UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(Mark One)
For the quarterly period ended:
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PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
Index to Form 10-Q
For the Quarterly Period Ended
March 31, 2023
| Page | ||
| Part I Financial Information (Unaudited) | 1 | |
| Item 1. | Financial Statements | 1 |
| Consolidated Balance Sheets (Unaudited) | 1 | |
| Consolidated Statements of Operations (Unaudited) | 2 | |
| Consolidated Statements of Cash Flows (Unaudited) | 4 | |
| Notes to Consolidated | 5 | |
| Financial Statements (Unaudited) | ||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 21 |
| Item 4. | Controls and Procedures | 21 |
| Part II Other Information | 22 | |
| Item 1. | Legal Proceedings | 22 |
| Item 6. | Exhibits | 22 |
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Assets | (Unaudited) | |||||||
| Real estate | $ | $ | ||||||
| Less: accumulated depreciation | ||||||||
| Net real estate | ||||||||
| Investment in Avalon Jubilee, LLC | ||||||||
| Prepaid expenses | ||||||||
| Other receivables (net of valuation allowance of $ | ||||||||
| Cash | ||||||||
| Mortgage escrow | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Equity | ||||||||
| Liabilities: | ||||||||
| Mortgage payable, net | $ | $ | ||||||
| Accounts payable and accrued liabilities | ||||||||
| Other liabilities | ||||||||
| Total Liabilities | ||||||||
| Presidential Stockholders’ Deficit: | ||||||||
| Common stock: par value $.00001 per share | ||||||||
| March 31, 2023 | December 31, 2022 | |||||||||||||||
| Class A | ||||||||||||||||
| Authorized: | ||||||||||||||||
| Class B | ||||||||||||||||
| Authorized: | ||||||||||||||||
| Additional paid-in capital | ||||||||||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||||||||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||||||||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||||||||||
See notes to the consolidated financial statements.
1
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the three months ended March 31, | ||||||||
| Unaudited | ||||||||
| 2023 | 2022 | |||||||
| Revenues: | ||||||||
| Rental | $ | $ | ||||||
| Total Revenue | ||||||||
| Costs and Expenses: | ||||||||
| General and administrative | ||||||||
| Rental property: | ||||||||
| Operating expenses | ||||||||
| Interest expense and amortization of mortgage costs | ||||||||
| Real estate taxes | ||||||||
| Depreciation on real estate | ||||||||
| Total Costs and Expenses | ||||||||
| Other Income: | ||||||||
| Investment income | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Net loss per Common Share -basic | $ | ( | ) | $ | ( | ) | ||
| Net loss per Common Share -diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted Average Number of Shares Outstanding | ||||||||
| basic | ||||||||
| diluted | ||||||||
See notes to the consolidated financial statements.
2
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (Unaudited)
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Deficit | |||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||
| Balance at March 31, 2023 | ( | ) | ( | ) | ||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||
| Balance at March 31, 2022 | ( | ) | ( | ) | ||||||||||||
See notes to the consolidated financial statements.
3
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| FOR THE THREE MONTHS ENDED | ||||||||
| MARCH 31, | ||||||||
| 2023 | 2022 | |||||||
| Unaudited | Unaudited | |||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash flow from operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Bad debt | ||||||||
| Changes in assets and liabilities: | ||||||||
| Decrease (increase) in: | ||||||||
| Other receivables | ( | ) | ( | ) | ||||
| Prepaid expenses | ||||||||
| Other assets | ( | ) | ||||||
| Increase (decreases) in: | ||||||||
| Accounts payable and accrued liabilities | ||||||||
| Other liabilities | ( | ) | ( | ) | ||||
| Total adjustments | ||||||||
| Net cash flow provided by operating activities | ||||||||
| Cash Flows from Investing Activities: | ||||||||
| Payments disbursed for capital improvements | ( | ) | ( | ) | ||||
| Net cash flow used in investing activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from SBA PPP loan | ||||||||
| Principal payments on mortgage debt | ( | ) | ( | ) | ||||
| Net cash flow used in financing activities | ( | ) | ( | ) | ||||
| Net (decrease) increase in cash and restricted cash | ( | ) | ||||||
| Cash and restricted cash, Beginning of Year | ||||||||
| Cash and restricted cash, End of Year (1) | $ | $ | ||||||
| Supplemental cash flow information: | ||||||||
| Interest paid in cash | $ | $ | ||||||
| (1) | This line item includes restricted cash of $112,956 and $88,423 at March 31, 2023 and 2022, respectively. These amount are presented in the “mortgage escrow” caption on the accompanying consolidated balance sheets. |
See notes to the consolidated financial statements.
4
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 operated as a self-administrated, self-managed Real Estate Investment Trust (“REIT”). The Company is engaged principally in the ownership of income producing real estate. Presidential operates in a single business segment, investments in real estate related assets.
