PRESIDENTIAL REALTY CORP/DE/ - Quarter Report: 2013 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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: June 30, 2013

 

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: 001-08594

 

PRESIDENTIAL REALTY CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware		13-1954619
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

1430 Broadway Suite 503

New York, NY 10018

(Address of Principal Executive Office)

 

Registrant’s Telephone Number, Including Area Code:  (914) 948-1300

 

N/A

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer ¨	Accelerated filer  ¨
Non-accelerated filer ¨	Smaller reporting company x
(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

 

 Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

As of August 14, 2013, there were 442,533 shares of Class A common stock and 3,227,147 shares of Class B common stock outstanding.  

 

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES 

 

Index to Form 10-Q

For the Quarterly Period Ended

June 30, 2013

 

		Page
Part I	Financial Information (Unaudited)
Item 1.	Financial Statements
	Consolidated Balance Sheets (Unaudited)	1
	Consolidated Statements of Operations (Unaudited)	2
	Consolidated Statements of Cash Flows (Unaudited)	3
	Notes to Consolidated Financial Statements (Unaudited)	4-12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	17
Item 4.	Controls and Procedures	17
Part II	Other Information
Item 6.	Exhibits	18

Item 1.  Financial Statements

							June 30,		December 31,
							2013			2012
							(Unaudited)
Assets
Real estate (Note 2)						$	1,114,413		$	1,111,534
Less: accumulated depreciation							489,406			465,016
Net real estate							625,007			646,518
Net mortgage portfolio							7,017			14,654
Prepaid expenses							151,709			253,330
Other receivables (net of valuation allowance of $5,625 in 2013 and $7,506 in 2012 )							30,536			31,825
Cash and cash equivalents							719,913			852,674
Assets related to discontinued operations							14,280,381			14,198,806
Other assets							17,668			11,988
Total Assets						$	15,832,231		$	16,009,795
Liabilities and Equity
Liabilities:
Liabilities related to discontinued operations						$	18,532,790		$	17,843,489
Mortgage payable							477,143			488,748
Line of Credit							200,000			-
Accrued liabilities							480,792			337,827
Accounts payable							-			7,559
Other liabilities							639,500			633,815
Total Liabilities							20,330,225			19,311,438
Presidential Stockholders' Deficit:
Common stock: par value $.00001 per share
		June 30, 2013		December 31, 2012
Class A
Authorized:		700,000		700,000
Issued:		471,633		471,633			5			5
Treasury:		29,100		29,100
Class B
Authorized:		999,300,000		999,300,000
Issued:		3,756,842		3,756,842			38			38
Treasury:		529,695		529,695
Additional paid-in capital							5,254,135			5,254,135
Accumulated deficit							(4,642,334)			(3,717,861)
Treasury stock (at cost)							(2,879,354)			(2,879,354)
Total Presidential stockholders' deficit							(2,267,510)			(1,343,037)
Non-controlling interest (Note 5)							(2,230,484)			(1,958,606)
Total Deficit							(4,497,994)			(3,301,643)
Total Liabilities and Stockholders' Deficit						$	15,832,231		$	16,009,795

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. Organization and Summary of Significant Accounting Policies

 

Organization

 

Presidential Realty Corporation (“Presidential” or “the Company”) is a Delaware corporation organized in 1983 to succeed to the business of a company of the same name which was organized in 1961 to succeed to the business of a closely held real estate business founded in 1911. Since 1982, we have elected to be treated as a real estate investment trust (“REIT”) for Federal and State income tax purposes. We own, directly or indirectly, interests in real estate and interests in entities which own real estate.

 

On November 8, 2011, we and PDL Partnership, a New York general partnership (“PDL Partnership”), the general partners of which are Jeffrey F. Joseph (a director and former officer), Steven Baruch (a former director and former officer) and Thomas Viertel (a former director and former officer), entered into a series of transactions with the investors and Signature Community Investment Group LLC (together with its affiliates, “Signature”)(“Strategic Transaction”). Signature is owned by Nickolas W. Jekogian, III, the promoter of the stock transactions included in the Strategic Transaction. The Strategic Transaction among other things resulted in the termination of our plan of liquidation.

