Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly period ended  September 30, 2019

 

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                                                     to                                                  

 

Commission file number 1-7865

 

HMG/COURTLAND PROPERTIES, INC.

(Exact name of small business issuer as specified in its charter)

 

Delaware		59-1914299
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

1870 S. Bayshore Drive, Coconut Grove, Florida		33133
(Address of principal executive offices)		(Zip Code)

 

305-854-6803

(Registrant's telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

Yes x  No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x  No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company x
Emerging growth company ¨
	(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the exchange Act).   Yes ¨  No x

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock - Par value $1.00 per share		HMG		NYSE

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.  1,013,292 Common shares were outstanding as of November 13, 2019. 

 

  

 

 

 

HMG/COURTLAND PROPERTIES, INC.

 

Index

 

		PAGE
		NUMBER
PART I.	Condensed Consolidated Financial Information
	Item 1.  Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018	1
	Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)	2
	Condensed Consolidated Statements of Changes in Stockholder’s Equity for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (Unaudited)	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	5
	Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations	11
	Item 3.  Quantitative and Qualitative Disclosures About Market Risk	12
	Item 4.  Controls and Procedures	12
PART II.	Other Information
	Item 1.  Legal Proceedings	12
	Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	12
	Item 3.   Defaults Upon Senior Securities	12
	Item 4.  Mine Safety Disclosures	12
	Item 5.  Other Information	12
	Item 6.  Exhibits	12
Signatures		13

 

Cautionary Statement.  This Form 10-Q contains certain statements relating to future results of the Company that are considered "forward-looking statements" within the meaning of the Private Litigation Reform Act of 1995.  Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, changes in political and economic conditions; interest rate fluctuation; competitive pricing pressures within the Company's market; equity and fixed income market fluctuation; technological change; changes in law; changes in fiscal, monetary, regulatory and tax policies; monetary fluctuations as well as other risks and uncertainties detailed elsewhere in this Form 10-Q or from time-to-time in the filings of the Company with the Securities and Exchange Commission.  Such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. 

 

 

 

HMG/COURTLAND PROPERTIES, INC.  AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
		2019				2018
		(UNAUDITED)
Investment properties, net of accumulated depreciation:
Office building and other commercial property		$	929,812			$	875,198
Total investment properties, net			929,812				875,198
Cash and cash equivalents			16,237,134				19,738,174
Investments in marketable securities			3,491,531				3,075,718
Other investments			5,919,222				6,039,456
Investment in affiliate			1,437,632				1,637,985
Loans, notes and other receivables			1,799,055				1,796,926
Investment in residential real estate partnership			3,203,225				200,000
Other assets			72,779				73,477
TOTAL ASSETS		$	33,090,390			$	33,436,934
LIABILITIES
Margin payable		$	9,926,672			$	9,857,918
Dividends payable			-				506,646
Accounts payable, accrued expenses and other liabilities			407,256				370,632
Amounts due to Adviser			64,356				40,426
Note payable to affiliate			1,000,000				1,340,000
Deferred income taxes payable			63,338				47,888
TOTAL LIABILITIES			11,461,622				12,163,510
STOCKHOLDERS' EQUITY
Excess common stock, $1 par value; 100,000 shares authorized: no shares issued			-				-
Common stock, $1 par value; 1,050,000 shares authorized, 1,013,292 issued as of September 30, 2019 and 1,046,393 shares issued as of December 31, 2018			1,013,292				1,046,393
Additional paid-in capital			23,859,686				24,157,986
Less: Treasury shares at cost 33,101 shares			-				(340,281	)
Undistributed gains from sales of properties, net of losses			54,642,764				54,642,764
Undistributed losses from operations			(58,136,652	)			(58,473,807	)
Total stockholders' equity			21,379,090				21,033,055
Noncontrolling interest			249,678				240,369
TOTAL EQUITY			21,628,768				21,273,424
TOTAL LIABILITIES AND EQUITY		$	33,090,390			$	33,436,934

 

See notes to the condensed consolidated financial statements

 

 

1

 

HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

		For the three months ended								For the nine months ended
		September 30,								September 30,
		2019				2018				2019				2018
REVENUES
Real estate rentals and related revenue		$	18,786			$	18,092			$	56,358			$	54,275
EXPENSES
Operating expenses:
Rental and other properties			31,223				343,196				76,236				382,916
Adviser's base fee			165,000				165,000				495,000				495,000
General and administrative			41,048				92,540				150,550				212,682
Professional fees and expenses			22,637				13,527				144,662				134,819
Directors' fees and expenses			21,583				17,452				59,744				57,817
Depreciation and amortization			3,849				3,849				11,548				11,548
Interest expense			13,447				19,032				42,748				68,262
Total expenses			298,787				654,596				980,488				1,363,044
Loss before other income, income taxes and gain on sale of real estate			(280,001	)			(636,504	)			(924,130	)			(1,308,769	)
Net realized and unrealized gains from investments in marketable securities			12,190				1,829				252,747				26,291
Equity gain (loss) from operations of residential real estate partnerships			3,225				-				3,225				(143,890	)
Net income from other investments			479,258				80,208				654,239				370,616
Interest, dividend and other income			136,909				82,756				375,336				271,298
Total other income			631,582				164,793				1,285,547				524,315
Income (loss) before taxes and gain on sale of real estate			351,581				(471,711	)			361,417				(784,454	)
Provision for income taxes			(12,010	)			(26,532	)			(14,954	)			(60,111	)
Net income (loss) before gain on sale of real estate			339,571				(498,243	)			346,463				(844,565	)
Gain on sale of real estate, net			-				-				-				5,473,887
Net income (loss)			339,571				(498,243	)			346,463				4,629,322
Gain attributable to non-controlling interest			(850	)			(3,097	)			(9,308	)			(14,010	)
Net income (loss) attributable to the company		$	338,721			$	(501,340	)		$	337,155			$	4,615,312
Weighted average common shares outstanding-basic and diluted			1,013,292				1,013,292				1,013,292				1,011,349
Net income (loss) per common share:
Basic and diluted net income (loss) per share		$	0.33			$	(0.49	)		$	0.33			$	4.56

 

See notes to the condensed consolidated financial statements

 

 

2

 

HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 (Unaudited)

		Common Stock								Additional				Undistributed  Gains from Sales of Properties				Undistributed  Losses from				Treasury Stock								Total Stockholders'
		Shares				Amount				Paid-In Capital				Net of Losses				Operations				Shares				Cost				Equity
Balance as of January 1, 2018			1,035,493			$	1,035,493			$	24,076,991			$	52,208,753			$	(57,120,990	)			33,101			$	(340,281	)		$	19,859,966
Net income (loss) for three months ended March 31, 2018			-				-				-				5,473,887				(282,994	)			-				-				5,190,893
Stock options exercised, net of 1,600 re-load shares			10,900				10,900				80,995				-				-				-				-				91,895
Dividend paid -$2.50 per share			-				-				-				(2,533,230	)			-				-				-				(2,533,230	)
Balance as of March 31, 2018			1,046,393				1,046,393				24,157,986				55,149,410				(57,403,984	)			33,101				(340,281	)			22,609,524
Net loss for three months ended June 30, 2018			-				-				-				-				(74,240	)			-				-				(74,240	)
Balance as of June 30, 2018			1,046,393				1,046,393				24,157,986				55,149,410				(57,478,224	)			33,101				(340,281	)			22,535,284
Net loss for three months ended September 30, 2018			-				-				-				-				(501,340	)			-				-				(501,340	)
Balance as of September 30, 2018			1,046,393			$	1,046,393			$	24,157,986			$	55,149,410			$	(57,979,564	)			33,101			$	(340,281	)		$	22,033,944

		Common Stock								Additional				Undistributed  Gains from Sales of Properties				Undistributed  Losses from				Treasury Stock								Total Stockholders'
		Shares				Amount				Paid-In Capital				Net of Losses				Operations				Shares				Cost				Equity
Balance as of January 1, 2019			1,046,393			$	1,046,393			$	24,157,986			$	54,642,764			$	(58,473,807	)			33,101			$	(340,281	)		$	21,033,055
Net loss for three months ended March 31, 2019			-				-				-				-				(11,116	)			-				-				(11,116	)
Balance as of March 31, 2019			1,046,393				1,046,393				24,157,986				54,642,764				(58,484,923	)			33,101				(340,281	)			21,021,939
Net income for three months ended June 30, 2019			-				-				-				-				9,550				-				-				9,550
Retired 33,101 treasury shares			(33,101	)			(33,101	)			(307,180	)			-				-				(33,101	)			340,281				-
Balance as of June 30, 2019			1,013,292				1,013,292				23,850,806				54,642,764				(58,475,373	)			-				-				21,031,489
Net income for three months ended September 30, 2019			-				-				-				-				338,721				-				-				338,721
Stock compensation expense											8,880																				8,880
Balance as of September 30, 2019			1,013,292			$	1,013,292			$	23,859,686			$	54,642,764			$	(58,136,652	)		$	-			$	-			$	21,379,090