Basis of Presentation
At March 31, 2023, the Company had a loss from operations. This combined with a history of operating losses and working capital deficiency, has been detrimental to our operations and could potentially affect our ability to meet our obligations and continue as a going concern. Our ability to continue as a going concern is dependent upon the successful execution of strategies to achieve profitability and increase working capital by raising debt and/or equity. The accompanying financial statements do not include any adjustments that may result from this uncertainty.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the requirements of the Securities and Exchange Commission (“SEC”). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of the Company’s financial position and operating results.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the requirements of the Securities and Exchange Commission (“SEC”) for interim financial information. The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of the Company’s financial position and operating results. 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, 2022 filed on March 31, 2023.
Real Estate
Real estate is stated at cost. Generally, depreciation
is provided on the straight-line method over the assets estimated useful lives, which range from
Principles of Consolidation
The Company consolidates variable interest entities (VIEs) for which it is the primary beneficiary, generally as a result of having the power to direct the activities that most significantly affect the VIE’s economic performance and holding variable interest that convey to the Company the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
The accompanying consolidated financial statements include the accounts of Presidential Realty Corporation and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
5
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
| 1. | Organization and Summary of Significant Accounting Policies (Continued) |
Investments in Joint Venture
The Company has an equity investment in a joint venture and accounts for this investment using the fair value method of accounting.
Revenue Recognition
Rental revenues include revenues from the leasing of space at our Mapletree Property, which primarily consist of monthly base rents in addition to the reimbursement of utilities. Other rental revenues, which are included as a component of rental revenue, primarily include fees related to build-out or other services performed by the Company on the property.
The Company recognizes Revenue from Contracts with Customers in accordance with ( ASC 606), as the majority of the Company’s revenue is recognized under ASC 840, Leases, and subsequently ASU 2016-02, Leases (ASC 842), upon its adoption, which are scoped out of ASC 606. ASC 606 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. This standard requires us to recognize for certain of our revenue sources the transfer of promised goods or services to customers in an amount that reflects the consideration we are entitled to in exchange for those goods or services. The Company’s other rental revenues recognized in accordance with ASC 606 are recognized over time as the performance obligations are satisfied. Such revenues are not material to the consolidated financial statements.
The Company adopted ASC 842 effective January 1, 2019, and its adoption did not have a material effect on the consolidated financial statements. As a lessor, the adoption of ASC 842 (as amended by subsequent ASUs) did not change the timing of revenue recognition of the Company’s rental revenues. Revenues from the leasing of space at our property to tenants includes (i) lease components, including fixed and variable lease payments, and nonlease components which include reimbursement of electric expense and (ii) reimbursement of real estate taxes. As lessor, we have elected to combine the lease and nonlease components of our operating lease agreements and account for the components as a single lease component in accordance with ASC 842.
Revenues derived from fixed lease payments are recognized on a straight-line basis over the non-cancelable period of the lease, together with renewal options that are reasonably certain of being exercised. We commence rental revenue recognition when the underlying asset is available for use by the lessee. Revenue derived from the reimbursement of real estate taxes and electric expense are generally recognized in the same period as the related expenses are incurred, which did not change as a result of the adoption of ASC 842.
The Company assesses the collectability of lease receivables (including future minimum rental payments) both at commencement and throughout the lease term. If our assessment of collectability changes during the lease term, any difference between the revenue that would have been received under the straight-line method and the lease payments that have been collected will be recognized as a current period adjustment to rental revenue. Rental revenue associated with leases where collectability has been deemed less than probable is recognized on a cash basis in accordance with ASC 842.
Allowance for Doubtful Accounts
The Company assesses the collectability of amounts
due from tenants and other receivables, using indicators such as past-due accounts, the nature and age of the receivable, the payment
history and the ability of the tenant or debtor to meet its payment obligations. Management’s estimate of allowances for doubtful
accounts is subject to revision as these factors change. Any subsequent recovery of tenant receivable that were previously reserved is
recorded as a reduction in the allowance of bad debt. As of March 31, 2023 and December 31, 2022, the allowance relating to tenant receivables
was $
6
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
| 1. | Organization and Summary of Significant Accounting Policies (Continued) |
Net Income (Loss) Per Share
Basic net income (loss) per share data is computed
by dividing net income (loss) by the weighted average number of shares of Class A and Class B common stock outstanding (excluding non-vested
shares) during each period. Diluted net income (loss) per share is computed by dividing net income by the weighted average shares outstanding,
including the dilutive effect, if any, of non-vested shares. For the three months ended March 31, 2023 and 2022, the weighted average
shares outstanding as used in the calculation of diluted loss per share do not include
Cash and cash equivalents
Cash includes cash on hand, cash in banks and cash in money market funds. Cash equivalents represent short-term, highly liquid investment which are readily convertible to cash and have maturities of three months or less.
