UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-SA
| ☒ | SEMIANNUAL REPORT PURSUANT TO REGULATION A |
| or | |
| ☐ | SPECIAL FINANCIAL REPORT PURSUANT TO REGULATION A |
For the fiscal semiannual period ended September 30, 2023
Worthy Property Bonds 2, Inc.
(Exact name of issuer as specified in its charter)
| Georgia | 92-2292464 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
11175 Cicero Drive, Suite 100 Suite 100 Alpharetta, GA | 30022 | |
| (Full mailing address of principal executive offices) | (Zip Code) |
(678) 646-6791
(Issuer’s telephone number, including area code)
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This semi-annual report contains forward looking statements that are subject to various risk and uncertainties and that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results, in contrast with statements that reflect historical facts. Many of these statements are contained under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements are generally identifiable by use of forward-looking terminology such as “anticipate,” “intend,” “believe,” “estimate,” “plan,” “seek,” “project” or “expect,” “may,” “will,” “would,” “could” or “should,” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, or state other forward-looking information. Our ability to predict future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, actual outcomes could differ materially from those set forth or anticipated in our forward-looking statements. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our views as of the date of this semi-annual report. Furthermore, except as required by law, we are under no duty to, and do not intend to, update any of our forward-looking statements after the date of this semi-annual report, whether as a result of new information, future events or otherwise.
You should thoroughly read this semi-annual report and the documents that we refer to herein with the understanding that our actual future results may be materially different from and/or worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this semi-annual report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.
Item 1. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our consolidated financial condition and consolidated results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this semi-annual report.
Background and Overview
Worthy Property Bonds 2, Inc., (the “Company,” “we,” “us,” “our,” or “ours”) was incorporated under the laws of the State of Florida on April 9, 2021. Our wholly owned subsidiary Worthy Lending VI, LLC (“Worthy Lending VI”) was organized as a limited liability company in Delaware. We are a wholly owned subsidiary of Worthy Financial, Inc. (“WFI”) which owns a fintech platform and mobile app (the “Worthy App”) and also owns its proprietary website (collectively the “Worthy Fintech Platform”). On April 9, 2021, we issued 100 shares of our $0.001 per share par value common stock to WFI in exchange for $5,000. WFI is the sole shareholder of the Company’s common stock.
On April 1, 2023, the Company filed a public offering pursuant to Regulation A (the “Offering”) of $75 million aggregate principal amount of Worthy Property Bonds 2 (the “Worthy Property Bonds 2”) under the Company’s qualified Offering Statement (File No. 024-12206). On June 21, 2023, the Offering was qualified by the SEC. From June 21, 2023, through September 30, 2023, the Company sold approximately $7 million aggregate principal amount of Worthy Property Bonds.
We are an early-stage company, which, through our wholly owned subsidiary Worthy Lending VI, we are implementing our business model. Our business model is centered primarily around purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. We anticipate that (i) at least 55% of our assets will consist of “mortgages and other liens on and interests in real estate” (“Qualifying Interests”), (ii) at least an additional 25% of our assets will consist of “real estate-type interests” (subject to proportionate reduction if greater than 55% of our assets are Qualifying Interests), and (iii) not more than 20% of our total assets consist of assets that have no relationship to real estate provided the amount and nature of such activities do not cause us to lose our exemption from regulations as an investment company pursuant to the Investment Company Act of 1940, or the “40 Act.” Qualifying Interests are assets that represent an actual interest in real estate or are loans or liens “fully secured by real estate” but exclude securities in other issuers engaged in the real estate business. Real estate-type interests include certain mortgage-related instruments including loans where 55% of the fair market value of the loan is secured by real property at the time the issuer acquired the loan and agency partial-pool certificates.
| 2 |
Mortgage Loans Held for Investment
Commencing in July of 2023, the Company began investing in mortgage loans. Each loan is secured by a mortgage on the real estate, which is in the state of Florida. Each loan has a maturity date of 2 years and mature between July and September of 2025. These loans pay interest at rates between 10.5% and 11.25%, annually and are serviced by an outside, unrelated party.
A summary of the Company’s loan portfolio as of September 30, 2023, disaggregated by class of financing receivable, are as follows:
Loans to Real Estate Developers Secured by First Mortgages | ||||
| Outstanding at September 30, 2023 | ||||
| Loans | $ | 3,039,000 | ||
| Allowance for loan losses | $ | (30,390 | ) | |
| Total Loans, net | $ | 3,008,610 | ||
As of September 30, 2023, all of our loans are individually evaluated for impairment purposes when calculating the allowances for loan losses. As of September 30, 2023, the recorded investment in financing receivables used to individually evaluate for impairment was $3,039,000.
