Velocity Portfolio 10Q 2009 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q

x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2009 or

o Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ______ to ______

000-161570
(Commission file No.)

VELOCITY PORTFOLIO GROUP, INC.
(Exact name of Smaller Reporting Company as specified in its charter)


DELAWARE		65-0008442
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)

1800 Route 34N, Suite 404A, Wall, NJ 07719
(Address of principal executive offices)

(732) 556-9090
(Issuer’s telephone number, including area code)

Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

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


	Large Accelerated filer o		Accelerated filer o		Non-Accelerated filer o		Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of September 4, 2009, there were 897,399 shares of the Company’s common stock outstanding.

VELOCITY PORTFOLIO GROUP, INC.

TABLE OF CONTENTS

FORM 10-Q

June 30, 2009



		Page

PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements		1
Condensed Consolidated Balance Sheets (unaudited)		1
Condensed Consolidated Statements of Operations (unaudited)		2
Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited)		3
Condensed Consolidated Statements of Cash Flows (unaudited)		4
Notes to the Condensed Consolidated Financial Statements (unaudited)		5-14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3. Quantitative and Qualitative Disclosure About Market Risks		26
Item 4. Controls and Procedures		26

PART II - OTHER INFORMATION

Exhibit 31.1	Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2	Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1	Certification of Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2	Certification of Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002

PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

VELOCITY PORTFOLIO GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	June 30, 2009			December 31, 2008

	(Unaudited)

ASSETS

Cash and cash equivalents	$	92,333		$	7,869
Consumer receivables, net		29,194,821			37,592,634
Income taxes receivable		161,174			177,208
Property and equipment, net of accumulated depreciation		39,456			44,980
Deferred income tax asset, net of valuation allowance		1,394,500			1,158,500
Restricted cash		290,000			—
Security deposits		30,224			30,224
Other assets		414,155			337,964
Assets of discontinued operations		4,812,550			5,759,478


Total assets	$	36,429,213		$	45,108,857


LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES

Accounts payable and accrued expenses	$	1,054,720		$	1,186,536
Estimated court and media costs		4,627,834			5,195,437
Line of credit		7,138,129			8,400,067
Notes payable		450,000			400,000
Notes payable to related parties		1,100,000			1,100,000
Accrued preferred dividends		575,000			—
Convertible subordinated notes		2,350,000			2,350,000
Other liabilities (including notes payable to related parties of $150,000)		290,000			—
Other liabilities-warrants		264,157			—
Liabilities from discontinued operations (including notes payable to related parties of $2,300,000)		5,714,345			5,566,279


Total liabilities		23,564,185			24,198,319


STOCKHOLDERS’ EQUITY

Series A 10% convertible preferred stock, $0.001 par value, 10,000,000 shares authorized, 1,380,000 shares issued and outstanding (liquidation preference of $13,800,000)		1,380			1,380
Common stock, $0.001 par value, 40,000,000 shares authorized, 894,799 and 853,341 shares issued and outstanding, respectively		895			895
Additional paid-in-capital		25,855,869			25,943,069
Accumulated deficit		(12,993,116	)		(5,034,806	)


Total stockholders’ equity		12,865,028			20,910,538


Total liabilities and stockholders’ equity	$	36,429,213		$	45,108,857

See accompanying notes to the condensed consolidated financial statements.

VELOCITY PORTFOLIO GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,

	2009			2008			2009			2008


REVENUES
Income on consumer receivables	$	2,964,311		$	3,660,073		$	6,096,846		$	7,494,926
Other income		1			1,840			4			3,196


Total revenues		2,964,312			3,661,913			6,096,850			7,498,122


OPERATING EXPENSES
Professional fees (including fees paid to related parties of $164,458 and $226,104 and $354,610 and $436,645 for the three and six months ended June 30, 2009 and 2008, respectively)		1,010,205			1,401,163			2,107,244			2,570,707
General and administrative expenses		537,338			656,955			1,092,627			1,198,381
Impairment of consumer receivables		6,364,423			—			8,527,097			—


Total operating expenses		7,911,966			2,058,118			11,726,968			3,769,088


Income (loss) from operations		(4,947,654	)		1,603,795			(5,630,118	)		3,729,034


Other income (expenses)
Other income		75,000			—			75,000			—
Change in fair value of warrants		(168,015	)		—			(99,131	)		—
Interest expense (including interest incurred to related parties of $34,914 and $3,500 and $63,567 and $7,000 for the three and six months ended June 30, 2009 and 2008, respectively)		(241,751	)		(273,708	)		(473,880	)		(608,779	)


Total other expense		(334,766	)		(273,708	)		(498,011	)		(608,779	)


(Loss) income from continuing operations before provision for income taxes		(5,282,420	)		1,330,087			(6,128,129	)		3,120,255

Provision for (benefit from) income taxes		166,544			579,578			(217,159	)		1,321,828


(Loss) income from continuing operations		(5,448,964	)		750,509			(5,910,970	)		1,798,427

Loss from discontinued operations (including interest incurred to related parties of $58,139 and $58,139 and $115,639 and $116,278 for the three and six months ended June 30, 2009 and 2008, respectively and net of tax provision (benefit) of $136,560 and ($231,390) and $2,600 and ($295,554) for the three and six months ended June 30, 2009 and 2008, respectively)		(1,050,609	)		(452,095	)		(1,279,514	)		(843,297	)


Net (loss) income		(6,499,573	)		298,414			(7,190,484	)		955,130

Preferred stock dividends		(345,000	)		(345,000	)		(690,000	)		(690,000	)


Net (loss) income attributable to common stockholders	$	(6,844,573	)	$	(46,586	)	$	(7,880,484	)	$	265,130


(Loss) income per common share:
(Loss) income from continuing operations:
Basic	$	(6.48	)	$	0.46		$	(7.38	)	$	1.28
Diluted	$	(6.48	)	$	0.46		$	(7.38	)	$	1.28
Discontinued operations:
Basic	$	(1.17	)	$	(0.52	)	$	(1.43	)	$	(0.98	)
Diluted	$	(1.17	)	$	(0.51	)	$	(1.43	)	$	(0.97	)
Net (loss) income:
Basic	$	(7.65	)	$	(0.05	)	$	(8.81	)	$	0.31
Diluted	$	(7.65	)	$	(0.05	)	$	(8.81	)	$	0.31

Average common shares - basic		894,799			874,427			894,799			863,398
Average common shares - diluted		894,799			880,223			894,799			867,755

See accompanying notes to the condensed consolidated financial statements.

