UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended September 30th, 2015
000-54560
(Commission
File Number)
POWER
REIT
(Exact
name of registrant as specified in its charter)
Maryland |
45-3116572 |
(State
of Organization) |
(I.R.S.
Employer Identification No.) |
|
|
301
Winding Road, Old Bethpage, NY |
11804 |
(Address
of principal executive offices) |
(Zip
Code) |
(212)
750-0373
(Registrant’s
telephone number, including area code)
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 the 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] |
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.
1,742,688
common shares, $0.001 par value, outstanding at November 6, 2015.
TABLE
OF CONTENTS
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements.
POWER
REIT AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
| |
(Unaudited)
September 30, 2015 | | |
(See
Note 1) December 31, 2014 | |
ASSETS | |
| | | |
| | |
Land | |
$ | 6,788,067 | | |
$ | 6,788,067 | |
Net investment in capital lease - railroad | |
| 9,150,000 | | |
| 9,150,000 | |
Total real estate
assets | |
| 15,938,067 | | |
| 15,938,067 | |
| |
| | | |
| | |
Cash and cash equivalents | |
| 280,187 | | |
| 654,381 | |
Other receivables | |
| - | | |
| 1,054 | |
Prepaid expenses | |
| 31,974 | | |
| 13,576 | |
Intangible assets, net of accumulated amortization | |
| 4,597,305 | | |
| 4,775,161 | |
Other assets | |
| 540,910 | | |
| 957,231 | |
TOTAL
ASSETS | |
$ | 21,388,443 | | |
$ | 22,339,470 | |
| |
| | | |
| | |
LIABILITIES AND EQUITY | |
| | | |
| | |
Deferred revenue | |
$ | 146,397 | | |
$ | 25,582 | |
Accounts payable | |
| 269,868 | | |
| 572,591 | |
Accounts payable, related party | |
| 296,483 | | |
| 641,628 | |
Accrued interest | |
| 85,102 | | |
| 46,873 | |
Current portion of long-term debt | |
| 199,640 | | |
| 198,709 | |
Current debt, related party | |
| 1,650,000 | | |
| - | |
Long term debt, related party | |
| - | | |
| 1,650,000 | |
Other long-term debt | |
| 7,252,021 | | |
| 7,519,413 | |
Interest rate swap | |
| 717,151 | | |
| 528,040 | |
TOTAL
LIABILITIES | |
| 10,616,662 | | |
| 11,182,836 | |
| |
| | | |
| | |
Series A 7.75% Cumulative Redeemable Perpetual Preferred Stock Par Value
$25.00 (175,000 shares authorized; 144,636 issued and outstanding as of September 30, 2015 and December 31, 2014) | |
| 3,492,149 | | |
| 3,492,149 | |
| |
| | | |
| | |
Commitments and Contingencies | |
| | | |
| | |
| |
| | | |
| | |
Equity: | |
| | | |
| | |
Common Shares, $0.001 par value (100,000,000 shares authorized; 1,742,688 and 1,731,788 shares issued and outstanding
as of September 30, 2015 and December 31, 2014) | |
| 1,743 | | |
| 1,732 | |
Additional paid-in capital | |
| 10,966,326 | | |
| 10,815,889 | |
Accumulated deficit | |
| (3,688,437 | ) | |
| (3,153,136 | ) |
Total
Equity | |
| 7,279,632 | | |
| 7,664,485 | |
| |
| | | |
| | |
TOTAL LIABILITIES
AND EQUITY | |
$ | 21,388,443 | | |
$ | 22,339,470 | |
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
POWER
REIT AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
| |
Three
Months Ended September 30, | | |
Nine
Months Ended September 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
REVENUE | |
| | | |
| | | |
| | | |
| | |
Lease income from capital lease – railroad, net | |
$ | 228,750 | | |
$ | 228,750 | | |
$ | 686,250 | | |
$ | 686,250 | |
Rental income | |
| 262,851 | | |
| 262,851 | | |
| 787,279 | | |
| 565,229 | |
Misc. Income | |
| 9 | | |
| 22 | | |
| 4,976 | | |
| 68 | |
TOTAL REVENUE | |
| 491,610 | | |
| 491,623 | | |
| 1,478,505 | | |
| 1,251,547 | |
| |
| | | |
| | | |
| | | |
| | |
EXPENSES | |
| | | |
| | | |
| | | |
| | |
Amortization of intangible assets | |
| 59,285 | | |
| 59,285 | | |
| 177,856 | | |
| 112,773 | |
General and administrative | |
| 38,992 | | |
| 44,962 | | |
| 156,326 | | |
| 213,608 | |
Stock-based compensation | |
| 46,544 | | |
| 53,983 | | |
| 150,448 | | |
| 129,515 | |
Property tax | |
| 5,472 | | |
| 1,350 | | |
| 16,397 | | |
| 17,242 | |
Property acquisition expenses | |
| - | | |
| - | | |
| (1,105 | ) | |
| 364,920 | |
Litigation expenses (see note 5) | |
| 117,586 | | |
| 343,586 | | |
| 241,538 | | |
| 605,005 | |
Unrealized loss on interest rate swap | |
| 250,066 | | |
| 60,486 | | |
| 189,111 | | |
| 273,517 | |
Interest expense | |
| 159,301 | | |
| 230,769 | | |
| 873,332 | | |
| 481,167 | |
TOTAL EXPENSES | |
| 677,246 | | |
| 794,421 | | |
| 1,803,903 | | |
| 2,197,747 | |
| |
| | | |
| | | |
| | | |
| | |
NET LOSS | |
| (185,636 | ) | |
| (302,798 | ) | |
| (325,398 | ) | |
| (946,200 | ) |
| |
| | | |
| | | |
| | | |
| | |
Preferred Stock Dividends | |
| 69,968 | | |
| 62,888 | | |
| 209,903 | | |
| 123,916 | |
| |
| | | |
| | | |
| | | |
| | |
NET LOSS ATTRIBUTABLE
TO COMMON SHARES | |
$ | (255,604 | ) | |
$ | (365,686 | ) | |
$ | (535,301 | ) | |
$ | (1,070,116 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss Per Common Share: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
$ | (0.15 | ) | |
$ | (0.21 | ) | |
$ | (0.31 | ) | |
$ | (0.63 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted Average Number of Shares Outstanding: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
| 1,734,210 | | |
| 1,731,788 | | |
| 1,732,595 | | |
| 1,692,719 | |
| |
| | | |
| | | |
| | | |
| | |
Cash dividend per Series A Preferred
Share | |
$ | 0.48 | | |
$ | 0.48 | | |
$ | 1.45 | | |
$ | 0.96 | |
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
POWER
REIT AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
| |
Nine
Months Ended September 30, | |
| |
2015 | | |
2014 | |
Operating activities | |
| | | |
| | |
Net loss | |
$ | (325,398 | ) | |
$ | (946,200 | ) |
| |
| | | |
| | |
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities: | |
| | | |
| | |
Amortization of intangible assets | |
| 177,856 | | |
| 112,103 | |
Change in unrealized loss on interest rate swap | |
| 189,111 | | |
| 273,517 | |
Amortization of debt costs | |
| 460,813 | | |
| 92,541 | |
Stock-based compensation | |
| 150,448 | | |
| 129,515 | |
| |
| | | |
| | |
Changes in operating assets and liabilities | |
| | | |
| | |
(Increase) decrease in other receivables | |
| 1,054 | | |
| (14,238 | ) |
(Increase) in prepaid expense | |
| (18,398 | ) | |
| (27,745 | ) |
(Increase) decrease in other assets | |
| - | | |
| (50,000 | ) |
Increase (decrease) in deferred revenue | |
| (6,500 | ) | |
