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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
x Quarterly Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934
For the quarterly period ended June 30, 2013
o Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to .
Commission file number
814-00631
TIMIOS NATIONAL CORPORATION
(Name of small business issuer in its charter)
Delaware | | 52-2050585 |
(State or Other Jurisdiction of Incorporation
or Organization) | | (I.R.S. Employer Identification No.)
|
| | |
4601 Fairfax Drive, Suite 1200
Arlington, VA | | 22203 |
(Address of principal executive offices) | | (Zip code) |
(703) 528-7073
(Issuer’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | | Accelerated filer o |
Non-accelerated filer o | | Smaller reporting company x |
(Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of August 9, 2013, there were 2,351,599 shares of common stock, par value $0.001, outstanding.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The accompanying interim condensed consolidated financial statements and notes to the condensed consolidated financial statements for the interim period as of June 30, 2013, are unaudited. The accompanying interim unaudited financial statements have been prepared by Timios National Corporation (the “Company” or the “Holding Company”) in accordance with accounting principles generally accepted in the United States for interim financial statements and pursuant to the requirements for reporting on Form 10-Q. Accordingly, these interim unaudited financial statements do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2013, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2013. The condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as of and for the twelve months ended December 31, 2012.
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TIMIOS NATIONAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
| | June 30, | | December 31, | |
| | 2013 | | 2012 | |
Assets: | | | | | |
Cash | | $ | 653,953 | | $ | 1,565,758 | |
Escrow receivable | | — | | 800,000 | |
Current portion of note receivable | | 90,530 | | 90,530 | |
Prepaid and other | | 830,040 | | 489,427 | |
Total current assets | | 1,574,523 | | 2,945,715 | |
Fixed assets - net | | 557,348 | | 381,877 | |
Loan and collar agreement | | 500,000 | | — | |
Note receivable | | 88,325 | | 139,244 | |
Intangible assets - net | | 475,697 | | 248,667 | |
Goodwill | | 1,674,242 | | 1,674,242 | |
Total assets | | $ | 4,870,135 | | $ | 5,389,745 | |
Liabilities and Stockholders’ Equity | | | | | |
Current liabilities: | | | | | |
Accounts payable | | $ | 1,267,013 | | $ | 925,104 | |
Contingent consideration | | 30,000 | | 254,215 | |
Curent portion of note payable - related party | | 184,671 | | 980,637 | |
Accrued compensation | | 627,379 | | 824,005 | |
Accrued other liabilities | | 26,495 | | 24,318 | |
State income taxes payable | | 102,195 | | 101,269 | |
Total current liabilities | | 2,237,753 | | 3,109,548 | |
Note payable - related party | | 209,508 | | 287,676 | |
Total liabilities | | 2,447,261 | | 3,397,224 | |
Stockholders’ Equity | | | | | |
Preferred stock, $0.01 par value, 5,000,000 shares authorized, 2,564,487 shares (2,589,143 at December 31, 2012) issued and outstanding | | 25,645 | | 25,891 | |
Common stock, $0.001 par value, 50,000,000 shares authorized, 2,351,599 shares (2,270,528 at December 31, 2012) issued and outstanding | | 2,352 | | 2,271 | |
Additional paid-in capital | | 77,509,487 | | 77,473,993 | |
Accumulated deficit | | (75,114,610 | ) | (75,509,634 | ) |
Total stockholders’ equity | | 2,422,874 | | 1,992,521 | |
Total liabilities and stockholders’ equity | | $ | 4,870,135 | | $ | 5,389,745 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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TIMIOS NATIONAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
| | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | 2013 | | 2012 | | 2013 | | 2012 | |
Net revenue | | $ | 8,518,721 | | $ | 4,577,193 | | $ | 15,873,332 | | $ | 9,464,671 | |
Costs of revenue | | 5,886,440 | | 3,453,815 | | 11,158,500 | | 6,835,975 | |
Gross profit on revenue | | 2,632,281 | | 1,123,378 | | 4,714,832 | | 2,628,696 | |
General and administrative expenses | | 2,273,654 | | 1,506,527 | | 4,229,351 | | 2,997,227 | |
Operating income | | 358,627 | | (383,149 | ) | 485,481 | | (368,531 | ) |
Other expense | | (1,406 | ) | (28,187 | ) | (4,047 | ) | (94,465 | ) |
Income (loss) before income taxes | | 357,221 | | (411,336 | ) | 481,434 | | (462,996 | ) |
State income tax expense | | 28,021 | | 36,435 | | 86,410 | | 80,735 | |
Net income (loss) | | 329,200 | | (447,771 | ) | 395,024 | | (543,731 | ) |
Loss attributable to noncontrolling interests | | — | | 23,900 | | — | | 4,683 | |
Series H Preferred Stock beneficial conversion | | — | | (3,681 | ) | — | | (7,362 | ) |
Income (loss) attributable to common stockholders of Timios National Corporation | | $ | 329,200 | | $ | (427,552 | ) | $ | 395,024 | | $ | (546,410 | ) |
Income (loss) per common share attributable to Timios National Corporation stockholders - basic and diluted | | | | | | | | | |
Basic | | $ | 0.14 | | $ | (3.92 | ) | $ | 0.17 | | $ | (5.01 | ) |
Diluted | | $ | 0.03 | | $ | (3.92 | ) | $ | 0.04 | | $ | (5.01 | ) |
Weighted average shares outstanding - | | | | | | | | | |
Basic | | 2,351,599 | | 108,983 | | 2,322,805 | | 108,983 | |
Diluted | | 11,113,651 | | 108,983 | | 11,013,759 | | 108,983 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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TIMIOS NATIONAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
