Revenue Recognition

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers. Since that date, the FASB has issued additional ASUs providing further revenue recognition guidance (collectively, “Topic 606”). Topic 606 clarifies the principles for recognizing revenues and costs related to obtaining and fulfilling customer contracts, with the objective of improving financial reporting. The core principle of Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. Topic 606 defines a five-step process to achieve this core principle, and more judgment and estimates are required under Topic 606 than were required under the prior generally accepted accounting principles of Topic 605,Revenue Recognition (“Topic 605”). In accordance with Topic 606, fulfillment services revenues are recognized as the services are performed in proportion to the transfer of control to the customer and real estate revenues are recognized at the time of sale when consideration has been exchanged and title has been conveyed to the buyer.

Topic 606 was effective for the Company’s fiscal year beginning May 1, 2018. The Company adopted Topic 606 using the modified retrospective method. Results for reporting periods beginning after May 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with Topic 605. The adoption of Topic 606 had no impact on the Company’s results of operations.

Statements of Cash Flows

In August 2016, the FASB issued ASU No. 2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 reduces the diversity in practice regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows, including classifying proceeds from company-owned life insurance proceeds as an investing activity. ASU 2016-15 was effective for the Company’s fiscal year beginning May 1, 2018.

RESULTS OF OPERATIONS

For the second quarter ofPrior to April 26, 2019, the Company had been engaged in the fulfillment services business. On April 26, 2019, the fulfillment services business was sold (refer to Item 1 of Part I of the 2019 Form 10-K for more detail). The Company’s fulfillment services business has been classified as discontinued operations in the financial statements included in this report on Form 10-Q. Financial information from prior periods has been reclassified to conform to this presentation.

For the first quarter of 2020, the Company recorded a net incomeloss of $55,000,$196,000, or $0.00$0.02 per share, compared to net income of $278,000,$61,000, or $0.03$0.01 per share, for the secondfirst quarter of 2018.2019. Results from 2020 consisted entirely of continuing operations. For the first six monthsquarter of 2019, the Company recordedresults consisted of (i) a net loss from continuing operations of $662,000, or $0.08 per share and (ii) net income from discontinued operations of $116,000,$723,000, or $0.01$0.09 per share,share. A discussion of continuing operations follows.

Continuing Operations

Revenues were $4,767,000 for the first quarter of 2020 compared to net income of $1,726,000, or $0.21 per share,$4,238,000 for the same period of 2018. Revenues were $9,608,000 and $21,323,000 for the second quarter and first six months of 2019 compared to $9,175,000 and $20,501,000 for the same periods of the prior year.2019.

Revenues from land sales at AMREP Southwest and its subsidiaries were $2,367,000 and $6,548,000$4,382,000 for the secondfirst quarter and first six months of 20192020 compared to $1,416,000 and $4,093,000$4,181,000 for the same periodsperiod of the prior year.2019. For the first six monthsquarter of 2018, $2,044,000 of the $4,093,000 of revenues from land sales was for an approximate five acre undeveloped commercial property in Colorado, which was sold with a gross profit percentage of 65%.

For the second quarter2020 and first six months of 2019, and 2018, the Company’s land sales in New Mexico were as follows (dollars in thousands):

The average gross profit percentage on land sales in New Mexico before indirect costs was 9% and 10%17% for the secondfirst quarter and first six months of 20192020 compared to 20% and 19%11% for the same periodsperiod of 2018.2019. The profit percentage increase is attributable to the mix ofdemand for lots sold with developed lots having a lower profit percentage compared to undeveloped lots.by builders. As a result of many factors, including the nature and timing of specific transactions and the type and location of land being sold, revenues, average selling prices and related average gross profits from land sales can vary significantly from period to period and prior results are not necessarily a good indication of what may occur in future periods.

