UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_________________
FORM 10Q/A
_________________
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to ___________
NAVIDEC FINANICAL SERVICES, INC.
_______________________________________________________
(Exact name of registrant as specified in its charter)
| Colorado | 000-51139 | 13-4228144 | ||
| (State of Incorporation) | (Commission File Number) | (IRS Employer Identification No.) |
2000 South Colorado Blvd., Suite 200, Denver, Colorado 80222
_______________________________________________
(Address of principal executive offices)
303-222-1000
__________________________
(Registrant's Telephone number)
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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated file, 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 [ ] Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes [ ] No [ X ]
Indicate the number of share outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
As of September 30, 2008, there were 9,024,583 shares of the registrant’s common stock issued and outstanding.
EXPLANATORY NOTE
This Form 10-Q/A (the “Amendment”) amends our Form 10-Q for the period ended September 30, 2008, which was filed with the Securities and Exchange Commission on November 13, 2008 (the “Original Filing”). We are filing this Form 10-Q/A to amend Item 1 “Financial Statements” Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 4 “Controls and Procedures” and Item 4T “Controls and Procedures.”
In connection with the filing of this Form 10-Q/A and pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, we are including with this Form 10-Q/A certain currently dated certifications.
This Amendment does not reflect events occurring after the Original Filing except as noted above. Except for the foregoing amended information, this Form 10-Q/A continues to speak as of the date of the Original Filing and the Company has not otherwise updated disclosures contained therein or herein to reflect events that occurred at a later date.
| Item 1 | Financial Statements (Unaudited) | ||
September 30, 2008 and December 31, 2007 | 1 | ||
Three and Nine months ended September 30, 2008 and 2007 | 2 | ||
Consolidated Statements of Cash Flows – Nine months ended September 30, 2008 and 2007 | 3 | ||
Consolidated Statement of Changes in Stockholders’ Equity - September 30, 2008 | 4 | ||
| 5 | |||
| Item 2 | 26 | ||
| Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 31 | |
| Item 4 | 31 | ||
| Item 4T | Controls and Procedures | 32 | |
| Item 1 | Legal Proceedings | 34 | |
| Item 2 | Changes in Securities | 34 | |
| Item 3 | Defaults Upon Senior Securities | 34 | |
| Item 4 | Submission of Matters to a Vote of Security Holders | 34 | |
| Item 5 | Other Information – Not Applicable | 34 | |
| Item 6 | Exhibits | 35 | |
| SIGNATURES | |||
PART I
ITEM 1. FINANCIAL STATEMENTS
NAVIDEC FINANCIAL SERVICES, INC. AND SUBSIDIARIES
(In Thousands)
| September 30, | December 31, | ||||||
| 2008 | 2007 | ||||||
| RESTATED | RESTATED | ||||||
| (Unaudited) | (Audited) | ||||||
| ASSETS | |||||||
| Current Assets | |||||||
| Cash and cash equivalents | $ | 704 | $ | 1,407 | |||
| S/T Mortgages receivable - net of allowance of $807 on September 30, 2008 and $5 on December 31, 2007 | 4,556 | 2,148 | |||||
| S/T Note receivable - Jaguar Group LLC - net of allowance of $1,407 | |||||||
| on September 30, 2008 and $0 on December 31, 2007 (Notes 1, 4) | - | 1,047 | |||||
| Accrued interest receivable | 112 | 45 | |||||
| Advances receivable | 6 | 5 | |||||
| Prepaid Expenses | - | 62 | |||||
| Total Current Assets | 5,378 | 4,714 | |||||
| Property, equipment and software, net | 105 | 45 | |||||
| Other Assets | |||||||
| Note receivable - Aegis/Grizzle - (Note 4) | 450 | 450 | |||||
| Investment - BPZ Energy - (Note 5) | 673 | 2,541 | |||||
| Investment - Boston Property (Note 5) | 2,587 | 1,279 | |||||
| Real estate owned - net of impairment of $198 and depreciation of $13 on September 30, 2008 and $0 on December 31, 2007 (Note 5) | 2,144 | 379 | |||||
| Other assets | 22 | 15 | |||||
| Total Other Assets | 5,876 | 4,664 | |||||
| TOTAL ASSETS | $ | 11,359 | $ | 9,423 | |||
| LIABILITIES & STOCKHOLDERS' EQUITY | |||||||
| Liabilities | |||||||
| Current Liabilities | |||||||
| Advances repayable - related party | $ | - | $ | 15 | |||
| Accounts Payable | 550 | - | |||||
| Short term borrowings (Note 7) | 1,219 | 286 | |||||
| Accrued taxes and liabilities | 836 | 154 | |||||
| Total Current Liabilities | 2,605 | 455 | |||||
| Stockholders' Equity | |||||||
| Common stock, $0.001 par value, 100,000,000 shares authorized, 9,024,583 and 8,924,583 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively | 9 | 9 | |||||
| Additional paid-in capital | 8,966 | 8,758 | |||||
| Unrealized gain on securities | 334 | 1,578 | |||||
| Retained earnings | (555) | (1,377) | |||||
| Total Stockholders' Equity | 8,754 | 8,968 | |||||
| TOTAL LIABILITIES & STOCKHOLDERS' EQUITY | $ | 11,359 | $ | 9,423 | |||
The accompanying notes to consolidated financial statements are an integral part of these statements.
NAVIDEC FINANCIAL SERVICES, INC. AND SUBSIDIARIES
(In Thousands)
Unaudited
| For the Three Months Ended | For the Nine Months Ended | |||||||||
| September 30, | September 30, | |||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||
| RESTATED | RESTATED | RESTATED | ||||||||
| Revenue | ||||||||||
| Loan Fees | $ | 221 | $ | 97 | $ | 675 | $ | 484 | ||
| Interest revenues | 33 | - | 202 | - | ||||||
| Cost of loan fees | (476) | (98) | (667) | (445) | ||||||
| Gross Profit | (222) | (1) | 210 | 39 | ||||||
| Operating Expenses: | ||||||||||
| General and administrative | 1,203 | 236 | 3,598 | 727 | ||||||
| Depreciation and amortization | 23 | - | 26 | 4 | ||||||
| Total operating expenses | 1,226 | 236 | 3,624 | 731 | ||||||
| Loss from operations | (1,448) | (237) | (3,414) | (692) | ||||||
| Other income (expense) | ||||||||||
| Gain on sale of investments | (10) | 1,349 | 5,604 | 1,884 | ||||||
| Other (loss) or Gain | 11 | - | 11 | 50 | ||||||
| Net rental income | 13 | - | 20 | - | ||||||
| Miscellaneous non-operating expense | (199) | - | (269) | - | ||||||
| Interest income | 21 | 15 | 44 | 56 | ||||||
| Interest expense | (40) | - | (66) | - | ||||||
| Total other (expense) income | (204) | 1,364 | 5,344 | 1,990 | ||||||
| Net (Loss) Income before minority interest and income tax | (1,652) | 1,127 | 1,930 | 1,298 | ||||||
| Minority Interest | ||||||||||
| Minority interest in consolidated subsidiary | - | - | (24) | (8) | ||||||
| Net (Loss) Income before taxes | (1,652) | 1,127 | 1,906 | 1,290 | ||||||
| Income Taxes | ||||||||||
| Provision for income tax (credit) | (112) | - | 1,084 | - | ||||||
| Net (Loss) Income | $ | (1,540) | $ | 1,127 | $ | 822 | $ | 1,290 | ||
| Earnings Per Share: | ||||||||||
| Basic (Note 2) | $ | (0.17) | $ | 0.13 | $ | 0.09 | $ | 0.14 | ||
| Weighted Average Shares Outstanding: | ||||||||||
| Basic | 9,025 | 8,983 | 9,025 | 8,983 | ||||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
NAVIDEC FINANCIAL SERVICES, INC. AND SUBSIDIARIES
(In Thousands)
Unaudited
| For the Nine Months Ended | ||||||
| September 30, | ||||||
| 2008 | 2007 | |||||
| RESTATED | RESTATED | |||||
| Cash Flows from Operating Activities: | ||||||
| Net Income | $ | 822 | $ | 1,290 | ||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||
| Depreciation expense | 26 | 4 | ||||
| Gain on sale investments | (5,604) | (1,884) | ||||
| Increase in reserves and impairments | 2,412 | - | ||||
| Gain on settlement of debt | - | (50) | ||||
| Minority interest | 24 | 8 | ||||
| Changes in operating assets and liabilities: | ||||||
| (Increase) decrease in accounts receivable | (1) | 23 | ||||
| Increase in accrued interest | (67) | (39) | ||||
| (Increase) decrease in prepaid expenses and other assets | 62 | 102 | ||||
| (Increase) decrease in short term loans receivable | (2,408) | 898 | ||||
| (See Supplemental Information below) | ||||||
| Increase in accounts payable | 550 | - | ||||
| Increase (decrease) in accrued liabilities and other | 667 | (60) | ||||
| Net Cash (Used) Provided by Operating Activities | (3,517) | 292 | ||||
| Cash Flows from Investing Activities: | ||||||
| Investments (increased) decreased | ||||||
| Boston real estate | (1,308) | - | ||||
| Other real estate (See Supplemental Information below) | - | - | ||||
| (Increase) in fixed assets | (79) | (2) | ||||
| Proceeds from sale of equity investments | 3,268 | 1,068 | ||||
| Net Cash Provided by Investing Activities | 1,881 | 1,066 | ||||
| Cash Flows from Financing Activities: | ||||||
| Increase (decrease) in short term borrowings | 933 | - | ||||
| Post-merger proceeds from exercise of BPZ Options | - | 1,220 | ||||
| Net Cash Provided by Financing Activities | 933 | 1,220 | ||||
| Net (Decrease) Increase in Cash & Cash Equivalents | (703) | 2,579 | ||||
| Beginning Cash & Cash Equivalents | 1,407 | 179 | ||||
| Ending Cash & Cash Equivalents | $ | 704 | $ | 2,758 | ||
| Supplemental Disclosure of Cash Flow Information | ||||||
| Non-cash exchange of receivable from parent company | $ | 1,995 | $ | - | ||
| Cash paid for Interest | $ | 66 | $ | - | ||
| Cash paid for Income Taxes | $ | 350 | $ | - | ||
| Increase in Additional Paid In Capital due to stock options issued | $ | 64 | $ | - | ||
The accompanying notes to consolidated financial statements are an integral part of these statements.
