UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K





(Mark One)


x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934





For the fiscal year ended December 31, 2010





OR


.


 ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934





Commission File Number 000-25991





MANHATTAN BRIDGE CAPITAL, INC.





New York
11-3474831(State or other jurisdiction
(I.R.S. Employerof incorporation or organization)
Identification No.)192 Lexington Avenue, New York, NY 10016(Address of Principal Executive Office) (Zip Code)(212) 489-6800(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:Title of each class
Name of each exchange

on which registeredCommon Stock, par value $.001 per share
The NASDAQ Capital Market




Securities registered pursuant to section 12(g) of the Act: NONE





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  ̈.        No þ.


Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.Yes ̈.        Noþ.


Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter earlier period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yesþ.        No ̈.


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to post such files).Yes  ̈.        No  ̈.


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Act.


Large accelerated filer  ̈
Accelerated filer  ̈Non-accelerated filer   ̈  (Do not check if a smaller reporting company)
Smaller Reporting Company x


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ̈.        No x




The aggregate market value of the Registrant’s voting and non-voting common stock held by non-affiliates of the Registrant on June 30, 2010, computed by reference to the closing price for such common stock on the NASDAQ Capital Market on such date, was approximately $2,422,853. (For this computation, the Registrant has excluded the market value of all shares of its common stock reported as beneficially owned by executive officers and directors of the Registrant and certain other shareholders; such an exclusion shall not be deemed to constitute an admission that any such person is an “affiliate” of the Registrant.)





As of March 16, 2011 the registrant has a total of 3,324,459 shares of Common Stock outstanding.





DOCUMENTS INCORPORATED BY REFERENCE





None.










MANHATTAN BRIDGE CAPITAL, INC.


FORM 10-K ANNUAL REPORT


TABLE OF CONTENTS


PagePART IItem 1.
Business
4Item 1A.
Risk Factors
6Item 1B.
Unresolved Staff Comments
12Item 2.
Properties
12Item 3.
Legal Proceedings
12Item 4.
(Removed and Reserved)
12PART IIItem 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities
13Item 6.
Selected Financial Data
13Item 7.
Management's Discussion and Analysis of Financial Condition and Results ofOperations
14Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
20Item 8.
Financial Statements and Supplementary Data
20Item 9.
Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure
20Item 9A.
Controls and Procedures
20Item 9B.
Other Information
21PART IIIItem 10.
Directors, Executive Officers and Corporate Governance
22Item 11.
Executive Compensation
25Item 12.
Security Ownership of Certain Beneficial Owners and Management and RelatedStockholders Matters
29Item 13.
Certain Relationships and Related Transactions and Director Independence
31Item 14.
Principal Accountant Fees and Services
31PART IVItem 15.
Exhibits, Financial Statement Schedules
32SIGNATURES
34EXHIBITS
35




2


FORWARD-LOOKING STATEMENTS




This report contains forward-looking statements within the meaning of section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Forward-looking statements are typically identified by the words “believe,” “expect,” “intend,” “estimate” and similar expressions.  Those statements appear in a number of places in this report and include statements regarding our intent, belief or current expectations or those of our directors or officers with respect to, among other things, trends affecting our financial conditions and results of operations and our business and growth strategies.  These forward-looking statements are not guarantees of future performance and involve risks and
uncertainties.  Actual results may differ materially from those projected, expressed or implied in the forward-looking statements as a result of various factors (such factors are referred to herein as “Cautionary Statements”), including but not limited to the following: (i)  the successful integration of new businesses that we may acquire; (ii) the success of new operations which we have commenced and of our new business strategy; (iii) our limited operating history in our new business; (iv) potential fluctuations in our quarterly operating results; and (v) challenges facing us relating to our growth.  The accompanying information contained in this report, including the information set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, identifies important factors that could cause such differences.  These forward-looking statements speak only as of the date of this
report, and we caution potential investors not to place undue reliance on such statements.  We undertake no obligation to update or revise any forward-looking statements.  All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Cautionary Statements.







All references in this Annual Report to “Manhattan Bridge Capital” “the Company,” “we,” “us” and “our” refer to Manhattan Bridge Capital, Inc. a New York corporation founded in 1989 and its consolidated subsidiaries DAG Funding Solutions, Inc. (“DAG Funding”), formed under the laws of the State of New York in May 2007 and MBC Funding I, Inc. (“MBC Funding”), formed under the laws of the State of New York in October 2010 and DAG Interactive, Inc. (“DAG Interactive”) formed under the laws of Delaware in December 2005, which was dissolved in June 2010, unless the context otherwise requires.





3




PART I





Item 1.  Business





General




The Company offers short-term, secured, non–banking loans to real estate investors (also known as hard money) to fund their acquisition and construction of properties located in New York Metropolitan area.




Products and services




▪ Manhattan Bridge Capital, DAG Funding and MBC Funding.




The Company offers short-term, secured, non–banking loans to real estate investors (also known as hard money) to fund their acquisition of properties located in New York Metropolitan area. The loans are principally secured by collateral consisting of real estate and, generally, accompanied by personal guarantees from the principals of the businesses. The loans are generally for a term of one year. Most of the loans provide for receipt of interest only during the term of the loan and a balloon payment at the end of the term. For the years ended December 31, 2010 and 2009 the total amounts of $6,141,593and $7,204,229, respectively, have been lent, offset by collections received from borrowers, under the short-term
commercial loans in the amount of $4,461,921 and $6,289,668, respectively. Loans ranging in size from $50,000 to $900,000 were concluded at stated interest rates of 12% to 16%, but often at higher effective rates based upon points or other up-front fees. The Company uses its own employees, outside lawyers and other independent professionals to verify titles and ownership, to file liens and to consummate the transactions.  Outside appraisers are also employed to assist the Company’s officials in evaluating the worth of collateral, when deemed necessary by management.




The Company generally grants loans for a term of one year.  In certain situations the Company and its borrowers have mutually agreed to the extension of the loans as a result of the downturn in the economy and the real estate industry in the New York metropolitan area. Potential buyers of the real estate serving as collateral for the short-term loans may have difficulty securing financing due to restrictions imposed by financial institutions resulting from the recent mortgage crisis. In addition, the Company’s borrowers may be having difficulty securing permanent financing.  Prior to the Company granting an extension of any loan, it reevaluates the underlying collateral.




To date, the Company has not experienced any defaults and none of the loans previously made have been non-collectable, although no assurances can be given that existing or future loans may not go into default or prove to be non-collectible in the future.




At December 31, 2010, the Company is committed to an additional $1,521,000 in construction loans that can be drawn by the borrower when certain conditions are met.




4




▪ DAG Interactive.




On June 21, 2010 the board of directors of the Company decided to dissolve DAG Interactive. Upon dissolution, all of DAG Interactive’s assets including, the rights to its proprietary software, were distributed to its shareholders in the same proportion as their percentage ownership in DAG Interactive.




Growth strategy




The immediate focus of our expansion plans is to increase the volume of our short-term, secured commercial loans to small businesses.  As we gain experience in these operations we believe we will be able to do so.  If we develop a successful track record in our lending operations, we will seek additional loans from a commercial bank which, if obtained, will enable us to maintain higher outstanding loan balances to our customers.




Sales and Marketing




The Company offers its loans primarily through the Company’s officers and independent loan brokers.  Leads have been generated through a limited amount of newspaper advertising and direct mail.  A principal source of new transactions has been repeat business from prior customers and their referral of new business.




Government regulation




We are subject to laws and regulations relating to business corporations generally, such as the Occupational Safety and Health Act, Fair Employment Practices and minimum wage standards. In addition, we are subject to laws and regulations imposing various requirements and restrictions, which among other things establish maximum interest rates, finance charges and charges we can impose for credit and our right to repossess and sell collateral.




We believe that we are in compliance with all laws and regulations affecting our business and we do not have any material liabilities under these laws and regulations.  In addition, compliance with all of these laws and regulations does not have a material adverse effect on our capital expenditures, earnings, or competitive position.




Competition




As a commercial lender, we face intense competition in our business from numerous bank and non-bank providers of commercial loans. Our competitors include bank and institutional commercial lenders in the mortgage lending businesses, such as lending institutions and non-depository institutions that are able to offer the same products and services.  Some of these companies are substantially larger and have more resources than we do. In addition, such larger competitors may have a larger customer base, operational efficiencies and more versatile technology platforms than we do. Competitors will continue to increase pressures on both us and other companies in our industry. Industry competitors have continuously solicited our customers with varied loan programs and interest rate strategies. Management
believes the competition has put, and will continue to put pressure on our pricing.




5




We believe that we are able to compete effectively in our current markets. There can be no assurance, however, that our ability to market products and services successfully or to obtain adequate returns on our products and services will not be impacted by the nature of the competition that now exists or may later develop.




Website access to Company’s reports and governance documents




The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge on the Company’s website at www.manhattanbridgecapital.com as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. Copies of the Company’s annual report are also available, on the Company’s website. Charters of the Company’s Audit Committee, Compensation Committee, and Nominating Committee, along with the Company’s Code of Ethics, are available for viewing on the Company’s website.




Intellectual property




To protect our rights to our intellectual property, we rely on a combination of federal, state and common law trademarks, service marks and trade names, copyrights and trade secret protection.  We have registered some of our trademarks and service marks in the United States Patent and Trademark Office (USPTO) including the following marks relating to our current business:




Manhattan Bridge Capital




DAG Funding Solutions




Nextyellow




Let the business do the walking




Where the business does the walking




Where the business calls you




The protective steps we have taken may be inadequate to deter misappropriation of our proprietary information. These claims, if meritorious, could require us to license other rights or subject us to damages and, even if not meritorious, could result in the expenditure of significant financial and managerial resources on our part.




Employees




As of December 31, 2010, we employed a total of 3 people, including full-time and executive employees. We believe that our relationships with our employees and contractors are good.  None of our employees are represented by a labor union.




Item 1A. Risk Factors




We are exposed to certain risk factors that may affect growth and financial results. The risks and uncertainties described below are not the only risks and uncertainties that we face. Additional risks and uncertainties not presently known to us or that are currently deemed immaterial may also impair our future business operations.




6




Risks Related to our Business




We have generated only limited revenues from our lending operations





We have generated aggregate revenues of approximately $2.25 million from our lending operations during 2010 and 2009 and there can be no assurance that we can operate on a scale that would permit us to earn substantial income.




We may not be able to maintain or obtain trademark protection for our trademarks, service marks and domain names, which could impede our efforts to build brand identity.




We regard our intellectual property, particularly our trademarks, service marks and domain names, as critical to our success. As a result, we rely on a combination of contractual restrictions and trade secrets to protect our proprietary rights, know-how, information and technology. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our intellectual property without authorization or independently develop similar intellectual property.




Our facilities are located in New York City, an area that has been and may again be the target of terrorist acts or other catastrophic events.




Our headquarters and business office is located in New York City, an area that has been and may again be the target of terrorist acts or other catastrophic events. A terrorist attack or other catastrophic event could cause interruptions or delays in our business.  Our systems are not fully redundant, and we do not have backup operating facilities. We currently have no formal disaster recovery plan or physical space to relocate in an emergency and our business interruption insurance may not adequately compensate us for losses that may occur.




We face intense competition in our market




We operate in a highly competitive environment, and we expect competitive conditions to continue to intensify as merger activity in the financial services industry continues to produce larger, better capitalized and more geographically diverse companies that are capable of offering a wider array of financial products and services at better prices. In such a competitive environment, we may lose entire accounts, or may lose account balances, to competing financial institutions, or find it more costly to maintain our existing customer base. Customer attrition from any or all of our lending products, together with any lowering of interest rates or fees that we might implement to retain customers, could reduce our revenues and therefore our earnings.




