The aggregate market value of voting stock held by non-affiliates
based on the closing price of the stock at June 30, 2016 was $176,040. For purposes of this calculation it is assumed that officers
and directors of the registrant are affiliates and that the BBJ Family Irrevocable Trust is an affiliate. The registrant has no
non-voting stock. The number of shares outstanding of each of the registrant’s classes of common stock as of April 7, 2017
was 442,533 shares of Class A common stock and 4,746,147 shares of Class B common stock.
This report contains statements that do not
relate to historical facts, but are “forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to analyses
and other information based on forecasts of future results and estimates of amounts not yet determinable. These statements may
also relate to future events or trends, our future prospects and proposed development or business strategies, among other things.
These statements can generally (although not always) be identified by their use of terms and phrases such as anticipate, appear,
believe, continue, could, estimate, expect, indicate, intend, may, plan, possible, predict, project, pursue, will, would and other
similar terms and phrases, as well as the use of the future tense. Forward-looking statements in this Annual Report on Form 10-K
speak only as of the date hereof, and forward looking statements in documents incorporated by reference speak only as of the date
of those documents. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward-looking
statements, whether as a result of new information, future events or otherwise.
Examples of forward-looking statements in this
report include, but are not limited to, the following categories of expectations about:
Any forward-looking statements are based upon management’s
beliefs, assumptions and expectations of our future performance, taking into account information concurrently available. These
beliefs, assumptions and expectations may change as a result of possible events or factors, not all of which are known. If a change
occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in forward-looking
statements. Actual results may vary from forward-looking statements due to, but not limited to, the following:
PART I.
Presidential Realty Corporation is a Delaware
corporation organized in 1983 to succeed to the business of a company of the same name which was organized in 1961 to succeed to
the business of a closely held real estate business founded in 1911. The terms, “we”, “us”, “our”,
“Presidential” or the “Company” refer to the present Presidential Realty Corporation or its predecessor
company of the same name and to any subsidiaries. Since 1982, we have elected to be treated as a real estate investment trust (“REIT”)
for Federal and State income tax purposes. See (e)
Qualification as a REIT
. We own, directly or indirectly, interests in
real estate and interests in entities which own real estate.
On December 16, 2016, the “Company”
and its newly formed operating partnership, Presidential Realty Operating Partnership LP (“Presidential OP”), entered
into an interest contribution agreement (the “Initial Agreement”) with First Capital Real Estate Trust Incorporated
(“FC REIT”), First Capital Real Estate Operating Partnership (the “FC OP”), Township Nine Owner, LLC (T9/JV),
Capital Station Holdings, LLC, Capital Station Member, LLC, Capital Station 65 LLC and Avalon Jubilee LLC. On January 6, 2017,
the Company and the other parties to the Initial Agreement entered into the First Amendment to the Initial Agreement (the “Amendment,”
and, together with the Initial Agreement, the “Agreement”) and FC OP entered into the Agreement of Limited Partnership
(the “Limited Partnership Agreement”) of Presidential OP, as limited partner, with the Company as general partner.
The Agreement contemplated that the Company would acquire from FC OP its 31.3333% interest in the owner of a residential community
referred to as the “Avalon Property” and 66% percent (the “T9 Transferred Interest”) of its 92% interest
(FC/T9 Interest) in the owner of a development property known as the “T9 Property.” The purchase price for the interests
is payable in limited partnership interests in Presidential OP (“Presidential OP Units”) convertible under certain
conditions into shares of the Company’s Class B common stock.
The Company’s acquisition of
the interest in the Avalon Property was completed on January 6, 2017. The Avalon Property consists of 251 non-contiguous single-family,
residential lots and a 10,000 square foot clubhouse, within the Jubilee at Los Lunas subdivision located in Los Lunas, New Mexico
(the “Avalon Property”). At the Closing, in exchange for the contribution to Presidential OP of FC OP’s membership
interests in Avalon, FC OP received 4,632,000 Presidential OP Units in, and became a limited partner of, Presidential OP. Such
limited partnership interests are convertible, upon the satisfaction of certain conditions, into shares of Class B common stock
of the Company on a one-for-one basis. In connection with the Closing, FC REIT paid $800,000 to Presidential to be used as operating
capital.
On March 31, 2017, the Company and Presidential OP entered into
a second amendment to the Agreement pursuant to which the T9 Transferred Interest was assigned to PRES-T9 Holdings, LLC, a Delaware
limited liability company and wholly owned subsidiary of Presidential OP (PRES-T9). PRES-T9 was admitted as a member of the T9/JV.
The Second Amendment also provides for the satisfaction of certain conditions prior to the issuance and delivery of 100% of the
Presidential OP Units to be issued in connection with the transaction. Those Presidential OP Units will be held back (the “Holdback
Units”) until a new appraisal of the FC/T9 Interest has been obtained and the loan secured by the T9 Properties has been
extended or refinanced. The loan is currently in default. Presidential has an opportunity for 30 days to endeavor to obtain an
extension or refinancing of the loan. Thereafter, the FC Parties will continue to seek an extension/refinancing of the loan. If
the appraisal and the loan extension/refinancing are not obtained within 180 days, then the FC Parties and Presidential may within 10 days mutually agree in writing to extend the time to complete the extension/refinancing of the loan, or either the
FC Parties or Presidential may elect to cancel the transfer of the T9 Transferred Interest following 10 days prior
written notice to the other party.
The number
of Presidential OP Units ultimately issued if these conditions are satisfied is subject to adjustment based on the new appraisal
and the amount of the mortgage debt (the extended/refinanced loan) at that time. These adjustments could result in a material change
in the number of Presidential OP Units that are ultimately issued and delivered if the conditions are satisfied.
The final
number of Presidential OP Units will be determined by taking the amount of the new appraisal, subtracting therefrom the amount
of the extended/refinanced loan and the legal costs and expenses incurred by the Company in securing the extended/refinanced loan
and multiplying the amount thereby obtained by 66%.
As a result
of the conditional nature of the transfer of the Transferred Interest, the Company will not be reflecting the Transferred Interest
in its financial statements until the conditions in the Second Amendment have been satisfied and the applicable number of OP Units
has been determined and issued.
In connection with the Agreement, Palisades Pacific Realty Trust,
Inc (“Palisades”) became a consultant to the Company to provide services relating to the integration of the First
Capital properties (the interests in the Avalon Property and T9 Property) and in connection with potential capital raising activities.
The Company paid Palisades $200,000 and reimbursed certain expenses approved by the Company. Palisades notified the Company
on March 1, 2017 that they were ceasing to provide services thus terminating the arrangement. Palisades has requested reimbursement
of certain other expenses which the Company believes it is not responsible for.
In connection with and as a condition
of the Agreement, on January 6, 2017, the Company entered into various agreements with the officers, directors and Management of
the Company to restructure amounts owed to them as well as change the equity compensation due or held by them. The Company entered
into an agreement with Signature Group Advisors, LLC (“Signature”), an affiliate of Nickolas W. Jekogian, III, a director,
Chairman and Chief Executive Officer of the Company, and an adviser to the Company (the “Signature Agreement”) pursuant
to which (i) Signature will receive $1,000,000 payable in cash as consideration for sourcing, negotiating and documenting the transactions
contemplated by the Agreement (“Transaction Fee”), which will become earned, due and payable upon the closing by the
Company or Presidential OP of a preferred stock offering (or similar instrument) of at least $50,000,000 in gross proceeds; and
(ii) commencing on the closing for the T9 Property under the Agreement, Signature will be engaged as a consultant to the Company
for a four year term. The fee payable to Signature as a consultant (the “Consulting Fee”) will be $500,000 per annum,
payable in cash in arrears on each anniversary of the closing for the T9 Property; provided, however, that no portion of the Consulting
Fee will be earned or paid unless and until the net asset value of the Company is at least $200,000,000.
On January 6, 2017, the Company and
Mr. Alexander Ludwig, our President and Chief Operating Officer, entered into a Cancellation and Release Agreement for the cancellation
of all stock options and warrants held by Mr. Ludwig as of such date in consideration for the issuance of (x) 450,000 shares of
Class B common stock of the Company and (y) an option to purchase an additional 550,000 shares of Class B common stock of the Company.
The exercise of such option is subject to certain conditions, including that the issuance of any shares of Class B common stock
of the Company covered by Mr. Ludwig’s option would not be deemed “Excess Shares” as that term is defined in
our certificate of incorporation. The exercise price of the option is $0.00.
On January 6, 2017, Mr. Jekogian entered into a Cancellation
and Release Agreement for the (x) cancellation of all stock options and warrants held by Mr. Jekogian as of such date and (y) termination
of his Employment Agreement effective as of such date. Mr. Jekogian will continue as an employee of the Company in his capacity
as Chairman and Chief Executive Officer on a month-to-month basis until such time as otherwise determined by the Company in its
sole discretion. It is expected that his salary will remain unchanged.
On January 6, 2017, each of Richard Brandt, Robert Feder
and Jeffrey Joseph, non-management directors of the Company, and Jeffrey Rogers, a former non-management director of the Company,
entered into Issuance and Release Agreements for the issuance of an aggregate of 450,000 shares of Class B common stock of the
Company in consideration of the release of the Company’s obligations to pay past due and current director’s fees, of
which 90,000 were issued to the current directors for their services in connection with the Agreement.
On January 6, 2017, the Company and
Presidential OP entered into an Acknowledgement and Certification (the “Shareholder Certification”) with Mr. Jekogian,
The BBJ Family Irrevocable Trust (the “Trust”), FC OP and FC REIT, pursuant to which the Trust agreed to, among other
things, (i) exchange its shares of Class A stock for shares of Class B stock of the Company upon the occurrence and satisfaction
of certain conditions, (ii) refrain from taking certain actions, and (iii) vote its shares of Class A stock in favor of certain
actions. Pursuant to such Shareholder Certification, the Company agreed not to issue or cause to be issued any additional shares
of its Class A stock.
In connection with the foregoing,
certain holders of Class A common stock of the Company, representing an aggregate of 49,000 shares of Class A common stock,
entered into a Proxy and Option to Purchase with The BBJ Family Irrevocable Trust designating The BBJ Family Irrevocable
Trust as proxy to vote on all matters with respect to their shares. In addition, such agreement granted The BBJ Family
Irrevocable Trust an option to purchase such shares at a purchase price of $2.00 per share. During the first quarter the
Trust exercised its option and purchased 49,000 shares of Class A common stock. The Company was not a party to that
agreement.
The shares
of Class B common stock of the Company issued in connection with the transactions contemplated by the Agreement were issued
in reliance on the exemption from securities registration requirements contained in Section 4(a)(2) of the Securities
Act of 1933, as amended, and the rules promulgated thereunder.
At December 31, 2016, the Company had a loss
from continuing operations. This combined with a history of operating losses and working capital deficiency, has been detrimental
to our operations and could potentially affect our ability to meet our obligations and continue as a going concern. Our ability
to continue as a going concern is dependent upon the successful execution of strategies to achieve profitability and to increase
working capital by raising debt and/or equity. The accompanying financial statements do not include any adjustments that may result
from this uncertainty.
We have only one business segment: our real
estate interests. Our principal assets fall into the following categories:
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(i)
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Ownership
of Rental Properties at December 31, 2016: $1,169,459 net of depreciation $646.770 which is approximately 61% of our assets is
in rental properties wholly owned by us. At December 31, 2016, this consisted of our ownership of the Mapletree Industrial Center
located in Palmer, Massachusetts. This is a multi-tenant rental facility which was originally the Wickwire-Spencer Wire Mill until
1970 at which time it became rental space. The property consists of 31 buildings located on approximately 48 acres. Major tenants
include National Fiber, Creative Material Technologies office and lab, New England Promotional Marketing and Fulfillment Plus,
Consolidated Lumber Transport office, Eastern States Associates office, ESSROC Materials (a Portland cement distributor) and American
Cable Assembly.
The property offers traditional office space and industrial/warehouse
space along with vacant land with rail access ready for development.
As of December 31, 2016, the property had 87% occupancy.
The buildings comprise a total of 418,679 square feet, of which 336,259 is rentable. The property has a carrying value of $1,169,459,
less accumulated depreciation of $646,770, resulting in a net carrying value of $522,689 at December 31, 2016. See
Properties
below.
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(ii)
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Cash:
At December 31, 2016, we had $78,400 in cash, which is approximately 9% of our assets. (See
Investment Strategies
below.)
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Under the Internal Revenue Code of 1986, as
amended (the “Code”), a REIT that meets certain requirements is not subject to Federal income tax on that portion of
its taxable income that is distributed to its shareholders, if at least 90% of its “real estate investment trust taxable
income” (exclusive of capital gains) is so distributed. Since January 1, 1982, the Company has elected to be taxed as a REIT.
We sustained losses in 2016 and 2015 and, accordingly, did not pay any dividends in 2016 and 2015.
While we intend to operate in such a manner
as to be taxed as a REIT, and to pay dividends in an amount sufficient to maintain REIT status, we cannot promise that we will,
in fact, continue to be taxed as a REIT or that the Company will have cash available to pay any dividends that may be required
to maintain REIT status. We were not required to pay any dividends in 2016, and believe that we will not be required to pay dividends
in 2017 to maintain our REIT status. See (
e) Qualification as a REIT and Item 5. - Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities.
We currently maintain a website at www.presrealty.com.
We file annual, quarterly and periodic reports, proxy statements and other information electronically with the Securities and Exchange
Commission (“SEC”), which filings are available at the SEC’s website (http://www.sec.gov.) free of charge, or
at its public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC 1-800-SEC-0330 for further information
about the public reference room.
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(d)
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Investment
Strategies
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Our general investment strategy is to continue
our REIT status, make investments in real estate assets that offer attractive current yields and, in some cases, potential for
capital appreciation. Management plans to utilize its experience in real estate investing to grow our asset base. The Company’s
board adopted a new business/investment strategy in March 2017 to focus on assets in the health care sector.
Our investment policy is not contained in or subject to restrictions
included in the Company’s Certificate of Incorporation or Bylaws and there are no limits in the Company’s Certificate
of Incorporation or Bylaws on the percentage of assets that it may invest in any one type of asset or the percentage of securities
of any one issuer that it may acquire. The investment policy may, therefore, be changed by our Board of Directors of the Company
without the concurrence of the holders of its outstanding stock. However, to continue to qualify as a REIT, we must restrict our
activities to those permitted under the Code. See (e)
Qualification as a REIT
.
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(e)
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Qualification
as a REIT
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Since 1982, we have operated in a manner intended
to permit us to qualify as a REIT under Sections 856 to 860 of the Code. We intend to continue to operate in a manner to continue
to qualify as a REIT. However, we cannot promise that we will be able to continue to operate in such a manner or to remain qualified.
In any year that we qualify as a REIT and meet
other conditions, including the distribution to stockholders of at least 90% of our “real estate investment trust taxable
income” (excluding long-term capital gains but before a deduction for dividends paid), we will be entitled to deduct the
distributions that we pay to our stockholders in determining our ordinary income and capital gains that are subject to Federal
income taxation (see Note 5 of
Notes to Consolidated Financial Statements
). Income not distributed is subject to tax at
rates applicable to a domestic corporation. In addition, we are subject to an excise tax (at a rate of 4%) if the amounts actually
or deemed distributed during the year do not meet certain distribution requirements. In order to receive this favorable tax treatment,
the Company must restrict our operations to those activities that are permitted under the Code and to the holding of assets that
a REIT is permitted to hold.
We cannot promise that we will continue to
be taxed as a REIT, that we will have sufficient cash to pay dividends in order to maintain REIT status or that we will make cash
distributions in the future. In addition, even if we continue to qualify as a REIT, the Board of Directors has the discretion to
determine whether or not to distribute long-term capital gains and other types of income not required to be distributed in order
to maintain REIT tax treatment.
The real estate business is highly competitive
in all respects. In all phases of our business we face competition from companies with greater financial and other resources. To
the extent that we seek to acquire additional properties or originate new loans, we face competition from other potential purchasers
or lenders with greater financial resources.
Obtaining tenants for our rental property is
also highly competitive. We face competition from newer buildings and from property owners who have more financial resources available
to them for capital improvements to their properties.
At December 31, 2016, we employed 4 people,
two of whom are employed at our executive office and two of whom are employed at an individual property site.
In addition to the other information contained
in this Form 10-K, the following risk factors should be considered carefully in evaluation of our business. Our business, financial
condition, or results of operations could be materially adversely affected by any of these risks. Additional risks not presently
known to us, or which we currently consider immaterial, may also impair our business and operations.
We have limited working capital and may
not be able to continue as a going concern.
For the year ended December 31, 2016,
the Company had a loss from continuing operations. This, combined with a history of operating losses and working
capital deficiency, has been detrimental to our operations and could potentially affect our ability to meet our obligations
and continue as a going concern. Our ability to continue as a going concern is dependent upon the successful execution of
our business plan to achieve profitability and to increase working capital by raising debt and/or equity.
The Company is highly leveraged
and may not be able
to generate sufficient revenue to pay its debt service and operating expenses
.
The Company’s largest asset and its primary income producing
asset, the Mapletree Industrial Center, acts as security for a mortgage loan. There is no guaranty that the Mapletree Property
will continue to generate revenues sufficient to pay the debt service on the loan and, together with other income, to pay the Company’s
operating expenses. If the Company is unable to service the debt, or pay its operating expenses, then the Company will be
required to sell the Mapletree Property and may cease to qualify as a REIT. The Company may not be able to continue as a going
concern.
Volatility in capital and credit markets,
or other unfavorable changes in economic conditions, could adversely impact us.