NAVIDEC FINANCIAL SERVICES, INC. AND SUBSIDIARIES
(Restated)
For the Period from December 31, 2006 to September 30, 2008
(In thousands)
(Unaudited)
| Voting | Additional | Unrealized | Retained | Stockholders' | |||||||||
| Common Stock | Paid-in | Gain | Earnings | Equity | |||||||||
| Shares | Amount | Capital | (Deficit) | ||||||||||
| Balances, December 31, 2006 | |||||||||||||
| (as previously reported) | 7,950 | $ | 8 | $ | 9,413 | $ | 1,483 | $ | (3,973) | $ | 6,931 | ||
| Adjusted unrealized gains | - | - | - | (902) | - | (902) | |||||||
| Reverse incorrect entry | - | - | (1,203) | (1,203) | |||||||||
| Legal Settlement | - | - | - | - | 295 | 295 | |||||||
| Balances, December 31, 2006 (as restated) | 7,950 | 8 | 8,210 | 581 | (3,678) | 5,121 | |||||||
| Net income | - | - | - | - | 2,301 | 2,301 | |||||||
| Options exercised | 1,000 | 1 | 49 | - | - | 50 | |||||||
| BPZ transaction correction | 33 | - | 2 | - | - | 2 | |||||||
| Private placement correction | 9 | - | - | - | - | - | |||||||
| Legacy options exercised | - | - | 647 | - | - | 647 | |||||||
| Treasury stock - Armijo settlement | (68) | - | (150) | - | - | (150) | |||||||
| Change in unrealized gains | - | - | - | 997 | - | 997 | |||||||
| Balances, December 31, 2007 | 8,924 | $ | 9 | $ | 8,758 | $ | 1,578 | $ | (1,377) | $ | 8,968 | ||
| Net income | - | - | - | - | 822 | 822 | |||||||
| Options exercised | 100 | - | 5 | - | - | 5 | |||||||
| Change in unrealized gains | - | - | - | (1,578) | - | (1,578) | |||||||
| Options issued | - | - | 60 | - | - | 60 | |||||||
| Reclaimed BPZ stock (Notes 2, 4) | - | - | 143 | 334 | - | 477 | |||||||
| Balances - September 30, 2008 | 9,024 | $ | 9 | $ | 8,966 | $ | 334 | $ | (555) | $ | 8,754 | ||
The accompanying notes to consolidated financial statements are an integral part of these statements.
NAVIDEC FINANCIAL SERVICES, INC. AND SUBSIDIARIES
For the Nine Months Ended September 30, 2008 and 2007
(Restated)
(Unaudited)
NOTE 1 - ORGANIZATION
Navidec Financial Services, Inc. ("NFS" or “Company") was incorporated in December 2002, as a wholly owned subsidiary of Navidec Inc. ("Old Navidec"). In September 2004, Old Navidec consummated a reverse merger agreement with BPZ Energy, Inc. a Texas corporation established in 2001 ("BPZ") whereby Old Navidec transferred all of its asset, liabilities and historical operations into NFS and Old Navidec changed its name to BPZ Energy Inc. Also pursuant to the merger agreement, Old Navidec affected a one share of NFS for one share of Old Navidec spin off to the shareholders of record of Old Navidec.
NFS is now a holding company that is in the business of creating or acquiring a controlling interest in development stage enterprises with the expectation of further developing the enterprise and then taking the enterprise public.
On September 11, 2003, Old Navidec purchased an 80% interest in Northsight Mortgage Group, LLC ("NMG"), an Arizona mortgage broker. NFS received the 80% interest in NMG as part of the merger agreement with BPZ. On May 4, 2005, the Company formed Navidec Mortgage Holdings, Inc., a Colorado corporation ("NMH"), as a subsidiary of NFS and received 2,000,000 common shares of NMH. On November 11, 2007, NMH amended its articles of incorporation in order to change its name to Northsight, Inc. ("Northsight").
On October 12, 2007, NFS exchanged its 80% interest in NMG for 3,000,000 common shares of Northsight to bring the total common shares of Northsight owned by NFS to 5,000,000 shares. On October 12, 2007, Northsight then purchased the remaining 20% minority interest in NMG from the minority member for 100,000 shares of Northsight. As a result of this transaction, NFS owns 98% of Northsight and the former minority member of NMG owns 2% of Northsight.
On July 9, 2008, the Board of Directors of Navidec declared two dividend distributions for its shareholders as of September 8, 2008. On October 2, 2008, Navidec modified the record date and “ex-dividend” date to be the date that a Registration Statement on Form S-1 for the dividend securities is declared effective by the Securities and Exchange Commission.
The first dividend is a distribution of two Navidec Warrants to purchase common shares of Navidec, $.001 par value, for each share of Navidec. The Units consist of an “A” Warrant, exercisable at $2.00 per share until July 1, 2013, and a “B” Warrant exercisable at $4.00 per share until July 1, 2013.
The second dividend is distribution of a Unit of Northsight, Inc ("Northsight"). The Units will be distributed one Unit of Northsight for each 2.27336 shares of Navidec. Navidec currently owns 20,000,000 Units of Northsight. Navidec will distribute 4,000,000 Units to its shareholders, resulting in Navidec owning 16,000,000 Unit after the dividend distribution. The Northsight Units to be distributed will consist of one share of Northsight, a Northsight “A” Purchase Warrant, exercisable at $2.00 per share until July 1, 2013, and a “B” Purchase Warrant exercisable at $4.00 per share until July 1, 2013.
Starting in July 2007, NFS began lending money to Northsight to enable Northsight to make short term, first deed of trust collateralized loans to borrowers who are purchasing deeply discounted or foreclosed residential real estate in Arizona and Colorado. During the year ended December 31, 2007, NFS had lent Northsight approximately $5,826,000. The loans to Northsight yield 12% and are callable on demand by NFS. As of September 30, 2008, NFS had approximately $4,556,000 (net of allowance of $807,000) and as of December 31, 2007 had $2,204,000 in short term bridge loans outstanding. Short term bridge loans outstanding grew by 107% in the nine months ended September 30, 2008 compared to December 31, 2007 balances.
Southie Development, LLC (Southie) was formed in January 2008 and is wholly-owned by NFS. The purpose of Southie is to develop residential real estate for resale and to own and manage residential real estate acquired via default of real estate loans owned by NFS. Once a real estate loan defaults and NFS obtains title to the collateral, NFS transfers the property to Southie for development and management. As part of the management and development of the properties transferred to it, Southie honors any existing residential leases, will potentially expend monies for rehabilitation of the property with the goal of selling the property in a short time period, usually less than one year. However, if the Company deems the property to be a good longer term investment, they might hold the property for longer periods.
The Company purchased a home in South Boston on December 4, 2007 (Thomas Park) and began improving the property with the intent to construct three condominium units for resale. The purchase price was $1,200,000 plus closing costs. As of May 19, 2008, the Company acquired a $1,200,000 line with Mt. Washington Cooperative Bank for the development of Thomas Park. The line is due November 19, 2009, monthly interest only payments, with a prime plus 2% interest rate and an interest rate floor of 7%. As of September 30, 2008, the balance owed on this line was $908,000. As of September 30, 2008, the Company had invested $2,587,000 less the bank line of $908,000. The Company estimates that construction will be completed by January 2009.
Jaguar Group Investments, LLC
In February 2008, our subsidiary, Northsight entered into a joint venture agreement with Jaguar Group, LLC. The purpose of this joint venture was to provide wholesale financing loan products to the real estate mortgage industry.
Northsight was to purchase 50% equity and voting interest in Jaguar Investment Group, LLC (Jaguar) and the remaining 50% was to be owned by Jaguar Group, LLC. Each equity interest was to be purchased for $4 million dollars each, to be in the form of cash, real estate equity, and/or any form of consideration agreed by both members. The joint venture was never funded due to Jaguar Group, LLC’s inability to fund its portion.
On September 29, 2008, Northsight filed a lawsuit, in the Boulder County District Court, against Jaguar Group, LLC, John R. Reinholdt II and the Estate of John R. Reinholdt Sr. (Defendants) for non-payment of a $1,100,000 loan made by the Company to Jaguar. The lawsuit also demands immediate payment of other receivables in the amount of $307,000 owed by Jaguar to the Company. The lawsuit alleges breach of the security and purchase agreements, fraud, civil theft, and conversion.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements and related notes for the nine months ended September 30, 2008 and 2007, presented herein have been prepared by the management of NFS and its subsidiaries pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. Operating results for the nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the full year. It is suggested that these unaudited consolidated financial statements be read in conjunction with the December 31, 2007 audited consolidated financial statements.
In the opinion of management, all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of operating results for the interim period presented have been made.
RESTATEMENT OF RESULTS
Subsequent to the issuance of the Company's audited financial statements for the year ended December 31, 2008, the Company determined that it would restate its financial statements for the year ended December 31, 2007 as contained in its Annual Report on Form 10KSBA, dated April 28, 2008 and the Form 10-Qs for the quarterly periods ended March 31, 2008, June 30, 2008 and September 30, 2008.
As a result of the revocation of the registration with the Public Accounting Oversight Board (PCAOB) of its previous auditors, Jaspers + Hall, PC, the Company was required to engage new PCAOB registered accountants and re-audit its 2007 Financial Statements.