Management Estimates
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated balance sheets and the reported amounts of income and expense for the reporting period. Actual results could differ from those estimates.
Accounting for Stock Awards
The Company recognizes the cost of employee and
non-employee services received in exchange for awards of equity instruments as stock-based compensation expense. Stock-based compensation
expense is measured at the grant date based on the fair value of the stock award and options, is recognized as an expense, less expected
forfeitures, over the requisite service period, which typically equals the vesting period. Stock-based compensation expense for the three
months ended March 31, 2023 and 2022 was $
Accounting for Income Taxes
The Company accounts for income taxes utilizing the asset and liability approach requiring the recognition of deferred tax assets and liabilities for the expected future tax consequences of net operating loss carryforwards and temporary differences between the basis of assets and liabilities for financial reporting purposes and tax purposes and for net operating loss and other carryforwards. A valuation allowance is provided for deferred tax assets based on the likelihood of realization.
The Company recognizes the benefit of an uncertain
tax position that it has been taken or expects to take on income tax returns it files if such tax position is more likely than not to
be sustained on examination by the taxing authorities, based on the technical merits of the position. These tax benefits are measured
based on the largest benefit that has a greater than
The Company operates in multiple tax jurisdictions within the United States of America. The Company remains subject to examination in all tax jurisdictions until the applicable statutes of limitation expire. As of March 31, 2023, the tax years after 2020 remain subject to examination. The Company did not record any unrecognized tax positions for the three months ended March 31, 2023 and 2022.
Mortgage costs
The Company amortizes mortgage costs over the life of the loan.
7
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
| 1. | Organization and Summary of Significant Accounting Policies (Continued) |
Recent Accounting Pronouncements Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update requires immediate recognition of management’s estimates of current expected credit losses (“CECL”). Under the prior model, losses were recognized only as they were incurred. The new model is applicable to all financial instruments that are not accounted for at fair value through net income. The standard is effective for fiscal years beginning after December 15, 2022, for public entities qualifying as smaller reporting companies. The adoption did not have a material effect on the consolidated financial statements.
| 2. | Real Estate |
Real estate is comprised of the following:
| March 31, 2023 | December 31, 2022 | |||||||
| Land | $ | $ | ||||||
| Buildings | ||||||||
| Furniture and equipment | ||||||||
| Total | $ | $ | ||||||
Rental revenue is from our Mapletree Property which constituted all of the rental revenue for the Company for the three months ended March 31, 2023 and 2022.
| 3. | Investment in Partnership |
We own a
On March 31, 2023 and December 31, 2022 the Avalon Property consists of 19 finished, single-family subdivision lots and approximately 21.42 acres of subsequent phases of undeveloped land in Los Lunas, New Mexico.
8
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
| 4. | Mortgage Debt |
On July 28, 2015, Palmer-Mapletree LLC, a wholly-owned
subsidiary of the Company entered into a Loan Agreement (the “Loan Agreement”) with Natixis Real Estate Capital LLC providing
for a mortgage loan in the principal amount of $
| Mortgage | Unamortized mortgage | Interest | ||||||||||
| Balance | Costs | Expense | ||||||||||
| March 31, 2023 | $ | $ | $ | |||||||||
| December 31, 2022 | $ | $ | $ | |||||||||
The Company is required to maintain certain financial covenants on the mortgage. The Company was in compliance with the covenants on March 31, 2023 and December 31, 2022.
Future maturities of mortgage payments are as follows:
| 2023 | $ | |||
| 2024 | $ | |||
| 2025 | $ |
| 5. | Income Taxes |
Presidential has elected to qualify as a Real
Estate Investment Trust under the Internal Revenue Code. A REIT which distributes at least
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 March 31, 2023, the tax years that remain open to examination by the federal, state, and local taxing authorities are the 2020 – 2022 tax years and the Company was not required to accrue any liability for those tax years.
The Company has accumulated a net operating loss
carry forward of approximately $
For the three months ended March 31, 2023, the
Company had taxable income of approximately $
9
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
| 6. | Commitments, Contingencies, Concentrations and Related parties |
| A) | Related Parties |
| 1) | Executive Employment Agreements |
Nickolas W. Jekogian III –Mr. Jekogian is employed by the Company as the Chief Executive Officer on a month-to-month basis until such time as otherwise determined by the Company in its sole discretion. Mr. Jekogian has not received any salary for the three months ended March 31, 2023 and 2022, and we do not anticipate paying him any salary during the remainder of 2023.
Alexander Ludwig - Mr. Ludwig, is employed by the Company as the President, Chief Operating Officer and Principal Financial Officer. Mr. Ludwig has not received any salary for the three months ended March 31, 2023 and 2022, and we do not anticipate paying him any salary during the remainder of 2023.
| 2) | Property Management Agreement |
On November 8, 2011, the Company and
Signature Community Management LLC (“Signature”), (an entity owned by our CEO) entered into a Property Management Agreement
pursuant to which the Company retained Signature as the exclusive, managing and leasing agent for the Company’s Mapletree Property.
