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 March 31, 2020

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, or a smaller reporting company. See 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 Amex

 

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 May 13, 2020.

 

 

 

 

 

  

HMG/COURTLAND PROPERTIES, INC.

 

Index

 

				PAGE
				NUMBER
PART I.	Financial Information
	Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2020 (Unaudited) and December 31, 2019			1
	Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2020 and 2019 (Unaudited)			2
	Condensed Consolidated Statements of Changes in Stockholder’s Equity for the Three Months Ended March 31, 2020 and 2019 (Unaudited)			3
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 (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

 

		March 31,				December 31,
		2020				2019
		(UNAUDITED)
ASSETS
Investment properties, net of accumulated depreciation:
Office building and other commercial property		$	922,113			$	925,963
Total investment properties, net			922,113				925,963
Cash and cash equivalents			15,456,448				15,382,596
Investments in marketable securities			2,800,767				3,473,521
Other investments			5,672,251				5,585,666
Investment in affiliate			1,203,416				1,442,423
Loans, notes and other receivables			1,301,501				2,519,570
Investment in residential real estate partnership			3,627,598				3,627,598
Deferred income tax asset			22,894				-
Other assets			45,235				55,152
TOTAL ASSETS		$	31,052,223			$	33,012,489
LIABILITIES
Note payable to affiliate		$	650,000			$	1,000,000
Margin payable			9,981,074				9,916,774
Dividends payable			-				506,646
Accounts payable, accrued expenses and other liabilities			266,727				373,649
Amounts due to Adviser for incentive fee			81,333				81,333
Deferred income tax liability			-				77,485
TOTAL LIABILITIES			10,979,134				11,955,887
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 shares issued and outstanding			1,013,292				1,013,292
Additional paid-in capital			23,859,686				23,859,686
Undistributed gains from sales of properties, net of losses			54,136,119				54,136,119
Undistributed losses from operations			(59,168,807	)			(58,203,938	)
Total stockholders' equity			19,840,290				20,805,159
Noncontrolling interest			232,799				251,443
TOTAL EQUITY			20,073,089				21,056,602
TOTAL LIABILITIES AND EQUITY		$	31,052,223			$	33,012,489

 

See notes to the condensed consolidated financial statements

 

1

 

  

HMG/COURTLAND PROPERTIES, INC.  AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS INCOME (UNAUDITED)

 

		For the three months ended
		March 31,
		2020				2019
REVENUES
Real estate rentals and related revenue		$	19,515			$	18,786
Total revenues			19,515				18,786
EXPENSES
Operating Expenses:
Rental and other properties			17,470				13,474
Adviser's base fee			165,000				165,000
General and administrative			80,968				81,090
Professional fees and expenses			93,941				79,431
Directors' fees and expenses			18,250				17,500
Depreciation expense			3,849				3,849
Interest expense			12,743				15,015
Total expenses			392,221				375,359
Loss before other income and income taxes			(372,706	)			(356,573	)
Net realized and unrealized (losses) gains from investments in marketable securities			(869,778	)			180,474
Net income from other investments			113,843				77,855
Other than temporary impairment losses from other investments			(50,000	)			-
Interest, dividend and other income			94,379				85,463
Total other (loss) income			(711,556	)			343,792
Loss before income taxes and gain on sale of real estate			(1,084,262	)			(12,780	)
Benefit from income taxes			100,749				4,472
Net loss			(983,513	)			(8,308	)
Gain (loss) from noncontrolling interest			18,644				(2,808	)
Net loss attributable to the Company		$	(964,869	)		$	(11,116	)
Weighted average common shares outstanding-basic and diluted			1,013,292				1,013,292
Net loss per common share: Basic and diluted
Basic and diluted loss per share		$	(0.95	)		$	(0.01	)

 

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 MONTHS ENDED MARCH 31, 2020 AND 2019

 

														Undistributed
														Gains from Sales				Undistributed												Total
		Common Stock								Additional				of Properties				Losses from				Treasury Stock								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			$	54,642,765			$	(58,473,808	)		$	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				54,642,765				(58,484,924	)			33,101				(340,281	)			21,021,939
														Undistributed
														Gains from Sales				Undistributed												Total
		Common Stock								Additional				of Properties				Losses from				Treasury Stock								Stockholders’
		Shares				Amount				Paid-In Capital				Net of Losses				Operations				Shares				Cost				Equity
Balance as of January 1, 2020			1,013,292			$	1,013,292			$	23,859,686			$	54,136,119			$	(58,203,938	)			-				-				20,805,159
Net Loss for three months ended March 31, 2020																			(964,869	)											(964,869	)
Balance as of March 31,2020			1,013,292			$	1,013,292			$	23,859,686			$	54,136,119			$	(59,168,807	)			-			$	-			$	19,840,290