 

Basis of Presentation and Going Concern Considerations

 

For the six months ended June 30, 2013, the Company had a loss from continuing operations. This combined with a history of operating losses and working capital deficiency have been detrimental to our operations and could potentially affect our ability to meet our obligations and continue as a going concern. See Note 7A3 of Notes to Consolidated Financial Statements. If the Company is required to pay any significant amounts under its guaranty related to our Hato Rey property, such a payment would also adversely impact our liquidity.  Our ability to continue as a going concern is dependent upon management’s successful execution of our business plan to achieve profitability, to increase working capital raising debt and or equity and a successful defense of the claims against the Company under its guaranty related to the Hato Rey property. The accompanying consolidated financial statements do not include any adjustments that may result from this uncertainty.

 

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the requirements of the Securities and Exchange Commission (“SEC”). The consolidated financial statements include all normal and recurring adjustments that are necessary for a fair presentation of the Company’s financial position and operating results.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information.  The results for such interim periods are not necessarily indicative of the results to be expected for the year.  In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the results for the respective periods have been reflected.  These consolidated financial statements and accompanying notes should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2012.

 

 

4

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.

Organization and Summary of Significant Accounting Policies (Continued)

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Presidential Realty Corporation and its wholly owned subsidiaries. Additionally, the consolidated financial statements include 100% of the account balances of PDL, Inc. and Associates Limited Co-Partnership (the “Hato Rey Partnership”). PDL, Inc. (a wholly owned subsidiary of Presidential and the general partner of the Hato Rey Partnership) and Presidential own an aggregate 60% general and limited partnership interest in the Hato Rey Partnership (see Note 5). All significant intercompany balances and transactions have been eliminated.

 

Rental Revenue Recognition

 

The Company acts as lessor under operating leases. Rental revenue is recorded on the straight-line basis from the later of the date of the commencement of the lease or the date of acquisition of the property subject to existing leases, which averages minimum rents over the terms of the leases. Certain leases require the tenants to reimburse a pro rata share of real estate taxes, utilities and maintenance costs. Recognition of rental revenue is generally discontinued when the rental is delinquent for ninety days or more, or earlier if management determines that collection is doubtful.

 

Allowance for Doubtful Accounts

 

The Company assesses the collectability of amounts due from tenants and other receivables, using indicators such as past-due accounts, the nature and age of the receivable, the payment history and the ability of the tenant or debtor to meet its payment obligations. Management’s estimate of allowances for doubtful accounts is subject to revision as these factors change. Rental revenue is recorded on the accrual method and rental revenue recognition is generally discontinued when the tenant in occupancy is delinquent for ninety days or more. Bad debt expense is charged for vacated tenant accounts and subsequent receipts collected for those receivables will reduce bad debt expense. As of June 30, 2013 and December 31, 2012, the allowance for doubtful accounts for continuing operations relating to tenant obligations was $5,625 and $7,506, respectively.

 

Net Loss Per Share

 

Basic net loss per share data is computed by dividing net loss by the weighted average number of shares of Class A and Class B common stock outstanding (excluding nonvested shares) during each period. Diluted net loss per share is computed by dividing net loss by the weighted average shares outstanding, including the dilutive effect, if any, of nonvested shares. For the three and six months ended June 30, 2013 and 2012, the weighted average shares outstanding as used in the calculation of diluted loss per share do not include 740,000 of outstanding stock options, as their inclusion would be antidilutive.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand; cash in banks and money market funds.

 

Management Estimates

 

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated balance sheets and the reported amounts of income and expense for the reporting period. Actual results could differ from those estimates.

 

 

5

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. Organization and Summary of Significant Accounting Policies (Continued)

 

Discontinued Operations

 

The Company follows the guidance of the presentation and property, plant, and equipment Topics of the ASC, with respect to long-lived assets classified as held for sale. The ASC requires that the results of operations, including impairment, gains and losses related to the properties that have been sold or properties that are intended to be sold, be presented as discontinued operations in the statements of operations for all periods presented and the assets and liabilities of properties intended to be sold are to be separately classified on the balance sheet. Properties designated as held for sale are carried at the lower of cost or fair value less costs to sell and are not depreciated.

 

Accounting for Uncertainty in Income Taxes

 

The Company follows the guidance of the recognition of current and deferred income tax accounts, including accrued interest and penalties, in accordance with ASC 740-10-25. Under this guidance, if the Company’s tax positions in relation to certain transactions were examined and were not ultimately upheld, the Company would be required to pay an income tax assessment and related interest. Alternatively, the Company could elect to pay a deficiency dividend to its shareholders in order to continue to qualify as a REIT and the related interest assessment to the taxing authorities.