| | Six Months Ended June 30, | |
| | 2013 | | 2012 | |
| | | | | |
Net cash provided by (used in) operating activities | | $ | 217,755 | | $ | (443,722 | ) |
Net cash used in investing activities | | (252,785 | ) | (476,208 | ) |
Net cash (used in) provided by financing activities | | (876,775 | ) | 16,799 | |
Net decrease in cash | | (911,805 | ) | (903,131 | ) |
Cash, beginning of period | | 1,565,758 | | 2,679,057 | |
Cash, end of period | | $ | 653,953 | | $ | 1,775,926 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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TIMIOS NATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2013
1. Organization and Basis of Presentation of Unaudited Interim Financial Statements.
Organization
Timios National Corporation (the “Company” or the “Holding Company”) is a consolidator of companies, whose current subsidiaries provide title, settlement, escrow, appraisal and asset management real estate services. We are focused on creating long term value by taking a controlling interest in and developing our subsidiary companies through superior operations and management. We intend to operate businesses that provide real estate services, growing organically and by acquisitions. The Company targets emerging companies that are generating revenues but face challenges in scaling their businesses to capitalize on opportunities in the aforementioned industry sector.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.
The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary, Fiducia Real Estate Services, Inc. (“FRES”) and FRES’s wholly-owned subsidiaries, Timios, Inc. (“Timios” and its wholly-owned subsidiaries Timios Escrow Services, Inc. or “TEI” and Glen County Title Company, Inc. or “GCTC”), Timios Appraisal Management, Inc. (“TAM”) and Default Servicing USA, Inc. (“DSUSA”). All intercompany balances and transactions have been eliminated.
Reclassifications — Certain prior period balances have been reclassified to conform to the current period presentation.
2. Income Taxes
The Company has not recorded any federal income tax expense or benefit for the six months ended June 30, 2013, mainly due to available federal net operating loss carryforwards. The Company has recorded an income tax valuation allowance equal to the benefit of any deferred tax asset because of the uncertain nature of realization. The Company has recorded state income tax expense for certain of the jurisdictions in which it operates.
3. Earnings (Loss) Per Share
The basic earnings (loss) per share was computed by dividing the net income or loss applicable to the Company’s common stockholders by the weighted average shares of common stock outstanding during each period.
Diluted earnings per share are computed using outstanding shares of common stock plus the Company’s Series J convertible preferred stock (the “Preferred Shares”) and common stock options and warrants that can be exercised or converted, as applicable, into common stock, par value $0.001, at June 30, 2013 and 2012. Diluted earnings per share are not indicated for the three and six month periods ended June 30, 2012 because the effect would be anti-dilutive.
The reconciliations of the basic and diluted income (loss) per share for the income (loss) attributable to the Company’s shareholders are as follows:
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| | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | 2013 | | 2012 | | 2013 | | 2012 | |
| | | | | | | | | |
Basic and Diluted Earnings (Loss) Per Share: | | | | | | | | | |
Net Income (Loss) | | $ | 329,200 | | $ | (447,771 | ) | $ | 395,024 | | $ | (543,731 | ) |
Loss attributable to noncontrolling interests | | — | | 23,900 | | — | | 4,683 | |
Series H Preferred Stock beneficial conversion feature | | — | | (3,681 | ) | — | | (7,362 | ) |
Income (loss) attributable to common stockholders | | $ | 329,200 | | $ | (427,552 | ) | $ | 395,024 | | $ | (546,410 | ) |
| | | | | | | | | |
Shares (Denominator) | | | | | | | | | |
Weighted-average number of common shares: | | | | | | | | | |
Basic | | 2,351,599 | | 108,983 | | 2,322,805 | | 108,983 | |
Diluted | | 11,113,651 | | 108,983 | | 11,013,759 | | 108,983 | |
| | | | | | | | | |
Earnings Per Common Share | | | | | | | | | |
Basic — net income (loss) | | $ | 0.14 | | $ | (3.92 | ) | $ | 0.17 | | $ | (5.01 | ) |
Diluted — net income (loss) | | $ | 0.03 | | $ | (3.92 | ) | $ | 0.04 | | $ | (5.01 | ) |
4. Cash Flows
Supplemental disclosure of cash flow information for the six month period ending June 30, 2013 and 2012, are as follows:
| | Six Months Ended June 30, | |
| | 2013 | | 2012 | |
| | | | | |
Cash paid during the period for: | | | | | |
Taxes | | $ | 86,941 | | $ | — | |
| | | | | |
Supplemental disclosure for noncash investing and financing activity: | | | | | |
Dividends recognized from beneficial Conversion feature | | $ | — | | $ | 7,362 | |
Settlement of related party Note receivable | | $ | — | | $ | 458,453 | |
Debt issuance for acquisition of subsidiary | | $ | 200,000 | | $ | — | |
5. Equity Activity
During the three and six months ended June 30, 2013, the Company recorded $17,616 and $35,232, respectively ($5,872 per month) as compensation expense, thereby increasing additional paid in capital, based on the stock options granted to employees and a director on December 17, 2012, under the 2012 Employee, Director and Consultant Equity Incentive Plan, or the 2012 Plan.