 

3

 

  

HMG/COURTLAND PROPERTIES, INC.  AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

		For the three months ended March 31,
		2020				2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss attributable to the Company		$	(964,869	)		$	(11,116	)
Adjustments to reconcile net loss attributable to the Company to net cash used in operating activities:
Depreciation expense			3,849				3,849
Net income from other investments, excluding impairment losses			(113,843	)			(77,855	)
Other than temporary impairment losses from other investments			50,000				-
Net (gains) losses from investments in marketable securities			869,778				(180,474	)
Net (loss) gain attributable to noncontrolling interest			(18,644	)			2,808
Deferred income taxes			(100,379	)			(4,472	)
Changes in assets and liabilities:
Other assets and other receivables			27,986				(212,394	)
Accounts payable, accrued expenses and other liabilities			(106,921	)			13,619
Total adjustments			611,826				(454,919	)
Net cash used in operating activities			(353,043	)			(466,035	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sales and redemptions of marketable securities			373,005				645,931
Investments in marketable securities			(570,029	)			(696,561	)
Distributions from other investments			184,899				175,008
Contributions to other investments			(189,532	)			(328,108	)
Proceeds from repayment of notes and mortgage loans receivable			1,200,000				-
Distribution from affiliate			220,899				220,899
Purchases and improvements of properties			-				(218	)
Net cash provided by investing activities			1,219,242				16,951
CASH FLOWS FROM FINANCING ACTIVITIES:
Margin borrowings, net of repayments			64,299				117,055
Dividend paid			(506,646	)			(506,646	)
Repayment of note payable to affiliate			(350,000	)			(340,000	)
Net cash used in financing activities			(792,347	)			(729,591	)
Net increase (decrease) in cash and cash equivalents			73,852				(1,178,675	)
Cash and cash equivalents at beginning of the period			15,382,596				19,738,174
Cash and cash equivalents at end of the period		$	15,456,448			$	18,559,499
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest		$	13,000			$	15,000

 

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, 2019. The balance sheet as of December 31, 2019 was derived from audited consolidated financial statements as of that date. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year.

 

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

 

2.

COVID-19 DISCLOSURE

 

As a result of the spread of COVID-19, economic uncertainties have arisen. Management is monitoring and managing operations in order to timely react to its potential impacts. The duration and intensity of this global health emergency and related disruptions is uncertain.

 

The Company has a strong balance sheet and sufficient liquidity in place. The Company has cash and cash equivalents of $5.47 million (excluding $9.98 million in quarter-end margin balance) and marketable securities of $2.80 million. Approximately 54% of marketable securities is a portfolio of preferred stock of large cap REITs. We have reviewed this portfolio and concluded the best course points to an outlook that most will return to pre-crisis levels as REITs strive to remain current on preferred dividends in order to retain access to capital markets. Our other investments with a carrying value of $5.67 million are primarily recorded on a cost recovery basis. As of March 31, 2020, we identified one investment which required an impairment valuation adjustment of $50,000 (refer to Note 6). We will continue monitoring these investments to determine if any further valuation adjustments are necessary. The Company’s construction project in Fort Myers, Florida continues on schedule and is projected for completion by the first quarter of 2021.

 

The Company believes it is able to support continuing operations, fund commitments in other investments and meet all other liabilities as they become due. We believe that future opportunities will likely mirror the Company’s present posture. This generally entails seeking development opportunities in the multi-family segment, together with qualified partners in various markets.

 

3.

NEW ACCOUNTING PRONOUNCEMENTS

 

There are several new accounting pronouncements issued or proposed by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company’s condensed consolidated financial position, operating results, or cash flow.

 

4.

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. As of March 31, 2020, the outstanding balance on the Loan was approximately $5.33 million. The Project is 38% complete and expected to be fully completed by the first quarter of 2021.

 

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 for 15% 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 March 31, 2020, HMG was in compliance with all covenants required by Guarantors in the Loan Agreement.

 

5.

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 $1.51 million and $1.86 million in preferred stock of large capital real estate investment trusts (REITs) as of March 31, 2020 and December 31, 2019, respectively.

 

Net realized and unrealized gain from investments in marketable securities for the three months ended March 31, 2020 and 2019 is summarized below: 

 

		Three Months Ended March 31,
Description		2020				2019
Net realized loss from sales of securities		$	(27,000	)		$	(28,000	)
Unrealized net (loss) gain securities			(843,000	)			208,000
Total net (loss) gain from investments in marketable securities		$	(870,000	)		$	180,000

 

For the three months ended March 31, 2020, net unrealized loss from marketable securities of approximately $843,000 was primarily the result of the large decline in the overall U.S. stock market experienced as a result of business closures from the on-going pandemic.