The capital and credit markets are subject
to volatility and disruption. We may not be able to obtain new debt financing or refinance our existing debt on favorable terms
or at all, which would adversely affect our liquidity, our ability to make distributions to stockholders and acquire and dispose
of assets. Other weakened economic conditions, including job losses and high unemployment rates, could adversely affect rental
rates and occupancy levels. Unfavorable changes in economic conditions may have a material adverse impact on our cash flows and
operating results.
Additional key economic risks which may adversely
affect conditions in the markets in which we operate include the following:
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local
conditions, such as an oversupply of office space available to rent, or a reduction in demand for office space in the area;
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declines in the financial condition of our tenants, which may make it more difficult for us to collect rents from some tenants;
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declines in market rental rates;
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regional economic downturns which may affect one or more of our geographical markets;
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increased
operating costs, if these costs cannot be passed through to tenants;
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material changes in any significant tenant industry concentration;
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the general reputation of real estate as an attractive investment
in comparison to other equity securities; changes in market valuations of our properties;
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the reputation of the product types of our assets compare to other
sectors of the real estate industry;
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adverse market reaction to the amount of our outstanding debt at any
time, the amount of our maturing debt and our ability to refinance such debt on favorable terms;
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any failure to comply with existing debt covenants; and
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the realization of any other risk factors described in this report.
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Difficulties of selling real estate could
limit our flexibility.
We intend to continue to evaluate the potential
disposition of assets which may no longer meet our investment objectives. When we decide to sell an asset, we may encounter difficulty
in finding buyers in a timely manner as real estate investments generally cannot be disposed of quickly, especially when market
conditions are poor. These factors may limit our ability to vary our portfolio promptly in response to changes in economic or other
conditions and may also limit our ability to utilize sales proceeds as a source of liquidity, which would adversely affect our
ability to make distributions to stockholders or repay debt.
Competition could limit our ability to
lease our properties or increase or maintain rental income.
There are numerous alternatives which compete
with our properties in attracting tenants. Some of these other properties may be newer and offer more modern amenities. This competitive
environment could have a material adverse effect on our ability to lease our present properties as well as on the rents realized.
Our acquisition strategy may not produce
the cash flows expected.
We may acquire additional operating properties
on a selective basis. Our acquisition activities are subject to a number of risks, including the following:
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our percentage ownership in any new property may be small;
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we may not be able to successfully integrate acquired properties into our existing operations;
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our estimates of the costs, if any, of repositioning or redeveloping the acquired property may prove inaccurate;
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the expected occupancy and rental rates may differ from the actual results; and
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we may not be able to obtain adequate financing.
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A portion of any acquisitions we may make in
the near future will have to be made through the issuance and/or sale of shares of our common stock and will likely result in our
ownership together with other partners. We may not be able to identify suitable partners or properties on terms acceptable to us
and may not achieve expected returns or other benefits.
We may change our targeted investments
without stockholder consent.
We have no restrictions
in our Certificate of Incorporation or other organization documents with respect to the types of investments we may make. We may
make adjustments to our target portfolio based on real estate market conditions and investment opportunities, and we may change
our targeted investments and investment guidelines at any time without the consent of our common stockholders, which could result
in our making investments that are different from, and possibly riskier than, the investments that we have made in the past. A
change in our targeted investments or investment guidelines may increase our exposure to real estate market risk, interest rate
risk, default risk and concentration risk, all of which could adversely affect the value of our common stock and our ability to
make distributions to our stockholders.
A stockholder’s interest in us
may be diluted if we issue additional stock.
Our common stockholders do not have preemptive
rights to any stock we issue in the future. Therefore, in the event that we (1) sell stock in the future, (2) sell securities that
are convertible into stock, (3) issue stock in a private offering, (4) issue stock upon the exercise of options granted to our
directors, executives, employees or others, or (5) issue stock to sellers of assets acquired by us in connection with an exchange
of limited partnership interests in the our operating partnership, holders of our common stock will experience dilution of their
percentage ownership in us. Depending on the terms of such transactions, most notably the price per share, which may be less than
the price paid per share in our public or private offerings, and the value of our properties, holders of our common stock might
also experience a dilution in the book value per share of their stock.
A stockholder’s interest in us
may be diluted if we issue additional units in our operating partnership.
Holders of units of our operating partnership
will receive distributions at the same time as the partnership makes distributions to the Company. Units of our operating partnership
will generally have the right to exchange their units of the operating partnership for shares of our common stock. In the event
we issue additional units in our operating partnership, investors holding our common stock will experience potential dilution in
their percentage ownership interest in us. Depending on the terms of such transactions, holders of our common stock might also
experience a dilution in the book value per share of their stock.
Our organization documents permit
our board of directors to issue stock or securities convertible or exchangeable into equity securities, with terms that may
have priority over the rights of our common stockholders or discourage a third party from acquiring us in a manner that could
result in a premium price to our stockholders.
Our board of directors may issue, classify
and establish the preferences, conversion or other rights, voting powers, restrictions, and limitations as to distributions, qualifications
and terms or conditions of redemption of any of our preferred stock. Our board of directors could authorize the issuance of preferred
stock or securities convertible or exchangeable into equity securities, with terms and conditions that could have priority as to
distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Such preferred stock and
convertible or exchangeable securities could also have the effect of delaying, deferring or preventing a change in control of us,
including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that
might provide a premium price to holders of our common stock.
Our stockholders have limited control
over changes in our policies and operations, which increases the uncertainty and risks of an investment in us.
Our board’s broad discretion in setting
policies and our stockholders’ inability to exert control over those policies increases the uncertainty and risks of an investment
in us.
We have limited assets so that an adverse
event occurring with respect to one asset may not be offset by the performance of the remaining assets
.
At the end of 2016 we owned one investment:
Mapletree Industrial Center. Since the beginning of 2017 we have acquired interests (less than 100%) in two owners of properties
that are not expected to generate revenues in the near future. Due to the small number of assets, we are vulnerable to significant
losses as a percentage of our assets if there is an adverse effect to one of the properties.
Losses from catastrophes may exceed our
insurance coverage.
We carry comprehensive property and liability
insurance on our properties, which we believe is of the type and amount customarily obtained on similar real property assets by
similar types of owners. We intend to obtain similar coverage for properties we acquire in the future. However, some losses, generally
of a catastrophic nature, such as losses from floods, hurricanes, or earthquakes, may be subject to coverage limitations. We exercise
our discretion in determining amounts, coverage limits, and deductible provisions of insurance to maintain appropriate insurance
on our investments at a reasonable cost and on suitable terms. If we suffer a catastrophic loss, our insurance coverage may not
be sufficient to pay the full current market value or current replacement value of our lost investment, as well as the anticipated
future revenues from the property. Inflation, changes in building codes and ordinances, environmental considerations, and other
factors also may reduce the feasibility of using insurance proceeds to replace a property after it has been damaged or destroyed.
Investments through joint ventures involve
risks not present in investments in which we are the sole investor.
We have invested, and may continue to invest,
as a joint venture partner in joint ventures. These investments involve risks, including the possibility the other joint venture
partner may have business goals which are inconsistent with ours, possess the ability to take action or withhold consent contrary
to our requests, or become insolvent and require us to assume and fulfill the joint venture’s financial obligations. We and
our joint venture partner may each have the right to initiate a buy-sell arrangement, which could cause us to sell our interest,
or acquire our joint venture partner’s interest, at a time when we otherwise would not have entered into such a transaction.
Each joint venture agreement is individually negotiated, and our ability to operate, finance, and/or dispose of a community in
our sole discretion may be limited to varying degrees depending on the terms of the joint venture agreement.
Such investments may involve risks not otherwise
present when acquiring real estate directly, including for example:
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joint
ventures may share certain approval rights over major decisions;
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co-venturers,
co-owner or partner may at any time have economic or business interests or goals which are or which may become inconsistent with
our business interests or goals, including inconsistent goals relating to the sale of properties held in the joint venture or
the timing of termination or liquidation of the joint venture;
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the
possibility that our co-venturers, co-owner or partner in an investment might become insolvent or bankrupt;
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the
possibility that we may incur liabilities as a result of an action taken by our co-venture, co-owner or partner;
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a
co-venture, co-owner or partner may be in a position to take action contrary to our instructions or requests or contrary to our
policies or objectives, including our policy with respect to qualifying and maintaining our qualification as a REIT;
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disputes
between us and our co-venturers may result in litigation or arbitration that would increase our expenses and prevent its officers
and directors from focusing their time and effort on our business and result in subjecting the properties owned by the applicable
join venture to additional risk; or
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under
certain joint venture arrangements, neither joint venture partner may have the power to control the venture, and an impasse could
be reached which might have a negative influence on the joint venture
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Tax matters, including failure to qualify
as a REIT, could have adverse consequences.
We may not continue to qualify as a REIT in
the future. The Internal Revenue Service may challenge our qualification as a REIT for prior years and new legislation, regulations,
administrative interpretations, or court decisions may change the tax laws or the application of the tax laws with respect to qualification
as a REIT or the federal tax consequences of such qualification.
For any taxable year that we fail to qualify
as a REIT and do not qualify under statutory relief provisions:
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we
would be subject to federal income tax on our taxable income at regular corporate rates, including any applicable alternative
minimum tax;
|
|
|
·
|
we
would be disqualified from treatment as a REIT for the four taxable years following the year in which we failed to qualify, thereby
reducing our net income, including any distributions to shareholders, as we would be required to pay significant income taxes
for the year or years involved; and
|
|
|
·
|
our
ability to expand our business and raise capital would be impaired, which may adversely affect the value of our common shares.
|
We may face other tax liabilities in the future
which may impact our cash flow. These potential tax liabilities may be calculated on our income or property values at either the
corporate or individual property levels. Any additional tax expense incurred would decrease the cash available for cash distributions
to our common shareholders, perpetual preferred unit holders, and non-controlling interest holders.
We depend on our key personnel.
Our success depends in part on our ability
to attract and retain the services of executive officers and other personnel. There is substantial competition for qualified personnel
in the real estate industry, and the loss of key personnel could have an adverse effect on us.
Insufficient cash flows could limit our
ability to pay our operating expenses to make required payments for debt obligations or pay distributions to shareholders.
All of our income is derived from rental and
other income from our Mapletree property. As a result, our performance depends in large part on our ability to collect rent from
tenants, which could be negatively affected by a number of factors, including the following:
|
|
·
|
delay in lease commencements;
|
|
|
·
|
failure of tenants to make rental payments when due;
|
|
|
·
|
the attractiveness of our properties to tenants and potential tenants;
|
|
|
·
|
our ability to adequately manage and maintain our properties;
|
|
|
·
|
competition from other available commercial alternatives; and
|
|
|
·
|
changes in market rents.
|
Cash flow could be insufficient to meet required
payments of principal and interest with respect to debt financing. In order for us to continue to qualify as a REIT, we must meet
a number of organizational and operational requirements, including a requirement to distribute annual dividends to our stockholders
equal to a minimum of 90% of our REIT taxable income, computed without regard to the dividends paid deduction and our net capital
gains. This requirement limits the cash available to meet required principal payments on our debt.
We may be unable to renew, repay or refinance
our outstanding debt.
We are subject to the risk that indebtedness
on our properties will not be renewed, repaid or refinanced when due or the terms of any renewal or refinancing will not be as
favorable as the existing terms of such indebtedness. If we are unable to refinance our indebtedness on acceptable terms, or at
all, we might be forced to dispose of one or more of the properties on disadvantageous terms, which might result in losses to us.
Such losses could have a material adverse effect on us and our ability to make distributions to our shareholders and pay amounts
due on our debt. Furthermore, if a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments,
the mortgagee could foreclose on the property, appoint a receiver and exercise rights under an assignment of rents and leases,
or pursue other remedies, all with a consequent loss of our revenues and asset value. Foreclosures could also create taxable income
without accompanying cash proceeds, thereby hindering our ability to meet the REIT distribution requirements of the Code.
Issuances of additional debt may adversely
impact our financial condition.
Our capital requirements depend on numerous
factors, including the rental and occupancy rates of our properties, dividend payment rates to our stockholders, capital expenditures,
costs of operations and potential acquisitions. If our capital requirements vary materially from our plans, we may require additional
financing earlier than anticipated. If we issue more debt, we could become more leveraged, resulting in increased risk of default
on our obligations and an increase in our debt service requirements, both of which could adversely affect our financial condition
and ability to access debt and equity capital markets in the future.
Share ownership limits and our ability
to issue additional equity securities may prevent takeovers beneficial to shareholders and limits our ability to make investments
using our common stock.
For us to maintain our qualification as a REIT,
we must have 100 or more shareholders during the year and not more than 50% in value of our outstanding shares may be owned, directly
or indirectly, by five or fewer individuals. As defined for federal income tax purposes, the term “individuals” includes
a number of specified entities. To minimize the possibility of us failing to qualify as a REIT under this test, our articles of
incorporation include restrictions on transfers of our shares and ownership limits. The ownership limits, as well as our ability
to issue other classes of equity securities, may delay, defer, or prevent a change in control. These provisions may also deter
tender offers for our common shares which may be attractive to you or limit your opportunity to receive a premium for your shares
which might otherwise exist if a third party were attempting to effect a change in control transaction.
Our Certificate of Incorporation limits ownership
of our common stock by a single holder or group of related holders to 9.2%. Until we can increase the market price of our stock
and increase our asset base, the number of shares that can be issued to any single holder or group of related holders adversely
affects our ability to use our common stock as the purchase price for new assets. We have issued Presidential OP Units convertible
into shares of our common stock but the ability to convert those units is dependent upon the issuance of a substantial number of
additional shares.
Our share price will fluctuate.
The market price and trading volume of our
common shares are subject to fluctuation due to general market conditions, the risks discussed in this report and other matters,
including the following:
|
|
·
|
operating results which vary from the expectations of securities analysts and investors;
|
|
|
·
|
investor interest in our property portfolio;
|
|
|
·
|
the reputation and performance of REITs;
|
|
|
·
|
the attractiveness of REITs as compared to other investment vehicles;
|
|
|
·
|
the results of our financial condition and operations;
|
|
|
·
|
the perception of our growth and earnings potential;
|
|
|
·
|
dividend payment rates;
|
|
|
·
|
increases in market interest rates, which may lead purchasers of our common shares to demand a higher yield; and
|
|
|
·
|
changes in financial markets and national economic and general market conditions.
|
The form, timing and/or amount of dividend
distributions in future periods may vary and be impacted by economic and other considerations.
The form, timing and/or amount of dividend
distributions will be declared at the discretion of our Board of Directors and will depend on actual cash from operations, our
financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and other
factors as the Board may consider relevant. The Board may modify the form, timing and/or amount of dividends from time to time.
Our common stock is quoted on the Pink
Sheets OTCQB market which may have an unfavorable impact on our stock price and liquidity.
Our common stock is quoted on the Pink Sheets
OTCQB market, which is a significantly more limited trading market than the New York Stock Exchange or The NASDAQ Stock Market.
The quotation of the Company’s shares on the OTCQB may result in a less liquid market available for existing and potential
stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term
adverse impact on our ability to raise capital in the future.
When fewer shares of a security are being traded
on the OTCQB, volatility of prices may increase and price movement may outpace the ability to deliver accurate quote information.
Due to lower trading volumes in shares of our common stock, there may be a lower likelihood of one’s orders for shares of
our common stock being executed, and current prices may differ significantly from the price one was quoted at the time of one’s
order entry.
Our common stock is thinly traded, so
stockholders may be unable to sell at or near asking prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.
Currently, our common stock is quoted in the
Pink Sheets OTCQB market and the trading volume the Company anticipates to develop may be limited by the fact that many major institutional
investment funds, including mutual funds, as well as individual investors follow a policy of not investing in unlisted stocks and
certain major brokerage firms restrict their brokers from recommending unlisted stocks because they are considered speculative,
volatile and thinly traded. The Pink Sheets OTCQB market is an inter-dealer market much less regulated than the major exchanges,
and our common stock is subject to abuses, volatility and shorting. Thus, there is currently no broadly followed and established
trading market for our common stock. An established trading market may never develop or be maintained. Active trading markets generally
result in lower price volatility and more efficient execution of buy and sell orders. Absence of an active trading market reduces
the liquidity of the shares traded there.
The trading volume of our common stock has
been, and may continue to be, limited and sporadic. As a result of such trading activity, the quoted price for our common stock
on the OTCQB may not necessarily be a reliable indicator of its fair market value. Further, if we cease to be quoted, holders would
find it more difficult to dispose of our common stock or to obtain accurate quotations as to the market value of our common stock
and as a result, the market value of our common stock likely would decline.
We are subject to the penny stock rules
adopted by the Securities and Exchange Commission (“SEC”) that require brokers to provide extensive disclosure to its
customers prior to executing trades in penny stocks. These disclosure requirements may cause a reduction in the trading activity
of our common stock, which in all likelihood would make it difficult for our stockholders to sell their securities.
Rule 3a51-1 of the Securities Exchange Act
of 1934, as amended, establishes the definition of a “penny stock,” for purposes relevant to us, as any equity security
that has a minimum bid price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a
limited number of exceptions which are not available to us. This classification would severely and adversely affect any market
liquidity for our common stock. For any transaction involving a penny stock, unless exempt, the penny stock rules require that
a broker or dealer approve a person’s account for transactions in penny stocks and the broker or dealer receive from the
investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased. In
order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information
and investment experience and objectives of the person and make a reasonable determination that the transactions in penny stocks
are suitable for that person and that that person has sufficient knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior
to any transaction in a penny stock, a disclosure schedule required by the SEC relating to the penny stock market, which, in highlight
form, sets forth:
|
|
·
|
The
basis on which the broker or dealer made the suitability determination; and
|
|
|
·
|
That
the broker or dealer received a signed, written agreement from the investor prior to the transaction.
|
Disclosure also has to be made about the risks
of investing in penny stocks in both public offerings and in secondary trading and commission payable to both the broker-dealer
and the registered representative, current quotations for the securities and the rights and remedies available to an investor in
cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for
the penny stock held in the account and information on the limited market in penny stocks.