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6. Term Loan and Collar Agreement with Yorkville Global Investments, L.P. (“YA”)
On May 21, 2013, the Company entered into the following agreements with YA Global Investments, L.P. (“YA”): (i) Term Loan and Collar Agreement (the “Loan Agreement”), Stock Pledge Agreement (the “Pledge Agreement”) and Loan and Collar Call Agreement (the “Call Agreement”).
Under the terms of the Loan Agreement, the Company loaned a principal amount of $500,000 to YA (the “Loan”) at an annually compounded interest rate equal to One and Nine One Hundredths Percent (1.09%). The Loan matures on May 21, 2017, unless the Company accelerates maturity with 30 days’ prior notice (the “Maturity Date”). The Loan is secured by 253,434 shares of the Company’s Series J Preferred Stock, par value $0.01 (the “Preferred Stock”), owned by YA, which Preferred Stock is pledged to the Company pursuant to the Pledge Agreement (the “Collateral Shares”). The Loan is to be repaid in cash on the settlement date, which is the earlier to occur of (i) the date on which all of the Collateral Shares have been sold or otherwise disposed of and (ii) the date that is 120 days after the Maturity Date (the “Settlement Date”), or earlier if an Event of Default has occurred, as defined in the Loan Agreement. Although YA may prepay all or part of the Loan without penalty, YA is not required to pay any amounts under the Loan Agreement prior to the Settlement Date.
Within ten calendar days after the Maturity Date, YA is required to retain a broker mutually acceptable to both parties, or failing this the Company may retain one, who would be required to sell all, but not less than all, Collateral Shares not previously sold prior to the Maturity Date. The broker would have 90 days to sell the Collateral Shares, or failing this YA may put the Collateral Shares to the Company at a price per share of the Company’s common stock as determined by a third party valuation company, or other valuation methodology, in each case, mutually acceptable to both the Company and YA; provided, however, that if the Company’s common stock ceases to be quoted for trading or listed for trading on any national securities exchange that is registered with the Securities Exchange Commission or with the NASDAQ OTC Bulletin Board (a “Going Private Event”), the value of such common stock shall be $0.78 per share.
The Company and YA agreed on a collar arrangement that allocates the risk associated with the value of the Collateral Shares as of the Settlement Date as follows:
· If (i) a Going Private Event has not occurred, (ii) the Collateral Shares are sold or otherwise disposed of and (iii) the price per share of common stock (issued upon conversion of the Preferred Stock, or “Conversion Share”) is $0.60 or less, then the Company is required to pay to YA an amount equal to the product of (A) the difference between $0.60 and the price per Conversion Share and (B) the number of Conversion Shares.
· If (i) a Going Private Event has occurred, (ii) the Collateral Shares are sold or otherwise disposed of and (iii) the price per Conversion Share is $0.78 or less, then the Company is required to pay to YA an amount equal to the product of (A) the difference between $0.78 and the price per Conversion Share and (B) the number of Conversion Shares.
· If Collateral Shares are sold or otherwise disposed of and the price per Conversion Share is more than $0.78, then YA is required to pay to the Company an amount equal to the product of (i) the difference between the price per Conversion Share and $0.78 and (ii) the number of Conversion Shares.
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The Company also entered into the Call Agreement with YA, pursuant to which the Company may require YA to enter into a second loan and collar agreement substantially similar to the Loan Agreement, for a period of six months following the execution of the Call Agreement. This optional loan would be in an original principal amount equal to $3,274,409 and would be secured by 1,659,690 shares of Preferred Stock owned by YA pursuant to a pledge agreement substantially similar to the Pledge Agreement. The balance of the Preferred Stock owned by YA, or 76,030 shares, may be converted and sold by YA in its sole discretion (“Discretionary Sales”). YA is also subject to a beneficial ownership blocker and can only vote shares of the Company’s common stock that it owns, directly or on an as-converted basis, in an amount up to 9.9% of the Company’s outstanding shares of common stock (“Beneficial Ownership Limitation”).
