UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________
FORM 10-Q
______________________________
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File #333-105778
MORTGAGEBROKERS.COM HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| DELAWARE | 05-0554486 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
260 Edgeley Boulevard, Suite 11, Concord, Ontario L4K 3Y4
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (877) 410-4848
Indicate by check mark whether the registrant (1) has filed all reports required 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 periods 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition of “accelerated filer” and “large accelerated filer” in rule 12b-2 of the Exchange Act (Check one):
| Large accelerated filer | o | Accelerated filer | o |
| Non-accelerated filer | o | 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 o No x
Indicate the number of shares outstanding of the Registrant’s common stock as of the latest practicable date.
| Class | | Outstanding at August 14, 2009 |
| Common Stock, $.0001 par value | | 42,976,548 |
TABLE OF CONTENTS
PART I-- FINANCIAL INFORMATION
| Item 1. | Financial Statements |
| Item 2. | Management’s Discussion and Analysis of Financial Condition |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
| Item 4T. | Control and Procedures |
PART II-- OTHER INFORMATION
| Item 1 | Legal Proceedings |
| Item 1A | Risk Factors |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
| Item 3. | Defaults Upon Senior Securities |
| Item 4. | Submission of Matters to a Vote of Security Holders |
| Item 5. | Other Information |
| Item 6. | Exhibits and Reports on Form 8-K |
SIGNATURE
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Basis of Presentation
The accompanying condensed and consolidated statements are presented in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal occurring adjustments) considered necessary in order to make the financial statements not misleading, have been included. Operating results for the six months ended June 30, 2009 are not necessarily indicative of results that may be expected for the year ending December 31, 2009.
The financial statements of the Company appear at the end of this report beginning with the Index to Financial Statements on page F-1 and ending on F-20.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
The following is management’s discussion and analysis of the consolidated financial condition and results of operations of MortgageBrokers.com Holdings, Inc. for the periods ending June 30, 2009 and 2008. The following information should be read in conjunction with the consolidated financial statements for the periods ending June 30, 2009 and notes thereto appearing elsewhere in this form 10-Q.
Overview
MortgageBrokers.com Holdings, Inc. (the “Company”, “MortgageBrokers.com”, “we”, “our”, or “us”) was incorporated under the laws of Delaware on February 6, 2003 as MagnaData, Inc. (“MagnaData”). In February 2005, we filed articles of amendments with the State of Delaware changing the name of our Company to MortgageBrokers.com Holdings, Inc.
Over the past three year period, sales operations were conducted through our subsidiaries in Canada only:
| | 1. | MortgageBrokers.com Inc. - an Ontario Canada provincially incorporated company that currently holds our licensure for operating as a mortgage broker in the Province of Ontario; |
| | 2. | MortgageBrokers.com Financial Group of Companies Inc. - a Canadian federally incorporated company, which currently holds our licensure for operating as a mortgage broker in the Provinces of Newfoundland, Nova Scotia, New Brunswick, Prince Edward Island and Alberta; and, |
| | 3. | MBKR Holdings Inc., a Canadian federally incorporated company, on November 24, 2008 for the intended centralization of back office services in Canada. |
We established MBKR Franchising Inc., a Canadian federally incorporated company, on January 30, 2009 for the intended launch of MortgageBrokers.com as a franchisor in Canada.
As at June 30, 2009, we had 412 licensed mortgage agents operating across Canada. The number of mortgage agents in our national sales agency at the end of the reporting period represents a 2% increase over that of the same period in 2008.
As at June 30, 2009, our Company had 15 full-time employees and 1 full-time contract staff for a total of 16 full-time staff.
The Company’s corporate offices are at 11-260 Edgeley Boulevard, City of Vaughan, Ontario, CANADA. Our current contact information for our Ontario office is telephone number: (877) 410-4848 and fax number: (877) 410-4845. Our internet website can be found under the domain name: www.mortgagebrokers.com. The Company also has a regional corporate office in Calgary, Alberta, Canada.
Results of Operations
Three months ended June 30, 2009 Compared to Three months ended June 30, 2008
Gross revenue in our first quarter in 2009 increased by 9% from that of 2008 to $4,415,746, which was directly related to increasing the number of sales agency mortgage agents by 2%, supporting our existing agent sales force to increase productivity and negotiating better lender commissions.
The Company’s operating expenses increased in the second quarter of 2009 by 14% over the same period in 2008 to $4,335,166 as we built our growing business. The consolidated comparative increase is affected in a small part due to a 5.5 % decrease in value of the Canadian dollar (where all of our operations take place) as compared to the United States dollar (what we report in for filing purposes) between our second quarter in 2008 to that of 2009. The primary components that comprise our operating expenses and contribute to this trend are stock-based compensation, agent commissions, salaries and benefits, general and administrative expenses, and occupancy costs:
| · | Due in part to a 50 % decrease in our stock price between reporting periods, the Company reported charges for accruals in employee stock-based compensation accrued during the reporting period of only $4,983. Due to decreases in our stock price between reporting periods, the Company reported negative charges reversing accruals for services associated with our agents, strategic alliances and consultants of a combined $1,578 Stock-based compensation is a charge that is based on our stock pricing at the end of the period. The accrual is valued based on stock prices at the end of the period, for which the Company has no direct influence; therefore it is difficult to analyze related trends. In aggregate, these charges were approximately 0.15% of the reported total operating expenses and the net sum increased our reported Net Income accordingly. It is the intent of management to continue using our stock-based compensation programs to maximize working capital and align the interests of our employees and mortgage agents with those of our shareholders. |
| · | 85% of the operating expenses in the reporting period were associated with agent commissions. Reported agent commission fees as a percent of revenues increased by 1% from the second quarter 2008 as compared to that of 2009 likely associated with changes in the foreign exchange rate between the periods as well as a nominal increase in our mortgage origination volumes between the periods. |
| · | 10% of the operating expenses in the reporting period were associated with salaries and benefits. Salaries and benefits increased by 22% from the second quarter 2008 as compared to that of 2009 as we invested into hiring a more seasoned sales management team. |
| · | 5% of our operating expenses in the reporting period were associated with general and administrative expenses. General and administrative expenses increased 9% from the second quarter 2008 as compared to that of 2009 to $197,771 which increase was likely associated with the increased costs of running our growing business. |
| · | Occupancy costs this period were relatively flat compared to 2008 wherein they decreased 10% from the second quarter 2008 to $32,837 in the first six months of 2009 likely associated with changes in the foreign exchange rate between the periods as these costs are relatively fixed long term contractual arrangements. |
Six months ended June 30, 2009 Compared to Six months ended June 30, 2008
Gross revenue in our first six months ending June 30, 2009 increased by 9% from that of 2008 to $6,997,302, which was directly related to increasing the number of sales agency mortgage agents by 2%, supporting our existing agent sales force to increase productivity and negotiating better lender commissions.
