Manhattan Bridge Capital, Inc: Form 10-Q for the period ended Sep 30, 2021

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q. The discussion and analysis contains forward-looking statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in such forward-looking statements.

We are a New York-based real estate finance company that specializes in originating, servicing and managing a portfolio of first mortgage loans. We offer short-term, secured, non-bank loans (sometimes referred to as “hard money” loans), which we may renew or extend on, before or after their initial term expires, to real estate investors to fund their acquisition, renovation, rehabilitation or improvement of properties located in the New York metropolitan area, including New Jersey and Connecticut, and in Florida.

The properties securing the loans are generally classified as residential or commercial real estate and, typically, are not income producing. Each loan is secured by a first mortgage lien on real estate. In addition, each loan is personally guaranteed by the principal(s) of the borrower, which guarantee may be collaterally secured by a pledge of the guarantor’s interest in the borrower. The face amount of the loans we originated during the past seven years ranged from $30,000 to a maximum of $2.5 million. Our lending policy limits the maximum amount of any loan to the lower of (i) 9.9% of the aggregate amount of our loan portfolio (not including the loan under consideration) and (ii) $3 million. Our loans typically have a maximum initial term of 12 months and bear interest at a fixed rate of 8% to 14% per year. In addition, we usually receive origination fees or “points” ranging from 0% to 2% of the original principal amount of the loan as well as other fees relating to underwriting and funding the loan. Interest is always payable monthly, in arrears. In the case of acquisition financing, the principal amount of the loan usually does not exceed 75% of the value of the property (as determined by an independent appraiser) and in the case of construction financing, it is typically up to 80% of construction costs.

Since commencing this business in 2007, we have made approximately 990 loans and never foreclosed on a property. We believe that we maintain a lower debt-to-equity ratio, compared to our peers. We currently manage a portfolio of approximately 120 loans secured primarily by residential properties. In addition, none of our loans have ever gone into default, although sometimes we have renewed or extended our loans to enable the borrower to avoid premature sale or refinancing of the property. When we renew or extend a loan, we receive additional “points” and other fees.

Our primary business objective is to grow our loan portfolio while protecting and preserving capital in a manner that provides for attractive risk-adjusted returns to our shareholders over the long term through dividends and stock price appreciation. We intend to achieve this objective by continuing to selectively originate loans and carefully manage our portfolio of first mortgage real estate loans in a manner designed to generate attractive risk-adjusted returns across a variety of market conditions and economic cycles. We believe that the demand for relatively small loans secured by residential and commercial real estate held for investment around the New York metropolitan market, including New Jersey and Connecticut, and in the Florida market remains relatively strong, but subject to volatility due to the COVID-19 pandemic. We believe that our ability to close deals quickly has created an opportunity for non-bank “hard money” real estate lenders like us to selectively originate high-quality first mortgage loans and we currently anticipate this operating environment to continue for a number of years. However, we have observed more intense competition in our industry from both small and large lenders, which has resulted in more liquidity in the real estate markets in the geographic areas in which we operate.

Since the onset of the COVID-19 pandemic, we have continued to originate loans as well as continued to service our existing loans, though we have observed lower demand for new loans. In addition, we may experience difficulties collecting the monthly interest on time, property values may decline and certain of our originated loans may need to be extended, though to date we have not experienced many borrowers requiring such accommodations. In addition, due to market conditions and intense competition in the market, we have begun to charge our customers lower interest rates and origination fees charged on loans. We have also seen a lower demand of new loans resulting from the COVID-19 pandemic. To date, we have not been materially impacted by the COVID-19 pandemic and will continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business.

We expect the significance of the COVID-19 pandemic, including the extent of its effect on our financial and operational results, to be dictated by, among other things, its duration, the success of efforts to contain it and the impact of actions taken in response. For instance, government action to provide substantial financial support to businesses has provided helpful mitigation for us and certain of our borrowers; its ultimate impact, however, is not yet clear. While we are not able at this time to estimate the future impact of the COVID-19 pandemic on our financial and operational results, it could be material.

