Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the consolidated financial
statements and related notes, which are contained in Part II - Item 8, herein.
BUSINESS OVERVIEW
AmBase Corporation (the "Company" or "AmBase") is a Delaware corporation that
was incorporated in 1975. AmBase is a holding company. At December 31, 2021,
the Company's assets consisted primarily of cash and cash equivalents. The
Company is engaged in the management of its assets and liabilities.
In June 2013, the Company purchased an equity interest in a real estate
development property through a joint venture agreement to purchase and develop
real property located at 105 through 111 West 57th Street in New York, New York
(the "111 West 57th Property"). The Company is engaged in material disputes and
litigation with regard to the 111 West 57th Property. Despite ongoing litigation
challenging the legitimacy of the actions taken in connection with the "Strict
Foreclosure", (as defined and further discussed herein), in accordance with
GAAP, the Company recorded an impairment for the full amount of its equity
investment in the 111 West 57th Property in 2017. Prior to the Strict
Foreclosure, the carrying value of the Company's equity investment in the 111
West 57th Property represented a substantial portion of the Company's assets and
net equity value.
For additional information concerning the Company's recording of an impairment
of its equity investment in the 111 West 57th Property in 2017 and the Company's
legal proceedings relating to the 111 West 57th Property, including the
Company's challenge to the Strict Foreclosure, see Part II - Item 8 - Note 3 and
Note 8 to the Company's consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets at December 31, 2021, aggregated $3,083,000, consisting
principally of cash and cash equivalents of $3,003,000. At December 31, 2021,
the Company's liabilities aggregated $684,000. Total stockholders' equity was
$2,399,000.
In 2020, the Company received federal tax refunds of alternative minimum tax
("AMT") credit carryforwards as provided for in the 2017 Tax Cuts and Jobs Act
(the "2017 Tax Act"), based on the Company's 2019 federal income tax returns as
filed. The Company's management is continuing to work closely with outside
advisors on the Company's various federal tax return matters for the numerous
interrelated tax years. For additional information, see Part II - Item 8 - Note
7 to the Company's consolidated financial statements.
In 2019, the Company received a letter from the Federal Deposit Insurance
Corporation ("FDIC"), requesting the Company reimburse the FDIC for 2012 federal
taxes of approximately $501,000 that the FDIC had previously reimbursed the
Company, pursuant to a 2012 settlement agreement which was approved by the
United States Court of Federal Claims (the "Court of Federal Claims") in October
2012 (the "2012 Tax Amount"). The Company is currently reviewing the FDIC
request, along with the SGW 2012 Settlement Agreement and Court of Federal
Claims August 2013 ruling, with its outside legal and tax advisors. The Company
is unable to predict at this time whether the 2012 Tax Amount is refundable back
to the FDIC in current and/or future years. For additional information, see Part
II - Item 8 - Note 7 to the Company's consolidated financial statements.
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A fundamental principle of the preparation of financial statements in accordance
with GAAP is the assumption that an entity will continue in existence as a going
concern, which contemplates continuity of operations and the realization of
assets and settlement of liabilities occurring in the ordinary course of
business. In accordance with this requirement, the Company has prepared its
accompanying consolidated financial statements assuming the Company will
continue as a going concern.
The Company has incurred operating losses for the past several years. The
Company has continued to keep operating expenses at a reduced level; however,
there can be no assurance that the Company's current level of operating expenses
will not increase or that other uses of cash will not be necessary. The Company
believes that based on its current level of operating expenses its existing cash
and cash equivalents may not be sufficient to cover operating cash needs through
the twelve month period from the financial statement reporting date. Based on
the above factors, management determined there is substantial doubt about the
Company's ability to continue as a going concern within one year after the date
that the financial statements are issued. The accompanying consolidated
financial statements have been prepared assuming that the Company will continue
as a going concern. The financial statements do not include adjustments to the
carrying value of assets and liabilities which might be necessary should the
Company not continue in operation.
In order to continue as a going concern, the Company must take steps to manage
its current level of cash and cash equivalents, through various ways, including
but not limited to, raising additional capital through the sale of assets or
long term borrowings, which may include additional borrowings from affiliates of
the Company, reducing operating expenses, and seeking recoveries from various
sources. There can be no assurance that the Company will be able to adequately
implement these cash management measures, in whole or in part or sell any of its
assets or raise capital on terms acceptable to the Company, if at all.
