|• KENT FINANCIAL SERVICES, INC. FORM 10-Q MARCH 31, 2012 • CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 • CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 • XBRL INSTANCE • XBRL SCHEMA • XBRL CALCULATION • XBRL DEFINITION • XBRL LABEL • XBRL PRESENTATION|
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the quarterly period ended: March 31, 2012
Commission File No.: 1-7986
Kent Financial Services, Inc.
(Exact name of registrant as specified in its charter)
7501 Tillman Hill Road, Colleyville, Texas 76034
(Address of principal executive offices)
(Registrant's telephone number)
Indicate by check mark whether the registrant(1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company X
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: As of April 30, 2012, the issuer had 2,700,464 shares of its common stock, par value $.10 per share, outstanding.
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
For The Quarterly Period Ended March 31, 2012
Table of Contents
PART I -FINANCIAL INFORMATION
Item 1. - Financial Statements
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of Kent Financial Services, Inc. and subsidiaries (the "Company") reflect all material adjustments consisting of only normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. Certain information and footnote disclosures required under accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates that are particularly susceptible to change include assumptions used in determining the fair value of securities owned and non-readily marketable securities.
The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the entire year or for any other period.
NOTE 2 - Principles of Consolidation
The consolidated financial statements include the accounts of Kent Financial Services, Inc. (the “Company”, “Kent”, “we” or “our”) and the consolidated accounts of Kent’s wholly owned subsidiary, Kent International Holdings, Inc., (“Kent International”) and its subsidiaries Kent Capital, Inc. (“Kent Capital”) and Kent Texas Properties, LLC (“KTP”). Intercompany balances and transactions between the Company and its subsidiaries have been eliminated.
NOTE 3 – Business
The Company’s business is operating as a real estate corporation through its wholly owned subsidiary, Kent International Holdings.
Kent International is operating as a full service real estate corporation that owns and operates an income producing property. We will look to opportunistically acquire additional properties, primarily in the Dallas/Fort Worth area; however, we will not limit our search to that market. Alternatively, management will also continue to pursue other acquisition opportunities that offer potentially profitable uses for the Company’s available capital.
Kent International’s general investment strategy shall be to make investments in real properties that offer attractive current yields with, in some cases, potential for capital appreciation. We may buy these properties directly, through joint ventures, or as general partner in limited partnerships utilizing funds raised from accredited investors.
In 2009 Kent International’s subsidiary, Kent Capital, Inc., registered with the Financial Industry Regulatory Authority (FINRA), as a securities broker-dealer. To date, Kent Capital, Inc. has not produced any revenue.
The Company does not expect that these activities will generate any significant revenues for an indefinite period as these efforts are in their early stages. As a result, these programs may produce significant losses until such time as meaningful revenues are achieved.
NOTE 4 – Summary of Significant Accounting Policies
Upon acquisition of wholly-owned properties or joint venture investments that are less than wholly-owned, but which we control or for which we are the primary beneficiary, the assets and liabilities purchased are recorded at their fair market value at the date of the acquisition using the acquisition method in accordance with FASB ASC Topic 805 Business Combinations. We recognize the net tangible and identified intangible assets based on fair values (including land, buildings, tenant improvements, acquired above and below market leases and the origination cost of acquired in-place leases) and acquired liabilities. The intangible assets recorded are amortized over the weighted average lease lives. We identify any above or below market leases or customer relationship intangibles that exist at the acquisition date. We recognize mortgages and other liabilities at fair market value at the date of the acquisition. We utilize an independent appraiser to assess fair value based on estimated cash flow projections for the tangible assets acquired that utilize discount and capitalization rates deemed appropriate and available market information. We expense acquisition costs as incurred.
Rental income is recognized when earned. As our lease with the General Services Administration provides for the payment of monthly rental in arrears, a receivable is recorded at the end of each month for the previous month’s rent. Any above or below market leases acquired are amortized over the lease lives and recorded as an increase or decrease to rental revenue.