VELOCITY PORTFOLIO GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)


	Preferred Stock				Common Stock				Additional						Total

	Number of				Number of				Paid in			Accumulated			Stockholders’
	Shares		Par Value		Shares		Par Value		Capital			Deficit			Equity


BALANCES, December 31, 2008		1,380,000	$	1,380		894,799	$	895	$	25,943,069		$	(5,034,806	)	$	20,910,538

Cumulative effect of EITF 07-5 Application		—		—		—		—		(87,200	)		(77,826	)		(165,026	)

Dividends accrued on preferred stock		—		—		—		—		—			(690,000	)		(690,000	)

Net loss		—		—		—		—		—			(7,190,484	)		(7,190,484	)


BALANCES, June 30, 2009		1,380,000	$	1,380		894,799	$	895	$	25,855,869		$	(12,993,116	)	$	12,865,028

See accompanying notes to the condensed consolidated financial statements.

VELOCITY PORTFOLIO GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	For the Six Months Ended June 30,

	2009			2008

CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income	$	(7,190,484	)	$	955,130
Loss from discontinued operations		1,279,514			843,297

(Loss) Income from continuing operations		(5,910,970	)		1,798,427
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		75,497			83,471
Deferred income tax		(236,000	)		20,600
Change in fair value of warrants		99,131			—
Impairment of consumer receivables		8,527,097			—
Increase (decrease) in:
Income taxes receivable		16,034			—
Other assets		(116,566	)		(14,705	)
Accounts payable and accrued expenses		(131,816	)		(192,617	)
Estimated court and media costs		(567,603	)		(1,155,622	)
Income taxes payable		—			273,387

Net cash provided by operating activities		1,754,804			812,941


CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment		—			(1,123	)
Acquisition of consumer receivables		(1,083,177	)		(1,603,082	)
Collections applied to principal on consumer receivables		924,295			1,717,999

Net cash (used in) provided by investing activities		(158,882	)		113,794


CASH FLOWS FROM FINANCING ACTIVITIES
(Repayments) borrowings under lines of credit, net		(1,261,938	)		(2,851,701	)
Proceeds of notes payable		50,000			200,000
Proceeds of note payable from a related party		—			500,000
Net proceeds from private placement		—			793,650
Payment of preferred dividends		(115,000	)		(690,000	)

Net cash used in financing activities		(1,326,938	)		(2,048,051	)


CASH FLOWS FROM DISCONTINUED OPERATIONS, NET
Operating activities		(184,520	)		129,310
Investing activities		—			100,000
Financing activities		—			896,992

Net cash (used in) provided by discontinued operations		(184,520	)		1,126,302


Net increase in cash and cash equivalents		84,464			4,986

Cash and cash equivalents, beginning of period		7,869			162,180


Cash and cash equivalents, end of period	$	92,333		$	167,166


Supplemental disclosure of cash flow information:
Cash paid for interest	$	395,024		$	919,841
Cash paid for income taxes	$	5,463		$	606,778

Non-cash item:
Retirement of common stock in satisfaction of employee receivable	$	—		$	115,146

See accompanying notes to the condensed consolidated financial statements.

VELOCITY PORTFOLIO GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009

(UNAUDITED)

NOTE 1 – ORGANIZATION AND BUSINESS

The condensed consolidated financial statements of Velocity Portfolio Group, Inc. (“PGV”) and its wholly-owned subsidiaries, Velocity Investments, LLC (“Velocity”), J. Holder, Inc. (“J. Holder”), VOM, LLC, (“VOM”), TLOP Acquisition Company, LLC (“TLOP”) (the “Subsidiaries”, and together with Velocity Portfolio Group, Inc., the “Company”) included herein have been prepared by the Company and are unaudited; however, such information has been prepared in accordance with Securities and Exchange Commission regulations and reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods to which the report relates. The results of operations for the three and six month periods ended June 30, 2009 and 2008 are not necessarily indicative of the operating results that may be achieved for the full year. The assets, liabilities and results of operations of J. Holder and VOM, have been presented as discontinued operations of these entities in these financial statements.

Certain information and footnote disclosures, normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the audited, consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

The Company has one continuing industry segment - the acquisition, management, collection and servicing of consumer receivables.

Going Concern

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities in the ordinary course of business. As a result of the impairment charge related to the consumer receivables portfolio, the Company did not meet certain financial covenants contained in their Credit Facility with Wells Fargo Foothill, Inc. (“Lender”) and has requested but not obtained a waiver. Until we obtain waivers of the breaches of these covenants, there is substantial doubt of our ability to continue as a going concern. As a result, the Lender has the right to call the loan at any time. The Company is currently working with its Lender to obtain a waiver and to amend the Credit Facility to restructure these financial covenants. The Company anticipates completion of this waiver and amendment to the Credit Facility in September 2009, however, there is no assurance that the waiver or the amendment will be obtained. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

During the preparation of the Quarterly Report on Form 10-Q for the period ended June 30, 2009, the Company discovered that the extension of its collection curve from 60 to 84 months had resulted in the Company understating revenue in the first quarter by approximately $1.45 million. As a result, the Company will be restating its financial statements for the quarter ended March 31, 2009. The Company will increase its First Quarter impairment provision by approximately $1.45 million and these adjustments have no net effect on the results of operations and earnings per share amounts for the period ended March 31, 2009. The Company will be filing an amended quarterly report on Form 10-Q for the period ended March 31, 2009. Total revenues for the period ended March 31, 2009 will increase from $1,679,872 to $3,132,538. The impairment on consumer receivables provision will increase from $710,008 to $2,162,674.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consumer Receivables

The Company purchases consumer receivable portfolios at a substantial discount from their face amount due to a deterioration of credit quality between the time of origination and the Company’s acquisition of the portfolios. Income is recognized using either the interest method or cost recovery method. Upon acquisition, the Company reviews each consumer receivable portfolio to determine whether each such portfolio is to be accounted for individually or whether such portfolio will be assembled into static pools of consumer receivable portfolios based on common risk characteristics. Once the static portfolio pools are created, management estimates the future anticipated cash flows for each pool. If management can reasonably estimate the expected timing and amount of future cash flows, the interest method is applied. However, if the expected future cash flows cannot be reasonably estimated, the Company uses the cost recovery method.