As noted herein, in June 2013, the Company purchased an equity interest in the
111 West 57th Property. The Company is engaged in material disputes and
litigation with regard to the 111 West 57th Property. Despite ongoing litigation
challenging the legitimacy of the actions taken in connection with the "Strict
Foreclosure", (as defined and further discussed herein), in accordance with
GAAP, the Company recorded an impairment for the full amount of its equity
investment in the 111 West 57th Property of $63,745,000 in 2017. Prior to the
Strict Foreclosure, the carrying value of the Company's equity investment in the
111 West 57th Property represented a substantial portion of the Company's assets
and net equity value. The Company has several legal proceedings pending against
various parties with regard to the 111 West 57th Street Property. For additional
information concerning the Company's recording of an impairment of its equity
investment in the 111 West 57th Property in 2017 and the Company's legal
proceedings relating to the 111 West 57th Property, including the Company's
challenge to the Strict Foreclosure, see Part II - Item 8 - Note 3 and Note 8 to
the Company's consolidated financial statements.
In 2017, the Company entered into a Litigation Funding Agreement (the "LFA")
with Mr. R. A. Bianco. Pursuant to the LFA, Mr. R. A. Bianco agreed to provide
litigation funding to the Company, to satisfy actual documented litigation costs
and expenses of the Company, including attorneys' fees, expert witness fees,
consulting fees and disbursements in connection with the Company's legal
proceedings related to the Company's equity investment in the 111 West 57th
Street Property. In 2019, the Company and Mr. R. A. Bianco entered into an
amendment to the LFA (the "Amendment). For additional information including the
terms of the Litigation Funding Agreement, as amended by the Amendment, see Part
II - Item 8 - Note 9 to the Company's consolidated financial statements.
With respect to its disputes and litigation relating to its interest in the 111
West 57th Property, the Company is pursuing, and will continue to pursue, other
options to realize the Company's investment value, various legal courses of
action to protect its legal rights, recovery of its asset value from various
sources of recovery, as well as considering other possible economic strategies,
including the possible sale of the Company's interest in and/or rights with
respect to the 111 West 57th Property; however, there can be no assurance that
the Company will prevail with respect to any of its claims.
The Company can give no assurances regarding the outcome of the matters
described herein, including as to the effect of Spruce's actions described
herein, whether the Sponsors will perform their contractual commitments to the
Company under the JV Agreement, as to what further action, if any, the lenders
may take with respect to the project, as to the ultimate resolution of the
ongoing litigation proceedings relating to the Company's investment interest in
the 111 West 57th Property, as to the ultimate effect of the Sponsors', the
Company's or the lenders' actions on the project, as to the completion or
ultimate success of the project, or as to the value or ultimate realization of
any portion of the Company's equity investment in the 111 West 57th Street. For
additional information with regard to the Company's investment in the 111 West
57th Property and the legal proceedings related thereto see Part II - Item 8 -
Note 3 and Note 8 to the Company's consolidated financial statements.
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While the Company's management is evaluating future courses of action to protect
and/or recover the value of the Company's equity investment in the 111 West 57th
Property, the adverse developments make it uncertain as to whether any such
courses of action will be successful. Any such efforts are likely to require
sustained effort over a period of time and substantial additional financial
resources. Inability to recover all or most of such value would, in all
likelihood, have a material adverse effect on the Company's financial condition
and future prospects. The Company can give no assurances with regard to if it
will prevail with respect to any of its claims.
For the year ended December 31, 2021, cash of $4,922,000 was used by operations
for the payment of operating expenses and prior year accruals.
For the year ended December 31, 2020, cash of $5,074,000 was provided by
operations as a result of the federal tax refunds received in 2020, partially
offset by the payment of operating expenses and prior year accruals.
Accounts payable and accrued liabilities as of December 31, 2021, increased as
compared to December 31, 2020. The amounts in the respective years are
principally related to accruals for legal expenses in connection with the 111
West 57th Property legal proceedings, which were paid in the subsequent year.
There are no material commitments for capital expenditures as of December 31,
2021. Inflation has had no material impact on the business and operations of
the Company.
RESULTS OF OPERATIONS
The Company recorded a net loss of $5,208,000 or $0.13 per share for the year
ended December 31, 2021. For the year ended December 31, 2020, the Company
recorded a net loss of $5,604,000 or $0.14 per share.