Repairs and Maintenance
Repairs and maintenance costs are expensed as incurred. Significant improvements, renovations and replacements are capitalized.
Property and Depreciation
Land, buildings and amenities are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are generally 5-30 years for land improvements, 7-30 years for buildings and improvements and 5-30 years for amenities. Tenant improvements are generally depreciated over the life of the initial or renewal term of the respective tenant lease.
FASB ASC Topic 360 Property, Plant and Equipment specifies circumstances in which certain long-lived assets must be reviewed for impairment. If the carrying amount of an asset exceeds the sum of its expected future cash flows, the asset’s carrying value must be written down to fair value. In determining the value of an investment property and whether the investment property is impaired, management considers several factors such as projected rental and vacancy rates, property operating expenses, capital expenditures and interest rates. The capitalization rate used to determine property valuation is based on the market in which the investment property is located, length of leases, tenant financial strength, the economy in general, demographics, environment, property location, visibility, age and physical condition among others. All of these factors are considered by management in determining the value of any particular investment property. The value of any particular investment property is sensitive to the actual results of any of these factors, either individually or taken as a whole. If the actual results differ from management’s judgment, the valuation could be negatively or positively affected.
NOTE 5 - Securities Owned
Marketable securities owned as of March 31, 2012 and December 31, 2011, comprised mainly of portfolio positions (equity securities) held for capital appreciation, consisted of the following:
The Company follows FASB accounting guidance for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a framework for measuring fair value and expands disclosures about fair value measurements. The valuation techniques required are based upon observable and unobservable inputs. Observable input reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 - Quoted prices for identical instruments in active markets.
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.
Level 3 - Significant inputs to the valuation model are unobservable.
All of the Company’s marketable securities are Level 2 type assets. Among the observable inputs considered by management in determining fair value of thinly traded portfolio positions are the financial condition, asset composition and operating results of the issuer, the long-term business potential of the issuer and other factors generally pertinent to the valuation of investments, including the analysis of the valuation of comparable companies.
NOTE 6 – Real Estate and Related Assets
Real estate assets together with real estate related intangible assets and liabilities as of March 31, 2012 consisted of:
Depreciation and amortization expense was $101,731 for the three months ended March 31, 2012. $15,969 in capitalized below market rents were amortized as an increase to rental income during the three months ended March 31, 2012.
The Property is 100% leased to the General Services Administration (GSA) of the United States pursuant to a lease dated January 9, 2006. The initial term of the GSA lease runs from January 18, 2008 until January 18, 2018 with an optional five year renewal period from January 2018 to January 2023. The base rent during the initial term is $746,464 annually and includes a provision of $123,099 annually for the reimbursement of tenant improvement allowances. The base rent during the renewal term is $623,365. Although the Company is responsible for Property operating expenses, the lease includes a provision for reimbursement of certain operating expenses that exceed a baseline. This base is subject to annual adjustment on March 1st of each year based on the Cost of Living Index (COLI). The operating expense base was adjusted on March 1, 2012 resulting in an annual increase to the provision for reimbursement in the amount of $6,281.
NOTE 7 - Capital Stock Activity
No dividends were declared or paid during the three months ended March 31, 2012.
Common Stock Repurchases
In August 2004, the Board of Directors approved a plan to repurchase up to 200,000 shares of the Company’s common stock at prices deemed favorable in the open market or in privately negotiated transactions subject to market conditions, the Company’s financial position and other considerations. In December 2011, the Board of Directors approved an increase in the amount of shares available to repurchase under the plan from 64,769 shares to 250,000 shares. This program has no expiration date. 47,736 and nil shares were repurchased in the three month periods ending March 31, 2012 and 2011, respectively. As of March 31, 2012, 193,890 shares remained authorized for repurchase under the program.
NOTE 8 - Net Income (Loss) Per Share
Basic income (loss) per share includes the weighted average number of common shares outstanding during the year. Diluted income (loss) per share includes the weighted average number of shares outstanding and dilutive potential common shares, such as warrants and options. The Company had no common stock options or warrants outstanding at March 31, 2012 and 2011.