Signature receives compensation of
The balance unpaid to Signature at
March 31, 2023 and December 31, 2022, for management fees was $
| 3) | Asset Management Agreement |
On November 8, 2011, the Company entered
into an Asset Management Agreement with Signature Community Investment Group LLC (“SCIG”), (an entity owned by our CEO) pursuant
to which the Company engaged SCIG to oversee the Mapletree Property. SCIG receives an asset management fee of
The balance unpaid to SCIG at March
31, 2023 and December 31, 2022 for asset management fees was $
10
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
| 6. | Commitments, Contingencies, Concentrations and Related parties (continued) |
| B) | Legal Proceedings |
In the ordinary course of business,
we may be subject to litigation from time to time. Except as discussed below, there is no current, pending or, to our knowledge, threatened
litigation or administrative action to which we are a party or of which our property is the subject (including litigation or actions
involving our officers, directors, affiliates, or other key personnel, or holders of record or beneficially of more than
There is pending in the Supreme Court of the state of New York county of New York (Index No. 656191/2017) an action entitled MLF3 NWJ LLC filed in October of 2017, against Nickolas W. Jekogian, III, Presidential Realty Corporation, Presidential Realty Operating Partnership LP, First Capital Real Estate Trust Incorporated, First Capital Real Estate Operating Partnership, Nickolas W. Jekogian, JR. as trustee of The BBJ Family Irrevocable Trust, Alexander Ludwig, Signature Group Advisors LLC, Richard Brandt, Marjorie Feder as Executrix of the Estate of Robert Feder, Jeffrey F. Joseph, Jeffrey Rogers.
The litigation is related to actions
taken by Mr. Jekogian individually on a real estate project and personal guarantee that predated his involvement with the Company.
The Plaintiff had received a judgment against Mr. Jekogian for approximately $
| C) | Concentration of Credit Risk |
Financial instruments, which potentially subject the Company to concentrations of credit risk.
There were no accounts receivable concentrations as of March 31, 2023.
Four customers accounted for approximately
The Company generally maintains its cash in money market funds with financial institutions. Although the Company may maintain balances at these institutions in excess of the FDIC insurance limit, the Company does not anticipate and has not experienced any losses.
| 7. | Common Stock |
The Class A and Class B common stock of Presidential has identical rights except that the holders of Class A common stock are entitled to elect two-thirds of the Board of Directors and the holders of the Class B common stock are entitled to elect one-third of the Board of Directors.
11
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
| 8. | Stock-based Compensation |
On August 15, 2012, the stockholders approved
the 2012 Incentive Plan which reserves
The following summarizes the outstanding and vested stock option activity as of March 31, 2023 and December 31, 2022:
| Shares Underling Options | Weighted Average Exercise Price (per share) | Weighted Average Remaining Contractual Term (in years) | ||||||||||
| Outstanding at December 31, 2022 | $ | |||||||||||
| Granted | ||||||||||||
| Forfeited and expired | ||||||||||||
| Outstanding at March 31, 2023 | $ | |||||||||||
| 9. | Fair Value Measurements |
ASC 820 defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). The standards generally require the use of one or more valuation techniques that include the market, income or cost approaches. The standards also establish market or observable inputs as the preferred source of values when using such valuation techniques, followed by assumptions based on hypothetical transactions in the absence of market inputs. ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 – quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. and Level 3 – unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as consider counterparty credit risk in our assessment of fair value. Considerable judgment is necessary to interpret Level 2 and 3 inputs in determining the fair value of our financial and non-financial assets and liabilities. Accordingly, our fair value estimates, which are made at the end of each reporting period, may be different than the amounts that may ultimately be realized upon sale or disposition of these assets.
12
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
| 9. | Fair Value Measurements (Continued) |
Non-Financial Assets Measured at Fair Value on a Recurring Basis
The Non-Financial asset that is measured at fair value on our consolidated balance sheet consists of a real estate partnership investment. The tables below aggregate the fair values of the non-financial assets by their levels in the fair value hierarchy.
| As of March 31, 2023 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Investment in Avalon Jubilee, LLC | $ | $ | $ | $ | ||||||||||||
| As of December 31, 2022 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Investment in Avalon Jubilee, LLC | $ | $ | $ | $ | ||||||||||||
Investment in Avalon Jubilee, LLC
Significant unobservable quantitative inputs used in determining the fair value of each investment include capitalization rates and discount rates. These rates are based on the location, type and nature of each property, current and anticipated market conditions, and industry publications. Significant unobservable quantitative inputs in the table below were utilized in determining the fair value of this real estate partnership investment.