We expect that competition will continue to grow more intensely with respect to our products. Some of our competitors may be substantially larger than we are, which may give those competitors advantages, including a more diversified product and customer base, the ability to reach out to more customers and potential customers, operational efficiencies, lower-cost funding, and larger existing branch networks. These competitors may also consolidate with other financial institutions in ways that enhance these advantages and intensify our competitive environment.




7




We may experience increased delinquencies and credit losses




Like other lenders, we face the risk that our customers will not repay their loans. Rising losses or leading indicators of rising losses (higher delinquencies, non-performing loans, or bankruptcy rates; lower collateral values) may require us to increase our allowance for loan losses and may degrade our profitability if we are unable to raise revenue or reduce costs to compensate for higher losses. The favorable credit environment we have experienced may not continue. In particular, we face the following risks in this area:




·
Missed Payments.  We face the risk that customers will miss payments. Loan charge-offs are generally preceded by missed payments or other indications of worsening financial condition. Our reported delinquency levels measure these trends. Customers may be more likely to miss payments in the event of an economic downturn. In addition, we face the risk that consumer and commercial customer behavior may change, causing a long-term rise in delinquencies and charge-offs;




·
Collateral.  We face the risk that collateral, when we have it, will be insufficient to compensate us for loan losses. When customers default on their loans and we have collateral, we attempt to seize it. However, the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from our customers. Particularly with respect to our commercial lending and mortgage activities, decreases in real estate values could adversely affect the value of property used as collateral for our loans and investments. Thus, the recovery of such property could be insufficient to compensate us for the value of these loans;




·
Estimates of future losses.  We face the risk that we may underestimate our future losses and fail to hold a loan loss allowance sufficient to account for these losses. Incorrect assumptions could lead to material underestimates of future losses and inadequate allowance for loan losses. In addition, our estimate of future losses impacts the amount of reserves we build to account for those losses. The build or release of reserves impacts our current financial results.




We face risk from a volatile real estate market and risks inherent in the real estate lending business.




We concentrate our lending in the real estate market.  Accordingly, our portfolio may experience more volatility and be exposed to greater risk than a more diversified portfolio.  Our business and performance will be affected by factors affecting the value of real estate and the earnings of companies engaged in the real estate industry.  These factors include, but are not limited to:  (a) changes in general economic and market conditions; (b) changes in the value of real estate properties; (c) risks related to local economic conditions, overbuilding, and increased competition; (d) increases in property taxes and operating expenses; (e) changes in zoning laws; (f) variations in rental income, neighborhood values, or appeal of property to tenants; and (g) changes in interest
rates.




8




The recent decline in the broader credit markets related to sub-prime mortgage dislocation has cause the global financial markets to become more volatile and the homebuilding and real estate markets have been dramatically impacted as a result.  The continued depression in and volatility of these markets could create a difficult operating environment in the near term and investors should be aware that general risks of investing in real estate may be magnified.




Real estate lending involves certain inherent risks, including the following:




Our real estate loans may include loans secured by income producing commercial property.  These loans have risk because leases expire, market rents may decline, expenses may rise and net operating income may decline.  Our loans may include construction mortgage loans.  These are loans generally made to real estate developers to fund the construction of one or more buildings on commercial real property.  These loans are riskier than loans secured by income producing properties because during the construction period the borrower does not receive income from the property to make payments on the loan.  In addition, events may occur during the time the property is under construction that causes its value to be less than the outstanding loan amount.




Our loans provide for a "balloon payment."  A balloon payment is a large principal balance that is payable after a period of time during which the borrower has repaid none or only a small portion of the principal balance.  Loans with balloon payments can be riskier than fully amortizing loans with even payments of principal over an extended time period because the borrower's repayment depends on its ability to refinance the loan or sell the property profitably when the loan comes due.  There is no assurance that a borrower will have sufficient resources to make a balloon payment when due.  The borrower or property may not qualify for the refinancing of the balloon amount if the borrower’s creditworthiness has declined, the property’s net operating income is
insufficient to support the necessary debt service for the new loan or there simply is not capital available to finance the property.




Manhattan Bridge Capital's business is affected by market interest rates.




Our business and financial performance is affected by market interest rates and movement in those rates.  The monetary, tax and other policies of governmental agencies, including the Federal Reserve, have a significant impact on interest rates and overall financial market performance over which we  have no control and which we may not be able to adequately predict.




We face risk from economic downturns




Delinquencies and credit losses in individual and small business loans generally increase during economic downturns or recessions. Likewise, demand from these borrowers may decline during an economic downturn or recession. The effects of higher interest rates, higher energy costs and pressure on housing prices may place added strain on our customers’ ability to repay their loans.  These risks may be exacerbated because our loans are concentrated in a single region, the New York metropolitan area. Continuing decline in general economic conditions could have a material adverse effect on our financial condition and results of operations.




9




We Face Risk Related to the Strength and Growth of our Operations




Our ability to grow and compete is dependent on our ability to borrow money to leverage our loans and to build and manage the cost of an expanded infrastructure




Reputational Risk and Social Factors May Impact our Results




Our ability to originate loans is highly dependent upon the perceptions of small business borrowers and other external perceptions of our business. Adverse perceptions regarding our reputation in the consumer, commercial and funding markets could lead to difficulties in generating loans. In addition, adverse developments or perceptions regarding the practices of our competitors may also negatively impact our reputation. Finally, negative perceptions regarding the reputations of third parties with whom we have important relationships, such as our independent auditors, also may adversely impact our reputation.




We May Face Limited Availability of Financing




Our ability to grow and compete is dependent on our ability to borrow money to leverage our loans and to build and manage the cost of an expanded infrastructure.In general, the amount, type and cost of our funding, including financing from other financial institutions directly impact our expenses in operating our business and growing our assets and therefore, can positively or negatively affect our financial results.




A number of factors could make such financing more difficult, more expensive or unavailable on any terms both domestically and internationally (where funding transactions may be on terms more or less favorable than in the United States), including, but not limited to, financial results and losses, specific events that adversely impact our reputation, specific events that adversely impact the financial services industry, counter-party availability, interest rate fluctuations, rating agencies’ actions, and the general state of the U.S. and world economies. Also, we compete for funding with other lenders, some of which are publicly traded. Many of these lenders are substantially larger, may have more capital and other resources.




Our growth depends on the continued services of Assaf Ran.




We depend on the continued services of Assaf Ran, our founder, president and chief executive officer.  Mr. Ran supervises all aspects of our business. Mr. Ran has entered into an employment agreement that is subject to automatic one-year renewals on June 30th of every year, unless either party gives a termination notice at least 180 days prior to this date.  In addition, we have purchased a $500,000 key man life insurance policy on Mr. Ran.




10




Risks Related to Our Common Stock




Our management and other affiliates have significant control of our common stock and could significantly influence our actions in a manner that conflicts with our interests and the interests of other shareholders.


As of December 31, 2010, our executive officers and directors collectively own approximately 46.80% of the outstanding shares of our common stock or beneficially own 53.35% of the outstanding shares of our common stock, assuming the exercise of options which are currently exercisable or will become exercisable within 60 days from the filing of this report, held by these shareholders.  As a result, these shareholders, acting together, will be able to exercise significant influence over matters requiring approval by our shareholders, including the election of directors.  Such a concentration of ownership may have the effect of delaying or preventing a change in control of us, including transactions in which our shareholders might otherwise receive a premium for their shares over then current
market prices.




Our shareholders may experience substantial dilution as a result of the exercise of outstanding options to purchase our common stock.




As of December 31, 2010, we had outstanding options for 631,000 shares, with exercise prices range from $0.67 to $2.26 per share.  The exercise of these options could result in dilution to our existing shareholders and could have a material adverse effect on our stock price.




Our stock price is volatile, and purchasers of our common stock could incur substantial losses.




The market price of our common stock may be influenced by many factors, including:




·
sales of large blocks of our common stock;




·
sales of our common stock by our executive officers, directors and significant stockholders and




·
restatements of our financial results and/or material weaknesses in our internal controls.





The stock markets in general and the markets for real estate in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. In the past, class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Any such litigation brought against us could result in substantial costs, which would hurt our financial condition and results of operations, divert management’s attention and resources.




Our common stock has a limited trading market, which could limit your ability to resell your shares of common stock at or above your purchase price.




Our common stock is quoted on the Nasdaq Capital Market and currently has a limited trading market.  We cannot assure you that an active trading market will develop or, if developed, will be maintained.  As a result, our shareholders may find it difficult to dispose of shares of our common stock and, as a result, may suffer a loss of all or a substantial portion of their investment.




11




Item 1B. Unresolved Staff Comments





None.




Item 2.Properties




Our executive and principal operating office is located in New York, New York.  We use this space for all of our operations.  This space is occupied under a lease that expires June 30, 2011.  The current monthly rent is $6,025 including electricity.  We believe this facility is adequate to meet our requirements at our current level of business activity.




Item 3.  Legal Proceedings




None.




Item 4.  (Removed and Reserved)




12




PART II





Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.




(a)           Market Information




Our Common Stock is traded on the NASDAQ Capital Market under the symbol “LOAN”.




The high and low sales prices for our common stock as reported by the NASDAQ Capital Market for the quarterly periods during 2010 and 2009 were as follows:




High


Low2009First Quarter

$
0.79


$
0.55Second Quarter

$
1.09


$
0.54Third Quarter

$
1.05


$
0.8Fourth Quarter

$
1.22


$
0.952010First Quarter

$
1.56


$
1.00Second Quarter

$
1.39


$
1.10Third Quarter

$
1.70


$
1.26Fourth Quarter

$
1.56


$
1.23





On March 14, 2011, the last reported sale price of our common stock on the NASDAQ Capital Market was $1.59 per share.




(b)           Holders




As of March 14, 2011, the approximate number of record holders of our Common Stock was 16. The number of holders does not include individuals or entities who beneficially own shares but whose shares, which are held of record by a broker or clearing agency, but does include each such broker or clearing agency as one record holder. American Stock Transfer & Trust Company serves as transfer agent for our shares of common stock.




(c)           Dividends




In 2010 and 2009, we did not declare a dividend. At this point, we have no plans to pay dividends.




Item 6.  Selected Financial Data




The Company is a “smaller reporting company” as defined by Regulation S-K and as such, is not providing the information contained in this item pursuant to Regulation S-K.




13




Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations




The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and notes thereto contained elsewhere in this report.  This discussion contains forward-looking statements based on current expectations that involve risks and uncertainties.  Actual results and the timing of certain events may differ significantly from those projected in such forward-looking statements.




Overview




The Company offers short-term, secured, non–banking loans to real estate investors (also known as hard money) to fund their acquisition and construction of properties located in the New York Metropolitan area. The loans are principally secured by collateral consisting of real estate and, generally, accompanied by personal guarantees from the principals of the businesses. The loans are generally for a term of one year. Most of the loans provide for receipt of interest only during the term of the loan and a balloon payment at the end of the term. For the years ended December 31, 2010 and 2009 the total amounts of $6,141,593and $7,204,229, respectively, have been lent, offset by collections received from borrowers, under
the short term commercial loans in the amount of $4,461,921 and $6,289,668, respectively. Loans ranging in size from $50,000 to $900,000 were concluded at stated interest rates of 12% to 16%, but often at higher effective rates based upon points or other up-front fees.




The Company uses its own employees, outside lawyers and other independent professionals to verify titles and ownership, to file liens and to consummate the transactions.  Outside appraisers are also used to assist the Company’s officials in evaluating the worth of collateral.