If the Company requires YA to enter into a second loan and collar agreement, YA has agreed to vote in favor of revising the terms of the Certificate of Designations, Preferences and Rights of Series J Preferred Stock filed with the Secretary of State of the State of Delaware on August 28, 2012 (the “Certificate of Designation”), such that all protective and dilution provisions will be removed, as described in more detail in the Call Agreement. In addition, YA’s ability to waive its Beneficial Ownership Limitation will be removed, except in the case of a mandatory conversion of the Preferred Stock under the terms of the Certificate of Designation. As a condition precedent to the effectiveness of the Call Agreement, the price per share of the Company’s common stock must be at least $0.60, but not more than $0.78. In addition, YA has agreed not to enter, either directly or indirectly, into any hedging arrangement, as described in more detail in the Call Agreement, with respect to any of the Company’s shares, and not to sell and/or convert any shares of Preferred Stock, other than in connection with Discretionary Sales.
Copies of each of the Loan Agreement, Pledge Agreement and Call Agreement were filed as exhibits to an 8K on May 23, 2013 and such documents are incorporated herein by reference. The information contained in this footnote is only a brief description of the material terms of such documents, does not purport to be a complete description of the rights and obligations of the parties thereunder and is qualified in its entirety by reference to such exhibits.
7. Completion of Glen County Title Company (“GCTC”) Acquisition
In May 2012, the Company through its wholly owned Timios, Inc. subsidiary, entered into a purchase and sale agreement with Glen County Title Company (“GCTC”) and its owners. The agreement stipulated that the Company, upon approval of the California Department of Insurance, would acquire GCTC for an initial cash purchase price of $175,000, subject to working capital requirements, and a twelve (12) month earnout of up to $200,000, subject to the former owner remaining as an employee of GCTC.
On June 6, 2013, the California Department of Insurance gave its regulatory approval to complete the acquisition under the terms of the original purchase and sale agreement. On June 15, 2013, the Company completed the acquisition, pursuant to the May 2012 agreement. The Company believes it is highly certain that the former owner of GCTC will achieve the maximum earnout as determined under the agreement.
Since GCTC is not significant to the overall operations of Timios National Corporation or Timios, Inc., the Company has not provided comparative historical financial information concerning the acquisition. The table below reflects the allocation of the estimated final purchase price of GCTC:
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Assets Purchased and Liabilities Assumed | | Purchase Price
Allocation | |
| | | |
Cash (received at closing) | | $ | 75,318 | |
Accounts receivable | | 27,914 | |
Fixed assets | | 40,486 | |
California title insurance license | | 102,889 | |
Title plant (historical title records) | | 127,742 | |
Prepaid expenses and deposits | | 18,207 | |
Employee non-compete agreement | | 15,000 | |
Accounts payable and accrued liabilities | | (17,702 | ) |
Other liabilities | | (14,854 | ) |
| | | |
Total purchase price | | $ | 375,000 | |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including, without limitation, Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend that the forward-looking statements be covered by the safe harbor for forward-looking statements in the Exchange Act. The forward-looking information is based on various factors and was derived using numerous assumptions. All statements, other than statements of historical fact, that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. These forward-looking statements are usually accompanied by words such as “believe,” “anticipate,” “plan,” “seek,” “expect,” “intend” and similar expressions.
Forward-looking statements necessarily involve risks and uncertainties, and our actual results could differ materially from those anticipated in the forward looking statements due to a number of factors, including those set forth in Part I, Item 1A, entitled “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2012, as may be updated and supplemented by this report. These factors as well as other cautionary statements made in this Quarterly Report on Form 10-Q, should be read and understood as being applicable to all related forward-looking statements wherever they appear herein. The forward-looking statements contained in this Quarterly Report on Form 10-Q represent our judgment as of the date hereof. We encourage you to read those descriptions carefully. We caution you not to place undue reliance on the forward-looking statements contained in this report. These statements, like all statements in this report, speak only as of the date of this report (unless an earlier date is indicated) and we undertake no obligation to update or revise the statements except as required by law. Such forward-looking statements are not guarantees of future performance and actual results will likely differ, perhaps materially, from those suggested by such forward-looking statements. In this report, the “Company,” “the Holding Company,” “we,” “us,” and “our” refer to Timios National Corporation.