Revenues

Rent revenues were $341,000 for the first quarter of 2020. There were no comparable rents from the Company’s fulfillment services operations were $6,941,000 and $14,386,000 forprior year due to the second quarter and first six monthsapplicable lease agreements being signed in April 2019 as part of 2019 compared to $7,673,000 and $14,916,000 for the same periods of 2018. The decreased revenues were primarily attributable to reduced business volumes from existing customers, price concessions on renewed contracts and lost business, offset in part by new business. The Company’s fulfillment services business has been successful in obtaining new business partially as a result of a significant competitor announcing its intention to cease operations; however, one customersale of the Company’s fulfillment services business whose revenues were approximately 7.8% of total Company revenues for the first six months of 2019 in-sourced a significant portion of its business from the Company’s fulfillment services business in August 2018, which transfer had been expected and previously disclosed. Otherwise, magazine publishers are one of the principal customers of the Company’s fulfillment services operations, and these customers have continued to be negatively impacted by increased competition from new media sources, alternative technologies for the distribution, storage and consumption of media content, weakness in advertising revenues and increases in paper costs, printing costs and postal rates. The result has been reduced subscription sales, which has caused publishers to close some magazine titles, change subscription fulfillment providers and seek more favorable terms from the Company’s fulfillment services business and its competitors when contracts are up for bid or renewal.business.

Other revenues were $300,000 and $389,000$44,000 for the secondfirst quarter and first six months of 20192020 compared to $86,000 and $1,492,000$57,000 for the same periodsperiod of 2018.2019. Other revenues included fees and forfeited deposits from customers and, for the first six months of 2018 were primarily due to a pre-tax gain of $1,318,000 related to a settlement agreement with the State of Florida by Palm Coast (refer to Note 7 of the notes to the consolidated financial statements included in this report on Form 10-Q). In addition to this pre-tax gain in 2018, Other revenues in the second quarter and first six months of 2019, and 2018 included the recognition of $57,000 of deferred revenue related to an oil and gas lease, fees and forfeited deposits from customers earned by AMREP Southwest and miscellaneous other income items.lease.

Operating and selling expenses for real estate decreasedincreased from $582,000 and $1,093,000$276,000 for the secondfirst quarter and first six months of 20182019 to $245,000 and $521,000$559,000 for the same periodsperiod of 2019,2020, primarily due to reduced commissions on sales activity and lowerincreased employee bonuses, new allocations of certain employee costs to operating expenses, increased accruals for real estate taxes and costs of storm water pollution prevention. Operating and selling expenses for fulfillment services were $5,974,000 and $12,312,000 for the second quarter and first six months of 2019 compared to $5,983,000 and $12,077,000 for the same periods of 2018. The increase for the six month period was primarily due to increased costs related to payroll andhealth care benefits bad debt expense, supplies expense and outside services, offset in part by reduced depreciation expense.costs.

Real estate general and administrative expenses increaseddecreased from $86,000 and $200,000$188,000 for the secondfirst quarter and first six months of 20182019 to $116,000 and $304,000$113,000 for the same periodsperiod of 2019,2020, primarily due to an increasea decrease in legal expenses related to debt financing contracts. Fulfillment services general and administrative expenses increased from $308,000 and $657,000 for the second quarter and first six months of 2018 to $334,000 and $680,000 for the same periods of 2019, primarily due to an increase in legal expenses related to a specific project that has been completed.fees. Corporate general and administrative expenses increaseddecreased from $696,000 and $1,504,000$927,000 for the secondfirst quarter and first six months of 20182019 to $762,000 and $1,584,000$894,000 for the same periodsperiod of 2019,2020, primarily due to increasednew allocations of certain employee costs related to payrolloperating expenses and healthcare benefits, offset in part by lower travel and legal expenses.