2. Real Estate

 

Real estate included in continuing operations is comprised of the following:

 

 

Rental revenue from the Maple Tree property constituted all of the rental revenue for the Company during the three and six months ended June 30, 2013 and 2012.

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

The following table summarizes operations for the property discontinued:

 

 

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

4. Mortgage Debt

 

The mortgage debt on the Hato Rey Center in Puerto Rico is being recorded in discontinued operations. At June 30, 2013 and December 31, 2012, the principal balance on the mortgage was $13,910,592 and $14,009,797. The loan is nonrecourse to the Company with standard carve outs. The first mortgage loan on the Hato Rey Center property matures on May 11, 2028, but provided that if it was not repaid on or before May 11, 2008, the interest rate on the loan was increased by two percentage points to 9.38% per annum of which 2% per annum would be deferred until maturity.

 

Since April 2011, cash flow at the property was not sufficient to make the required monthly mortgage payments. (See Note 7A3). At this time, Berkadia Commercial Mortgage LLC (“Berkadia”) was put in place as the special servicer for the loan and all rental payments for the property were sent to a lock box controlled by Berkadia. During the current quarter Berkadia has applied $99,205 to the mortgage balance and $263,578 to interest accrued on the mortgage. The Company is accruing an additional 5% per annum as default interest and a 5% late payment fee. At June 30, 2013 and December 31, 2012, interest and other fees payable were $4,052,063 and $3,287,507, respectively, which were offset by escrow accounts maintained by Berkadia. Because of the foreclosure action the Hato Rey Center property was classified as a discontinued operation.

 

On June 8, 2012, we closed on a mortgage and line of credit for a combined total of $1,000,000 with Country Bank for Savings on the Mapletree Industrial Center. The mortgage is for $500,000 at a 5% interest rate, for a term of5 years. Thereafter the interest will adjust monthly equal to the bank’s Prime Rate, plus 1% with an interest rate floor of 5%, for a term of 15 years. We received $459,620 of net proceeds. The balance at June 30, 2013 and December 31, 2012 was $477,143 and $488,748, respectively. The line of credit is for $500,000, with an interest rate of 1% over the bank’s Prime Rate. At June 30, 2013, there was $200,000 outstanding on the line of credit. The line of credit is due on demand. Both the mortgage and the line of credit are secured by the Mapletree Industrial Center in Palmer, Massachusetts.

8

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

5.     Hato Rey Partnership

 

PDL, Inc. (a wholly owned subsidiary of Presidential) is the general partner of the Hato Rey Partnership. Presidential and PDL, Inc. have an aggregate 60% general and limited partner interest in the Hato Rey Partnership. The Company exercises effective control over the partnership through its ability to manage the affairs of the partnership in the ordinary course of business. Accordingly, the Company consolidates the Hato Rey Partnership in the accompanying consolidated financial statements. As of March 2012, the Company has reported the partnership as a discontinued operation.

 

The Hato Rey Partnership owns and operates the Hato Rey Center, an office building with 207,000 square feet of commercial space, located in Hato Rey, Puerto Rico. The Company advanced $2,670,000 to the partnership to be used for building improvements and for operations. The loan, which was advanced to the partnership, as needed, bears interest at the rate of 13% per annum, with interest and principal to be paid out of the positive cash flow from the property or upon a refinancing of the First Mortgage on the property. At June 30, 2013 and December 31, 2012, the loan balance was $2,670,000 and accrued interest amounted to $1,614,941. These amounts were eliminated in consolidation. Management does not believe the Company will collect any of the principal or interest owed the Company. During the second quarter of 2012 the Company stopped accruing interest on the loan.

6.    Income Taxes

 

Presidential has elected to qualify as a Real Estate Investment Trust under the Internal Revenue Code. A REIT which distributes at least 90% of its real estate investment trust taxable income to its shareholders each year by the end of the following year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders.

 

ASC 740 prescribes a more likely than not recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken. If the Company’s tax position in relation to a transaction was not likely to be upheld, the Company would be required to record the accrual for the tax and interest thereon. As of June 30, 2013, the tax years that remain open to examination by the federal, state and local taxing authorities are the 2009 – 2011 tax years. The Company was not required to accrue any liability for those tax years.

 

For the six months ended June 30, 2013, the Company had a tax loss of approximately $812,000 or ($0.22) per share, which is comprised of an ordinary loss.

7.    Commitments, Contingencies and Related parties

 

A.