| Range | ||||
| March 31, 2023 | December 31, 2022 | |||
| Unobservable Quantitative Input | ||||
| Discount rates | ||||
The inputs above are subject to change based on changes in economic and market conditions and/or changes in use or timing of exit. Changes in discount rates and terminal capitalization rates result in increases or decreases in the fair values of the investment. The discount rates encompass, among other things, uncertainties in the valuation models with respect to terminal capitalization rates and the amount and timing of cash flows. Therefore, a change in the fair value of the investment resulting from a change in the terminal capitalization rate may be partially offset by a change in the discount rate. It is not possible for us to predict the effect of future economic or market conditions on our estimated fair values. The table below summarizes the changes in the fair value of real estate investments that are classified as Level 3.
| March 31, 2023 | December 31, 2022 | |||||||
| Beginning Balance | $ | - | $ | - | ||||
| Net unrealized gain(loss) on held investment | - | - | ||||||
| Purchase /additional funding | - | - | ||||||
| Ending balance | $ | - | $ | - | ||||
13
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
| 9. | Fair Value Measurements (Continued) |
The carrying amounts of cash and cash equivalents, escrow, deposits and other assets and receivables and accrued expenses and other liabilities are not measured at fair value on a recurring basis but are considered to be recorded at amounts that approximate fair value.
At March 31, 2023, the $
At December 31, 2022, the
$
The fair value of the Company’s mortgages payable is estimated using unobservable inputs such as available market information and discounted cash flow analysis based on borrowing rates the Company believes it could obtain with similar terms and maturities. These fair value measurements fall within Level 3 of the fair value hierarchy.
Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
| 10. | Restricted Cash |
Restricted cash represents funds held for specific purposes and are therefore not available for general corporate purposes. The mortgage escrow reflected on the consolidated balance sheets represents funds that are held by the Company specifically for capital improvements, insurance and real estate taxes on the Mapletree Property.
| 11. | Future Minimum Annual Base Rents |
Future minimum annual base rental revenue for the next five years for commercial real estate owned at March 31, 2023, and subject to non-cancelable operating leases is as follows:
| Year ending December 31, | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total | $ |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report contains statements that do not relate to historical facts, but are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable. These statements may also relate to future events or trends, our future prospects and proposed development or business strategies, among other things. These statements can generally (although not always) be identified by their use of terms and phrases such as anticipate, appear, believe, continue, could, estimate, expect, indicate, intend, may, plan, possible, predict, project, pursue, will, would and other similar terms and phrases, as well as the use of the future tense. Forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date hereof, and forward-looking statements in documents incorporated by reference speak only as of the date of those documents. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.
We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure you that the assumptions and expectations will prove to be correct. You should understand that the following important factors could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:
| ● | our ability to implement plans for growth; |
| ● | our ability to finance the acquisition of new real estate assets; |
| ● | our ability to manage growth; |
| ● | our ability to generate operating liquidity; |
| ● | our ability to attract and maintain tenants for our rental properties; |
| ● | the demand for rental properties and the creditworthiness of tenants; |
| ● | financial results for 2023 and beyond; |
| ● | future acquisitions and dispositions of assets; |
| ● | future development and redevelopment opportunities; |
| ● | future issuances of capital stock; |
| ● | market and industry trends; |
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| ● | interest rates; |
| ● | the outcome and impact of any litigation; |
| ● | operating performance including statements relating to creating value for stockholders; |
| ● | governmental actions and initiatives; |
| ● | environmental and safety requirements; |
| ● | the form, timing and/or amount of dividend distributions in future periods. |
Any forward-looking statements are based upon management’s beliefs, assumptions and expectations of our future performance, taking into account information currently available. These beliefs, assumptions and expectations may change as a result of possible events or factors, not all of which are known. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in forward-looking statements. Actual results may vary from forward-looking statements due to, but not limited to, the following:
| ● | the availability and terms of capital and financing; |
| ● | the ability to refinance or repay indebtedness as it matures; |
| ● | the failure of purchase, sale, or other contracts to ultimately close; |
| ● | the failure to achieve anticipated benefits from acquisitions and investments or from dispositions; |
| ● | the potential dilutive effect of common or preferred stock offerings; |
| ● | the impact of future financing arrangements including secured and unsecured indebtedness; |
| ● | the availability of buyers and pricing with respect to the disposition of assets; |
| ● | risks and uncertainties related to national and local economic conditions, the real estate industry in general, and the commercial real estate markets in particular; |
| ● | leasing risks, including the ability to obtain new tenants or renew expiring tenants, the ability to lease newly developed and/or recently acquired space, and the risk of declining leasing rates; |
| ● | the adverse change in the financial condition of one or more of our major tenants; |
| ● | volatility in interest rates and insurance rates; |
| ● | competition from other developers or investors; |
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| ● | the risks associated with real estate developments (such as zoning approval, receipt of required permits, construction delays, cost overruns, and leasing risk); |
| ● | the loss of key personnel; |
| ● | the potential liability for uninsured losses, condemnation, or environmental issues; |
| ● | the potential liability for a failure to meet regulatory requirements; |
| ● | the financial condition and liquidity of, or disputes with, joint venture partners; |
| ● | any failure to comply with debt covenants under credit agreements; |
| ● | any failure to continue to qualify for taxation as a real estate investment trust and meet regulatory requirements; |
| ● | risks associated with the COVID 19 Pandemic; |
| ● | potential changes to tax legislation; |
| ● | potential changes to state, local or federal regulations applicable to our business; |
| ● | changes in demand for properties; |
| ● | risks associated with the acquisition, development, expansion, leasing and management of properties; |
| ● | significant costs related to condemnation, or environmental issues; |
| ● | those additional risks and factors discussed in reports filed with the Securities and Exchange Commission (“SEC”) by us. |
In light of these risks and uncertainties, we may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions, and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in Part I Item 1A — Risk Factors of the Annual Report on Form 10-K for the fiscal year ended December 31, 2022, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Those factors and the other risk factors described therein are not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, collaborations, or investments we may make. Consequently, there can be no assurance that actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Given these uncertainties, investors are cautioned not to place undue reliance on such forward-looking statements.