During the re-audit, the Company determined that it had not used the proper cost in computing the gain on the sale of 980,000 BPZ Energy, Inc. (“BPZ”) common shares. The BPZ shares were acquired through warrants issued as a result of the reverse merger with BPZ and Navidec, Inc. and the Company had originally valued the warrants at $1.88 a share. The warrants had a strike price of $2.00 a share. Upon exercising the warrants and selling the shares, the Company had reported a cost of $2.00 in its 2007 financial statements. The Company should have used $3.88 a share, which is the original value of $1.88 a share plus the strike price of $2.00 a share. The Company incorrectly reduced the cost with a corresponding decrease to Additional Paid In Capital in 2007.
As a result, the Company over stated its earnings from the sale of BPZ shares by $1,842,000 during the year ended December 31, 2007. In the restatement of the December 31, 2007 financial statements, the $1,842,000 was accounted for as an increase in Additional Paid In Capital, to correct the previous incorrect reduction in Additional Paid In Capital. The result from the change was a decrease in Retained Earnings of $1,842,000 and an increase of $1,842,000 in Additional Paid In Capital. This correction resulted in no overall change in Stockholders’ Equity.
Due to using the incorrect BPZ cost, as of December 31, 2006, the BPZ asset and the corresponding unrealized gain on securities were overstated by approximately $900,000. Also in 2006, an additional 100,000 shares of BPZ were received by the Company via a default judgment received by the Company. A fair market value of approximately $300,000 was not recognized upon receipt, which amount would increase earnings in 2006 by $300,000. In addition, the Company had incorrectly recorded an increase of $1,200,000 to Additional Paid In Capital in 2005. The net impact on December 31, 2006 Stockholders’ Equity was an approximate $1,800,000 reduction.
Additionally, as of December 31, 2007, the BPZ asset and the corresponding unrealized gain on securities were overstated by approximately $810,000, due to failure to reduce unrealized gains by related deferred taxes. In addition, unrealized gains were understated by $240,000 due to the cost adjustment. The net impact on December 31, 2007 Shareholders’ Equity from this matter, exclusive of the tax considerations below, is an approximate $570,000 reduction. Since all of the remaining BPZ investment was sold in 2008, the unrealized BPZ gains were eliminated from the balance sheet along with the prior adjustments for unrealized gains.
The Company also corrected deferred revenue from mortgage origination and accrued expenses at December 31, 2007, that were previously recorded in 2008 of approximately $200,000. This correction resulted in a decrease of the Company’s 2007 net income of $200,000; however, the correction increased revenue and decrease expenses by the same amount for the year ended December 31, 2008.
Further, in May 2009, the Company’s accounting staff began a review of all of the Company’s ownership and transactions in BPZ Energy, Inc. common stock. During this internal review, the Company discovered that an additional 39,088 shares of BPZ were due from BPZ to the Company based on a past cashless exercise of Navidec legacy options. It is estimated that these shares were due to the Company toward the end of the year ended December 31, 2006, so the fair market value of the stock ($3.65 per share) for a total fair market value of $142,671 at December 31, 2006 is used for book basis. As of September 30, 2008 this increased the Investment in BPZ by $673,000, increased deferred tax liability by $196,000, and increased unrealized gain by $334,000. No adjustment was made at December 31, 2007 and 2006 because the value of the additional 39,088 shares in BPZ at those dates was deemed to be immaterial. (Also see Note 4)
As of September 30, 2008 the Balance Sheets, Statement of Operations, and Statement of Cash Flows were restated due to the factors listed above.
September 30, 2008 Detail of Restated Financials
| September 30, 2008 | |||||||||
| Previously | |||||||||
| RESTATED | Reported | ||||||||
| (Unaudited) | (Unaudited) | Change | |||||||
| ASSETS | |||||||||
| Current Assets | |||||||||
| Cash and cash equivalents | $ | 704 | $ | 704 | $ | - | |||
| S/T Mortgages receivable - net of allowance of $807 on September 30, 2008 and $5 on December 31, 2007 | 4,556 | 4,556 | - | ||||||
| S/T Note receivable - Jaguar Group LLC - net of allowance of $1,407 on September 30, 2008 and $0 on December 31, 2007 (Notes 1, 4) | - | - | - | ||||||
| Accrued interest receivable | 112 | 112 | - | ||||||
| Advances receivable | 6 | 6 | - | ||||||
| Prepaid Expenses | - | - | - | ||||||
| Total Current Assets | 5,378 | 5,378 | - | ||||||
| Property, equipment and software, net | 105 | 105 | - | ||||||
| Other Assets | |||||||||
| Note receivable - Aegis/Grizzle - (Note 4) | 450 | 450 | - | ||||||
| Investment - BPZ Energy - (Note 5) | 673 | - | 673 | ||||||
| Investment - Boston Property (Note 5) | 2,587 | 2,587 | - | ||||||
| Real estate owned - net of impairment of $298 and depreciation of $13 on September 30, 2008 and $0 on December 31, 2007 (Note 5) | 2,144 | 2,144 | - | ||||||
| Other assets | 22 | 22 | - | ||||||
| Total Other Assets | 5,876 | 5,203 | 673 | ||||||
| TOTAL ASSETS | $ | 11,359 | $ | 10,686 | $ | 673 | |||
| LIABILITIES & STOCKHOLDERS' EQUITY | |||||||||
| Liabilities | |||||||||
| Current Liabilities | |||||||||
| Advances repayable - related party | $ | - | $ | - | $ | - | |||
| Accounts Payable | 550 | 550 | - | ||||||
| Short term borrowings (Note 7) | 1,219 | 1,219 | - | ||||||
| Accrued taxes and liabilities | 836 | 636 | 200 | ||||||
| Total Current Liabilities | 2,605 | 2,405 | 200 | ||||||
| Stockholders' Equity | |||||||||
| Common stock, $0.001 par value, 100,000,000 shares authorized, 9,024,583 and 8,924,583 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively | 9 | 9 | - | ||||||
| Additional paid-in capital | 8,966 | 7,456 | 1,510 | ||||||
| Unrealized gain on securities | 334 | - | 334 | ||||||
| Retained earnings | (555) | 816 | (1,371) | ||||||
| Total Stockholders' Equity | 8,754 | 8,281 | 473 | ||||||
| TOTAL LIABILITIES & STOCKHOLDERS' EQUITY | $ | 11,359 | $ | 10,686 | $ | 673 | |||
| For the Three Months Ended | For the Nine Months Ended | |||||||||
| September 30, 2008 | September 30, 2008 | |||||||||
| Originally Reported | ADJ | RESTATED | Originally Reported | ADJ | RESTATED | |||||
| Revenue | ||||||||||
| Loan Fees | $ | 221 | 221 | 675 | - | 675 | ||||
| Interest revenues | 33 | 33 | 202 | - | 202 | |||||
| Cost of Loan Fees | (476) | (476) | (667) | - | (667) | |||||
| Gross Profit | (222) | - | (222) | 210 | - | 210 | ||||
| Operating Expenses: | ||||||||||
| General and administrative | 1,203 | 1,203 | 3,726 | (128) | 3,598 | |||||
| Depreciation and amortization | 23 | 23 | 26 | - | 26 | |||||
| Total operating expenses | 1,226 | - | 1,226 | 3,752 | (128) | 3,624 | ||||
| Loss from operations | (1,448) | - | (1,448) | (3,542) | 128 | (3,414) | ||||
| Other income (expense) | ||||||||||
| Gain on sale of investments | (10) | (10) | 5,412 | 192 | 5,604 | |||||
| Other (loss) or Gain | 11 | 11 | 11 | - | 11 | |||||
| Net rental income | 13 | 13 | 20 | - | 20 | |||||
| Miscellaneous non-operating expense | (199) | (199) | (269) | - | (269) | |||||
| Interest income | 21 | 21 | 44 | - | 44 | |||||
| Interest expense | (40) | (40) | (66) | - | (66) | |||||
| Total other (expense) income | (204) | - | (204) | 5,152 | 192 | 5,344 | ||||
| Net (Loss) Income before minority interest and income tax | (1,652) | - | (1,652) | 1,610 | 320 | 1,930 | ||||
| Minority Interest | ||||||||||
| Minority interest in consolidated subsidiary | - | - | (24) | - | (24) | |||||
| Net (Loss) Income before taxes | (1,652) | (1,652) | 1,586 | 320 | 1,906 | |||||
| Income Taxes | ||||||||||
| Provision for income tax (credit) | (112) | (112) | 1,084 | - | 1,084 | |||||
| Net (Loss) Income | $ | (1,540) | - | (1,540) | 502 | 320 | 822 | |||
| Earnings Per Share: | ||||||||||
| Basic | $ | (0.17) | - | (0.17) | 0.06 | 0.03 | 0.09 | |||
| Weighted Average Shares Outstanding: | ||||||||||
| Basic | 9,025 | - | 9,025 | 9,025 | - | 9,025 | ||||
| For the Three Months Ended | For the Nine Months Ended | |||||||||
| September 30, 2007 | September 30, 2007 | |||||||||
| Originally Reported | ADJ | RESTATED | Originally Reported | ADJ | RESTATED | |||||
| Revenue | ||||||||||
| Loan Fees | $ | 97 | - | 97 | 484 | 484 | ||||
| Interest revenues | - | - | - | - | - | |||||
| Cost of Loan Fees | (98) | - | (98) | (445) | (445) | |||||
| Gross Profit | (1) | - | (1) | 39 | 39 | |||||
| Operating Expenses: | ||||||||||
| General and administrative | 236 | - | 236 | 727 | 727 | |||||
| Depreciation and amortization | - | - | - | 4 | 4 | |||||
| Total operating expenses | 236 | - | 236 | 731 | 731 | |||||
| Loss from operations | (237) | - | (237) | (692) | (692) | |||||
| Other income (expense) | ||||||||||
| Gain on sale of investments | 2,484 | (1,135) | 1,349 | 3,551 | (1,667) | 1,884 | ||||
| Other (loss) or Gain | - | - | - | 50 | 50 | |||||
| Net rental income | - | - | - | - | - | |||||
| Miscellaneous non-operating expense | - | - | - | - | - | |||||
| Interest income | 15 | - | 15 | 56 | 56 | |||||
| Interest expense | - | - | - | - | - | |||||
| Total other (expense) income | 2,499 | (1,135) | 1,364 | 3,657 | (1,667) | 1,990 | ||||
| Net (Loss) Income before minority interest and income tax | 2,262 | (1,135) | 1,127 | 2,965 | (1,667) | 1,298 | ||||
| Minority Interest | ||||||||||
| Minority interest in consolidated subsidiary | - | - | - | (8) | - | (8) | ||||
| Net (Loss) Income before taxes | 2,262 | (1,135) | 1,127 | 2,957 | (1,667) | 1,290 | ||||
| Income Taxes | ||||||||||
| Provision for income tax (credit) | - | - | - | - | - | |||||
| Net (Loss) Income | $ | 2,262 | (1,135) | 1,127 | 2,957 | (1,667) | 1,290 | |||
| Earnings Per Share: | ||||||||||
| Basic | $ | 0.25 | (0.13) | 0.13 | 0.33 | (0.19) | 0.14 | |||
| Weighted Average Shares Outstanding: | ||||||||||
| Basic | 8,983 | - | 8,983 | 8,983 | - | 8,983 | ||||
PRINCIPLES OF CONSOLIDATION AND MINORITY INTEREST
The accompanying consolidated financial statements include the accounts of NFS and its subsidiary, Northsight, Inc., Northsight Mortgage formerly known as Navidec Mortgage Holdings, Inc., and Southie Development, LLC. NFS owns 98% of Northsight and the former minority member or Northsight Mortgage Group, LLC owns 2% of Northsight, Inc. NFS owns 100% of Southie Development, LLC. As of December 31, 2007, Northsight Inc had a negative stockholders’ equity, therefore the consolidated financial statements do not include a liability for minority interest. As of September 30, 2008, Northsight Inc. had a positive stockholders’ equity, therefore the consolidated financial statements include an expense for minority interest.