The Company generally grants loans for a term of one year.  In certain situations the Company and its borrowers have mutually agreed to the extension of the loans as a result of the downturn in the economy and the real estate industry in the New York metropolitan area. Prior to the Company granting an extension of any loan, it reevaluates the underlying collateral. At December 31, 2010, the Company’s short-term loans include loans in the amount of $250,000, $813,000, and $3,045,200, originally due in 2008, 2009 and 2010, respectively. In all instances the borrowers are currently paying their interest and, generally, the Company receives a fee in connection with the extension of the loans.  Accordingly, at December 31, 2010 and 2009, no loan impairments exist and there are no provisions
for impairments of loans or recoveries thereof included in operations for the years then ended.  Subsequent to the balance sheet date approximately $1,503,000 of the extended loans outstanding at December 31, 2010 are currently being negotiated for a further extension of the due date.




To date, the Company has not experienced any defaults and none of the loans previously made have been non-collectable, although no assurances can be given that existing or future loans may not go into default or prove to be non-collectible in the future.




At December 31, 2010, the Company was committed to an additional $1,521,000 in construction loans that can be drawn by the borrower when certain conditions are met.




14




Critical Accounting Policies and Use of Estimates




The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). On July 1, 2009, the Financial Accounting Standards Board (“FASB”) released the authoritative version of its new Accounting Standards Codification (“ASC”) as the single source for GAAP, which replaces all previous GAAP accounting standards. While not intended to change GAAP, ASC significantly changes the way in which the accounting literature is organized. In the fourth quarter of fiscal year 2009, the Company adopted ASC to reference GAAP accounting standards in its consolidated financial statements. The adoption of ASC did not have an effect on the Company’s consolidated financial position, results of operations or
cash flows.




The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management will base the use of estimates on (a) a preset number of assumptions that consider past experience, (b) future projections, and (c) general financial market conditions. Actual amounts could differ from those estimates.




The Company recognizes revenues in accordance with ASC 605, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. ASC 605 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, the Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery of the product has occurred or services have been rendered, (iii) the sales price charged is fixed or determinable, and (iv) collectability is reasonably assured.




Interest income from short term commercial loans is recognized, as earned, over the loan period.




Origination fee revenue on short term commercial loans is amortized over the term of the respective note.




The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of long lived assets, including intangible assets and goodwill, may not be recoverable. When such events or changes in circumstances occur, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the undiscounted cash flows is less than the carrying amount of these assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets.




15




There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result.  See our audited consolidated financial statements and Notes thereto which begin on page F-1 of this Annual Report on Form 10-K, which contain accounting policies and other disclosures required by generally accepted accounting principles in the United States of America.




Results of operations




Years ended December 31, 2010 and 2009




Total revenue




Total revenue for the year ended December 31, 2010 was $1,210,000 compared to $1,039,000 for the year ended December 31, 2009 an increase of $171,000 or 16.5%. The increase in revenue represents an increase in lending operations. In 2010, $994,000 of the Company’s revenue represents interest income on the short-term, secured, commercial loans that the Company offers to small businesses compared to $840,000 in 2009 and $216,000 represents origination fees on such loans compared to $199,000 in 2009. The loans are principally secured by collateral consisting of real estate and, generally, accompanied by personal guarantees from the principals of the businesses.




Interest expense on lines of credit used




Interest expense on lines of credit used for the year ended December 31, 2010 was $29,000 compared to $0 for the year ended December 31, 2009. The increase in interest expense is due to use of the two lines of credit we established (See note 6 to the financial statements) in order to increase our ability to make loans.




Referral fees




Referral fees for the year ended December 31, 2010 was $12,000 compared to $0 for the year ended December 31, 2009. The referral fees represent fees paid on such loans which amortize over the life of the loan.




General and administrative expenses




General and administrative expenses for the year ended December 31, 2010 were $783,000 compared to $673,000 for the year ended December 31, 2009, an increase of $110,000 or 16.3%. This increase is primarily attributable to an increase in payroll expenses of approximately $88,000 (See also note 13 to the financial statements) and an increase of $20,000 in legal expenses.




16




Other income




For the year ended December 31, 2010, we had other income of approximately $156,000 consisting of realized gains on marketable securities that were previously marked down of approximately $151,000, and dividend and interest income of $5,000. For the year ended December 31, 2009, we had other income of approximately $44,000, consisting mainly of dividend and interest income of approximately $24,000, settlement income of $15,000 with the former CEO of Shopila Corp, and realized income on the sale of marketable securities of approximately $5,000.




Income from operations before income tax expense




Income from operations before provision for income tax for the year ended December 31, 2010 was $542,000 compared to $410,000 for the year ended December 31, 2009. This increase is primarily attributable to an increase in revenue and an increase in other income, offset by an increase in operating costs and expenses.




Income tax expense




In the year ended December 31, 2010 we had income tax expense (including interest and penalties) of approximately $223,000 and for the year ended December 31, 2009 we had income tax expense of approximately $174,000.




Liquidity and Capital Resources




At December 31, 2010, we had cash and cash equivalents of $386,000 and working capital of $8,034,000 compared to cash and cash equivalents and marketable securities of $1,112,000 and working capital of $7,332,000 at December 31, 2009.  The decrease in cash and cash equivalents and marketable securities primarily reflects the making of short term commercial loans in the total amount of approximately $6,142,000, offset by collections received from borrowers in the amount approximately $4,462,000, proceeds from the sale of the Company’s remaining marketable securities of $432,000, the use of our bank line of credit in the amount of $300,000 and our issuance of senior secured notes in the amount of $500,000. The increase in working capital is primarily attributable to the issuance of senior secured
notes in the amount of $500,000, net income of approximately $319,000, offset by deferred financing costs of $97,500.




For the year ended December 31, 2010 net cash provided by operating activities was $224,000 compared to $486,000 for the year ended December 31, 2009. The decrease in net cash provided by operating activities primarily results from an increase in the realized gain on marketable securities that were previously marked down in the amount of $141,000, an increase in   taxes paid during the year ended December 31, 2010, a decrease in the change of deferred origination fees and a decrease in collection of interest receivable on short term commercial loans due to increase in loans made, offset by an increase in net income of $84,000.




17




For the year ended December 31, 2010 net cash used in investing activities was $1,248,000, compared to $661,000 for the year ended December 31, 2009, Net cash used in investing activities for the year ended December 31, 2010,consisted primarily of the issuance of our short term commercial loans in the amount of approximately $6,142,000, offset by collection of these loans in the amount of approximately $4,462,000 and the proceeds from the sale of marketable securities in the amount of $432,000.




For the year ended December 31, 2010 net cash provided by financing activities was $703,000, compared to net cash used in financing activities of $1,000 for the year ended December 31, 2009. Net cash provided by financing activities for the year ended December 31, 2010 reflects the use of our line of credit in the amount of $300,000 and issuance of our senior secured notes in the amount of $500,000, offset by deferred financing costs on the issuance of the senior secured notes in the amount of $97,500.




Until our initial public offering in 1999, our only source of funds was cash flow from operations, which funded both our working capital needs and capital expenditures.  As a result of our initial public offering in May 1999, we received proceeds of approximately $6.4 million, which has increased our ability to pay operating expenses.  Our credit facilities are limited.  As of December 31, 2010, our funds were invested in money market funds,  and short term commercial loans.




Contractual Obligations




Contractual Obligations

Total


Lessthan 1

Year


1-3

Years


3-5

Years


Morethan

5 yearsLong-Term Debt Obligations

$
—


$
—


$
—


$
—


$
—Operating Lease Obligations


35,029



35,029



—



—



—Total

$
35,029


$
35,029


$
—


$
—


$
—




We anticipate that our current cash balances together with our cash flows from operations will be sufficient to fund the operations for the next 12 months.




Recent Technical Accounting Pronouncements




In June 2009, the FASB issued “The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles” under ASC 105. ASC 105 establishes the FASB Standards Accounting Codification as the source of authoritative U.S. generally accepted accounting principles recognized by the FASB to be applied to nongovernmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification supersedes all the existing non-SEC accounting and reporting standards upon its effective date and subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. The adoption of this new standard did not have a material effect on the Company’s disclosures of the
consolidated financial statements.




18




In August 2009, the FASB issued an update to ASC 820. This Accounting Standards Update (“ASU”) No. 2009-5, Measuring Liabilities at Fair Value (“ASU 2009-5”) amends the provisions in ASC 820 related to the fair value measurement of liabilities and clarifies for circumstances in which a quoted price in an active market for the identical liability is not available. ASU 2009-5 is intended to reduce potential ambiguity in financial reporting when measuring the fair value of liabilities. ASU 2009-5 was effective for the Company in the first quarter of fiscal year 2010. ASU 2009-5 concerns disclosure only. The adoption of ASU 2009-5 did not have a material effect on the Company’s consolidated financial statements.




In December 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-17, which codifies SFAS No. 167, Amendments to FASB Interpretation No. 46(R) issued in June 2009. ASU 2009-17 requires a qualitative approach to identifying a controlling financial interest in a variable interest entity (“VIE”), and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. ASU 2009-17 is effective for annual reporting periods beginning after November 15, 2009. The   adoption of ASU 2009-17 did not have a material effect on the Company’s  consolidated financial statements.




In January 2010, the FASB issued ASU 2010-6, Improving Disclosures About Fair Value Measurements, which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair- value measurements. ASU 2010-6 is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. Currently, the Company believes that the adoption of ASU 2010-6 will not have a material effect on its consolidated financial statements.




In February 2010, FASB issued ASU 2010-9, as an amendment to ASC 855. This update eliminates the requirement to provide a specific date through which subsequent events were evaluated. This update was issued to alleviate potential conflicts between ASC855 and SEC reporting requirements. The update was effective upon issuance and has no impact on the Company’s consolidated financial statements.




In July 2010, FASB issued ASU 2010-20, entitled “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” which is effective for public entities interim and annual financial statements ending after December 15, 2010. The objective of this amended guidance is for an entity to provide disclosures that facilitate financial statement users’ evaluation of; the nature of credit risk inherent in the entities portfolio of financing receivables; how risk is analyzed and assessed in arriving at the allowance for credit losses; and the changes and reasons for those changes in the allowance for credit losses. Existing guidance has been amended to provide enhanced disaggregated disclosures in situations involving impairments or troubled loan restructurings, with
the guidance for trouble debt restructuring disclosures delayed pursuant to ASU 2011-01. Company disclosures herein are based on the Company’s adoption of ASU 2010-20, and providing disclosures there under that apply to its short term loan portfolio in the current circumstances.




19




Management does not believe that any other recently issued, but not yet effected, accounting standards if currently adopted would have a material effect on the Company’s consolidated financial statements.




Item 7A.  Quantitative and Qualitative Disclosures About Market Risk




The Company is a “smaller reporting company” as defined by Regulation S-K and as such, is not providing the information contained in this item pursuant to Regulation S-K.




Item 8.  Financial Statements




The consolidated financial statements of the Company required by this item are set forth beginning on page F-1.




Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.




None.




Item 9A. Controls and Procedures




1.
Disclosure Controls and Procedures




Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2010 (the “Evaluation Date”).  Based upon that evaluation, the chief executive officer and the chief financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) are accumulated and communicated to our management, including its
chief executive and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.




20




2.
Internal Control over Financial Reporting




(a)
Management’s Annual Report on Internal Control Over Financial Reporting


The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the SEC, internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the Company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial
reporting is supported by written policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company's assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company's management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.




The Company's internal control system was designed to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations which may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.




Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. In making this assessment, management used the framework set forth in the report entitled Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring.  Based on this evaluation, management concluded that the Company’s internal control over financial reporting was
effective as of December 31, 2010.




(b)
Changes in Internal Control Over Financial Reporting




There was no change in our internal controlover financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) that occurred during the fiscal quarter ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




Item 9B.    Other Information.





None.




21




PART III





Item 10.  Directors, Executive Officers and Corporate Governance.