Because of these regulations, broker-dealers
may not wish to engage in the above-referenced necessary paperwork and disclosures and/or may encounter difficulties in their attempt
to sell shares of our common stock, which may affect the ability of selling stockholders or other holders to sell their shares
in any secondary market and have the effect of reducing the level of trading activity in any secondary market. These additional
sales practice and disclosure requirements could impede the sale of our common stock, if and when our common stock becomes publicly
traded. In addition, the liquidity for our common stock may decrease, with a corresponding decrease in the price of our common
stock. Our common stock, in all probability, will be subject to such penny stock rules for the foreseeable future and our stockholders
will, in all likelihood, find it difficult to sell their common stock.
Newly developed and acquired properties
may not produce the cash flow that we expect, which could adversely affect our overall financial performance.
In deciding whether to acquire or develop a
particular property, we make assumptions regarding the expected future performance of that property. If our estimated return on
investment proves to be inaccurate, it may fail to perform as we expected. With certain properties, our business plan contemplates
reposition or redeveloping that property with the goal of increasing jts cash flow, value or both. Our estimate of the costs of
repositioning or redeveloping an acquired property may prove to be inaccurate, which may result in our failure to meet our profitability
goals. Additionally, we may acquire new properties not fully leased or developed and the cash flow from those properties may be
insufficient to pay the operating expenses and debt service associated with that property until the property is more fully leased
or developed. If one or more of these new properties do not perform as expected or we are unable to successfully integrate new
properties into our operations, our financial performance and ability to make distributions may be adversely affected.
A concentration of our investments in
the healthcare sector may leave our profitability vulnerable to a downturn or slowdown in that sector.
If our investments are concentrated in the
healthcare sector which our new investment/business strategy contemplates, we will be subject to risks inherent in investments
in a single type of property and the potential effects on our revenues, and as a result, our cash available for distribution to
our stockholders, resulting from a downturn or slowdown in the healthcare sector could be more pronounced then if we had a more
fully diversified portfolio.
Tenants of healthcare properties may
derive a substantial portion of their income from third-party payors.
Many tenants of healthcare facilities derive
a substantial portion of their net operating revenues from third-party payors, including Medicare and Medicaid programs. These
programs are highly regulated by federal, state and local laws, rules and regulations and are subject to frequent and substantial
change. There are no assurances that payments from governmental payors will remain at levels comparable to current levels or will,
in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement under these programs.
As of December 31, 2016, we owned 100% of the
Mapletree Industrial Center located in Palmer, Massachusetts.
On September 22, 2016 the Company signed a
new sublease for their executive office space under a month to month lease with Nexelus for a monthly rental payment of $1,500
or $18,000 per year. Either party may terminate the sublease upon 30 days prior written notice.
The chart below lists the Company’s properties
as of December 31, 2016.
|
|
|
|
|
Gross Amount of Real Estate At
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
|
Rentable
Space
|
|
Land ($)
|
|
|
Buildings,
Improvements
and equipment
($)
|
|
|
Total ($)
|
|
|
Accumulated
Depreciation
December
31, 2016 ($)
|
|
|
Net
Amount of
Real
Estate At
December
31, 2016
($)
|
|
|
Mortgage
Balance at
December
31, 2016
($)
|
|
|
Maturity
Date
|
|
|
Interest
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mapletree Industrial Center, Palmer, MA
|
|
336,259sq. ft.
|
|
$
|
79,100
|
|
|
$
|
1,090,359
|
|
|
$
|
1,169.459
|
|
|
$
|
646,770
|
|
|
$
|
522,689
|
|
|
$
|
1,710,651
|
|
|
|
(1
|
)
|
|
|
6.031
|
%
|
|
|
(1)
|
Mortgage matures August 2025
|
Mapletree Industrial Center
–
Palmer, Massachusetts
We own 100% of the Mapletree Industrial Center
located in Palmer, Massachusetts. This is a multi-tenant rental facility which was originally the Wickwire-Spencer Wire Mill until
1970 at which time it became rental space. The property consists of 31 buildings located on approximately 48 acres. Major tenants
include Creative Material Technologies office and lab, Consolidated Lumber Transport office, Australian natural Soapworks, ESSROC
Materials (a Portland cement distributor), Michael Houle, JP Mc Carthy & Sons and American Cable Assembly.
The
property offers traditional office space and industrial/warehouse space along with vacant land with rail access ready for development.
The
buildings comprise a total of 418,679 square feet, of which 336,259 is rentable. The property has a carrying value of
$1,169,459, less accumulated depreciation of $646,770, resulting in a net carrying value of $522,689 at December 31, 2016.
|
|
¨
|
The
occupancy rate at the property at December 31, 2016 was 87% with most tenants being on month to month lease terms.
|
|
|
¨
|
Due
to the varied nature of the building types on this property, it is occupied by office tenants as well as storage, warehouse and
distribution operations. The average effective annual rent per square foot at the property is $2.55 and varies based on the type
and location of the space within the property.
|
In the opinion of management, all of our properties
are adequately covered by insurance in accordance with normal insurance practices. All real estate owned by us is owned in fee
simple interest with title insurance.
|
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
There is pending in the United States District
Court for the Southern District of New York (Civ. Act. No. 16-cv-08633) an action entitled JFURTI, LLC and JACOB FRYDMAN, Suing
Individually and Derivatively and On Behalf of All Similarly Situated Limited Partners and Shareholders in the Name and Right of
FIRST CAPITAL REAL ESTATE TRUST INCORPORATED and FIRST CAPITAL REAL ESTATE OPERATING PARTNERSHIP, L.P., Plaintiffs, against FORUM
PARTNERS INVESTMENT MANAGEMENT, LLC; RUSSELL C. PLATT; MARBLE 15 SCS; PRESIDENTIAL REALTY CORPORATION; PRESIDENTIAL REALTY OPERATING
PARTNERSHIP; SUNEET SINGAL; JAVIER VANDE STEEG; MICHAEL MCCOOK; FRANK GRANT; RICHARD LEIDER; FIRST CAPITAL REAL ESTATE ADVISORS,
LP; FIRST CAPITAL REAL ESTATE INVESTMENTS, LLC; FIRST CAPITAL BORROWER, LLC; UNITED 25250 TILDEN, LLC; and PHOENIX AMERICAN FINANCIAL
SERVICES, INC. Defendants, and FIRST CAPITAL REAL ESTATE TRUST INCORPORATED and FIRST CAPITAL REAL ESTATE OPERATING PARTNERSHIP,
L.P., Nominal Derivative Defendants. The action has been brought under the Racketeer Influenced And Corrupt Organizations Act (“RICO”),
the Securities Exchange Act of 1934 (the “Exchange Act”) and for breach of contract and fraudulent conveyance and seeks
treble, actual and punitive damages, injunctive relief, an accounting and attorneys’ fees. The amended complaint alleges
twenty one causes of action that the defendants engaged in a fraudulent scheme (the “Fraudulent Scheme”) to take control
of First Capital REIT (a publicly registered fully reporting 1933 and 1934 Act public company that is organized as a real estate
investment trust), and use First Capital REIT to divert monies for their own purposes. The underlying actions alleged against the
Company arise from the Company’s transactions and proposed transactions with First Capital REIT. The plaintiff’s seek
injunctions against the FC Parties enjoining them from disposing of any assets and setting aside any conveyances that have taken
place. The action was initially commenced in November 2016 and the RICO claims were added by way of an amended complaint filed
December 29, 2016. On February 17, 2017 a motion to dismiss the complaint was filed on behalf of the Company and other defendants.
That motion is still in the briefing stage. The Company believes that as to the Company and its operating partnership, the claims
have no merit.
|
|
ITEM
4.
|
Mine
Safety Disclosures
|
Not applicable.
PART II.
|
|
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
(a) The principal market for our Class A
common stock (ticker symbol PDNLA) and our Class B common stock (ticker symbol PDNLB) is the Pink Sheets OTCQB market.
The range of high low bid information for the
Class A and Class B common stock for the last two calendar years are set forth below:
|
|
|
Class A
|
|
|
Class B
|
|
|
Calendar 2016
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
.50
|
|
|
$
|
.30
|
|
|
$
|
.01
|
|
|
$
|
.00
|
|
|
Second Quarter
|
|
|
.40
|
|
|
|
.35
|
|
|
|
.01
|
|
|
|
.01
|
|
|
Third Quarter
|
|
|
.90
|
|
|
|
.35
|
|
|
|
.05
|
|
|
|
.01
|
|
|
Fourth Quarter
|
|
|
.75
|
|
|
|
.65
|
|
|
|
.12
|
|
|
|
.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
1.00
|
|
|
|
.35
|
|
|
|
.02
|
|
|
|
.01
|
|
|
Second Quarter
|
|
|
.35
|
|
|
|
.35
|
|
|
|
.07
|
|
|
|
.04
|
|
|
Third Quarter
|
|
|
.35
|
|
|
|
.35
|
|
|
|
.04
|
|
|
|
.02
|
|
|
Fourth Quarter
|
|
|
.35
|
|
|
|
.35
|
|
|
|
.02
|
|
|
|
.01
|
|
(b) The number of aggregate record
holders for the Company’s Class A and Class B Common Stock at April 7, 2017 was 361 holders.
(c ) Under the
Code, a REIT which meets certain requirements is not subject to Federal income tax on that portion of its taxable income which
is distributed to its shareholders, if at least 90% of its “real estate investment trust taxable income” (exclusive
of capital gains) is so distributed. In 2016 and 2015, the Company did not pay any dividends. Management does not believe that any
dividend will be payable in respect to 2016. We cannot promise that we will continue to be taxed as a REIT, or that we will have
sufficient cash to pay dividends in order to maintain REIT status
. See Item 1. - Business – (e) Qualification as a REIT
above.
(d) The following table sets forth certain
information as of December 31, 2016, relating to the Company’s equity compensation plans:
|
Plan Category
|
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
|
|
|
Weighted average exercise
price of outstanding options,
warrants and rights
|
|
|
Number of securities
remaining available for
further issuance under
equity compensation plans
(excluding securities
reflected in column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity compensation plans approved by security holders
|
|
|
None
|
|
|
|
None
|
|
|
1,000,000 Class B Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders
|
|
|
740,000
|
|
|
$
|
1.25
|
|
|
N/A
|
|
|
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
Not required for a smaller reporting company.
|
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Overview
Presidential is a Delaware corporation organized
in 1983 to succeed to the business of a company of the same name which was organized in 1961 to succeed to the business of a closely
held real estate business founded in 1911. Since 1982, we have elected to be treated as a real estate investment trust (“REIT”)
for Federal and State income tax purposes. We own, directly or indirectly, interests in real estate and interests in entities which
own real estate.
On December 16, 2016, the “Company”
and its newly formed operating partnership, Presidential Realty Operating Partnership LP (“Presidential OP”), entered
into an interest contribution agreement (the “Initial Agreement”) with First Capital Real Estate Trust Incorporated
(“FC REIT”), First Capital Real Estate Operating Partnership (the “FC OP”), Township Nine Owner, LLC (T9/JV),
Capital Station Holdings, LLC, Capital Station Member, LLC, Capital Station 65 LLC and Avalon Jubilee LLC. On January 6, 2017,
the Company and the other parties to the Initial Agreement entered into the First Amendment to the Initial Agreement (the “Amendment,”
and, together with the Initial Agreement, the “Agreement”) and FC OP entered into the Agreement of Limited Partnership
(the “Limited Partnership Agreement”) of Presidential OP, as limited partner, with the Company as general partner.
The Agreement contemplated that the Company would acquire from FC OP its 31.3333% interest in the owner of a residential community
referred to as the “Avalon Property” and 66% percent (the “T9 Transferred Interest”) of its 92% interest
(FC/T9 Interest) in the owner of a development property known as the “T9 Property.” The purchase price for the interests
is payable in limited partnership interests in Presidential OP (“Presidential OP Units”) convertible under certain
conditions into shares of the Company’s Class B common stock.
The Company’s acquisition of
the interest in the Avalon Property was completed on January 6, 2017. The Avalon Property consists of 251 non-contiguous single-family,
residential lots and a 10,000 square foot clubhouse, within the Jubilee at Los Lunas subdivision located in Los Lunas, New Mexico
(the “Avalon Property”). At the Closing, in exchange for the contribution to Presidential OP of FC OP’s membership
interests in Avalon, FC OP received 4,632,000 Presidential OP Units in, and became a limited partner of, Presidential OP. Such
limited partnership interests are convertible, upon the satisfaction of certain conditions, into shares of Class B common stock
of the Company on a one-for-one basis. In connection with the Closing, FC REIT paid $800,000 to Presidential to be used as operating
capital.
On March 31, 2017, the Company and Presidential OP entered
into a second amendment to the Agreement pursuant to which the T9 Transferred Interest was assigned to PRES-T9 Holdings, LLC, a
Delaware limited liability company and wholly owned subsidiary of Presidential OP (PRES-T9). PRES-T9 was admitted as a member of
the T9/JV. The Second Amendment also provides for the satisfaction of certain conditions prior to the issuance and delivery of
100% of the Presidential OP Units to be issued in connection with the transaction. Those Presidential OP Units will be held back
(the “Holdback Units”) until a new appraisal of the FC/T9 Interest has been obtained and the loan secured by the T9
Properties has been extended or refinanced. The loan is currently in default. Presidential has an opportunity for 30 days to endeavor
to obtain an extension or refinancing of the loan. Thereafter, the FC Parties will continue to seek an extension/refinancing of
the loan. If the appraisal and the loan extension/refinancing are not obtained within 180 days, then the FC Parties and Presidential may within 10 days mutually agree in writing to extend the time to complete the extension/refinancing of the loan, or either
the FC or Presidential may elect to cancel the transfer of the T9 Transferred Interest following 10 days prior
written notice to the other party.
The
number of Presidential OP Units ultimately issued if these conditions are satisfied is subject to adjustment based on the new appraisal
and the amount of the mortgage debt (the extended/refinanced loan) at that time. These adjustments could result in a material change
in the number of Presidential OP Units that are ultimately issued and delivered if the conditions are satisfied.
The final
number of Presidential OP Units will be determined by taking the amount of the new appraisal, subtracting therefrom the amount
of the extended/refinanced loan and the legal costs and expenses incurred by the Company in securing the extended/refinanced loan
and multiplying the amount thereby obtained by 66%.
As a result
of the conditional nature of the transfer of the Transferred Interest, the Company will not be reflecting the Transferred Interest
in its financial statements until the conditions in the Second Amendment have been satisfied and the applicable number of OP Units
has been determined and issued.
In connection with the Agreement, Palisades Pacific Realty Trust, Inc (“Palisades”) became
a consultant to the Company to provide services relating to the integration of the First Capital properties (the interests in the
Avalon Property and T9 Property) and in connection with potential capital raising activities. The Company paid Palisades $200,000
and reimbursed certain expenses approved by the Company. Palisades notified the Company on March 1, 2017 that they were
ceasing to provide services thus terminating the arrangement. Palisades has requested reimbursement of certain other expenses which
the Company believes it is not responsible for.
In connection with and as a condition
of the Agreement, on January 6, 2017, the Company entered into various agreements with the officers, directors and Management of
the Company to restructure amounts owed to them as well as change the equity compensation due or held by them. The Company entered
into an agreement with Signature Group Advisors, LLC (“Signature”), an affiliate of Nickolas W. Jekogian, III, a director,
Chairman and Chief Executive Officer of the Company, and an adviser to the Company (the “Signature Agreement”) pursuant
to which (i) Signature will receive $1,000,000 payable in cash as consideration for sourcing, negotiating and documenting the transactions
contemplated by the Agreement (“Transaction Fee”), which will become earned, due and payable upon the closing by the
Company or Presidential OP of a preferred stock offering (or similar instrument) of at least $50,000,000 in gross proceeds; and
(ii) commencing on the closing for the T9 Property under the Agreement, Signature will be engaged as a consultant to the Company
for a four year term. The fee payable to Signature as a consultant (the “Consulting Fee”) will be $500,000 per annum,
payable in cash in arrears on each anniversary of the closing for the T9 Property; provided, however, that no portion of the Consulting
Fee will be earned or paid unless and until the net asset value of the Company is at least $200,000,000.
On January 6, 2017, the Company and
Mr. Alexander Ludwig, our President and Chief Operating Officer, entered into a Cancellation and Release Agreement for the cancellation
of all stock options and warrants held by Mr. Ludwig as of such date in consideration for the issuance of (x) 450,000 shares of
Class B common stock of the Company and (y) an option to purchase an additional 550,000 shares of Class B common stock of the Company.
The exercise of such option is subject to certain conditions, including that the issuance of any shares of Class B common stock
of the Company covered by Mr. Ludwig’s option would not be deemed “Excess Shares” as that term is defined in
our certificate of incorporation. The exercise price of the option is $0.00.
On January 6, 2017, Mr. Jekogian entered into a Cancellation
and Release Agreement for the (x) cancellation of all stock options and warrants held by Mr. Jekogian as of such date and (y) termination
of his Employment Agreement effective as of such date. Mr. Jekogian will continue as an employee of the Company in his capacity
as Chairman and Chief Executive Officer on a month-to-month basis until such time as otherwise determined by the Company in its
sole discretion. It is expected that his salary will remain unchanged.
On January 6, 2017, each of Richard Brandt, Robert Feder
and Jeffrey Joseph, non-management directors of the Company, and Jeffrey Rogers, a former non-management director of the Company,
entered into Issuance and Release Agreements for the issuance of an aggregate of 450,000 shares of Class B common stock of the
Company in consideration of the release of the Company’s obligations to pay past due and current director’s fees, of
which 90,000 were issued to the current directors for their services in connection with the Agreement.