Commitments and Contingencies

 

1)

Except as described in item 3 below, Presidential is not a party to any material legal proceedings. The Company may from time to time be a party to routine litigation incidental to the ordinary course of its business.

 

2)

In the opinion of management, all of the Company’s properties are adequately covered by insurance in accordance with normal insurance practices.

 

 

9

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

3)

On April 4, 2012, a mortgage foreclosure action was filed in the Court of First Instance, San Juan Superior Part, in the Commonwealth of Puerto Rico to foreclose on the Company’s Hato Rey property. The action is entitled U.S. Bank National Association, as trustee, as successor-in-interest to Bank of America, National Association, as trustee for the Registered Holders of GS Mortgage Securities Corporation II, Commercial Mortgage Pass-Through Certificates, Series 1998-C1, acting by and through Berkadia Commercial Mortgage LLC in its capacity as special servicer pursuant to the pooling and servicing agreement dated October 11, 1998 against PDL, Inc. & Associates, Limited Co-partnership; PDL, Inc., Presidential Realty Corporation; Lester Cohen and F.D. Rich Company of Puerto Rico, Inc. The complaint seeks a judgment against the Hato Rey Partnership in the amount of not less than $19,512,591, consisting of i) $14,484,138 in principal, ii) $1,119,406 in accrued interest, iii) $685,985 in default interest, iv) $48,371 in late charges, v) $1,424,691 in deferred interest and vi) $1,750,000 in liquidated damages as well as additional interest and default charges which continue to accrue under the mortgage loan on the Hato Rey property and foreclosure of the mortgage notes in order to sell the Hato Rey property and apply the proceeds of sale against the indebtedness. The Company’s wholly owned subsidiary, PDL, Inc., is the general partner of the partnership and the Company’s wholly owned subsidiary, Presidential Matmor Corporation, is a limited partner of the partnership. The complaint also seeks judgments against PDL, Inc., the Company, Lester Cohen and F.D. Rich Company of Puerto Rico, Inc., with liability among them to be allocated 1%, 45%, 9% and 45%, respectively, under the terms of certain guarantees issued by them in connection with the mortgage loans, for alleged physical waste to the Property and, the costs of certain repairs to the property of not less than $1,100,000 and the reasonable legal costs and expenses in connection with the enforcement of the loan documents.

 

In 1998, at the time the mortgage loan was made, F.D. Rich Company of Puerto Rico, Inc. was a limited partner of the partnership. In April 2006, Presidential Matmor Corp. acquired the limited partnership interest in the partnership owned by F.D. Rich Company of Puerto Rico, Inc. In connection with the acquisition of that interest, the parties executed a release and indemnification agreement which provides, among other things, that the Company and Presidential Matmor Corp. agree to indemnify F.D. Rich of Puerto Rico, Inc. against any liability under the guaranty.

 

The guarantees provide that the guarantors will pay the lender any loss, damage, cost, expense, liability, claim or other obligation incurred by the lender arising out of fraud, intentional material misrepresentation, willful misconduct, physical waste committed on the subject property, failure to pay any valid taxes and assessments to the extent rents from the property are sufficient to pay such taxes, mechanics liens, materialmen’s liens or other liens which could create liens superior to the mortgage lien, reasonable legal costs and expenses incurred by lender in connection with litigation or other legal proceedings to enforce the loan, the breach of any material representation, covenant and warranty under the related environmental and hazardous substance indemnification agreement, misapplication or conversion of any insurance proceeds, awards or other amounts received in connection with condemnation of all or a portion of the property or any rents following an event of default and any security deposits not delivered to the lender. The lender has not asserted any claims against the Company other than those asserted under the guarantees as referenced above. The Company believes that the likelihood that the Company will be held liable for the claims asserted under the guarantees is remote.

 

The plaintiff has made a motion for the entry of judgment against the Partnership and PDL Inc. and the right to sell the property in foreclosure.  Plaintiff’s motion for the entry of a monetary judgment against the Partnership and PDL under the loan and for the right to sell the property in foreclosure has been granted, however the parties have agreed to hold the entry of judgment in abeyance while they continue negotiations.  The plaintiff lender has also obtained a default judgment against F. D. Rich Company of Puerto Rico, Inc. That company was dissolved in 2009.

 

 

10

   

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

B.