Executive Officers and Directors




Our executive officers and directors and their respective ages are as follows:




Name

Age

PositionAssaf Ran

45

Founder, Chairman of the Board, Chief Executive Officer,President and DirectorInbar Evron-Yogev

38

Chief Financial Officer, Vice President,Treasurer and SecretaryMichael Jackson (1,2,3)

46

DirectorPhillip Michals (1,2,3)

41

DirectorEran Goldshmid (1,2,3)

44

DirectorMark Alhadeff

47

DirectorLyron Bentovim(2)

42

Director





(1) Member of the Compensation Committee


(2) Member of the Audit Committee


(3) Member of the Nominating Committee




All directors hold office until the next annual meeting of shareholders and until their successors are duly elected and qualified.  Officers are elected to serve subject to the discretion of the board of directors.




The Board of Directors, acting through the Nominating Committee, is responsible for assembling for stockholder consideration a group of nominees that, taken together, have the experience, qualifications, attributes, and skills appropriate for functioning effectively as a Board.




The Nominating Committee looks for certain characteristics common to all board members, including integrity, strong professional reputation and record of achievement, constructive and collegial personal attributes, and the ability and commitment to devote sufficient time and energy to Board service.




In addition, the Nominating Committee seeks to include on the Board a complementary mix of individuals with diverse backgrounds and skills reflecting the broad set of challenges that the board confronts.




Set forth below is a brief description of the background and business experience of our executive officers and directors:




22




Assaf Ran, our founder, has been our Chief Executive Officer and President since our inception in 1989.  Mr. Ran has 22 years of senior management experience leading public and private directories businesses.  Mr. Ran started several yellow page businesses from the ground up and managed to make each one of them successful. Mr. Ran’s professional experience and background with us, as our director since March 1999, have given him the expertise needed to serve as one of our directors.




Mrs. Evron-Yogev joined the Company in March 2006, as our Chief Financial Officer, Mrs. Evron-Yogev is an Israeli licensed CPA and has professional experience in financial accounting.  From 2003 until accepting her position with us, Mrs. Evron-Yogev worked at PriceWaterhouseCoopers (“PWC”) in New York City, as an experienced senior associate on an audit team.  From 2000 to 2003 Mrs. Evron-Yogev worked at the Luboshitz Kasierer office of Arthur Andersen, in Tel-Aviv, Israel, as a senior associate in an audit team.




Michael J. Jackson has been a member of our Board since July 2000.  Since April 2007, he has been the Chief Financial Officer and the Executive Vice President of iCrossing, Inc., a digital marketing agency. From September 1999 to April 2007, he was the corporate controller of AGENCY.COM, a global Internet professional services company, for which he was the Chief Accounting Officer from May 2000 until September 2001 and the Chief Financial Officer from October 2001 to April 2007.  From October 1994 until August 1999, Mr. Jackson was a manager at Arthur Andersen, LLP and Ernst and Young.  Mr. Jackson also served on the New York State Society Auditing Standards and Procedures Committee from 1998 to 1999 and served on the New York State Society’s SEC Committee from 1999 to 2001.
 Mr. Jackson holds an M.B.A. in Finance from Hofstra University and is a Certified Public Accountant. During the past five years, until May 2008, Mr. Jackson also was a member of the Board of Directors of Adstar, Inc. (PINKSHEETS: ADST.PK). Mr. Jackson’s professional experience and background with other companies and with us, as our director since July 2000, have given him the expertise needed to serve as one of our directors.




Phillip Michals has been a member of our Board of Directors since March 1999.  PhilMichals currently is the Head of Business Development with Aegis Capital Corp.  Phil has specialized in recruiting and retention and has been partners in two previous HR consulting companies MSCI and Uptick Trading, both companies consulted with NYSE and FINRA broker- dealers. Since November 2000, he has also been a Principal of RG Michals and PPG Trading, Phil is also a Founder and Principal of Quadstar Capital Advisors, a financial advisory company.   Mr. Michals received a BS degree in human resources from the University of Delaware in May 1992. Mr. Michals is currently registered as an Investment
Advisor.  Mr. Michals’s professional experience and background with other companies and with us, as our director since March 1999, have given him the expertise needed to serve as one of our directors.




Eran Goldshmid has been a member of our board of directors since March 1999.  Mr. Goldshmid received certification as a financial consultant in February 1993 from the School for Investment Consultants, Tel Aviv, Israel, and a BA in business administration from the University of Humberside, England in December 1998.  From December 1998 until July 2001, he had been the general manager of the Carmiel Shopping Center in Carmiel, Israel.  Since August 2001, he has been president of the New York Diamond Center, New York, NY.  Mr. Goldshmid’s professional experience and background with other companies and with us, as our director since March 1999, have given him the expertise needed to serve as one of our directors.




23




Mark Alhadeff has been a member of our Board since December 2005.  Mr. Alhadeff also served as the Chief Technology Officer of DAG Interactive, Inc.  Mr. Alhadeff is the co-founder of Ocean-7 Development, Inc., a technology corporation in the business of providing programming services as well as web development services and database solutions.  Mr. Alhadeff has been Ocean-7’s president since its formation in 1999.  Prior to founding Ocean-7, Mr. Alhadeff served as a consultant to various publishers, worked as an art director and was actively involved in creating and implementing the transition to digital production methodologies before they became common industry practice.  Mr. Alhadeff is a Stony Brook University graduate.  Mr. Alhadeff’s
professional experience and background with other companies and with us, as our director since December 2005, have given him the expertise needed to serve as one of our directors.




Lyron Bentovim has been a member of our Board since December 2008.  Since August 2009 Mr. Bentovim is Chief Operating Officer and Chief Financial Officer at Sunrise Telecom a leader in test and measurement solutions for telecom, wireless and cable networks. From August 2001 to July 2009, he was a Portfolio Manager of SKIRITAI Capital LLC, an investment advisor based in San Francisco. From May 2000 to August 2001, he served as the President, COO and co-founder of WebBrix Inc., a retail channel aiming to provide physical space and services for online retailers. Additionally, Mr. Bentovim spent time as a Senior Engagement Manager with strategy consultancies of USWeb/CKS and the Mitchell Madison Group from September 1997 to May 2000. Mr. Bentovim also
holds directorships at Three Five Systems Inc.(PINKSHEETS – TFSI.PK)since September 2005, Argonaut Technologies Inc. (PINKSHEETS – AGNT.PK) since May 2005 and Top Image Systems LTD (NASDAQ – TISA) since November 2008.  During the past five years, Mr. Bentovim also held directorships at Sunrise Telecom (PINKSHEETS – SRTI) from October 2008 until August 2009, Ault Inc. (was NASDAQ – AULT – company sold) from October 2005 until February 2006, RTW Inc. (was NASDAQ – RTWI -company sold) from April 2006 until December 2007.Mr. Bentovim’s professional experience and background with other companies and with us, as
our director since December 2008, have given him the expertise needed to serve as one of our directors.




The Audit Committee meets with management and our independent auditors to determine the adequacy of internal controls and other financial reporting matters.  In addition, the committee provides an avenue for communication between the independent accountants, financial management and the Board.  Subject to the prior approval of the Board, the committee is granted the authority to investigate any matter or activity involving financial accounting and financial reporting, as well as our internal controls.  The Nominating Committee is responsible for nominating director candidates for the Annual Meeting of Stockholders each year and will consider director candidates recommended by shareholders.  In considering candidates submitted by shareholders, the Nominating Committee will
take into consideration the needs of the Board and the qualification of the candidate.




Section 16(a) Beneficial Ownership Reporting Compliance




Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than ten percent (10%) of a registered class of our equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission.  Officers, directors and greater than ten percent (10%) shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.




24




To the best of our knowledge, based solely on review of the copies of such forms furnished to us, or written representations that no other forms were required, we believe that all Section 16(a) filing requirements applicable to our officers, directors and greater than ten percent (10%) shareholders were complied with during 2010.




Code of Ethics




We have adopted a code of ethics that applies to our principal executive officer, principal financial officer and other persons performing similar functions.  This code of ethics is posted on our web site at www.manhattanbridgecapital.com.




AuditCommittee




We currently have a separately- designated standing Audit Committee of the Board of Directors which was established in compliance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934.  The members of our Audit Committee are Michael J. Jackson, Phillip Michals, Eran Goldshmid and Lyron Bentovim. The Board of Directors has determined that Michael Jackson, the chairman of the Audit Committee, is qualified as an Audit Committee Financial Expert pursuant to Item 407(d)(5) of Regulations S-K.  Each of the Audit Committee members is independent, as that term is defined in Section 10A(m)(3) of the Exchange Act, and their relevant experience is more fully
described above.




Stockholder Communications




The board has established a process to receive communications from stockholders. Stockholders and other interested parties may contact any member (or all members) of the board, or the non-management directors as a group, any board committee or any chair of any such committee by mail or electronically. To communicate with the board of directors, any individual director or any group or committee of directors, correspondence should be addressed to the board of directors or any such individual director or group or committee of directors by either name or title. All such correspondence should be sent "c/o Corporate Secretary" at 192 Lexington Avenue New York, New York 10016.




All communications received as set forth in the preceding paragraph will be opened by the Secretary of the Company for the sole purpose of determining whether the contents represent a message to our directors. Any contents that are not in the nature of advertising, promotions of a product or service, patently offensive material or matters deemed inappropriate for the board of directors will be forwarded promptly to the addressee. In the case of communications to the board or any group or committee of directors, the Company Secretary will make sufficient copies of the contents to send to each director who is a member of the group or committee to which the envelope or e-mail is addressed.




Item 11.  ExecutiveCompensation.




The following Summary Compensation Table sets forth all compensation earned, in all capacities, during the years ended December 31, 2010 and 2009 by our (i) principal executive officer and (ii) the next two highest paid executive officers, other than the principal executive officer, whose salaries during the last completed fiscal year exceeded $100,000. These individuals are referred to as the ‘‘named executive officers.’’




25




Summary Compensation Table




Name and

Principal

Position

Year

Salary

($)


Bonus

($)


Stock

Awards

($)


Option

Awards

($)

(1)


Non

Equity

Incentive

plan

Compen-

sation

($)


Non-

qualified

Deferred

Compen-

sation

Earning

($)


All Other

Compen-

sation

($)

(2)


Total

($)Assaf Ran

2010

$
167,308


$
65,000



—


$
53,799


$
5,019



—


$
5,019


$
291,126Chief Executive Officer and President

2009

$
91,586


$
65,000



—


$
47,574


$
2,748



—


$
2,748


$
206,908




(1) Consists of stock options valued in accordance with ASC Topic 718


(2) Company’s matching contributions are made pursuant to a simple master IRA plan.





Employment Contracts




In March 1999, we entered into an employment agreement with Assaf Ran, our President and Chief Executive Officer.  Mr. Ran’s employment term renews automatically on July 1st of each year for successive one-year periods unless either party gives 180 days written notice of its intention to terminate the agreement.  Under the agreement, Mr. Ran receives an annual base salary of $75,000 and annual bonuses as determined by the compensation committee of the Board of Directors in its sole and absolute discretion and is eligible to participate in all executive benefit plans established and maintained by us.  Under the agreement, Mr. Ran agreed to a one-year non-competition period following the termination of his employment. As of March 2003 the compensation committee approved an
increase in Mr. Ran’s compensation to an annual base salary of $225,000. On March 13, 2008 the compensation committee approved Mr. Ran’s reduction of his annual salary by 75% to $56,000 for an additional one year or until the Company has more significant operations (as defined by the Committee). On March 18, 2009 the compensation committee approved Mr. Ran’s continuing the reduction of his annual salary to $100,000 for one year or until the Company has more significant operations (as defined by the Committee). On June 21, 2010 the board restored Mr. Ran’s salary to the level of $225,000 per year.Mr. Ran’s annual base compensation was $167,000 and $92,000 during the years 2010 and 2009, respectively, and a bonus of $65,000 for each of the years 2010 and 2009, which was approved by the Compensation Committee of the Board of Directors.