On January 6, 2017, the Company and
Presidential OP entered into an Acknowledgement and Certification (the “Shareholder Certification”) with Mr. Jekogian,
The BBJ Family Irrevocable Trust (the “Trust”), FC OP and FC REIT, pursuant to which the Trust agreed to, among other
things, (i) exchange its shares of Class A stock for shares of Class B stock of the Company upon the occurrence and satisfaction
of certain conditions, (ii) refrain from taking certain actions, and (iii) vote its shares of Class A stock in favor of certain
actions. Pursuant to such Shareholder Certification, the Company agreed not to issue or cause to be issued any additional shares
of its Class A stock.
In connection with the foregoing,
certain holders of Class A common stock of the Company, representing an aggregate of 49,000 shares of Class A common stock,
entered into a Proxy and Option to Purchase with The BBJ Family Irrevocable Trust designating The BBJ Family Irrevocable
Trust as proxy to vote on all matters with respect to their shares. In addition, such agreement granted The BBJ Family
Irrevocable Trust an option to purchase such shares at a purchase price of $2.00 per share. During the first quarter the
Trust exercised its option and purchased 49,000 shares of Class A common stock. The Company was not a party to that agreement.
The shares
of Class B common stock of the Company issued in connection with the transactions contemplated by the Agreement were issued
in reliance on the exemption from securities registration requirements contained in Section 4(a)(2) of the Securities
Act of 1933, as amended, and the rules promulgated thereunder.
We outsource the management of the Mapletree
Industrial Center to Signature Community Management a company owned by our CEO.
We obtain funds for working capital and investment
from our available cash, operating activities, and refinancing of mortgage loans on our real estate.
On July 28, 2015, Palmer-Mapletree LLC, a wholly-owned
subsidiary of the Company entered into a Loan Agreement (the “Loan Agreement”) with Natixis Real Estate Capital LLC
providing for a mortgage loan in the principal amount of $1,750,000 (the “Loan”) at an interest rate of 6.031%. $934,794
of the loan proceeds were used to repay the prior mortgage loan and line of credit on the Mapletree Property. $123,757 of the Loan
proceeds was set aside for capital improvements and reserves for the property. We received net proceeds of $585,125. The Loan matures
on August 5, 2025 and requires monthly payments of $11,308. The outstanding balance of the loan and mortgage costs at December
31, 2016 and 2015 was $1,710,651 and $134,706, respectively and $1,740,462 and $150,438, respectively. The Company is required
to maintain certain Financial Covenants. The Company was is in compliance with the covenants at December 31, 2016.
Critical Accounting Policies
For the 2016, the Company had a loss
from continuing operations. This, combined with a history of operating losses and working capital deficiency, has been detrimental
to our operations and could potentially affect our ability to meet our obligations and continue as a going concern. Our ability
to continue as a going concern is dependent upon the successful execution of our business plan to achieve profitability and to
increase working capital, raising debt and or equity. The accompanying financial statements do not include any adjustments that
may result from this uncertainty.
In preparing the consolidated financial statements in
conformity with accounting principles generally accepted in the United States of America (“GAAP”), management is
required to make estimates and assumptions that affect the financial statements and disclosures. These estimates require
difficult, complex and subjective judgments. Management has discussed with the Audit Committee the implementation of the
critical accounting policies described below and the estimates required with respect to such policies.
Real Estate
Real estate is carried at cost, net of accumulated
depreciation and amortization. Additions and improvements are capitalized whereas repairs and maintenance are charged to rental
property operating expenses as incurred. Depreciation is generally provided on the straight-line method over the estimated useful
life of the asset. The useful life of each property, as well as the allocation of the costs associated with a property to its various
components, requires estimates by management. If management incorrectly estimates the allocation of those costs or incorrectly
estimates the useful lives of its real estate, depreciation expense may be miscalculated.
The Company reviews its properties for
impairment if events or changes in circumstances warrant. If impairment were to occur, the property would be written down to
its estimated fair value. The Company assesses the recoverability of its investment in real estate based on undiscounted cash
flow estimates. The future estimated cash flows of a property are based on current rental revenues and operating expenses, as
well as the current local economic climate affecting the property. Considerable judgment is required in making these
estimates and changes in these estimates could cause the estimated cash flows to change and impairment could occur. As of
December 31, 2016, the Company’s net real estate was carried at $522,689.
Rental Revenue Recognition
The Company recognizes rental revenue on the
straight-line basis from the later of the date of the commencement of the lease or the date of acquisition of the property subject
to existing leases, which averages minimum rents over the terms of the leases. Certain leases require the tenants to reimburse
a pro rata share of real estate taxes, utilities and maintenance costs.
Allowance for Doubtful Accounts
Management assesses the collectability of amounts
due from tenants and other receivables, using indicators such as past-due accounts, the nature and age of the receivable, the payment
history and the ability of the tenant or debtor to meet its payment obligations. Management’s estimate of allowances for
doubtful accounts is subject to revision as these factors change. Rental revenue is recorded on the accrual method and rental revenue
recognition is generally discontinued when the tenant in occupancy is delinquent for ninety days or more. Bad debt expense is charged
for vacated tenant accounts and subsequent receipts collected for those receivables will reduce bad debt expense. At December 31,
2016 and 2015, allowance for doubtful accounts relating to tenant obligations was $2,426 and $790, respectively.
Income Taxes
We operate in a manner intended to enable us
to continue to qualify as a Real Estate Investment Trust under Sections 856 to 860 of the Code. Under those sections, a REIT which
meets certain requirements is not subject to Federal income tax on that portion of its taxable income which is distributed to its
shareholders, if at least 90% of its REIT taxable income (exclusive of capital gains) is so distributed. As a result of our ordinary
tax loss for 2015 there was no requirement to make a distribution in 2016. In addition, no provision for income taxes was required
at December 31, 2016. If the Company fails to distribute the required amounts of income to its shareholders, or otherwise fails
to meet the REIT requirements, we would fail to qualify as a REIT and substantial adverse tax consequences could result. We believe
that we will not be required to pay a dividend in 2017 to maintain our REIT status.
Results of Operations
Results of Operations for the year ended December
31, 2016 compared to the year ended December 31, 2015 were as follows:
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2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
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|
$
|
938,903
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|
|
$
|
932,044
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|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
557,176
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|
|
$
|
566,610
|
|
|
|
|
|
|
|
|
|
|
|
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Net loss
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$
|
(826,318
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)
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|
$
|
(495,377
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)
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Revenues increased by $6,859 for the year ended
December 31, 2016, compared to the year ended December 31, 2015, primarily as a result of increased occupancy at the Mapletree
Industrial Center.
Net loss for the year ended December 31,
2016 was $826,318 compared to $495,377 for the year ended December 31, 2016, an increase of $330,941. The increase was
comprised of: (i) an increase in general and administrative expenses of approximately $87,000, which consists primarily of
increased legal and professional fees related the First Capital transaction which was completed on January 6, 2017 (ii) an
increase in interest income and fees on mortgage debt incurred in connection with the refinance of the Mapletree property in
2015 and (iii) the decrease in other income of $228,261 from the extinguishment gain recognized on the settlement of the
former officers deferred compensation (iv) and a decrease in investment income received from Broadway Partners Fund II of
approximately $8,900. This loss was offset by (i) an increase in rental income of $7,059, (ii) and decrease in operating
expenses of $9,434.
Balance Sheet
December 31, 2016 compared to December 31,
2015
Net real estate increased by approximately
$6,500 as a result of additions and improvements of approximately $51,000 offset by depreciation expense of approximately $45,000,
in 2016.
Prepaid expenses decreased by approximately
$49,000 primarily as a result of the current year expense of prepaid insurance in connection with the multi-year directors and
officers tail policy purchased in 2011 and other insurance expense.
Mortgage escrow increased by approximately
$22,000 primarily due to timing of real estate taxes and insurance payments
Accrued liabilities increased by approximately
$438,000 primarily due to accrued salary for Nicholas W. Jekogian, CEO as required by his employment contract of $225,000 and $120,000
of accrued expense related to the First Capital transaction and timing of payments at December 31, 2016.
Liquidity and Capital Resources
We obtain funds for working capital and investment
from our available cash and operating activities, and refinancing of mortgage loans on our real estate.
The Company had a loss from continuing operations
at December 31, 2016, combined with a history of operating losses and working capital deficiency, has been detrimental to
our operations and could potentially affect our ability to meet our obligations and continue as a going concern. Our ability to
continue as a going concern is dependent upon the successful execution of our strategies to achieve profitability and to increase
working capital, raising debt and/ or equity. The accompanying financial statements do not include any adjustments that may result
from this uncertainty.
At December 31, 2016, we had approximately
$78,400 in available cash, a significant decrease from December 31, 2015. The decrease in cash was due to cash used in operating
activities of approximately $284,000, $51,000 used for capital improvements and $30,000 in principal payment on the Mapletree Industrial
Center.
In connections with the First Capital transaction
in we received $800,000 cash for working capital and expenses related to the transaction.
(a)
Insurance
The Company carries comprehensive liability,
fire, extended coverage, auto, workman’s compensation, rental loss and acts of terrorism insurance on its properties. The
Company also carries director and officer insurance and a director and officer insurance tail policy. Management believes that
its properties are adequately covered by insurance. In 2016, the cost for this insurance was approximately $226,000 including the
accretion during the year of $29,000 paid in 2011 for the director and officer insurance tail policy. The Company has renewed its
insurance coverage for 2017 and the Company estimates that the premium costs will be approximately $152,000. Although the Company
has been able to obtain terrorism coverage on its properties in the past, this coverage may not be available in the future.
(b)
Operating Activities
Cash from operating activities includes interest
on the Company’s mortgage portfolio and net cash received from rental property operations. Net cash received from rental
property operations was approximately $947,000. Net cash received from rental property operations is before additions and improvements
and mortgage amortization.
(c)
Investing Activities
During 2016, the Company invested approximately
$51,000 in additions and improvements to its properties
(d)
Financing Activities
During 2016, the Company made principal payments
of approximately $30,000 in connection with the Mapletree property.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements
that have, or are reasonably likely to have, a material effect on the financial condition, changes in financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital resources of the Company.
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ITEM
7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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While we are not required as a smaller reporting
company to comply with this Item 7A, we are providing the following general discussion of qualitative market risk.
Our financial instruments consist primarily
of notes receivable and mortgage notes payable. Substantially all of these instruments bear interest at fixed rates, so our cash
flows from them are not directly impacted by changes in market rates of interest. However, changes in market rates of interest
impact the fair values of these fixed rate assets and liabilities. We generally hold our notes receivable until maturity or prepayment
and repay our notes payable at maturity or upon sale of the related properties, and, accordingly, any fluctuations in values do
not impact our earnings, balance sheet or cash flows. We also have investments in securities available for sale, which are reported
at fair value. We evaluate these instruments for other-than-temporary declines in value, and, if such declines were other than
temporary, would record a loss on the investments. We do not own any derivative financial instruments or engage in hedging activities.
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|
ITEM
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
See Table of Contents to Consolidated Financial
Statements.
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|
ITEM
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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None.
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|
ITEM
9A.
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CONTROLSAND
PROCEDURES
|
(a) Evaluation of Disclosure Controls
and Procedures
We maintain disclosure controls and procedures
or controls and other procedures that are designed to ensure that the information required to be disclosed by us in the reports
that we file or submit under the Securities Exchange Act of 1934, or Exchange Act, is recorded, processed, summarized and reported,
within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports
that a company files or submits under the Exchange Act is accumulated and communicated to our management, including our Chief Executive
Officer and President, as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision
and with the participation of our Chief Executive Officer and President, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of December 31, 2016.
Based on this evaluation, our Chief Executive Officer and our President concluded that as of December 31, 2016, our disclosure
controls and procedures were effective at providing reasonable assurance that the information required to be disclosed by the Company
in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in
the SEC’s rules and forms; and (ii) accumulated and communicated to our management, including our Chief Executive Officer
and President, as appropriate, to allow timely decisions regarding disclosure.
(b) Internal Controls over Financial Reporting
Management of the Company is responsible for
establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under
the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures
that:
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·
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Pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets;
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|
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·
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Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the Company; and
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·
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Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, 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 assessed the effectiveness of our
internal control over financial reporting as of December 31, 2016. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
Based on its assessment and those criteria, management believes that the Company maintained effective internal control over financial
reporting at December 31, 2016.
This Annual Report does not include an attestation
report of our registered public accounting firm regarding our internal control over financial reporting. The Company is a smaller
reporting company and, as such, management’s report is not subject to attestation by our registered public accounting firm
pursuant to rules of the SEC that permits us to provide only management’s report in this Annual Report.
(c) Changes in Internal Control over Financial
Reporting
There have been no changes in our internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
the fourth quarter of Fiscal 2016 that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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ITEM
9B.
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OTHER
INFORMATION
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None.
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|
ITEM
10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Directors and Executive Officers of the
Company
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Name of Director (Age)
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Position with Company and Principal
Occupation
|
|
Director Since
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Richard Brandt (89)
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|
Director
|
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1972
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Nickolas W. Jekogian III (47)
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|
Director, Chairman and Chief Executive Officer; Owner and Chief Executive Officer of Signature Community Investment Group LLC
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2011
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Jeffrey F. Joseph (75)
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Director
|
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1993
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Alexander Ludwig (46)
|
|
Director, President, Chief Operating Officer and Principal Financial Officer
|
|
2011
|
Richard Brandt
Mr. Brandt has
been a member of the Board of Directors of Presidential and the chairman of its Audit and Compensation Committees since 1972.
He became President of Trans-Lux Corporation, a diversified entertainment and electronic communications company, in 1962 and then
served as Chairman of the Board of Directors of Trans-Lux from 1974 until 2003. Mr. Brandt brings extensive experience to
the Board of Directors as a chief executive of a public company and from his thorough knowledge of Presidential’s business.
Nickolas W. Jekogian, III
Mr. Jekogian,
is the founder, owner and President of Signature Community Investment Group LLC, a Delaware limited liability company (together
with its affiliates, "Signature"). Mr. Jekogian founded Signature in 1991 while in college with the purchase of an apartment
building in Center City Philadelphia. Since that time, Mr. Jekogian has obtained extensive experience in the real estate industry
focusing Signature primarily on multi-family rental properties and at the same time gaining experience in developing commercial
properties for third parties. He has built Signature into an integrated real estate company that has owned and operated over its
history approximately 5,000 apartment units in 17 markets throughout the United States. Mr. Jekogian is a licensed real estate
broker in New York. He has a business Administration degree from Drexel University and a Masters degree in Management from the
University of Pennsylvania. Mr. Jekogian has more than 15 years experience developing commercial projects in the New York and
Philadelphia Metropolitan areas for retailers such as CVS Drugs, Commerce Bank and Blockbuster Video. During the last five years,
prior to joining Presidential, Mr. Jekogian worked exclusively with Signature. Through his extensive experience in the real estate
industry, his involvement in strategic transactions within the industry and educational background, Mr. Jekogian provides important
expertise to the Board of Directors.
Jeffrey F. Joseph
Mr. Joseph has been
employed by Presidential for many years in many capacities. Mr. Joseph initially served as General Counsel for Presidential
and was its President and Chief Executive Officer from 1992 to 2011. Mr. Joseph has served as a director of Presidential since
1993. As a result of his long experience in the real estate business in general and with Presidential, Mr. Joseph has a deep understanding
of Presidential’s business, finances and operational requirements and is a valuable member of our Board.
Alexander Ludwig
Since February 2011
Mr. Ludwig, has provided, and will continue to provide, consulting services for Signature. From 2009 to October of 2011 he worked
at Urban Real Estate Growth Fund LLC, a real estate development and financing company, where he oversaw new investments. Prior
to joining Urban Real Estate Growth Fund LLC, Mr. Ludwig worked from 2003 to 2008 for ADG Capital LLC, a real estate development
and financing company, where he oversaw multiple real estate development projects. Mr. Ludwig also held various positions in banking,
where he structured debt and corporate finance transactions, most recently as a Vice President at Societe Generale, where he was
employed from 1997 until 2002. Previously he worked for First Union National Bank and First Fidelity Bank from 1993 to 1997 underwriting
and structuring loan transactions. Mr. Ludwig holds a BA degree in history from The University of Pennsylvania. Mr. Ludwig brings
substantial leadership skills and knowledge to our board of directors through his experience in the real estate and financial
industries.
BBJ Family Irrevocable Trust
owns 226,013
shares of Class A common stock and 250,000 shares of Class B common stock. The Trust was formed in September 2009 by Mr. Jekogian
for the benefit of family members including Mr. Jekogian's parents, grandparents, wife, sister, children, nieces and nephews. The
trustee of the Trust is Mr. Jekogian’s father and Mr. Jekogian remains the protector of the Trust. There is no agreement
between the trustee of the Trust and Mr. Jekogian as to how the shares of Class A common stock acquired by the trust will be voted
or otherwise dealt with except on January 6, 2017, the Company and Presidential OP entered into the Shareholder Certification with
Mr. Jekogian, the Trust, FC OP and FC REIT, pursuant to which the Trust agreed to, among other things, (i) exchange its shares
of Class A stock for shares of Class B stock of the Company upon the occurrence and satisfaction of certain conditions, (ii) refrain
from taking certain actions, and (iii) vote its shares of Class A stock in favor of certain actions. Pursuant to such Shareholder
Certification, the Company agreed not to issue or cause to be issued any additional shares of its Class A stock. The terms of
the transaction pursuant to which the shares of Class A common stock were acquired by the Trust provide that the Trust will vote
its shares of Class A common stock for Mr. Robert Feder and/or Mr. Richard Brandt as directors (subject to their desire to remain
as directors); provided that each of them continues to qualify as an independent director under applicable rules, including the
rules of any exchange on which either the Class A common stock or the shares of Class B common stock may then be listed and until
the occurrence of a Capital Event. “Capital Event” means the receipt by us of at least $20,000,000 in cash or property
from a capital raising activity including the following: (a) the sale for cash of shares of the Class A common stock or Class B
common stock or securities convertible into shares of the Class A common stock or Class B common stock; (b) the exchange of shares
of Class A common stock or Class B common stock for real estate assets consistent with our status as a REIT; (c) the sale of unsecured
subordinated debt instruments issued by us, the proceeds of which may be used to acquire real estate assets which are consistent
with our status as a REIT. Mr. Feder died in January 2017.