Interest expense was $7,000 and $12,000income, net increased from $28,000 for the secondfirst quarter and first six months of 2019 compared to $18,000 and $31,000$124,000 for the same periodsperiod of 2018. Interest expense2020, primarily due to management of excess funds in 2019 was related to borrowings for land development activities, whilehigher yielding savings accounts and a reduction in interest expense in 2018 was primarily related to the liability with the State of Florida noted above. The Company capitalized interest of $26,000 and $52,000 for the second quarter and first six months of 2019 compared to none for the same periods of 2018.

The U.S. Tax Cuts and Jobs Act (the “Act”) was signed into law in December 2017. The Act significantly revised the future ongoing U.S. corporate income tax by, among other things, lowering U.S. corporate income tax rates. The Act reduced the federal corporate tax rate to 21.0% effective January 1, 2018. As the Company has an April 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in the Company having a blended federal tax rate of 29.7% for 2018. Effective May 1, 2018, the Company’s federal corporate tax rate is 21.0%.expense.

The Company had a benefit for income taxes of $47,000 and $99,000$134,000 in connection with a $330,000 loss from continuing operations before income taxes for the secondfirst quarter and first six months of 20192020, as compared to a provisionbenefit for income taxes of $85,000 and $851,000$194,000 in connection with an $856,000 loss from continuing operations before income taxes for the same periodsperiod of 2018.2019. The benefit or provision for income taxes includesincluded expenses related to federal income tax as well as the net tax benefits related to state operating losses. The change in the effective tax rate in the first quarter of 2020 from the first quarter of 2019 was due to the effect of discontinued operations.

The total tax effect of gross unrecognized tax

In the quarter ended July 31, 2019, the Company initiated a limited offer for certain former employees with vested benefits in the accompanying financial statements at bothCompany’s defined benefit pension plan to elect to receive a lump sum payout of their pension benefit. The Company completed these lump sum payments from the pension plan in September 2019 to 309 former employees for approximately $7,200,000. The Company expects to recognize a non-cash pre-tax pension settlement charge in the quarter ending October 31, 2018 and April 30, 2018 was $58,000, which, if recognized, will have an impact on the effective tax rate. As a result2019 of the lapse of the statute of limitations, this amount is expected to be recognized during the three month period ending January 31, 2019.approximately $2,960,000.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary sources of funding for working capital requirements are cash flow from operations, bank financing for specific real estate projects and existing cash balances. The Company’s liquidity is affected by many factors, including some that are based on normal operations and some that are related to the industriesindustry in which the Company operates and the economy generally. Except as described below, there have been no material changes to the Company’s liquidity and capital resources as reflected in the Liquidity and Capital Resources section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 20182019 Form 10-K.

Pension Plan

The Company has a defined benefit pension plan for which accumulated benefits were frozen and future service credits were curtailed as of March 1, 2004. Refer to Note 11 to the consolidated financial statements contained in the 2018 Form 10-K for additional detail regarding the Company’s agreements with the Pension Benefit Guaranty Corporation (the “PBGC”). The agreements with the PBGC terminated by their terms in August 2018 with the PBGC being deemed to have released and discharged the Company and all other members of its controlled group from any claims under such agreements.

Operating Activities

Receivables, net

Real estate inventory decreased from $5,901,000$57,773,000 at April 30, 20182019 to $5,542,000$55,515,000 at OctoberJuly 31, 2018,2019, primarily due lower business volumesto real estate land sales, which were offset in the fulfillment services business. Real estate inventory increased from $58,874,000 at April 30, 2018 to $58,968,000 at October 31, 2018, primarily due topart by an increase in land development activity, offset in part by real estate land sales. Property, plant and equipment,activity. Investment assets, net decreased from $9,745,000$17,227,000 at April 30, 20182019 to $9,207,000$17,108,000 at OctoberJuly 31, 2018,2019, primarily due to depreciation of fixed assets. Taxes receivable, net was $209,000 at April 30, 2018, and included an anticipated refund of federal taxes of $271,000. During the three months ended July 31, 2018, the Company received the $271,000 tax refund, which resulted in a Taxes payable, net balance of $44,000 at October 31, 2018.depreciation.