26




Outstanding Equity Awards at Fiscal Year-End




The following table sets forth information concerning outstanding options to purchase our common stock by the named executive as of December 31, 2010.




Option Awards

Stock AwardsName

(a)



Number of

Securities

Underlying

Unexercised

Options

(#)

Exercisable


Number of

Securities

Underlying

Unexercised

Options

(#)

Unexercisable


Equity

Incentive Plan

Awards:

Number of

Securities

Underlying

Unexercised

Unearned

Options

(#)


Option

Exercise

Price

($)

Option

Expiration

Date

Number

of Shares

or Units

of Stock

That

HaveNot

Vested

(#)


Market

Value of

Shares or

Units of

Stock That

Have Not

Vested

($)


Equity

Incentive

Plan

Awards:

Number

of

Unearned

Shares,

Units or

Other

Rights

That

Have Not

Vested

(#)


Equity

Incentive Plan

Awards:

Market or

Payout Value

of Unearned

Shares, Units

or Other

Rights That

Have Not

Vested

($)Assaf Ran

2006(1)


140,000



—



—


$
2.26

3/15/2011


—



—



—



—Chief Executive

2007(2)


70,000



—



—


$
1.69

3/22/2012Officer and

2008(3)


46,667



—



—


$
1.01

3/13/2013President

2009(4)


93,333



46,667



—


$
0.74

3/18/20142010(5)


23,333



46,667



—


$
1.43

3/16/2015




(1)
The options were granted on March 15, 2006.  One third of such options vested immediately and the balance vest in equal annual installments on each anniversary of the grant date.  The exercise price represents 110% of the fair market price on the date of grant.




(2)
The options were granted on March 22, 2007.  One third of such options vested immediately and the balance vest in equal annual installments on each anniversary of the grant date.  The exercise price represents 110% of the fair market price on the date of grant.




(3)
The options were granted on March 13, 2008.  One third of such options vested immediately and the balance vest in equal annual installments on each anniversary of the grant date.  The exercise price represents 110% of the fair market price on the date of grant.




(4)
The options were granted on March 18, 2009.  One third of such options vested immediately and the balance vest in equal annual installments on each anniversary of the grant date.  The exercise price represents 110% of the fair market price on the date of grant.




(5)
The options were granted on March 16, 2010.  One third of such options vested immediately and the balance vest in equal annual installments on each anniversary of the grant date.  The exercise price represents 110% of the fair market price on the date of grant.




In addition, Inbar Evron-Yogev, our current Chief Financial Officer was granted options for 5,000 shares of the Company’s common stock on each of on March 15, 2006, March 22, 2007 and March 13, 2008.  The exercise price of each option is $2.05, $1.54 and $0.92, respectively, which was the fair market price on the date of the grant.




27




Compensation of Directors




Non-employee directors are granted, upon becoming a director, and renewal of director term, five-year options to purchase 7,000 shares of common stock at an exercise price equal to the fair market value of a share of common stock on the date of grant.  They also receive cash compensation of $600 per board meeting attended and $300 for any other committee participation. Assaf Ran and Mark Alhadeff do not receive compensation in connection with their position on our board.




Director Compensation


Name

(a)

Fees Earned or

Paid in Cash

($)


Option Awards

($)

(1)


Total ($)Michael Jackson (2)

$
2,100


$
5,701


$
7,801Phillip Michals(2)

$
2,400


$
5,701


$
8,101Eran Goldshmid (2)

$
2,400


$
5,701


$
8,101Mark Alhadeff


—



—



—Lyron Bentovim (2)

$
2,100


$
5,701


$
7,801




(1)
Consists of stock options. Valuation is based on ASC Topic 718.




(2)
Represents option awards to purchase 7,000 shares of our common stock.




28




Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters




The following table, together with the accompanying footnotes, sets forth information, as of March 16, 2011, regarding the beneficial ownership of our common stock by all persons known by us to beneficially own more than 5% of our outstanding common stock, each named executive officer, each director, and all of our directors and officers as a group:




Name of Beneficial Owner (1)

Title of

Class

Amount and

Nature of

Beneficial

Ownership (2)


Percentage

of

ClassExecutive Officers and DirectorsAssaf Ran (3)

Common


1,802,262



49.36
%Michael Jackson (4)

Common


35,000



1.04
%Phillip Michals (5)

Common


50,000



1.49
%Eran Goldshmid (4)

Common


35,000



1.04
%Mark Alhadeff

Common


60,000



1.80
%Lyron Bentovim (6)

Common


26,358



*All officers and directors as a group(7 persons)

Common


2,022,620



53.35
%





* Less than 1%




(1)           Unless otherwise provided, the address of each of the individuals above is c/o Manhattan Bridge Capital, Inc., 192 Lexington Avenue, New York, New York 10016.




(2)           A person is deemed to be a beneficial owner of securities that can be acquired by such person within 60 days from March 16, 2011 upon the exercise of options and warrants or conversion of convertible securities.  Each beneficial owner’s percentage ownership is determined by assuming that options, warrants and convertible securities that are held by such person (but not held by any other person) and that are exercisable or convertible within 60 days from March 16, 2011 have been exercised or converted.  Except as otherwise indicated, and subject to applicable community property and similar laws, each of the persons named has sole voting and investment power with respect to the shares shown as beneficially
owned.  All percentages are determined based on 3,324,459 shares outstanding on March 16, 2011.




(3)  Includes 326,667 shares underlying options.




(4)  All of the shares beneficially owned by Michael Jackson and Eran Goldshmid underly options.




(5)  Includes 35,000 shares underlying options.




(6)  Includes 21,000 shares underlying options.




29




Equity Compensation Plan Information




On June 23, 2009 the Company adopted the 2009 Stock Option Plan (the “Plan”) which replaced the 1999 Stock Option Plan as amended (the “Prior Plan”), which expired in May of 2009. Options granted under the Prior Plan remain outstanding until expired, exercised or cancelled.




The following table summarizes the (i) options granted under the Company’s 1999 Stock Option Plan, (ii) options granted under the Company’s 2009 Stock Option Plan, and (iii) options granted outside the Company Option Plan, as of December 31, 2010.  The shares covered by outstanding options and warrants are subject to adjustment for changes in capitalization stock splits, stock dividends and similar events.  No other equity compensation has been issued.




Equity Compensation Plan TableNumber of

securities(1) to

beissued upon

exercise of

outstanding

options, warrants

and rights


Weighted-

averageexercise

price of

outstanding

options, warrants

and rights


Number of

securities(1)

remaining available

for future issuance

under equity

compensation plansEquity Compensation Plans Approved By Security HoldersGrants under the Company’s 1999 Stock OptionPlan


505,000


$
1.44



0Grants under the Company’s 2009 Stock OptionPlan


126,000


$
1.30



224,000Equity Compensation Plans Not Requiring Approval By Security HoldersAggregate Individual Option Grants


20,000


$
2.50


Not applicableTotal


651,000


$
1.44



224,000




The aggregate individual warrant grants outside the Stock Option Plan referred to in the table above include 20,000warrants granted to Paulson in connection with the Company’s private placement of senior secured notes.




The market value of the common stock underlying the options abovementioned, as of March 14, 2011 is $1,035,000.




30




Item 13.  Certain Relationships and Related Transactions and Director Independence




In April 2010, in connection with the closing of loan transaction to a third party by the Company, Mr. Ran our CEO loaned the Company $150,000 bearing interest of 12% per annum, which was fully repaid to him within a week. During the year of 2010 interest expense on such loan was $400.




Director Independence




Our Board of Directors is comprised of Assaf Ran, Michael J. Jackson, Phillip Michal, Eran Goldshmid, Mark Alhadeff, and Lyron Bentovim.




The Board has determined, in accordance with Nasdaq’s listing standards, that: (i) Messrs. Jackson, Michals, Goldshmid and Bentovim (the “Independent Directors”) are independent and represent a majority of its members; (ii) Messrs. Jackson, Michals, Goldshmid and Bentovim, as the sole members of the Audit Committee, are independent for such purposes; and (iii) Messrs. Jackson, Michals and Goldshmid, members of Compensation Committee, as the sole members of the Compensation Committee, are independent for such purposes.




In determining director independence, our Board applies the independence standards set by Nasdaq. In its application of such standards the Board takes into consideration all transactions with Independent Directors and the impact of such transactions, if any, on any of the Independent Directors’ ability to continue to serve on our Board. To that end, for the fiscal year ended 2010, our Board considered the options awarded to the Independent Directors disclosed above in “Item 11 – Executive Compensation – Director Compensation” and determined that those transactions were within the limits of the independence standards set by Nasdaq and did not impact their ability to continue to serve as Independent Directors.




Item 14.  Principal Accountant Fees and Services




The aggregate fees billed by our principal accounting firm, Hoberman, Miller, Goldstein & Lesser, P.C, for the fiscal years ended December 31, 2010 and 2009 are as follows:




(a)           Audit Fees




2010




The aggregate fees incurred during 2010 for Hoberman, Miller, Goldstein & Lesser, P.C, our principal accountant, were $55,500, covering the audit of our annual financial statements and the review of our financial statements for the first, second and third quarters of 2010.




2009




The aggregate fees incurred during 2009 for Hoberman, Miller, Goldstein & Lesser, P.C, our principal accountant, were $47,500, covering the audit of our annual financial statements and the review of our financial statements for the first, second and third quarters of 2009.




31




(b)           Audit-Related Fees




There were no audit-related fees billed by Hoberman, Miller, Goldstein & Lesser, P.C, our principal accountant during 2010 or 2009.




(c)           Tax Fees




Tax fees of $2,500 were billed by our principal accountants in 2010 for preparing the 2009 tax return.




Tax fees of $2,500 were billed by our principal accountants in 2009 for preparing the 2008 tax return.




(d)       All Other Fees




Our principal accountants billed no other fees, beyond those disclosed in this Item 14, in 2010 and 2009.




Audit Committee Pre-Approval, Policies and Procedures




Our Audit Committee approved the engagement with Hoberman, Miller, Goldstein & Lesser, P.C, our principal accountant, in advance. In addition the Audit Committee approved tax services (as described in c above) provided by our independent auditors. These services were pre-approved by our Audit Committee to assure that such services do not impair the auditor’s independence from us.




The percentage of hours expended on audit by persons other than our principal accountant’s full time, permanent employees, did not exceed 50%.




PART IV




Item 15.  Exhibits, Financial Statement Schedules




(a)   1.Financial Statements- See Index to Financial Statements on page F-1.




2.  Financial Statement Schedules–See (c) below.




3.  Exhibits–See (b) below.




(b)
Certain of the following exhibits were filed as Exhibits to the registration statement on form SB-2, Registration No. 333-74203 and amendments thereto (the "Registration Statement") filed by the Registrant under the Securities Act of 1933, as amended, or the reports filed under the Securities and Exchange Act of 1934, as amended, and are hereby incorporated by reference.




32




Exhibit No.

Description3.1(a)

Certificate of Incorporation of the Company (1)3.1(b)

Certificate of Amendment of the Certificate of Incorporation (6)3.1(c)

Certificate of Change (5)3.2

By-laws of the Company (1)4.1

Specimen Stock Certificate (2)4.2

Form of Underwriter’s Warrant (1)10.1*

Employment Agreement dated March 1, 1999 by and between Assaf Ran and the Company (1)10.2

Web Site Company Formation, Development and Services Agreement dated December 5, 2005 by and between Manhattan Bridge Capital, Inc. and Ocean-7 Development, Inc. (3)10.3

Lease Agreement by and between the Company. and Cres, Inc. for the premises located at 192 Lexington Avenue, New York, New York 10016.  (4)10.4*

Form of the Company’s 2009 Stock Option Plan, as amended (6)23.1

Consent of Hoberman, Miller, Goldstein & Lesser, P.C., dated March 16, 2011. (filed herewith)31.1

Chief Executive Officer Certification as required under section 302 of the Sarbanes Oxley Act (filed herewith)31.2

Chief Financial Officer Certification as required under section 302 of the Sarbanes Oxley Act (filed herewith)32.1**

Chief Executive Officer Certification pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 906 of the Sarbanes Oxley Act (furnished herewith)32.2**

Chief Financial Officer Certification pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 906 of the Sarbanes Oxley Act (furnished herewith)





* Compensation plan or arrangement for current or former executive officers and directors.