 

See notes to the condensed consolidated financial statements

 

 

3

 

HMG/COURTLAND PROPERTIES, INC.  AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

		For the nine months ended  September 30,
		2019				2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income attributable to the Company		$	337,155			$	4,615,312
Adjustments to reconcile net income attributable to the Company to net cash used in operating activities:
Depreciation expense			11,548				11,548
Stock compensation expense			8,880				-
Net income from other investments, excluding impairment losses			(654,239	)			(370,616	)
Equity (gain) on sale of property in residential real estate partnership			-				(5,473,887	)
Equity (gain) loss from operations of residential real estate partnership			(3,225	)			143,890
Net (gains) from investments in marketable securities			(252,747	)			(26,291	)
Net gain attributable to non-controlling interest			9,308				14,010
Deferred income tax expense			15,450				60,111
Changes in assets and liabilities:
Other assets and other receivables			(7,616	)			62,942
Accounts payable, accrued expenses and other liabilities			(1,785	)			(223,636	)
Total adjustments			(874,426	)			(5,801,929	)
Net cash used in operating activities			(537,271	)			(1,186,617	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sales and redemptions of securities			1,096,670				1,140,259
Investments in marketable securities			(959,737	)			(1,379,385	)
Distribution from investment in residential real estate partnership, Orlando, FL			6,187				7,525,000
Contributions to investment residential real estate partnership, Fort Myers, FL			(3,000,000	)			(200,000	)
Distributions from other investments			1,435,879				1,560,667
Contributions to other investments			(919,613	)			(1,079,783	)
Proceeds from collections of mortgage loans and notes receivables			-				500,000
Distribution from affiliate			220,899				193,286
Purchases and improvements of properties			(66,162	)			(26,097	)
Net cash (used in) provided by investing activities			(2,185,877	)			8,233,947
CASH FLOWS FROM FINANCING ACTIVITIES:
Margin borrowings			68,754				9,725,280
Dividend paid			(506,646	)			(2,533,230	)
Repayment of note payable to affiliate			(340,000	)			(210,000	)
Proceeds from stock options exercised			-				91,895
Net cash (used in) provided by financing activities			(777,892	)			7,073,945
Net (decrease) increase in cash and cash equivalents			(3,501,040	)			14,121,275
Cash and cash equivalents at beginning of the period			19,738,174				5,223,995
Cash and cash equivalents at end of the period		$	16,237,134			$	19,345,270
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest		$	43,000			$	68,000
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Retirement of treasury stock during the period		$	340,281			$	-

 

See notes to the condensed consolidated financial statements

 

 

4

 

HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements prepared in accordance with instructions for Form 10-Q, include all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the results for the periods presented.  Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  It is suggested that these condensed consolidated financial statements be read in conjunction with the Company's Annual Report for the year ended December 31, 2018.  The balance sheet as of December 31, 2018 was derived from audited consolidated financial statements as of that date. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for future periods or the full year.

 

The condensed consolidated financial statements include the accounts of HMG/Courtland Properties, Inc. (the "Company") and entities in which the Company owns a majority voting interest or controlling financial interest. All material transactions and balances with consolidated and unconsolidated entities have been eliminated in consolidation or as required under the equity method.

 

2.	RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718).” ASU 2018-07 simplifies the accounting for nonemployee stock-based payment transactions. This ASU is effective for public entities for interim and annual reporting periods beginning after December 15, 2018, and early application is permitted. The adoption of this guidance on January 1, 2019 did not have an impact on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, “Leases,” which created a new Topic, ASC Topic 842 and established the core principle that a lessee should recognize the assets, representing rights-of-use, and liabilities to make lease payments that arise from leases. For leases with a term of 12 months or less, a lessee is permitted to make an election under which such assets and liabilities would not be recognized, and lease expense would be recognized generally on a straight-line basis over the lease term. This ASU is effective for public entities for interim and annual reporting periods beginning after December 15, 2018, and early application is permitted. The adoption of this guidance on January 1, 2019 did not have an impact on the Company’s consolidated financial statements.