The Company’s operating expenses increased in our first six months ending June 30, 2009 by 14% over the same period in 2008 to $6,915,043 as we built our growing business. The consolidated comparative increase is smaller in part due to a 19% decrease in the rate of foreign exchange between our first six months ending June 30, 2008 to that of 2009. The primary components that comprise our operating expenses and contribute to this trend are stock-based compensation, agent commissions, salaries and benefits, general and administrative expenses, and occupancy costs:
| · | Due to a 50 % decreases in our stock price between reporting periods, the Company reported negative charges reversing accruals in employee stock-based compensation accrued during the reporting period of $21,196. The Company also reported negative charges reversing accruals for services associated with our agents, strategic alliances and consultants of a combined $60,316. Stock-based compensation is a charge that is based on our stock pricing at the end of the period. The accrual is valued based on stock prices at the end of the period, for which the Company has no direct influence; therefore it is difficult to analyze related trends. In aggregate, these charges were approximately 1% of the reported total operating expenses and increased our reported Net Income accordingly. It is the intent of management to continue using our stock-based compensation programs to maximize working capital and align the interests of our employees and mortgage agents with those of our shareholders. |
| · | 83% of the operating expenses in the reporting period were associated with agent commissions. Reported agent commission fees as a percent of revenues decreased by 1% from the first quarter 2008 as compared to that of 2008 likely associated, in part, with changes in the foreign exchange rate between the periods. |
| · | 12% of the operating expenses in the reporting period were associated with salaries and benefits. Salaries and benefits increased by 17% from our first six months ending June 30, 2008 as compared to that of 2009 as we invested into hiring a more seasoned sales management team. |
| · | 5% of the operating expenses in the reporting period were associated with general and administrative expenses. General and administrative expenses decreased by 16% from our first six months ending June 30, 2008 as compared to that of 2009 as we reduced travel expenses and reduced telephone expenses through long distance plans, and had a reduction in professional fees. |
| · | Reported occupancy costs this period were relatively flat compared to 2008 wherein they decreased 7% from our first six months ending June 30, 2008 to $70,120 in the first six months of 2009 likely associated with changes in the foreign exchange rate between the periods. |
Liquidity and Capital Resources
As at June 30, 2009, we had $1,452,785 in cash; $17,501 of referral fees held in trust (which are awaiting completion of administrative processes to distribute the fees to referral source agents), $71,759 in prepaid expenses, $111,373 in equipment and equipment under capital leases for a total of $1,653,418 in assets. Comparatively as at December 31, 2008, we had $1,262,321 in cash; $17,848 of referral fees held in trust, $116,211 in prepaid expenses, $114,608 in equipment and equipment under capital leases a total of $1,510,988 in assets.
As at June 30, 2009, we had $2,445,231 in accounts payable and accrued liabilities, $121,180 in loans payable to a related party, $228,595 in accrued stock-based compensation, $91,398 in bank indebtedness related to an unsecured term loan, $17,501 in trust liability associated with agent referral commissions payable awaiting transfer pending the completion of associated administration, capital lease obligations of $453 for a total of $2,904,358 in liabilities. Comparatively as at December 31, 2008 at the beginning of the reporting period, the Company had $2,223,326 in accounts payable and accrued liabilities, $129,425 in loans payable to a related party, $310,108 in accrued stock-based compensation, $117,385 in bank indebtedness related to an unsecured term loan, $17,848 in trust liability associated with agent referral commissions payable awaiting transfer pending the completion of associated administration, capital lease obligations of $1,624 for a total of $2,799,716 in liabilities.
Management makes the following comments regarding the most significant factors affecting Company liquidity and capital resources and their measured trends over the reporting period:
| · | Cash and cash equivalents nominally increased by 15% over the reporting period during the Company’s seasonally slowest half of the year. This increase was related to increasing the number of sales agency mortgage agents by 2%, supporting our existing agent sales force to increase productivity and negotiating better lender commissions. |
| · | Accounts payable nominally increased by 10% over the reporting period to $2,445,231. The bulk of this payable amount is Work in Progress payable following completion of mortgage agent origination compliance procedures. Work in Progress mortgage agent commissions payable typically have an Average Days Payable of 10 business days. Other items that make up this amount include accrued liabilities related to services received but not invoiced as of June 30, 2009 and employee vacation accrual, $237,654 in employee tax deductions payable (see discussion below), and $743,836 in accrued expenses associated with a legal judgment (see discussion Part II, Item 1). The Company is in arrears on the tax withholdings due to Canada Revenue Agency (“CRA”) related to employee salaries. As at the end of the reporting period, the company had a tax liability with CRA of $237,654. The Company has negotiated an agreement with CRA which, if certain conditions are met (remaining current with existing payroll tax submissions and regular reporting), allows the Company to pay down the balance in monthly instalments, which are currently $5,000 per month through to October, 2009 and then to continue to pay monthly instalments of $10,000 until such time as the company is able to pay the balance to CRA in a lump sum payment. In the event that the Company secures further investment capital, the balance is to be paid off in full shortly after receipt of the funds. In addition, CRA has registered a Certificate in the Canadian Federal Court and the Property Register of Ontario for the amount owing to CRA. The liability currently bears interest at 9% annually. |
| · | Bank indebtedness decreased by 22% as the Company continues to pay down our loan facility with a lender. |
The Company reported a Net Income from operations for the second quarter of 2009. If we continue to grow at our current rate, it is expected by management that we will achieve consistent positive earnings from operations and should have adequate working capital for the near future to fund normal operations. In the event that we grow beyond our available working capital resources, or experience a prolonged market down turn, we will likely need to rely upon the issuance of common stock and additional capital contributions from shareholders and/or loans from shareholders and third-party lenders to meet our working capital needs. It is expected by management that the Company will need to rely upon either new capital contributions or profits from 2009 operations to pay the employee tax liability described below.
Critical Accounting Policies
Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Revenue Recognition
Revenue consists of mortgage brokerage fees, finders’ fees and insurance commissions. The revenue from brokerage fees and finders’ fees are recognized upon the funding of a customer’s mortgage and when the collection is reasonably assured which typically occurs when the brokerage fee or finders fees from the lender has been advanced. Insurance commission revenues are recognized when collection is reasonably assured which typically occurs when the insurance commission fees from the insurance provider has been advanced.
Share-based Payment
The Company adopted the disclosure requirements of SFAS No. 123R, "Share-Based Payment" ("SFAS No. 123R") for stock options and similar equity instruments (collectively, "options") issued to employees. The Company applies the fair value base method of accounting as prescribed by SFAS No. 123R. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. For stock options, the fair value is determined using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock and the expected dividends on it, and the risk-free interest rate over the expected life of the option. SFAS No. 123R also applies to transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable, as described in Note 11 to the financial statements.
Going Concern
The Company’s consolidated financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the three month reporting period ended June 30, 2009, the Company incurred a Net Income of $82,770 (as compared to Q2 2009, a Net Income of $216,181). Certain conditions noted below raise doubt about the Company’s ability to continue as a going concern.
The Company’s ability to continue as a going concern is contingent upon its ability to secure additional debt or equity financing, continue to grow sales of its services and continue to achieve profitable operations. Management’s plan is to expand it’s sales force to increase it’s gross revenue, to carefully manage expenses and capital investment related to scalability to establish sustainable operational profitability through our rapid growth and to secure additional funds through future debt or equity financings. Current economic conditions may impact our ability to recruit mortgage agents or may result in changes by lenders to our commission fee schedules, both of which would have a negative impact on our revenue growth. Also, financing may not be available or may not be available on reasonable terms to the Company. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.
The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
Off-Balance Sheet Arrangements
None.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to certain market risks, including changes in interest rates and currency exchange rates. The Company does not undertake any specific actions to limit those exposures.
ITEM 4T. CONTROLS AND PROCEDURES
Disclosure controls and procedures
Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial and Accounting Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial and Accounting Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the end of such period, are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
There have been no significant changes in our internal controls over financial reporting during the second quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
This Quarterly Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Quarterly Report.
Management Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act. Those rules define internal control over financial reporting as a process designed 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 and includes those policies and procedures that:
| | • Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; |
| | • Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and the receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the Company; and |
| | • Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the company's assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. 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 assessed the effectiveness of our internal control over financial reporting as of June 30, 2009. In making this assessment, our management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 27, 2006, Trisan Equitable Corporation (`Trisan``)`commenced an action in the Ontario Superior Court in Ontario, Canada against several parties including MortgageBrokers.com Holdings, Inc. (the ``Company``) its subsidiary MortgageBrokers.com Inc., and Alex Haditaghi, our principal shareholder, sole director and chief executive officer. The statement of claim filed by Trisan asserted a number of claims in the aggregate amount of approximately CDN $1.4 million, arising out of a loan agreement with Trisan dated January 27, 2005. In January 2007, we filed a statement of defence, cross claim and counter claim in response to Trisan`s statement of claim. On October 3, 2007, a partial summary judgment from the Ontario Superior Court was awarded to Trisan regarding the matter in an aggregate amount of CDN$748,671 plus 500,000 shares of our common stock. The October 3, 2007 partial summary judgment was appealed by us but the judgment was upheld on appeal by the Ontario Court of Appeal on March 31, 2008.