All significant inter-company balances and transactions have been eliminated in consolidation.
RECLASSIFICATION
To make the Consolidated Statement of Operations comparable, certain 2007 expenses were reclassified. For the nine months ending September 30, 2007, the reclassification from General and Administration to Cost of Sales was $445,000. For the three months ending September 30, 2007, the reclassification from General and Administration to Cost of Sales was $98,000.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ materially from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, NFS considers cash and cash equivalents to include highly liquid investments with original maturities of 90 days or less. Those are readily convertible into cash and not subject to significant risk from fluctuations in interest rates. The recorded amounts for cash equivalents approximate fair value due to the short-term nature of these financial instruments.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject NFS to significant concentrations of credit risk include cash equivalents, notes receivable and trade accounts receivable. The Company maintains its cash and investment balances in the form of bank demand deposits, money market accounts, commercial papers and short-term notes with financial institutions that management believes to be of high credit quality. Accounts receivable are typically unsecured and are derived from transactions with and from customers primarily located in the United States.
NFS performs ongoing evaluations of its clients' financial condition and generally does not require collateral, except for billings in advance of work performed. Management reviews accounts receivable periodically and reduces the carrying amount by a valuation allowance that reflects management's best estimate of amounts that may not be collectible. Allowances, if any, for uncollectible accounts receivable are determined based upon information available and historical experience. There was no allowance at December 31, 2007.
During the quarter ended June 30, 2008, management felt, based on prevailing market conditions, that it was necessary to establish a reserve. During the quarter ended June 30, 2008, a reserve of approximately $853,000 was established for short term notes receivable and a reserve of approximately $198,000 was established for the real estate owned by Southie.
During the quarter ended September 30, 2008, the reserve accounts were reviewed and adjusted. As a result of the review the real estate owned reserve was decreased by $46,000 for a balance of $807,000 at September 30, 2008.
During the quarter ended September 30, 2008, as a result of the lawsuit filed against Jaguar, the Company increased their reserves to the full amount of the note and account receivables owed by Jaguar, which is $1,407,000.
Other financial instruments that potentially subject the company to concentrations of credit risk consist principally of cash and cash equivalents. At September 30, 2008 and December 31, 2007, the Company had approximately $390,000 and $1,145,000, respectively, of cash or cash equivalents in financial institutions in excess of amounts insured by agencies of the U.S. Government.
No sales to unaffiliated customers represented 10% or more of the Company’s revenue for the nine months ended September 30, 2008.
NOTES RECEIVABLE
The Company carries its notes receivable at cost or loan balance, subject to the valuation procedures described below. The book value of these financial instruments is representative of their fair values. As of September 30, 2008 and December 31, 2007, the Company had a total of $4,556,000 and $2,148,000, respectively, invested in notes receivable, net of an allowance for bad debt of $807,000 and $5,000 respectively.
Interest is accrued monthly on notes receivable as earned and is no longer accrued if the loan becomes more than 90 days past due. The Company provides a valuation for certain loans that are delinquent. The valuation account is netted against notes receivable.
ALLOWANCE FOR BAD DEBT
NFS’s policy on allowances for bad debt determines the timing and recognition of expenses. The Company follows guidelines for allowances based off of historical and account specific trends; however, certain judgments affect the application of NFS bad debt allowance policy. NFS receivables are recorded net of an allowance for doubtful accounts which requires management to estimate amounts due which may not be collected. This estimate requires consideration of general economic conditions, overall historical trends related to the Company’s collection of receivables, customer specific payment history, and customer specific factors affecting their ability to pay amounts due. Management routinely assesses and revises its estimate of the allowance for doubtful accounts. As of year ended December 31, 2007, the Company had a $5,000 allowance for that debt. As of September 30, 2008 the Company had a $807,000 allowance against the short term mortgages and an allowance of $1,407,000 against the Jaguar notes receivable.
IMPAIRMENT POLICY
Once per quarter, Navidec examines all of their assets for proper valuation and to determine if an allowance for impairment is necessary. In terms of real estate owned, this impairment examination also includes the accumulated depreciation. Management examines market valuations and if an additional impairment is necessary for lower of cost or market, then impairment is booked. Conversely, if Management determines the impairment to be excessive, then the impairment will be reduced. Each real estate property and note held is analyzed quarterly.
INVESTMENTS
Investments in publicly traded equity securities over which NFS does not exercise significant influence are recorded at market value in accordance with Financial Accounting Statement (“FAS”) No. 115, "Accounting for Certain Investments in Debt and Equity Securities", which requires that all applicable investments be classified as trading securities, available for sale securities or held-to-maturity securities. The Company has investments treated as available-for-sale securities that are restricted from sale in the open market under Section 144 and have limited trading volume. There can be no assurance that we will realize the recorded value of this investment due to the size of the investment and its limited trading volume. Comprehensive income includes net income or loss and changes in equity from the market price variations in stock and warrants held by the Company.
Investments in non-publicly traded equity securities or non-marketable equity securities are stated at the lower of cost or estimated realizable value.
OTHER REAL ESTATE OWNED
Other real estate owned, at September 30, 2008, is comprised of real estate and other assets acquired through foreclosure, acceptance of a deed in lieu of foreclosure or otherwise acquired from the debtor in lieu of repayment of the debt. Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Revenues, expenses and subsequent adjustments to fair value less estimated costs to sell are classified as expenses for other real estate owned.
| Part 1—Real estate owned at end of period (in thousands) | Part 2—Rental income (in thousands) | ||||||||
| Column A—List classification of property as indicated below | Column B—Amount of incumbrances | Column C—Initial cost to company | Column D—Cost of improve- ments, etc. | Column E—Amount at which carried at close of period | Column F—Reserve for depreciation and Impairments | Column G—Rents due and accrued at end of period | Column H—Total rental income applicable to period | Column I—Expended for interest, taxes, repairs and expenses | Column J—Net income applicable to period |
| Farms | |||||||||
| Residential | |||||||||
| Colorado | $ 250 | 1463 | 34 | 1,497 | (143) | 18 | 7 | 11 | |
| Arizona | 858 | 858 | (68) | 1 | 3 | (2) | |||
| Massachusetts | 908 | 1,200 | 1387 | 2,587 | |||||
| Apartments and business | |||||||||
| Unimproved | |||||||||
| Total | 1,158 | 3,521 | 1,421 | 4,942 | (211) | 19 | 10 | 9 | |
| Rent from properties sold during period | |||||||||
| Total | $ 1,158 | 3,521 | 1,421 | 4,942 | (211) | 19 | 10 | 9 | |
| Real Estate Detail (in thousands) | Boston Property | Other Real Estate Owned | Total | |
| Beginning Balance, January 1, 2008 | $1,200 | $379 | $1,579 | |
| Additions during the period: | ||||
| Acquisitions through foreclosure | 1,942 | 1,942 | ||
| Other acquisitions | ||||
| Improvements, etc. | 1,387 | 34 | 1,421 | |
| Other (describe) | ||||
| Deductions during the period: | ||||
| Cost of real estate sold | ||||
| Impairments and depreciation | (211) | (211) | ||
| Other (describe) | ||||
| Ending Balance, September 30, 2008 | $2,587 | $2,144 | $4,731 |
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed principally on the straight-line method over the estimated useful life of each type of asset which ranges from three to seven years. Leasehold improvements are amortized over the remaining term of the applicable leases or their useful lives, whichever is shorter. Maintenance and repairs are charged to expense as incurred; improvements and betterments are capitalized. Upon retirement or disposition, the related costs and accumulated depreciation are removed from the accounts, and any resulting gains or losses are credited or charged to income.