The beginning balance of our loan loss reserve on March 31, 2023, was $0, the September 30, 2023, provision for expected losses was $30,562, and the ending balance at September 30, 2023 is $30,562, which includes $172 of interest receivable reserve.
We had no loans past due or on non-accrual status on September 30, 2023, which was past due by more than 90 days.
As of September 30, 2023, future annual maturities of mortgage loans held for investment consists of the following:
| Period Ended September 30, | Amount | |||
| 2025 | $ | 3,039,000 | ||
| $ | 3,039,000 | |||
As of September 30, 2023, there were 5 mortgage loans with a gross balance of $3,039,000 which are required to pay only interest until maturity when the principal is due.
These loans were funded by our bond sales.
All of our loans are individually evaluated for impairment purposes when calculating the allowances for loan losses.
| 3 |
Recent Developments
Covid 19 Pandemic Impact
While the extent to which COVID-19 impacts the Company’s future results will depend on future developments, the pandemic and associated economic impacts could result in a material impact to the Company’s future financial condition, results of operations and cash flows.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company generated net losses of approximately $416,000 and had cash used in operations of approximately $378,000 for the six months ended September 30, 2023. The net losses incurred from inception have resulted in an accumulated deficit of approximately $469,000 at September 30, 2023. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the issuance date of this report. During 2023, the Company began to incur operating expenses, however, the Company filed the Form 1-A Regulation A Offering Statement on April 1, 2023, that allows the Company to raise funds, which was qualified on June 21, 2023.
In response to the losses incurred, the Company constantly evaluates and monitors its cash needs and existing cash burn rate, in order to make adjustments to its operating expenses. Cash on hand was approximately $2,966,000 at September 30, 2023. This cash was obtained through the sale of our Worthy Bonds and through interest, dividends and fees earned on our loans and investments.
No assurances can be given that the Company will achieve success without seeking additional financing. There also can be no assurances that any additional financing if required, can be obtained, or obtained on reasonable terms acceptable to the Company. The consolidated financial statements do not include adjustments related to the recoverability and classifications of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
| 4 |
Operating Results
Interest on mortgage loans receivable
Interest on mortgage loans receivable for the six months ended September 30, 2023, was $45,893. This was due to an increase in the mortgage loans receivable balance during the six-month period ended September 30, 2023. At September 30, 2023, our mortgage loans receivable held for investment, net balance was $3,008,610.
Cost of Revenue
Interest expense on bonds
Interest expense on bonds for the six-month period ended September 30, 2023, was $49,560. Interest expense on bonds is the direct result of having outstanding bond liabilities at September 30, 2023. Bonds outstanding were $6,218,949 at September 30, 2023.
Provision for loan losses
The provision for loan losses for the six months ended September 30, 2023, is $30,562.
Operating Expenses
As a result of the increasing mortgage loans receivable and bond liabilities, our operating expenses increased in the six months ended September 30, 2023.
This increase is primarily attributable to increases of approximately $275,000 in compensation and related costs, $93,000 in general and administrative expenses and $14,000 in sales and marketing expenses. The increase in compensation and related expenses and general and administrative expenses is the result of having an active bond offering. The increase in sales and marketing expenses is directly related to the cost of marketing that primarily supports bond sales.
| 5 |
Liquidity and Capital Resources
At September 30, 2023, we had total shareholder’s deficit of approximately $391,000 as compared to a total shareholder’s deficit of approximately $20,000 at March 31, 2023.
Our total assets increased by approximately $5,982,000 at September 30, 2023 as compared to March 31, 2023. We had approximately $2,966,000 cash on hand at September 30, 2023 as compared to approximately $10,000 cash on hand at March 31, 2023, and approximately $3,008,000 of mortgage loans receivable at September 30, 2023.
We do not have any commitments for capital expenditures.
Our consolidated shareholders’ deficit and working capital deficiency are the result of initial and early-stage operating expenses. These deficiencies are also the result of an increase to our loan loss provision. The combination of interest payable on the bonds, initial startup costs and operating expenses initially generate working capital deficit.
To date, the working capital deficit has been funded by capital infusions to the Company, from its parent (WFI), through funds raised by the parent in a variety of equity, debt, and convertible debt financings. One of the primary uses of proceeds of a pending offering by the parent company is to provide additional capital to the Company and to reduce or eliminate the shareholders’ deficit.
Worthy Bond redemptions subsequent to September 30, 2023, were approximately $1,349,000. These bond redemptions have been recorded as a decrease in cash and a decrease in bond liabilities.