Overview
Timios National Corporation was incorporated in Delaware on August 12, 1997 under the name “Celerity Systems, Inc.” In August 2005, we changed our name to “Homeland Security Capital Corporation” and changed our business plan to seek acquisitions of and joint ventures with companies operating in the homeland security business sector and, until July 2011, operated soley as a provider of specialized, technology-based, radiological, nuclear, environmental, disaster relief and electronic security solutions to government and commercial customers. Our corporate headquarters is located in Arlington, Virginia.
On August 19, 2011, we completed the sale of substantially all of the assets of Corporate Security Solutions, Inc., the operating subsidiary of our 93%-owned Nexus Technologies Group, Inc. subsidiary and on October 31, 2011, we completed the sale of our wholly-owned subsidiary, Safety& Ecology Holdings Corporation. The proceeds from these sales were used to retire debt.
In July 2011, we expanded the scope of operations to include companies operating in the real estate services industry through our acquisition of Fiducia Real Estate Solutions, Inc. or “FRES”. FRES conducts its operations through three wholly owned operating companies: (1) Timios, Inc., or “Timios”, which is engaged nationally in title and escrow services for mortgage origination, refinance, reverse mortgages and deed-in-lieu transactions; (2) Timios Appraisal Management, Inc. , or “TAM”, which is engaged nationally in residential property appraisals; and (3) and Default Servicing USA, Inc., or “DSUSA”, which is engaged nationally in real estate-owned liquidation services to institutional real estate owned, or REO, customers.
In August 2012, we changed our name to Timios National Corporation.
The Company expects to grow these businesses both organically and through acquisitions. The Company continues to target growth companies that are generating revenues but face challenges in scaling their businesses to
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capitalize on growth opportunities. The Company plans to enhance the operations of these companies by helping them generate new business, grow revenues, develop superior management, build infrastructure and improve cash flows.
Results of Operations
The Company operates businesses that provide products and services to the real estate industry through a wholly-owned subsidiary holding company FRES and its three wholly-owned subsidiaries; Timios and it’s wholly- owned subsidiaries TEI and GCTC; TAM and DSUSA. Our primary customers include financial institutions, mortgage lenders, government service enterprises and property portfolio managers. We derive our revenue from the sale of products and services that include title insurance, settlement services, REO transactions and deed-in-lieu transactions in the case of Timios, residential property appraisals in the case of TAM and residential asset management disposition transactions in the case of DSUSA.
The Company’s profitability is dependent on the volume of closing real estate transactions. Certain operating expenses of the Company are fixed regardless of closing transactions, and as a result the Company’s profitability is dependent on volume of real estate closings. Real estate closing activity is affected by various factors including: general United States economic conditions, availability of mortgage credit, consumer confidence and interest rates.
In general, rising interest rates tend to have a negative effect on the volume of real estate transactions. This is specifically the case for real estate transactions that include mortgage refinancing, a business channel that makes up a large portion of our closing transactions. In May 2013, mortgage interest rates in the U.S. started to increase, eventually increasing by over 1% by June 30, 2013. Although this increase did not significantly affect the results of our quarter ended June 30, 2013, mainly due to the timing of the orders in our existing inventory, we do expect this rate increase will lead to lower order volume and have a negative effect on our future quarters, specifically the third and fourth quarters of 2013.
Management considers Timios, TAM and DSUSA to be operating in the same industry, real estate products and services. As a result, management does not measure each company as if it was its own segment and accordingly does not include such segment data in this discussion.
Three Month Period Ended June 30, 2013 Compared To Three Month Period Ended June 30, 2012
Revenue
Timios’ main source of revenue is derived from title insurance fees and escrow service fees. TAM derives its revenue from residential property appraisals. DSUSA derives its revenue from fees associated with the management of properties, which are owned by banks or other mortgage lenders.
The table below reflects the revenue we recorded by each subsidiary:
| | Three Months Ended June 30, | | Increase/(Decrease) | | Increase/(Decrease) | |
Company | | 2013 | | 2012 | | $ | | % | |
Timios | | $ | 8,219,211 | | $ | 4,541,336 | | $ | 3,677,875 | | 81.0 | % |
TAM | | 299,510 | | 11,810 | | 287,700 | | 2,436.1 | % |
DSUSA | | — | | 24,047 | | (24,047 | ) | (100.0 | )% |
Total | | $ | 8,518,721 | | $ | 4,577,193 | | $ | 3,941,528 | | 86.1 | % |
Timios’ revenue increased as a result of a 91% increase in real estate closings over the same period in 2012. The increased closings are attributed to the addition of new institutional customers and increases in volume from existing customers during the 2013 quarter, as well as the addition of TEI ($330,269) and GCTC ($36,576), neither of which were included in 2012. TAM’s revenue increased during the three months ended June 30, 2013 as a result of its maturing operations which were in the startup phase during the same quarter in 2012. DSUSA’s revenue decrease is related to the DSUSA’s inability to attract customers for its asset management services. Management believes that DSUSA will build its business as the year progresses.