| | |
Increase in prepaid rent | |
| 120,815 | | |
| 245,139 | |
Increase (decrease) in accounts payable | |
| (302,723 | ) | |
| 556,905 | |
Increase (decrease) in accounts payable, related party | |
| (345,145 | ) | |
| | |
Increase (decrease) in accrued interest | |
| 38,229 | | |
| (9,814 | ) |
Net cash provided by (used in) operating
activities | |
| 140,162 | | |
| 361,723 | |
| |
| | | |
| | |
Investing Activities | |
| | | |
| | |
Acquisition of land, net | |
| - | | |
| (4,419,985 | ) |
Acquisition of intangibles | |
| - | | |
| (4,713,548 | ) |
Net cash used
in investing activities | |
| - | | |
| (9,133,533 | ) |
| |
| | | |
| | |
Financing Activities | |
| | | |
| | |
Principal payment on long-term debt | |
| (266,461 | ) | |
| (73,817 | ) |
Net proceeds from issuance of preferred stock | |
| - | | |
| 3,384,101 | |
Proceeds from other long-term debt | |
| - | | |
| 6,941,429 | |
Payment of deferred finance costs | |
| (37,992 | ) | |
| (836,031 | ) |
Proceeds from exercise of stock options | |
| - | | |
| 159,180 | |
Cash dividends paid on preferred stock | |
| (209,903 | ) | |
| (123,916 | ) |
Net cash provided by (used in) financing
activities | |
| (514,356 | ) | |
| 9,450,946 | |
| |
| | | |
| | |
Net increase (decrease) in cash and
cash equivalents | |
| (374,194 | ) | |
| 679,136 | |
| |
| | | |
| | |
Cash and cash equivalents, beginning
of period | |
| 654,381 | | |
| 78,113 | |
| |
| | | |
| | |
Cash and cash equivalents, end of period | |
$ | 280,187 | | |
$ | 757,249 | |
| |
| | | |
| | |
Non cash investing equivalents, end
of period | |
| | | |
| | |
Amortization of preferred stock costs | |
$ | - | | |
$ | 80,000 | |
Supplemental disclosure of cash flow
information: | |
| | | |
| | |
Interest paid | |
$ | 374,290 | | |
$ | 310,000 | |
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
POWER
REIT AND SUBSIDIARIES
Notes
to Unaudited Consolidated Financial Statements
1.
GENERAL INFORMATION
The
accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) for interim financial information, and with the rules and regulations
of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, these interim
financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In
the opinion of the Company, as defined below, these unaudited consolidated financial statements include all adjustments necessary
to present fairly the information set forth herein. All such adjustments are of a normal recurring nature. Results for interim
periods are not necessarily indicative of results to be expected for a full year.
These
unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements and
notes included in our latest Annual Report on Form 10-K filed with the SEC on March 31, 2015.
Power
REIT (the “Registrant” or the “Trust”, and together with its consolidated subsidiaries, “we”,
“us”, the “Company” or “Power REIT”, unless the context requires otherwise) is a Maryland-domiciled
real estate investment trust (a “REIT”) that holds, develops, acquires and manages real estate assets related to transportation
and energy infrastructure in the United States. Within the transportation and energy infrastructure sectors, Power REIT is focused
on making new acquisitions of real estate that are or will be leased to renewable energy generation projects, such as utility-scale
solar farms and wind farms, that have low or minimal technology risk.
The
Trust is structured as a holding company and owns its assets through five wholly-owned, special purpose subsidiaries, with one
subsidiary owning another subsidiary, that have been formed in order to hold real estate assets, obtain financing and generate
lease revenue. As of September 30th, 2015, the Trust’s assets consisted of approximately 112 miles of railroad
infrastructure and related real estate which is owned by its subsidiary Pittsburgh & West Virginia Railroad (“P&WV”)
and approximately 601 acres of fee simple land leased to a number of solar power generating projects with an aggregate generating
capacity of approximately 108 Megawatts (“MW”). Power REIT is actively seeking to expand its portfolio of real estate
related to renewable energy generation projects and is pursuing investment opportunities that qualify for REIT ownership within
solar, wind, hydroelectric, geothermal, transmission and other infrastructure projects.
P&WV
is a business trust organized under the laws of Pennsylvania for the purpose of owning railroad assets that are currently leased
to Norfolk Southern Railway (“NSC”) pursuant to a 99-year lease that became effective in 1964 and is subject to an
unlimited number of 99-year renewal periods under the same terms and conditions, including annual rent payments, at the option
of NSC (the “Railroad Lease”). P&WV’s assets consist of a railroad line of approximately 112 miles in length,
extending through Connellsville, Washington and Allegheny Counties in the Commonwealth of Pennsylvania, through Brooke County
in the State of West Virginia and through Jefferson and Harrison Counties in the State of Ohio, to Pittsburgh Junction in Harrison
County, Ohio. There are also branch lines that total approximately 20 miles in length located in Washington and Allegheny Counties
in Pennsylvania and Brooke County in West Virginia. NSC pays P&WV base cash rent of $915,000 per year, payable in quarterly
installments. In addition, Power REIT believes NSC is responsible for additional rent and other amounts, which is currently the
subject of litigation (See Note 5).
PW
Salisbury Solar, LLC (“PWSS”) is a Massachusetts limited liability company that owns approximately 54 acres of land
located in Salisbury, Massachusetts that is leased to a 5.7 MW operational solar farm. Pursuant to the lease agreement, PWSS’
tenant is required to pay PWSS rent of $80,800 cash for the year December 1, 2012 to November 30, 2013, with a 1.0% escalation
in each corresponding year thereafter. Rent is payable quarterly in advance and is recorded by Power REIT for accounting purposes
on a straight-line basis. Rent for the year ended December 31, 2014 was $89,494. For each of the nine months ended September 30th,
2015 and 2014 rent has been recorded in the amount of approximately $67,000. At the end of the 22-year lease period, which commenced
on December 1, 2011 (prior to being assumed by PWSS), the tenant has certain renewal options, with terms to be mutually agreed
upon.