The Company accounts for its investment in consumer receivable portfolios using the interest method under the guidance of American Institute of Certified Public Accountants Statement of Position (“SOP”) 03-3, “Accounting for Loans or Certain Securities Acquired in a Transfer.” SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt if those differences are attributable, at least in part, to credit quality. Increases in expected cash flows are recognized prospectively through adjustment of the internal rate of return (“IRR”) while decreases in expected cash flows are recognized as impairments.

Under the guidance of SOP 03-3, when expected cash flows are higher than prior projections, the increase in expected cash flows results in an increase in the IRR and therefore, the effect of the cash flow increase is recognized as increased revenue prospectively over the remaining life of the affected pool. However, when expected cash flows are lower than prior projections, SOP 03-3 requires that the expected decrease be recognized as an impairment by decreasing the carrying value of the affected pool (rather than lowering the IRR) so that the pool will amortize over its expected life using the original IRR. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received.

VELOCITY PORTFOLIO GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009

(UNAUDITED)

Effective December 31, 2008, the Company revised its expected estimated cash collection forecast methodology by extending the collection forecast useful life of its pools from 60 months to 84 months and adjusted the timing of expected future cash collections. The Company has observed that receivable portfolios purchased in 2003 have experienced cash collections beyond 60 months from the date of purchase. When the Company first developed its cash forecasting models in 2004, limited historical collection data was available with which to accurately model projected future cash flows beyond 60 months. During the quarter ended December 31, 2008, the Company determined there was enough additional collection data accumulated over the previous several years to extend this forecast to 84 months and more accurately forecast the estimated timing of such collections. The increase in collection forecast from 60 to 84 months was applied effective December 31, 2008, to each portfolio for which the Company could accurately forecast through such term and resulted in an increase in the aggregate total estimated remaining collections for the receivable portfolios by 9.3% or $4.8 million, as of December 31, 2008. The extension of the collection forecast is being treated as a change in estimate and, in accordance with Statement of Financial Accounting Standard No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3,” will be recognized prospectively in the consolidated financial statements. During the year ended December 31, 2008, we recorded an impairment of approximately $8.36 million on our consumer receivables portfolios.

The Company reported a net loss for the three and six months ended June 30, 2009 of ($6,499,573) and ($7,190,484), respectively, as compared to net income of $298,414 and $955,130 for the three and six months ended June 30, 2008. The net loss included an impairment expense of $6,364,423 and $8,527,097 on our consumer receivable portfolios. This impairment was primarily due to a continued shortfall in collections in certain pool groups against our forecast, primarily our 2005 and 2006 vintages. We believe that it was necessary to reassess our forecasts of the 2005 and 2006 vintages at June 30, 2009 based on the continued distress being experienced by the consumer as a result of the current economic crisis which has impacted our ability to meet our original collection forecasts.

Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the portfolio, or until such time that the Company considers the collections to be probable and estimable and begins to recognize income based on the interest method as described above. The Company currently has no consumer receivable portfolios accounted for under the cost recovery method.

The Company estimates and capitalizes certain fees paid and to be paid to third parties related to the direct acquisition and collection of a portfolio of accounts. These fees are added to the cost of the individual portfolio and amortized over the life of the portfolio using the interest method. An offsetting liability is included as “Estimated court and media costs” on the balance sheet.

The Company establishes valuation allowances for all acquired loans subject to SOP 03-3 to reflect only those losses incurred after acquisition (that is, the present value of cash flows initially expected at acquisition that are no longer expected to be collected). Valuation allowances are established only subsequent to acquisition of the loans, if necessary. At June 30, 2009 and December 31, 2008, the Company had $16.89 million and $8.36 million in valuation allowances on its consumer receivables, respectively.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

With respect to income recognition under the interest method, significant estimates have been made by management with respect to the timing and amount of future cash flows from the portfolios. The Company takes into consideration the relative credit quality of the underlying receivables constituting the portfolio acquired, the strategy implemented to maximize collections thereof as well as other factors, including current economic factors, to estimate the anticipated cash flows. Actual results could differ from these estimates making it reasonably possible that a change in these estimates could occur within one reporting period. On a quarterly basis, management reviews the estimate of future cash collections, and whether it is reasonably possible that its assessment of collectability may change based on actual results and other factors, including the current economic crisis, which could lead to future impairments.

VELOCITY PORTFOLIO GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009

(UNAUDITED)

Properties held for sale as discontinued operations are carried at fair value less estimated costs to sell. The Company utilizes the appraisals of third party experts in determining fair value; however, the current economic and housing crisis may have a material impact on the ultimate amount realized on the sale of the property.

Recently Issued Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codifications and the Hierarchy of Generally Accepted Accounting Principles- a replacement of FASB Statement No. 162.” Under SFAS No. 168, The FASB Accounting Standards Codification (“Codification”) will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of the federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of SFAS No. 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. In the FASB’s view, the issuance of SFAS No. 168 and the Codification will not change GAAP, except for those nonpublic nongovernmental entities that must now apply the American Institute of Certified Public Accountants Technical Inquiry Service Section 5100, “Revenue Recognition” paragraphs 38-76. The adoption of SFAS No. 168 will not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”. The FSP amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The FSP also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods. The effective date of the pronouncement is for interim reporting periods ending after June 15, 2009. The Company adopted this pronouncement for the period ended June 30, 2009. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” The FSP provides additional guidance for estimating fair value in accordance with SFAS 157, “Fair Value Measurement,” when the volume and level of activity for the asset or liability have significantly decreased. The FSP also amends statement 157 to require reporting entities to disclose in interim and annual periods the inputs and valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques, if any, as well as requiring reporting entities to define major categories for equity and debt securities in accordance with the major security types as described in SFAS 115, Accounting for Certain Investments in Debt and Equity Securities.” The effective date of the pronouncement is for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted this pronouncement for the period ended June 30, 2009. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.