You should read this Quarterly Report on Form 10-Q in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (including the documents incorporated by reference therein) completely and with the understanding that our actual future results may be materially different from what we expect. These forward-looking statements speak only as of the date of this report. We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, even if experience or future developments make it clear that projected results expressed or implied in such statements will not be realized, except as may be required by law.
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Overview
We own 100% of the Mapletree Industrial Center located in Palmer, Massachusetts. This is a multi-tenant rental facility which was originally the Wickwire-Spencer Wire Mill until 1970 at which time it became rental space. The property consists of 31 buildings located on approximately 48 acres. Major tenants include Creative Material Technologies office and lab, Consolidated Lumber Transport office, Australian natural Soapworks, ESSROC Materials (a Portland cement distributor), Michael Houle, JP Mc Carthy & Sons and American Cable Assembly. The property offers traditional office space and industrial/warehouse space along with vacant land with rail access ready for development. The buildings comprise a total of 420,797 square feet, of which 318,780 is rented.
We own a 31.3333% non-controlling joint venture partnership interest in Avalon Jubilee LLC located in Los Lunas, New Mexico. The Avalon Property consists of 19 finished, single-family subdivision lots and approximately 21.42 acres of subsequent phases of undeveloped land in Los Lunas, New Mexico.
We outsource the management of the Mapletree Industrial Center to Signature Community Management LLC (“Signature”) and our asset management to Signature Community Investment Group LLC (“SCIG”), companies owned by our CEO. We accrued a management fee of $12,452 and an asset management fee of $3,736 for the three months ended March 31, 2023.
We obtain funds for working capital and investment from our available cash, operating activities, and refinancing of mortgage loans on our real estate.
On July 28, 2015, Palmer-Mapletree LLC, a wholly-owned subsidiary of the Company entered into a Loan Agreement (the “Loan Agreement”) with Natixis Real Estate Capital LLC providing for a mortgage loan in the principal amount of $1,750,000 (the “Loan”) at an interest rate of 6.031%. $934,794 of the loan proceeds were used to repay the prior mortgage loan and line of credit on the Mapletree Property. $123,757 of the Loan proceeds was set aside for capital improvements and reserves for the property. We received net proceeds of $585,125. The Loan matures on August 5, 2025 and requires monthly principal and interest payments of $11,308 and escrows for insurance, taxes and capital improvements. Escrow balances are considered restricted cash. The Company was in compliance with the loan covenants at March 31, 2023.
Critical Accounting Policies
In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), management is required to make estimates and assumptions that affect the financial statements and disclosures. These estimates require difficult, complex and subjective judgments. Management has discussed with the Audit Committee the implementation of the critical accounting policies described below and the estimates required with respect to such policies.
Real Estate
Real estate is carried at cost, net of accumulated depreciation. Additions and improvements are capitalized whereas repairs and maintenance are charged to rental property operating expenses as incurred. Depreciation is generally provided on the straight-line method over the estimated useful life of the asset. The useful life of each property, as well as the allocation of the costs associated with a property to its various components, requires estimates by management. If management incorrectly estimates the allocation of those costs or incorrectly estimates the useful lives of its real estate, depreciation expense may be miscalculated.
The Company reviews its properties for impairment if events or changes in circumstances warrant. If impairment were to occur, the property would be written down to its estimated fair value. The Company assesses the recoverability of its investment in real estate based on undiscounted cash flow estimates. The future estimated cash flows of a property are based on current rental revenues and operating expenses, as well as the current local economic climate affecting the property. Considerable judgment is required in making these estimates and changes in these estimates could cause the estimated cash flows to change and impairment could occur. As of March 31, 2023, the Company’s net real estate was carried at $672,694.