 

The Company does not believe that any recently issued, but not yet effective accounting standards, if currently adopted, will have a material effect on the Company’s consolidated financial position, results of operations and cash flows.

 

3.	INVESTMENT IN RESIDENTIAL REAL ESTATE PARTNERSHIP (FORT MYERS, FL)

 

As previously reported on Form 8-K dated July 19, 2019, pursuant to the terms of a Construction and Mini Perm Loan Agreement ("Loan Agreement"), between Murano At Three Oaks Associates LLC, a Florida limited liability company formed in September 2018 (the “Borrower”) which is 25% owned by HMG, and PNC Bank, National Association ("Lender"), Lender provided a construction loan to the Borrower for the principal sum of approximately $41.59 million (“Loan”). The proceeds of the Loan shall be used to finance the construction of multi-family residential apartments containing 318 units totaling approximately 312,000 net rentable square feet on a 17.5-acre site located in Fort Myers, Florida ("Project").  The Project site was purchased by the Borrower concurrently with the closing of the Loan. Total development costs for the Project are estimated at approximately $56.08 million and the Borrower’s equity totals approximately $14.49 million. HMG’s share of the equity is 25%, or approximately $3.62 million, all of which has been funded to date including approximately $423,000 funded on October 8, 2019. Construction activities on the Project site began in August 2019. There is no outstanding amount on the loan as of September 30, 2019.

 

5

 

HMG and the other members (or affiliates thereof) of the Borrower ("Guarantors") entered into a Completion Guaranty ("Completion Guaranty") and a Guaranty and Suretyship Agreement ("Repayment Guaranty") (collectively, the “Guaranties”). Under the Completion Guaranty, each Guarantor shall unconditionally guaranty, as a primary obligor, and become surety for the prompt payment and performance by Borrower of the “Guaranteed Obligations” (as defined). Under the Repayment Guaranty, Guarantor unconditionally guarantees, as a primary obligor, and becomes surety for the prompt payment and performance of, as defined (i) all Interest Obligations, (ii) all Loan Document Obligations, (iii) all Expense Obligations, (iv) the Carrying Cost Obligations, (v) the Principal Amount, (vi) interest on each of the foregoing including, if applicable, interest at the Default Rate (as defined). At all times prior to the First Reduction Date (as defined below), the Guarantors are collectively responsible for 30% of the Principal Obligations, (ii) at all times after the First Reduction Date, the Guarantors are collectively responsible for15% of the Principal Obligations, and (iii) at all times after the Second Reduction Date, 0% of the Principal Obligations. First Reduction Conditions" means satisfaction of the following conditions: (i) no Event of Default has occurred and is continuing; (ii) Completion of Construction has occurred; and (iii) the Project has achieved a DSCR of not less than 1.25 to 1.00 for two (2) consecutive fiscal quarters.

 

Each Guarantor is required to maintain compliance with the following financial covenants, as defined: (1) liquidity shall not be less than $2.5 million. Liquidity is defined as the sum of unencumbered, unrestricted cash and cash equivalents and marketable securities, and (2) net worth shall not be less than $10 million.  As of September 30, 2019, HMG was in compliance with all covenants required by Guarantors in the Loan Agreement.

4.	INVESTMENTS IN MARKETABLE SECURITIES

 

Investments in marketable securities consist primarily of large capital corporate equity and debt securities in varying industries or issued by government agencies with readily determinable fair values. These securities are stated at market value, as determined by the most recent traded price of each security at the balance sheet date. Consistent with the Company's overall current investment objectives and activities its entire marketable securities portfolio is classified as trading. Accordingly, all unrealized gains (losses) on this portfolio are recorded in income.  Included in investments in marketable securities is approximately $1.90 million and $1.76 million of large capital real estate investment trusts (REITs) as of September 30, 2019 and December 31, 2018, respectively.

 

Net realized and unrealized gain from investments in marketable securities for the three and nine months ended September 30, 2019 and 2018 is summarized below:

 

		Three months ended September 30,								Nine months ended September 30,
Description		2019				2018				2019				2018
Net realized gain from sales of securities		$	17,000			$	39,000			$	6,000			$	35,000
Unrealized net (loss) gain in trading securities			(5,000	)			(37,000	)			247,000				(9,000	)
Total net gain from investments in marketable securities		$	12,000			$	2,000			$	253,000			$	26,000

 

For the three months ended September 30, 2019, net realized gain from sales of marketable securities was approximately $17,000 which consisted of $19,000 of gross gains and $2,000 of gross losses. For the nine months ended September 30, 2019, net realized loss from sales of marketable securities was approximately $6,000 and consisted of approximately $66,000 of gross gains net of $60,000 of gross losses.

