuation allowance
|
|
|
-
|
|
|
|
(10,000
|
)
|
|
Total
|
|
$
|
(4,000
|
)
|
|
$
|
27,000
|
|
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, 2018. The Company’s federal income tax returns since 2014 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.
During the three months ended March 31, 2019 there were no options
granted, expired or forfeited.
In January and March 2018 three directors and one officer exercised
options to purchase a total of 10,900 shares at $9.31 per share (options to purchase 1,600 shares by one director were exchanged
for new options via Stock Option Agreement re-load provision). Stock based compensation expense is recognized using the fair-value
method for all awards.
The following table summarizes information concerning outstanding
and exercisable options as of March 31, 2019:
|
|
|
Number of
securities to be
issued upon
exercise of
outstanding
options
|
|
|
Weighted-average
exercise price of
outstanding
options
|
|
|
Number of securities
remaining available for future
issuance under equity
compensation plans
|
|
|
Equity compensation plan approved by shareholders
|
|
|
1,600
|
|
|
$
|
15.30
|
|
|
|
47,608
|
|
|
Equity compensation plan not approved by shareholders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
|
1,600
|
|
|
$
|
15.30
|
|
|
|
47,608
|
|
As of March 31, 2019, the stock options outstanding and exercisable
had no intrinsic value.
|
|
Item 2.
|
Management's Discussion and Analysis of Financial Condition and Results of Operations
|
RESULTS OF OPERATIONS
The Company reported net loss of approximately $11,000 (or
$0.01 per share) for the three months ended March 31, 2019. For the three months ended March 31, 2018, the Company reported
net income of approximately $5.19 million (or $5.15 per share).
REVENUES
Rentals and related revenues for the three months ended March
31, 2019 and 2018 were approximately $19,000 and $18,000, respectively and primarily consists of rent from the Advisor to CII for
its corporate office.
Net realized and unrealized gain from investments in marketable
securities:
Net realized and unrealized gain (loss) from investments in
marketable securities for the three months ended March 31, 2019 and 2018 was approximately $180,000 and ($21,000), respectively.
For further details, refer to Note 3 to Condensed Consolidated Financial Statements (unaudited).
Equity loss from operations in residential real estate partnership:
Equity loss from operations in residential real estate partnership
for the three months ended March 31, 2018 was approximately $144,000. This project was sold in February 2018.
Net income from other investments:
Net income from other investments for the three months ended
March 31, 2019 and 2018 was approximately $78,000 and $218,000, respectively. For further details, refer to Note 5 to Condensed
Consolidated Financial Statements (unaudited).
EXPENSES
Professional fees and expenses for the
three months ended March 31, 2019 as compared with the same period in 2018 decreased by approximately $23,000 (or 22%) primarily
due to 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 $1.0 million due
on demand, contributions committed to other investments of approximately $911,000 due upon demand. The $9.97 million in margin
is primarily related to the purchase of US T-bills at quarter end. The T-bills were sold in April 2019 and the related margin was
repaid. The purchase of T-bills at each fiscal quarter end is for the purposes of qualifying for the REIT asset test. The funds
necessary to meet these obligations are expected from the proceeds from the sales of investments, distributions from investments
and available cash.
MATERIAL COMPONENTS OF CASH FLOWS
For the three months ended March 31, 2019, net cash used in
operating activities was approximately $466,000, primarily consisting of operating expenses and $250,000 increase in other assets
relating to deposits made on an anticipated new development of a multi-family residential real estate project near Fort Myers,
Florida.
For the three months ended March 31, 2019, net cash provided
by investing activities was approximately $17,000. This consisted primarily of net proceeds from sales and redemptions of marketable
securities of $646,000, distributions from other investments of $175,000 and distribution from affiliate of $221,000. These sources
of funds were partially offset by uses of cash consisting primarily of $697,000 in purchases of marketable securities and $328,000
of contributions to other investments.
For the three months ended March 31, 2019, net cash used in
financing activities was approximately $730,000, consisting of $506,000 dividend paid and $340,000 principal payment on note due
to affiliate. These uses of funds were partially offset by increased margin borrowings (net of repayments) of $117,000.