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Cost of Revenue
Costs associated with revenues include all direct labor and other non-labor costs and those indirect costs related to revenue generation such as fringe benefits, overhead labor, supplies and equipment rental in addition to depreciation on equipment.
The table below reflects the cost of revenue we recorded by each subsidiary:
| | Three Months Ended June 30, | | Increase/(Decrease) | | Increase/(Decrease) | |
Company | | 2013 | | 2012 | | $ | | % | |
Timios | | $ | 5,525,816 | | $ | 3,191,318 | | $ | 2,334,498 | | 73.2 | % |
TAM | | 354,881 | | 219,908 | | 134,973 | | 61.4 | % |
DSUSA | | 5,743 | | 42,589 | | (36,846 | ) | (86.5 | )% |
Total | | $ | 5,886,440 | | $ | 3,453,815 | | $ | 2,432,625 | | 70.4 | % |
Timios’ cost of revenue increased as a result of additional direct labor and overhead costs required to support increased revenues during the 2013 quarter, as well as the addition of TEI ($143,582) and GCTC ($16,337), neither of which were included in 2012. TAM’s cost of revenue increased during the three month period ended June 30, 2013, as a result of additional direct labor and overhead costs associated with its maturing operations. DSUSA’s cost of revenue decrease is directly related to servicing fewer customers and downsizing the operations during the 2013 quarter.
Operating expenses
Operating expenses consist of personnel costs of management, including fringe benefits, insurance and facility costs, travel and entertainment, depreciation and amortization, marketing, professional services such as legal and accounting costs and general administrative costs. During the quarter the Company increased headcount, specifically in its information technology areas. To the extent possible, the Company has eliminated costs associated with redundant services carried on separately at each location by centralizing such activities.
The table below reflects the operating expenses we recorded by the Holding Company and each of the subsidiaries:
| | Three Months June 30, | | Increase/(Decrease) | | Increase/(Decrease) | |
Company | | 2013 | | 2012 | | $ | | % | |
Timios | | $ | 1,702,453 | | $ | 1,049,175 | | $ | 653,278 | | 62.3 | % |
TAM | | 48,737 | | 49,618 | | (881 | ) | (1.8 | )% |
DSUSA | | 108,361 | | 18,797 | | 89,564 | | 476.5 | % |
Holding Company | | 414,103 | | 388,937 | | 25,166 | | 6.5 | % |
Total | | $ | 2,273,654 | | $ | 1,506,527 | | $ | 767,127 | | 50.9 | % |
The Holding Company’s operating expenses increase is directly related to legal fees incurred during the 2013 quarter resulting from the completion of the Term Loan and Collar Agreement, Stock Pledge Agreement and Loan and Collar Agreement, which were finalized in May 2013.
Timios operating expenses increase is related to the increase in indirect costs, mainly personnel and facility costs, associated with expansion of the business during the 2013 quarter, as well as the addition of TEI ($49,793) and GCTC ($1,569), neither of which were included in 2012. Timios also leased additional office space in the second quarter of 2013 to support increased number of personnel needed to support increased sales volume. The Company also continued its technology initiative which the Company updated certain software and hired information technology personal to support activities.
DSUSA’s operating expense increase is related to personnel costs associated with the separation of several employees as the subsidiary was downsized during the 2013 quarter.
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Other (income) expense
The table below reflects the other expense we recorded for the Holding Company and each of the subsidiaries:
| | Three Months Ended June 30, | | Increase/(Decrease) | | Increase/(Decrease) | |
Company | | 2013 | | 2012 | | $ | | % | |
Timios | | $ | (2,200 | ) | $ | (6,352 | ) | $ | 4,152 | | 65.4 | % |
TAM | | (110 | ) | — | | (110 | ) | — | |
DSUSA | | (382 | ) | 98 | | (480 | ) | (489.8 | )% |
Holding Company | | 4,098 | | 34,441 | | (30,343 | ) | (88.1 | )% |
Total | | $ | 1,406 | | $ | 28,187 | | $ | (26,781 | ) | (95.0 | )% |
The Holding Company’s other expense consisted primarily of the amortization of debt discount. The decrease during the quarter is primarily the result of lower interest costs associated with the Company’s restructured debt. Timios’ other income consisted primarily of refunds on deposits. The decrease from 2012 is the result of miscellaneous credits in 2012 not recurring in 2013.
Six Month Period Ended June 30, 2013 Compared To Six Month Period Ended June 30, 2012
Revenue
Timios’ main source of revenue is derived from title insurance fees and escrow service fees. TAM derives its revenue from residential property appraisals. DSUSA derives its revenue from fees associated with the management of properties, which are owned by banks or other mortgage lenders.