 

For the three months ended September 30, 2018, net realized gain from sales of marketable securities was approximately $39,000 of which approximately $44,000 consisted of gross gains and $5,000 of gross losses. For the nine months ended September 30, 2018, net realized gain from sales of marketable securities was approximately $35,000 and consisted of approximately $68,000 of gross gains net of $33,000 of gross losses.

 

Investment gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company's net earnings. However, the amount of investment gains or losses on marketable securities for any given period has no predictive value and variations in amount from period to period have no practical analytical value.

 

5.	OTHER INVESTMENTS

 

As of September 30, 2019, the Company’s portfolio of other investments had an aggregate carrying value of approximately $5.9 million and we have committed to fund approximately $919,000 as required by agreements with the investees. The carrying value of these investments is equal to contributions less distributions and loss valuation adjustments, if any.

 

 

6

During the nine months ended September 30, 2019, we made cash contributions to other investments of approximately $920,000. This consisted of $700,000 in three new investments.  One in February 2019 for $200,000 in a partnership which holds residential mortgages acquired from a bank at discount, one in June 2019 for $300,000 in a partnership that is constructing residential apartments in Atlanta, GA and one in July 2019 for $200,000 in a real estate private lending fund.  We also made follow on contributions to existing investments of approximately $220,000.

 

During the nine months ended September 30, 2019, we received cash distributions from other investments of approximately $1,436,000.  This consisted of distributions from existing investments (primarily real estate related), including $563,000 received in September 2019 from a partnership which sold its sole asset, a multifamily residential property located in Austin, Texas.  We recognized a gain of $429,000 on this investment, before incentive fee.  In August 2019, we redeemed a stock fund for $316,000 and recognized a gain of $66,000, before incentive fee. Also, in the first quarter of 2019 the Company’s $300,000 investments in a private insurance company publicly registered all shares and began trading on the NASDAQ on March 29, 2019.  Accordingly, we have transferred this investment to marketable securities.  As of September 30, 2019, this investment had an unrealized loss of approximately $98,000.

 

Net income from other investments for the three and nine months ended September 30, 2019 and 2018, is approximately as follows:

 

		Three months ended September 30,								Nine months ended September 30,
Description		2019				2018				2019				2018
Partnerships owning real estate and related		$	409,000			$	26,000			$	536,000			$	191,000
Partnerships owning diversified businesses			61,000				29,000				97,000				70,000
Other (bank stocks)			-				-				-				34,000
Income from investment in 49% owned affiliate (T.G.I.F. Texas, Inc.)			9,000				25,000				21,000				76,000
Total net income from other investments		$	479,000			$	80,000			$	654,000			$	371,000

 

The following tables present approximate gross unrealized losses and fair values for those investments that were in an unrealized loss position as of September 30, 2019 and December 31, 2018, aggregated by investment category and the length of time that investments have been in a continuous loss position:

 

		As of September 30, 2019
		12 Months or Less								Greater than 12 Months								Total
Investment Description		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
Partnerships owning investments in technology related industries		$	-			$	-			$	150,000			$	(11,000	)		$	150,000			$	(11,000	)
Partnerships owning investments in diversified businesses			513,000				(30,000	)			-				-				513,000				(30,000	)
Total		$	513,000			$	(30,000	)		$	150,000			$	(11,000	)		$	663,000			$	(41,000	)

		As of December 31, 2018
		12 Months or Less								Greater than 12 Months								Total
Investment Description		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
Partnerships owning investments in technology related industries		$	-			$	-			$	132,000			$	(18,000	)		$	132,000			$	(18,000	)
Partnerships owning investments in diversified businesses			273,00				(27,000	)											273,000				(27,000	)
Total		$	273,000				(27,000	)			132,000			$	(18,000	)		$	405,000			$	(45,000	)

 

When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis.

 

 

7

In accordance with ASC Topic 320-10-65, Recognition and Presentation of Other-Than-Temporary Impairments there were no impairment valuation adjustments for the three and nine months ended September 30, 2019 and 2018.