Summary of cash flows
Six Months Ended September 30, 2023 | ||||
| Net cash (used) in provided by operating activities | $ | (378,314 | ) | |
| Net cash (used) in provided by investing activities | $ | (3,038,828 | ) | |
| Net cash (used) in provided by financing activities | $ | 6,373,394 | ||
For the six months ended September 30, 2023, net cash used in operating activities was $378,314, this starts with the net loss of $416,146, offset primarily by $46,396 accrued bond interest addback, and $30,562 of provision for loan loss addback. Net cash used in investing activities in the six months ended September 30, 2023, represent by loan disbursements. Net cash provided by financing activities in the six months ended September 30, 2023, consists primarily of proceeds from bond sales offset by bond redemptions.
| 6 |
Significant accounting policies
Our significant accounting policies are fully described in Note 3 to our consolidated financial statements appearing elsewhere in this Semi-Annual Report, and we believe those accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements.
The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“US-GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting periods. Actual results could differ from those estimates. Estimates which are particularly significant to the consolidated financial statements include, but are not limited to, assessing the collectability of loans and interest receivable, and estimates of the valuation allowance on deferred tax assets.
Revenue Recognition
We recognize revenue in accordance with the guidance in FASB ASC 942 “Financial Services – Depository Lending.”
We generate revenue primarily through interest earned.
Cash and cash equivalents
Cash and cash equivalents include checking, savings, unrestricted deposits with investment-grade financial institutions, institutional money market funds, certificates of deposit and other short-term interest-bearing products. We consider all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.
Mortgage Loans Held for Investment
Mortgage loans held for investment consist of loans secured by a mortgage in the real estate and is located in the state of Florida. These loans typically have a maturity date of 1 to 2 years, pay interest at rates between 10.5% and 11.25% and are serviced by an outside, unrelated party. These loans require monthly interest payments to us. We have both the ability and intent to hold these loans to maturity. These loans are carried at amortized cost, reduced by a valuation allowance for loan losses, if deemed necessary, estimated as of the consolidated balance sheet dates.
Accrued Interest Receivable
In accordance with ASC 360-20-30-5A, the Company includes, in the reserves for loans receivable an amount attributed to accrued interest receivable.
In accordance with ASC 360-20-35-8A, the Company has an accounting policy election, at the class of financing receivable, to write off accrued interest receivables by recognizing credit loss expense.
Allowance for Loan Losses
The allowance for loan losses (“ALLL”) is established with respect to our loans held for investment through charges to the provision for loan losses in compliance with ASC 326 “Financial Instruments – Credit Losses.” Loan losses are charged against the ALLL when we believe that the future collection of principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. We evaluate the creditworthiness of our portfolio on an individual loan basis and on a portfolio basis. The allowance is subjective as it requires material estimates, including such factors as historical trends, known and inherent risks in the loan portfolio, adverse situations that may affect borrowers’ ability to repay and current economic conditions. Other qualitative factors considered may include items such as uncertainties in forecasting and modeling techniques, changes in portfolio composition, business conditions and emerging trends. Recovery of the carrying value of loans is dependent to a great extent on conditions that may be beyond our control. Any combination of the aforementioned factors may adversely affect our loan portfolio resulting in increased delinquencies and loan losses and could require additional provisions for loan losses, which could impact future periods.
Past Due and Non-Accrual Loans Receivable
Loans receivable are considered past due when a borrower hasn’t made a principal or interest payment for 90 days. The Company considers a loan to be non-performing and put on non-accrual status when management believes collectability is not probable.
Management predicts probability of collectability through qualitative and quantitative criteria, including whether the loan is in past due status, borrower financial condition including net collateral to loan balance, personal or corporate validity or other guarantees, our experience with the borrower, quality of borrower internal credit review system, quality of borrower management, and external operating environment.
When a loan is placed on non-accrual status, we cease accruing interest and a reserve on interest receivable is established.
Item 2. Other Information.
None.
| 7 |
Item 3. Financial Statements.
WORTHY PROPERTY BONDS 2, INC.