Fair Value of Financial Instruments

The fair value of consumer receivables, tax certificates held, accounts payable, accrued expenses, borrowings and other assets are considered to approximate their carrying amount because they are (i) short term in nature and/or (ii) carry interest rates which are comparable to market based rates. The fair value of cash and cash equivalents approximates their respective carrying value.

NOTE 3 – FAIR VALUE MEASUREMENTS

The Company maintains policies and procedures to measure instruments at fair value using the best and most relevant data available. Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and emphasizes that fair value is a market-based measurement, not an entity-specific measurement. It establishes a fair value hierarchy and expands disclosures about fair value measurements in both interim and annual periods. In the absence of active markets for identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date (the exit price). Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. Preference is given to observable inputs. SFAS No. 157 establishes a three-level valuation hierarchy based upon observable and unobservable inputs:


	Level 1 – Quoted prices for identical instruments in active markets

VELOCITY PORTFOLIO GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009

(UNAUDITED)


	Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

	Level 3 – Instruments that have little or no pricing observability as of the measurement date. These instruments are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimates.

Fair values of assets measured on a nonrecurring basis during the six month period ended June 30, 2009 are as follows:


	Fair Value at Six Months Ended June 30, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total Gains (Losses)


Properties held for sale	$	3,436,905	$	—	$	—	$	3,436,905	$	(939,946	)
Other liabilities - warrants		264,157		—		264,157		—		(99,131	)

In accordance with the provisions of SFAS No. 144, properties held for sale with a carrying amount of $4,376,851 at December 31, 2008 were written down to their fair value of $3,436,905, resulting in an impairment charge of $742,600 and $939,946 for the three and six months ended June 30, 2009, respectively.


	Three Months Ended June 30, 2009			Six Months Ended June 30, 2009

Balance at beginning of period	$	4,179,505		$	4,376,851
Impairment during the period		(742,600	)		(939,946	)


Balance at end of period	$	3,436,905		$	3,436,905


Total amount of losses for the periods attributable to impairment	$	742,600		$	939,946

The fair value of other liabilities-warrants was derived using the Black-Scholes model. The change in the fair value of $168,015 and $99,131 for the three and six month periods ended June 30, 2009, respectively were reported in the statement of operations under Other Income.

VELOCITY PORTFOLIO GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009

(UNAUDITED)

NOTE 4 – CONSUMER RECEIVABLES

Consumer receivable activity for the periods ended June 30, 2009 and 2008 consists of the following:


	Three Months Ended June 30, 2009			Three Months Ended June 30, 2008			Six Months Ended June 30, 2009			Six Months Ended June 30, 2008

Balance at beginning of period	$	35,512,165		$	46,606,524		$	37,592,634		$	46,971,014


Acquisitions and capitalized costs, net of returns		583,219			1,337,901			1,083,177			1,603,082
Amortization of capitalized costs		(14,799	)		(14,799	)		(29,598	)		(29,598	)

		568,420			1,323,102			1,053,579			1,573,484


Cash collections (1)		(3,485,652	)		(4,739,198	)		(7,021,141	)		(9,212,925	)
Income recognized on consumer receivables (1)		2,964,311			3,636,071			6,096,846			7,494,926

Cash collections applied to principal		(521,341	)		(1,103,127	)		(924,295	)		(1,717,999	)


Impairment		(6,364,423	)		—			(8,527,097	)		—


Balance at end of period	$	29,194,821		$	46,826,499		$	29,194,821		$	46,826,499


(1)	Includes $95,576 and $24,002 for the three months ended June 30, 2009 and 2008, respectively, and $179,047 and $52,609 for the six months ended June 30, 2009 and 2008, respectively, derived from fully amortized pools.

As of June 30, 2009, management’s current estimate of future collections applied to principal are as follows:


	June 30,

2010	$	6,606,432
2011		5,904,386
2012		5,477,651
2013		5,023,488
2014		4,157,393
Thereafter		2,025,471


	$	29,194,821

VELOCITY PORTFOLIO GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009

(UNAUDITED)

The accretable yield represents the amount of income the Company can expect to generate over the remaining lives of its existing portfolios based on estimated cash flows as of June 30, 2009 and 2008. Changes in the accretable yield are as follows:


	Six Months Ended			Six Months Ended
	June 30, 2009			June 30, 2008

Balance at beginning of period	$	32,529,809		$	31,442,803
Income recognized on consumer receivables		(6,096,846	)		(3,834,853	)
Reclassifications from nonaccretable difference		179,047			28,607
Reduction for impairment of future cash flows		(2,292,032	)		—
Additions from current purchases		1,472,635			235,339


Balance at end of period	$	25,792,613		$	27,871,896

NOTE 5 – DISCONTINUED OPERATIONS

On December 31, 2007, the Board of Directors voted to discontinue operations of its wholly-owned subsidiaries J. Holder and VOM. The operations of J. Holder will cease upon the liquidation of all real properties, assignments and judgments. The Company is currently liquidating all of VOM’s tax certificates and is accepting proposals for the sale of VOM, including the sale of individual tax certificates. The Company expects the liquidation or sale to be completed within the next twelve months.

The divestiture of the businesses is consistent with the Company’s strategy of concentrating its resources on consumer receivables.