 

6.	FAIR VALUE OF FINANCIAL INSTRUMENTS

 

In accordance with ASC Topic 820, the Company measures cash and cash equivalents and marketable debt and equity securities at fair value on a recurring basis. Other investments are measured at fair value on a nonrecurring basis.

 

The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018, using quoted prices in active markets for identical assets (Level 1) and significant other observable inputs (Level 2).  For the periods presented, there were no major assets measured at fair value on a recurring basis where significant unobservable inputs were used (Level 3):

 

Assets and liabilities measured at fair value on a recurring basis are summarized below:

 

		Fair value measurement at reporting date using
Description		Total  September 30, 2019				Quoted Prices in Active  Markets for Identical Assets (Level 1)				Significant Other  Observable Inputs (Level 2)				Significant  Unobservable Inputs (Level 3)
Assets:
Cash equivalents:
Money market mutual funds		$	1,040,000			$	1,040,000				-			$	-
US T-Bills			14,282,000				14,282,000				-				-
Marketable securities:
Corporate debt securities			520,000				-			$	520,000				-
Marketable equity securities			2,971,000				2,971,000				-				-
Total assets		$	18,813,000			$	18,293,000			$	520,000			$	-

 

		Fair value measurement at reporting date using
Description		Total  December 31, 2018				Quoted Prices in Active  Markets for Identical Assets (Level 1)				Significant Other  Observable Inputs (Level 2)				Significant  Unobservable Inputs (Level 3)
Assets:
Cash equivalents:
Time deposits		$	355,000			$	-			$	355,000			$	-
Money market mutual funds			1,594,000				1,594,000				-				-
US T-Bills			17,429,000				17,429,000				-				-
Marketable securities:
Corporate debt securities			502,000				-				502,000				-
Marketable equity securities			2,574,000				2,574,000				-				-
Total assets		$	22,454,000			$	21,597,000			$	857,000			$	-

 

Carrying amount is the estimated fair value for corporate debt securities and time deposits based on a market-based approach using observable (Level 2) inputs such as prices of similar assets in active markets.

 

7.	INCOME TAXES

 

The Company as a qualifying real estate investment trust (“REIT”) distributes its taxable ordinary income to stockholders in conformity with requirements of the Internal Revenue Code and is not required to report deferred items due to its ability to distribute all taxable income. In addition, net operating losses can be carried forward to reduce future taxable income but cannot be carried back.

 

The Company’s 95%-owned taxable REIT subsidiary, CII, files a separate income tax return and its operations are not included in the REIT’s income tax return.

 

 

8

 

Distributed capital gains on sales of real estate as they relate to REIT activities are not subject to taxes; however, undistributed capital gains may be subject to corporate tax.

 

On December 14, 2018 the Company declared a capital gain dividend of $0.50 per share which was payable on January 9, 2019 to all shareholders of record as of December 28, 2018.

 

The Company accounts for income taxes in accordance with ASC Topic 740, “Accounting for Income Taxes.” ASC Topic 740 requires a Company to use the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred taxes only pertain to CII. As of September 30, 2019, and December 31, 2018, the Company has recorded a net deferred tax liability of $63,000 and $48,000, respectively, primarily as a result of timing differences associated with the carrying value of the investment in affiliate (TGIF) and other investments. CII’s NOL carryover to 2019 is approximately at $1 million and has been fully reserved due to CII historically having tax losses.

 

The provision for income taxes in the consolidated statements of comprehensive income consists approximately of the following:

 

Nine months ended September 30,		2019				2018
Current:
Federal		$	-			$	-
State			-				-
			-				-
Deferred:
Federal		$	13,000			$	43,000
State			2,000				10,000
			15,000				53,000
Increased valuation allowance			-				7,000
Total		$	15,000			$	60,000

 

The Company follows the provisions of ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with ASC Topic 740 and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This topic also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our consolidated financial statements. Our evaluation was performed for the tax years ended December 31, 2018. The Company’s federal income tax returns since 2014 are subject to examination by the Internal Revenue Service, generally for a period of three years after the returns were filed.

  

We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in the consolidated financial statements as selling, general and administrative expense.