Below is a summary of property and equipment:
| Asset Type | Life in Years | September 30, 2008 | December 31, 2007 |
| Office equipment & Furniture | 5 – 7 | $ 122,000 | $ 91,000 |
| Computers | 3 | 53,000 | 24,000 |
| Subtotal | 175,000 | 115,000 | |
| Less Accumulated Depreciation | 70,000 | 70,000 | |
| Net Book Value | $ 105,000 | $ 45,000 |
GOODWILL AND INTANGIBLE ASSETS
NFS does not carry any intangible assets or goodwill on its books as of September 30, 2008.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, trade receivables and payables approximated their fair value because of their short-term nature. Investments in debt securities are recorded at their amortized cost, which approximates fair value because of their short-term maturity. Investments in marketable equity securities are recorded at fair value based upon quoted market prices. Investments in non-marketable equity securities are based upon recent sales of similar securities by the investees and approximated their carrying value. The Company’s borrowings approximate their carrying amounts based upon interest rates currently available to the Company.
REVENUE RECOGNITION
Mortgage Revenues
The Company primarily recognizes its operating revenue through its subsidiary, Northsight, Inc., by charging origination fees from borrowers and earning interest and penalty fees on outstanding loan balances. Northsight recognizes fee and interest income on bridge, asset and conventional mortgage loans after mortgage loan transactions close. Northsight accrues interest and penalty interest income at the end of each quarter. Mortgage revenues were $675,000 for the nine months ended September 30, 2008 ($221,000 for the three months ended September 30, 2008).
Interest Revenues
Revenues from interest are recorded at the time they are earned, thus the revenues shown are for interest actually received and the accruals for that which is due to the Company. Interest revenues for the nine months ended September 30, 2008 were approximately $202,000 ($33,000 for the three months ended September 30, 2008).
INCOME TAXES
Provision for income taxes represents actual or estimated amounts payable on tax return filings each year. Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying balance sheets, and for operating loss and tax credit carry forwards. The change in deferred tax assets and liabilities for the period measures the deferred tax provision or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustment to the tax provision or benefit in the period of enactment.
During the nine months ending September 30, 2008, the Company evaluated book versus tax. This analysis gave rise to a tax expense of $1,084,000 for the nine months ended September 30, 2008, with $824,000 as a liability as of September 30, 2008. Of the $824,000 tax liability, $628,000 is currently payable and $196,000 is deferred based on the projected gain on the sale of the BPZ
STOCK BASED COMPENSATION
Beginning January 1, 2006, the Company adopted the provisions of and accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards (SFAS) No. 123 – revised 2004 (SFAS 123R), Share-Based Payment, which replaced SFAS No. 123 (SFAS 123), Accounting for Stock-based Compensation, and supersedes APB Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which generally is the vesting period. The Company elected the modified-prospective method, under which prior periods are not revised for comparative purposes. The valuation provisions of SFAS 123R apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified.
All options granted prior to the adoption of SFAS 123R and outstanding during the periods presented were fully-vested at the date of adoption.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss) available to common shareholders for the period by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and potential common shares outstanding during the period.
The dilutive effect of approximately 6,479,843 options and warrants at September 30, 2008, has not been included in the determination of diluted earnings per share since, under FAS-128 they would anti-dilutive.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income or loss and changes in equity from the market price variations in the BPZ stock held by the Company. During the three months ended September 30, 2008, there were 39,088 remaining shares of BPZ to sell, and for the nine months ending September 30, 2008shares of BPZ were sold representing a gain of $5,604,000.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 permits entities to choose to measure, on an item-by-item basis, specified financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are required to be reported in earnings at each reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, the provisions of which are required to be applied prospectively. We believe that SFAS 159 should not have a material impact on our financial position or results of operations
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations, or SFAS No. 141R. SFAS No. 141R will change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Accordingly, any business combinations we engage in will be recorded and disclosed following existing GAAP until January 1, 2009. We expect SFAS No. 141R will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time. We are still assessing the impact of this pronouncement.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51, or SFAS No. 160”. SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. We believe that SFAS 160 should not have a material impact on our financial position or results of operations.
In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (SFAS 161). The Statement requires companies to provide enhanced disclosures regarding derivative instruments and hedging activities. It requires companies to better convey the purpose of derivative use in terms of the risks that such company is intending to manage. Disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect a company’s financial position, financial performance, and cash flows are required. This Statement retains the same scope as SFAS No. 133 and is effective for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect the adoption of SFAS 161 to have a material effect on its results of operations and financial condition.
In May 2008, the FASB issued FASB Staff Position (FSP) No. APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (FSP APB 14-1). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis and will be adopted by the Company in the first quarter of fiscal 2009. The Company does not expect the adoption of FSP APB 14-1 to have a material effect on its results of operations and financial condition.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.” This FSP provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Upon adoption, companies are required to retrospectively adjust earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform to provisions of this FSP. The Company does not anticipate the adoption of FSP EITF 03-6-1 will have a material impact on its results of operations, cash flows or financial condition.
There were various other accounting standards and interpretations issued in 2008 and 2007, none of which are expected to have a material impact on the Company’s financial position, operations or cash flows.
NOTE 3 - INVESTMENT IN BPZ
Upon consummation of the merger transaction between Old Navidec and BPZ, BPZ issued 604,246 shares of its common stock to NFS. These shares were issued in consideration of NFS's assumption of all of the pre-merger business assets and liabilities of Old Navidec. These shares qualify as "marketable securities" as that term is defined by SFAS 115 (and as further defined in Footnote 2 to that Statement). Under this definition, if the equity security is restricted for sale by a governmental or other contractual requirement, but the holder of the security has the power to cause such requirement of restriction to be met in a manner that the security would reasonably be expected to qualify for sale within one year, the security is not considered restricted for the purposes of SFAS 115. As such, we are required to record our investment in these securities at their fair value.
The Company's "investments in BPZ" of 300,000 shares were valued at $3,354,000 on December 31, 2007. The Company held 39,088 shares of BPZ at September 30, 2008. (See also Note 2 – Restatement of Results.)
NOTE 4 – NOTES RECEIVABLE
Notes Receivable – General
During the year ended December 31, 2007, the Company entered a transaction with a former officer of the Company, Mr. Robert Grizzle. In exchange for Mr. Grizzle’s shares in the Company, on May 3, 2007, Mr. Grizzle executed a note payable to the Company in the amount of $450,000. The note caries an 8% interest rate and is collateralized by 1,000,000 Aegis common shares, 1,500,000 Aegis preferred shares, 220,000 shares of the Company's common stock and 200,000 options to purchase shares of the Company's common stock at $0.05 per share held by Mr. Grizzle. The note is a limited recourse note whereby Mr. Grizzle is personally responsible for one half the original principal and interest. The balance owed is collateralized by Mr. Grizzle’s Aegis common and preferred shares and the Company’s common stock. Further, the note provides that at the earlier of one year from the date that the common stock of the Company is publicly traded and his shares are registered for resale under an effective registration statement filed by the Company or December 31, 2009. On September 30, 2007, Mr. Grizzle resigned as the Chief Operating Officer and the Chief Financial Officer of the Company. On October 17, 2008, the Company filed with the SEC an S-8 registration statement registering Mr. Grizzle’s shares.
On December 13, 2007, Northsight, Inc. (formerly Navidec Mortgage Holdings, Inc.) entered into a loan agreement with Welend Associated Group, LLC, a Colorado limited liability company and Jaguar Group, LLC, (Jaguar) a Colorado limited liability company, each with joint and severable liability, in the amount of $1,100,000. The note carries an interest rate of 0% and has a maturity date of six months from the date of the note. As consideration for making the loan to Jaguar, the Company received the ability to utilize Jaguar’s line funding capabilities through third party lenders. Security for the note is a first security interest in the equity of the debtor’s warehouse line of credit with Colorado State Bank. As of September 30, 2008 there is an additional receivable from Jaguar for approximately $307,000 which represents loans funded by NFS but not yet funded by Jaguar. Further, as of September 30, 2008, there is $62,000 in a note payable to Jaguar.
On September 29, 2008, Northsight filed a lawsuit, in the Boulder County District Court, against Jaguar Group, LLC, John R. Reinholdt II and the Estate of John R. Reinholdt Sr. (Defendants) for non-payment of a $1,100,000 loan made by the Company to Jaguar. The lawsuit also demands immediate payment of other receivables in the amount of $307,000 owed by Jaguar to the Company. The lawsuit alleges breach of the security and purchase agreements, fraud, civil theft, and conversion.
During the quarter ended September 30, 2008, as a result of the lawsuit filed against Jaguar, the Company increased their reserves to the full amount of the note and account receivables owed by Jaguar, which is $1,407,000.
Mortgages Receivable
In July 2007, Northsight, Inc. (formerly Navidec Mortgage Holdings, Inc.), a 98% owned subsidiary of the Company, began making short term loans to purchasers of residential properties who purchase their property as part of or after the repossession in a foreclosure proceeding. As of September 30, 2008, the Company had made approximately $4,556,000 (net of allowance of $807,000) in such loans. The loans are made primarily to good credit borrowers and are collateralized by a first mortgage on the purchased properties. The average numbers of days outstanding for the loans are less than 90 days, and the primary
takeout on the loans is long term financing through secondary sources such as the Federal National Mortgage Association.
In September 2008, the Company transferred the ownership of the short term loans from Northsight, Inc. to the Company. Due to this transfer, the Company funds and owns the loans. There is no longer an intercompany transfer of funds.