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Rental Revenue Recognition
Rental revenues include revenues from the leasing of space at our Mapletree Property, which primarily consist of monthly base rents in addition to the reimbursement of utilities. Other rental revenues, which are included as a component of rental revenue, primarily include fees related to build-out or other services performed by the Company on the property.
The Company adopted ASU 2014-09, Revenue from Contracts with Customers (ASC 606) effective January 1, 2018, and its adoption did not have a material effect on the consolidated financial statements, as the majority of the Company’s revenue is recognized under ASC 840, Leases, and subsequently ASC 842, Leases, upon its adoption, which are scoped out of ASC 606. ASC 606 establishes a single comprehensive model for entities to use in accounting for revenue arising from contract with customers and supersedes most of the existing revenue recognition guidance. This standard requires us to recognize for certain of our revenue sources the transfer of promised goods or services to customers in an amount that reflects the consideration we are entitled to in exchange for those goods or services. The Company’s other rental revenues recognized in accordance with ASC 606 are recognized over time as the performance obligations are satisfied. Such revenues are not material to the consolidated financial statements.
Revenues from the leasing of space at our property to tenants includes (i) lease components, including fixed and variable lease payments, and nonlease components which include reimbursement of electric expense and (ii) reimbursement of real estate taxes. As lessor, we have elected to combine the lease and nonlease components of our operating lease agreements and account for the components as a single lease component in accordance with ASC 842.
Revenues derived from fixed lease payments are recognized on a straight-line basis over the non-cancelable period of the lease, together with renewal options that are reasonably certain of being exercised. We commence rental revenue recognition when the underlying asset is available for use by the lessee. Revenue derived from the reimbursement of real estate taxes and electric expense are generally recognized in the same period as the related expenses are incurred, which did not change as a result of the adoption of ASU 2016-02.
The Company assesses the collectability of lease receivables (including future minimum rental payments) both at commencement and throughout the lease term. If our assessment of collectability changes during the lease term, any difference between the revenue that would have been received under the straight-line method and the lease payments that have been collected will be recognized as a current period adjustment to rental revenue. Rental revenue associated with leases where collectability has been deemed less than probable is recognized on a cash basis in accordance with ASC 842.
Allowance for Doubtful Accounts
The Company assesses the collectability of amounts due from tenants and other receivables, using indicators such as past-due accounts, the nature and age of the receivable, the payment history and the ability of the tenant or debtor to meet its payment obligations. Management’s estimate of allowances for doubtful accounts is subject to revision as these factors change. Any subsequent recovery of tenant receivables that were previously reserved is recorded as a reduction in the allowance of bad debt. As of March 31, 2023 and December 31, 2022, the allowance relating to tenant receivables was $1,900 and $3,500, respectively.
Investments in Joint Venture
The Company has an equity investment in a joint venture and accounts for this investment using the fair value method of accounting.
Income Taxes
We operate in a manner intended to enable us to continue to qualify as a Real Estate Investment Trust under Sections 856 to 860 of the Code. Under those sections, a REIT which meets certain requirements is not subject to Federal income tax on that portion of its taxable income which is distributed to its shareholders, if at least 90% of its REIT taxable income (exclusive of capital gains) is so distributed. As a result of using our ordinary tax loss carry forwards in 2022 there was no requirement to make a distribution in 2023. In addition, no provision for income taxes was required at December 31, 2022. If the Company fails to distribute the required amounts of income to its shareholders, or otherwise fails to meet the REIT requirements, we would fail to qualify as a REIT and substantial adverse tax consequences could result. We believe that we will not be required to pay a dividend in 2023 to maintain our REIT status.
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Results of Operations
Results of Operations for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 as follows:
| 2023 | 2022 | |||||||
| Total revenue | $ | 290,983 | $ | 274,298 | ||||
| General and administrative expenses | $ | 71,168 | $ | 169,415 | ||||
| Operating expenses | $ | 180,030 | $ | 174,153 | ||||
| Net (loss) | $ | (9,799 | ) | $ | (120,123 | ) | ||
Revenues increased by $16,685 for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, as a result of increased rental rates at the Mapletree Property.
Net loss for the three months ended March 31, 2023 was $9,799 compared to net loss of $120,123 for the three months ended March 31, 2022, a decrease of $110,324. The decrease was comprised: (i) of lower general and administrative expenses of approximately $98,000 due to a decrease in professional fees (ii) increase in rental revenue of approximately $17,000, offset by increased operating costs at the Mapletree Property of approximately $6,000. In the three months ended March 31, 2022 we incurred legal fees in the exploration of strategic growth transactions for the Company.
Balance Sheet
March 31, 2023 compared to December 31, 2022
Net real estate increased by $5,471 due to capital improvements of $20,403, recorded during the three months ended March 31, 2023, offset by depreciation expense of $14,932 on the MapleTree Property.