 

8.	STOCK OPTIONS

 

Stock based compensation expense is recognized using the fair-value method for all awards. On July 25, 2019 the Company granted options to purchase 8,000 shares of the Company’s common stock to three directors and one officer.  The exercise price of the options is equal to $13.20 per share, the market price of the stock on the date of grant and the options expires on June 29, 2021.  The Company determined the fair value of its option awards using the Black-Scholes option pricing model.  The following assumptions were used to value the options granted during the nine months ended September 30, 2019: 2 year expected life; expected volatility of approximately 19.5%; risk-free of 1.93% and annual dividend yield of 4%.  The expected life for options granted during the period represents the period of time that options are to be outstanding based on the expiration date of the Plan.  Expected volatilities are based upon historical volatility of the Company’s stock over a period equal to the 2 year expected life.

 

 

9

 

The weighted average fair value for options granted during the nine months ended September 30, 2019 was $1.11 per share.  For the nine months ended September 30, 2019 the Company recorded approximately $9,000 in stock expense compensation relating to the options granted in 2019. 

 

The following table summarizes stock option activity during the nine months ended September 30, 2019:

 

						Weighted
						Average
		Options				Exercise
		Outstanding				Price
Outstanding at January 1, 2019			1,600			$	15.30
Exercised			-				-
Forfeited			-				-
Expired unexercised			-				-
Granted options			8,000				13.20
Outstanding at September 30, 2019			9,600			$	13.55

 

The following table summarizes information concerning outstanding and exercisable options as of September 30, 2019:

 

		Number of  securities to be issued upon  exercise of outstanding options				Weighted-average  exercise price of outstanding options				Number of securities  remaining available for future issuance under equity  compensation plans
Equity compensation plan approved by shareholders			9,600			$	13.55				36,608
Equity compensation plan not approved by shareholders			—				—				—
Total			9,600			$	13.55				36,608

 

As of September 30, 2019, the stock options outstanding and exercisable had no intrinsic value.

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Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

RESULTS OF OPERATIONS 

The Company reported net income of approximately $339,000 ($0.33 per share) and $337,000 ($0.33 per share) for the three and nine months ended September 30, 2019, respectively. The Company reported a net loss of approximately $501,000 ($0.49 per share) for the three months ended September 30, 2018, and net income of approximately $4.6 million ($4.56 per share) for the nine months ended September 30, 2018.

 

REVENUES 

Rentals and related revenues for the three and nine months ended September 30, 2019 were approximately $19,000 and $56,000, respectively and primarily consists of rent from the Advisor to CII for its corporate office. For the three and nine months ended September 30, 2018 rental and related revenues were $18,000 and $54,000, respectively.

 

Net realized and unrealized gains from investments in marketable securities: 

Net realized gain from the sale of marketable securities for the three and nine months ended September 30, 2019 was approximately $17,000 and $6,000, respectively.  Unrealized net loss from investments in marketable securities for the three months ended September 30, 2019 was approximately $5,000. Unrealized net gain from investments in marketable securities for the nine months ended September 30, 2019 was approximately $247,000. Net realized gain from investments in marketable securities for the three and nine months ended September 30, 2018 was approximately $39,000 and $35,000, respectively.  Unrealized net loss from investments in marketable securities for the three and nine months ended September 30, 2018 was approximately $37,000 and $9,000, respectively.  For further details refer to Note 4 to Condensed Consolidated Financial Statements (unaudited).

 

Equity gain (loss) from operations in residential real estate partnerships: 

Equity gain (loss) from operations in residential real estate partnerships for the three and nine months ended September 30, 2019 was approximately $3,000 from interest income earned from member contributions prior to construction of multi-family residential apartments in Fort Myers, FL. Equity loss from operations in residential real estate partnerships for the nine months ended September 30, 2018 was approximately$144,000 relating to the multi-family residential apartments which property was sold in February 2018 and the Company recognized a gain on the sale of approximately $5.47 million, net of incentive fee in the first quarter of 2018.

 

Net income from other investments: 

Net income from other investments for the three and nine months ended September 30, 2019 was approximately $479,000 and $654,000, respectively.  Net income from other investments for the three and nine months ended September 30, 2018 was approximately $80,000 and $371,000, respectively.   For further details refer to Note 5 to Condensed Consolidated Financial Statements (unaudited).

 

Interest, dividend and other income: 

Interest, dividend and other income for the three and nine months ended September 30, 2019 was approximately $137,000 and $375,000, respectively.  Interest, dividend and other income for the three and nine months ended September 30, 2018 was approximately $83,000 and $271,000, respectively.  The increases in the three and nine-month comparable periods was primarily due to increased interest income from investments in US T-bills.