Revenues and loss for the discontinued operations were as follows:


	Three Months Ended June 30, 2009			Three Months Ended June 30, 2008			Six Months Ended June 30, 2009			Six Months Ended June 30, 2008

Revenues	$	2,771		$	341,603		$	8,753		$	383,029


Loss from discontinued operations, before income tax effect	$	(914,049	)	$	(683,485	)	$	(1,276,914	)	$	(1,138,851	)

Assets and liabilities of the discontinued businesses were as follows:


	June 30, 2009		December 31, 2008


Notes receivable	$	25,000	$	25,000
Deposits on properties		10,000		10,000
Properties held for sale		3,436,905		4,376,851
Tax certificates held and accrued interest receivable, net		252,762		258,704
Deferred income tax asset, net		1,087,000		1,087,000
Other assets		883		1,923

Total assets	$	4,812,550	$	5,759,478


Accounts payable and accrued expenses	$	1,315,313	$	1,168,287
Income tax payable		1,040		—
Line of credit		212,992		212,992
Notes payable		1,885,000		1,885,000
Notes payable to related parties		2,300,000		2,300,000

Total liabilities	$	5,714,345	$	5,566,279

VELOCITY PORTFOLIO GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009

(UNAUDITED)

NOTE 6 – LINES OF CREDIT

On November 1, 2008, Velocity entered into a Fifth Amendment to the Loan and Security Agreement (the “Fifth Amendment to the Loan Agreement”) with the Lender. Pursuant to the Fifth Amendment to the Loan Agreement, the applicable interest rate on loans to Velocity changed from the prime rate plus 1.5% to the rate equal to the three-month LIBOR plus 4%. Also pursuant to the Fifth Amendment to the Loan Agreement, the Loan Sub-Account Amortization Schedule which sets forth the maximum principal loan amount Velocity may have outstanding during a three-month period, has been extended from 36 months to 42 months.

Use of the credit facility is subject to certain restrictive covenants including but not limited to: a restriction on incurring additional indebtedness or liens; a change of control of Velocity; and a restriction on entering into transactions with affiliates outside the course of Velocity’s ordinary business. Velocity has agreed to maintain at least $14,000,000 in member’s equity and subordinated debt. The Company has also agreed to maintain at least $25,000,000 in stockholder’s equity and subordinated debt for the duration of the facility. In addition, Velocity and the Company have agreed that net income for each subsequent quarter shall not be less than $375,000 and $200,000, respectively.

As of June 30, 2009, the Company has not met the required minimum stockholder’s equity under the Credit Facility. In addition, both the Company and Velocity have not met the minimum net income covenant for the 2^nd quarter ended June 30, 2009. The defaults related to the required minimum stockholder’s equity and minimum net income covenants for the three month period ended June 30, 2009 have not been waived.

On June 2, 2009, the Company, entered into a Sixth Amendment to the Loan and Security Agreement with the Lender, pursuant to which the Lender agreed to amend the Original Loan Agreement. Pursuant to the Sixth Amendment to the Loan Agreement, the Lender agreed to waive certain events of default (as that term is defined in the Original Loan Agreement, as amended) for the year ended December 31, 2008 and for the three month period ended March 31, 2009 and the financial covenant requiring the Company to maintain stockholder’s equity plus Subordinated Debt was decreased from $25,000,000 to $22,500,000.

As of June 30, 2009 and December 31, 2008, the Company had $7,138,129 and $8,400,067 outstanding on the credit facility, respectively. The rate of interest at June 30, 2009 was 4.67%.

On June 14, 2007, the Company entered into an agreement for a revolving credit line for $800,000 with Northern State Bank. Interest on the outstanding principal balance is equal to the bank’s prime rate plus one-half percent per annum. Payments of interest only were due on the 1st day of each and every month until July 1, 2008, on which date the entire balance or principal, interest and fees then unpaid was due and payable. The credit line is secured by various mortgages of real property held by the Company’s subsidiary, J. Holder. The Company had $212,992 outstanding on the credit line as of June 30, 2009 and December 31, 2008, which is reported in net liabilities of discontinued operations. On July 1, 2008, the Company extended the maturity date of the line until January 1, 2009 and reduced the maximum principal amount of the line to $212,992. On June 30, 2009, the Company extended the maturity date of the line until July 31, 2009. The Company sold the final property under the line on July 31, 2009. The balance left due on the line was $50,343. The bank has agreed to term out the balance over 9 months at 6.5%.

NOTE 7 – NOTES PAYABLE

On April 25, 2007, the Company issued two promissory notes of $35,000 and $200,000 to investors in a private placement. The notes bear interest at 10% per annum plus 15% of the net profit related to the sale of specified real property owned by the Company’s subsidiary, J. Holder. All amounts owed were due no later than April 25, 2008, which was extended through April 25, 2010.

On January 25, 2008, the Company entered into a promissory note for $1,000,000 with a financial institution. The note bears interest at a rate of 7% per annum, payable monthly in arrears, on the first day of each month with the original principal amount of the note plus accrued interest due on April 24, 2009 and was extended to September 22, 2009. The note is collateralized by specified real property owned by the Company’s subsidiary, J. Holder. The note is guaranteed by the Company and personally by certain executive officers of the Company. J. Holder has agreed to maintain a loan to value ratio of 33% at all times. This note is reported in net liabilities of discontinued operations.

On May 30, 2008 and June 10, 2008, Velocity consummated the closings of its private placement offering of 14% Subordinated Notes (the “Notes”) due 2011 (the “Offering”) to accredited investors (“Investors”). On October 29, 2008, Velocity consummated a closing of the private placement offering to accredited investors. On April 1, 2009, Velocity consummated a final closing of the private placement offering to accredited investors. The Notes were offered and sold pursuant to exemption from registration under Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). Velocity issued the Notes in the aggregate principal amount of $1,350,000. Interest is payable quarterly in arrears beginning on the last day of the month that is four months from the date of the Notes. Velocity will pay the principal amount of the Notes upon the earlier of maturity or redemption. The Notes are subordinated in liquidation preference and in right of payment to all of the Company’s existing debt. The Notes will be senior in right of payment and in liquidation preference to any future “long term” debt of the Company. Upon an event of default, Velocity will pay the Note holder a late charge computed at the rate of 18% per annum of the amount not paid. $900,000 of the Notes are being held by related parties of the Company.

VELOCITY PORTFOLIO GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009

(UNAUDITED)

NOTE 8 – RELATED PARTY TRANSACTIONS

The Company has notes payable to various related parties. Total interest expense to related parties for the three and six month periods ended June 30, 2009 and 2008 was $93,053 and $61,639 and $296,007 and $123,278, respectively. For the three and six months ended June 30, 2009 and 2008, $58,139 and $58,139 and $232,440 and $116,278, respectively, is included in the results of operations of discontinued operations.