Our balance sheet as at June 30, 2009, reflects an accrual of $644,018 (CDN$748,671) plus interest of $99,818 (CDN$116,039) related to the Trisan legal judgment.
On July 8, 2009, a full and final settlement agreement was executed between Trisan and the defendants including MortgageBrokers.com Holdings, Inc. and its subsidiary, MortgageBrokers.com Inc., regarding the prior summary judgment awarded to Trisan and all outstanding and related matters. The Agreement provides for a mutual final and full release and discharge regarding for the company and our subsidiaries for all matters up to and including July 8, 2009 related to the original claim and action, counterclaim, judgment, and appeal between Trisan and the Company and it’s subsidiaries. The Trisan settlement agreement required a third party company, of which our Chief Executive Officer is a related party, to be encumbered with a financial arrangement.
The settlement agreement does not provide for the payment of any monies, the creation of any obligations or any encumbrances in favor of Trisan, by or upon Mortgagebrokers.com Holdings Inc. or its subsidiary MortgageBrokers.com Inc. other than the release of 500,000 shares of Mortgagebrokers.com Holdings Inc. common stock which were issued in 2006 to Trisan related parties in escrow.
ITEM 1A. RISK FACTORS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4: SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of the CEO and CFO Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports of Form 8-K
On May 22, 2009, the Company filed a Form 8K disclosing the provision of notice to RE/MAX Ontario-Atlantic Canada Inc. (“RE/MAX”) to terminate its agreement with RE/MAX on June 12, 2009 in accordance with the provisions of the agreement. The agreement was originally executed on January 31, 2006 and thereafter amended on May 25, 2006.
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, there unto duly authorized.
| MORTGAGEBROKERS.COM HOLDINGS, INC. |
By: /s/ Alex Haditaghi |
| Alex Haditaghi |
| Principal Executive Officer, |
| Principal Accounting Officer, |
| President, Secretary and Director |
Dated: August 14, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| NAME | | TITLE | DATE |
| | | | |
| /s/ Alex Haditaghi | | President, Secretary and Director | August 14, 2009 |
| Alex Haditaghi | | | |
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS JUNE 30, 2009 AND 2008 UNAUDITED |
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
CONTENTS
| | |
| Condensed Consolidated Balance Sheets | F3 |
| | |
| Condensed Consolidated Statements of Operations and Comprehensive Income | F4 |
| | |
| Condensed Consolidated Statements of Cash Flows | F5 |
| | |
| Notes to Condensed Consolidated Financial Statements | F6 - F20 |
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2009 and December 31, 2008
| | | 2009 (Unaudited) | | | 2008 (Audited) | |
| ASSETS | |
| Current Assets | | | | | | |
| Cash and cash equivalents | | $ | 1,452,785 | | | $ | 1,262,321 | |
| Referral fees held in trust – restricted (note 3) | | | 17,501 | | | | 17,848 | |
| Prepaid expenses | | | 71,759 | | | | 116,211 | |
| | | | | | | | | |
| Total Current Assets | | | 1,542,045 | | | | 1,396,380 | |
Equipment, net (note 4) | | | 109,203 | | | | 112,184 | |
Equipment Under Capital Leases (note 5) | | | 2,170 | | | | 2,424 | |
| | | | | | | | | |
| Total Assets | | $ | 1,653,418 | | | $ | 1,510,988 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' DEFICIT | |
| Current Liabilities | | | | | | | | |
| Bank indebtedness – current portion (note 6) | | $ | 64,516 | | | $ | 61,244 | |
| Accounts payable and accrued liabilities(note 7) | | | 2,445,231 | | | | 2,223,326 | |
| Advances from related party – current portion (note 8) | | | 76,180 | | | | 84,425 | |
| Trust liability (note 3) | | | 17,501 | | | | 17,848 | |
| Obligation under capital leases - current portion (note 9) | | | 453 | | | | 1,624 | |
| Stock-based compensation accrual - current portion (note 10a) | | | 32,095 | | | | 41,562 | |
| Employee stock-based compensation accrual (note 10b) | | | 122,583 | | | | 143,779 | |
| | | | | | | | | |
| Total Current Liabilities | | | 2,758,559 | | | | 2,573,808 | |
Bank Indebtedness (note 6) | | | 26,882 | | | | 56,141 | |
Advances from related party (note 8) | | | 45,000 | | | | 45,000 | |
Stock-based Compensation Accrual (note 10c) | | | 73,917 | | | | 124,767 | |
| | | | | | | | | |
| Total Liabilities | | | 2,904,358 | | | | 2,799,716 | |
| | | | | | | | | |
Commitments and Contingencies (note 17) | | | | | | | | |
| STOCKHOLDERS' DEFICIT | | | | | | | | |
| Capital Stock | | | | | | | | |
Preferred stock, $0.0001 par value; 5,000,000 shares authorized, none issued | | | - | | | | - | |
Capital stock, $0.0001 par value; 100,000,000 shares authorized; 42,976,548 (2008: 42,976,548) issued and outstanding (note 11) | | | 4,298 | | | | 4,298 | |
| Additional Paid-in Capital | | | 4,116,807 | | | | 4,116,807 | |
Additional Paid-in Capital - Warrants (note 12) | | | 489,243 | | | | 489,243 | |
| Subscription for Stock | | | 8,240 | | | | 8,240 | |
Subscription Receivable (note 13) | | | (227,540 | ) | | | (227,540 | ) |
Treasury Stock (note 14) | | | (25,234 | ) | | | (25,234 | ) |
| Accumulated Other Comprehensive Income | | | 121,901 | | | | 163,852 | |
| Accumulated Deficit | | | (5,738,655 | ) | | | (5,818,394 | ) |
| | | | | | | | | |
| Total Stockholders' Deficit | | | (1,250,940 | ) | | | (1,288,728 | ) |
| | | | | | | | | |
| Total Liabilities and Stockholders' Deficit | | $ | 1,653,418 | | | $ | 1,510,988 | |
| | | | | | | | | |
(The accompanying notes are an integral part of these consolidated financial statements.)