TABLE OF CONTENTS
| F-1 |
WORTHY PROPERTY BONDS 2, INC.
| September 30, 2023 | March 31, 2023 | |||||||
| ASSETS | ||||||||
| Assets | ||||||||
| Cash | $ | 2,966,126 | $ | 9,874 | ||||
| Mortgages loans held for investment, net of $30,390 and $0 reserve at September 30, 2023 and March 31, 2023, respectively | 3,008,610 | - | ||||||
| Interest receivable net of $172 and $0 reserve at September 30, 2023 and March 31, 2023, respectively | 16,995 | - | ||||||
| TOTAL ASSETS | $ | 5,991,731 | $ | 9,874 | ||||
| LIABILITIES AND SHAREHOLDER’S DEFICIT | ||||||||
| Liabilities | ||||||||
| Accounts Payable | $ | 41 | $ | 29,904 | ||||
| Bond liabilities | 6,218,949 | - | ||||||
| Accrued interest | 46,396 | - | ||||||
| Accrued expenses | 8,076 | - | ||||||
| Due to affiliate | 108,825 | - | ||||||
| Total Liabilities | 6,382,287 | 29,904 | ||||||
| Commitments and Contingencies (note 7) | ||||||||
| Shareholder’s Deficit | ||||||||
| Common Stock, par value $0.001, and 100 shares authorized, and 100 shares issued and outstanding | - | - | ||||||
| Additional paid-in capital | 78,120 | 32,500 | ||||||
| Accumulated deficit | (468,676 | ) | (52,530 | ) | ||||
| Total Shareholder’s Deficit | (390,556 | ) | (20,030 | ) | ||||
| TOTAL LIABILITIES AND SHAREHOLDER’S DEFICIT | $ | 5,991,731 | $ | 9,874 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
These consolidated financial statements have not been subjected to an audit or review or compilation engagement, and no assurance is provided on them
| F-2 |
WORTHY PROPERTY BONDS 2, INC.
Consolidated Statement of Operations
Six Months Ended September 30, 2023
| Operating Revenue | ||||
| Interest on loans receivable | $ | 45,893 | ||
| Cost of Revenue | ||||
| Interest expense on bonds | 49,560 | |||
| Provision for loan losses | 30,562 | |||
| Total cost of revenue | 80,122 | |||
| Gross margin | (34,229 | ) | ||
| Operating expenses | ||||
| General and administrative expenses | 92,632 | |||
| Compensation and related expenses | 274,916 | |||
| Sales and marketing | 14,369 | |||
| Total operating expenses | 381,917 | |||
| Net Loss | $ | (416,146 | ) | |
| Net loss per common share | $ | (4,161.46 | ) | |
| Weighted average number of shares outstanding | 100 |
The accompanying notes are an integral part of the consolidated financial statements.
These consolidated financial statements have not been subjected to an audit or review or compilation engagement, and no assurance is provided on them
| F-3 |
WORTHY PROPERTY BONDS 2, INC.
Consolidated Statement of Changes in Shareholder’s Deficit
From February 1, 2023 (Inception) through March 31, 2023 and the Six Months Ended September 30, 2023
| Common Shares | Common Stock, Par | Additional Paid in Capital | Accumulated Deficit | Total | ||||||||||||||||
| Balance at February 1, 2023 (Inception) | - | $ | - | $ | - | $ | - | $ | - | |||||||||||
| Common shares issued for cash | 100 | - | 5,000 | - | 5,000 | |||||||||||||||
| Capital contributions from parent | - | - | 27,500 | - | 27,500 | |||||||||||||||
| Net loss | - | - | - | (52,530 | ) | (52,530 | ) | |||||||||||||
| Balance at March 31, 2023 | 100 | - | 32,500 | (52,530 | ) | (20,030 | ) | |||||||||||||
| Capital contributions from parent | - | - | 45,620 | - | 45,620 | |||||||||||||||
| Net loss | - | - | - | (416,146 | ) | (416,146 | ) | |||||||||||||
| Balance at September 30, 2023 | 100 | $ | - | $ | 78,120 | $ | (468,676 | ) | $ | (390,556 | ) | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
These consolidated financial statements have not been subjected to an audit or review or compilation engagement, and no assurance is provided on them
| F-4 |
WORTHY PROPERTY BONDS 2, INC.