POWER
REIT AND SUBSIDIARIES
Notes
to Unaudited Consolidated Financial Statements
PW
Tulare Solar, LLC (“PWTS”) is a California limited liability company that owns approximately 100 acres of land leased
to five solar farms, with an aggregate generating capacity of approximately 20MW, located near Fresno, California. The solar farm
tenants pay PWTS an aggregate annual rent of $157,500 cash, payable in advance and without escalation during the 25-year term
of the leases. At the end of the 25-year term, which commenced in March 2013 (prior to being assumed by PWTS), the tenants have
certain renewal options, with terms to be mutually agreed upon. For the year ended December 31, 2014, PPWTS recorded rental income
of $167,603. For the nine months ended September 30th, 2015 and 2014, PWTS recorded rental income of approximately
$118,000 and $128,000, respectively.
PW
Regulus Solar, LLC (“PWRS”) is a California limited liability company that owns approximately 447 acres of land leased
to a solar project with an aggregate generating capacity of approximately 82 Megawatts in Kern County, California near Bakersfield.
PWRS’s lease was structured to provide it with initial quarterly rental payments until the solar farm achieves commercial
operations which occurred on November 11, 2014. During the primary term of the lease which extends for 20 years from achieving
commercial operations, PWRS will receive an initial annual rent of approximately $735,000 per annum which grows at 1% per annum.
The lease is a “triple net” lease with all expenses to be paid by the tenant. At the end of the primary term of the
lease, the tenants have certain renewal options with rent calculated as the greater of a minimum stated rental amount or a percentage
of the total project-level gross revenue. The acquisition price, not including transaction and closing costs, was approximately
$9.2 million. For the year ended December 31, 2014, PWRS recorded rental income of approximately $571,000. For the nine months
ended September 30th, 2015 and 2014, PWRS recorded rental income of approximately $602,000 and $370,000, respectively.
Power
REIT Financo, LLC (“Financo”), a wholly-owned, direct subsidiary of Power REIT, entered into a credit facility in
April 2014 with a major institutional lender (the “Credit Facility”). Financo is the owner of PWRS.
During
the quarter ended September 30th, 2015, the Trust paid a quarterly dividend of approximately $70,000 ($0.48375 per
share) on Power REIT’s 7.75% Series A Cumulative Redeemable Perpetual Preferred Stock.
The
Trust was formed as part of a reorganization and reverse triangular merger of P&WV that closed on December 2, 2011. P&WV
survived the reorganization as a wholly-owned subsidiary of the Trust.
The
Trust has elected to be treated for tax purposes as a REIT, which means that it is exempt from U.S. federal income tax if a sufficient
portion of its annual income is distributed to its shareholders, and if certain other requirements are met. In order for the Trust
to maintain its REIT qualification, at least 90% of its ordinary taxable annual income must be distributed to shareholders.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
These
consolidated financial statements have been prepared in accordance with GAAP.
Principles
of Consolidation
The
accompanying consolidated financial statements include Power REIT and its wholly-owned subsidiaries. All intercompany balances
have been eliminated in consolidation.
POWER
REIT AND SUBSIDIARIES
Notes
to Unaudited Consolidated Financial Statements
Reclassifications
Certain
amounts in the 2014 consolidated financial statements have been reclassified to conform to the 2015 presentation.
Derivative
Financial Instruments
The
Trust uses derivative financial instruments to reduce interest rate risks. Derivatives are measured at fair value and recognized
as either assets or liabilities in the Trust’s Consolidated Balance Sheets. Changes in the fair value of these instruments
are reported in earnings or other comprehensive income depending on the use of the derivatives and whether it qualifies for hedge
accounting. The accounting for gains and losses associated with changes in the fair value of the derivative and the effect on
the Consolidated Financial Statements will depend on its hedge designation and whether the hedge is highly effective in achieving
offsetting changes in the fair value of cash flows of the asset or liability hedged. The Trust does not hold or issue derivative
financial instruments for trading purposes; however, the Trust has not performed the activities necessary to qualify its interest
rate swap for hedge accounting. As a result, changes in the fair value of these instruments are reported in earnings.
Fair
Value
Fair
value represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. The Trust measures its financial assets and liabilities in three levels, based on the markets in which the assets
and liabilities are traded and the reliability of the assumptions used to determine fair value.
|
● |
Level
1 – valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that
allow a company to sell its ownership interest back at net asset value on a daily basis. Valuations are obtained from readily
available pricing sources for market transactions involving identical assets, liabilities or funds. |
|
|
|
|
● |
Level
2 – valuations for assets and liabilities traded in less active dealer, or broker markets, such as quoted prices for
similar assets or liabilities or quoted prices in markets that are not active. Level 2 includes U.S. Treasury, U.S. government
and agency debt securities, and certain corporate obligations. Valuations are usually obtained from third party pricing services
for identical or comparable assets or liabilities. |
|
|
|
|
● |
Level
3 – valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing
models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions.
Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or
liabilities. |
In
determining fair value, the Trust utilizes valuation techniques that maximize the use of observable inputs and minimize the use
of unobservable inputs to the extent possible as well as considering counterparty credit risk.
POWER
REIT AND SUBSIDIARIES
Notes
to Unaudited Consolidated Financial Statements
The
carrying amounts of Power REIT’s financial instruments, including cash and cash equivalents, deposits, and accounts payable
approximate fair value because of their relatively short maturity. Financial assets and liabilities reported or disclosed at fair
value were as follows:
September
30, 2015
($
in thousands)
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| |
| | |
| | |
| | |
| |
Assets | |
| | | |
| | | |
| | | |
| | |
Cash
and cash equivalents(1) | |
$ | 280 | | |
$ | - | | |
$ | - | | |
$ | 280 | |
Total at fair value | |
$ | 280 | | |
$ | - | | |
$ | - | | |
$ | 280 | |
| |
| | | |
| | | |
| | | |
| | |
Liabilities | |
| | | |
| | | |
| | | |
| | |
Current debt, related party(2) | |
$ | - | | |
$ | 1,650 | | |
$ | - | | |
$ | 1,650 | |
Long-term debt(3) | |
| - | | |
| 603 | | |
| - | | |
| 603 | |
Interest rate
swap(4) | |
| - | | |
| 717 | | |
| - | | |
| 717 | |
Total at fair value | |
$ | - | | |
$ | 2,970 | | |
$ | - | | |
$ | 2,970 | |
(1)
Comprises money market funds, which are included in Cash & Cash Equivalents in the accompanying consolidated balance sheet.
(2)
Comprises amount borrowed by PWTS from Hudson Bay Partners, LP, a wholly owned affiliate of David H. Lesser, to fund its acquisition
of property in July 2013.
(3)
Comprises amounts borrowed and assumed by PWSS in connection with its acquisition of property in December 2012 and PWRS in connection
with its acquisition of property in April 2014.
(4)
The Trust has entered into swap agreements to hedge interest rate exposure on floating rate debt associated with its Credit Facility.
The interest Rate swap is designated as a Level 2 instrument. The fair value of the interest rate swap is determined using observable
market inputs such as current interest rates and considered non-performance risk of the Trust and its counterparties. The liability
indicates that interest rates have declined since the inception of the swap which represents an unrealized loss at September 30,
2015.