NOTE 9 - Stock Option Plans
On November 25, 2005, shareholders of the Company approved the 2005 Stock Option Plan making a total of 400,000 common stock options available for issuance. The Company did not record stock-based compensation expense for the three month periods ending March 31, 2012 and 2011, as no options were earned during these periods. At March 31, 2012, the Company had no common stock options outstanding.
NOTE 10 - Related Party Transactions
The Company and its consolidated subsidiaries reimburse an affiliate, Bedminster Management Corp., for the allocated direct cost of group health insurance and office supplies. These reimbursements were $19,359 for the three months ended March 31, 2012 and $19,767 for the same period in 2011.
NOTE 11 – Net Operating Loss Carryforwards
As of December 31, 2011, the Company had approximately $3.348 million of net operating loss carryforwards (“NOL”) for income tax purposes. In addition, Kent International had approximately $20.89 million of NOL and $67,432 of research and development and foreign tax credit carryforwards available to offset future federal income tax, subject to limitations for alternative minimum tax. The NOL’s and tax credit carryforwards expire in various years from 2012 through 2025. The Company’s and Kent International’s use of operating loss carryforwards and tax credit carryforwards is subject to limitations imposed by the Internal Revenue Code. Management believes that the deferred tax assets as of March 31, 2012 do not satisfy the realization criteria and has recorded a valuation allowance for the entire net tax asset. By recording a valuation allowance for the entire amount of future tax benefits, the Company has not recognized a deferred tax benefit for income taxes in its statements of operations.
NOTE 12 – Subsequent Events
On April 3, 2012, KTP, a wholly owned subsidiary of Kent International, entered into a contract to sell the property located at 4211 Cedar Springs Road in Dallas, Texas to Andrews-Dillingham Properties, Ltd. (the “Purchaser”) for $5,000,000. The Purchaser is a non-affiliated Dallas based private real estate investor. The sales contract is subject to the purchaser’s due diligence and inspection of the property.
Under the terms of the sales contract, the Purchaser placed a $25,000 refundable earnest money deposit in an escrow account to be applied towards the purchase price due at closing. At the expiration of the inspection period (30 days from the effective date of the contract), the earnest money deposit converts to a non-refundable deposit. The net sale proceeds to the Company will be the $5,000,000 sales price less a 2% commission, legal fees and closing costs which include the purchase of a title insurance policy. Unless the sales contract is terminated by the Purchaser during the inspection period, the Company expects to close the sale by May 24, 2012.
Subsequent events were evaluated through the date the financial statements were issued.
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended December 31, 2011, of Kent Financial Services, Inc. (the “Company”, “Kent”, “we” or “our”) as well as the Company’s financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Statements in this report relating to future plans, projections, events or conditions are forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those described. The Company expressly disclaims any obligation or undertaking to update these statements in the future.
Kent Financial Services, Inc.’s (“Kent” or the “Company”) business is operating as a real estate corporation through its wholly owned subsidiary, Kent International Holdings, Inc. (“Kent International”). Kent was formed in 1988 as a Delaware corporation and reincorporated in Nevada in 2006 by a merger into a newly formed, wholly owned Nevada subsidiary with the same name that was the surviving corporation of the merger.
Commencing with the purchase of the land and improvements located at 4211 Cedar Springs Road in Dallas, Texas (the “Property”), Kent International began operating as a full service real estate corporation that owns and operates an income producing property. We will look to opportunistically acquire additional properties, primarily in the Dallas/Fort Worth area; however, we will not limit our search to that market. We will compete for these opportunities with small private real estate companies and investors. Alternatively, management will also continue to pursue other acquisition opportunities that offer potentially profitable uses for the Company’s available capital.