Accounts payable and accrued expenses increased from $7,497,000$2,964,000 at April 30, 20182019 to $7,767,000$3,009,000 at OctoberJuly 31, 2018,2019, primarily due to an increasenew accounting for additional lease liabilities at July 31, 2019, offset partially by a reduction in land development activity (refer to Note 10 of the notes to the consolidated financial statements includedbuilder deposits in this report on Form 10-Q regarding the prior period revision toconnection with sales activity. Trade accounts payable and accrued expenses). Notes payable, net increased from $1,843,000 at April 30, 2018 to $1,972,000 at October 31, 2018, primarily due to financing of land development activity. Other liabilities and deferred revenue decreased from $149,000 at April 30, 2018 to $99,000 at October 31, 2018, primarily due toalso declined as construction activity was slower during the recognition of deferred revenue related to an oil and gas lease.period.

Financing Activities

Lomas Encantadas Subdivision – ReferNotes payable, net decreased from $1,319,000 at April 30, 2019 to Note 8$842,000 at July 31, 2019, primarily due to the consolidated financial statements containedrepayments made on financings for land development activity. The Company’s financing arrangements in the 2018 Form 10-K for detail about the loan agreement and related documentation entered into with BOKF, NA dba Bank of Albuquerque in December 2017 with respect to the development of certain planned residential lots within the Lomas Encantadas subdivision located in Rio Rancho, New Mexico.

Pursuant to such loan documentation, BOKF, NA agrees to lend up to $4,750,000 to the borrower on a non-revolving line of credit basis to partially fund the development of certain planned residential lots within the Lomas Encantadas subdivision. Interest on the outstanding principal amount of the loan is payable monthly at the annual rate equal to the London Interbank Offered Rate for a thirty-day interest period plus a spread of 3.0%, adjusted monthly. The outstanding principal amount of the loan as of October 31, 2018 was $2,009,000 and the borrower made principal repayments of $1,171,000effect during the first six monthsquarter of 2019. The outstanding principal amount of the loan as of December 5, 2018 was $1,327,000. The loan is scheduled to mature in December 2021. The total book value of the property within the Lomas Encantadas subdivision mortgaged to BOKF, NA was $11,273,000 as of October 31, 2018. The Company capitalized $25,000 and $51,000 of interest related to this loan in the second quarter and first six months of 2019. At October 31, 2018, both the borrower and AMREP Southwest were in compliance with the covenants contained within the loan documentation.2020 are described below:

Hawk Site Subdivision – In July 2018, Hawksite 27 Development Company, LLC (“HDC”), a subsidiary of AMREP Southwest, entered into a Business Loan Agreement with Main Bank. The loan under the Business Loan Agreement is evidenced by a Promissory Note and is secured by a Mortgage, between HDC and Main Bank with respect to certain planned residential lots within the Hawk Site subdivision located in Rio Rancho, New Mexico. Pursuant to a Commercial Guaranty entered into by AMREP Southwest in favor of Main Bank, AMREP Southwest has guaranteed HDC’s obligations under each of the above agreements. The Business Loan Agreement, Promissory Note, Mortgage, Commercial Guaranty and other related transaction documents are collectively referred to as the “HS Loan Documentation.”

Pursuant to the HS Loan Documentation, Main Bank agrees to lend up to $1,800,000 to HDC on a non-revolving line of credit basis to partially fund the development of certain planned residential lots within the Hawk Site subdivision. Interest on the outstanding principal amount of the loan is payable monthly at the annual rate equal to the Wall Street Journal Prime Rate plus a spread of 2.38%, adjusted annually. Main Bank is required to release the lien of its mortgage on any lot upon HDC making a principal payment equal to the greater of $30,000 or 55% of the sales price of the lot. HDC is required to reduce the principal balance of the loan to a maximum of $1,700,000 in July 2020. The outstanding principal amount of the loan may be prepaid at any time without penalty. The loan is scheduled to mature in July 2021. HDC incurred customary costs and expenses and paid fees to Main Bank in connection with the loan. The outstanding principal amount of the loan as of October 31, 2018 was $42,000 and HDC made no principal repayments during the first six months of 2019. The outstanding principal amount of the loan as of December 5, 2018 was $582,000. The total book value of the property within the Hawk Site subdivision mortgaged to Main Bank was $3,883,000 as of October 31, 2018. The Company capitalized $1,000 of interest related to this loan in the second quarter and first six months of 2019.