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Three and Six Months Ended June 30, 2009 and 2008
Unaudited
| | | | | | | | | | | | | |
| | | Six Months Ended 2009 | | | Six Months Ended 2008 | | | Three Months Ended 2009 | | | Three Months Ended 2008 | |
| | | | | | | | | | | | | |
| Revenues | | $ | 6,997,302 | | | $ | 6,433,617 | | | | 4,415,746 | | | $ | 4,034,215 | |
| | | | | | | | | | | | | | | | | |
| Expenses | | | | | | | | | | | | | | | | |
| Commission and agent fees | | | 5,734,877 | | | | 5,308,800 | | | | 3,664,885 | | | | 3,322,615 | |
| Salaries and benefits | | | 824,929 | | | | 703,093 | | | | 429,422 | | | | 351,837 | |
| General and administrative expenses | | | 353,477 | | | | 422,908 | | | | 197,771 | | | | 180,684 | |
| Employee stock-based compensation (note 10b) | | | (21,196 | ) | | | (330,644 | ) | | | 4,983 | | | | (62,182 | ) |
| Stock based compensation (note 17c ii) | | | (9,467 | ) | | | (41,638 | ) | | | 1,503 | | | | (10,410 | ) |
| Stock based compensation (note 17a, 17b, and 17c i) | | | (50,849) | | | | (113,786 | ) | | | (3,081) | | | | (17,563 | ) |
| Stock based compensation for services | | | - | | | | 2,759 | | | | - | | | | 2,388 | |
| Occupancy costs | | | 70,120 | | | | 75,732 | | | | 32,837 | | | | 36,288 | |
| Depreciation expense | | | 13,152 | | | | 16,088 | | | | 6,846 | | | | 7,792 | |
| | | | | | | | | | | | | | | | | |
| Total Operating Expenses | | | 6,915,043 | | | | 6,043,312 | | | | 4,335,166 | | | | 3,811,449 | |
| | | | | | | | | | | | | | | | | |
| Income (Loss) from Operations | | | 82,259 | | | | 390,305 | | | | 80,580 | | | | 222,766 | |
| | | | | | | | | | | | | | | | | |
| Other Expenses | | | 2,520 | | | | 13,895 | | | | (2,190) | | | | 6,585 | |
| | | | | | | | | | | | | | | | | |
| Income (Loss) Before Income Taxes | | | 79,739 | | | | 376,410 | | | | 82,770 | | | | 216,181 | |
| | | | | | | | | | | | | | | | | |
| Provision for income taxes (note 16) | | | | | | | - | | | | | | | | - | |
| | | | | | | | | | | | | | | | | |
| Net Income (Loss) | | | 79,739 | | | | 376,410 | | | | 82,770 | | | | 216,181 | |
| | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustment | | | (41,951) | | | | (1,230 | ) | | | (65,141) | | | | (14,300 | ) |
| | | | | | | | | | | | | | | | | |
| Comprehensive Income (Loss) | | $ | 37,788 | | | $ | 375,180 | | | | 17,629 | | | $ | 201,881 | |
| | | | | | | | | | | | | | | | | |
Net income (loss) per share - Basic and Diluted during the period | | $ | 0.00 | | | $ | 0.01 | | | | 0.00 | | | $ | 0.01 | |
| | | | | | | | | | | | | | | | | |
| Weighted Average Number of Shares (note 18) | | | | | | | | | | | | | | | | |
| Outstanding During the Periods -Basic | | | 42,976,548 | | | | 38,506,855 | | | | 42,976,548 | | | | 38,516,470 | |
| Diluted | | | 48,815,937 | | | | 45,220,600 | | | | 48,815,937 | | | | 45,230,215 | |
(The accompanying notes are an integral part of these consolidated financial statements.)
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
Six Months Ended June 30, 2009 and 2008
Unaudited
| | | 2009 | | | 2008 | |
| Cash Flows from Operating Activities | | | | | | |
| Net Income | | $ | 79,739 | | | $ | 376,410 | |
| Adjustments to reconcile Net Income to net cash used in operating activities: | | | | | | | | |
| Depreciation | | | 13,152 | | | | 16,088 | |
| Stock issued for services | | | - | | | | 2,759 | |
| Employee stock-based compensation | | | (21,196) | | | | (330,644 | ) |
| Stock-based compensation accrual | | | (60,316) | | | | (133,924 | ) |
| (Increase) decrease in net assets: | | | | | | | | |
| Referral fees held in trust | | | (347 | ) | | | 29,313 | |
| Prepaid expense | | | 44,452 | | | | 31,398 | |
| Accounts payable and Accrued Liabilities | | | 221,905 | | | | 465,931 | |
| Trust liability | | | 347 | | | | (29,313 | ) |
| | | | | | | | | |
| Net Cash Provided by (Used in) Operating Activities | | | 277,736 | | | | 428,018 | |
| | | | | | | | | |
| Cash Flows from Investing Activities | | | | | | | | |
| Purchase of equipment | | | (4,276 | ) | | | (2,098 | ) |
| | | | | | | | | |
| Net Cash Used in Investing Activities | | | (4,276 | ) | | | (2,098 | ) |
| | | | | | | | | |
| Cash Flows from Financing Activities | | | | | | | | |
| Repayments of obligation under capital leases | | | (1,171 | ) | | | (1,338 | ) |
| Repayment of advances from related party | | | (8,245 | ) | | | (14,131 | ) |
| (Decrease) in bank indebtedness | | | (25,987 | ) | | | (4,055 | ) |
| | | | | | | | | |
| Net Cash(Used in) Provided by Financing Activities | | | (35,403 | ) | | | (19,524 | ) |
| | | | | | | | | |
| Net Increase in Cash and Cash Equivalents | | | 238,057 | | | | 406,396 | |
| | | | | | | | | |
| Foreign Exchange on Balances | | | (47,593 | ) | | | 31,779 | |
| | | | | | | | | |
| Cash and Cash Equivalents - Beginning of Period | | | 1,262,321 | | | | 830,852 | |
| | | | | | | | | |
| Cash and Cash Equivalents - End of Period | | $ | 1,452,785 | | | $ | 1,269,027 | |
| | | | | | | | | |
| Supplemental Cash Flow Information | | | | | | | | |
| Interest paid | | $ | 10,377 | | | $ | 9,363 | |
| | | | | | | | | |
| Income taxes paid | | $ | | | | $ | - | |
(The accompanying notes are an integral part of these consolidated financial statements.)
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
June 30, 2009
Unaudited
| 1. | Nature of Business and Going Concern |
Nature of Business
MortgageBrokers.com Holdings, Inc., and Subsidiaries (the “Company”) was organized under the laws of the State of Delaware on February 6, 2003.
Mortgage brokerage operations are presently conducted through the Company’s subsidiaries, Mortgagebrokers.com Inc. (an Ontario, Canada company), MortgageBrokers.com Financial Group of Companies, Inc., MBKR Holdings Inc. and MBKR Franchising Inc. (Canadian federal companies), in Canada only. The planned operations of the Company consist of becoming a financial services company centered around mortgage finance, brokerage, sales and consulting in Canada, the United States and the European Union (“E.U.”).
Going Concern
The Company’s consolidated financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the six month period ended June 30, 2009, the Company generated net income of $79,739 (for the year ended December 31, 2008 a net income of - $376,410). Certain conditions noted below raise substantial doubt about the Company’s ability to continue as a going concern.
The Company’s ability to continue as a going concern is contingent upon its ability to secure additional debt or equity financing, continue to grow sales of its services and achieve profitable operations. Management’s plan is to secure additional funds through future debt or equity financings. Such financings may not be available or may not be available on reasonable terms to the Company. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.
The Company has devoted substantially all of its efforts to establishing its current business. Management continues to develop and execute its business model, business plans and strategic marketing plans which includes: organization of the Company and divisions; identification of the Company’s sales channels and associated supply chain; development of marketing strategic plans and sales execution strategies; preparation of a financial plan, risk and capital structure planning models, and mortgage origination ‘book of business’ models; hiring mortgage sales agents to build its national sales force and continuing to develop our referral relationship; developing cash flow forecasts and an operating budget; identifying markets to raise additional equity capital and debt financing; embarking on research and development activities; performing employment searches and preparing agent contracts; and, recruiting and hiring technicians, management and industry specialists.