** Furnished, not filed, in accordance with item 601(32)(ii) of Regulation S-K.


(1)
Previously filed as exhibit to Form SB-2 on March 10, 1999 and incorporated herein by reference .(2)
Previously filed as exhibit to Form SB-2/A on April 23, 1999 and incorporated herein by reference .(3)
Previously filed as exhibit to Form 8-K on December 12, 2005 and incorporated herein by reference.(4)
Previously filed as an exhibit to Form 10-QSB on August 14, 2006 and incorporated herein by reference.(5)
Previously filed as exhibit to Form 8-K on July 24, 2008 and incorporated herein by reference .(6)
Previously filed as Appendix A to Schedule 14A on May 14, 2010 and incorporated herein by reference.





(c)
No financial statement schedules are included because the information is either provided in the financial statements or is not required under the related instructions or is inapplicable and such schedules therefore have been omitted.




33


SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.




Manhattan Bridge Capital, Inc.By:
/s/ Assaf RanAssaf Ran, President, Chief Executive Officer and Chairman of the Board of Directors


Date:  March 16, 2011




In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on March 16, 2011:




Signature

Date

Title/s/ Assaf Ran

March 16, 2011

President, Chief Executive OfficerAssaf Ran



and Chairman of the Board of Directors (principal executive officer)/s/ Inbar Evron-Yogev

March 16, 2011

Chief Financial Officer (principalInbar Evron-Yogev



financial and accounting officer)/s/ Phillip Michals

March 16, 2011

DirectorPhillip Michals/s/ Eran Goldshmid

March 16, 2011

DirectorEran Goldshmid/s/ Michael Jackson

March 16, 2011

DirectorMichael Jackson/s/ Mark Alhadeff

March 16, 2011

DirectorMark Alhadeff/s/ Lyron Bentovim

March 16, 2011

DirectorLyron Bentovim





34




MANHATTAN BRIDGE CAPITAL, INC.





Index to Consolidated Financial Statements





Page NumberReport of Independent Registered Public Accounting Firm
F-2Consolidated Financial Statements:Balance Sheets at December 31, 2010 and 2009
F-3Statements of Operations for the years ended December 31, 2010 and 2009
F-4Statements of Changes in Shareholders’ Equity for the years ended December 31, 2010 and 2009
F-5Statements of Cash Flows for the years ended December 31, 2010 and 2009
F-6Notes to Consolidated Financial Statements
F-7




F-1




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the Board of Directors and Stockholders


Manhattan Bridge Capital, Inc.





We have audited the accompanying consolidated balance sheets of Manhattan Bridge Capital, Inc. and Subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2010.  Manhattan Bridge Capital, Inc.’s management is responsible for these financial statements.  Our responsibility is to express an opinion on these financial statements based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Manhattan Bridge Capital, Inc. and Subsidiaries as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.





By: /s/ Hoberman, Miller, Goldstein & Lesser, P.C





Hoberman, Miller, Goldstein & Lesser, CPA’s, P.C.





New York, New York


March 16, 2011





F-2





MANHATTAN BRIDGE CAPITAL, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


DECEMBER 31, 2010 and 2009





2010


2009AssetsCurrent assets:Cash and cash equivalents

$
386,023


$
707,449Investment in marketable securities


—



404,268Total cash and cash equivalents and investment in marketable securities at fair value


386,023



1,111,717Short term loans


8,156,293



6,476,621Interest receivable on short term loans


91,593



60,207Other current assets


13,427



26,568Total current assets


8,647,336



7,675,113Property and equipment, net


2,425



5,458Security deposit


17,515



17,515Investment in privately held company, at cost


100,000



100,000Deferred financing costs


109,183



—Total assets

$
8,876,459


$
7,798,086Liabilities and Shareholders’ EquityCurrent liabilities:Line of credit

$
300,000


$
—Accounts payable and accrued expenses


56,405



77,768Deferred origination fees


76,428



102,751Income taxes payable


180,513



162,182Total current liabilities


613,346



342,701Long term liabilities:Senior secured notes


500,000



—Total liabilities


1,113,346



342,701Commitments and contingenciesShareholders’ equity:Preferred shares - $.01 par value; 5,000,000 shares authorized; no shares issued


—



—Common shares - $.001 par value; 25,000,000 authorized; 3,405,190 issued; 3,324,459 outstanding at December 31, 2010 and 2009


3,405



3,405Additional paid-in capital


9,588,849



9,476,762Treasury stock, at cost- 80,731 common shares at December 31, 2010 and 2009


(241,400
)


(241,400
)Accumulated other comprehensive income


—



123,823Accumulated deficit


(1,587,741
)


(1,907,205
)Total shareholders’ equity


7,763,113



7,455,385Total liabilities and shareholders’ equity

$
8,876,459


$
7,798,086





The accompanying notes are an integral part of these consolidated financial statements.





F-3





MANHATTAN BRIDGE CAPITAL, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009





2010


2009Interest income from short term loans

$
993,601


$
839,802Origination fees


216,058



199,023Total Revenue


1,209,659



1,038,825Operating costs and expenses:Interest expense on lines of credit used


28,527



—Referral fees


11,981



—General and administrative expenses


783,231



673,221Total operating costs and expenses


823,739



673,221Income from operations


385,920



365,604Interest and dividend income


4,972



24,210Realized net loss on marketable securities


—



(5,940
)Realized gain on marketable securities that were previously marked down


151,419



10,653Other income


—



15,000Total other income


156,391



43,923Income from operations before income tax expense


542,311



409,527Income tax expense


(222,847
)


(173,780
)Net income

$
319,464


$
235,747Basic and diluted net income per common share outstanding:—Basic

$
0.10


$
0.07—Diluted

$
0.09


$
0.07Weighted average number of common shares outstanding—Basic


3,324,459



3,325,566—Diluted


3,372,289



3,330,315





The accompanying notes are an integral part of these consolidated financial statements





F-4





MANHATTAN BRIDGE CAPITAL, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009





Common Stock


Additional

Paid-in

Capital


Treasury Stock


Accumulated

Other

Comprehensive

Income (Loss)


Accumulated

Deficit


TotalsShares


Amount





Shares


CostBalance, January 1, 2009


3,405,190


$
3,405


$
9,399,861



79,430


$
(239,944
)

$
(30,088
)

$
(2,142,952
)

$
6,990,282Non cash compensation










76,901



















76,901Treasury Shares














1,301



(1,456
)










(1,456
)Unrealized gain on preferred stocks and other marketable securities






















153,911







153,911Net income for the year ended December 31, 2009


























235,747



235,747Total comprehensive income






























389,658Balance, December 31, 2009


3,405,190



3,405



9,476,762



80,731



(241,400
)


123,823



(1,907,205
)


7,455,385Non cash compensation










72,443



















72,443Warrants granted










11,683



















11,683Forgiveness of debt










27,961



















27,961Effect of sale of remaining marketable securities






















(123,823
)






(123,823
)Net income  for the year ended December 31, 2010


























319,464



319,464Total comprehensive income






























195,641Balance, December 31, 2010


3,405,190


$
3,405


$
9,588,849



80,731


$
(241,400
)

$
—-


$
(1,587,741
)

$
7,763,113





The accompanying notes are an integral part of these consolidated financial statements.





F-5




MANHATTAN BRIDGE CAPITAL, INC.  AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009





2010


2009Cash flows from operating activities:Net income

$
319,464


$
235,747Adjustments to reconcile net income to net cash provided by operating activities -Depreciation


3,033



3,963Non cash compensation expense


72,443



76,901Realized gain on marketable securities that were previously marked down


(151,419
)


(10,653
)Realized loss on sale of marketable securities, net


—



5,940Changes in operating assets and liabilitiesInterest receivable on short term commercial loans


(31,386
)


19,467Other current  assets


13,141



(17,755
)Accounts payable and accrued expenses


6,598



(52,607
)Deferred origination fees


(26,323
)


49,645Due from purchasers


—



23,881Income taxes payable


18,331



151,078Net cash provided by operating activities


223,882



485,607Cash flows from investing activities:Proceeds from sale of marketable securities


431,864



253,563Short term commercial loans made


(6,141,593
)


(7,204,229
)Collections received from short term commercial loans


4,461,921



6,289,668Net cash used in investing activities


(1,247,808
)


(660,998
)Cash flows from financing activities:Purchase of treasury stock


—



(1,456
)Credit line used, net


300,000



—Proceeds from issuance of senior secured notes


500,000



—Deferred financing costs on senior secured notes


(97,500
)


—Net cash provided by (used in) financing activities


702,500



(1,456
)Net decrease in cash and cash equivalents


(321,426
)


(176,847
)Cash and cash equivalents, beginning of year


707,449



884,296Cash and cash equivalents, end of year

$
386,023


$
707,449Supplemental Cash Flow Information:Taxes paid during the year

$
203,669


$
30,753Interest paid during the year

$
28,527


$
1,234Non-cash investing and financing activities:Forgiveness of debt by related party

$
27,961



—Warrants issued in connection with issuance of senior secured notes

$
11,683



—





The accompanying notes are an integral part of these consolidated financial statements.





F-6





MANHATTAN BRIDGE CAPITAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER 31, 2010 AND 2009





1.
The Company





Manhattan Bridge Capital, Inc. (“MBC”) and its wholly-owned subsidiaries DAG Funding Solutions, Inc. and MBC Funding I, Inc. (collectively the “Company”),  offer short-term, secured, non–banking loans to real estate investors (also known as hard money) to fund their acquisition and construction of properties located in the New York Metropolitan area.




On June 21, 2010 the board of directors of the Company decided to dissolve DAG Interactive, Inc. (“DAG Interactive”), its 80% owned subsidiary. (See note 12).




2.
Significant Accounting Policies





Principles of Consolidation





The consolidated financial statements include the accounts of Manhattan Bridge Capital, Inc., its wholly-owned subsidiary DAG Funding Solutions, Inc.(“DAG Funding”), its wholly-owned subsidiary    MBC Funding I, Inc. (“MBC Funding”) and its 80% owned subsidiary, DAG Interactive, which was dissolved in June 2010. All significant intercompany balances and transactions have been eliminated in consolidation.




Basis of Presentation





The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). On July 1, 2009, the Financial Accounting Standards Board (“FASB”) released the authoritative version of its new Accounting Standards Codification (“ASC”) as the single source for GAAP, which replaces all previous GAAP accounting standards. While not intended to change GAAP, ASC significantly changes the way in which the accounting literature is organized. In the fourth quarter of fiscal year 2009, the Company adopted ASC to reference GAAP accounting standards in its consolidated financial statements. The adoption of ASC did not have an effect on the Company’s consolidated financial position, results of operations or
cash flows.




Use of Estimates





The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management will base the use of estimates on (a) a preset number of assumptions that consider past experience, (b) future projections, and (c) general financial market condition. Actual amounts could differ from those estimates.




Cash and Cash Equivalents




For the purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.




F-7




Marketable Securities





Marketable securities are reported at fair value and are classified as available-for-sale. Unrealized gains and losses from those securities are reported as a separate component of shareholders’ equity, net of the related tax effect. Realized gains and losses are determined on a specific identification basis. Additionally, theCompany assesses whether an other-than-temporary impairment loss on the investments has occurred due to declines in fair value or other market conditions. Declines in fair value that are considered other than temporary, if any, are recorded as charges in the Consolidated Statements of Operations. The Company did not record an impairment loss on marketable securities for the years ended December 31, 2009. As of
December 31, 2010, the Company had sold all of its marketable securities.