A principal source of new transactions has been repeat business from prior customers and their referral of new business to us. We also receive leads for new business from banks, brokers and select advertising. Additionally, our Chief Executive Officer also spends a significant portion of his time on new business development. We rely on our own employees, independent legal counsel, and other independent professionals to verify titles and ownership, to file liens and to consummate the transactions. Outside appraisers are used to assist us in evaluating the worth of collateral, when deemed necessary by management. We also use construction inspectors as well as mortgage brokers and deal initiators.

For the nine months ended September 30, 2021 and 2020, the total amounts of $28,534,303 and $35,410,076, respectively, have been lent, offset by collections received from borrowers, under our commercial loans of $33,058,052 and $31,041,693, respectively.

At September 30, 2021, we were committed to $5,664,928 in construction loans that can be drawn by the borrowers when certain conditions are met.

Since our inception, we have not experienced any defaults and none of the loans previously made have been non-collectable, although no assurances can be given that existing or future loans may not go into default or prove to be non-collectible in the future.

We satisfied all of the requirements to be taxed as a real estate investment trust (“REIT”) and elected to be taxed as a REIT commencing with our taxable year ended December 31, 2014. In order to maintain our qualification for taxation as a REIT and avoid any excise tax on our net taxable income, we are required to distribute each year at least 90% of our REIT taxable income. If we distribute less than 100% of our taxable income (but more than 90%), the undistributed portion will be taxed at the regular corporate income tax rates. As a REIT, we may also be subject to federal excise taxes and minimum state taxes.

Results of Operations

Three months ended September 30, 2021 compared to three months ended September 30, 2020

Revenue

Total revenues for the three months ended September 30, 2021 were approximately $1,627,000 compared to approximately $1,786,000 for the three months ended September 30, 2020, a decrease of $159,000 or 8.9%. The decrease in revenue was primarily attributable to lower interest rates charged on loans due to market conditions and intense competition from other lenders, partially offset by an increase in origination fees. For the three months ended September 30, 2021 and 2020, approximately $1,323,000 and $1,521,000, respectively, of our revenues were attributable to interest income on secured commercial loans that we offer to real estate investors, and approximately $304,000 and $265,000, respectively, of our revenues were attributable to origination fees on such loans. The loans are principally secured by collateral consisting of real estate and accompanied by personal guarantees from the principals of the borrowers.

Interest and amortization of deferred financing costs

Interest and amortization of deferred financing costs for the three months ended September 30, 2021 were approximately $185,000 compared to approximately $338,000 for the three months ended September 30, 2020, a decrease of $153,000, or 45.3%. The decrease was primarily attributable to the reduced outstanding balance of the Webster Credit Line resulting from a public offering of our common shares in July 2021 and decreased interest expense due to lower LIBOR rates. (See Note 9 and Note 5 to the financial statements included elsewhere in this quarterly report).

General and administrative expenses

General and administrative expenses for the three months ended September 30, 2021 were approximately $335,000 compared to approximately $305,000 for the three months ended September 30, 2020, an increase of $30,000, or 9.8%. The increase is primarily attributable to increases in payroll, advertising and travel expenses, partially offset by a decrease in bank fees.

Net income

Net income for the three months ended September 30, 2021 was approximately $1,110,000 compared to approximately $1,151,000 for the three months ended September 30, 2020, a decrease of $41,000, or 3.6%. The decrease is primarily attributable to the decrease in interest income from loans, partially offset by a decrease in interest expense.

Nine months ended September 30, 2021 compared to nine months ended September 30, 2020

Revenue

Total revenues for the nine months ended September 30, 2021 were approximately $5,070,000 compared to approximately $5,239,000 for the nine months ended September 30, 2020, a decrease of $169,000, or 3.2%. The decrease in revenue was primarily attributable to lower interest rates charged on loans due to market conditions and intense competition from other lenders, partially offset by an increase in origination fees. For the nine months ended September 30, 2021 and 2020, revenues of approximately $4,190,000 and $4,485,000, respectively, were attributable to interest income on the secured commercial loans that we offer to real estate investors, and approximately $880,000 and $753,000, respectively, of our revenues were attributable to origination fees on such loans. The loans are principally secured by collateral consisting of real estate and accompanied by personal guarantees from the principals of the borrowers.