Consolidated Statement of Cash Flows
Six Months Ended September 30, 2023
| Cash flows from operating activities: | ||||
| Net loss | $ | (416,146 | ) | |
| Adjustments to reconcile net loss to cash used in operating activities: | ||||
| Provision for loan loss | 30,562 | |||
| Changes in working capital items: | ||||
| Interest receivable | (17,167 | ) | ||
| Accrued interest | 46,396 | |||
| Accrued expenses | 8,076 | |||
| Accounts payable | (29,863 | ) | ||
| Cash used in operating activities | (378,142 | ) | ||
| Cash flows from investing activities: | ||||
| Loans receivable disbursements | (3,038,828 | ) | ||
| Net cash used in investing activities | (3,038,828 | ) | ||
| Cash flows from financing activities: | ||||
| Proceeds from bonds | 6,793,670 | |||
| Redemption of bonds | (574,721 | ) | ||
| Capital contribution | 45,620 | |||
| Advances from affiliate | 108,825 | |||
| Cash provided by financing activities | 6,373,394 | |||
| Net change in cash | 2,956,424 | |||
| Cash at beginning of period | 9,874 | |||
| Cash at end of period | $ | 2,966,298 | ||
| Supplemental Disclosures of Cash Flow Information: | ||||
| Cash paid for interest | $ | 3,164 | ||
| Cash paid for taxes | $ | - | ||
The accompanying notes are an integral part of the consolidated financial statements.
These consolidated financial statements have not been subjected to an audit or review or compilation engagement, and no assurance is provided on them
| F-5 |
WORTHY PROPERTY BONDS 2, INC.
Notes to Consolidated Financial Statements
Six months ended September 30, 2023
NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS
Worthy Property Bonds 2, Inc., a Florida corporation, (the “Company,” “WPB2”, “we,” or “us”) was founded in February of 2023. Also, in February 2023, the Company organized Worthy Lending VI, LLC, a Delaware limited liability company, (“WL VI”) as a wholly owned subsidiary of Worthy Property Bonds 2, Inc. This early-stage company will primarily make real estate loans secured by mortgages. We will offer our Worthy Property 2 Bonds in $10.00 increments on a continuous basis directly through the Worthy Bonds website via computer or the Worthy App, to fund our loans.
We are a wholly owned subsidiary of Worthy Financial, Inc. (“WFI”) “Worthy Financial”, which owns a mobile app (the “Worthy App”) that allows its users to round up their debit card and checking account linked credit card purchases and other checking account transactions and thereafter use the “round up” dollars in increments of $10.00 to purchase Worthy Bonds. The “users” may also use additional funds to purchase Worthy Bonds. WFI also owns the technology on the website. This technology is defined as the “Worthy Technology Platform.”
The Company’s year-end is March 31st.
NOTE 2. GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company generated net losses of approximately $416,000 and had cash used in operations of approximately $378,000 for the six months ended September 30, 2023. The net losses incurred from inception have resulted in an accumulated deficit of approximately $469,000 at September 30, 2023. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the issuance date of this report. During 2023, the Company began to incur operating expenses, however, the Company filed the Form 1-A Regulation A Offering Statement on April 1, 2023, that allows the Company to raise funds, which was qualified on June 21, 2023.
No assurances can be given that the Company will achieve success, without seeking additional financing. There also can be no assurances that the Form 1-A will result in additional financing or that any additional financing if required, can be obtained, or obtained on reasonable terms acceptable to the Company. These consolidated financial statements do not include adjustments related to the recoverability and classifications of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the operations of the Company and its wholly owned subsidiary, Worthy Lending VI, LLC.
All intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates
The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting periods. Actual results could differ from those estimates. Estimates which are particularly significant to the consolidated financial statements include, but are not limited to, assessing the collectability of loans and interest receivable and estimates of the valuation allowance on deferred tax assets.
| F-6 |
WORTHY PROPERTY BONDS 2, INC.
Notes to Consolidated Financial Statements
Six months ended September 30, 2023
Cash and cash equivalents
Cash and cash equivalents include checking, savings, unrestricted deposits with investment-grade financial institutions, institutional money market funds, certificates of deposit and other short-term interest-bearing products. We consider all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. There were no cash equivalents on September 30, 2023, or March 31, 2023.
Concentration of Credit Risk
The Company is subject to potential concentrations of credit risk in its cash accounts. Noninterest-bearing deposits in financial institutions insured by the Federal Deposit Insurance Corporation (FDIC) were insured up to a maximum of $250,000 at September 30, 2023 and March 31, 2023. At September 30, 2023, the aggregate balances were in excess of the insurance. The Company places its cash with high quality financial institutions. As of September 30, 2023, the Company is in excess of FDIC insurance limits in the amount of $2,716,126. The Company does not believe it is exposed to any significant credit risk on cash and cash equivalents.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and accounts payable. The carrying amount of these financial instruments approximate fair value due to the short-term nature of these instruments.
Fair Value Measurement
In accordance with ASC 820, Fair Value Measurement, we use a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a nonrecurring basis, in periods subsequent to their initial measurement. The hierarchy requires us to use observable inputs when available, and to minimize the use of unobservable inputs when determining fair value.