The table below reflects the revenue we recorded by each subsidiary:
| | Six Months Ended June 30, | | Increase/(Decrease) | | Increase/(Decrease) | |
Company | | 2013 | | 2012 | | $ | | % | |
Timios | | $ | 15,312,494 | | $ | 9,403,305 | | $ | 5,909,189 | | 62.8 | % |
TAM | | 546,777 | | 11,810 | | 534,967 | | 4,529.8 | % |
DSUSA | | 14,061 | | 49,556 | | (35,495 | ) | (71.6 | )% |
Total | | $ | 15,873,332 | | $ | 9,464,671 | | $ | 6,408,661 | | 67.7 | % |
Timios’ revenue increased as a result of a 70% increase in real estate closings over the same period in 2012. The increased closings are attributed to the addition of new institutional customers and increases in volume from existing customers during the six months ending June 30, 2013, as well as the addition of TEI ($469,484) and GCTC ($36,576), neither of which were included in 2012. TAM’s revenue increased during the six months ended June 30, 2013 as a result of its maturing operations, which were in the startup phase during the same quarter in 2012. DSUSA revenue decrease is related to the DSUSA’s inability to attract customers for its asset management services.
Cost of Revenue
Costs associated with revenues include all direct labor and other non-labor costs and those indirect costs related to revenue generation such as fringe benefits, overhead labor, supplies and equipment rental in addition to depreciation on equipment.
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The table below reflects the cost of revenue we recorded by each subsidiary:
| | Six Months Ended June 30, | | Increase/(Decrease) | | Increase/(Decrease) | |
Company | | 2013 | | 2012 | | $ | | % | |
Timios | | $ | 10,471,893 | | $ | 6,310,295 | | $ | 4,161,598 | | 65.9 | % |
TAM | | 646,663 | | 219,908 | | 426,755 | | 194.1 | % |
DSUSA | | 39,944 | | 305,772 | | (265,828 | ) | (86.9 | )% |
Total | | $ | 11,158,500 | | $ | 6,835,975 | | $ | 4,322,525 | | 63.2 | % |
Timios’ cost of revenue increased as a result of additional direct labor and overhead costs required to support increased revenues during the 2013 quarter. Also included in Timios’ cost of revenue are TEI ($242,986) and GCTC ($16,337) costs of revenue, which were not included in the same period of 2012. TAM’s cost of revenue increased during the six month period ended June 30, 2013, as a result of its operations growing beyond the startup phase. DSUSA’s cost of revenue decrease is directly related to servicing fewer customers and downsizing the operations during the period ended June 30, 2013.
Operating expenses
Operating expenses consist of personnel costs of management, including fringe benefits, insurance and facility costs, travel and entertainment, depreciation and amortization, marketing, professional services such as legal and accounting costs and general administrative costs. During the quarter the Company increased headcount, specifically in its information technology areas. To the extent possible, the Company has eliminated costs associated with redundant services carried on separately at each location by centralizing such activities.
The table below reflects the operating expenses we recorded by the Holding Company and each of the subsidiaries:
| | Six Months June 30, | | Increase/(Decrease) | | Increase/(Decrease) | |
Company | | 2013 | | 2012 | | $ | | % | |
Timios | | $ | 3,091,275 | | $ | 2,113,559 | | $ | 977,716 | | 46.3 | % |
TAM | | 92,575 | | 49,618 | | 42,957 | | 86.6 | % |
DSUSA | | 183,332 | | 74,595 | | 108,737 | | 145.8 | % |
Holding Company | | 862,169 | | 759,455 | | 102,714 | | 13.5 | % |
Total | | $ | 4,229,351 | | $ | 2,997,227 | | $ | 1,232,124 | | 41.1 | % |
The Holding Company’s operating expenses increase is directly related to increased professional fees, including legal, accounting and shareholder expenses during the six months of 2013, mainly resulting from the settlement, debt restructuring and loan and collar transactions that were completed during this period.
Timios operating expenses increase is related to the increase in indirect costs, mainly personnel and facility costs, associated with expansion of the business and revenue growth during the six months ended June 30, 2013, in addition to adding the operating expenses of TEI ($242,986) and GCTC ($16,337) in 2013. Timios also leased additional office space during this period to support the increased number of personnel needed to support increased sales volume. The Company also continued its technology initiative, updating software and introducing new smart device applications.
TAM’s operating expense increase was from indirect labor and overhead costs associated with the business growth of the operations out of its initial startup phase.
DSUSA’s operating cost increase is directly related to personnel costs associated with the separation of several employees, as the subsidiary was downsized during the six month period ended June 30, 2013.