The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
June 30, 2009
Unaudited
| 2. Summary of Significant Accounting Policies |
The accounting policies of the Company are in accordance with accounting principles generally accepted in the United States of America, and their basis of application is consistent. Outlined below are those policies considered particularly significant:
a) Interim Financial Statements
The accompanying interim unaudited financial information has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. The interim financial statements should be read in conjunction with the Company's annual financial statements, notes and accounting policies included in the Company's annual report on form 10 K for the year ended December 31, 2008 as filed with the SEC. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, are necessary to present fairly the financial position of the Company as of June 30, 2009 and the related operating results and cash flows for the interim period presented have been made. The results of operations of such interim period are not necessarily indicative of the results of the full year.
b) Basis of Consolidation and Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company, its wholly-owned subsidiaries Mortgagebrokers.com Inc., Mortgagebrokers.com Financial Group of Companies, Inc., MBKR Holdings, Inc., and MBKR Franchising Inc. All significant inter-company transactions and balances have been eliminated upon consolidation.
c) Cash and Cash Equivalents
Cash and cash equivalents consist of cash on account and short-term investments with remaining maturities at acquisition of three months or less.
d) Equipment, net
Equipment is stated at cost. Depreciation is calculated using the following annual rates and methods based on the estimated useful lives of the assets:
| Furniture and equipment | 20% declining |
| Computer equipment | 30% declining |
| Computer software | 30% declining |
| Leasehold improvements | Over the remaining term of the lease |
e) Revenue Recognition
Revenue consists of mortgage brokerage fees, finders’ fees and insurance commissions. The revenue from brokerage fees and finders’ fees are recognized upon the funding of a customer’s mortgage and when the collection is reasonably assured which typically occurs when the brokerage fee or finders fees from the lender has been advanced. Insurance commission revenues are recognized when collection is reasonably assured which typically occurs when the insurance commission fees from the insurance provider has been advanced.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
June 30, 2009
Unaudited
| 2. | Summary of Significant Accounting Policies (cont'd) |
f) Use of Estimates
Preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and related notes to financial statements. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Actual results may ultimately differ from estimates, although management does not believe such changes will materially affect the consolidated financial statements in any individual year.
g) Financial Instruments
In accordance with Statement of Financial Accounting Standards ("SFAS") SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS No. 107"), the estimated fair value of financial instruments has been determined by the Company using available market information and valuation methodologies. Considerable judgment is required in estimating fair value. Accordingly, the estimates may not be indicative of the amounts the Company could realize in a current market exchange. As of June 30, 2009, the carrying value of accounts payable and accrued liabilities, advances from related party, and all other current liabilities and long term debt approximate their fair value because of the limited terms of these instruments. The Company is exposed to interest rate risk on its bank loan as the interest charged on the loan fluctuates with the bank’s prime rate.
In accordance with Statement of Financial Accounting Standards ("SFAS") SFAS No. 157, “Defining Fair Value Measurement” ("SFAS No. 157"), the Company adopted the standard which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.
h) Impairment of Long-lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company evaluates whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value of asset less cost to sell. As described in note 1, the long-lived assets have been valued on a going concern basis, however, substantial doubt exists as to the ability of the Company to continue as a going concern. If the Company ceases operations, the asset values may be materially impaired.
i) Share-based Payment
The Company adopted the disclosure requirements of SFAS No. 123R, "Share-Based Payment" ("SFAS No. 123R") for stock options and similar equity instruments (collectively, "options") issued to employees. The Company applies the fair value base method of accounting as prescribed by SFAS No. 123R. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. For stock options, the fair value is determined using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock and the expected dividends on it, and the risk-free interest rate over the expected life of the option. For restricted stock, the fair value is determined based on the quoted market price. SFAS No. 123R also applies to transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable, as described in note 11.The Company is in the process of creating a policy for share based compensation in regard to a RE/MAX obligation pursuant to our May 25, 2006 amending agreement which expired June 9, 2009.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
June 30, 2009
Unaudited
| 2. | Summary of Significant Accounting Policies (cont'd) |
j) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”. Deferred tax assets and liabilities are recorded for differences between the consolidated financial statement and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is recorded for the amount of income tax payable or refundable for the period increased or decreased by the change in deferred tax assets and liabilities during the period.
k) Earnings or Loss Per Share
The Company accounts for earnings per share pursuant to SFAS No. 128, Earnings per Share, which requires disclosure in the financial statements of basic and diluted earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to stock options and warrants for each period.
l) Foreign Currency Translation
The Company accounts for foreign currency translation pursuant to SFAS No. 52, “Foreign Currency Translation”. The Company’s functional currency is the Canadian dollar. All assets and liabilities are translated into United States dollars using the exchange rates prevailing at the end of the period. Revenues and expenses are translated using the average exchange rates prevailing throughout the period.
Unrealized foreign exchange amounts resulting from translations at different rates according to their nature are included in accumulated other comprehensive income.
Realized foreign currency transaction gains and losses are recognized in operations.
m) Work in Progress
The Company classifies revenue received, for which the associated mortgage origination files have not passed Company compliance procedures, as Work in Progress payables and is recorded in Accounts payable and accrued liabilities.
Registration and other flow through fees are recorded as Prepaid expenses until the transaction is completed.
n) Comprehensive Income or Loss
The Company adopted SFAS No. 130, “Reporting Comprehensive Income.” SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income is presented in the statements of stockholders’ deficit, and consists of net loss and unrealized gains (loss) on available for sale marketable securities; foreign currency translation adjustments and changes in market value of future contracts that qualify as a hedge; and negative equity adjustments recognized in accordance with SFAS No. 87. SFAS No. 130 requires only additional disclosures in the financial statements and does not affect the Company’s financial position or results of operations.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
June 30, 2009
Unaudited
| 2. | Summary of Significant Accounting Policies (cont'd) |
o) Concentration of Credit Risk
SFAS No. 105, “Disclosure of Information About Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk”, requires disclosure of any significant off-balance sheet risk and credit risk concentration. The Company does not have significant off-balance sheet risk or credit concentration.
p) Recent Accounting Pronouncements
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for nongovernmental entities. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” Management believes the adoption of this pronouncement will not have a material impact on the Company’s results of operations, financial position or cash flows.
| 3. | Referral Fees Held in Trust and Trust Liability |
Pursuant to service agreements, a portion of RE/MAX referral fees charged to the Company will be payable to RE/MAX agents and will be paid into a Registered Retirement Savings Plan ("RRSP") account on behalf of the respective agent, administered as the RE/MAX Agent Retirement Plan by Manulife Financial. The aforementioned referral fees to date have been deposited into a temporary in-trust account that has signing officers from both the Company & RE/MAX, until the Manulife Financial administered program is fully established for new entrants to the program. It is expected that these funds will be deposited into the respective agents' RRSP’s during 2009.
| | | | | | Net Book | | Net Book | |
| | | | Accumulated | | Value June 30, | | Value December 31, | |
| | Cost | | Depreciation | | 2009 | | 2008 | |
| | | | | | | | | |
| Furniture and equipment | | $ | 159,277 | | | $ | 74,428 | | | $ | 84,849 | | | $ | 87,936 | |
| Computer equipment | | | 29,197 | | | | 15,263 | | | | 13,934 | | | | 12,751 | |
| Leasehold improvements | | | 17,743 | | | | 7,323 | | | | 10,420 | | | | 11,497 | |
| | | | | | | | | | | | | | | | | |
| | | $ | 206,217 | | | $ | 97,014 | | | $ | 109,203 | | | $ | 112,184 | |
| | | | | | | | | | | | | | | | | |
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
June 30, 2009
Unaudited
| 5. | Equipment Under Capital Leases |
| | | June 30, 2009 | | | December 31, 2008 | |
| Computer equipment | | $ | 6,130 | | | $ | 5,819 | |
| Less: accumulated depreciation | | | (3,960 | ) | | | (3,395 | ) |
| | | | | | | | | |
| | | $ | 2,170 | | | $ | 2,424 | |
The equipment under the capital leases is depreciated on a 30% declining balance.