Prepaid expenses decreased by $30,322 primarily due to the timing of payments on both directors and officer’s insurance premiums and insurance on the Mapletree Property.
Mortgage escrow increased $31,865 due to the timing of payments of insurance and improvement payments on the Mapletree Property.
Accounts payable and accrued liabilities increased by $29,142 primarily due to the accrual of our property and asset management fees to Signature and SCIG.
Other liabilities decreased $5,660 due to decreased security deposits and prepaid rent.
Liquidity and Capital Resources
We obtain funds for working capital and investment from our available cash.
On March 31, 2023, we had $144,747 in available cash, a decrease of $9,584 from $154,331 available at December 31, 2022. This decrease in cash and cash equivalents was due to cash provided by operating activities of $54,254, cash used in investing activities of $20,403, and cash used in financing activities of $11,570.
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Operating Activities
Cash from operating activities includes net cash received from rental property operations. For the three months ended March 31, 2023, cash received from interest on cash balances was $16. Net cash received from rental property operations was approximately $280,000 at March 31, 2023. Net cash received from rental property operations is before additions and improvements and mortgage amortization.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None
Item 4. Controls and Procedures
| (a) | Evaluation of Disclosure Controls and Procedures |
The Company, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, herein referred to as the Exchange Act) as of the end of the period covered by this report. The purpose of disclosure controls is to ensure that information required to be disclosed in our reports filed with or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings and ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms.
| (b) | Changes in Internal Control over Financial Reporting |
The principal executive officer and principal financial officer also conducted an evaluation of internal control over financial reporting, herein referred to as internal control, to determine whether any changes in internal control occurred during the three months ended March 31, 2023 that may have materially affected, or which are reasonably likely to materially affect internal control. Based on that evaluation, there has been no change in the Company’s internal control during the three months ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, we may be subject to litigation from time to time. Except as discussed below, there is no current, pending or, to our knowledge, threatened litigation or administrative action to which we are a party or of which our property is the subject (including litigation or actions involving our officers, directors, affiliates, or other key personnel, or holders of record or beneficially of more than 5% of any class of our voting securities, or any associate of such party) which in our opinion has, or is expected to have, a material adverse effect upon our business, prospects, financial condition or operations.
There is pending in the Supreme Court of the state of New York county of New York (Index No. 656191/2017) an action entitled MLF3 NWJ LLC filed in October of 2017, against Nickolas W. Jekogian, III, Presidential Realty Corporation, Presidential Realty Operating Partnership LP, First Capital Real Estate Trust Incorporated, First Capital Real Estate Operating Partnership, Nickolas W. Jekogian, JR. as trustee of The BBJ Family Irrevocable Trust, Alexander Ludwig, Signature Group Advisors LLC, Richard Brandt, Marjorie Feder as Executrix of the Estate of Robert Feder, Jeffrey F. Joseph, Jeffrey Rogers.
The litigation is related to actions taken by Mr. Jekogian individually on a real estate project and personal guarantee that predated his involvement with the Company. The Plaintiff had received a judgment against Mr. Jekogian for approximately $1,500,000, in addition to attorneys’ fees, and had filed a lien on assets owned individually by Mr. Jekogian including certain options and warrants to purchase stock in the Company. When the Company entered into the Contribution Agreement with FC REIT in January of 2017, Mr. Jekogian surrendered these options and warrants to purchase stock in the Company as part of the transaction. The Plaintiff is arguing that they had a lien on Mr. Jekogian’s options and warrants in the Company and that the actions taken by the Company, its Officers and Directors, in entering into the Contribution Agreement with FC REIT fraudulently conveyed their interests in the options and warrants owned by Mr. Jekogian and damaged their position. The Company, its Officers and Directors, named in this action had no involvement in this personal matter relating to Mr. Jekogian and answered the complaint in February of 2018 stating that it had no merit. Since that time, the Company has received no additional notification that the action against the Company, its Officers and Directors is moving forward. The Company believes that as to the Company, Officers and Directors, the claims have no merit.
Item 6. Exhibits
| 31.1 | Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. | |
| 31.2 | Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. | |
| 32.1 | Certification of Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101 .INS | Inline XBRL Instance Document | |
| 101 .SCH | Inline XBRL Taxonomy Schema | |
| 101 .CAL | Inline XBRL Taxonomy Calculation Linkbase | |
| 101 .DEF | Inline XBRL Definition Linkbase | |
| 101 .LAB | Inline Taxonomy Label Linkbase | |
| 101 .PRE | Inline XBRL Taxonomy Presentation Linkbase | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 15th day of May, 2023.
| PRESIDENTIAL REALTY CORPORATION | ||
| By: | /s/ Nickolas W. Jekogian | |
|
Nickolas Jekogian Chief Executive Officer and | ||
| By: | /s/ Alexander Ludwig | |
| Alexander Ludwig | ||
| President, Chief Operating Officer and Principal Financial Officer | ||
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