The three tiers are defined as follows:
Level 1: Quoted prices in active markets or liabilities in active markets for identical assets or liabilities, accessible by us at the measurement date.
Level 2: Quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3: Unobservable inputs for assets or liabilities for which there is little or no market data, which require us to develop our own assumptions. These unobservable assumptions reflect estimates of inputs that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flows, or similar techniques, which incorporate our own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.
A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.
| F-7 |
WORTHY PROPERTY BONDS 2, INC.
Notes to Consolidated Financial Statements
Six months ended September 30, 2023
Mortgage Loans Held for Investment
Mortgage loans held for investment consist of loans secured by a mortgage in the real estate, which is located in the state of Florida. These loans typically have a maturity date of 2 years, pay interest at rates between 10.5% and 11.25% and are serviced by an outside, unrelated party. These loans require monthly interest payments to us. We have both the ability and intent to hold these loans to maturity. These loans are carried at amortized cost, reduced by a valuation allowance for loan losses, if deemed necessary, estimated as of the consolidated balance sheet dates.
Accrued Interest Receivable
In accordance with ASC 326-20-30-5A, Financial Instruments – Credit Losses (“ASC 326”), the Company includes, in the allowance for loan losses an amount attributed to accrued interest receivable.
In accordance with ASC 326, the Company has an accounting policy election, at the class of financing receivable, to write off accrued interest receivables by recognizing credit loss expense.
Allowance for Loan Losses
In 2021, the allowance for loan losses (“ALLL”) was established with respect to our mortgage loans through charges to the provision for loan losses in compliance with ASC 326. Mortgage loan losses are charged against the ALLL when we believe that the future collection of principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. We evaluate the credit worthiness of our portfolio on an individual loan basis and on a portfolio basis. The allowance is subjective as it requires material estimates, including such factors as historical trends, known and inherent risks in the loan portfolio, adverse situations that may affect borrowers’ ability to repay and current economic conditions. Other qualitative factors considered may include items such as uncertainties in forecasting and modeling techniques, changes in portfolio composition, business conditions and emerging trends. Recovery of the carrying value of loans is dependent to a great extent on conditions that may be beyond our control. Any combination of the aforementioned factors may adversely affect our loan portfolio resulting in increased delinquencies and loan losses and could require additional provisions for loan losses, which could impact future periods.
Past Due and Non-Accrual Loans Receivable
Mortgage loans receivable are considered past due when a borrower hasn’t made a principal or interest payment for 90 days. The Company considers a mortgage loan to be non-performing and put on non-accrual status when management believes collectability is not probable. Management predicts probability of collectability through qualitative and quantitative criteria, including whether the loan is in past due status, borrower financial condition, including net collateral to mortgage loan balance, personal or corporate validity or other guarantees, our experience with the borrower, quality of borrower internal credit review system, quality of borrower management, and external operating environment. When a mortgage loan is placed on non-accrual status, we cease accruing interest and a reserve on interest receivable is established.
Revenue Recognition
We will recognize revenue in accordance with the guidance in FASB ASC 942 “Financial Services – Depository Lending”.
We will generate revenue primarily through interest earned on loans outstanding.
| F-8 |
WORTHY PROPERTY BONDS 2, INC.
Notes to Consolidated Financial Statements
Six months ended September 30, 2023
Allocation of expenses Incurred by Affiliate on Behalf of the Company
Costs incurred by our affiliate will be allocated to the Company for the purposes of preparing the consolidated financial statements based on a specific identification basis or, when specific identification is not practicable, a proportional cost allocation method which allocates expenses based upon the percentage of employee time expended on the Company’s business as compared to total employee time. The proportional use basis was adopted to allocate shared costs is in accordance with the guidance of SEC Staff Accounting Bulletin (“SAB”) Topic 1B, Allocation Of Expenses And Related Disclosure In Financial Statements Of Subsidiaries, Divisions Or Lesser Business Components Of Another Entity. Management has determined that the method of allocating costs to the Company is reasonable.
Management believes that the consolidated statements of operations include a reasonable allocation of costs and expenses incurred by the Company. However, such amounts may not be indicative of the actual level of costs and expenses that would have been incurred by the Company if it had operated as an independent company or of the costs and expenses expected to be incurred in the future.
Income taxes
Income taxes - The Company accounts for income taxes in accordance with ASC Topic 740, Accounting for Income Taxes. Under this method, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws.
Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers tax regulations of the jurisdictions in which they operate, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results, or the ability to implement tax- planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria of Topic 740. FASB ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. The Company believes that its income tax positions would be sustained on audit and does not anticipate any adjustments that would result in a material change to it’s financial position.
