MANHATTAN BRIDGE CAPITAL, INC annual report, FY2014

Manhattan Bridge Capital, Inc. — 2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014; filed March 23, 2015. This is an annual report, not a standalone fourth-quarter report. The company originates short-term, first-mortgage “hard money” loans, primarily to real estate investors in the New York metropolitan area.

Financial performance and portfolio

Metric	2014	2013
Total revenue	$2.904 million	$2.260 million
Interest income	$2.401 million	$1.858 million
Origination fees	$503,000	$402,000
Income from operations	$1.461 million	$977,000
Net income	$1.455 million	$583,000
Diluted earnings per share	$0.29	$0.14
Net cash from operating activities	$1.278 million	$786,000

• Revenue increased 28.5%; operating income rose 49.4%. Net income increased 149.5%, reflecting higher operating income and a substantially lower income-tax expense ($28,000 versus $387,000). The filing says 2014 tax expense includes an under-accrual of prior-year tax expense.
• Revenue less reported operating costs implies an operating margin of approximately 50.3% in 2014, compared with 43.3% in 2013. Net margin was approximately 50.1% versus 25.8%.
• Loans originated were $22.586 million, up from $15.159 million; repayments were $13.248 million versus $14.089 million. Year-end loans earning interest totaled $24.032 million across 86 loans, compared with $14.695 million across 60 loans. Weighted-average contractual interest rate was 12.5% versus 12.6%.
• Year-end total assets were $24.444 million, liabilities $10.578 million, and stockholders’ equity $13.866 million. Debt comprised $7.700 million on the Sterling credit line and $2.469 million in short-term notes. The company reported working capital of approximately $8.8 million, but cash was only $47,676, down from $1.021 million.
• Cash flow from investing activities was negative $9.210 million, principally reflecting loan originations net of collections. Financing activities provided $6.958 million, including $4.289 million net proceeds from the share offering. Dividends paid were $853,000.

Material changes, outlook and commentary

• In July 2014, the company sold 1,754,386 shares at $2.85 each, raising $5.0 million gross and approximately $4.3 million net. It intended to elect REIT status beginning with the 2014 tax year; the filing says it planned to make that election with its return by September 15, 2015. REIT qualification and ongoing compliance were not assured.
• On February 27, 2015, after year-end, the company repaid and terminated its fully drawn $7.7 million Sterling facility and replaced it with a three-year Webster revolving line of credit of up to $14 million. Pricing is LIBOR plus 4.75% or Webster’s base commercial rate plus 3.25%, at the company’s choice for each draw. Borrowing is subject to collateral eligibility, a stated 70% advance rate, covenants and other restrictions; the CEO personally guarantees the facility.
• Management expected cash balances, operating cash flow and the Webster facility to fund operations for the next 12 months, while anticipating increased working-capital needs as the business grows. No earnings or revenue guidance was provided.
• The company reported no historical loan defaults or foreclosures and no loan-loss allowance. However, several loans had been extended beyond original maturity; the filing says borrowers were paying interest. The portfolio is concentrated in one region and consists largely of collateral that does not generate income.
• Dividends increased to $0.07 per share quarterly during 2014, then to $0.08 for payments scheduled in January and April 2015. REIT rules generally require distributions of at least 90% of taxable income, but the board has not established a minimum dividend.

Risks, contingencies and unusual items

• Liquidity and funding risks include minimal year-end cash, reliance on leverage, $2.469 million in short-term notes due over the following 12 months, and Webster covenants and collateral requirements. The facility’s maximum availability is not equivalent to cash on hand.
• Credit risks include borrower refinancing or sale dependence, property-value declines, potentially lengthy foreclosure processes, geographic concentration, and the absence of loan-loss reserves. The filing states no borrower exceeded 10% of the portfolio at year-end 2014.
• REIT status depends on complex income, asset, ownership and distribution tests. Failure to qualify could result in corporate-level taxes and reduced distributions. The company also relies on an Investment Company Act exemption that constrains asset composition.
• Purchasers in the July 2014 offering may have had rescission rights because of a possible preliminary-prospectus delivery issue. Investors were required to notify the company by July 28, 2015; the company said it intended to contest rescission claims. The filing does not quantify potential exposure.
• The auditor change in November 2014 followed a change in ownership of the former audit firm. The filing reports no disagreements or qualifying audit opinions. The financial statement auditor gave an unqualified opinion; it did not express an opinion on internal control effectiveness. Management concluded disclosure controls and internal control over financial reporting were effective.
• The filing reports no pending legal proceedings. It also describes a previously settled derivative action; the court-approved $80,000 counsel fee was paid by insurance, and the litigation was concluded.

Important facts for investors to verify

• Whether the company completed its intended 2014 REIT election and can satisfy the REIT and Investment Company Act tests.
• Actual Webster borrowing capacity and covenant compliance, including eligible collateral and the 70% advance rate; also verify repayment or refinancing of short-term notes.
• Loan performance, extensions, collections and any subsequent delinquencies or losses, given the lack of reserves and limited year-end cash.
• Any offering rescission notices or claims, and the resulting financial exposure.
• The filing gives different construction-loan commitment figures in different sections: approximately $1.0 million of unfunded commitments in one disclosure, $2.5525 million in the loan note, and a $3.351 million portfolio-level difference described as including unfunded commitments and principal repayments. Clarify the amounts and definitions.