The Company engages Ragan & Ragan, PC, an entity owned by Messrs. Ragan & Ragan, to pursue legal collection of its receivable portfolios with respect to obligors and properties located in the State of New Jersey. The fee arrangements between the Company’s subsidiaries Velocity, J. Holder and VOM and Ragan & Ragan, P.C., each dated as of January 1, 2005, have been reviewed and approved by all the members of a committee appointed by the board of directors other than Mr. Ragan, Sr. who abstained. In May 2007, the fee arrangements were approved by Unanimous Written Consent of the board of directors other than Mr. Ragan, Sr. who abstained.

Ragan and Ragan, P.C. routinely advances court costs associated with their legal collections of consumer receivable portfolios, which are subsequently reimbursed by the Company. These costs are included in the estimated court and media costs in the consolidated balance sheets.

Legal fees paid to Ragan & Ragan, P.C., by the Company’s subsidiaries were as follows:


	Three Months Ended June 30, 2009		Three Months Ended June 30, 2008		Six Months Ended June 30, 2009		Six Months Ended June 30, 2008


Velocity Investments, LLC	$	164,458	$	226,104	$	354,610	$	436,645

NOTE 9 – PREFERRED STOCK

On February 26, 2009, the Company temporarily suspended the payment of monthly dividends on its Series A Preferred Stock beginning February 28, 2009 in order to preserve capital. As a result the Company has recorded accrued preferred dividends in the amount of $575,000 as of June 30, 2009.

NOTE 10 – EARNINGS PER SHARE

Basic earnings per share are computed using the weighted average number of shares outstanding during each period. Diluted earnings per share are computed using the weighted average number of shares outstanding during each period, plus the dilutive effects of potential convertible securities related to preferred stock, convertible notes, options and warrants. Outstanding options and warrants to non-employees convertible into 103,417 and 72,860 shares of common stock; convertible preferred stock, convertible into 276,000 shares of common stock; and convertible notes, convertible into 47,000 shares for the three and six months ended June 30, 2009 and 2008 were not included in the dilutive per share calculations because their effect would have been anti-dilutive.

VELOCITY PORTFOLIO GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009

(UNAUDITED)


	Three Months Ended June 30, 2009			Three Months Ended June 30, 2008			Six Months Ended June 30, 2009			Six Months Ended June 30, 2008

Numerator:
(Loss) income from continuing operations	$	(5,448,964	)	$	750,509		$	(5,910,970	)	$	1,798,427
Preferred stock dividends		(345,000	)		(345,000	)		(690,000	)		(690,000	)

(Loss) income from continuing operations available to common stockholders		(5,793,964	)		405,509			(6,600,970	)		1,108,427
Discontinued operations, net of tax		(1,050,609	)		(452,095	)		(1,279,514	)		(843,297	)


Net (loss) income attributable to common stockholders - Basic and Diluted	$	(6,844,573	)	$	(46,586	)	$	(7,880,484	)	$	265,130


Denominator:
Average shares of common stock outstanding - Basic		894,799			874,427			894,799			863,398
Effect of dilutive instruments:
Stock options		—			5,796			—			4,357


Weighted average shares - Diluted		894,799			880,223			894,799			867,755

NOTE 11 – OUTSTANDING OPTIONS AND WARRANTS

In June 2008, the FASB ratified the consensus reached on Emerging Issues Task Force (EITF) Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock. EITF Issue No. 07-05 clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which would qualify as a scope exception under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. We adopted EITF Issue No. 07-5 as of January 1, 2009. In October 2005 and April 2006, we issued warrants for 10,000 and 2,500 shares of our Common Stock, respectively, at an exercise price of $62 per share in a private placement to an institutional investor. These warrants were reassessed under EITF 07-5 and due to a price adjustment clause included in these warrants, such warrants are no longer deemed to be indexed to our stock and therefore, no longer meet the scope exception of FAS 133. Therefore, these warrants were reclassified to a liability and will be adjusted to fair value on a quarterly basis going forward. As a result, we recorded a cumulative catch up adjustment of $77,826 to accumulated deficit and an adjustment of $87,200 to additional paid in capital on January 1, 2009.

The fair value of these warrants increased to $264,157 as of June 30, 2009. As such, we recorded an expense amounting to $168,015 and $99,131 from the change in fair value of these warrants for the three and six months ended June 30, 2009, respectively.

NOTE 12 – INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). SFAS 109 requires the recognition of deferred tax assets and liabilities based on differences between financial reporting and the tax bases of the assets and liabilities, measured using the enacted tax rates and laws that will be in effect when the differences are expected to be reversed. An allowance against deferred tax assets is recorded when it is more likely than not that such tax benefits will not be realized.

We have net losses for financial reporting purposes. Recognition of deferred tax assets will require generation of future taxable income. There can be no assurance that we will generate sufficient taxable income in future years. Therefore, we established a valuation allowance on net deferred tax assets of $3,129,040 as of June 30, 2009 and $0 as of December 31, 2008 because the more likely than not criteria for recognition was not met.

The Company recorded an income tax (benefit) provision of $303,104 and $348,188 and $(214,559) and $1,026,274 for the three and six months ended June 30, 2009 and 2008, respectively. For the three and six months ended June 30, 2009 and 2008, an income tax provision (benefit) of $136,560 and ($231,390) and $2,600 and ($295,554), respectively has been reported in the results of discontinued operations.

The Company accounts for uncertain tax positions in accordance with SFAS Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return.

VELOCITY PORTFOLIO GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009

(UNAUDITED)

The Company’s liability for income taxes associated with uncertain tax positions includes estimated interest and penalties. Interest and penalties related to the Company’s uncertain tax positions are included in income tax expense and administrative expense, respectively, in the consolidated statements of operations. At June 30, 2009 and December 31, 2008, $42,023 and $35,471, respectively, had been recorded as a liability for uncertain tax positions.