Interest and amortization of deferred financing costs

Interest and amortization of deferred financing costs for the nine months ended September 30, 2021 were approximately $819,000 compared to approximately $1,017,000 for the nine months ended September 30, 2020, a decrease of $198,000, or 19.5%. The decrease was primarily attributable to the reduced outstanding balance of the Webster Credit Line resulting from a public offering of our common shares in July 2021 and decreased interest expense due to lower LIBOR rates. (See Note 9 and Note 5 to the financial statements included elsewhere in this quarterly report).

General and administrative expenses

General and administrative expenses for the nine months ended September 30, 2021 were approximately $984,000 compared to approximately $969,000 for the nine months ended September 30, 2020, an increase of $15,000, or 1.5%. The increase is primarily attributable to increases in travel, rent, insurance and advertising expenses, partially offset by a decrease in bank fees and a special bonus paid to our Chief Financial Officer in 2020.

Net income

Net income for the nine months ended September 30, 2021 was approximately $3,274,000 compared to approximately $3,264,000 for the nine months ended September 30, 2020, an increase of $10,000. This increase is primarily attributable to the decrease in interest expense, offset by the decrease in revenue.

Liquidity and Capital Resources

At September 30, 2021, we had cash of approximately $110,000 compared to cash of approximately $132,000 at December 31, 2020 (not including restricted cash, which mainly represents collections received, pending check clearance, from the Company’s commercial loans and is primarily dedicated to the reduction of the Webster Credit Line).

For the nine months ended September 30, 2021, net cash provided by operating activities was approximately $3,150,000, compared to approximately $3,263,000 for the nine months ended September 30, 2020. The decrease in net cash provided by operating activities primarily resulted from a decrease in accounts payable and accrued expenses, and a decrease in the increase in deferred origination fees compared to the nine months ended September 30, 2020.

For the nine months ended September 30, 2021, net cash provided by investing activities was approximately $4,524,000, compared to net cash used in investing activities of approximately $4,384,000 for the nine months ended September 30, 2020. Net cash provided by investing activities for the nine months ended September 30, 2021 consisted of the collection of our commercial loans of approximately $33,058,000, offset by the issuance of commercial loans of approximately $28,534,000. During the period ended September 30, 2020, net cash used in investing activities mainly consisted of the issuance of commercial loans of approximately $35,410,000 and the release of loan holdback of $15,000, offset by collection of our commercial loans of approximately $31,042,000.

For the nine months ended September 30, 2021, net cash used in financing activities was approximately $8,024,000, compared to net cash provided by financing activities of approximately $1,159,000 for the nine months ended September 30, 2020. Net cash used in financing activities for the nine months ended September 30, 2021 reflects the repayment of the Webster Credit Line of an aggregate of approximately $16,825,000 and the dividend payments of approximately $3,553,000, offset by the net proceeds from the public offering, as described below, of approximately $12,354,000. Net cash provided by financing activities for the nine months ended September 30, 2020 reflects the net proceeds from the Webster Credit Line of an aggregate of approximately $4,547,000, offset by the dividend payments of approximately $3,181,000, the purchase of treasury shares of approximately $179,000 and deferred financing costs of approximately $27,000.

We maintain the Webster Credit Line which currently provides us with a credit line of $32.5 million in the aggregate until February 28, 2023 secured by assignments of mortgages and other collateral. On August 8, 2017, we entered into the Amended and Restated Credit Agreement, which provides for the current Webster Credit Line.

The interest rates relating to Webster Credit Line equal (i) LIBOR plus a premium, which rate aggregated approximately 4.1%, including a 0.5% agency fee, as of September 30, 2021, or (ii) a Base Rate (as defined in the Amended and Restated Credit Agreement) plus 2.25% plus a 0.5% agency fee, as chosen by the Company for each drawdown. Under the Amended and Restated Credit Agreement, the Company may repurchase, redeem or otherwise retire its equity securities in an amount not to exceed ten percent of our annual net income from the prior fiscal year. Further, the Company may issue up to $20 million in bonds through its subsidiary, of which not more than $10 million of such bonds may be secured by mortgage notes receivable, and provided that the terms and conditions of such bonds are approved by Webster, subject to its reasonable discretion. In addition, Mr. Ran has provided a personal guaranty to the Webster Credit Line, which shall not exceed the sum of $500,000 plus any costs relating to the enforcement of the personal guaranty.