On November 22, 2005, the Company obtained a line of credit in the amount of $150,000 CDN. The line of credit bears interest at Royal Bank of Canada's prime plus 0.5% per annum, and is secured by a general security agreement in all assets except real property. On November 20, 2008, the credit facility was converted to a 24 month term loan whereby the Company pays principal of CDN $6,250 per month plus interest at the Royal Bank of Canada prime plus 1.5% per annum.
| 7. | Accrued Legal Judgment |
On October 27, 2006, Trisan Equitable Corporation (`Trisan`)`commenced an action in the Ontario Superior Court in Ontario, Canada against several parties including MortgageBrokers.com Holdings, Inc. (the ``Company``) its subsidiary MortgageBrokers.com Inc., and Alex Haditaghi, our principal shareholder, sole director and chief executive officer. The statement of claim filed by Trisan asserted a number of claims in the aggregate amount of approximately CDN $1.4 million, arising out of a loan agreement with Trisan dated January 27, 2005.
In January 2007, we filed a statement of defense, cross claim and counter claim in response to Trisan`s statement of claim. On October 3, 2007, a partial summary judgment from the Ontario Superior Court was awarded to Trisan regarding the matter in an aggregate amount of CDN$748,671 plus 500,000 shares of our common stock. The October 3, 2007 partial summary judgment was appealed by us but the judgment was upheld on appeal by the Ontario Court of Appeal on March 31, 2008.
Our balance sheet as at June 30, 2009, reflects an accrual of $644,018 (CDN$748,671) plus interest of $99,818 (CDN$116,039) related to the Trisan legal judgment.
On July 8, 2009, a full and final settlement agreement was executed between Trisan and the defendants including MortgageBrokers.com Holdings, Inc. and its subsidiary, MortgageBrokers.com Inc., regarding the prior summary judgment awarded to Trisan and all outstanding and related matters. The Agreement provides for a mutual final and full release and discharge for the company and our subsidiaries for all matters up to and including July 8, 2009 related to the original claim and action, counterclaim, judgment, and appeal between Trisan and the Company and it’s subsidiaries. The Trisan settlement agreement required a third party company, of which our Chief Executive Officer is a related party, to be encumbered with a financial arrangement.
The settlement agreement does not provide for the payment of any monies, the creation of any obligations or any encumbrances in favor of Trisan, by or upon Mortgagebrokers.com Holdings Inc. or its subsidiary MortgageBrokers.com Inc. other than the release of 500,000 shares of Mortgagebrokers.com Holdings Inc. common stock which were issued in 2006 to Trisan related parties in escrow.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
June 30, 2009
Unaudited
| 8. | Advances from Related Party |
As of June 30, 2009, the controlling shareholder and Chief Executive Officer of the Company had advanced $121,180 (December 31, 2008 - $129,425) to fund the working capital of the Company. The advances are unsecured, non-interest bearing, with $76,180 due on demand, $25,000 due in 2010, and $20,000 due in 2011.
| 9. Obligation Under Capital Leases |
The obligation under capital leases bear interest at approximately 30% per annum. Future minimum lease payments under the capital leases expiring December 31, 2009 together with the balance of the obligation under capital leases is as follows:
| | | June 30, 2009 | | December 31, 2008 | |
| | | | | | | | | |
| 2009 | | | 647 | | | | 2,212 | |
| | | | | | | | | |
| Total minimum lease payments | | | 647 | | | | 2,212 | |
| | | | | | | | | |
| Less: amount representing interest at approx. 30% | | | (194 | ) | | | (588 | ) |
| | | | | | | | | |
| Total obligation under capital leases | | | 453 | | | | 1,624 | |
| | | | | | | | | |
| Less: current portion | | | (453 | ) | | | (1,624 | ) |
| | | | | | | | | |
| Long-term portion | | $ | - | | | | - | |
| | | | | | | | | |
| 10. Stock-based Compensation Accrual |
The Company has accrued expenses for stock-based compensation:
| | a) | As of June 30, 2009, the Company has accrued, as stock-based compensation payable, 641,897 (December 31, 2008 – 377,838) common shares at a price of $0.05 (December 31, 2008 - $0.11) per share for a total of $32,095 (December 31, 2008 - $41,562) payable to the parties referred to in note 17c (ii). |
| | b) | As of June 30, 2009, the Company has accrued, as employee stock-based compensation, $122,583 (December 31, 2008 - $143,779) under its Equity Compensation Plan referred to in note 11. |
| | c) | As of June 30, 2009, the Company has accrued, as stock-based compensation, 1,478,349 (December 31, 2008 – 1,134,242) common shares at a price of $0.05 (December 31, 2008 - $0.11) per share for a total of $73,917 (December 31, 2008 - $124,767) payable to the parties referred to in note 17a, 17b, and 17c (i). |
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
June 30, 2009
Unaudited
Preferred Stock
The Company has 5,000,000 shares authorized of preferred stock with a par value of $0.0001. The Company has issued none of these shares as of June 30, 2009.
Common Stock
On June 9, 2006, the Company completed an offering in which it issued a total of 2,112,470 shares of its common stock to accredited investors including RE/MAX Ontario-Atlantic Canada Inc., its executives and franchisees, at a price per unit of $1.00 for an aggregate offering price of $2,112,470. Purchasers of these securities receive the following additional rights and privileges:
| | i) | the purchaser received a warrant (1 warrant = 1 share) to further purchase up to the total number shares of common stock purchased through the private placement exercisable at a rate of 20% each year following the anniversary date of the private placement closure. The warrants are exercisable at a price 30% below the 30 day fair market price preceding the date such warrants are exercised. Warrants expire if not exercised within 30 days of such anniversary date; and |
The following summarizes the warrants issued, outstanding, exercisable, expired and exercised related to the company’s private placement that closed on June 9, 2006:
| | | June 30, 2009 | | | June 30, 2008 | |
| Number of Warrants Outstanding | | | | | | |
| at Beginning of Period: | | | 1,267,4826 | | | | 1,682,976 | |
| Number of Warrants Exercised: | | | - | | | | - | |
| Warrants Expired: | | | - | | | | - | |
| Number of Warrants Outstanding and Exercisable at End of Period: | | | 1,267,482 | | | | 1,682,976 | |
| | ii) | further, pursuant to the execution of a service level agreement, on the anniversary date of the private placement closure, the Company has agreed to issue a number of shares of common stock equal to 25% of the number of common shares purchased in the private placement for ten consecutive anniversary dates. The receipt of such shares is dependent on the execution and maintenance in good standing of the terms of a service level agreement for each of the ten years. The service level agreement included the provisions of marketing, servicing and promotional services. |
The following is a summary of stock-based compensation issuances associated with our January 30, 2006 agreement with RE/MAX which was modified on May 25, 2006:
| | | | | | | | | | | |
| YEAR | Date of Issue | | Anniversary Stock Issued | | | Price | | | Value | |
| 2007 | July 7, 2007 | | | 478,000 | | | $ | 0.42 | | | $ | 200,760 | |
| 2008 | September 11, 2008 | | | 490,500 | | | $ | 0.11 | | | $ | 53,955 | |
| Subtotal | | | | 968,500 | | | | | | | | | |
Based upon the sale of 2,112,470 shares in our placement which closed on June 9, 2006, and pursuant to the January 30, 2006 agreement with RE/MAX which was modified on May 25, 2006, a maximum number of 528,117 shares could be issued each anniversary of the placement closing date for a total of 5,281,170 shares over 10 years. As at June 30, 2009, the Company has issued 968,500 of these common shares. The issuance of the anniversary shares is subject to the good standing of the RE/MAX January 30, 2006 and amended May 25, 2006 agreements for RE/MAX affiliates as well as the continued good standing of a one year renewable service level agreement for the RE/MAX Franchisee. The Company and RE/MAX terminated the agreement on June 9, 2009 and as such the obligation to issue anniversary shares following this period has been removed from the Company.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
June 30, 2009
Unaudited
| 11. Capital Stock (cont'd) |
The potential issuance of the shares to the June 9, 2006 private placement offering participants is accrued for quarterly and issued annually. The annual issuances are recorded at the market value of the share on the date of issuance.