POWER
REIT AND SUBSIDIARIES
Notes
to Unaudited Consolidated Financial Statements
December
31, 2014
($
in thousands)
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| |
| | |
| | |
| | |
| |
Assets | |
| | | |
| | | |
| | | |
| | |
Cash
and cash equivalents(1) | |
$ | 654 | | |
$ | - | | |
$ | - | | |
$ | 654 | |
Total at fair value | |
$ | 654 | | |
$ | - | | |
$ | - | | |
$ | 654 | |
| |
| | | |
| | | |
| | | |
| | |
Liabilities | |
| | | |
| | | |
| | | |
| | |
Current debt, related party(2) | |
$ | - | | |
$ | 1,650 | | |
$ | - | | |
$ | 1,650 | |
Long-term debt(3) | |
| - | | |
| 7,519 | | |
| - | | |
| 7,519 | |
Interest rate swap(4) | |
| - | | |
| 528 | | |
| - | | |
| 528 | |
Total at fair value | |
$ | - | | |
$ | 9,697 | | |
$ | - | | |
$ | 9,697 | |
(1)
Comprises money market funds, which are included in Cash & Cash Equivalents in the accompanying consolidated balance sheet.
(2)
Comprises amount borrowed by PWTS from Hudson Bay Partners, LP, a wholly owned affiliate of David H. Lesser, to fund its acquisition
of property in July 2013.
(3)
Long-term debt comprises amounts borrowed and assumed by PWSS in connection with its acquisition of property in December 2012.
(See Note 3, Long-term Debt.)
(4)
The Trust has entered into swap agreements to hedge interest rate exposure on floating rate debt associated with its Credit Facility.
The interest Rate swap is designated as a Level 2 instrument. The fair value of the interest rate swap is determined using observable
market inputs such as current interest rates and considered non-performance risk of the Trust and its counterparties. The liability
indicates that interest rates have declined since the inception of the swap which represents an unrealized loss at December, 2014.
For
financial assets that utilize Level 1 inputs, the Trust utilizes both direct and indirect observable price quotes, including quoted
market prices (Level 1 inputs).
3.
LONG-TERM DEBT
On
April 14, 2014, Power REIT Financo, LLC (“Financo”), a wholly owned, direct subsidiary of Power REIT, entered into
a credit facility with a major institutional lender (the “Credit Facility”). As part of the closing of the acquisition
by PWRS, approximately $6,891,000 was drawn on the Credit Facility including approximately $173,000 drawn to pay for bank fees.
The credit facility is intended to fund additional acquisitions. The Credit Facility has a five-year term and carries an interest
rate of 350 basis points over LIBOR during the first three years, and 400 basis points over LIBOR during the remainder of the
term. Power REIT has entered into interest rate hedging strategies designed to minimize the risks associated with any refinancing
and with interest rate swings. The outstanding balance of the Credit facility as of September 30th, 2015 is approximately
$6,649,000. On February 20, 2015, the Company amended the Credit Facility to reduce the amount of the Credit Facility from $26.2
million to $11.8 million and to reduce the unused fee from 0.75% to 0.25%. In connection with the amendment, the Company wrote
off the proportionate amount of unamortized debt costs associated with the Credit Facility amounting to approximately $354,000.
During the first nine months of 2015, the Company also paid approximately $38,000 of capitalized debt costs.
On
July 12, 2013, PWTS borrowed $1,650,000 from Hudson Bay Partners, L.P. (“HBP”), a wholly-owned affiliate of David
H. Lesser, our Chairman and CEO, in the form of an A note and a B Note (the “Notes”), to fund the acquisition of property
located near Fresno, California. The A note has a principal balance of $1,155,000 and carries an interest rate of 5.0% during
the first six months, stepped up to 8.5% thereafter. The B note has a principal balance of $495,000 and carries an interest rate
of 9.5% during the first six months, stepped up to 13.5% thereafter. Both notes mature in January of 2016 and require interest-only
payments at six-month intervals or upon a prepayment. In addition to a first lien mortgage on PWTS’s property, the notes
are also secured by a parent guarantee from the Trust. On November 6, 2015 the loan from HBP was repaid in full – see Subsequent
Events.
POWER
REIT AND SUBSIDIARIES
Notes
to Unaudited Consolidated Financial Statements
On
July 5, 2013, PWSS borrowed $750,000 from a regional bank (the “PWSS Term Loan”). The PWSS Term Loan carries a fixed
interest rate of 5.0%, a term of 10-years and amortizes based on a twenty-year principal amortization schedule. In addition to
being secured by PWSS’ real estate assets, the term loan is secured by a parent guarantee from the Trust. The balance of
the PWSS Term Loan as of September 30th, 2015 is approximately $700,000.
On
December 31, 2012, as part of the Salisbury land acquisition, PWSS assumed existing municipal financing (“Municipal Debt”).
The Municipal Debt has approximately 18 years remaining. The Municipal Debt has a simple interest rate of 5.0% that is paid annually,
with the next payment due February 1, 2016. The balance of the Municipal Debt as of September 30th, 2015 is approximately
$103,000.
4.
EQUITY AND LONG-TERM COMPENSATION
Summary
of Plan Activity – Options
The
summary of Plan activity for the nine months ended September 30, 2015, with respect to the Trust’s stock options, was as
follows:
| |
| | |
Weighted | | |
| |
| |
Number of | | |
Average | | |
Aggregate | |
| |
Options | | |
Exercise
Price | | |
Intrinsic
Value | |
Balance as of December
31, 2014 | |
| 106,000 | | |
| 7.96 | | |
| - | |
Plan Awards | |
| - | | |
| | | |
| | |
Options Exercised | |
| - | | |
| 7.96 | | |
| | |
Balance as of
September 30, 2015 | |
| 106,000 | | |
| 7.96 | | |
| - | |
Options vested
at September 30, 2015 | |
| 106,000 | | |
| 7.96 | | |
| - | |
For
the quarters ended September 30th, 2015 and 2014, the weighted average fair value of options vested and granted is
$0.96 per share. Since the Weighted Average Exercise Price exceeds the closing stock price of $4.26 at September 30th,
2015 the Aggregate Intrinsic Value is zero.