Compensation and benefits decreased to $1,506,000 in 2021 from $1,982,000 in
2020. The decreased amount in 2021 as compared to 2020 is primarily due to a
decrease in incentive compensation payments in 2021 versus 2020.
Professional and outside services expenses increased to $3,358,000 in 2021 from
$3,341,000 in 2020. The increase in 2021 as compared to 2020 is principally the
result of slightly higher level of legal and professional fees incurred in 2021
in connection with the Company's legal proceedings relating to the Company's
investment in the 111 West 57th Property. For additional information with
regard to the Company's investment in the 111 West 57th Property and the legal
proceedings related thereto, see Part II - Item 8 - Note 3 and Note 8 to the
Company's consolidated financial statements.
Property operating and maintenance expenses decreased to $15,000 in 2021 from
$18,000 in 2020. The decrease is primarily due to a slight decrease in property
operating and maintenance expenses in 2021 versus 2020.
Insurance expenses increased to $261,000 in 2021, compared with $211,000 in
2020. The increase is primarily due to an increase in insurance premium costs.
Other operating expenses decreased slightly to $68,000 in 2021 compared with
$88,000 in 2020 due to a general lower level of expenses in 2021 versus 2020.
Interest income in 2021 decreased to $1,000 compared to $8,000 in 2020. The
decreased interest income is due to a lower level of cash equivalents on hand in
2021 versus 2020.
For the year ended December 31, 2021, the Company recorded an income tax expense
of $1,000 attributable to a provision for a tax on capital imposed by the state
jurisdictions. For additional information see Part II - Item 8 - Note 7 to the
Company's consolidated financial statements.
For the year ended December 31, 2020, the Company recorded an income tax benefit
of $28,000. This amount includes an additional refund of $30,000 received in
2020 relating to the AMT credit carryforwards partially offset by a $2,000 state
tax expense, attributable to a provision for a tax on capital imposed by the
state jurisdictions. For additional information, see Part II - Item 8 - Note 7
to the Company's consolidated financial statements.
In 2020, the Company filed its 2019 federal income tax return and an amended
2019 federal income tax return seeking refunds of $10.7 million of AMT credit
carryforwards as provided for in the 2017 Tax Act which were received by the
Company in 2020. For additional information, see Part II - Item 8 - Note 7 to
the Company's consolidated financial statements.
A reconciliation between income taxes computed at the statutory federal rate and
the provision for income taxes is included in Part II - Item 8 - Note 7 to the
Company's consolidated financial statements. For additional information
including a discussion of income tax matters, see Part II - Item 8 - Note 7 to
the Company's consolidated financial statements.
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APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are based on the selection and application
of accounting principles generally accepted in the United States of America,
which require us to make estimates and assumptions about future events that
affect the amounts reported in our financial statements and the accompanying
notes. Future events and their effects cannot be determined with absolute
certainty. The determination of estimates requires the exercise of judgment.
Actual results could differ from those estimates, and any such differences may
be material to the consolidated financial statements. We believe that the
following accounting policies, which are important to our consolidated financial
position and consolidated results of operations, require a higher degree of
judgment and complexity in their application and represent the critical
accounting policies used in the preparation of our consolidated financial
statements. If different assumptions or conditions were to prevail, the results
could be materially different from our reported results. For a summary of all
our accounting policies, including the accounting policies discussed below, see
Part II - Item 8 - Note 2 to the Company's consolidated financial statements.
Equity Method Investment: Investments and ownership interests are accounted for
under the equity method of accounting if the Company has the ability to exercise
significant influence, but not control (under GAAP), over the investment.
Investments accounted for under the equity method are carried at cost, plus or
minus the Company's equity in the increases and decreases in the net assets
after the date of acquisition and certain other adjustments. The Company's share
of income or loss for equity method investments is recorded in the consolidated
statements of operations as equity income (loss). Dividends received, if any,
would reduce the carrying amount of the Company's investment.
Legal Proceedings: From time to time the Company and its subsidiaries may be
named as a defendant in various lawsuits or proceedings. At the current time,
except as set forth in Part II - Item 8 - Note 8 to the Company's consolidated
financial statements, the Company is unaware of any legal proceedings pending
against the Company. Management of the Company, in consultation with outside
legal counsel, continually reviews the likelihood of liability and associated
costs of pending and threatened litigation including the basis for the
calculation of any litigation reserves which may be necessary. The assessment of
such reserves includes an exercise of judgment and is a matter of opinion. The
Company intends to aggressively contest all threatened litigation and
contingencies, as well as pursue all sources for contributions to settlements.