On July 7, 2007, the Company issued 125,000 restricted (Rule 144) common shares at a price of $1 per share and having similar rights and obligations pursuant to the terms of the 2006 Private Placement offered to executives and franchisees of RE/MAX Ontario-Atlantic Canada Inc. These shares rights were assigned to the new subscribers by the initial subscribers of the 2006 PPM. These shares were issued in anticipation of the initial participants shares being cancelled. The shares were issued at $1.00 per share, the offered price in the private placement which closed on June 9, 2006.
Equity Compensation Plan
On February 6, 2003 and as amended on February 14, 2003, the Company adopted the 2003 Equity Compensation Plan to attract and retain high quality personnel. The adequacy of this plan is evaluated annually by Company management. As of June 30, 2009, no options had been issued under this plan. The disclosures made in the 2005 Audited Financial Statements (10-KSB - Item 10. Executive Compensation) and the `Amendment to License Agreement between RE/MAX and Mortgagebrokers.com Holding Inc.' dated May 25, 2006 (8-K - Schedule `A' 1. Outstanding Options) documenting the equity compensation of employees has not been implemented as of August 7, 2009. The Company is currently in the process of amending the existing employment agreements which are expected to be executed in 2009. Until the new employment contracts have been formally and legally executed, the existing employment contracts of the Company are still in effect.
Service Compensation Plan
On March 1, 2005 the Board of Directors approved the Service Compensation Plan ("the Service Plan"), the purpose of which is to enhance the Company’s stockholder value and maximize the available capital resources of the company through allowing non monetary transactions whereby the issuance of stock is granted for services rendered. This program is expected to support the Company in building a long term sustainable revenue pipeline, a national sales agency and referral program as well as provide incentive to service providers to establish long term relationships with the Company and to encourage stock ownership by such individuals by providing them with a means to acquire a proprietary interest in the Company’s success through stock ownership. Under the Service Plan, service providers, consultants, mortgage agents and strategic alliance partners who provide services to the Company may be granted options or warrants to acquire restricted stock of the Company. The total number of shares reserved for issuance under the Service Plan is 5,000,000, the adequacy of which will be evaluated annually.
| 12. Additional Paid-in Capital - Warrants |
On June 9, 2006, accredited investors including RE/MAX Ontario-Atlantic Canada Inc., its executives and franchisees purchased 2,112,470 units of the Company for aggregate proceeds of $2,112,470 as a part of private placement (note 11). Each unit consisted of one common share and one common share purchase warrant. The warrants are exercisable at a price 30% below the 30 day fair market price preceding the date such warrants are exercised. One-fifth of such warrants must be exercised (executed to purchase shares) within 30 days following each successive anniversary date of the private placement closing of the offering. Warrants expire if not exercised within 30 days of such anniversary date. The warrants were relatively valued at $732,605. The fair value of the warrants was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions: expected dividend yield of 0%, expected stock volatility of 64.7%, risk-free interest rate of 4.00% and an expected warrant life of 1 year. The expiry date of the warrants was extended for the first year only, to September 30, 2007. As of June 30, 2009, 233,078 of the warrants were exercised at an average price of $0.28. As of June 30, 2009, 611,910 warrants expired, 233,078 warrants were exercised and 1,267,482 warrants remain outstanding and exercisable. Subsequent to June 30, 2009 422,494 of the warrants expired unexcercised
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
June 30, 2009
Unaudited
| 13. Subscription Receivable |
On June 9, 2006, the Company completed an offering in which it issued a total of 2,112,470 shares of its common stock to accredited investors including executives and franchisees of RE/MAX Ontario-Atlantic Canada Inc., at a price per unit of $1.00 for an aggregate offering price of $2,112,470. Payment of $1,870,169 was received during the year ended December 31, 2006 and promissory notes were executed for the balance of $242,301. As of June 30, 2009, $155,000 of the original promissory notes remains outstanding. Due to the lack of fulfilling the terms of the promissory notes, two of the original participants’ shares, for a total of 125,000 shares, are in the process of being cancelled. As of June 30, 2009 two new participants subscribed for 125,000 shares under the private placement and as of June 30, 2009, $60,000 of the new participants’ promissory notes have been paid and $65,000 remains outstanding. In addition, as of June 30, 2009, 233,078 warrants issued under the private placement were exercised for a total value of $64,786, see note 12. During the fourth quarter of 2008, the Company issued 197,078 shares in relation to the warrants exercised and paid. The un-issued warrants exercised are included in subscription for stock in the equity section of the balance sheet. As of June 30, 2009, $7,540 receivable on the exercise of the warrants was outstanding and is included in subscriptions receivable in the equity section of the balance sheet. The shares underlying some of the warrants exercised have not been issued to date due to non receipt of payment from the exerciser of the warrant.
During 2007, the Company acquired 12,500 common shares of the Company, on the open market, at an average price of $0.60 per share for a total of $7,455. In 2006, the Company acquired 31,600 common shares of the Company, on the open market, at an average value of $0.56 per common share, for a total of $17,779.
| 15. Occupancy Costs - Related Party |
On August 1, 2007, the Company’s current office space was sold to a related party of the Chief Executive Officer, the Company`s majority shareholder. Please see note 17(f) for further details.
The Company has paid no federal or state income taxes. As of June 30, 2009, the Company had net operating loss carry forwards for federal income tax reporting purposes of $3,435,939 which, if unused, will expire in various years. The tax effect of the operating loss carry forwards and temporary differences at June 30, 2009 and December 31, 2008 are as follows:
| | | 2009 | | | 2008 | |
| Deferred Income Tax Assets: | | | | | | |
| Net Operating loss carry forward | | $ | 1,168,219 | | | $ | 1,167,616 | |
| Net book value and tax value differences | | | (35,434 | ) | | | (35,434 | ) |
| Valuation allowance for deferred income tax assets | | | (1,132,785 | ) | | | (1,132,183 | ) |
| | | | | | | | | |
| Total deferred tax effect | | $ | - | | | $ | - | |
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
June 30, 2009
Unaudited
The following is a reconciliation of the income tax benefit computed using the combined Canadian federal and provincial statutory rate of 34% (2008 - 34%) rate to the provision for income taxes:
| | | 2009 | | | 2008 | |
| Deferred Tax Provision: | | | | | | |
| Expected income tax benefit (expense) | | $ | (22,051 | ) | | $ | (114,945 | ) |
| Stock based compensation | | | 22,654 | | | | 60,734 | |
| Valuation allowance | | | 603 | | | | (54,211 | ) |
| | | | | | | | | |
| Provision for income taxes | | $ | - | | | $ | - | |
| | | | | | | | | |
| Current Tax Provision: | | | | | | | | |
| Federal and Provincial income tax | | $ | - | | | $ | - | |
| | | | | | | | | |
Due to the losses incurred since inception and expected future operating results, management has determined that the Company does not meet the 'more likely than not' criteria that the deferred tax assets resulting from the tax losses available for carry forward and the differences in tax bases of assets will be realized through the reduction of future income tax payments, accordingly a 100% valuation allowance has been recorded for deferred income tax assets
| 17. | Commitments and Contingencies |
Commitments
The Company has entered into agreements with various parties, whereby the Company is committed to issue compensatory warrants and stock as part of the “Service Compensation Plan” to mortgage agents and strategic alliance partners.
The effective date (“Effective Date”), when mentioned below, is the date the independent mortgage agent entered into a Mortgage Agent Agreement with the Company; or, is the date the RE/MAX Ontario-Atlantic Canada Inc. (“RE/MAX”) or Maxwell Realty Inc. (“Maxwell”) Franchisee entered into a Service Level Agreement with the Company and is also the date that the strike price (“Strike Price”) of the warrants is established. The strike price is the greater of $1 per share or the twenty day average closing price following the Effective Date.