POWER
REIT AND SUBSIDIARIES
Notes
to Unaudited Consolidated Financial Statements
Summary
of Plan Activity – Restricted Stock
The
summary of Plan activity for the nine months ended September 30th, 2015, with respect to the Trust’s restricted
stock, was as follows:
| |
Number of | | |
Weighted | |
| |
Shares of | | |
Average | |
| |
Restricted | | |
Grant Date | |
| |
Stock | | |
Fair
Value | |
Balance as of December
31, 2014 | |
| 37,042 | | |
| 8.08 | |
Plan Awards | |
| 10,900 | | |
| 4.59 | |
Restricted Stock Vested | |
| (18,575 | ) | |
| 8.29 | |
Balance as of
September 30, 2015 | |
| 29,367 | | |
| 7.62 | |
Stock-based
Compensation
During
the first nine months of 2015, the Trust recorded approximately $150,000 of non-cash expense related to restricted stock and options
granted under the Plan compared to approximately $130,000 for the first nine months of 2014. As of September 30, 2015 there was
approximately $224,000 of total unrecognized share-based compensation expense, which expense will be recognized through the second
quarter of 2018, equating to a weighted average amortization period of approximately 1.5 years from the issuance date. The Trust
does not currently have a policy regarding the repurchase of shares on the open market related to equity awards and does not currently
intend to acquire shares on the open market.
Preferred
Stock Dividends
During
the first nine months of 2015, the Trust paid a total of $209,903 of dividends to holders of Power REIT’s Series A Preferred
Stock.
5.
LEGAL PROCEEDINGS
As
previously disclosed in its public filings with the SEC, the Trust and its wholly-owned subsidiary P&WV are in litigation
with NSC and NSC’s sub-lessee, Wheeling & Lake Erie Railroad (“WLE” and, together with NSC, the “Litigants”)
concerning matters arising under the Railroad Lease. The case is pending in Federal trial court in Pittsburgh (the “Court”).
The Litigants initiated the litigation against the Trust and P&WV in December 2011, seeking, among other things, a declaratory
judgment that NSC was not in default under the Railroad Lease.
P&WV,
as lessor, has asserted counterclaims, seeking determinations that NSC is in default under the Railroad Lease for, among other
things, failing to reimburse P&WV for certain legal fees incurred by P&WV, failing to permit P&WV to inspect NSC’s
books and records as called for under the terms of the Railroad Lease and failing to pay other amounts that P&WV believes
are due and owing. P&WV also seeks declarations from the Court (a) that NSC’s obligation to repay the indebtedness owed
under the Railroad Lease is not indefinite in duration, and (b) that the indebtedness owed to P&WV is due on demand with interest.
If P&WV is successful with certain of its counterclaims, it can terminate the Railroad Lease and demand from NSC payment of
the indebtedness.
The
indebtedness is the cumulative result of amounts received by NSC from its dispositions of P&WV property, additional rental
amounts due and other sums that NSC owes to P&WV but which NSC has elected, under its interpretation of the Railroad Lease,
to pay by increasing its indebtedness to P&WV rather than by providing P&WV with cash. According to records maintained
by NSC pursuant to the Railroad Lease and provided by NSC to P&WV, as of December 31, 2012 the indebtedness owed to P&WV
was approximately $16,600,000. NSC has not provided a more recent update of the indebtedness amount. P&WV believes that the
indebtedness amount is understated. The indebtedness has not been included in P&WV’s balance sheets prepared under GAAP,
because of the dispute as to when it is due. Similarly, certain additional rental amounts that NSC disputes are due on a current
basis, and which have historically been treated as indebtedness, have not been included in P&WV’s income statements
or balance sheets prepared under GAAP; however, these additional rent amounts have historically been recorded as taxable income
on P&WV’s tax returns.
POWER
REIT AND SUBSIDIARIES
Notes
to Unaudited Consolidated Financial Statements
The
Litigants have alleged that the Trust is a successor in interest in respect of the Railroad Lease. If that allegation were to
be decided against us in a fact-finding stage of the litigation, it could lead to liability and expenses. The Trust believes that
it is not a successor in interest in respect of the Railroad Lease and is not constrained by any of the Railroad Lease restrictions.
The
parties have made certain supplements to their respective claims and counterclaims. In August 2013, P&WV filed a second supplement
to its counterclaims following the Litigants’ disclosure of previously undisclosed dispositions of P&WV property. P&WV
believes that additional amounts are owed to it as a result of these dispositions and, accordingly, asserted new counterclaims,
including claims of fraud and conversion. Based on the information available at the time P&WV supplemented its claims, P&WV
has estimated that the additional amounts owed to it exceed $8 million, not including potential interest and damages. P&WV
also supplemented its counterclaim for additional rental amounts due in order to include the reimbursement of its legal expenses
related to the litigation. In response to P&WV’s second supplement to its counterclaims, in January 2014 the Litigants
amended their pleadings to add additional claims against both P&WV and the Trust. The Litigants’ new claims seek additional
declarations from the Court that the Litigants have not defaulted on or violated the terms of the Railroad Lease.
On
September 13, 2013, the Trust filed a motion for summary judgment seeking dismissal of all of the claims against it primarily
based on the fact that the Trust is not a party to the Lease. On January 15, 2014, the Court heard oral arguments from the parties
on the Trust’s motion. On October 16, 2013, the Litigants filed a motion seeking leave to supplement their claims to include:
(i) nominal damages, (ii) enjoinment of Power REIT from taking actions in breach of the Lease Agreement, (iii) the withdrawal
of NSC’s consent to the additional share by PWV; and (iv) the undoing of the reverse triangular merger. On June 19, 2014,
the court denied the Trust’s motion but also denied Plaintiff’s motion seeking leave to supplement their claims with
the exception of granting the motion to seek nominal damages.
The
fact and expert discovery phases of the litigation have been completed. On September 8, 2014, P&WV filed a Motion for Summary
Judgment and on October 22, 2014, the Litigants filed an opposition to such motion and on November 5 2014, P&WV filed a Reply
to NSC and WLE’s opposition to such motion. On September 8, 2014, the Litigants filed a Motion for Summary Judgment and
on October 22, 2014, P&WV filed an opposition to such motion and on November 5, 2014, the Litigants filed a reply to P&WV’s
opposition to such motion. On December 16, 2014, the court held oral argument on both of the pending motions for Summary Judgment.
On
April 22, 2015, the court denied P&WV’s motion for summary judgment and granted the Litigants’ summary judgment
motion thereby dismissing all of P&WV’s claims. During the week of August 3, 2015, a trial was conducted on the two
remaining claims of the Litigants against P&WV and Power REIT. At the conclusion of the trial, the court indicated that it
hoped to render a final ruling on the case during the fourth quarter of 2015. The company is reviewing its legal options and evaluating
the prospects of an appeal.
P&WV
has provided key court filings in the litigation on its website (www.pwreit.com) under a tab called “P&WV Litigation
Update” which is under the “Investor Relations” tab. The provided documents and accompanying supporting documents
are not comprehensive or complete and the full case docket is available from the Public Access to Court Records (PACER) website.
Power REIT encourages interested parties to review all the public filings available on PACER and to review the risks and disclosures
in Power REIT’s Annual Report filed on Form 10-k and other documents filed from time to time with the Securities and Exchange
Commission (SEC).