Related Parties

 

Property Management Agreement

 

On November 8, 2011, the Company and Signature entered into a Property Management Agreement pursuant to which the Company has retained Signature as the exclusive managing and leasing agent for the Company’s Mapletree Industrial Center property in Palmer, Massachusetts (the “Mapletree Property”). Signature shall manage the Mapletree Property in accordance with specific management guidelines and leasing guidelines and shall meet specific reporting requirements and vendor insurance requirements. Signature will receive compensation of 5% of monthly rental income actually received from tenants at the Mapletree Property. The Company will reimburse Signature for all reasonable expenses incurred by Signature in performance of its duties under the Property Management Agreement that are either in accordance with the annual budget or which have been approved in writing by the Company. Such expense shall include, but not be limited to, Signature’s costs of the salaries, benefits and appropriate and prudent training for Signature’s employees who are engaged solely in management or operation of the Mapletree Property, but excluding certain expenses that will be borne by Signature, as specified in the Property Management Agreement. The Property Management Agreement renewed for a one year term on November 8, 2012 and will be automatically renewable for one year terms until it is terminated by either party upon written notice. For the three months ended June 30, 2013 and 2012 the Company incurred management fees of approximately $9,300 and $9,200, respectively. For the six months ended June 30, 2013 and 2012 the Company incurred management fees of approximately $18,600 and $17,700, respectively.

 

Asset Management Agreement

 

On November 8, 2011, the Company and Signature entered into an Asset Management Agreement pursuant to which the Company engaged Signature to oversee the Company’s Mapletree Industrial Center property in Palmer, Massachusetts and an office building at Hato Rey, Puerto Rico (the “Properties”). Signature’s duties include leasing, marketing and advertising, financing, construction and dispositions of the Properties. Signature will receive a construction fee for any major renovations or capital projects, subject to the approval of the Company’s Board of Directors, an asset management fee of 1.5% of the monthly gross rental revenues collected for the Properties, a finance fee of 1% on any debt placement, and a disposition fee of 1% on the sale of any assets, as specified in the Asset Management Agreement. The Asset Management Agreement renewed for a one year term on November 8, 2012 and will be automatically renewable for one year terms until it is terminated by either party upon written notice. For the three months ended June 30, 2013 and 2012 the Company incurred an asset management fee of approximately $12,200 and $0, respectively. For each of the Six months ended June 30, 2013 and 2012 the Company incurred an asset management fee of $26,000 and $25,000, respectively.

 

Sublease

 

The Company subleases their executive office space under a month to month lease with Signature for a monthly rental payment of $433 or $5,200 per year. Either party may terminate the sublease upon 30 days prior written notice. For each of the three and six month periods ended June 30, 2013 and 2012 the Company incurred approximately $1,300 and $2,600, respectively, in rent expense. On July 1, 2013 the Company moved their executive offices and amended its lease agreement with Signature for a monthly rental payment of $1,100 or $13,200 per year. All other terms of the sublease remained the same.

 

 

11

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

8.    Stock Options

 

In connection with the November 8, 2011 Strategic Transactions the Company issued 740,000 options at an exercise price of $1.25. A total of 148,000 shares vested after six months after the grant date. At June 30, 2013, the aggregate intrinsic value was $0. The remaining options vest upon the achievement of performance milestones. Options vesting on the achievement of performance milestones will not be recognized as compensation until such milestones are deemed probable of achievement. For the three and six months ended June 30, 2013 and 2012, compensation expense was $0 and $24,667 and $0 and $98,667, respectively. The Company has approximately $592,000 of unrecognized compensation expense related to unvested share-based compensation awards, which will vest upon the achievement of performance milestones.

9.    Estimated Fair Value of Financial Instruments

 

Estimated fair values of the Company’s financial instruments as of June 30, 2013 and December 31, 2012 were determined using available market information and various valuation estimation methodologies. Considerable judgment was required to interpret the effects on fair value of such items as future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. The estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a errant market exchange. Also, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair values.

 

 

(1) Net carrying value is net of valuation reserves and discounts where applicable.

 

The fair value estimates presented above were based on pertinent information available to management as of June 30, 2013 and December 31, 2012.

 

Fair value methods and assumptions were as follows:

 

Cash and Cash Equivalents – The estimated fair value approximated carrying value, due to the short maturity of these investments. 

  

Notes Receivable – The fair value of notes receivable was estimated by discounting projected cash flows using current rates for similar notes receivable.

 

Mortgage Debt and line of credit – The fair value of mortgage debt was estimated by discounting projected cash flows using current rates for similar debt.