In connection with the First Capital Transaction,
certain holders of Class A common stock of the Company, representing an aggregate of 49,000 shares of Class A common stock, entered
into a Proxy and Option to Purchase with Trust designating the Trust as proxy to vote on all matters with respect to their shares.
In addition, such agreement granted The BBJ Family Irrevocable Trust an option to purchase such shares at a purchase price of $2.00
per share. The Company was not a party to that. Since January 1, 2017, the Trust has acquired those 49,000 Class A shares which
are included in the 226,013 Class A shares owned by the Trust. See also a description of the Class A Shareholders Agreement contemplated
by the Interest Contribution Agreement described under Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters, Changes in Control.
Family Relationships
There are no family relationships between any
director and any executive officer.
Involvement in Certain Legal Proceedings
To our knowledge, during the past ten years,
none of our directors, executive officers, promoters, control persons, or nominees has:
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|
·
|
been
convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor
offenses);
|
|
|
·
|
had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
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|
|
·
|
been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
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|
·
|
been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
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|
|
·
|
been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
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|
|
·
|
been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
|
Section 16(A) Beneficial Ownership
Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires executive officers, directors and persons who beneficially own
more than 10% of a registered class of our equity securities to file reports of ownership and changes in ownership with the Securities
and Exchange Commission. Executive officers, directors and greater than 10% stockholders are required by regulations of the Securities
and Exchange Commission to furnish us with copies of all Section 16(a) reports they file. Based solely on our review of the copies
of reports we received, or written representations that no such reports were required for those persons, we believe that, for the
year ended December 31, 2016, all statements of beneficial ownership required to be filed with the Securities and Exchange Commission
were filed on a timely basis.
Code of Ethics
The Company has adopted a Code of Ethics that
applies to all officers and employees, including its Chief Executive Officer and Principal Financial Officer . The Company’s
Code of Business Conduct and Ethics is filed as Exhibit 14 to this report. and is available on the SEC’s website,
www.sec.gov
. We will provide any person without charge, upon your written request to the company, a copy of such code.
Audit Committee
The members of the Audit Committee
are Richard Brandt and Jeffrey Joseph. The function of the Audit Committee, which is established in accordance with
Section 3(a)(58)(A) of the Securities and Exchange Act, is to oversee the accounting and financial reporting process of
the Company and the audits of the financial statements of the Company. Each member of the Audit Committee is independent (as
defined in Section 803A(2) of the NYSE Amex Company Guide). The Board of Directors has adopted a written Charter for
the Audit Committee. The Audit Committee held four meetings during our last fiscal year.
The Board of Directors has determined that
Richard Brandt, a member of the Audit Committee, is financially sophisticated as defined by Section 803B(2)(a)(iii) of the
NYSE Amex Company Guide. The Board does not believe that it is necessary to have a member of the Audit Committee who meets the
definition of a financial expert pursuant to Item 407(d) of Regulation S-K because all of the members of the Audit Committee
satisfy the NYSE Amex requirements for Audit Committee membership applicable to NYSE Amex listed companies and, as mentioned above,
all the members of the Audit Committee are financially sophisticated individuals as defined by the NYSE Amex Company Guide. In
addition, all members of the Audit Committee have been members for at least ten years and are familiar with the business and accounting
practices of the Company. The Charter of the Audit Committee is filed as Exhibit A to the Company’s Proxy Statement for the
Annual Meeting of Stockholders held June 15, 2009, filed with the SEC on April 27, 2009, and is available on the SEC’s website,
www.sec.gov.
|
|
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
Remuneration of Executive Officers
The following table and discussion summarizes
the compensation for the two years ended December 31, 2016 and 2015 of the Principal Executive Officer and Principal Financial
Officer of the Company who served as such during fiscal 2016 and those persons serving in such capacity at December 31, 2016.
There were no other executive officers at December 31, 2016.
Summary Compensation Table
|
Name and Principal
|
|
|
|
Salary
|
|
|
Bonus
|
|
|
Stock
Awards
|
|
|
Option
Awards
|
|
|
Non-equity
incentive plan
compensation
|
|
|
Nonqualified
deferred
compensation
|
|
|
All Other
Compensation
|
|
|
Total
|
|
|
Position
|
|
Year
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
earnings ($)
|
|
|
($)
|
|
|
($)
|
|
|
Nickolas W. Jekogian (1)
|
|
2016
|
|
|
225,000
|
(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,882
|
|
|
|
256,560
|
|
Chairman, Chief Executive
Officer and Director
|
|
2015
|
|
|
225,000
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,560
|
|
|
|
256,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alexander Ludwig President (1)
Chief Operating Officer,
Principal Financial Officer
and Secretary
|
|
2016
|
|
|
225,000
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,888
|
|
|
|
233.907
|
|
|
|
|
2015
|
|
|
225,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,064
|
|
|
|
233,907
|
|
|
(1)
|
Elected as an officer effective November 16, 2011.
|
|
(2)
|
Salary is deferred until the occurrence of
a Capital Event.
See
Employment Agreements.
|
Outstanding Equity Awards at Fiscal Year-End
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
Name
|
|
Number of
securities
underlying
unexercised
options
exercisable
(#)
|
|
|
Number of
securities
underlying
unexercised
options
unexercisable
(#)
|
|
|
Equity
incentive plan
awards:
Number of
securities
underlying
unexercised
unearned
options (#)
|
|
|
Option
exercise
price per
share
($)
|
|
|
Option
expiration
date
|
|
|
Number
of
shares
or units
of stock
that
have not
vested
(#)
|
|
Market
value
of shares or
units of
stock
that have
not vested
($)
|
|
|
Equity
incentive
plan
awards:
Number of
unearned
shares,
units or
other rights
that
have
not vested
(#)
|
|
|
Equity
incentive
plan
awards:
Market or
payout
value of
unearned
shares,
units or
other
rights
that have
not vested
($)
|
|
|
Nickolas W. Jekogian
|
|
|
74,000
|
*
|
|
|
296,000
|
*
|
|
|
|
|
|
|
1.25
|
|
|
|
November 8, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alexander Ludwig
|
|
|
74,000
|
*
|
|
|
296,000
|
*
|
|
|
|
|
|
|
1.25
|
|
|
|
November 8, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nickolas W. Jekogian
|
|
|
|
|
|
|
1,700,000
|
*
|
|
|
|
|
|
|
.10
|
|
|
|
January 24, 2024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
All of the above options were terminated in connection
with the First Capital Transaction.
|
Compensation discussion and analysis
The Company has a Compensation Committee consisting
of two independent directors. The Compensation Committee has designed compensation packages for its executive offers which are
heavily weighted towards equity compensation realizable upon transactions that raise capital to the Company or which bring assets
into the Company. It’s key components are stock options, the value of which are directly tied to the performance of our executives.
Employment Agreements and Stock Option Agreements
Alexander Ludwig
On November 8, 2011, we entered into an
employment agreement with Mr. Ludwig pursuant to which we employ Mr. Ludwig as President and Chief Operating Officer. The employment
agreement has a term of eighteen months and may be terminated at any time by the Board of Directors for “cause” or
by Mr. Ludwig for “good reason,” each as defined in the employment agreement. Mr. Ludwig receives a base salary of
$225,000 per annum. Commencing with our fiscal year beginning January 1, 2012 and for each fiscal year thereafter during the term
of the employment agreement, Mr. Ludwig will have the opportunity to earn a bonus of up to $200,000, with the amount determined
by the Compensation Committee in its absolute discretion.
On January 8, 2014, the Company and Mr. Alexander Ludwig, a Director,
President, Chief Operating Office and Principal Financial Officer of the Company entered into an amendment to Mr. Ludwig’s
employment agreement dated November 8, 2011. The amendment provides for (i) the extension of the employment term from May 3, 2013
to December 31, 2015, (ii) continuation of Mr. Ludwig’s base salary through the balance of the term at the rate of $225,000
per annum, (iii) removal of the $200,000 cap on the amount of any annual bonus that might be awarded Mr. Ludwig, (iv) the issuance
of a “Transaction Warrant” to Mr. Ludwig upon the occurrence of a Capital Event, and (v) an increase in severance benefits
from three months to six months in the event of a termination of Mr. Ludwig’s employment following a change of control or
a termination for “good reason” as defined in the employment agreement.
Mr. Ludwig’s employment agreement,
as amended, expired at December 31, 2015 but the board agreed to continue Mr. Ludwig’s employment on the same terms as the
agreement until otherwise terminated by the board.
On January 6, 2017 as part of the First Capital transaction the
Company and Mr. Ludwig our President and Chief Operating Officer, entered into a Cancellation and Release Agreement for the cancellation
of all stock options and warrants held by Mr. Ludwig as of such date in consideration for the issuance of (x) 450,000 shares of
Class B common stock of the Company and (y) an option to purchase an additional 550,000 shares of Class B common stock of the Company.
The exercise of such option is subject to certain conditions, including that the Company has consummated an equity offering, capital
raise or such other offering such that the issuance of any shares of Class B common stock of the Company covered by Mr. Ludwig’s
option would not be deemed “Excess Shares” as that term is defined in the certificate of incorporation of the Company.
The exercise price is $0.00.
Mr. Ludwig will continue
to provide consulting services to and receive compensation from Signature. As a result, Mr. Ludwig may be subject to conflicts
of interest. Mr. Ludwig has agreed to keep the independent directors of the Board advised of his activities for and compensation
from Signature.
Compensation of Directors
The Directors received 90,000 shares of
Class B common stock each on January 6, 2017 as compensation for their services during 2016 and 2015.
|
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
As of April 7, 2017, there were 442,533 shares
of Class A common stock and 4,746,147 shares of Class B common stock outstanding.
The following tables set forth certain
information regarding our Class A and Class B common stock beneficially owned as of April 14, 2017, for (i) each
stockholder known to be the beneficial owner of 5% or more of any class of our outstanding shares of common stock, (ii) each
named executive officer and director, and (iii) all executive officers and directors as a group. A person is considered
to beneficially own any shares: (i) over which such person, directly or indirectly, exercises sole or shared voting or
investment power, or (ii) of which such person has the right to acquire beneficial ownership at any time within 60 days
through an exercise of stock options or warrants. Unless otherwise indicated, voting and investment power relating to the
shares shown in the table for our directors and executive officers is exercised solely by the beneficial owner or shared by
the owner and the owner’s spouse or children.
For purposes of these tables, a person or
group of persons is deemed to have “beneficial ownership” of any shares of common stock that such person has the
right to acquire within 60 days of April 14, 2017. For purposes of computing the percentage of outstanding shares
of our common stock held by each person or group of persons named above, any shares that such person or persons has the right
to acquire within 60 days of April 14, 2017 is deemed to be outstanding, but is not deemed to be outstanding for the purpose
of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially
owned does not constitute an admission of beneficial ownership.
Security Ownership of Management
As of April 14, 2017, the directors and executive
officers of Presidential owned beneficially the following amounts and percentages of the Class A and Class B common stock of Presidential:
|
Name of Beneficial Owner
|
|
Class A Common Beneficially
Owned and Percentage of Class
|
|
|
Class B Common Beneficially
Owned and Percentage of Class
|
|
|
Percentage
of all
Outstanding
Stock (Class
A and B
Combined)
|
|
|
|
|
Number of shares
|
|
|
%
|
|
|
Number of shares
|
|
|
%
|
|
|
%
|
|
|
Richard Brandt, Director
|
|
|
–
|
|
|
|
–
|
|
|
|
291,000
|
|
|
|
6.1
|
%
|
|
|
5.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey F. Joseph, Director
|
|
|
5,344
|
|
|
|
1.2
|
%
|
|
|
412,065
|
|
|
|
8.6
|
%
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alexander Ludwig, Director, President, Chief Operating Officer, Principal Financial Officer,
|
|
|
|
|
|
|
|
|
|
|
450,000
|
|
|
|
9.5
|
%
|
|
|
8.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All officers and directors as a group (3 persons)
|
|
|
5,344
|
|
|
|
1.2
|
%
|
|
|
1,153,065
|
|
|
|
24.29
|
%
|
|
|
22.33
|
%
|
Except as set forth in the notes to the table, each of the owners
of the shares set forth in the table has the sole voting and dispositive power over such shares except that any such owner has
no voting or dispositive power over shares the beneficial ownership of which is disclaimed.
Security Ownership of Certain Beneficial
Owners
The following table sets forth information as of the date noted
in the footnotes about persons, (whose ownership of our common stock is set forth in the previous table), who, to our knowledge,
as of April 7, 2017, beneficially owned more than 5% of any class of our outstanding shares of common stock determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934.
|
|
|
Class A Common Stock Beneficially
Owned and Percentage of Class
|
|
|
Class B Common Stock Beneficially
Owned and Percentage of Class
|
|
|
Percentage of all
Outstanding
Stock (Class A
and B Combined)
|
|
|
Name and Address
|
|
Number of Shares
|
|
|
%
|
|
|
Number of Shares
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nickolas W. Jekogian, Jr.,
Trustee of the BBJ Irrevocable Family Trust
312 Lewis Rd
Broomall, PA 19008
|
|
|
226,013
|
|
|
|
51.1
|
%
|
|
|
250,000
|
|
|
|
5.3
|
%
|
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alex B Gray (2)
6519 Oxford Avenue.
Zionsville, IN 46077
|
|
|
|
|
|
|
|
|
|
|
410,539
|
|
|
|
8.7
|
%
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Estate of Robert Feder, Deceased(1)
|
|
|
916
|
|
|
|
.2
|
%
|
|
|
349,312
|
|
|
|
7.3
|
%
|
|
|
6.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey Rogers
12 E. 86
th
St. Unit 921
New York, NY 10028
|
|
|
|
|
|
|
|
|
|
|
282,076
|
|
|
|
5.9
|
%
|
|
|
5.4
|
%
|
|
|
(1)
|
Includes 916 Class A shares and 59,888 Class B shares held by Mr. Feder’s wife, the beneficial
ownership of which is disclaimed
|
|
|
(2)
|
Includes 73,400 shares owned by Mr. Gray’s wife for which he shares voting power and 20,000
shares held in custodial accounts for his children which he has the right to vote but in which he disclaims any primary interest.
|
The Company’s management knows of no
other persons owning beneficially more than 5% of either the outstanding Class A common stock or the outstanding Class B
common stock of the Company.
Changes in Control
The holders of Class A shares have
the right to elect two thirds of our board of directors. Accordingly the holders of a majority of the Class A shares can exercise
significant control over the Company. The BBJ Irrevocable Family Trust holds a majority of the Class A shares. On January 6, 2017,
the Company and Presidential OP entered into the Shareholder Certification with Mr. Jekogian, Trust, FC OP and FC REIT, pursuant
to which the Trust agreed to, among other things, (i) exchange its shares of Class A stock for shares of Class B stock of the Company
upon the occurrence and satisfaction of certain conditions, (ii) refrain from taking certain actions, and (iii) vote its shares
of Class A stock in favor of certain actions. Pursuant to such Shareholder Certification, the Company agreed not to issue or cause
to be issued any additional shares of its Class A stock.
The Interest Contribution Agreement provides for a Class A Shareholders
Agreement which will provide that (i) subject to the approval of the Board of Directors of Presidential following the Closing for
the T9 Property (and the shareholders of Class A stock of Presidential if determined necessary or appropriate by the Board), the
holders of the Class A Controlling Stock will agree to exchange the Class A Controlling Stock for $5,000,000 of newly issued Class
B Shares of Presidential upon the earlier to occur of (a) Presidential having achieved total stabilized net asset value of not
less than $200,000,000 or (b) eighteen (18) months from the Closing for the Avalon Property; and (ii) the agreement of the holders
of the Class A Controlling Stock (x) not to transfer, lien or encumber the Class A Controlling Stock, (y) not to take any action
that would interfere with the transactions contemplated by this Agreement or that may be inconsistent with the terms of this Agreement;
(iii) to vote in favor of changing the name of Presidential to another name selected by the FC Parties; (iv) to vote in favor of
changing the domicile of Presidential as may be determined by the FC Parties; (v) to vote in favor of either cancelling the Class
A Shares or converting the Class A Shares into common Class B shares (vi) to vote in favor of the election or appointment of two
(2) new board members Serge Kasada and Richard Shea.
Either of these agreements could result in
a change in control of the Company.
|
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
Independent Directors
The Board has determined that Richard Brandt
and Jeffrey Joseph, are independent directors pursuant to Section 803A(2) of the NYSE MKT LLC Company Guide.
Conflicts of Interest and Fiduciary Duties
Conflicts of interest may arise as a result
of the relationship between Mr. Jekogian, who is Chairman of the Company’s board of directors and chief executive officer
of the Company, and signature of which Mr. Jekogian is the owner and chief executive officer. Mr. Ludwig, a Director, our President,
Chief Operating Officer and Principal Financial Officer, also provides consulting services to and receives compensation from Signature.
All of our directors and officers have fiduciary duties to manage the Company in a manner beneficial to our stockholders. At the
same time, Mr. Jekogian and Mr. Ludwig may also owe fiduciary duties to Signature. The independent directors of the Board will
review all transactions between the Company and Signature and the activities of Mr. Jekogian and Mr. Ludwig.