POWER
REIT AND SUBSIDIARIES
Notes
to Unaudited Consolidated Financial Statements
During
the quarter ended September 30, 2015 and 2014, P&WV incurred litigation related expenses of approximately $117,000 and $344,000,
respectively. During the nine months ended June 30, 2015 and 2014, P&WV incurred litigation related expenses of approximately
$241,000 and $605,000, respectively. As of September 30, 2015, P&WV had incurred a total of approximately $2,947,000 of cumulative
expenses related to the litigation, of which approximately $352,000 is in accounts payable. P&WV believes that the costs associated
with the litigation are reimbursable by NSC under the Railroad Lease as additional rent, but NSC has refused to pay such amounts.
At this point, in order to collect on such amounts, P&WV would need to file and prevail on an appeal. There can be no assurance
that P&WV will prevail in collecting its litigation expenses from NSC; accordingly, the expenses of the litigation are accrued
and expensed as incurred.
6.
RELATED PARTY TRANSACTIONS
The
Trust and its subsidiaries have hired Morrison Cohen, LLP (“Morrison Cohen”) as their legal counsel with respect to
general corporate matters and the litigation with NSC. The spouse of the Trust’s Chairman, CEO, Secretary and Treasurer
is a partner at Morrison Cohen. During the nine months ended September 30th, 2015 and 2014, Power REIT (on a consolidated
basis) paid approximately $558,000 and $676,000, respectively, in legal fees and costs to Morrison Cohen in connection with various
legal matters, including the litigation with NSC, and another approximately $296,000 had been billed, but not paid as of September
30, 2015.
On
July 11, 2013, HBP, a wholly-owned affiliate of the Trust’s Chairman, CEO, Secretary and Treasurer, loaned PWTS $1,650,000
in the form of senior, secured bridge loan notes which remains outstanding at September 30, 2015. The interest expense related
to this secured bridge loan for the nine months ended September 30, 2015 and 2014, amounted to approximately $123,000 (See Note
3). On November 6, 2015 the loan from HBP was repaid in full – see Subsequent Events.
A
wholly-owned subsidiary of HBP provides the Trust and its subsidiaries with office space at no cost.
Under
the Trust’s Declaration of Trust, the Trust may enter into transactions in which trustees, officers or employees have a
financial interest, provided however, that in the case of a material financial interest, the transaction is disclosed to the Board
of Trustees or the transaction shall be fair and reasonable. After consideration of the terms and conditions of the retention
of Morrison Cohen and the bridge loan arrangements described above, the independent trustees approved the hiring of Morrison Cohen
as counsel and approved the bridge loans, determining all such arrangements to be fair and reasonable and in the interest of the
Trust.
7.
SUBSEQUENT EVENTS
On
November 3, 2015, the Registrant declared a quarterly dividend of $0.48375 per share on Power REIT’s 7.75% Series A Cumulative
Redeemable Perpetual Preferred Stock payable on December 15, 2015 to shareholders of record on November 15, 2015.
On
November 6, 2015, the Registrant completed a refinancing of outstanding indebtedness secured by land owned by PWRS. PWRS acquired
the property for approximately $9.2 million in April 2014 and has received rental payments of approximately $1.2 million since
the acquisition. The financing is in the form of long term fixed rate bonds with gross proceeds of $10,150,000. The Bonds carry
a fixed interest rate of 4.34 and fully amortize over the life of the financing which matures in 2034. The use of proceeds from
the financing is to retire approximately $6.65 million of existing indebtedness and the associated swap that was entered which
are secured by the PWRS property; retire the $1.65 million loan to PW Tulare Solar, LLC (a wholly owned subsidiary of Power REIT)
from Hudson Bay Partners, LP (an affiliate of David H. Lesser - Chairman and CEO of Power REIT) including accrued interest; and,
to pay other accounts payable of Power REIT and its subsidiaries.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q includes 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. Forward-looking statements are those that predict
or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking
statements as statements containing the words “believe,” “expect,” “will,” “anticipate,”
“intend,” “estimate,” “project,” “plan,” “assume” or other similar
expressions, or negatives of those expressions, although not all forward-looking statements contain these identifying words. All
statements contained in this report regarding our future strategy, future operations, projected financial position, estimated
future revenues, projected costs, future prospects, the future of our industries and results that might be obtained by pursuing
management’s current or future plans and objectives are forward-looking statements.
You
should not place undue reliance on any forward-looking statements because the matters they describe are subject to known and unknown
risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are
based on the information currently available to us and speak only as of the date of the filing of this report. New risks and uncertainties
arise from time to time, and it is impossible for us to predict these matters or how they may affect us. Over time, our actual
results, performance, financial condition or achievements may differ from the anticipated results, performance, financial condition
or achievements that are expressed or implied by our forward-looking statements, and such differences may be significant and materially
adverse to our security holders. Our forward-looking statements contained herein speak only as of the date hereof, and we make
no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or
subsequent events, circumstances or changes in expectations.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
Power
REIT is a Maryland-domiciled REIT that holds, develops, acquires and manages real estate assets related to transportation and
energy infrastructure in the United States. Within the transportation and energy infrastructure sectors, Power REIT is focused
on making new acquisitions of real estate that are or will be leased to renewable energy generation projects, such as utility-scale
solar farms and wind farms, that have low or minimal technology risk.
Power
REIT is structured as a holding company and owns its assets through five wholly-owned, special purpose subsidiaries, with one
subsidiary owning another subsidiary, that have been formed in order to hold real estate assets, obtain financing and generate
lease revenue. Power REIT was formed as part of a reorganization and reverse triangular merger of P&WV that closed on December
2, 2011. P&WV survived the reorganization as a wholly-owned subsidiary of the Registrant. The Company’s investment strategy,
which is focused on transportation and energy infrastructure-related real estate, builds upon its subsidiary P&WV’s
historical ownership of railroad real estate assets, which are currently triple-net leased to NSC.
As
of September 30, 2015, the Trust’s assets consisted of approximately 112 miles of railroad infrastructure and related real
estate leased to a railway company which is owned by its subsidiary Pittsburgh & West Virginia Railroad (“P&WV”)
and approximately 601 acres of fee simple land leased to a number of solar power generating projects with an aggregate generating
capacity of approximately 108 MW. Power REIT is actively seeking to expand its portfolio of real estate related to renewable energy
generation projects and is pursuing investment opportunities that qualify for REIT ownership within solar, wind, hydroelectric,
geothermal, transmission and other infrastructure projects.
Revenue
during the third quarter of 2015 and 2014 was approximately $492,000 and $492,000, respectively. Net loss attributable to Common
Shares during the third quarter of 2015 was approximately $256,000, whereas a net loss attributable to common shares of approximately
$366,000 was reported during the third quarter of 2014. The difference between our 2015 and 2014 third quarter results were principally
attributable to the following: an approximately $190,000 increase in unrealized interest rate swap expense; an approximately $70,000
decrease in interest expense; and, an approximately $226,000 decrease in litigation expenses related to the NSC litigation.
The
Trust’s cash outlays, other than acquisitions and dividend payments, are for general and administrative (“G&A”)
expenses, which consist principally of legal and other professional fees, consultant fees, trustees’ fees, NYSE MKT listing
fees, shareholder service company fees and auditing costs. During the three years ended 2014, The Trust (on a consolidated basis)
incurred substantial litigation expenses related to its litigation related to P&WV (See Note 5).