We were in compliance with all covenants of the Webster Credit Line, as amended, as of September 30, 2021. At September 30, 2021, the outstanding amount under the Amended and Restated Credit Agreement was $3,484,151. The interest rate on the amount outstanding fluctuates daily. The rate, including a 0.5% agency fee, at September 30, 2021 was approximately 4.1%.

As of September 30, 2021, MBC Funding II has $6,000,000 of outstanding principal amount of Notes. The Notes mature on April 22, 2026, unless redeemed earlier, and accrue interest at a rate of 6% per annum commencing on May 16, 2016 and will be payable monthly, in arrears, in cash, on the 15th day of each calendar month, commencing June 2016.

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

The Notes are secured by a first priority lien on all of MBC Funding II’s assets, including, primarily, mortgage notes, mortgages and other transaction documents entered into in connection with first mortgage loans originated and funded by us, which MBC Funding II acquired from MBC pursuant to an asset purchase agreement. MBC Funding II may redeem the Notes, in whole or in part, at any time after April 22, 2019 upon at least 30 days prior written notice to the noteholders. No Notes were redeemed by MBC Funding II as of September 30, 2021.

Each Noteholder had the right to cause MBC Funding II to redeem his, her or its Notes on April 22, 2021 by notifying MBC Funding II in writing, no earlier than November 22, 2020 and no later than January 22, 2021. No Noteholder exercised such right during the required time frame and as such the Notes are no longer redeemable by the Noteholders.

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

We guarantee MBC Funding II’s obligations under the Notes, which are secured by our pledge of 100% of the outstanding common shares of MBC Funding II that we own.

On July 2, 2021, we entered into a consent and amendment letter agreement with respect to the Amended and Restated Credit Agreement with the Lenders and Assaf Ran, as guarantor, to amend the definition of “Change of Control” to provide that Mr. Ran would be required to own at least 20%, instead of 27%, of the equity interests of the Company, on a fully diluted basis.

On July 9, 2021, we completed an underwritten public offering of 1,875,000 of our common shares at a public offering price of $7.20 per share (the “Offering”). The gross proceeds raised by us in the Offering were $13,500,000 before deducting underwriting discounts and commissions and other estimated offering expenses. The total net proceeds from the Offering of approximately $12,354,000 were used to reduce the outstanding balance of the Webster Credit Line. We granted the underwriters a 30-day option to purchase up to an additional 281,250 of our common shares to cover over-allotments, if any. The option expired unexercised in August 2021.

On September 28, 2021, Mr. Ran voluntarily agreed to forgo his base salary for the months of October, November and December 2021 in an aggregate amount of $76,250 (the “Salary Waiver”). The reason for the Salary Waiver was to provide the Company with temporary additional liquidity which was necessary as a result of the dividend payment of $0.125 per share that was paid to all shareholders of record on July 9, 2021, that also included the shareholders that participated in the recent Offering, which was paid prior to our being able to deploy the proceeds from the Offering into new loans.

We anticipate that our current cash balances, the proceeds of the Offering, and the Amended and Restated Credit Agreement, as described above, together with our cash flows from operations will be sufficient to fund our operations for the next 12 months. In addition, from time to time, we receive short term unsecured loans from our executive officers and others in order to provide us with the flexibility necessary to maintain a steady deployment of capital. However, we expect our working capital requirements to increase over the next 12 months as we continue to strive for growth.

As a result of the COVID-19 pandemic, we have experienced a slowdown in the deployment of capital and lower demand for new loans. However, to date, we have not been materially impacted by the COVID-19 pandemic and have not experienced any material disruptions in our business operations. We will continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business. If the COVID-19 pandemic worsens in the New York area in which we operate, the pandemic could materially affect our financial and operational results.

Off-Balance Sheet Arrangements

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

Changes to Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

(a) Evaluation and Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2021 (the “Evaluation Date”). Based upon that evaluation, the chief executive officer and the chief financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) are recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) are accumulated and communicated to our management, including its chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.