Summary of Receivables
| Note From | Due | Principal Amount | Annual Interest rate | Accrued Interest | Security |
| Robert Grizzle | Oct 17, 2009 | $ 450,000 | 8% | $51,000 | Shares and options in Navidec and Aegis |
| Welend-Jaguar | June 13, 2008 | 1,407,000 | 0% | -0- | Junior security in residential mortgages |
| Various short term home mortgages | Various and on-going | 5,363,000 | 9.95% to 14% | 61,000 | First mortgage |
| Total | 7,220,000 | $ 112,000 | |||
| Less: Impairments | 2,214,000 | ||||
| Net Balance | $ 5,006,000 |
NOTE 5 – INVESTMENTS
In December 2007, Northsight, Inc. (a 98% owned subsidiary of the Company) purchased a 3 unit property in Boston, Massachusetts, known as Thomas Park. The objective is to rehabilitate the property and then sell it. During the quarter ending June 30, 2008, this property was transferred to Southie Development, LLC (a 100% owned subsidiary of the Company). As of September 30, 2008, the Company and subsidiaries had invested a total of approximately $2,587,000 in the property. Part of this investment is funded by a $1,200,000 line of credit from Mt. Washington Cooperative Bank, of which $908,000 was due on this line as of September 30, 2008.
On December 20, 2007, Northsight repossessed a property with a value of $360,000 securing one of its short term loans due to non-payment. During the nine months ended September 30, 2008, the Company took title to properties with a value of $1,995,000 for non-payment. The Company has expended fix up costs on these properties and have added the cost to their valuation. All of these properties are held as real estate owned and some provide rental income to Southie. The properties may be held to rent or may be sold in the future. At September 30, 2008, the valuation of these real estate owned properties is $2,355,000 less a reserve of $198,000 and accumulated depreciation on the rental properties of $13,000, for a net balance of $2,144,000. It is management’s belief that the carrying value of these properties is less than the fair market value.
Further, in May 2009, the Company’s accounting staff began a review of all of the Company’s ownership and transactions in BPZ Energy, Inc. common stock. During this internal review, the Company found that 39,088 shares of BPZ were due from BPZ to the Company based on a past cashless exercise of Navidec legacy options. It is estimated that these shares were due the Company toward the end of 2006, so the fair market value of the stock was $143,000 ($3.65 per share) at December 31, 2006 and is used for book basis and the computation of unrealized and realized gains.
As of September 30, 2008, the 39,088 shares of BPZ had a market price of $7.80 per share for a total valuation of $673,000. The Company recognized $373,000 in deferred taxes on the unrealized gain and an unrealized gain of $633,000.
NOTE 6 – SHORT TERM BORROWINGS
Effective August, 2007 the Company’s subsidiary Northsight, Inc. arranged for a bank line of credit. During the three months ended March 31, 2008, the subsidiary had drawn a total of approximately $155,000 against a total line of $3,000,000. During the nine months ended September 30, 2008, the Company paid the outstanding amount owed on the line. The line expired on August 31, 2008 and the Company did not renew the line of credit.
In May 2008, Northsight arranged for a construction line of credit for $1,200,000, due November 2009. Proceeds from this line are used strictly for the renovation of the Thomas Park property in Boston with the intent to resale. As for September 30, 2008, the balance outstanding was $908,000. See also Note 5. This construction line is due November 19, 2009 with interest only payments at prime +2%, with a floor at 7%. The line contains the general covenants which management believes are in full compliance.
The Company also owes notes payable to Jaguar of $312,000 for purchase of real estate properties, for a total of approximately $1,219,000 in short term borrowings as of September 30, 2008.
NOTE 7 - SUBSIDIARIES
The accompanying consolidated financial statements include the accounts of NFS and its subsidiary, Northsight, Inc. (formerly called Navidec Mortgage Holdings, Inc), Northsight’s subsidiary Northsight Mortgage Group, LLC. of Phoenix, Arizona, and its subsidiary, Southie Development, LLC. All significant inter-company balances and transactions have been eliminated in consolidation.
The Company currently operates in the mortgage services sector. During the nine months ended September 30, 2008, the revenues for the mortgage services and brokerage business were approximately $748,000 ($221,000 for the three months ended September 30, 2008). During the three months ended September 30, 2008, we incurred a loss from operations of $1,448,000. During the nine months ended September 30, 2007, we incurred a loss from operations of approximately $3,542,000.
Northsight is focused on the Arizona and Colorado mortgage markets and is primarily engaged in the business of marketing and brokering mortgages collateralized by real estate with an emphasis on providing credit worthy individuals with interim financing for the purchase of repossessed or auctioned residential properties.
Operating results for each of the segments of the Company are as follows:
| For the Nine Months Ended | For the Nine Months Ended | ||||||||||||||
| September 30, 2008 | September 30, 2007 | ||||||||||||||
| (Data in thousands) | (Data in thousands) | ||||||||||||||
| Navidec | Northsight, | Southie, | Navidec | Northsight, | Southie, | ||||||||||
| Financial | Inc. | LLC. | Financial | Inc. | LLC. | ||||||||||
| Services | Services | ||||||||||||||
| Revenue | |||||||||||||||
| Sales | $ | 129 | 725 | 23 | - | 484 | - | ||||||||
| Cost of Sales | - | 667 | - | - | 445 | - | |||||||||
| Gross Profit | 129 | 58 | 23 | - | 39 | - | |||||||||
| Total Operating Expenses | 3,119 | 488 | 17 | 568 | 162 | - | |||||||||
| Other Income/(Expense) | |||||||||||||||
| Gain on sale of investments | 5,604 | - | - | 1,884 | - | - | |||||||||
| Other income/(expense) | (57) | (22) | (205) | 90 | 7 | - | |||||||||
| Total Other Income/(Expense) | 5,547 | (22) | (205) | 1,974 | 7 | - | |||||||||
| Income Taxes (credit) | 1,254 | (170) | - | - | - | - | |||||||||
| Net Income (Loss) | $ | 1,303 | (282) | (199) | 1,406 | (116) | - | ||||||||
NOTE 8 – INCOME TAXES
Provision for income taxes represents actual or estimated amounts payable on tax return filings each year. Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying balance sheets, and for operating loss and tax credit carry forwards. The change in deferred tax assets and liabilities for the period measures the deferred tax provision or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustment to the tax provision or benefit in the period of enactment.
During the nine months ending September 30, 2008, the Company evaluated book versus tax. This analysis gave rise to a tax expense of $1,084,000 for the nine months ended September 30, 2008, with $824,000 as a liability as of September 30, 2008. Of the $824,000 tax liability, $628,000 is currently payable and $196,000 is deferred based on the projected gain on the sale of the BPZ.
Statutory Rate Reconciliation
| Federal Rate | 34.00% |
| State Rate | 4.63% |
| Federal benefit of State Rate | (1.57)% |
| Net Effective Rate | 37.06% |
Deferred Tax and Tax Liability Computation for 2008
| Federal (000s) | |
| Book Income before taxes | $ 1,610 |
| Tax Adjustments: | |
| Additions (Temporary): | |
| Non-deductible impairments | 1,310 |
| Additions (Permanent): | |
| Entertainment exclusion | 5 |
| Projected Taxable Income | $ 2,925 |
| Net Effective rate | 37.06% |
| Projected Tax - current | $ 1,084 |
NOTE 9 - EQUITY TRANSACTIONS
COMMON STOCK
During the nine months ended September 30, 2008, the Company issued 100,000 shares of its common stock in connection with the exercise of an option.
STOCK OPTIONS
During the nine months ended September 30, 2008, a shareholder of the Company exercised options exercisable for 100,000 shares of the Company’s restricted common stock at $0.05 per share.
During the nine months ended September 30, 2008, the Company awarded 400,000 options at $2.00/share, vesting over three years with a 10 year term to a director and a to an employee. These awards were in two different grants. The option for 250,000 shares to a director vests 1/3 of shares immediately (83,333 shares), 1/3 in one year (83,333 shares) from the date of issuance and 1/3 in two years (83,334 shares). The second option for 150,000 shares vests 1/3 in 12 months from the date of issuance, 1/3 in 24 months and 1/3 in 36 months. Under FAS 123R, the grant and vesting of 83,333 shares caused payroll expense to increase $60,500 with an offset to Additional Paid In Capital. A Black-Scholes computation was made using a volatility of 81%.
The aggregate intrinsic value of outstanding fully-vested options as of September 30, 2008 was approximately $535,000.
A summary of the option plan is as follows:
2008 | ||
| Shares | Weighted Average Exercise Price | |
| Outstanding, January 1, 2008 | 3,681,510 | $ 1.18 |
| Granted | 400,000 | 2.00 |
| Cancelled | - | - |
| Expired | - | - |
| Exercised | (100,000) | - |
| Outstanding, September 30, 2008 | 3,981,510 | $ 1.26 |
| Options Exercisable , September 30, 2008 | 3,664,843 | $ 1.20 |
WARRANTS
At September 30, 2008, the following warrants to purchase common stock were outstanding:
Number of common shares covered by warrants | Exercise Price | Expiration Date |
| 1,332,500 | $ 4.00 | May 2010 |
| 1,332,500 | 2.00 | May 2010 |
| 150,000 | 1.00 | July 2010 |
| 2,815,000 |
During the nine months ended September 30, 2008 the Company did not issue any warrants. On July 9, 2008, The Board of Directors of Navidec declared two dividend distributions for its shareholders as of September 8, 2008, record date. One distribution is to the Company’s Shareholders of common stock and warrants in the Company’s subsidiary Northsight. The other distribution is warrants. Each common share of Navidec receives an “A” Warrant to purchase one share of the Company’s common stock for $2 and a “B” Warrant to purchase one share of the Company’s common stock for $4. Both warrants expire July 1, 2013. On October 2, 2008, Navidec has modified the record date and “ex-dividend” date to be the date that a Registration Statement on Form S-1 for the dividend securities is declared effective by the Securities and Exchange Commission.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
In August 2005, the Company along with its subsidiary, Northsight entered into an office lease for the Phoenix operations for a payment of $6,697, plus pass throughs, per month. The lease expires July 31, 2010.