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Other (income) expense
The table below reflects the other expense we recorded for the Holding Company and each of the subsidiaries:
| | Six Months Ended June 30, | | Increase/(Decrease) | | Increase/(Decrease) | |
Company | | 2013 | | 2012 | | $ | | % | |
Timios | | $ | — | | $ | 20,764 | | $ | (20,764 | ) | (100.0 | )% |
DSUSA | | (550 | ) | 73 | | (623 | ) | (853.4 | )% |
Holding Company | | 4,597 | | 73,628 | | (69,031 | ) | (93.8 | )% |
Total | | $ | 4,047 | | $ | 94,465 | | $ | (90,418 | ) | (95.7 | )% |
The Holding Company’s other expense in 2013 consists of the amortization of debt discount reduced by interest income. The decrease is primarily the result of lower interest costs associated with the Company’s restructured debt. Timios’ did not have other expense in 2013. Timios’ other expense in 2012 consisted of various miscellaneous charges in the normal course of business.
Liquidity and Capital Resources
The Company’s remaining debt owed to YA, its main borrowing source, has decreased significantly as a result of the 2012 exchange agreement and 2013 debt restructuring agreement. At June 30, 2013, the Company had two notes outstanding issued to YA; a 24 month non-recourse note in the principle amount of $209,264 (not including debt discounts) and a 24 month unsecured recourse note in the principle amount of $210,000 (not including debt discounts). The non-recourse note represents the amount due to the Company from the buyer of one of the Company’s former subsidiaries and is paid to YA as collected monthly in the amount of $10,184. The unsecured recourse note is paid to YA by the Company in $10,000 monthly installments.
The agreements described above have enabled the Company to use most of the cash generated from operations to expand the Company’s operations in anticipation of future growth, as opposed to service debt. Management believes that each of the subsidiaries can achieve meaningful organic growth in 2013 and beyond, however one or more acquisitions of product and/or service providers in the real estate industry will be required to achieve the relative size the Company projects in the future. There can be no guarantee that the Company will be able to identify suitable acquisition candidates and if it does, will be able to access the capital resources needed to complete such an acquisition. We continue to be vigilant in marshalling all of our resources, reducing costs where appropriate and expanding our businesses within our identified markets.
As mentioned above, the Company believes that the recent increase in interest rates in the U.S. will have a negative impact on our revenue and cash flows for the remainder of 2013. The Company is in the process of expanding its business channels into areas that are not as negatively affected by rising interest rates and has had some initial successes in doing so.
The Company had cash on hand of $653,953 at June 30, 2013. Our primary needs for cash are to fund and grow our ongoing operations and our secondary need for cash is to make additional acquisitions of businesses that provide products and services in our target industries. We will require additional capital to make significant acquisitions in the future.
During the six months ended June 30, 2013, the Company had a net decrease in cash of $911,805. The Company’s sources and uses of cash were as follows:
Cash Flows From Operating Activities
We provided net cash of $217,755 in our operating activities during the six months ended June 30, 2013, consisting of a income of $541,689 (net income of $395,024, plus adjustments for non-cash items of approximately $146,665), less net uses of cash totaling approximately $323,934 due to changes in our operating assets and liabilities.
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Cash Flows From Investing Activities
We used net cash of $252,785 in our investing activities during the six months ended June 30, 2013, consisting of collections of notes receivable of $50,919 and escrow accounts of $800,000, reduced by $223,909 in cash used to purchase fixed assets, payments of contingent consideration (Timios deferred purchase price) of $224,215, initial loan to YA of $500,000 under the Loan and Collar Agreement, acquisition of intangible assets of $55,898 and the net cash used to acquire GCTC of $99,682 .
Cash Flows From Financing Activities
We used net cash of $876,775 in our financing activities during the six months ended June 30, 2013, consisting of the repayment of related party debt.
As of June 30, 2013, the Company had negative working capital of $663,230.
Off-Balance Sheet Arrangements
The Company was not a party to any off-balance sheet arrangements during the quarter ended June 30, 2013.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide information required by this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting
During the most recently completed fiscal quarter, there has been no significant change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting as such term is defined in Rule 13a-15 and 15d-15 of the Exchange Act.
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings.
As of June 30, 2013, we were not subject to any material legal proceedings. From time to time, however, we and/or our subsidiaries may become involved in litigation and other legal proceedings relating to claims arising from our operations in the normal course of business
Item 1A. Risk Factors.
As a smaller reporting company, we are not required to provide information required by this item.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits
Exhibit | | Description |
31.1 | | Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a) As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
| | |
31.2 | | Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a) As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
| | |
32.1 | | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
| | |
32.2 | | Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
| | |
101** | | The following materials from the Quarterly Report on Form 10-Q of Timios National Corporation for the period ended June 30, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Cash Flows; and (iv) Notes to Consolidated Financial Statements. |
* Exhibit filed with this Quarterly Report on Form 10-Q.
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| TIMIOS NATIONAL CORPORATION |
| |
Date: August 12, 2013 | /s/ Michael T. Brigante |
| Michael T. Brigante |
| (Authorized Officer and Principal Financial Officer) |
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