HDC and AMREP Southwest have made certain representations and warranties in the HS Loan Documentation and are required to comply with various covenants, reporting requirements and other customary requirements for similar loans. The HS Loan Documentation contains customary events of default for similar financing transactions, including: HDC’s failure to make principal, interest or other payments when due; the failure of HDC or AMREP Southwest to observe or perform their respective covenants under the HS Loan Documentation; the representations and warranties of HDC or AMREP Southwest being false; and the insolvency or bankruptcy of HDC or AMREP Southwest. Upon the occurrence and during the continuance of an event of default, Main Bank may declare the outstanding principal amount and all other obligations under the HS Loan Documentation immediately due and payable. At October 31, 2018, both HDC and AMREP Southwest were in compliance with the covenants contained within the HS Loan Documentation.

Investing Activities

Capital expenditures for property, plant and equipment totaled $34,000$1,000 for the first six monthsquarter of 2019 and $29,0002020, primarily for computer equipment. There were no capital expenditures in the same period of 2018, primarily related to the Company’s fulfillment services business in both periods.2019.

The Company received life insurance proceeds of $85,000 during the three months ended July 31, 2018.first quarter of 2019, which is reflected in the accompanying Consolidated Statement of Cash Flows. The income associated with the life insurance proceeds was recognized in various years prior to the first quarter of 2019.

Statement of Forward-Looking Information

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. The Company and its representatives may from time to time make written or oral statements that are “forward-looking”, including statements contained in this report and other filings with the Securities and Exchange Commission, reports to the Company’s shareholders and news releases. All statements that express expectations, estimates, forecasts or projections are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, other written or oral statements, which constitute forward-looking statements, may be made by or on behalf of the Company. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “projects”, “forecasts”, “may”, “should”, variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and contingencies that are difficult to predict. All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to the Company or any person acting on behalf of the Company are qualified by the cautionary statements in this section. Many of the factors that will determine the Company’s future results are beyond the ability of management to control or predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in or suggested by such forward-looking statements.

The forward-looking statements contained in this report include, but are not limited to, statements regarding (1) the Company’s expected liquidity sources, (2) the availability of bank financing for projects, (3) the expected utilization of existing bank financing, (4) the effect of recent accounting pronouncements, on the Company,(5) the timing of recognizing unrecognized compensation expense related to shares of restricted common stock issued under the AMREP Corporation 2006 Equity Plans,Compensation Plan or the AMREP Corporation 2016 Equity Compensation Plan, (6) the future issuance of deferred stock units to non-employee membersdirectors of the Company’s Board of Directors, the liability for unrecognized tax benefits changing in the next twelve months, the availability of bank financing for projects, the expected utilization of existing bank financing, the impact and the timing of completion of accounting for the tax effects of the U.S. Tax Cuts and Jobs Act on the Company, and(7) the future business conditions that may be experienced by the Company.Company and (8) the recognition of a non-cash pre-tax pension settlement charge in the quarter ending October 31, 2019. The Company undertakes no obligation to update or publicly release any revisions to any forward-looking statementsstatement to reflect events, circumstances or changes in expectations after the date of such forward-looking statement, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. As a result of such evaluation, the Company’s chief executive officer and chief financial officer have concluded that such disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding disclosure. The Company believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting

No change in the Company’s system of internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

PART II. OTHER INFORMATION