Indemnification of Directors and Officers
The Company’s Articles of Incorporation
provide that no director, officer of or employee to the corporation past, present or future, shall be personally liable to the
corporation or any of its shareholders for damages for breach of fiduciary duty as a director or officer; provided, however, that
the liability of a director for acts or omissions which involve intentional misconduct, fraud or knowing violation of law and for
the payment of dividends is not so eliminated. The corporation shall advance or reimburse reasonable expenses incurred by
an affected officer, director or employee without regard to the above limitations, or any other limitation which may hereafter
be enacted to the extent such limitation may be disregarded if authorized by the Articles of Incorporation.
|
|
ITEM
14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
Audit Fees
The following table presents fees billed for
professional services rendered by Baker Tilly Vichow Krause LLP (“Baker Tilly”) for the audit of the Company’s
financial statements for the fiscal years ended December 31, 2016 and December 31, 2015 and fees for other services rendered
by Baker Tilly during those periods.
|
|
|
2016
|
|
|
2015
|
|
|
Audit Fees (a)
|
|
$
|
70,250
|
|
|
$
|
53,650
|
|
|
Audit-Related Fees (b)
|
|
|
750
|
|
|
|
750
|
|
|
Tax Fees
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
71,500
|
|
|
$
|
53,250
|
|
|
(a)
|
Fees for audit services consisted of the audit of the Company’s annual consolidated financial statements and review of the Company’s quarterly financial statements.
|
|
(b)
|
Fees for accounting related services consisted of a compilation for one of the Company’s wholly-owned subsidiaries.
|
All audit-related services, tax
services and other services in 2016 and 2015 were pre-approved by the Audit Committee.
Policy on Pre-Approval of Independent Registered
Public Accounting Firm
The Audit Committee is responsible for appointing,
setting compensation and overseeing the work of the independent registered public accounting firm. The Audit Committee has established
a policy regarding pre-approval of all audit and non-audit services provided by our Company’s independent registered public
accounting firm.
On an on-going basis, management communicates
specific projects and categories of service for which the advance approval of the Audit Committee is requested. The Audit Committee
reviews these requests and advises management if the Audit Committee approves the engagement of the independent registered public
accounting firm. The Audit Committee may also delegate the ability to pre-approve audit and permitted non-audit services to one
or more of its members, provided that any pre-approvals are reported to the Audit Committee at its next regularly scheduled meeting.
PART IV.
|
|
ITEM
15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
3.1 Certificate of Incorporation of the Company (incorporated herein
by reference to Exhibit 3.5 to Post-effective Amendment No. 1 to the Company’s Registration Statement on Form S-14, Registration
No. 2-83073).
3.2 Certificate of Amendment to Certificate
of Incorporation of the Company (incorporated herein by reference to Exhibit 3 to the Company’s Annual Report on Form 10-K
for the year ended December 31, 1987, Commission File No. 1-8594).
3.3 Certificate of Amendment to Certificate of Incorporation of
the Company, filed July 21, 1988 with the Secretary of State of the State of Delaware (incorporated herein by reference to Exhibit
3.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1988, Commission File No. 1-8594).
3.4 Certificate of Amendment to Certificate
of Incorporation of the Company, filed on September 12, 1989 with the Secretary of State of the State of Delaware (incorporated
herein by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1989, Commission
File No. 1-8594).
3.5 Certificate of Amendment to Certificate
of Incorporation of the Company, filed on August 15, 2012 with the Secretary of State of the State of Delaware (incorporated herein
by reference to Exhibit A to the Company’s definitive Proxy Statement for its Annual Meeting to Shareholders filed with the
Securities and Exchange Commission on July 3, 2012, Commission File No. 1-8594).
3.6 By-laws of the Company (incorporated
herein by reference to Exhibit 3.7 to Post-effective Amendment No. 1 to the Company’s Registration Statement on Form S-14,
Registration No. 2-83073).
4.1 2012 Equity Incentive Plan and Forms of
Award Agreements (incorporated herein by reference to Exhibit B to the Company’s definitive Proxy Statement for its Annual
Meeting to Shareholders filed with the Securities and Exchange Commission on July 3, 2012, Commission File No. 1-8594).
10.1 Property Management Agreement, dated November
8, 2011, between Presidential Realty Corp. and Signature Community Investment Group LLC (incorporated herein by reference to Exhibit
10.2 to the Company’s Form 8-K as filed on November 9, 2011, Commission File No. 1-8594)
10.2 Asset Management Agreement, dated November
8, 2011, between Presidential Realty Corp. and Signature Community Investment Group LLC (incorporated herein by reference to Exhibit
10.3 to the Company’s Form 8-K as filed on November 9, 2011, Commission File No. 1-8594).
10.3 Executive Employment Agreement, dated
November 8, 2011, between Presidential Realty Corp. and Nickolas W. Jekogian, III (incorporated herein by reference to Exhibit
10.4 to the Company’s Form 8-K as filed on November 9, 2011, Commission File No. 1-8594).
10.4 Warrant issued January 8, 2014 to Nickolas
W. Jekogian to purchase 1,700,000 shares of Class B Common Stock. (incorporated herein by reference to Exhibit 4 to the Company’s
Form 8-K as filed on January 15, 2014, Commission File No. 1-8594).
10.5 Amendment dated January 8, 2014 to the
Employment Agreement dated November 8, 2011 between the Company and Nickolas W. Jekogian (incorporated herein by reference to Exhibit
10.1 to the Company’s Form 8-K as filed on January 15, 2014, Commission File No. 1-8594).
10.6 Option Agreement, dated November 8, 2011,
between Presidential Realty Corp. and Nickolas W. Jekogian, III (incorporated herein by reference to Exhibit 10.5 to the Company’s
Form 8-K as filed on November 9, 2011, Commission File No. 1-8594).
10.7 Executive Employment Agreement, dated
November 8, 2011, between the Company and Alexander Ludwig (incorporated herein by reference to Exhibit 10.6 to the Company’s
Form 8-K as filed on November 9, 2011, Commission File No. 1-8594).
10.8 Amendment dated January 8, 2014 to the
Employment Agreement dated November 8, 2011 between the Company and Alexander Ludwig (incorporated herein by reference to Exhibit
10.2 to the Company’s Form 8-K as filed on January 15, 2014, Commission File No. 1-8594).
10.9 Option Agreement, dated November 8, 2011,
between the Company and Alexander Ludwig (incorporated herein by reference to Exhibit
to the Company’s Form 8-K as filed on
November 9, 2011, Commission File No. 1-8594)
10.10 Form of Indemnification Agreement between
Presidential Realty Corp. and each officer and director (incorporated herein by reference to Exhibit 10.6 to the Company’s
Form 8-K as filed on November 9, 2011, Commission File No. 1-8594).
10.11 Loan Agreement dated as of July 28, 2015
between Palmer-Mapletree LLC and Natixis Real Estate Capital LLC (incorporated by reference to Exhibit 10.1 to the Company’s
Form 8-K as filed on August 3, 2015, commission file No. 1-8594).
1012 Promissory Note dated as of July 28, 2015,
by Palmer-Mapletree LLC in favor of Natixis Real Estate Capital LLC ( incorporated by reference to Exhibit 10.2 to the Company’s
Form 8-K as filed on August 3, 2015, commission file No. 1-8594).
10.13 Mortgage, Assignment of Leases and Rents
and Security Agreement dated as of July 28, 2015, by Palmer-Mapletree LLC to Natixis Real Estate Capital LLC. (incorporated by
reference to Exhibit 10.3 to the Company’s Form 8-K as filed on August 3, 2015, commission file No. 1-8594).
10.14 Guaranty of Recourse Obligations dated
as of July 28, 2015, by Presidential Realty Corporation in favor of Natixis Real Estate Capital LLC. (incorporated by reference
to Exhibit 10.4 to the Company’s Form 8-K as filed on August 3, 2015, commission file No. 1-8594).
10.15 Interest Contribution Agreement, dated
as of December 16, 2016 among Presidential Realty Corporation, Presidential Realty Operating Partnership LP, First Capital Real
Estate Trust Incorporated, First Capital Real Estate Operating Partnership, Township Nine Owner, LLC, Capital Station Holdings,
LLC, Capital Station Member, LLC, Capital Station 65 LLC and Avalon Jubilee LLC. (incorporated by reference to Exhibit 10.1
to the Company’s Form 8-K as filed on December 20, 2016, commission file No. 1-8594).
10.16 First Amendment dated January 6, 2017 to the Interest
Contribution Agreement, dated as of December 16, 2016 among Presidential Realty Corporation, Presidential Realty Operating Partnership
LP, First Capital Real Estate Trust Incorporated, First Capital Real Estate Operating Partnership, Township Nine Owner, LLC, Capital
Station Holdings, LLC, Capital Station Member, LLC, Capital Station 65 LLC and Avalon Jubilee LLC (incorporated by reference to
Exhibit 10.1 to the Company’s Form 8-K filed on January 12, 2017, commission file no. 1-8594).
10.17 Limited Partnership Agreement dated January 6, 2017 between
Presidential Realty Corporation and First Capital Real Estate Trust Incorporated, First Capital Real Estate Operating Partnership
(incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on January 12, 2017, commission file no. 1-8594).
10.18 Consulting Agreement dated January 6, 2017 between Presidential
Realty Corporation and Signature Group Advisors, LLC (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K
filed on January 12, 2017, commission file no. 1-8594).
10.19 Cancellation and Release Agreement dated January 6, 2017
between Presidential Realty Corporation and Alexander Ludwig (incorporated by reference to Exhibit 10.4 to the Company’s
Form 8-K filed on January 12, 2017, commission file no. 1-8594).
10.20 Stock Option Agreement dated January 6, 2017 between Presidential
Realty Corporation and Alexander Ludwig (incorporated by reference to Exhibit 10.5 to the Company’s Form 8-K filed on January
12, 2017, commission file no. 1-8594).
10.21 Cancellation and Release Agreement dated January 6, 2017
between Presidential Realty Corporation and Nickolas W. Jekogian, III (incorporated by reference to Exhibit 10.6 to the Company’s
Form 8-K filed on January 12, 2017, commission file no. 1-8594).
10.22 Issuance and Release Agreement dated January 6, 2017 between
Presidential Realty Corporation and Richard Brandt (incorporated by reference to Exhibit 10.7 to the Company’s Form 8-K filed
on January 12, 2017, commission file no. 1-8594).
10.23 Issuance and Release Agreement dated January 6, 2017 between
Presidential Realty Corporation and Robert Feder (incorporated by reference to Exhibit 10.8 to the Company’s Form 8-K filed
on January 12, 2017, commission file no. 1-8594).
10.24 Issuance and Release Agreement dated January 6, 2017 between
Presidential Realty Corporation and Jeffrey Joseph (incorporated by reference to Exhibit 10.9 to the Company’s Form 8-K filed
on January 12, 2017, commission file no. 1-8594).
10.25 Issuance and Release Agreement dated January 6, 2017 between
Presidential Realty Corporation and Jeffrey Rogers (incorporated by reference to Exhibit 10.10 to the Company’s Form 8-K
filed on January 12, 2017, commission file no. 1-8594).
10.26 Second Amendment to Interest Contribution Agreement, dated
as of March 31, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on April 5, 2017, Commission
File No. 1-8594).
10.27 Limited Liability Company Agreement of Township Nine Owner,
LLC, dated as of February 5, 2016, (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on April 5,
2017, Commission File No. 1-8594).
10.28 First Amendment to Limited Liability Company Agreement
of Township Nine Owner, LLC, dated as of March 31, 2017 (incorporated by reference to Exhibit 10.3 to the Company’s Form
8-K filed on April 5, 2017, Commission File No. 1-8594).
14. Code of Business Conduct and
Ethics of the Company (incorporated herein by reference to Exhibit 14 to the Company’s Annual Report on Form 10-K
for the year ended December 31, 2015, Commission File No. 1-8594).
21. List of Subsidiaries of Registrant.
31.1 Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2 Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1 Certification of Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on the 17th
day of April 2017.
|
|
PRESIDENTIAL REALTY CORPORATION
|
|
|
|
|
|
|
By:
|
/s/ Nickolas W. Jekogian
|
|
|
|
Nickolas Jekogian
|
|
|
|
Chief Executive Officer and Chairman of the Board
|
|
|
|
|
|
By:
|
/s/ Alexander Ludwig
|
|
|
|
Alexander Ludwig
|
|
|
|
President, Chief Operating Officer and Principal Financial Officer
|
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
|
Signature and Title
|
|
Date
|
|
|
|
|
|
By:
|
/s/ RICHARD BRANDT
|
|
April 17, 2017
|
|
|
Richard Brandt
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
By
|
/s/ NICKOLAS W. JEKOGIAN
|
|
April 17, 2017
|
|
|
Nickolas W. Jekogian
|
|
|
|
|
Director, Chairman and Chief Executive Officer
|
|
|
|
|
|
|
|
|
By:
|
/s/ JEFFREY F. JOSEPH
|
|
April 17, 2017
|
|
|
Jeffrey F. Joseph
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
By:
|
/s/ALEXANDER LUDWIG
|
|
April 17, 2017
|
|
|
Alexander Ludwig
|
|
|
|
|
Director, President, Chief Operating Officer and Principal Financial Officer
|
|
|
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To
the Shareholders, Audit Committee and Board of Directors
Presidential
Realty Corporation
New
York, NY
We
have audited the accompanying consolidated balance sheets of Presidential Realty Corporation (the “Company”) as of December 31, 2016
and 2015, and the related consolidated statements of operations, stockholders' deficit and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of its internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, 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. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating
the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Presidential Realty Corporation as of December 31, 2016 and 2015 and the results of its operations and cash flows for the years
then ended, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the company has changed its method of
accounting for the presentation of debt issuance costs due to the adoption of Accounting Standards Update 2015-03,
Interest—Imputation
of Interest: Simplifying the Presentation of Debt Issuance Costs.
The
accompanying consolidated financial statements have been prepared assuming that the company will continue as a going concern.
As discussed in Note 1 to the consolidated financial statements, the company has suffered recurring losses from operations and
has a working capital deficiency. These factors raise substantial doubt about its ability to continue as a going concern. Managements’
plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/
Baker Tilly Virchow Krause, LLP
Melville,
New York
April
17, 2017
|
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
|
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate (Note 2)
|
|
$
|
1,169,459
|
|
|
$
|
1,118,345
|
|
|
Less: accumulated depreciation
|
|
|
646,770
|
|
|
|
602,220
|
|
|
|
|
|
|
|
|
|
|
|
|
Net real estate
|
|
|
522,689
|
|
|
|
516,125
|
|
|
Prepaid expenses
|
|
|
90,613
|
|
|
|
139,587
|
|
|
Other receivables (net of valuation allowance of
|
|
|
|
|
|
|
|
|
|
$2,426 in 2016 and $790 in 2015)
|
|
|
18,446
|
|
|
|
27,784
|
|
|
Cash
|
|
|
78,400
|
|
|
|
442,922
|
|
|
Mortgage escrow
|
|
|
138,135
|
|
|
|
116,581
|
|
|
Other assets
|
|
|
5,492
|
|
|
|
5,453
|
|
|
Total Assets
|
|
$
|
853,775
|
|
|
$
|
1,248,452
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Mortgage payable
|
|
$
|
1,575,945
|
|
|
$
|
1,590,024
|
|
|
Accounts payable and accrued liabilities
|
|
|
1,073,724
|
|
|
|
635,865
|
|
|
Other liabilities
|
|
|
46,702
|
|
|
|
38,841
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
2,696,371
|
|
|
|
2,264,730
|
|
|
|
|
|
|
|
|
|
|
|
|
Presidential Stockholders' Deficit:
|
|
|
|
|
|
|
|
|
|
Common stock: par value $.00001 per share
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Shares
|
|
|
|
|
|
|
|
|
Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized:
|
|
|
700,000
|
|
|
|
700,000
|
|
|
|
|
|
|
|
|
|
|
Issued:
|
|
|
442,533
|
|
|
|
442,533
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized:
|
|
|
999,300,000
|
|
|
|
999,300,000
|
|
|
|
|
|
|
|
|
|
|
Issued:
|
|
|
3,846,147
|
|
|
|
3,846,147
|
|
|
|
38
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
3,108,471
|
|
|
|
3,108,471
|
|
|
Accumulated deficit
|
|
|
|
|
|
|
|
|
|
|
(4,951,109
|
)
|
|
|
(4,124,791
|
)
|
|
Total Stockholders' Deficit
|
|
|
|
|
|
|
|
|
|
|
(1,842,596
|
)
|
|
|
(1,016,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Deficit
|
|
|
|
|
|
|
|
|
|
$
|
853,775
|
|
|
$
|
1,248,452
|
|
See notes to the consolidated financial statements.
|
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
YEARS ENDED DECEMBER 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$
|
938,903
|
|
|
$
|
931,844
|
|
|
Interest on mortgages - notes receivable
|
|
|
-
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
938,903
|
|
|
|
932,044
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1,001,853
|
|
|
|
914,882
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental property:
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
557,176
|
|
|
|
566,610
|
|
|
Interest expense and amortization of mortgage costs
|
|
|
121,468
|
|
|
|
93,475
|
|
|
Real estate taxes
|
|
|
41,697
|
|
|
|
41,069
|
|
|
Depreciation on real estate
|
|
|
44,550
|
|
|
|
50,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenes
|
|
|
1,766,744
|
|
|
|
1,666,941
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income:
|
|
|
|
|
|
|
|
|
|
Gain on the extinguishment of debt
|
|
|
-
|
|
|
|
228,261
|
|
|
Investment income
|
|
|
1,523
|
|
|
|
11,259
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(826,318
|
)
|
|
$
|
(495,377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per Common Share -basic and diluted
|
|
$
|
(0.19
|
)
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Shares Outstanding -
|
|
|
|
|
|
|
|
|
|
basic
|
|
|
4,288,680
|
|
|
|
4,288,680
|
|
|
diluted
|
|
|
4,288,680
|
|
|
|
4,288,680
|
|
See notes to the consolidated financial statements.