The Company’s general investment strategy shall be to make investments in real properties that offer attractive current yields with, in some cases, potential for capital appreciation. We may buy these properties directly, through joint ventures, or as general partner in limited partnerships utilizing funds raised from accredited investors. We believe that the current economic climate together with a restriction in credit available to would be purchasers of real estate will enable Kent International to acquire properties at favorable prices by funding the purchases with cash on hand.
Additionally, the Kent International’s wholly owned subsidiary, Kent Capital, Inc. (“Kent Capital”), is a securities broker-dealer. Kent Capital’s membership agreement with the Financial Industry Regulatory Authority (FINRA) allows it to operate under three business lines; Private Placements, Real Estate Syndication and Trading Securities for Our Own Account. Kent Capital has not yet generated any revenue. Kent International plans to operate the broker dealer in conjunction with our real estate operations.
Results of Operations
The Company had a net loss of $139,092, or $.05 basic and fully diluted loss per share, for the quarter ended March 31, 2012, compared to a net loss of $154,667, or $0.06 basic and fully diluted loss per share, for the quarter ended March 31, 2011. The decrease in the net loss was caused by a combination of the reduction of general and administrative expenses together with the excess of Property revenues over expenses.
The Property located at 4211 Cedar Springs Road generated $202,586 in rental income and $15,293 in expense reimbursements during the three months ended March 31, 2012, all from the General Services Administration (GSA ), which is the only tenant for the Property. During the period from March 22, 2011, when we acquired the Property, to March 31, 2011 the Property generated $21,564 in rental income and $489 in expense reimbursements. The initial term of the GSA lease runs until January 18, 2018 with an optional five year renewal period from January 2018 to January 2023. The base rent during the initial term is $746,464 annually and includes a provision of $123,099 annually for the reimbursement of tenant improvement allowances. The base rent during the renewal term is $623,365.
The lease rate includes an operating expense base of $187,206 annually (excluding property taxes) and a real estate tax base of $70,189. The base year operating expenses are adjusted annually via the Cost of Living Index (COLI) and the GSA is responsible for any increases over the adjusted base year expenses. Based upon 2011 actual property taxes and the operating expense base adjustment on March 1, 2012, this calculation is expected to generate an expense reimbursement of approximately $60,930 in 2012.
For the three months ended March 31, 2012, other income decreased to $6,500 from $7,632 for the three months ended March 31, 2011. The decrease was caused primarily by the decrease in administrative fees paid by an un-affiliated investment partnership. These administrative fees fluctuate based on the performance of the investment partnership and; therefore, are unpredictable
Interest and dividend income decreased to zero for the three months ended March 31, 2012, from $3,115 for the three months ended March 31, 2011. The decrease for the period was caused primarily by the decrease in cash and cash equivalents available for investment after the acquisition of the Property and to a lesser extent by the extremely low interest rate on 90 day U.S. Treasury Bills.
General and Administrative Expenses
General and administrative expenses were $170,940 in the three months ended March 31, 2012 compared to $228,238 in the three months ended March 31, 2011, a decrease of $57,298 or 25%. Significant decreases included approximately $29,000 in salaries and related payroll expenses, $7,000 in directors’ fees for both Kent and Kent International, and $7,000 in amortized Nasdaq listing fees. The Company also incurred approximately $4,500 in travel, consulting and due diligence expenses related to the exploration of other potential transactions during the current quarter, as compared to the approximately $23,161 in consulting, due diligence and closing expenses related to the acquisition and operation of the Property incurred in the three months ended March 31, 2011.
Kent International incurred $192,184 in expenses related to the operations of the Property during the quarter ended March 31, 2012. These expenses included $29,314 in property taxes and $101,731 in depreciation and amortization expense. Other major expense categories include utilities (electricity, water, sewer, trash removal, and telephone), building maintenance (HVAC, plumbing, window washing, elevator and janitorial), and grounds maintenance (landscaping and irrigation). Kent International shall review these expenses to determine if there are any areas of savings. We cannot be certain that the expenses we incur in operating the Property will not increase.