For a discussion of lawsuits and proceedings, see Part II - Item 8 - Note 8 to
the Company's consolidated financial statements.
Income Tax Audits: The Company's federal, state and local tax returns, from
time to time, may be audited by the tax authorities, which could result in
proposed assessments or a change in the NOL carryforwards and of AMT credits
currently available. In connection with the IRS examination of the Company's
2012 federal income tax return, the IRS accepted the Company's federal NOL loss
carryforward deductions from 1997 through 2006 which were utilized as part of
the Company's 2012 federal income tax return to reduce the Company's 2012
federal taxable income. The Company has not been notified of any other
potential tax audits by any federal, state or local tax authorities. As such,
the Company believes the statutes of limitations for the assessment of
additional federal and state tax liabilities are generally closed for tax years
prior to 2018.
Deferred Tax Assets: As of December 31, 2021 and 2020, the Company had deferred
tax assets arising primarily from net operating loss carryforwards available to
offset taxable income in future periods. A valuation allowance remains on the
remaining deferred tax asset amounts relating to the NOL carryforwards as
management has no basis to conclude that realization is more likely than not.
The valuation allowance was calculated in accordance with current standards,
which places primary importance on a company's cumulative operating results for
the current and preceding years. We intend to maintain a valuation allowance for
the deferred tax asset amount relating to the NOL carryforwards until sufficient
positive evidence exists to support a reversal. See Part II - Item 8 - Note 7 to
the Company's consolidated financial statements.
New Accounting Pronouncements: There are no new accounting pronouncements that
would likely materially affect the Company's financial statements for the
periods reported herein.
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Cautionary Statement for Forward-Looking Information
This Annual Report together with other statements and information publicly
disseminated by the Company may contain certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or make oral statements that constitute forward-looking
statements. The Company intends such forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. Forward-looking statements are
inherently subject to risks and uncertainties, many of which cannot be predicted
or quantified. The forward-looking statements may relate to such matters as
anticipated financial performance, future revenues or earnings, business
prospects, projected ventures, anticipated market performance, anticipated
litigation results or the timing of pending litigation, and similar matters.
When used in this Annual Report, the words "estimates," "expects,"
"anticipates," "believes," "plans," "intends" and variations of such words and
similar expressions are intended to identify forward-looking statements that
involve risks and uncertainties. The Company cautions readers that a variety of
factors could cause the Company's actual results to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. These risks and uncertainties, many of which are
beyond the Company's control, include, but are not limited to those set forth in
"Item 1A, Risk Factors" and elsewhere in this Annual Report and in the Company's
other public filings with the Securities and Exchange Commission including, but
not limited to: (i) risks with regard to the ability of the Company to continue
as a going concern; (ii) assumptions regarding the outcome of legal and/or tax
matters, based in whole or in part upon consultation with outside advisors;
(iii) risks arising from unfavorable decisions in tax, legal and/or other
proceedings; (iv) transaction volume in the securities markets; (v) the
volatility of the securities markets; (vi) fluctuations in interest rates; (vii)
risks inherent in the real estate business, including, but not limited to,
insurance risks, tenant defaults, risks associated with real estate development
activities, changes in occupancy rates or real estate values; (viii) changes in
regulatory requirements which could affect the cost of doing business; (ix)
general economic conditions; (x) risks with regard to whether or not the
Company's current financial resources will be adequate to fund operations over
the next twelve months from financial statement issuance date and/or continue
operations; (xi) changes in the rate of inflation and the related impact on the
securities markets; and (xii) changes in federal and state tax laws.
Additionally, there is risk relating to assumptions regarding the outcome of tax
matters, based in whole or in part upon consultation with outside advisors; risk
relating to potential unfavorable decisions in tax proceedings; risks regarding
changes in, and/or interpretations of federal and state income tax laws; and
risk of IRS and/or state tax authority assessment of additional tax plus
interest. These are not the only risks that we face. There may be additional
risks that we do not presently know of or that we currently believe are
immaterial which could also impair our business and financial position.
Undue reliance should not be placed on these forward-looking statements, which
are applicable only as of the date hereof. The Company undertakes no obligation
to revise or update these forward-looking statements to reflect events or
circumstances that arise after the date of this Annual Report or to reflect the
occurrence of unanticipated events. Accordingly, there is no assurance that the
Company's expectations will be realized.
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