In February 2008, the Company along with its subsidiary, Northsight opened offices at 2000 S. Colorado Blvd, Suite 200, Denver, Colorado. The lease for this office is approximately $4,701 per month plus pass throughs. The lease has a term of approximately 3 years.
The amounts due at base rate are as follows:
| Period | Amount Due |
| October 1 – December 31 2008 | $34,000 |
| 2009 | $137,000 |
| 2010 | $105,000 |
| 2011 | $12,000 |
DEFINED CONTRIBUTION PLAN
NFS has a 401(k) profit sharing plan (the “Plan"). Subject to limitations, eligible employees may make voluntary contributions to the Plan. The Company may, at its discretion, make additional contributions to the Plan. The Company did not contribute during the quarter ended September 30, 2008.
NOTE 10 – RELATED PARTY TRANSACTIONS
The Company rents part of the CEO’s private home for the CEO’s office for $3,500 per month and $1,750 per month in 2007. There is no long term commitment for this payment. Based on the square footage, furniture and fixture and amenities, Management believes that this rent payment approximates the fair market value.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our unaudited financial statements and notes thereto included herein. In connection with, and because we desire to take advantage of, the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or on our behalf. We disclaim any obligation to update forward-looking statements.
OVERVIEW
NFS is a holding company that is in the business of creating or acquiring a controlling interest in development stage enterprises with the expectation of further developing the enterprise and then taking the enterprise public.
NFS owns 98% of its subsidiary, Northsight, Inc. (“Northsight”). Northsight is focused on the Arizona (through its subsidiary Northsight, Mortgages Group, LLC) and Colorado mortgage markets and is primarily engaged in the business of marketing and brokering mortgages collateralized by real estate with an emphasis on providing credit worthy individuals with interim financing for the purchase of repossessed or auctioned residential properties.
In February 2008, our subsidiary, Northsight entered into a joint venture agreement with Jaguar Group, LLC. Northsight purchased 50% equity and voting interest in Jaguar Investment Group, LLC (“Jaguar Investment Group”) and the remaining 50% is owned by Jaguar Group, LLC. Each equity interest was purchased for $4 million dollars, in the form of cash, real estate equity, and/or any form of consideration agreed by both members. The joint venture is to provide whole sale financing loan products to the real estate mortgage industry.
In January 2008, the Company formed Southie Development, LLC (Southie) as a wholly-owned subsidiary of NFS. The purpose of Southie is to develop residential real estate for resale and to own and manage residential real estate acquired via default of real estate loans owned by NFS. Once a real estate loan defaults, NFS transfers the property to Southie for development and management. As part of the management and development of the properties transferred to it, Southie honors any existing residential leases, will potentially expend monies for rehabilitation of the property with the goal of selling the property in a short time period, usually less than one year.
On July 9, 2008, The Board of Directors of Navidec declared two dividend distributions for its shareholders as of September 8, 2008, record date.
The first dividend is a distribution of two Navidec Warrants to purchase common shares of Navidec, $.001 par value, for each share of Navidec. The Units consist of an A Warrant, exercisable at $2.00 per share until July 1, 2013, and a B Warrant exercisable at $4.00 per share until July 1, 2013.
The second dividend is distribution of a Unit of Northsight, Inc ("Northsight"). The Units will be distributed one Unit of Northsight for each 2.27336 shares of Navidec. Navidec currently owns 20,000,000 Units of Northsight. Navidec will distribute 4,000,000 Units to its shareholders resulting in Navidec owning 16,000,000 after the dividend distribution. The Northsight Units to be distributed will consist of one share of Northsight, a Northsight A Purchase Warrant, exercisable at $2.00 per share until July 1, 2013, and a B Purchase Warrant exercisable at $4.00 per share until July 1, 2013.
The record date and ex-dividend date will be determined based on the date that a Registration Statement on Form S-1 for the dividend securities is declared effective by the Securities and Exchange Commission.
On September 29, 2008, Northsight filed a lawsuit, in the Boulder County District Court, against Jaguar Group, LLC, John R. Reinholdt II and the Estate of John R. Reinholdt Sr. (Defendants) for non-payment of a $1,100,000 loan made by the Company to Jaguar. The lawsuit also demands immediate payment of other receivables in the amount of $307,000 owed by Jaguar to the Company. The lawsuit alleges breach of the security and purchase agreements, fraud, civil theft, and conversion.
On November 6, 2008, the Company held the annual meeting of its shareholders. At such meeting a majority of the shareholders approved resolutions appointing Messrs. McKowen and Farkas and Ms. Henry to the Board of Directors. In addition, the nomination of the Company’s independent registered public accountants was approved.
On July 31, 2008, President Bush signed into law a package of housing legislation called the Federal Housing and Economic Recovery Act that is largely focused on safeguarding Fannie Mae and Freddie Mac. While it still is too early to gauge the impact of this legislation on the Company, management believes it would have no material negative impact, and could assist in mortgage operations going forward.
RESULTS OF OPERATIONS
For the Three Months Ended September 30, 2008 compared to the Three Months Ended September 30, 2007
During the three months ended September 30, 2008, we recognized revenues of approximately $254,000. During the three months ended September 30, 2008, revenues consisted of $221,000 from mortgage services and $33,000 from interest revenues. During the three months ended September 30, 2007, we recognized revenues of $97,000. The increase of $157,000 was a result of the development of a new bridge loan program that enables purchasers to acquire discounted residential real estate.
During the three months ended September 30, 2008, we incurred $476,000 in cost of loan fees. During the period ended September 30, 2007, we incurred $98,000 cost of loan fees.
During the three months ended September 30, 2008, we recognized a gross profit margin loss of $222,000 compared to gross profit margin loss of $1,000 for the three months ended September 30, 2007. The decrease of $223,000 was a result of increased underwriting standards for our mortgage loan activity.
During the three months ended September 30, 2008, we incurred total operating expenses of $1,226,000 compared to $236,000 during the three months ended September 30, 2007. The increase of $990,000 is a result of increasing a reserve against the Jaguar receivables. This reserve increased $984,000 during the three months ended September 30, 2008. During the three months ended September 30, 2008, we incurred general and administrative expense of $1,203,000 compared to $236,000 during the three months ended September 30, 2007.
During the three months ended September 30, 2008, we recognized a net loss of $1,540,000 compared to net income of $1,127,000 during the three months ended September 30, 2007. The increase of the loss was largely the result of increased Jaguar reserve of $984,000 during the three months ended September 30, 2008, and gains from the sale of investments during the three months ended September 30, 2007.
For the Nine Months Ended September 30, 2008 compared to the Nine Months Ended September 30, 2007
During the nine months ended September 30, 2008, we recognized revenues of $877,000. During the nine months ended September 30, 2008, we recognized $675,000 in revenues from Northsight’s mortgage activities and $202,000 in interest revenues. During the nine months ended September 30, 2007, we recognized revenues of $484,000, solely from Northsight’s mortgage activities. The increase of $395,000 was a result of the development of a new bridge loan program that enables purchasers to acquire discounted residential real estate.
During the nine months ended September 30, 2008, we incurred $667,000 in cost of loan fees. During the period ended September 30, 2007, we incurred $445,000 in cost of loan fees.
During the nine months ended September 30, 2008, we recognized a gross profit margin of $210,000 compared to $39,000 for the nine months ended September 30, 2007. The increase of $171,000 was a result of increased mortgage activity.
During the nine months ended September 30, 2008, we incurred total operating expenses of $3,624,000 compared to $731,000 during the nine months ended September 30, 2007. The increase of $2,893,000 is result of establishing a loan loss reserve of $2,467,000 and a redirection of Northsight’s mortgage operations to include an emphasis on short term bridge loans and the opening of Northsight’s offices in Colorado and focus on the Colorado market. During the nine months ended September 30, 2008 we incurred general and administrative expense of $3,598,000 compared to $727,000 during the nine months ended September 30, 2007.
During the nine months ended September 30, 2008, we recognized net income of $822,000 compared to $1,290,000 during the nine months ended September 30, 2007. The decrease of $468,000 was largely a result of the $2,467,000 in loan loss reserves and the provision for income tax of $1,084,000 offset by additional gains from sale of investments of $5,604,000 for the nine months ended September 30, 2008 compared to a gain of $1,884,000 for the nine months ended September 30, 2007. Proceeds from the sale of investments were used to expand Northsight’s mortgage operations, create our bridge loan product and increase our bridge loan portfolio.
LIQUIDITY
At September 30, 2008, we had total current assets of $5,378,000, consisting of cash of $704,000, net mortgage receivables of $4,556,000, accrued interest receivable of $112,000, and an advance receivable of $6,000. At September 30, 2008, we had total current liabilities of $2,605,000, consisting of an accounts payable of $550,000, short term borrowings of $1,219,000 and accrued taxes and liabilities of $836,000. Current assets exceed current liabilities by $2,773,000.
Net cash used by operating activities during the nine months ended September 30, 2008 was $3,517,000, compared to net cash provided in operating activities during the nine months ended September 30, 2007 of $292,000. During the nine months ended September 30, 2008, the net cash provided represented net income of $822,000, adjusted for the non-cash item of depreciation expense of $26,000, a gain on the sale of investments of $5,604,000, and impairments of $2,412,000. We also had an increase in accounts receivable of $1,000; increase in accrued interest of $67,000; increase of prepaid and other assets of $62,000; increase of short term loans receivable of $2,408,000; increase of accounts payable of $550,000, and increase in other accrued liability of $667,000.
During the nine months ended September 30, 2007, the net cash used by operating activities represented net income of $1,290,000 adjusted for certain non-cash items consisting of depreciation expense of $4,000, a gain on the sale of investments of $1,884,000, gain on settlement of debt for $50,000, and a minority interest of $8,000. We also had a decrease in accounts receivable of $23,000; increase in accrued interest of $39,000; decrease of prepaid and other assets of $102,000; decrease of short term loans receivable of $898,000, and decrease in other accrued liability of $60,000.