Concentrations of Credit Risk





Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and marketable securities. The Company maintains its cash and cash equivalents with one major financial institution. Accounts at the financial institution are insured by the Federal Deposit Insurance Corporation up to $250,000.




Credit risks associated with short term commercial loans the Company makes to small businesses and related interest receivable are described in Note 4 entitled Short Term Commercial Loans.




Property and Equipment




Property and equipment are recorded at cost. Depreciation is provided on a straight-line basis over the estimated useful economic lives of the assets, ranging from three to five years.




Impairment of long- lived assets





The Company continually monitors events or changes in circumstances that could indicate carrying amounts of long lived assets, may not be recoverable. When such events or changes in circumstances occur, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the undiscounted cash flows is less than the carrying amount of these assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. There was no impairment to the carrying value of property and equipment during the years ended December 31, 2010 or 2009.




Income Taxes





The Company accounts for income taxes under the provisions of FASB ASC 740, “Income Taxes”. Under the provisions of FASB ASC 740, deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rate is recognized in income in the period that includes the enactment date.




Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, the Company considers all available evidence including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that the Company changes its determination as to the amount of deferred tax assets that can be realized, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.




F-8




The Company follows ASC 740 rules governing tax positions which provides guidance for recognition and measurement. This prescribes a threshold condition that a tax position must meet for any of the benefits of the uncertain tax position to be recognized in the financial statements. It also provides accounting guidance on derecognization, classification and disclosure of these uncertain tax positions.




Revenue Recognition





The Company recognizes revenues in accordance with ASC 605, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. ASC 605 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, the Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery of the product has occurred or services have been rendered, (iii) the sales price charged is fixed or determinable, and (iv) collectability is reasonably assured.




Interest income from short term commercial loans is recognized, as earned, over the loan period.




Origination fee revenue on short term commercial loans is amortized over the term of the respective note.




Deferred Financing Costs





Costs incurred in connection with the Company’s senior secured notes, as discussed in Note 7, are being amortized over the term of the notes using the straight-line method.




Earnings Per Share (“EPS”)





Basic and diluted earnings per share are calculated in accordance with ASC 260 “Earnings Per Share”. Under ASC 260, basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share include the potential dilution from the exercise of stock options and warrants for common shares using the treasury stock method.




The numerator in calculating both basic and diluted earnings per common share for each year is the reported net income.  The denominator is based on the following weighted average number of common shares:




Years ended

December 31,2010


2009Basic weighted average common shares outstanding


3,324,459



3,325,566Incremental shares for assumed exercise of options


47,830



4,749Diluted weighted average common shares outstanding


3,372,289



3,330,315




486,837 and 571,584 vested options were not included in the diluted earnings per share calculation for the years ended December 31, 2010 and 2009, respectively, as their effect would have been anti-dilutive.




F-9





Stock-Based Compensation





The Company measures and recognizes compensation awards for all stock option grants made to employees and directors, based on their fair value in accordance with ASC 718 “Compensation- Stock Compensation”, which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. A key provision of this statement is to measure the cost of employee services received in exchange for an award of equity instruments (including stock options) based on the grant-date fair value of the award. The cost will be recognized over the service period during which an employee is required to provide service in exchange for the award (i.e., the requisite service period or vesting period). The Company accounts for equity instruments issued to non-employees
in accordance with the provisions of ASC 718 and ASC 505-50, “Equity Based Payment to Non-Employees”. All transactions with non-employees, in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more appropriately measurable.




Fair Value of Financial Instruments





For cash and cash equivalents the line of credit and account payable, as well as short term interest bearing commercial loans held by the Company, the carrying amount approximates fair value due to the short-term nature of such instruments. The senior secured notes approximate fair value due to the relative short term of the notes and the prevailing interest rate.




Other Comprehensive Loss





Other comprehensive income consists of the Company’s net income and net unrealized income (losses) on marketable securities. The Company’s comprehensive income for the years ended December 31, 2010 and 2009 amounted to $195,641 and $389,658, respectively.




Recent Accounting Pronouncements





In June 2009, the FASB issued “The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles” under ASC 105. ASC 105 establishes the FASB Standards Accounting Codification as the source of authoritative U.S. generally accepted accounting principles recognized by the FASB to be applied to nongovernmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification supersedes all the existing non-SEC accounting and reporting standards upon its effective date and subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. The adoption of this new standard did not have a material effect on the Company’s disclosures of the
consolidated financial statements.




In August 2009, the FASB issued an update to ASC 820. This Accounting Standards Update (“ASU”) No. 2009-5, Measuring Liabilities at Fair Value (“ASU 2009-5”) amends the provisions in ASC 820 related to the fair value measurement of liabilities and clarifies for circumstances in which a quoted price in an active market for the identical liability is not available. ASU 2009-5 is intended to reduce potential ambiguity in financial reporting when measuring the fair value of liabilities. ASU 2009-5 was effective for the Company in the first quarter of fiscal year 2010. ASU 2009-5 concerns disclosure only. The adoption of ASU 2009-5 did not have a material effect on the Company’s consolidated financial statements.




F-10


In December 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-17, which codifies SFAS No. 167, Amendments to FASB Interpretation No. 46(R) issued in June 2009. ASU 2009-17 requires a qualitative approach to identifying a controlling financial interest in a variable interest entity (“VIE”), and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. ASU 2009-17 is effective for annual reporting periods beginning after November 15, 2009. The adoption of ASU 2009-17 did not have a material effect on the Company’s  consolidated financial statements.




In January 2010, the FASB issued ASU 2010-6, Improving Disclosures About Fair Value Measurements, which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair- value measurements. ASU 2010-6 is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. Currently, the Company believes that the adoption of ASU 2010-6 will not have a material effect on its consolidated financial statements.




In February 2010, FASB issued ASU 2010-9, as an amendment to ASC 855. This update eliminates the requirement to provide a specific date through which subsequent events were evaluated. This update was issued to alleviate potential conflicts between ASC855 and SEC reporting requirements. The update was effective upon issuance and has no impact on the Company’s consolidated financial statements.




In July 2010, FASB issued ASU 2010-20, entitled “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,”which is effective for public entities interim and annual financial statements ending after December 15, 2010. The objective of this amended guidance is for an entity to provide disclosures that facilitate financial statement users’ evaluation of; the nature of credit risk inherent in the entities portfolio of financing receivables; how risk is analyzed and assessed in arriving at the allowance for credit losses; and the changes and reasons for those changes in the allowance for credit losses. Existing guidance has been amended to provide enhanced disaggregated disclosures in situations
involving impairments or troubled loan restructurings, with the guidance for trouble debt restructuring disclosures delayed pursuant to ASU 2011-01. Company disclosures herein are based on the Company’s adoption of ASU 2010-20, and providing disclosures there under that apply to its short term loan portfolio in the current circumstances.




Management does not believe that any other recently issued, but not yet effected, accounting standards if currently adopted would have a material effect on the Company’s consolidated financial statements.




3.
Marketable Securities





Effective January 1, 2008, the Company adopted  ASC 820, Fair Value Measurements, which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:




Level 1—Quoted prices in active markets.




Level 2—Observable inputs other than quoted prices in active markets that are either directly or indirectly observable.




F-11




Level 3—Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.




Cash equivalents and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy.The Company’s Level 1 investments are valued using quoted market prices in active markets.The Company’s Level 2 investments are valued using broker or dealer quotations for similar assets and liabilities.As of December 31, 2010 and 2009 the Company’s Level 1 investments consisted of cash, money market accounts and marketable securities in the amount of approximately $386,000 and $1,112,000, respectively, and were recorded as cash and cash equivalents and marketable securities in the Company’s
consolidated balance sheets.




As of December 31, 2009 the Company’s marketable securities consist of the following:




As of 12/31/2009

Fair Value


Cost


Holding GainsInvestment in Marketable Securities

$
404,268


$
280,445


$
123,823





4.
Short Term Commercial Loans





The Company offer short-term secured non–banking loans to real estate investors (also known as hard money) to fund their acquisition and construction of properties located in New York Metropolitan area. The loans are principally secured by collateral consisting of real estate and, generally, accompanied by personal guarantees from the principals of the businesses. The loans are generally for a term of one year. The short term loans are initially recorded, and carried thereafter, in the financial statements at cost. Most of the loans provide for receipt of interest only during the term of the loan and a balloon payment at the end of the term. For the years ended December 31, 2010 and 2009 the total amounts of $6,141,593
and $7,204,229, respectively, have been lent, offset by collections received from borrowers, under the short term commercial loans in the amount of $4,461,921 and $6,289,668, respectively. Loans ranging in size from $50,000 to $900,000 were concluded at stated interest rates of 12% to 16%, but often at higher effective rates based upon points or other up-front fees.  The Company uses its own employees, outside lawyers and other independent professionals to verify titles and ownership, to file liens and to consummate the transactions.  Outside appraisers are also used to assist the Company’s officials in evaluating the worth of collateral.  To date, the Company has not experienced any defaults and none of the loans previously made have been non-collectable, although no assurances can be given that existing or future loans may not go into default or prove to be non-collectible in the future.




Some of the loans in the Company’s portfolio at December 31, 2010, were jointly funded by the Company and unrelated entities during the year ended December 31, 2010, for aggregate loans of $1,980,000. The accompanying balance sheet includes the Company’s portion of the loan in the amount of $1,000,000.




At December 31, 2010, the Company was committed to an additional $1,521,000 in construction loans that can be drawn by the borrower when certain conditions are met.




At December 31, 2009, approximately $671,000 of the loans outstanding is due from one entity, which represents more than 10% of the total balance of the loans outstanding.  At December 31, 2010, no one entity has loans outstanding representing more than 10% of the total balance of the loans outstanding




At December 31, 2010, approximately $885,000 of the loans outstanding are due from three different entities that are all owned by the same individual, which represents more than 10% of the total balance of the loans outstanding.




F-12




At December 31, 2009, one individual has a fifty percent interest in each of four of the Company’s outstanding loans in the aggregate amount of $1,245,000.




The Company generally grants loans for a term of one year.  In certain situations the Company and its borrowers have mutually agreed to the extension of the loans as a result of the downturn in the economy and the real estate industry in the New York metropolitan area. Potential buyers of the real estate serving as collateral for the short-term loans may have difficulty securing financing due to restrictions imposed by financial institutions resulting from the recent mortgage crisis. In addition, the Company’s borrowers may be having difficulty securing permanent financing.  Prior to the Company granting an extension of any loan, it reevaluates the underlying collateral. At December 31, 2010, the Company’s short-term loans include loans in the amount of $250,000, $813,000, and
$3,045,200, originally due in 2008, 2009 and 2010, respectively. In all instances the borrowers are currently paying their interest and, generally, the Company receives a fee in connection with the extension of the loans.  Accordingly, at December 31, 2010 and 2009, no loan impairments exist and there are no provisions for impairments of loans or recoveries thereof included in operations for the years then ended.  Subsequent to the balance sheet date approximately $1,503,000 of the extended loans outstanding at December 31, 2010 are currently being negotiated for a further extension of the due date.




Credit risk profile based on loan activity as of December 31, 2010:




Developers-

Residential


Developers-

Commercial


Developers

Mixed

Used


Total

outstanding

loansPerforming loans

$
7,361,293


$
495,000


$
300,000


$
8,156,293





5.
Property and Equipment





Property and equipment, at cost, consist of the following:




December 312010


2009Office equipment

$
20,744


$
20,744Less:  Accumulated depreciation


(18,319
)


(15,286
)Property and equipment, net

$
2,425


$
5,458




Depreciation expense was $3,033 and $3,963 for the years ended December 31, 2010 and 2009, respectively.