Management has determined that the Company does not have any uncertain tax positions and associated unrecognized benefits that materially impact the financial statements or related disclosures. Since tax matters are subject to some degree of uncertainty, there can be no assurance that the Company’s tax returns
will not be challenged by the taxing authorities and that the Company will not be subject to additional tax, penalties, and interest as a result of such challenge.
The Company is included with its parent company (Worthy Financial Inc.) consolidated tax return. The parent company consolidated tax returns for the years 2020, 2021 and 2022 remain open for audit by the IRS.
Basic Income (Loss) Per Share
Basic income (loss) per share is calculated by dividing the Company’s net income (loss) by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net income (loss) available to common shareholders by the diluted weighted average number of shares outstanding during the period. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. The Company does not have any potentially dilutive debt or equity at September 30, 2023, and March 31, 2023.
| F-9 |
WORTHY PROPERTY BONDS 2, INC.
Notes to Consolidated Financial Statements
Six months ended September 30, 2023
NOTE 4. RECENTLY ISSUED ACCOUNTING STANDARDS
Accounting standards promulgated by the FASB are subject to change. Changes in such standards may have an impact on the Company’s future financial statements.
The Company periodically reviews new accounting standards that are issued. Although some of these accounting standards may be applicable to the Company, the Company has not identified any new standards that it believes merit further discussion, and the Company expects that none would have a significant impact on its consolidated financial statements.
NOTE 5. MORTGAGE LOANS HELD FOR INVESTMENT
Mortgage Loans Held for Investment
Commencing in July of 2023, the Company began investing in mortgage loans. Each loan is secured by a mortgage in the real estate, which is located in the state of Florida. Each loan has a maturity date of 2 years and mature between July and September of 2025. These loans pay interest at rates between 10% and 11.25%, annually and are serviced by an outside, unrelated party.
A summary of the Company’s loan portfolio as of September 30, 2023, disaggregated by class of financing receivable, are as follows:
Loans to Real Estate Developers Secured by First Mortgages | ||||
| Outstanding at September 30, 2023 | ||||
| Loans | $ | 3,039,000 | ||
| Allowance for loan losses | $ | (30,390 | ) | |
| Total Loans, net | $ | 3,008,610 | ||
As of September 30, 2023, all of our loans are individually evaluated for impairment purposes when calculating the allowances for loan losses. As of September 30, 2023, the recorded investment in financing receivables used to individually evaluate for impairment was $3,039,000.
The beginning balance of our loan loss reserve on March 31, 2023, was $0, the September 30, 2023, provision for expected losses was $30,562, and the ending balance at September 30, 2023 is $30,562, which includes $172 of interest receivable reserve.
We had no loans past due or on non-accrual status on September 30, 2023, which was past due by more than 90 days.
As of September 30, 2023, future annual maturities of mortgage loans held for investment consists of the following:
| Period Ended September 30, | Amount | |||
| 2025 | $ | 3,039,000 | ||
| $ | 3,039,000 | |||
| F-10 |
WORTHY PROPERTY BONDS 2, INC.
Notes to Consolidated Financial Statements
Six months ended September 30, 2023
As of September 30, 2023, there were 5 mortgage loans with a gross balance of $3,039,000 which are required to pay only interest until maturity when the principal is due.
NOTE 6. DUE TO AFFILIATE
In June of 2023, we entered into a Management Services Agreement (the “Management Services Agreement”) with Worthy Management, an affiliate. Worthy Management was established in October 2019 as part of the internal reorganization of the operations of our parent, WFI. Prior to this operational restructure, our executive officers and other administrative personnel were employed by either WFI or by our sister company Worthy Peer Capital, Inc. As a result, once the operational restructure was complete effective January 1, 2020, our executive officers and the other personnel which provide services to us are all employed by Worthy Management. These personnel also provide services to WFI, Worthy Peer, Worthy Peer II, Worthy Community Bonds, and Worthy Property Bonds, including its subsidiaries.
The initial term of the Management Services Agreement will continue until December 31, 2026, and will automatically renew for successive one-year terms. The Management Services Agreement can be terminated at any time upon 30 days’ prior written notice from one party to the other.
The balance due is $108,825 on September 30, 2023.
NOTE 7. BOND LIABILITIES
In October of 2022 our Regulation A+ Offering Statement was declared Qualified by the Securities and Exchange Commission allowing for the sale by the Company, within 12 months of up to $75,000,000 of $10.00, 5% Bonds, 5.5% interest (7% interest effective November 2023 through November 2024).