The corporate federal income tax returns of the Company for 2006 through 2008 are subject to examination by the IRS, generally for three years after they are filed. The state income tax returns and other state tax filings of the Company are subject to examination by the state taxing authorities, for various periods generally up to four years after they are filed.

NOTE 13 – SUBSEQUENT EVENTS

On July 2, 2009, Velocity Portfolio Group, Inc. consummated a closing of its private placement offering of an aggregate of $350,000 of its units, with each unit comprised of $35,000 principal amount secured promissory notes and warrants to purchase 10,000 shares of common stock at an exercise price of $3.50 per share to accredited investors. The securities were offered and sold pursuant to an exemption from registration under Section 4(2) of the securities Act of 1933, as amended. The Company sold an aggregate of 10 units at a purchase price of $35,000 per Unit. The Company used the net proceeds from the offering primarily for the purchase of portfolios of unsecured consumer receivables and for general corporate purposes, including working capital. As of June 30, 2009, the Company had received $290,000 of the proceeds from this offering. These amounts are classified as restricted cash on the balance sheet as of June 30, 2009.

The notes bear interest at a rate of ten percent (10%) per annum and mature on July 2, 2010. Interest is payable quarterly in arrears. The notes are secured by a lien on all of the Company’s assets. The Notes may be redeemed by the Company at any time prior to maturity at a rate of 110% of the then outstanding principal, plus accrued but unpaid interest. The Notes contain customary default provisions. Upon the occurrence of an event of the default, the Company will be charged an interest rate of eighteen percent (18%).

The warrants entitle the holders to purchase shares of the Company’s common stock reserved for issuance thereunder for a period of five years from the date of issuance. The warrants contain certain anti-dilution rights on terms specified in the warrants.

On July 21, 2009, 13,000 Series A preferred shares were converted into 2,600 common shares.

The Company evaluated subsequent events that have occurred through September 4, 2009, the date of the financial statement issuance.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and notes thereto and the other financial information included elsewhere in this quarterly report.

NOTE ON FORWARD LOOKING STATEMENTS

This quarterly report on Form 10-Q includes and incorporates by reference “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 with respect to our financial condition, results of operations, plans, objectives, future performance and business, which are usually identified by the use of words such as “will,” “may,” “anticipates,” “believes,” “estimates,” “expects,” “projects,” “plans,” “predicts,” “continues,” “intends,” “should,” “would,” or similar expressions. We intend for these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with these safe harbor provisions.

These forward-looking statements reflect our current views and expectations about our plans, strategies and prospects, which are based on the information currently available and on current assumptions.

We cannot give any guarantee that these plans, intentions or expectations will be achieved. Investors are cautioned that all forward-looking statements involve risks and uncertainties, and actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those Risk Factors set forth in our Form 10-K for the year ended December 31, 2008. Listed below and discussed elsewhere in this quarterly report are some important risks, uncertainties and contingencies that could cause our actual results, performances or achievements to be materially different from the forward-looking statements included in this quarterly report. These risks, uncertainties and contingencies include, but are not limited to, the following:


	·	the availability for purchase of consumer receivable portfolios that satisfy our criteria and our ability to liquidate our investments/interests in distressed real property and tax lien certificates;

	·	competition in the industry;

	·	the availability of debt and equity financing on acceptable terms;

	·	future acquisitions;

	·	the availability of qualified personnel;

	·	international, national, regional and local economic and political changes;

	·	general economic and market conditions;

	·	changes in applicable laws;

	·	trends affecting our industry, our financial condition or results of operations;

	·	the timing and amount of collections on our consumer receivable portfolios; and

	·	increases in operating expenses associated with the growth of our operations.

You should read this quarterly report and the documents that we incorporate by reference in this quarterly report completely and with the understanding that our actual future results may be materially different from what we expect. We may not update these forward-looking statements, even though our situation may change in the future. We qualify all of our forward-looking statements by these cautionary statements.

Overview

Velocity Portfolio Group, Inc., previously known as Velocity Asset Management, Inc. until November 19, 2008, and prior to that name was known as Tele-Optics, Inc. was organized in the State of Delaware in December 1986. We are a portfolio management company that purchases unsecured consumer receivables in the secondary market and seeks to collect those receivables through an outsourced legal collection network. Our primary business is to acquire credit-card receivable portfolios at significant discounts to the total amounts owed by the debtors. We use our proprietary valuation process to calculate the purchase price so that our estimated cash flow from such portfolios offers us an adequate return on our investment after servicing expenses.

We generally purchase consumer receivable portfolios that include charged-off credit card receivables, which are accounts that have been written off by the originators, and consumer installment loans. When evaluating a portfolio for purchase, we conduct an extensive quantitative and qualitative analysis of the portfolio to appropriately price the debt and to identify portfolios that are optimal for collection through our legal collection network. This analysis relies upon, but is not limited to, the use of our proprietary pricing and collection probability model and draws upon our extensive experience in the legal collection and debt-buying industry.

We purchase consumer receivable portfolios from creditors and others through privately negotiated direct sales and auctions in which sellers of consumer receivables seek bids from pre-qualified debt purchasers. We pursue new acquisitions of consumer receivable portfolios on an ongoing basis through our relationships with industry participants, collection agencies, investors, our financing sources, brokers who specialize in the sale of consumer receivable portfolios and other sources. Our consumer receivable portfolios are purchased through internally generated cash flow, seller financed credit lines/leases and traditional leverage methods. Our profitability depends upon our ability to purchase and collect on a sufficient volume of our consumer receivables to generate revenue that exceeds our costs, and our ability to exit our discontinued operations in distressed real property and the collection of taxes and accrued interest on tax lien certificates according to our plan.

Critical Accounting Policies

Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the fair value of consumer receivables, the fair value of properties held for sale and our tax lien certificates and the reported amounts of revenues and expenses. On an on-going basis, we evaluate our estimates, including those related to the recognition of revenue, future estimated cash flows and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. We believe the following critical accounting policies affect the significant judgment and estimates used in the preparation of our consolidated financial statements.