The GSA lease includes provisions for expense reimbursements of baseline expenses as adjusted by the COLI. Significant expenses that are not explicitly subject to reimbursement by the GSA are property insurance, alarm monitoring, telephone, and management fees. As the provision of all of these services is subject to intense competition, we do not anticipate meaningful increases.
Expenses such as electricity, water, cleaning, trash removal and landscaping are subject to GSA reimbursement to the extent that they increase, in the aggregate, above the baseline of $187,206 fixed in the GSA lease. Although most of these expenses have not materially increased in recent years, electricity billing rates are very volatile and may increase well in excess of the COLI in any given year. This base is subject to annual adjustment on March 1st of each year based on the Cost of Living Index (COLI). The operating expense base was adjusted on March 1, 2012 resulting in an annual increase to the provision for reimbursement in the amount of $6,281.
Kent International has entered into various service contracts in conjunction with the acquisition of the Property including a temporary management contract, elevator, landscaping and HVAC maintenance, janitorial services, alarm monitoring, and waste removal. These contracts include termination provisions and are not considered long term obligations.
Liquidity and Capital Resources
At March 31, 2012, the Company had cash and cash equivalents of $1,420,559. Cash and cash equivalents consist of cash held in banks and brokerage firms and U.S. Treasury bills with a maturity of 3 months or less. Working capital at March 31, 2012 was approximately $1.345 million. Although the Company does not have any established banking relationships or other sources of liquidity, management believes its cash and cash equivalents are sufficient for its business activities for at least the next 12 months.
Net cash of $84,801 was used in operations for the three months ended March 31, 2012, a decrease of $197,150 from the $281,951 used in operations for the three months ended March 31, 2011. Net cash used in operations for the periods was the result of the net losses for the periods coupled with the changes in operating assets and liabilities. The decrease in net cash used in operations was largely the result of cash flow generated by the Property.
There were no cash flows from investing activities reported during the quarter ended March 31, 2012. The Company utilized $4,325,000 during the three months ending March 31, 2011 for the acquisition of the Property (exclusive of due diligence and closing costs) located at 4211 Cedar Springs Road, Dallas, Texas. As of March 31, 2012, the Company had no commitments for capital expenditures.
$54,661 was utilized for the repurchase of 47,736 shares of common stock during the three months ended March 31, 2012. There were no cash flows from financing activities reported during the three month period ending March 31, 2011.
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk.
Item 4. - Controls and Procedures
As of the end of the period covered by this report, the Company carried out, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) in ensuring that information required to be disclosed by the Company in its reports is recorded, processed, summarized and reported within the required time periods. In carrying out that evaluation, management identified a material weakness (as defined in Public Company Accounting Oversight Board Standard No. 2) in our internal control over financial reporting.
The material weakness identified by Management consisted of inadequate staffing and supervision within the bookkeeping and accounting operations of our company. The relatively small number of employees who have bookkeeping and accounting functions prevents us from segregating duties within our internal control system. The inadequate segregation of duties is a weakness because it could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews. However, as there has been no instance in which the company failed to identify or resolve a disclosure matter or failed to perform a timely and effective review, management determined that the addition of personnel to our bookkeeping and accounting operations is not an efficient use of our resources at this time.
Accordingly, based on his evaluation of our disclosure controls and procedures as of March 31, 2012, the Company’s Chief Executive and Financial Officer concluded that, as of that date, the Company’s controls and procedures were not effective for the purposes described above.
There was no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended March 31, 2012 that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. - Legal Proceedings
ITEM 1A. Risk Factors
There has been no material change from the risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011.
ITEM 2. - Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
(COMMON STOCK-AUGUST 2004 REPURCHASE PLAN) (1)
ITEM 3. - Defaults Upon Senior Securities
ITEM 4. - Mine Safety Disclosures
ITEM 5. - Other Information
ITEM 6. - Exhibits
** Compensatory Plan
In accordance with the requirements of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KENT FINANCIAL SERVICES, INC.