During the six months ended September 30, 2023 and year ended March 31, 2023, the Company sold and redeemed Worthy Property Bonds. The Bonds are renewable at the option of the bond holder, accrue interest at 5.5% effective April 1, 2023 and 7% effective November 13, 2023 through November 13, 2024, and the Company may redeem the bonds at any time. The Company has up to 30 days to make payment on any redemption of $50,000 or greater. The Company has $46,396 and $0 of accrued interest related to these outstanding bonds at September 30, 2023 and March 31, 2023, respectively. The Bond liabilities balance at September 30, 2023 and March 31, 2023 were $6,218,949 and $0 respectively. During the six months ended September 30, 2023, and year ended March 31, 2023, bonds were redeemed, as noted in the table below. The interest expense on bond liabilities during the six months ended September 30, 2023 and 2022 were $49,560 and $0.
A summary of the Company’s bond liabilities activity for the six months ended September 30, 2023, is as follows:
| Worthy Property Bonds 2, Inc. | ||||
| Outstanding at March 31, 2023 | $ | - | ||
| Bond issuances | $ | 6,793,670 | ||
| Bond redemptions | $ | (574,721 | ) | |
| Outstanding at September 30, 2023 | $ | 6,218,949 | ||
| Interest Expense on bonds | $ | 49,560 | ||
| F-11 |
WORTHY PROPERTY BONDS 2, INC.
Notes to Consolidated Financial Statements
Six months ended September 30, 2023
NOTE 8. COMMITMENTS AND CONTINGENCIES
Legal contingencies
From time to time, the Company may be a defendant in pending or threatened legal proceedings arising in the normal course of its business. Management is not aware of any pending, threatened or asserted claims.
NOTE 9. EQUITY
The Company has authorized 100 shares of common stock. In February of 2023, the Company was founded with the issuance of 100 shares of our $0.001 per share par value common stock for $5,000 to WFI. In February of 2023, WFI contributed $27,500 as additional paid-in capital. During the six months ended September 30, 2023, WFI contributed $45,620 as additional paid-in capital. WFI is the sole shareholder of the Company’s common stock.
NOTE 10. RELATED PARTIES
The Company has received capital contributions from its parent company, see Note 9. The Company has entered into a management services agreement with Worthy Management, an affiliate, see note 6.
NOTE 11. CONCENTRATIONS
The mortgage loans held for investment gross balance at March 31, 2023 of $25,730,624 is due from 19 borrowers, of this gross balance 1 borrower’s balance due is approximately 10% of the total balance due.
NOTE 12. SUBSEQUENT EVENTS
Worthy Property Bond 2 sales subsequent to September 30, 2023, were approximately $5,984,000 while bond redemptions were approximately $774,000 during the same period. These sales have been recorded as an increase in cash and an increase in corresponding liability and the bond redemptions have been recorded as a decrease in cash and a decrease in bond liabilities.
As of November 13, 2023, Worthy Bonds made a modification to the interest rate from 5.5% to 7%, which will be effective through November 13, 2024.
The Company has evaluated these consolidated financial statements for subsequent events through the date these consolidated financial statements were available to be issued. Other than those noted above, management is not aware of any events that have occurred subsequent to the consolidated balance sheet date that would require adjustment to, or disclosure in the consolidated financial statements.
| F-12 |
Item 4. Exhibits.
| Exhibit No. | Exhibit Description | |
| 2.1* | Articles of Incorporation | |
| 2.2* | Bylaws | |
| 3.1* | Form of Worthy Property 2 Bond | |
| 4.1* | Form of Investor Agreement (for cash) | |
| 4.2* | Form of Subscription Agreement (for bond rewards) | |
| 4.3* | Form of Auto-Invest Program | |
| 6.1* | Management Services Agreement | |
| 11.1* | Auditors Consent | |
| 12.1* | Legal Opinion |
*Previously filed
| 8 |
SIGNATURES
Pursuant to the requirements of Regulation A, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly organized.
| Dated: December 8, 2023 | Worthy Property Bonds 2, Inc | |
| By: | /s/ Sally Outlaw | |
| Sally Outlaw | ||
| Chief Executive Officer, principal executive officer | ||
Pursuant to the requirements of Regulation A, this report has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated.
| Dated: December 8, 2023 | /s/ Sally Outlaw |
| Sally Outlaw | |
| Director, Chief Executive Officer, principal executive officer | |
| Dated: December 8, 2023 | /s/ Alan Jacobs |
| Alan Jacobs | |
| Director, Executive Vice President, Chief Operating Officer and principal financial and accounting officer |
| 9 |