 

EXPENSES 

Rental and other properties operating expenses for the three and nine months ended September 30, 2019 as compared with the same periods in 2018 decreased by $312,000 (91%) and $307,000 (80%), respectively.  The decreases were primarily the result of non-recurring estimated environmental remediation costs relating the Company’s property located in Montpelier, Vermont.

 

General and administrative expenses for the three and nine months ended September 30, 2019 as compared with the same periods in 2018 decreased by $51,000 (56%) and $62,000 (29%), respectively.  The decreases were primarily attributable to decreased dues and subscriptions expenses relating to Courtland Investments, Inc. and decreased non-recurring costs relating to a proposed real estate venture in Orlando which was not pursued, and the related deposits were written off in 2018.

 

Interest expense for the nine months ended September 30, 2019 as compared with the same period in 2018 decreased by approximately $25,000 (37%).  The decrease was primarily due to decreased interest rates.

 

EFFECT OF INFLATION: 

Inflation affects the costs of holding the Company's investments. Increased inflation would decrease the purchasing power of our mainly liquid investments.

 

 

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LIQUIDITY, CAPITAL EXPENDITURE REQUIREMENTS AND CAPITAL RESOURCES

The Company's material commitments primarily consist of a note payable to the Company’s 49% owned affiliate, T.G.I.F. Texas, Inc. (“TGIF”) of approximately $1.0 million due on demand, contributions committed to other investments of approximately $919,000 due upon demand. The $9.93 million in margin is primarily related to the purchase of US T-bills at quarter end.  The T-bills were sold in October 2019 and the related margin was repaid.  The purchase of T-bills at each fiscal quarter end is for the purposes of qualifying for the REIT asset test. The funds necessary to meet these obligations are expected from the proceeds from the sales of investments, distributions from investments and available cash. 

 

MATERIAL COMPONENTS OF CASH FLOWS 

For the nine months ended September 30, 2019, net cash used in operating activities was approximately $537,000, primarily consisting of operating expenses less interest, dividend and other income.

 

For the nine months ended September 30, 2019, net cash used in investing activities was approximately $2.19 million.  This consisted primarily of contributions to investment in residential real estate partnership (Fort Myers, FL) of $3.0 million, purchases of marketable securities of $960,000, contribution to other investments of $920,000 and purchases and improvements of properties of $66,000. These uses of funds were partially offset by sources of cash consisting primarily of $1.10 million of net proceeds from sales and redemptions of marketable securities, distributions from other investments of $1.44 million and distribution from affiliate of $221,000.

 

For the nine months ended September 30, 2019, net cash used in financing activities was approximately $778,000, consisting of $507,000 dividends paid and $340,000 principal payment on note due to affiliate.  These uses of funds were partially offset by increased margin borrowings (net of repayments) of $69,000.

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Not applicable

 

Item 4.

Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures.

Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q have concluded that, based on such evaluation, our disclosure controls and procedures were effective and designed to ensure that material information relating to us and our consolidated subsidiaries, which we are required to disclose in the reports we file or submit under the Securities Exchange Act of 1934, was made known to them by others within those entities and reported within the time periods specified in the SEC's rules and forms.

 

(b)

Changes in Internal Control Over Financial Reporting.

There were no changes in the Company's internal controls over financial reporting identified in connection with the evaluation of such internal control over financial reporting that occurred during our last fiscal quarter which have materially affected, or reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.   OTHER INFORMATION

 

Item 1.

Legal Proceedings: None

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds:

As previously reported on December 14, 2018, HMG announced that its Board of Directors has authorized the purchase of up to $500,000 of HMG common stock on the open market or through privately negotiated transactions.  The program will be in place through December 31, 2021.  During the nine months ended September 30, 2019, there were no shares purchased as part of this publicly announced program.

 

Item 3.

Defaults Upon Senior Securities: None.

 

Item 4.

Mine Safety Disclosures: Not applicable.

 

Item 5.

Other Information: None

 

Item 6.

Exhibits:

 

(a)  Certifications pursuant to 18 USC Section 1350-Sarbanes-Oxley Act of 2002. Filed herewith.

 

 

12

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	HMG/COURTLAND PROPERTIES, INC.
	/s/ Maurice Wiener
Dated:  November 13, 2019	CEO and President
Dated:  November 13, 2019	/s/Carlos Camarotti
	CFO and Vice President

 

 

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