Since the conversion ratio of dollar value of warrants into shares is fixed, but the share price fluctuates, the accrual to expense the value of the warrants earned by the mortgage agents and strategic alliance partners will fluctuate with the share price at the end of each period.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
June 30, 2009
Unaudited
| 17. | Commitments and Contingencies(cont’d) |
The Company has entered into agreements with the following parties:
a) Independent Mortgage Agents/Loan Officers
Pursuant to a 5 year Mortgage Agent Agreement, the Company is committed to issuing warrants, at no cost, for common stock of the Company in two series to mortgage agents licensed with the Company based on their annual mortgage origination sales volume, which are summarized as follows based on current formulae:
Series I Warrants
| | “Average Volume”: | defined as the average best three out of five years in funded mortgage origination volume |
| | Number of Warrants: | $8,257 worth of warrants divided by the Strike Price, per CDN $10 million in Average Volume, adjusted on a pro rata basis, no minimum or maximum thresholds. The warrants are convertible in common shares on a 1:1 basis. |
| | Earnings Period: | Series I warrants are earned in the first 5 years following the Effective Date; |
| | Additional Vestment: | all SERIES I warrants are fully vested on the 5th anniversary of the Effective Date |
| | | |
| | Determination Date: | 5 year anniversary of Effective Date | |
a) Independent Mortgage Agents/Loan Officers (cont'd)
Series II Warrants
| | “Annual Volume”: | defined as the total mortgage origination volume executed per 12 month period following the Effective Date and subsequent 12 month periods following the anniversary dates of the Effective Date |
| | Number of Warrants: | $1,651 worth of warrants divided by the Strike Price per CDN $10 million in Annual Volume, adjusted on a pro rata basis, no minimum or maximum thresholds. The warrants are convertible in common shares on a 1:1 basis. |
| | Earnings Period: | Series II warrants are earned in the first 5 years following the Effective Date |
| | Additional Vestment: | All SERIES II Warrants fully vest 3 years following the Determination Date |
| | Determination Date: | The Annual Volume is determined on the fifth year anniversary of the Effective Date |
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
June 30, 2009
Unaudited
| 17. | Commitments and Contingencies (cont'd) |
b) Maxwell Realty Inc.
Per a three year renewable agreement dated April 12, 2006 and pursuant to the execution of a service level agreement by the Maxwell Franchisee, the Company is committed to issuing to Maxwell at no cost, warrants for common stock of the Company based on referrals leading to funded mortgage origination volume. The Maxwell Warrant-Based Compensation Program, which issue warrants (“SERIES III Warrants”) that are divided amongst the Maxwell Franchisor, Franchisee and referring Sales Agent.
| | Annual Volume: | defined as the total funded mortgage origination volume from Maxwell lead referral executed per 12 month period following the Effective Date and subsequent 12 month periods following the anniversary dates of the Effective Date |
| | Number of Warrants: | $3,000 worth of warrants divided by the Strike Price per CDN $10 million in Annual Volume, adjusted on a pro rata basis, no minimum or maximum thresholds. The warrants are convertible in common shares on a 1:1 basis. |
| | Earnings Period: | Series III warrants are earned in the first 5 years following the Effective Date | |
| | | | |
| | Additional Vestment: | SERIES III warrants are fully vested on the fifth anniversary of the Effective Date |
| | i) | Pursuant to a ten year licensing agreement dated January 30, 2006 and amended May 25, 2006, and pursuant to the execution of a one year renewable service level agreement by the RE/MAX Franchisee, the Company is committed to issuing to RE/MAX at no cost, warrants for common stock of the Company based on referrals leading to funded mortgage origination volume. The RE/MAX Warrant-Based Compensation Program issues warrants (“SERIES IV Warrants”) as follows based on current formulae: |
| | Annual Volume: | defined as the total funded mortgage origination volume from RE/MAX lead referral executed per 12 month period following the Effective Date and subsequent 12 month periods following the anniversary dates of the Effective Date |
| | Number of Warrants: | $3,000 worth of warrants divided by the Strike Price per $10 million dollars CDN in Annual Volume, adjusted on a pro rata basis, no minimum or maximum thresholds. The warrants are convertible in common shares on a 1:1 basis. |
| | Earnings Period: | Series IV warrants are earned in the first 3 years following the Effective Date |
| | Additional Vestment: | SERIES IV warrants are fully vested on the 5th anniversary of the Effective Date |
| | ii) | Pursuant to the ten year licensing agreement dated January 30, 2006 and amended May 25, 2006, the Company has committed to issuing, at no cost, an aggregate of 528,118 common shares of the Company on each of the 10 year anniversary dates of the licensing agreement to those RE/MAX executives and franchisees that participated in the company’s private placement which closed on June 9, 2006. |
d) The Company has signed lease agreements for computer and office equipment. Committed annual payments are as follows:
| 2009 | | $ | 2,926 | |
| 2010 | | $ | 5,003 | |
| 2011 | | $ | 3,561 | |
| 2012 | | $ | 3,150 | |
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
June 30, 2009
Unaudited
| 17. Commitments and Contingencies (cont'd) |
e) On February 8, 2007, the Company entered into a lease to rent office space in Calgary, Alberta, Canada for maintaining the Company's western Canada operations. The agreement is effective commencing May 1, 2007 for a five year term.
Annual minimum lease payments (excluding utilities, taxes and common area maintenance expenses) are as follows:
| 2009 | | $ | 3,789 | |
| 2010 | | $ | 7,578 | |
| 2011 | | $ | 9,094 | |
| 2012 | | $ | 3,031 | |
Commitments (cont’d)
f) On March 27, 2007, the Company entered into a lease to rent office space in Concord, Ontario, Canada for maintaining the Company's Canadian head office.
Annual minimum lease payments (excluding utilities, taxes and common area maintenance expenses) are as follows:
| 2009 | | $ | 45,564 | |
| 2010 | | $ | 91,127 | |
| 2011 | | $ | 91,127 | |
| 2012 | | $ | 53,158 | |
g) Contingencies
The Company is party to various other claims and proceedings arising in the normal course of business. Management does not expect the disposition of these matters to have a material adverse effect on the Company’s results of operations or financial condition.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
June 30, 2009
Unaudited
| 18. | Earnings or Loss Per Share |
The Company calculates basic earnings per common share using net income divided by the weighted-average number of common shares outstanding. The Company calculates diluted earnings per common share in the same manner as basic, except we use the weighted-average number of diluted common shares outstanding in the denominator
| | | Six Months Ended 2009 | | | Six Months Ended 2008 | | | Three Months Ended 2009 | | | Three Months Ended 2008 | |
| Weighted average number of common shares outstanding | | | 42,976,548 | | | | 38,506,855 | | | | 42,976,548 | | | | 38,516,470 | |
| | | | | | | | | | | | | | | | | |
| Warrants | | | 1,267,482 | | | | 1,682,976 | | | | 1,267,482 | | | | 1,682,976 | |
| Stock Based Compensation payable (RE/MAX) | | | 641,897 | | | | 604,279 | | | | 641,897 | | | | 604,279 | |
| Stock Based Compensation payable (Other) | | | 1,478,349 | | | | 1,160,332 | | | | 1,478,349 | | | | 1,160,332 | |
| Stock Based Compensation payable (Employee) | | | 2,451,661 | | | | 3,266,158 | | | | 2,451,661 | | | | 3,266,158 | |
| | | | | | | | | | | | | | | | | |
| Weighted-average number of diluted common shares outstanding | | | 48,815,937 | | | | 5,220,600 | | | | 48,815,937 | | | | 45,230,215 | |
Certain figures for the previous period have been reclassified to conform to the current period’s financial statement presentation.
See Notes 7 and 12.
F-20