 

For the three months ended March 31, 2020, net realized losses from sales of marketable securities of approximately $27,000 consisted of approximately $39,000 of gross losses net of $12,000 of gross gains. For the three months ended March 31, 2019, net realized losses from sales of marketable securities of approximately $28,000 consisted of approximately $31,000 of gross losses net of $3,000 of gross gains.

 

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.

 

6

 

  

6.

OTHER INVESTMENTS

 

As of March 31, 2020, the Company’s portfolio of other investments had an aggregate carrying value of approximately $5.67 million and we have committed to fund approximately $715,000 as required by agreements with the investees. The carrying value of these investments is equal to contributions less distributions and impairment valuation adjustments, if any.

 

During the three months ended March 31, 2020, we made cash contributions to other investments of approximately $189,000. This consisted $100,000 as an addition to our existing investment in a private lending fund and approximately $89,000 in follow on commitments of existing investments.

 

During the three months ended March 31, 2020, we received cash distributions from other investments of approximately $185,000. This consisted of distributions from existing investments primarily in real estate and related entities. One investee sold its remaining rental apartment building located in Atlanta, Georgia and we received $121,000.

 

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, this investment is included in marketable securities, and as of March 31, 2020, had an unrealized loss of approximately $190,000.

 

Net income from other investments for the three months ended March 31, 2020 and 2019, is summarized below:

 

		2020				2019
Partnerships owning real estate & related		$	130,000			$	42,000
Partnerships owning diversified businesses			2,000				28,000
Income from investment in affiliate T.G.I.F. Texas, Inc.			(18,000	)			8,000
Total net income from other investments		$	114,000			$	78,000

 

The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of March 31, 2020 and December 31, 2019, aggregated by investment category and the length of time that investments have been in a continuous loss position:

 

		As of March 31, 2020
		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 diversified businesses		$	829,000			$	(261,000	)		$	-			$	-			$	829,000			$	(261,000	)
Partnerships owning real estate and related investments			169,000				(52,000	)			-				-				169,000				(52,000	)
Total		$	998,000			$	(313,000	)		$	-			$	-			$	998,000			$	(313,000	)
		As of December 31, 2019
		12 Months or Less								Greater than 12 Months								Total
Investment Description		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
Partnerships owning real estate and related investments		$	169,000			$	(52,000	)		$	-			$	-			$	169,000			$	(52,000	)
Partnerships owning diversified businesses investments			363,000				(57,000	)			188,000				(45,000	)			551,000				(102,000	)
Total		$	532,000			$	(109,000	)		$	188,000			$	(45,000	)		$	720,000			$	(154,000	)

 

7

 

  

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.

 

For the three months ended March 31, 2020, in accordance with ASC Topic 320-10-65, Recognition and Presentation of Other-Than-Temporary Impairments (“OTTI”), we have recognized $50,000 in an impairment valuation adjustment for an investment that has been in a continuous unrealized loss position for over 12 months. This investment is in a small business investment company licensed by the Small Business Administration in which we invested $300,000 in 2007. Distributions to date from this investment total $68,000. The carrying value of this investment is $182,000 after the OTTI adjustment.

 

There were no OTTI adjustments for the three months ended March 31, 2019.

 

7.

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019, using quoted prices in active markets for identical assets (Level 1) and significant other observable inputs (Level 2). For the periods presented, there were no major assets measured at fair value on a recurring basis which uses significant unobservable inputs (Level 3):

 

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

 

		Fair value measurement at reporting date using
Description		Total March 31, 2020				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		$	1,371,000			$	1,371,000				-				-
US T-bills			13,588,000				13,588,000
Marketable securities:
Corporate debt securities			546,000				-				546,000				-
Marketable equity securities			2,255,000				2,255,000				-				-
Total assets		$	17,760,000			$	17,214,000			$	546,000			$	-
		Fair value measurement at reporting date using
Description		Total December 31, 2019				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents:
Money market mutual funds		$	606,000			$	606,000				-				-
US T-bills			14,130,000				14,130,000
Marketable securities:
Corporate debt securities			474,000				-				474,000				-
Marketable equity securities			2,999,000				2,999,000				-				-
Total assets		$	18,209,000			$	17,735,000			$	474,000			$	-

 

8

 

  

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.

 

8.

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.

 

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 13, 2019, the Company declared a dividend of $0.50 per share which was payable on January 13, 2020 to all shareholders of record as of December 30, 2019. The dividend was 72% capital gain and 28% return of capital.