During the nine months ended September 30, 2008, we provided $1,881,000 in cash in investing activities. We invested $79,000 in fixed assets, $1,308,000 in real estate in Boston, Massachusetts, and received $3,268,000 from the proceeds of sale of equity investments.
During the nine months ended September 30, 2007, we received cash of $1,068,000 from of the sale of equity investments less $2,000 from the purchase of fixed assets, for a net cash provided of $1,066,000.
During the nine months ended September 30, 2008, net cash provided from financing activities was $933,000. We increased our short term borrowings by $933,000. During the nine months ended September 30, 2007, we recognized $1,220,000 from the post-merger proceeds from exercise of BPZ options.
CRITICAL ACCOUNTING POLICIES
NFS has identified the policies below as critical to NFS business operations and the understanding of NFS results from operations. The impact and any associated risks related to these policies on the Company's business operations is discussed throughout Management's Discussion and Analysis of Financial Conditions and Results of Operations where such policies affect NFS reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 2 in the Notes to the Consolidated Financial Statements beginning on page F-6 of this document. Note that the Company's preparation of this document requires NFS to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of NFS financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.
REVENUE RECOGNITION
NFS follows very specific and detailed guidelines in measuring revenue; however, certain judgments may affect the application of NFS revenue policy. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause NFS operating results to vary significantly from quarter to quarter and could result in future operating losses.
REVENUES BUSINESS DEVELOPMENT SERVICES
Revenue from NFS business development services is generally derived from time and materials contracts and is recognized as the work is completed. Revenue recognition for time and materials contracts is not significantly impacted by judgments and estimates. Within the business development division a small amount of the work is performed based on fixed price agreements. When this occurs the projects are generally of a short duration and revenue is recognized when the project is completed.
REVENUES FROM MORTGAGE SERVICES
Revenues from mortgage brokerage operations are generally related to transaction-based fees and are recognized at the consummation of the transactions, generally when mortgage transactions close.
In July 2007 Navidec Mortgage Holdings, Inc., a wholly owned subsidiary of the Company, in conjunction with Northsight Mortgage, and 80% owned subsidiary of the Company began making short term loans to purchasers of residential properties who purchase their property as part of or after the repossession in a foreclosure proceeding. As of September 30, 2008, the Company had made $4,556,000 (net of allowance of $807,000) in such loans that have yet to be placed outside the Company in a permanent loan takeout. The loans are collateralized by first deeds of trust on residential real estate properties.
As of September 30, 2008, the Company also holds $452,000 in escrow for the benefit of the property owners recognized under accounts payable. This is recognized as a reduction on the total amount of short term loans, for a net short term mortgage receivable of $4,556,000. This balance includes a reserve for uncollectible of $807,000.
RESERVES FOR BAD DEBT
NFS receivables are recorded net of an allowance for doubtful accounts which requires management to estimate amounts due which may not be collected. This estimate requires consideration of general economic conditions, overall historical trends related to the Company's collection of receivables, customer specific payment history, and customer specific factors affecting their ability to pay amounts due. Management routinely assesses and revises its estimate of the allowance for doubtful accounts.
For the quarter ending September 30, 2008, NFS established a reserve against bad debts as follows:
| Reserve for short term mortgages receivables | $807,000 |
| Reserve for Real Estate Owned | $198,000 |
| Reserve for amounts owed from Jaguar | $1,407,000 |
GOODWILL AND INTANGIBLE ASSETS
Intangible assets are amortized on a straight-line basis over their estimated useful lives. Goodwill is evaluated quarterly to determine if its value has been impaired. On September 11, 2003, Old Navidec entered into a purchase agreement with Northsight and its sole member that provided for the transfer of 80% of the issued and outstanding membership units of Northsight to Old Navidec resulting in the realization of $190,000 of goodwill. This membership interest was transferred to NFS pursuant to the terms of the merger agreement. Management determined that Goodwill should be written off as an asset on its books during the nine months ended September 30, 2008.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
NFS is exposed to the impact of interest rate changes and change in the market values of the Company's investments. Based on NFS's market risk sensitive instruments outstanding as of September 30, 2008, as described below, it has determined that there was no material market risk exposure to the Company's consolidated financial position, results of operations, or cash flows as of such date. NFS does not enter into derivatives or other financial instruments for trading or speculative purposes.
INTEREST RATE RISK – At September 30, 2008, the Company's exposure to market rate risk for changes in interest rates relates primarily to its mortgage services business. NFS has not used derivative financial instruments in its credit facilities. A hypothetical 10% increase in the Prime rate would not be significant to the Company’s financial position, results of operations, or cash flows.
INVESTMENT RISK - In addition to the Company's investments in securities of BPZ, from time to time NFS has made investments in equity instruments in companies for business and strategic purposes. These investments, when held, are included in other long-term assets and are accounted for under the cost method since ownership is less than twenty percent (20%) and NFS does not assert significant influence.
INFLATION -- NFS does not believe that inflation will have a material impact on its future operations.
ITEM 4. CONTROLS AND PROCEDURES
Disclosures Controls and Procedures
We have adopted and maintain disclosure controls and procedures (as such term is defined in Rules 13a 15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC's rules and forms and that the information is gathered and communicated to our management, including our Chief Executive Officer (Principal Executive Officer) and Principal Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
As required by SEC Rule 15d-15(b), Mr. McKowen, our Chief Executive Officer and Principal Accounting Officer, carried out an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 15d-14 as of the end of the period covered by this report. Based on the foregoing evaluation, Mr. McKowen has concluded that our disclosure controls and procedures are not effective in timely alerting them to material information required to be included in our periodic SEC filings and to ensure that information required to be disclosed in our periodic SEC filings is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure as a result of the deficiency in our internal control over financial reporting discussed below.
ITEM 4T. CONTROLS AND PROCEDURES
Management’s Quarterly Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company in accordance with as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is 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. Our internal control over financial reporting includes those policies and procedures that:
| (i) | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
| (ii) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| (iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. |
Our management, with the participation of the President, evaluated the effectiveness of the Company's internal control over financial reporting as of September 30, 2008. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - -- Integrated Framework. Based on this evaluation, our management, with the participation of the President, concluded that, as of September 30, 2008, our internal control over financial reporting was not effective due to material weaknesses in the system of internal control.
Specifically, management identified the following control deficiencies:
(1) The Company has not properly segregated duties as a few individuals initiate, authorize, and complete all transactions. The Company has not implemented measures that would prevent the individuals from overriding the internal control system. The Company does not believe that this control deficiency has resulted in deficient financial reporting because the Chief Financial Officer is aware of his responsibilities under the SEC's reporting requirements and personally certifies the financial reports.
(2) The Company has installed accounting software that does not prevent erroneous or unauthorized changes to previous reporting periods and does not provide an adequate audit trail of entries made in the accounting software.
Accordingly, while the Company has identified certain material weaknesses in its system of internal control over financial reporting, it believes that it has taken reasonable steps to ascertain that the financial information contained in this report is in accordance with generally accepted accounting principles and believes that the consolidated financial statements included in this report fairly present, in all material respects, our consolidated financial position and results of operations as of and for the period ended September 30, 2008.
.
Remediation of Material Weakness
As our current financial condition allows, we are in the process of analyzing and developing our processes for the establishment of formal policies and procedures with necessary segregation of duties, which will establish mitigating controls to compensate for the risk due to lack of segregation of duties.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.
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 annual report.
There was no change in our internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2008, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 29, 2008, Northsight filed a lawsuit, in the Boulder County District Court, against Jaguar Group, LLC, John R. Reinholdt II and the Estate of John R. Reinholdt Sr. (Defendants) for non-payment of a $1,100,000 loan made by the Company to Jaguar. The lawsuit also demands immediate payment of other receivables in the amount of $307,000 owed by Jaguar to the Company. The lawsuit alleges breach of the security and purchase agreements, fraud, civil theft, and conversion.
ITEM 2. CHANGES IN SECURITIES
During the period of July 1, 2008 through September 30, 2008, the Company did not make any sales of its unregistered securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company Shareholders convened the 2007 annual meeting on November 6, 2008 10:00 a.m. at the Company’s offices. At such meeting, the following resolutions were passed by a majority of the shareholders:
| - | The following were re-elected to serve on the Company’s Board of Directors: |
| o | John McKowen |
| o | Henry Farkas |
| o | Jolee Henry |
| - | The independent registered public accountants were appointed the auditors for the coming year. |
ITEM 5. OTHER INFORMATION
On November 5, 2008, Schumacher and Associates of Denver, Colorado were engaged as the Company’s independent registered public accountants after the dismissal of the Company’s independent registered public accountants, Jaspers + Hall, PC on October 28, 2008.
ITEM 6. EXHIBITS
Exhibits. The following is a complete list of exhibits filed as part of this Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-K.
| Exhibit 31 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act |
| Exhibit 32 | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act |
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NAVIDEC FINANCIAL SERVICES, INC. (Registrant) | ||
Dated: August 31, 2009 | By: /s/ John McKowen | |
| John McKowen, President & Chief Accounting Officer | ||
Exhibit 31.1
CERTIFICATION OF PERIODIC REPORT
I, John McKowen, certify that:
| 1. | I have reviewed this amended quarterly report on Form 10-Q/A of September 30, 2008; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s 4th quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 31, 2009
/s/ John McKowen
,
Chief Executive Officer, President
& Principal Accounting Officer
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Amended Quarterly Report of Navidec Financial Service, Inc. on Form 10-Q/A for the period ended September 30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John R. McKowen, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 31, 2009
By: /s/ John R. McKowen
John R. McKowen
Chief Executive Officer, Principal Accounting Officer