6.
Lines of Credit





The Company established a line of credit with Smith Barney.  The line of credit provided for maximum borrowings in the amount of up to 50% of the value of the Company's marketable securities held by Smith Barney.  This line bears interest at the prime rate minus .75%. During the year 2009 the Company used approximately $157,000 from its line, which was paid during the fourth quarter of 2009.




F-13




In addition, in 2009 the Company established a secured line of credit with Valley National Bank. The line of credit provides for maximum borrowings in the amount of up to $300,000, which may be prepaid by the Company at any time without penalty. The line requires monthly payments of interest only at the rate of 9%, per annum, with borrowings still outstanding due in October, 2012. Pursuant to a security agreement, the line of credit is secured by the Company’s short term loans. During the year 2009 the Company used approximately $262,000 from this line which was paid by the end of 2009. As of December 31, 2010, $300,000 is outstanding under this line.




7.
Senior secured notes





On December 28, 2010, MBC Funding completed a $500,000 private placement of three-year 6.63% senior secured notes. In connection therewith, MBC assigned approximately $750,000 of its short-term loans to MBC Funding to use as collateral for the notes. Pursuant to the agreement, MBC has also guaranteed the repayment of the notes. The notes require quarterly payments of interest only through the expiration date in December, 2013, at which time the notes become due. The private placement was the initial tranche of a $5,000,000 offering due to expire on March 31, 2011, which is no longer being marketed by the underwriter (Paulson).




Financing costs incurred in connection with the agreement totaled $109,183, including five year warrants (the “warrants”) to purchase 20,000 shares of the Company’s Common Stock issued to the underwriter at $2.50 per share, which were valued at $11,683.




8.
Income Taxes





Income tax expense (benefit) consists of the following:




2010


2009Current Taxes:Federal

$
176,205


$
131,300State


46,642



42,480222,847



173,780Deferred taxes:Federal


—



—State


—



——



—Income tax expense

$
222,847


$
173,780





Deferred tax assets consist of the following:




2010


2009Deferred tax assets:Unrealized loss on marketable securities (*)

$
—


$
122,009Realized losses on marketable securities (*)


160,822



48,186Compensation expenses


31,150



34,605Deferred tax assets


191,972



204,800Less: valuation allowance

$
(191,972
)

$
(204,800
)—



—





F-14




(*) Unrealized losses on marketable securities are not deductible for federal and state income tax purposes unless the underlying security giving rise to the loss is actually sold or has no market, at which time the resulting loss is only deductible to the extent of capital gains, if any.




The income tax expense (benefit) differs from the amount computed using the federal statutory rate of 34% as a result of the following:




Year Ended December 31,

2010


2009Federal Statutory Rate


34
%


34
%State and local income tax expense (benefit), net of federal tax effect


10
%


11
%Valuation allowance


—



—State and local franchise taxes


—



—Other


(3
)%


(3
)%Income tax expense (benefit)


41
%


42
%





The Company evaluates tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more likely than not” of being sustained by the applicable tax authorities.  Tax positions not deemed to meet the more likely than not threshold are recorded as tax benefits or expenses in the current year.  Management has analyzed the Company’s tax positions taken on Federal, state and local tax returns for all open tax years, and has concluded that no provision for Federal income tax is required in the Company’s financial statements.  The Company reports interest and penalties as income tax expense, which amounted to approximately $22,000 and $4,000 for the years ended December 31, 2010 and
2009, respectively.




The Company is no longer subject to U.S. federal and state and local income tax examinations by tax authorities for years prior to 2006, as these tax years are closed.




9.
Simple IRA Plan





On October 26, 2000, the Board of Directors approved a Simple IRA Plan (the “IRA Plan”) for the purpose of attracting and retaining valuable executives.  The IRA Plan was effective August 2000 with a trustee, which allows up to 100 eligible executives to participate.  It is a “Matching Contribution” plan under which eligible executives may contribute up to 6% of their yearly salary, on a pre-tax basis (with a cap of $10,500), with the Company matching on a dollar-for-dollar basis up to 3% of the executives’ compensation (with a cap of $10,500).  These thresholds are subject to change under notice by the trustee.   The Company is not responsible for any other costs under this plan.  For the years ended December 31, 2010 and 2009
the Company contributed $5,019 and $2,748, respectively, as matching contributions to the IRA Plan.




10.
Stock Option Plan





On June 23, 2009 the Company adopted the 2009 Stock Option Plan (the “Plan”) and replaced the 1999 Stock Option Plan as amended (the “Prior Plan”), which expired in May of 2009. Options granted under the Prior Plan remain outstanding until expired, exercised or cancelled.




The purpose of the Plan is to align the interests of officers, other key employees, consultants and non-employee directors of the Company and its subsidiaries with those of the stockholders of the Company, to afford an incentive to such officers, employees, consultants and directors to continue as such, to increase their efforts on behalf of the Company and to promote the success of the Company’s business.  The availability of additional shares will enhance the Company’s ability to achieve these goals. The basis of participation in the Plan is upon discretionary grants of the Board.The Board may at any time, and from time to time, suspend or terminate the Plan in whole or in
part or amend it from time to time.




F-15




The maximum number of Common Shares reserved for the grant of awards under the Plan is 350,000, subject to adjustment as provided in Section 9 of the Plan. As of December 31, 2010, 126,000 options were granted and 224,000 are available for grant under the 2009 stock option plan.




The exercise price of options granted under the Company’s stock option plan may not be less than the fair market value on the date of grant. Stock options under our stock option plan may be awarded to officers, key-employees, consultants and non-employee directors of the Company.  Under our stock option plan, every non-employee director of the Company is granted 7,000 options upon first taking office, and then 7,000 upon each additional year in office. Generally, options outstanding vest over periods not exceeding four years and are exercisable for up to five years from the grant date.




Share based compensation expense recognized under ASC 718 for the years ended December 31, 2010 and 2009 were $72,443 and 76,901, respectively.




The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average share assumptions used for grants in 2010 and 2009, respectively: (1) expected life of 5 years; (2) No annual dividend yield; (3) expected volatility 62% to 73%; (4) risk free interest rate of 1.5% to 5.1%.




The following summarizes stock option activity for the years ended December 31, 2010 and 2009:




Number of

Shares


Weighted

Average

Exercise

Price


Weighted

Average

Remaining

Contractual

Term (in

years)


Aggregate

Intrinsic

ValueOutstanding at January 1, 2009


615,000


$
2.51



2.29


$
741,474Granted in 2009


175,000



0.77Exercised in 2009


—



—Forfeited in 2009


(91,000
)


4.04Outstanding at December 31, 2009


699,000


$
1.87



2.30


$
624,353Granted in 2010


98,000



1.40Exercised in 2010


—



—Forfeited in 2010


(166,000
)


3.35Outstanding at December 31, 2010


631,000


$
1.41



2.21


$
469,352Vested and exercisable at December 31, 2009


576,333


$
2.10



1.94


$
576,413Vested and exercisable at December 31, 2010


534,666


$
1.47



1.94


$
415,655





The weighted-average fair value of each option granted during the year ended December 31, 2010 and 2009, estimated as of the grant date using the Black-Scholes option-pricing model, was $0.78 per option and $0.37 per option, respectively.




F-16




A summary of the status of the Company’s nonvested shares as of December 31, 2010 and 2009, and changes during the years then ended is as presented below:




Number

of

Shares


Weighted

Average

Exercise

Price


Weighted Average

Remaining

Contractual Term

(inyears)Nonvested shares at January 1, 2009


79,000


$
1.25



3.87Granted


175,000



0.77



4.29Vested


(131,333
)


1.01



3.72Nonvested shares at December 31, 2009


122,667


$
0.82



3.98Granted


98,000



1.40



4.32Vested


(124,333
)


1.07



3.48Nonvested shares at December 31, 2010


96,334


$
1.09



3.69







The following table summarizes information about stock options outstanding at December 31, 2010:




Stock Option Outstanding


ExercisableRange of Exercise

Prices

Number of

Shares


Weighted

Average

Exercise

Price


Weighted

Average

Remaining

Contractual

Term (in

years)


Number

ofShares


Weighted

Average

Exercise

Price$ 0.50- $ 1.00


201,000


$
0.78



3.18



152,333


$
0.79$ 1.01- $ 2.00


285,000



1.43



2.51



237,333



1.43$ 2.01- $ 3.00


145,000



2.25



0.25



145,000



2.25631,000


$
1.41



2.21



534,666


$
1.47





In connection with the Company’s private placement of senior secured notes the Company issued to Paulson 20,000 warrants. The warrants are convertible into the same number of common shares at an exercise price of $2.50 per warrant.  The warrants are exercisable over a five-year period beginning December 28, 2010.




11.
Shareholders’ Equity





In October 2009, the Board of Directors of the Company authorized a stock repurchase program. The program authorized the Company to purchase up to 100,000 common shares of the Company within the next year.  As of December 31, 2010 and 2009, the Company has purchased 1,301 common shares, from this repurchase program, at an aggregate cost of approximately $1,400.




12.
Forgiveness of Debt





On June 21, 2010 the board of directors of the Company decided to dissolve DAG Interactive.  In connection with the dissolution, the Company recorded forgiveness of debt, for accounts payable due to a related party, in the amount of $27,961 as an additional paid-in capital.




F-17




13.
Commitments and Contingencies





Operating Leases





On June 12, 2006, we entered into a new Lease Agreement dated as of June 9, 2006 (the “Agreement”). In accordance with the Agreement, we are leasing the Premises for a term of 5 years commencing July 1, 2006 and ending on June 30, 2011.  At December 31, 2010, approximate future minimum rental and utilities payments under these commitments are as follows:




2011


35,000Total

$
35,000





Rent expense was approximately $64,000 and $62,000 in 2010 and 2009, respectively.





Employment Agreements





In March 1999, the Company entered into an employment agreement with Assaf Ran, its president and chief executive officer.  Mr. Ran’s employment term initially renews automatically for successive one-year periods unless either party gives 180 days written notice of its intention to terminate the agreement.  Under the agreement, Mr. Ran will receive an annual base salary of $75,000, annual bonuses as determined by the compensation committee of the Board of Directors in its sole and absolute discretion, and is eligible to participate in all executive benefit plans established and maintained by the Company.  Under the agreement, Mr. Ran has also agreed to a one-year non-competition period following the termination of his employment.
As of March 2003 the compensation committee approved an increase in Mr. Ran’s compensation to an annual base salary of $225,000. On March 13, 2008 the compensation committee approved Mr. Ran’s reduction of his annual salary by 75% to $56,000 for an additional one year or until the Company has more significant operations (as defined by the Committee). On March 18, 2009 the compensation committee approved Mr. Ran’s continuing the reduction of his annual salary to $100,000 for one year or until the Company has more significant operations (as defined by the Committee). On June 21, 2010 the board restored Mr. Ran’s salary to the level of $225,000 per year.




Mr. Ran’s annual base compensation was $167,000 and $92,000 during the years 2010 and 2009, respectively, and a bonus of $65,000 for each of the years 2010 and 2009 which was approved by the Compensation committee of the Board of Directors.




14.
Related Parties Transactions





DAG Interactive Inc, our former subsidiary, was held 20% by Ocean-7. Mark Alhadeff is the main shareholder of Ocean-7 and effective December of 2005 is a member of our board of directors.




Accounts payable and accrued expenses at December 31, 2009 include approximately $30,000 due to Ocean-7. On June 21, 2010, the board of directors of the Company decided to dissolve DAG Interactive, Inc and, in connection therewith,  recorded  forgiveness of debt for the amount due to Ocean-7 (see Note 12).




On April 2010 Mr. Ran our CEO made a loan to the Company in the amount of $150,000 for one week bearing interest of 12%. During the year of 2010 interest expense on such loan was $400.




F-18