To
meet its working capital and longer-term capital needs, Power REIT relies on cash provided by its operating activities, proceeds
received from the issuance of equity securities and proceeds received from borrowings, which are typically secured by liens on
acquired assets.
FUNDS
FROM OPERATIONS – NON GAAP FINANCIAL MEASURES
We
assess and measure our overall operating results based upon an industry performance measure referred to as Core Funds From Operations
(“Core FFO”) which management believes is a useful indicator of our operating performance. This report contains supplemental
financial measures that are not calculated pursuant to U.S. generally accepted accounting principles (“GAAP”), including
the measure identified by us as Core FFO. Following is a definition of this measure, an explanation as to why we present it and,
at the end of this section, a reconciliation of Core FFO to the most directly comparable GAAP financial measure.
Core
FFO: Management believes that Core FFO is a useful supplemental measure of the Company’s operating performance. Management
believes that alternative measures of performance, such as net income computed under GAAP, or Funds From Operations computed in
accordance with the definition used by the National Association of Real Estate Investment Trusts (“NAREIT”), include
certain financial items that are not indicative of the results provided by the Company’s asset portfolio and inappropriately
affect the comparability of the Company’s period-over-period performance. These items include non-recurring expenses, such
as those incurred in connection with litigation, one-time upfront acquisition expenses that are not capitalized under ASC-805
and certain non-cash expenses, including stock-based compensation expense amortization and certain up front financing costs. Therefore,
management uses Core FFO and defines it as net income excluding such items. Management believes that, for the foregoing reasons,
these adjustments to net income are appropriate. The Company believes that Core FFO is a useful supplemental measure for the investing
community to employ, including when comparing the Company to other REITs that disclose similarly adjusted FFO figures, and when
analyzing changes in the Company’s performance over time. Readers are cautioned that other REITs may use different adjustments
to their GAAP financial measures than we do, and that as a result, the Company’s Core FFO may not be comparable to the FFO
measures used by other REITs or to other non-GAAP or GAAP financial measures used by REITs or other companies.
CORE
FUNDS FROM OPERATIONS (FFO)
(Unaudited)
| |
Three
Months Ended September 30, | | |
Nine
Months Ended September 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Core FFO Attributable to
Common Shares | |
$ | 242,844 | | |
$ | 241,827 | | |
$ | 688,736 | | |
$ | 580,521 | |
Growth - Core FFO | |
| 0 | % | |
| | | |
| 19 | % | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Core FFO per common share | |
| 0.14 | | |
| 0.14 | | |
| 0.40 | | |
$ | 0.34 | |
Growth - Core FFO per common share | |
| 0 | % | |
| | | |
| 16 | % | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Weighted Average shares outstanding (basic) | |
| 1,734,210 | | |
| 1,731,788 | | |
| 1,732,595 | | |
| 1,692,719 | |
RECONCILIATION
OF NON-GAAP FINANCIAL MEASURES
(Unaudited)
| |
Three
Months Ended September 30, | | |
Nine
Months Ended September 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Net loss Attributable to Common Shares | |
$ | (255,604 | ) | |
$ | (365,686 | ) | |
$ | (535,301 | ) | |
$ | (1,070,116 | ) |
Litigation expense | |
| 117,586 | | |
| 343,586 | | |
| 241,538 | | |
| 605,005 | |
Property acquisition expenses | |
| - | | |
| - | | |
| (1,105 | ) | |
| 364,920 | |
Stock-based compensation | |
| 46,544 | | |
| 53,983 | | |
| 150,448 | | |
| 129,515 | |
Finance Expense | |
| 3,578 | | |
| 37,432 | | |
| 15,471 | | |
| 67,982 | |
Interest Expense - Amortization of Debt Costs | |
| 21,389 | | |
| 52,741 | | |
| 450,718 | | |
| 96,925 | |
Amortization of Intangible Asset | |
| 59,285 | | |
| 59,285 | | |
| 177,856 | | |
| 112,773 | |
Unrealized loss on interest rate swap | |
| 250,066 | | |
| 60,486 | | |
| 189,111 | | |
| 273,517 | |
Core FFO Available to Common Shares | |
$ | 242,844 | | |
$ | 241,827 | | |
$ | 688,736 | | |
$ | 580,521 | |
Item
3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller
reporting company, the Trust is not required to provide the information required by this Item.
Item
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Management
is responsible for establishing and maintaining adequate disclosure controls and procedures (as defined in Rules 13a- 15(f) of
the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and preparation of financial
statements for external purposes in accordance with U.S. generally accepted accounting principles. A control system, no matter
how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Because of
the inherent limitations in all control systems, internal controls over financial reporting may not prevent or detect misstatements.
The design and operation of a control system must also reflect that there are resource constraints and management is necessarily
required to apply its judgment in evaluating the cost-benefit relationship of possible controls.
Our
management assessed the effectiveness of the design and operation of our disclosure controls and procedures. Based on our evaluation,
we believe that our disclosure controls and procedures as of September 30, 2015 were effective.
Changes
in Internal Control over Financial Reporting:
During
the fiscal quarter ended September 30, 2015, there were no changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings.
As
previously disclosed in its public filings with the SEC, the Trust and its wholly-owned subsidiary P&WV are in litigation
with NSC and NSC’s sub-lessee, Wheeling & Lake Erie Railroad (“WLE” and, together with NSC, the “Litigants”)
concerning matters arising under the Railroad Lease. The case is pending in Federal trial court in Pittsburgh (the “Court”).
The Litigants initiated the litigation against the Trust and P&WV in December 2011, seeking, among other things, a declaratory
judgment that NSC was not in default under the Railroad Lease.
P&WV,
as lessor, has asserted counterclaims, seeking determinations that NSC is in default under the Railroad Lease for, among other
things, failing to reimburse P&WV for certain legal fees incurred by P&WV, failing to permit P&WV to inspect NSC’s
books and records as called for under the terms of the Railroad Lease and failing to pay other amounts that P&WV believes
are due and owing. P&WV also seeks declarations from the Court (a) that NSC’s obligation to repay the indebtedness owed
under the Railroad Lease is not indefinite in duration, and (b) that the indebtedness owed to P&WV is due on demand with interest.
If P&WV is successful with certain of its counterclaims, it can terminate the Railroad Lease and demand from NSC payment of
the indebtedness.
The
indebtedness is the cumulative result of amounts received by NSC from its dispositions of P&WV property, additional rental
amounts due and other sums that NSC owes to P&WV but which NSC has elected, under its interpretation of the Railroad Lease,
to pay by increasing its indebtedness to P&WV rather than by providing P&WV with cash. According to records maintained
by NSC pursuant to the Railroad Lease and provided by NSC to P&WV, as of December 31, 2012 the indebtedness owed to P&WV
was approximately $16,600,000. NSC has not provided a more recent update of the indebtedness amount. P&WV believes that the
indebtedness amount is understated. The indebtedness has not been included in P&WV’s balance sheets prepared under GAAP,
because of the dispute as to when it is due. Similarly, certain additional rental amounts that NSC disputes are due on a current
basis, and which have historically been treated as indebtedness, have not been included in P&WV’s income statements
or balance sheets prepared under GAAP; however, these additional rent amounts have historically been recorded as taxable income
on P&WV’s tax returns.