|
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
|
|
For the Years Ended December 31, 2016 and 2015
|
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Total
Stockholders'
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2015
|
|
$
|
42
|
|
|
$
|
2,922,982
|
|
|
$
|
(3,629,414
|
)
|
|
$
|
(706,390
|
)
|
|
Stock based compensation
|
|
|
|
|
|
|
185,489
|
|
|
|
|
|
|
|
185,489
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(495,377
|
)
|
|
|
(495,377
|
)
|
|
Balance at December 31, 2015
|
|
|
42
|
|
|
|
3,108,471
|
|
|
|
(4,124,791
|
)
|
|
|
(1,016,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(826,318
|
)
|
|
|
(826,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
42
|
|
|
$
|
3,108,471
|
|
|
$
|
(4,951,109
|
)
|
|
$
|
(1,842,596
|
)
|
See notes to the consolidated financial statements.
|
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
YEARS ENDED DECEMBER 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(826,318
|
)
|
|
$
|
(495,377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash flow from operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
60,282
|
|
|
|
71,983
|
|
|
Investment income
|
|
|
-
|
|
|
|
(8,900
|
)
|
|
Non-cash compensation
|
|
|
-
|
|
|
|
2,680
|
|
|
Bad debt recovery
|
|
|
-
|
|
|
|
(5,523
|
)
|
|
Bad debt
|
|
|
1,636
|
|
|
|
-
|
|
|
Gain on debt extiguishment
|
|
|
-
|
|
|
|
(228,261
|
)
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Decrease (Increase) in:
|
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
7,702
|
|
|
|
7,090
|
|
|
Prepaid expenses
|
|
|
48,974
|
|
|
|
9,681
|
|
|
Mortgage escrows
|
|
|
(21,554
|
)
|
|
|
(105,805
|
)
|
|
Other assets
|
|
|
(39
|
)
|
|
|
(45
|
)
|
|
Increase (decreases) in:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
437,859
|
|
|
|
275,830
|
|
|
Other liabilities
|
|
|
7,861
|
|
|
|
(147,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
542,721
|
|
|
|
(128,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow used in operating activities
|
|
|
(283,597
|
)
|
|
|
(623,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
Payments received on notes receivable
|
|
|
-
|
|
|
|
405
|
|
|
Investment income Broadway Partners Fund II
|
|
|
-
|
|
|
|
8,900
|
|
|
Payments disbursed for capital improvements
|
|
|
(51,114
|
)
|
|
|
(13,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow (used in) investing activities
|
|
|
(51,114
|
)
|
|
|
(4,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
Payment of Line of credit
|
|
|
-
|
|
|
|
(500,000
|
)
|
|
Proceeds of mortgage financing net of mortgage costs
|
|
|
-
|
|
|
|
1,578,484
|
|
|
Principal payments on mortgage debt
|
|
|
(29,811
|
)
|
|
|
(450,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow (used in) / provided by financing activities
|
|
|
(29,811
|
)
|
|
|
628,292
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in Cash
|
|
|
(364,522
|
)
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, Beginning of Year
|
|
|
442,922
|
|
|
|
442,613
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, End of Year
|
|
$
|
78,400
|
|
|
$
|
442,922
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
Interest paid in cash
|
|
$
|
105,890
|
|
|
$
|
63,358
|
|
|
Schedule of non-cash investing and financing activites
|
|
|
|
|
|
|
|
|
|
Issuance of a stock option for accrued deferred compensation
|
|
$
|
-
|
|
|
$
|
185,489
|
|
See notes to the consolidated financial statements.
|
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
1.
|
Organization and Summary of Significant Accounting Policies
|
Organization
Presidential Realty Corporation (“Presidential”
or the “Company”) is operated as a self-administrated, self-managed Real Estate Investment Trust (“REIT”).
The Company is engaged principally in the ownership of income producing real estate. Presidential operates in a single business
segment, investments in real estate related assets.
Basis of Presentation and Going Concern
Considerations
For the year ended December 31, 2016,
the Company had a loss from operations and accumulated deficit. This combined with a history of operating losses and
working capital deficiency, has been detrimental to our operations and could potentially affect our ability to meet our
obligations and continue as a going concern. Our ability to continue as a going concern is dependent upon the successful
execution of strategies to achieve profitability, and increase working capital by raising debt and/or equity. The
accompanying financial statements do not include any adjustments that may result from this uncertainty.
The financial statements have been prepared
in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the requirements
of the Securities and Exchange Commission (“SEC”). The financial statements include all normal and recurring adjustments
that are necessary for a fair presentation of the Company’s financial position and operating results.
Real Estate
Real estate is stated at cost. Generally, depreciation
is provided on the straight-line method over the assets estimated useful lives, which range from twenty to thirty-nine years for
buildings and improvements and from three to ten years for furniture and equipment. Maintenance and repairs are charged to operations
as incurred and renewals and replacements are capitalized. The Company reviews each of its property investments for possible impairment
whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment of properties
is determined to exist when estimated amounts recoverable through future operations on an undiscounted basis are below the properties
carrying value. If a property is determined to be impaired, it is written down to its estimated fair value.
Principles of Consolidation
The consolidated financial statements include
the accounts of Presidential Realty Corporation and its wholly owned subsidiaries. All significant intercompany balances and transactions
have been eliminated.
Rental Revenue Recognition
The Company acts as lessor under operating
leases. Rental revenue is recorded on the straight-line basis from the later of the date of the commencement of the lease or the
date of acquisition of the property subject to existing leases, which averages minimum rents over the terms of the leases. Certain
leases require the tenants to reimburse a pro rata share of real estate taxes, utilities and maintenance costs. Recognition of
rental revenue is generally discontinued when the rental is delinquent for ninety days or more, or earlier if management determines
that collection is doubtful.
Allowance for Doubtful Accounts
The
Company assesses the collectability of amounts due from tenants and other receivables, using indicators such as past-due accounts,
the nature and age of the receivable, the payment history and the ability of the tenant or debtor to meet its payment obligations.
Management’s estimate of allowances for doubtful accounts is subject to revision as these factors change. Any subsequent
recovery of tenant receivable that were previously reserved
is
recorded as a reduction in the provision of bad debt expense. As of December 31, 2016 and 2015, the allowance relating to tenant
receivables was $2,426 and $790, respectively.
|
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
Net Income (Loss) Per Share
Basic net loss per share data is computed by
dividing net loss by the weighted average number of shares of Class A and Class B common stock outstanding (excluding non-vested
shares) during each period. Diluted net income per share is computed by dividing net income by the weighted average shares outstanding,
including the dilutive effect, if any, of non-vested shares. For the years ended December 31, 2016 and 2015, the weighted average
shares outstanding as used in the calculation of diluted loss per share do not include 740,000, of outstanding stock options and
1,700,000 of outstanding warrants, as their inclusion would be antidilutive.
Cash and cash equivalents
Cash includes cash on hand, cash in banks and
cash in money market funds. Cash equivalents represent short-term, highly liquid investment which are readily convertible to cash
and have maturities of three months or less.
Management Estimates
The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing the consolidated
financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities as of the date of the consolidated balance sheets and the reported amounts
of income and expense for the reporting period. Actual results could differ from those estimates.
Accounting for Stock Awards
The Company recognizes the cost of employee
and non-employee services received in exchange for awards of equity instruments as stock-based compensation expense. Stock-based
compensation expense is measured at the grant date based on the fair value of the stock award and options, is recognized as expense,
less expected forfeitures, over the requisite service period, which typically equals the vesting period. Stock-based compensation
expense was $0 in 2016 and 2015.
Accounting for Income Taxes
The Company accounts for income taxes utilizing
the asset and liability approach requiring the recognition of deferred tax assets and liabilities for the expected future tax consequences
of net operating loss carryforwards and temporary differences between the basis of assets and liabilities for financial reporting
purposes and tax purposes and for net operating loss and other carryforwards. A valuation allowance is provided for deferred tax
assets based on the likelihood of realization.
Mortgage costs
The Company amortize mortgage costs over the
life of the loan.
|
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
1.
|
Organization and Summary of Significant Accounting Policies (Continued)
|
Recent Accounting Pronouncements
Effective
January 1, 2016, the Company adopted Accounting Standards Update 2015-03, which requires the presentation of debt issuance costs
as a reduction of the debt liability on the balance sheet, consistent with the accounting for debt discounts. Amortization of debt
issuance costs and debt discounts are each recorded as non-cash interest expense over the life of the respective debt instrument.
The presentation of debt issuance costs as of and for the year ended December 31, 2015 has been reclassified to conform to this
guidance.
In
August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). The new guidance
addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue
as a going concern and to provide related footnote disclosures. This standard is effective for annual periods ending after December
15, 2016, and for annual and interim periods thereafter. The adoption of ASU 2014-15 did not have a material effect on the consolidated
financial statements, however it may affect future disclosures.
In February 2016, the Financial Accounting
Standards Board issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”),
which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract.
The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the
principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether
lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee
is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless
of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating
leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing
guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 supersedes the previous leases standard,
Leases (Topic 840). The standard is effective on January 1, 2019, with early adoption permitted. The Company is currently in the
process of evaluating the impact the adoption of ASU 2016-02 will have on the Company’s financial position or results of
operations.
In March
2016, FASB issued ASU No. 2016-09, “Improvements to Employee Share-based Payment Accounting” (“ASU 2016-09”).
ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic
entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification
in the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2017, and interim periods
within annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the standard
and the impact on its consolidated financial statements and footnote disclosures
.
In August 2016, the FASB issued ASU 2016-15, "Statement of
Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments" (ASU 2016-15. The new guidance clarifies
eight cash flow classification issues where current GAAP was either unclear or has no specific guidance. The new standard is effective
for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years. All entities may
elect to early adopt ASU 2016-15 in any interim period. If an entity early adopts it must adopt all eight of the amendments in
the same period and if early adopted in an interim period any adjustments should be reflected as of the beginning of the year.
The amendments in ASU 2016-15 will be applied using the modified retrospective transition method for each period presented. The
Company is evaluating the impact the adoption of this guidance will have on the classification of certain items on its statements
of cash flows.
Real estate is comprised of the following:
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
79,100
|
|
|
$
|
79,100
|
|
|
Buildings
|
|
|
1,039,984
|
|
|
|
995,215
|
|
|
Furniture and equipment
|
|
|
50,375
|
|
|
|
44,030
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,169,459
|
|
|
$
|
1,118,345
|
|
Rental revenue is from our only property Palmer
Maple Tree which constituted all of the rental revenue for the Company for the years ended December 31, 2016 and 2015.
|
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
3.
|
Investments in Partnership
|
We received distributions from Broadway Partners
Fund II in the amount of $0 and $8,900 during the years ended December 31, 2016 and 2015, respectively. This amount is reported
as investment income on the statement of operations at December 2015. This investment was previously written off. The Company recognizes
income received on the cash basis
.
The Broadway Partners Fund II was closed at the end of 2014
and we do not expect any income from this investment in the future.
On July 28, 2015, Palmer-Mapletree LLC, a wholly-owned
subsidiary of the Company entered into a Loan Agreement (the “Loan Agreement”) with Natixis Real Estate Capital LLC
providing for a mortgage loan in the principal amount of $1,750,000 (the “Loan”) at an interest rate of 6.031%. $934,794
of the loan proceeds were used to repay the prior mortgage loan and line of credit on the Mapletree Property. $123,757 of the Loan
proceeds was set aside for capital improvements and reserves for the property. We received net proceeds of $585,125. The Loan matures
on August 5, 2025 and requires monthly principal and interest payments of $11,308. The loan is presented net of unamortized mortgage
costs, the outstanding balance of the loan and mortgage costs at December 31, 2016 and 2015 was $1,710,651 and $134,706, respectively
and $1,740,462 and $150,438, respectively. The Company is required to maintain certain Financial Covenants. The Company was in
compliance with the covenants at December 31, 2016.
Maturities of Mortgage payments for the next five years
are as follows:
|
2017
|
|
$
|
33,596
|
|
|
2018
|
|
$
|
35,680
|
|
|
2019
|
|
$
|
37,892
|
|
|
2020
|
|
$
|
40,241
|
|
|
2021
|
|
$
|
42,737
|
|
|
Thereafter
|
|
$
|
1,520,415
|
|
Presidential has elected to qualify as a Real
Estate Investment Trust under the Internal Revenue Code. A REIT which distributes at least 90% of its real estate investment trust
taxable income to its shareholders each year by the end of the following year and which meets certain other conditions will not
be taxed on any of its taxable income as long as they distribute the required amounts to its shareholders.
ASC 740 prescribes a more likely than not recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken. If the Company’s
tax position in relation to a transaction was not likely to be upheld, the Company would be required to record the accrual for
the tax and interest thereon. As of December 31, 2016, the tax years that remain open to examination by the federal, state and
local taxing authorities are the 2012 – 2016 tax years and the Company was not required to accrue any liability for those
tax years.
The Company has accumulated a net operating
loss carry forward of approximately $20,900,000 expiring from 2028 through 2036.
For the year ended December 31, 2016, the Company
had a tax loss of approximately $600,000 ($.14 per share), which was all ordinary loss.
For the year ended December 31, 2015, the Company
had a tax loss of approximately $197,700 ($.05 per share), which was all ordinary loss.
|
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
6.
|
Commitments, Contingencies and Related parties
|
|
|
1)
|
Executive Employment Agreements
|
|
|
a.
|
Nickolas W. Jekogian –
On January 8, 2014, the Company and Mr. Nicholas W. Jekogian,
Chairman and Chief Executive Officer of the Company, entered into an amendment to Mr. Jekogian’s employment agreement dated
November 8, 2011. The amendment provides for (i) the extension of the employment term from May 3, 2013 to December 31, 2015, (ii)
continuation of Mr. Jekogian’s base salary through the balance of the term at the rate of $225,000 per annum (subject to
the continued deferral of the payment of the base salary until a Capital Event), (iii) removal of the $200,000 cap on the amount
of any annual bonus that might be awarded Mr. Jekogian, (iv) the issuance to Mr. Jekogian of a “Warrant” to purchase
1,700,000 shares of the Company’s Class B Common Stock in exchange for the complete cancellation of $425,000 of the deferred
compensation accrued under Mr. Jekogian’s employment agreement.
|
Mr. Jekogian’s employment agreement,
as amended, expired at December 31, 2015 but the board agreed to continue Mr. Jekogian’s employment on the same terms as
the agreement until otherwise terminated by the board.
On January 6, 2017, as part of the First Capital transaction
(See Note 13) Mr. Jekogian entered into a Cancellation and Release Agreement for the (x) cancellation of all stock options and
warrants held by Mr. Jekogian as of such date and (y) termination of his Employment Agreement effective as of such date. Mr. Jekogian
will continue as an employee of the Company in his capacity as Chairman and Chief Executive Officer on a month-to-month basis until
such time as otherwise determined by the Company in its sole discretion. It is expected that his salary will remain unchanged.
Alexander Ludwig –
On January 8, 2014, the
Company and Mr. Alexander Ludwig, a Director, President, Chief Operating Officer and Principal Financial Officer of the Company
entered into an amendment to Mr. Ludwig’s employment agreement dated November 8, 2011. The amendment provides for (i) the
extension of the employment term from May 3, 2013 to December 31, 2015, (ii) continuation of Mr. Ludwig’s base salary through
the balance of the term at the rate of $225,000 per annum, (iii) removal of the $200,000 cap on the amount of any annual bonus
that might be awarded Mr. Ludwig.
Mr. Ludwig’s employment agreement, as amended, expired
at December 31, 2015 but the board agreed to continue Mr. Ludwig’s employment on the same terms as the agreement until otherwise
terminated by the board.
On January 6, 2017 as part of the
First Capital transaction (See Note 13) the Company and Mr. Ludwig our President and Chief Operating Officer, entered into a Cancellation
and Release Agreement for the cancellation of all stock options and warrants held by Mr. Ludwig as of such date in consideration
for the issuance of (x) 450,000 shares of Class B common stock of the Company and (y) an option to purchase an additional 550,000
shares of Class B common stock of the Company. The exercise of such option is subject to certain conditions, including that the
Company has consummated an equity offering, capital raise or such other offering such that the issuance of any shares of Class
B common stock of the Company covered by Mr. Ludwig’s option would not be deemed “Excess Shares” as that term
is defined in the certificate of incorporation of the Company. The exercise price is $0.00.
|
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
6.
|
Commitments, Contingencies and Related parties (Continued)
|
|
|
2)
|
Property Management Agreement
|
On November 8, 2011, the Company
and Signature Community Management (“Signature”), (an entity owned by our CEO) entered into a Property Management Agreement
pursuant to which the Company retained Signature as the exclusive, managing and leasing agent for the Company’s Mapletree
Property. Signature receives compensation of 5% of monthly rental income actually received from tenants at the Mapletree Property.
The property Management Agreement renewed for a one year term on November 8, 2016 and will automatically renew for one year terms
until it is terminated by either party upon written notice. The Company incurred management fees of approximately $40,000 and $40,500
for the years ended December 31, 2016 and 2015, respectively.
|
|
3)
|
Asset Management Agreement
|
On November 8, 2011, the Company
entered into an Asset Management Agreement with Signature pursuant to which the Company engaged Signature to oversee the Mapletree
Property. Signature will receive an asset management fee of 1.5% of the monthly gross rental revenues collected for the Mapletree
Property. The Asset Management Agreement renewed for a one year term on November 8, 2016 and will automatically renew for one year
terms until it is terminated by either party upon written notice. The Company incurred asset management fees of approximately $12,000
for the years ended December 31, 2016 and 2015, respectively.