 

The Company accounts for income taxes in accordance with ASC Topic 740, “Accounting for Income Taxes.” ASC Topic 740 requires a Company to use the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred taxes only pertain to CII. As of March 31, 2020, the Company has recorded a net deferred tax asset of $23,000, and as December 31, 2019 recorded a net deferred tax liability of $77,000. Deferred taxes are primarily a result of timing differences associated with the carrying value of the investment in affiliate (TGIF), other investments and investments in marketable securities. CII’s NOL carryover to 2020 is estimated at $896,000 and has been fully reserved due to CII historically having tax losses.

 

The benefit from income taxes in the consolidated statements of income consists of the following:

 

Three months ended March 31,		2020				2019
Current:
Federal		$	-			$	-
State			-				-
			-				-
Deferred:
Federal		$	(75,000	)		$	(3,000	)
State			(16,000	)			(1,000	)
			(91,000	)			(4,000	)
Decreased valuation allowance			(10,000	)			-
Total		$	(101,000	)		$	(4,000	)

 

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, 2019. The Company’s federal income tax returns since 2016 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.

 

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9.

STOCK OPTIONS

 

During the three months ended March 31, 2020 there were no options granted, expired or forfeited.

 

The following table summarizes information concerning outstanding and exercisable options as of March 31, 2020:

 

		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 March 31, 2020, 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 loss of approximately $965,000 (or $0.95 per share) for the three months ended March 31, 2020. For the three months ended March 31, 2019 the Company reported a net loss of approximately $11,000 (or $0.01 per share).

 

REVENUES

Rentals and related revenues for the three months ended March 31, 2020 and 2019 were approximately $20,000 and $19,000, respectively and primarily consists of rent from the Advisor to CII for its corporate office.

 

Net realized and unrealized (loss) gain from investments in marketable securities:

Net realized and unrealized loss from investments in marketable securities for the three months ended March 31, 2020 was approximately $870,000. For the three months ended March 31, 2020, net unrealized loss from marketable securities of approximately $843,000 was primarily the result of the large decline in the overall U.S. stock market experienced as a result of business closures from the on-going pandemic.

 

For the three months ended March 31, 2019 net realized and unrealized gains from marketable securities was approximately $180,000. For further details, refer to Note 5 to Condensed Consolidated Financial Statements (unaudited).

 

Income from other investments:

Income from other investments for the three months ended March 31, 2020 and 2019 was approximately $113,000 and $78,000, respectively. For further details, refer to Note 6 to Condensed Consolidated Financial Statements (unaudited).

 

Other than temporary impairment losses from other investments (“OTTI”):

For the three months ended March 31, 2019 OTTI valuation adjustment was $50,000 from one investment. For further details, refer to Note 6 to Condensed Consolidated Financial Statements (unaudited).

 

EXPENSES

Professional fees and expenses for the three months ended March 31, 2020 as compared with the same period in 2019 increased by approximately $15,000 (or 18%) primarily due to increased tax preparation fees.

 

EFFECT OF INFLATION:

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

 

LIQUIDITY, CAPITAL EXPENDITURE REQUIREMENTS AND CAPITAL RESOURCES

The Company's material commitments primarily consist of a note payable to the Company’s 49% owned affiliate, T.G.I.F. Texas, Inc. (“TGIF”) of $650,000 due on demand, contributions committed to other investments of approximately $715,000 due upon demand. The $9.98 million in margin is primarily related to the purchase of US T-bills at quarter end. The T-bills were sold in April 2020 and the related margin was repaid. The purchase of T-bills at each fiscal quarter end is for the purposes of qualifying for the REIT asset test. The funds necessary to meet these obligations are expected from the proceeds from the sales of investments, distributions from investments and available cash.

 

MATERIAL COMPONENTS OF CASH FLOWS

For the three months ended March 31, 2020, net cash used in operating activities was approximately $353,000, primarily consisting of operating expenses.

 

For the three months ended March 31, 2020, net cash provided by investing activities was approximately $1.2 million. This consisted primarily of $1 million collection of loan due from purchaser of Grove Isle, $200,000 collection of loan participation, net proceeds from sales and redemptions of marketable securities of $373,000, distributions from other investments of $185,000 and distribution from affiliate of $221,000. These sources of funds were partially offset by uses of cash consisting primarily of $570,000 in purchases of marketable securities and $189,000 of contributions to other investments.

 

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For the three months ended March 31, 2020, net cash used in financing activities was approximately $792,000, consisting of $507,000 dividend paid and $350,000 principal payment on note due to affiliate. These uses of funds were partially offset by increased margin borrowings (net of repayments) of $64,000.

 

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 three months ended March 31, 2020, 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.

 

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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.
Dated:  May 13, 2020	/s/ Maurice Wiener
	CEO and President
Dated:  May 13, 2020	/s/Carlos Camarotti
	Vice President- Finance and Controller
	Principal Accounting Officer

 

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