The
Litigants have alleged that the Trust is a successor in interest in respect of the Railroad Lease. If that allegation were to
be decided against us in a fact-finding stage of the litigation, it could lead to liability and expenses. The Trust believes that
it is not a successor in interest in respect of the Railroad Lease and is not constrained by any of the Railroad Lease restrictions.
The
parties have made certain supplements to their respective claims and counterclaims. In August 2013, P&WV filed a second supplement
to its counterclaims following the Litigants’ disclosure of previously undisclosed dispositions of P&WV property. P&WV
believes that additional amounts are owed to it as a result of these dispositions and, accordingly, asserted new counterclaims,
including claims of fraud and conversion. Based on the information available at the time P&WV supplemented its claims, P&WV
has estimated that the additional amounts owed to it exceed $8 million, not including potential interest and damages. P&WV
also supplemented its counterclaim for additional rental amounts due in order to include the reimbursement of its legal expenses
related to the litigation. In response to P&WV’s second supplement to its counterclaims, in January 2014 the Litigants
amended their pleadings to add additional claims against both P&WV and the Trust. The Litigants’ new claims seek additional
declarations from the Court that the Litigants have not defaulted on or violated the terms of the Railroad Lease.
On
September 13, 2013, the Trust filed a motion for summary judgment seeking dismissal of all of the claims against it primarily
based on the fact that the Trust is not a party to the Lease. On January 15, 2014, the Court heard oral arguments from the parties
on the Trust’s motion. On October 16, 2013, the Litigants filed a motion seeking leave to supplement their claims to include:
(i) nominal damages, (ii) enjoinment of Power REIT from taking actions in breach of the Lease Agreement, (iii) the withdrawal
of NSC’s consent to the additional share by PWV; and (iv) the undoing of the reverse triangular merger. On June 19, 2014,
the court denied the Trust’s motion but also denied Plaintiff’s motion seeking leave to supplement their claims with
the exception of granting the motion to seek nominal damages.
The
fact and expert discovery phases of the litigation have been completed. On September 8, 2014, P&WV filed a Motion for Summary
Judgment and on October 22, 2014, the Litigants filed an opposition to such motion and on November 5 2014, P&WV filed a Reply
to NSC and WLE’s opposition to such motion. On September 8, 2014, the Litigants filed a Motion for Summary Judgment and
on October 22, 2014, P&WV filed an opposition to such motion and on November 5, 2014, the Litigants filed a reply to P&WV’s
opposition to such motion. On December 16, 2014, the court held oral argument on both of the pending motions for Summary Judgment.
On
April 22, 2015, the court denied P&WV’s motion for summary judgment and granted the Litigants’ summary judgment
motion thereby dismissing all of P&WV’s claims. During the week of August 3, 2015, a trial was conducted on the two
remaining claims of the Litigants against P&WV and Power REIT. At the conclusion of the trial, the court indicated that it
hoped to render a final ruling on the case during the fourth quarter of 2015. The company is reviewing its legal options and evaluating
the prospects of an appeal.
P&WV
has provided key court filings in the litigation on its website (www.pwreit.com) under a tab called “P&WV Litigation
Update” which is under the “Investor Relations” tab. The provided documents and accompanying supporting documents
are not comprehensive or complete and the full case docket is available from the Public Access to Court Records (PACER) website.
Power REIT encourages interested parties to review all the public filings available on PACER and to review the risks and disclosures
in Power REIT’s Annual Report filed on Form 10-k and other documents filed from time to time with the Securities and Exchange
Commission (SEC).
During
the quarter ended September 30, 2015 and 2014, P&WV incurred litigation related expenses of approximately $117,000 and $344,000,
respectively. During the nine months ended June 30, 2015 and 2014, P&WV incurred litigation related expenses of approximately
$241,000 and $605,000, respectively. As of September 30, 2015, P&WV had incurred a total of approximately $2,947,000 of cumulative
expenses related to the litigation, of which approximately $352,000 is in accounts payable. P&WV believes that the costs associated
with the litigation are reimbursable by NSC under the Railroad Lease as additional rent, but NSC has refused to pay such amounts.
At this point, in order to collect on such amounts, P&WV would need to file and prevail on an appeal. There can be no assurance
that P&WV will prevail in collecting its litigation expenses from NSC; accordingly, the expenses of the litigation are accrued
and expensed as incurred.
Item
1A. Risk Factors.
The
Trust’s results of operations and financial condition are subject to numerous risks and uncertainties as described in its
Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2015, which risk factors are incorporated
herein by reference. You should carefully consider these risk factors in conjunction with the other information contained in this
report. Should any of these risks materialize, the Trust’s business, financial condition and future prospects could be negatively
impacted.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item
3. Defaults Upon Senior Securities.
Not Applicable.
Item
4. Mine Safety Disclosures.
Not Applicable.
Item
5. Other Information.
Not Applicable.
Item
6. Exhibits.
Exhibit
Number |
|
|
|
|
|
Exhibit
31.1 |
|
Section 302 Certification
for David H. Lesser |
|
|
|
Exhibit 32.1 |
|
Section 906 Certification
for David H. Lesser |
|
|
|
Exhibit 101 |
|
Interactive
data files pursuant to Rule 405 of Regulation S-T, for the quarter ended September 30, 2015: (i) Consolidated Statements of
Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows and (iv) Notes to the Consolidated
Financial Statements |
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
POWER REIT
/s/
David H. Lesser |
|
David H. Lesser |
|
Chairman of the
Board & |
|
Chief Executive
Officer, Secretary and Treasurer |
|
Date: November
6, 2015 |
|
Exhibit
31.1
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
I,
David H. Lesser, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of the registrant, Power REIT;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3.
Based on my knowledge, the financial statements and other financial information included in this report fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on
such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date:
November 6, 2015 |
/s/
David H. Lesser |
|
David
H. Lesser |
|
Chairman
of the Board, Chief Executive Officer, Secretary and Treasurer |
|
(Principal executive officer and principal financial
officer) |
Exhibit
32.1
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT
In
connection with the quarterly report of Power REIT (the “registrant”) on Form 10-Q for the period ended September
30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David H. Lesser,
Chairman of the Board, Chief Executive Officer, Secretary and Treasurer, certify, to the best of my knowledge, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the registrant.
/s/
David H. Lesser |
|
David
H. Lesser |
|
Chairman
of the Board, Chief Executive Officer, Secretary and Treasurer |
(Principal executive officer and principal financial
officer) |
|
|
|
Date:
November 6, 2015 |
|
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