Prior to September 22, 2016 the Company
subleased their executive office space under a month to month lease with Signature for a monthly rental payment of $1,100 or $13,200
per year. The Company incurred $9.900 and $13,200 in rent expense for the years ended December 31, 2016 and 2015, respectively.
On September 22, 2016 the Company
signed a new sublease for their executive office space under a month to month lease with Nexelus for a monthly rental payment of
$1,500 or $18,000 per year. Either party may terminate the sublease upon 30 days prior written notice. The company incurred $4,500
in rent expenses for the year ended December 31, 2016.
The Company incurred total rent of
$14,400 and $13,200 for the years ended December 31, 2016 and 2015, respectively.
On
July 28, 2015 the Company successfully refinanced the Mapletree Property and made payments of $50,000 each and issued the option
agreements to each of three former officers. The options call for the issuance of a number of shares of restricted stock based
on the value at the public offering price equal to the balance due of $413,750. The options vest upon the consummation of an underwritten
registered public offering of the Company’s Class B Common Stock with gross proceeds of not less than $20,000,000. The options
expire 5 years from the grant date. The underlying shares of the exercised options must be held for a period of 180 days, therefore
a discount for lack of marketability was applied. The Company recorded an extinguishment of debt gain of $228,261 based on the
carrying value of the deferred compensation of $413,750
and the fair value of the options issued of $185,489.
|
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
6.
|
Commitments, Contingencies and Related parties (Continued)
|
|
|
C)
|
Other liabilities (Continued)
|
These options were valued using a monte carlo model valuation
methodology. The model embodies relevant assumptions that address the features underlying these instruments. Significant assumption
used in the monte carlo model to value these options were, the following: Exercises price - $1.00; Term - 5 years; Discount for
lack of marketability - 29.19%; Volatility - 108.6%; Risk-free interest rate - 1.61%; Dividend rate - 0%.
In the ordinary course of business,
we may be subject to litigation from time to time. Except as discussed below, there is no current, pending or, to our knowledge,
threatened litigation or administrative action to which we are a party or of which our property is the subject (including litigation
or actions involving our officers, directors, affiliates, or other key personnel, or holders of record or beneficially of more
than 5% of any class of our voting securities, or any associate of such party) which in our opinion has, or is expected to have,
a material adverse effect upon our business, prospects, financial condition or operations.
There is pending in the United States
District Court for the Southern District of New York (Civ. Act. No. 16-cv-08633) an action entitled JFURTI, LLC and JACOB FRYDMAN,
Suing Individually and Derivatively and On Behalf of All Similarly Situated Limited Partners and Shareholders in the Name and Right
of FIRST CAPITAL REAL ESTATE TRUST INCORPORATED and FIRST CAPITAL REAL ESTATE OPERATING PARTNERSHIP, L.P., Plaintiffs, against
FORUM PARTNERS INVESTMENT MANAGEMENT, LLC; RUSSELL C. PLATT; MARBLE 15 SCS; PRESIDENTIAL REALTY CORPORATION; PRESIDENTIAL REALTY
OPERATING PARTNERSHIP; SUNEET SINGAL; JAVIER VANDE STEEG; MICHAEL MCCOOK; FRANK GRANT; RICHARD LEIDER; FIRST CAPITAL REAL ESTATE
ADVISORS, LP; FIRST CAPITAL REAL ESTATE INVESTMENTS, LLC; FIRST CAPITAL BORROWER, LLC; UNITED 25250 TILDEN, LLC; and PHOENIX AMERICAN
FINANCIAL SERVICES, INC. Defendants, and FIRST CAPITAL REAL ESTATE TRUST INCORPORATED and FIRST CAPITAL REAL ESTATE OPERATING PARTNERSHIP,
L.P., Nominal Derivative Defendants. The action has been brought under the Racketeer Influenced And Corrupt Organizations Act (“RICO”),
the Securities Exchange Act of 1934 (the “Exchange Act”) and for breach of contract and fraudulent conveyance and seeks
treble, actual and punitive damages, injunctive relief, an accounting and attorneys’ fees. The amended complaint alleges
twenty one causes of action that the defendants engaged in a fraudulent scheme (the “Fraudulent Scheme”) to take control
of First Capital REIT (a publicly registered fully reporting 1933 and 1934 Act public company that is organized as a real estate
investment trust), and use First Capital REIT to divert monies for their own purposes. The underlying actions alleged against the
Company arise from the Company’s transactions and proposed transactions with First Capital REIT. The plaintiff’s seek
injunctions against the FC Parties enjoining them from disposing of any assets and setting aside any conveyances that have taken
place. The action was initially commenced in November 2016 and the RICO claims were added by way of an amended complaint filed
December 29, 2016. On February 17, 2017 a motion to dismiss the complaint was filed on behalf of the Company and other defendants.
That motion is still in the briefing stage. The Company believes that as to the Company and its operating partnership, the claims
have no merit.
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PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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7.
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Concentration of Credit Risk
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Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist principally of cash.
The Company generally maintains its cash in
money market funds with financial institutions. Although the Company may maintain balances at these institutions in excess of the
FDIC insurance limit, the Company does not anticipate and has not experienced any losses.
The Class A and Class B common stock of Presidential
have identical rights except that the holders of Class A common stock are entitled to elect two-thirds of the Board of Directors
and the holders of the Class B common stock are entitled to elect one-third of the Board of Directors.
Other than as described in Note 11, no shares
of common stock of Presidential are reserved.
The Company issued to Mr. Nicholas W. Jekogian
our CEO a Warrant in January 2014 to purchase 1,700,000 shares of the Company’s Class B Common Stock at an exercise price
of $0.10 per share in exchange for the complete cancellation of $425,000 of deferred compensation accrued under Mr. Nicholas W.
Jekogian’s employment agreement.
On November 8, 2011, the Company issued 740,000
options at an exercise price of $1.25. A total of 148,000 shares vest six months after the grant date. The aggregate intrinsic
value was $0.00. The remaining options vest upon the achievement of performance milestones. Options vesting on the achievement
of performance milestones will not be recognized as compensation until such milestones are deemed probable of achievement. The
Company has approximately $592,000 of unrecognized compensation expense respectively, related to unvested share-based compensation
awards. For the years ended December 31, 2016 and 2015 compensation expense was $0. Approximately $592,000 will vest upon the achievement
of performance milestones.
See Note 13 subsequent events for cancelations
and modification of options and warrants.
The weighted-average fair value per share of
the options granted is $1.00 estimated on the date of grant using the Black-Scholes-Merton option pricing model; the expected volatility
is based upon historical volatility of the Company’s stock. The expected term is based upon observation of actual time elapsed
between date of grant and exercise of options for all employees.
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10.
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Estimated Fair Value of Financial Instruments
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At December 31, 2016 and 2015, the carrying
amounts of the Company’s financial instruments, which include cash, accounts receivable and accounts payable, and accrued
expenses approximate their fair value due to their generally short maturities. Based upon current borrowing rates with similar
maturities the carrying value of long-term debt approximates the fair value as of December 31, 2016 and 2015.
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PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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On August 15, 2012 the stockholders approved
the 2012 Incentive Plan which reserves 1,000,000 shares of Class B common stock for distribution to executive officers (including
executive officers who are also directors), employees, directors, independent agents, consultants and attorneys in accordance
with the 2012 Plan’s terms. The 2012 Plan provides for the grant of any or all of the following types of awards (collectively,
“Awards”): (a) stock options and (b) restricted stock. Awards may be granted singly, in combination, or in tandem,
as determined by the Compensation Committee. The maximum number of shares of Class B common stock with respect to which incentive
stock options may be granted to any one individual in any calendar year shall not exceed $100,000 in fair market value as determined
at the time of grant. If any outstanding Award is canceled, forfeited, delivered to us as payment for the exercise price or surrendered
to us for tax withholding purposes, shares of Class B common stock allocable to such Award may again be available for Awards under
the 2012 Incentive Plan.
In 2005, shareholders approved the adoption
of the Company’s 2005 Restricted Stock Plan (the “2005 Plan”). The 2005 Plan provided that a total of 115,000
shares of the Company’s Class B common stock may be issued to employees, directors and consultants of the Company, to provide
incentive compensation. The 2005 Plan was administered by the Compensation Committees of the Company’s Board of Directors,
which had the authority, among other things, to determine the terms and conditions of any award under the 2005 Plan. The 2005
Plan expired on June 15, 2015.
The following is a summary of the Company’s
activity for the 2012 and 2005 Plans in 2016 and 2015:
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Value
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Shares
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at Date of
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Vested
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Date of Issuance
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Issued
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Grant
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Shares
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Balance, December 31, 2014
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642,100
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0.20
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642,100
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Shares issued in 2015
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-
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-
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-
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Balance, December 31, 2015
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642,100
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0.20
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642,100
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Shares issued in 2016
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-
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-
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-
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Balance, December 31, 2016
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642,100
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0.20
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642,100
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PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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12.
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Future Minimum Annual Base Rents
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Future minimum annual base rental revenue for
the next five years for commercial real estate owned at December 31, 2016, and subject to non-cancelable operating leases is as
follows:
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Year Ending December 31,
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2017
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$
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344,857
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2018
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23,795
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2019
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8,800
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2020
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0
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2021
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0
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Thereafter
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0
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Total
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$
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377,452
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On December 16, 2016, the “Company”
and its newly formed operating partnership, Presidential Realty Operating Partnership LP (“Presidential OP”), entered
into an interest contribution agreement (the “Initial Agreement”) with First Capital Real Estate Trust Incorporated
(“FC REIT”), First Capital Real Estate Operating Partnership (the “FC OP”), Township Nine Owner, LLC (T9/JV),
Capital Station Holdings, LLC, Capital Station Member, LLC, Capital Station 65 LLC and Avalon Jubilee LLC. On January 6, 2017,
the Company and the other parties to the Initial Agreement entered into the First Amendment to the Initial Agreement (the “Amendment,”
and, together with the Initial Agreement, the “Agreement”) and FC OP entered into the Agreement of Limited Partnership
(the “Limited Partnership Agreement”) of Presidential OP, as limited partner, with the Company as general partner.
The Agreement contemplated that the Company would acquire from FC OP its 31.3333% interest in the owner of a residential community
referred to as the “Avalon Property” and 66% percent (the “T9 Transferred Interest”) of its 92% interest
(FC/T9 Interest) in the owner of a development property known as the “T9 Property.” The purchase price for the interests
is payable in limited partnership interests in Presidential OP (“Presidential OP Units”) convertible under certain
conditions into shares of the Company’s Class B common stock.
The Company’s acquisition of
the interest in the Avalon Property was completed on January 6, 2017. The Avalon Property consists of 251 non-contiguous single-family,
residential lots and a 10,000 square foot clubhouse, within the Jubilee at Los Lunas subdivision located in Los Lunas, New Mexico
(the “Avalon Property”). At the Closing, in exchange for the contribution to Presidential OP of FC OP’s membership
interests in Avalon, FC OP received 4,632,000 Presidential OP Units in, and became a limited partner of, Presidential OP. Such
limited partnership interests are convertible, upon the satisfaction of certain conditions, into shares of Class B common stock
of the Company on a one-for-one basis. In connection with the Closing, FC REIT paid $800,000 to Presidential to be used as operating
capital.
On March 31, 2017, the Company
and Presidential OP entered into a second amendment to the Agreement pursuant to which the T9 Transferred Interest was assigned
to PRES-T9 Holdings, LLC, a Delaware limited liability company and wholly owned subsidiary of Presidential OP (PRES-T9). PRES-T9
was admitted as a member of the T9/JV. The Second Amendment also provides for the satisfaction of certain conditions prior to the
issuance and delivery of 100% of the Presidential OP Units to be issued in connection with the transaction. Those Presidential
OP Units will be held back (the “Holdback Units”) until a new appraisal of the FC/T9 Interest has been obtained and
the loan secured by the T9 Properties has been extended or refinanced. The loan is currently in default. Presidential has an opportunity
for 30 days to endeavor to obtain an extension or refinancing of the loan.
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PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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13.
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Subsequent Events (Continued)
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Thereafter, the FC Parties will continue to seek an extension/refinancing
of the loan. If the appraisal and the loan extension/refinancing are not obtained within 180 days, then the FC Parties and
Presidential may within 10 days mutually agree in writing to extend the time to complete the extension/refinancing of the
loan, or either the FC Parties or Presidential may elect to cancel the transfer of the T9 Transferred Interest following
10 days prior written notice to the other party.
The
number of Presidential OP Units ultimately issued if these conditions are satisfied is subject to adjustment based on the new appraisal
and the amount of the mortgage debt (the extended/refinanced loan) at that time. These adjustments could result in a material change
in the number of Presidential OP Units that are ultimately issued and delivered if the conditions are satisfied.
The final
number of Presidential OP Units will be determined by taking the amount of the new appraisal, subtracting therefrom the amount
of the extended/refinanced loan and the legal costs and expenses incurred by the Company in securing the extended/refinanced loan
and multiplying the amount thereby obtained by 66%.
As a result
of the conditional nature of the transfer of the Transferred Interest, the Company will not be reflecting the Transferred Interest
in its financial statements until the conditions in the Second Amendment have been satisfied and the applicable number of OP Units
has been determined and issued.
In connection with the
Agreement, Palisades Pacific Realty Trust, Inc (“Palisades”) became a consultant to the Company to provide services
relating to the integration of the First Capital properties (the interests in the Avalon Property and T9 Property) and in connection
with potential capital raising activities. The Company paid Palisades $200,000 and reimbursed certain expenses approved by the
Company. Palisades notified the Company on March 1, 2017 that they were ceasing to provide services thus terminating the
arrangement. Palisades has requested reimbursement of certain other expenses which the Company believes it is not responsible for.
In connection with and as a condition
of the Agreement, on January 6, 2017, the Company entered into various agreements with the officers, directors and Management of
the Company to restructure amounts owed to them as well as change the equity compensation due or held by them. The Company entered
into an agreement with Signature Group Advisors, LLC (“Signature”), an affiliate of Nickolas W. Jekogian, III, a director,
Chairman and Chief Executive Officer of the Company, and an adviser to the Company (the “Signature Agreement”) pursuant
to which (i) Signature will receive $1,000,000 payable in cash as consideration for sourcing, negotiating and documenting the transactions
contemplated by the Agreement (“Transaction Fee”), which will become earned, due and payable upon the closing by the
Company or Presidential OP of a preferred stock offering (or similar instrument) of at least $50,000,000 in gross proceeds; and
(ii) commencing on the closing for the T9 Property under the Agreement, Signature will be engaged as a consultant to the Company
for a four year term. The fee payable to Signature as a consultant (the “Consulting Fee”) will be $500,000 per annum,
payable in cash in arrears on each anniversary of the closing for the T9 Property; provided, however, that no portion of the Consulting
Fee will be earned or paid unless and until the net asset value of the Company is at least $200,000,000.
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PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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13.
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Subsequent Events (Continued)
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On January 6, 2017, the Company and
Mr. Alexander Ludwig, our President and Chief Operating Officer, entered into a Cancellation and Release Agreement for the cancellation
of all stock options and warrants held by Mr. Ludwig as of such date in consideration for the issuance of (x) 450,000 shares of
Class B common stock of the Company and (y) an option to purchase an additional 550,000 shares of Class B common stock of the Company.
The exercise of such option is subject to certain conditions, including that the issuance of any shares of Class B common stock
of the Company covered by Mr. Ludwig’s option would not be deemed “Excess Shares” as that term is defined in
our certificate of incorporation. The exercise price of the option is $0.00.
On January 6, 2017, Mr. Jekogian entered into a Cancellation
and Release Agreement for the (x) cancellation of all stock options and warrants held by Mr. Jekogian as of such date and (y) termination
of his Employment Agreement effective as of such date. Mr. Jekogian will continue as an employee of the Company in his capacity
as Chairman and Chief Executive Officer on a month-to-month basis until such time as otherwise determined by the Company in its
sole discretion. It is expected that his salary will remain unchanged.
On January 6, 2017, each of Richard Brandt, Robert Feder
and Jeffrey Joseph, non-management directors of the Company, and Jeffrey Rogers, a former non-management director of the Company,
entered into Issuance and Release Agreements for the issuance of an aggregate of 450,000 shares of Class B common stock of the
Company in consideration of the release of the Company’s obligations to pay past due and current director’s fees, of
which 90,000 were issued to the current directors for their services in connection with the Agreement.
On January 6, 2017, the Company and
Presidential OP entered into an Acknowledgement and Certification (the “Shareholder Certification”) with Mr. Jekogian,
The BBJ Family Irrevocable Trust (the “Trust”), FC OP and FC REIT, pursuant to which the Trust agreed to, among other
things, (i) exchange its shares of Class A stock for shares of Class B stock of the Company upon the occurrence and satisfaction
of certain conditions, (ii) refrain from taking certain actions, and (iii) vote its shares of Class A stock in favor of certain
actions. Pursuant to such Shareholder Certification, the Company agreed not to issue or cause to be issued any additional shares
of its Class A stock.
In connection with the foregoing,
certain holders of Class A common stock of the Company, representing an aggregate of 49,000 shares of Class A common stock,
entered into a Proxy and Option to Purchase with The BBJ Family Irrevocable Trust designating The BBJ Family Irrevocable
Trust as proxy to vote on all matters with respect to their shares. In addition, such agreement granted The BBJ Family
Irrevocable Trust an option to purchase such shares at a purchase price of $2.00 per share. During the first quarter the trust exercised its option and purchased 49,000 shares of Class A
common stock. The Company was not a party to that agreement.
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