Recent Developments

On July 2, 2009, we consummated a closing of our private placement offering of an aggregate of $350,000 of Units, with each Unit comprised of $35,000 principal amount secured promissory notes and warrants to purchase 10,000 shares of common stock at an exercise price of $3.50 per share to accredited investors. The securities were offered and sold pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933. The Company sold an aggregate of 10 units at a purchase price of $35,000 per unit. The Company used the net proceeds from the offering primarily for the purchase of portfolios of unsecured consumer receivables and for general corporate purposes, including working capital.

As of June 30, 2009, March 31, 2009 and December 31, 2008, we did not satisfy the required minimum stockholder’s equity covenant under the Credit Facility. In addition, we and Velocity each failed to satisfy the minimum net income covenant for the 1^st and 2^nd quarters of 2009 and the 4^th quarter of 2008. In June 2009, we obtained a waiver of the breach of the December 31, 2008 and March 31, 2009 covenants and we are currently working with Wells Fargo on obtaining a waiver of the breach of the June 30, 2009 covenants. Wells Fargo has the right to call the loan at anytime. We anticipate completion of this waiver and amendment to the Credit Facility by the end of the third quarter. However, Wells Fargo is not obligated to waive these covenants. If we are unable to obtain a waiver and amendment of the Credit Facility, Wells Fargo could exercise certain remedies under the Loan Agreement, including but not limited to foreclosure on the loan.

On February 26, 2009, we announced that we have temporarily suspended the payment of dividends on our Series A Preferred Stock in order to preserve capital. On February 27, 2009, we withdrew our registration statement for our proposed public offering of stock and warrants and our board of directors authorized us to begin a process of exploring strategic alternatives to enhance stockholder value.

As a result of our failure to satisfy these covenants or obtain a waiver as of June 30, 2009, and until we obtain waivers of the breaches of these covenants, there is substantial doubt about our ability to continue as a “going concern.” The report of our independent registered public accounting firm for our December 31, 2008 financial statements, which are included as part of our annual report for the year ending December 31, 2008, contains a statement concerning this matter.

Purchased Consumer Receivable Portfolios and Revenue Recognition

We purchase portfolios of consumer receivable accounts at a substantial discount from their face amounts, usually discounted at 75% to 98% from face value. We record these accounts at our acquisition cost, plus the estimated cost of court filing fees and account media. The portfolios of consumer receivables contain accounts that have experienced deterioration of credit quality between origination and our acquisition of the consumer receivable portfolios. The discounted amount paid for a portfolio of consumer receivable accounts reflects our determination that it is probable we will be unable to collect all amounts due according to the contractual terms of the accounts. At acquisition, we review the consumer receivable accounts in the portfolio to determine whether there is evidence of deterioration of credit quality since origination and whether it is probable that we will be unable to collect all amounts due according to the contractual terms of the accounts. If both conditions exist, we determine whether each such portfolio is to be accounted for individually or whether such portfolios will be assembled into static pools based on common risk characteristics. We consider expected prepayments and estimate the amount and timing of undiscounted expected principal, interest and other cash flows for each acquired portfolio of consumer receivable accounts and subsequently aggregated pools of consumer receivable portfolios. We determine the excess of the pool’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted based on our proprietary acquisition models. The remaining amount, representing the excess of the loan’s cash flows expected to be collected over the amount paid, is accreted into income recognized on consumer receivables over the remaining life of the loan or pool using the interest method.

We acquire these consumer receivable portfolios at a significant discount to the amount actually owed by the borrowers. We acquire these portfolios after a qualitative and quantitative analysis of the underlying receivables and calculate the purchase price so that our estimated cash flow provides us with a sufficient return on our acquisition costs and servicing expenses. After purchasing a portfolio, we actively monitor its performance and review and adjust our collection and servicing strategies accordingly.

We account for our investment in consumer receivables using the interest method under the guidance of American Institute of Certified Public Accountants Statement of Position 03-3, Accounting for Loans or Certain Securities Acquired in a Transfer.” In accordance with Statement of Position 03-03 (and the amended Practice Bulletin 6), revenue is recognized based on our anticipated gross cash collections and the estimated rate of return over the useful life of the pool.

We believe that the amounts and timing of cash collections for our purchased receivables can be reasonably estimated and, therefore, we utilize the interest method of accounting for our purchased consumer receivables prescribed by Statement of Position 03-3. Such belief is predicated on our historical results and our knowledge of the industry. Each static pool of receivables is statistically modeled to determine its projected cash flows based on historical cash collections for pools with similar risk characteristics. Statement of Position 03-3 requires that the accrual basis of accounting be used at the time the amount and timing of cash flows from an acquired portfolio can be reasonably estimated and collection is probable.

Where the future cash collections of a portfolio cannot be reasonably estimated, we use the cost recovery method as prescribed under Statement of Position 03-3. Under the cost recovery method, no revenue is recognized until we have fully collected the initial acquisition cost of the portfolio. We have no consumer receivable portfolios that are accounted for under the cost recovery method.

Under Statement of Position 03-3, when expected cash flows are higher than prior projections, the increase in expected cash flows results in an increase in the internal rate of return and therefore, the effect of the cash flow increase is recognized as increased revenue prospectively over the remaining life of the affected pool. However, when expected cash flows are lower than prior projections, Statement of Position 03-3 requires that the expected decrease be recognized as an impairment by decreasing the carrying value of the affected pool (rather than lowering the internal rate of return) so that the pool will amortize over its expected life using the original internal rate of return.

Historically, these portfolios had been expected to amortize over a five year period based on our estimated future cash flows. A majority of the cash we ultimately collect on a portfolio has generally been received during the first 48 months after acquiring the portfolio, although additional amounts are collected over the remaining period. The estimated future cash flows of the portfolios are re-evaluated quarterly.

On an ongoing basis, we compare the historical trends of each portfolio, or aggregated portfolios, to project collections. Future projected collections are then increased or decreased based on the actual cumulative performance of each portfolio. Management reviewed each portfolio’s adjusted projected collections to determine if further upward or downward adjustment is warranted. Management regularly reviews the trends in collection patterns and uses its reasonable best efforts to improve the collections of under-performing portfolios. However, actual results will differ from these estimates and a material change in the estimates could occur within one reporting period.

Effective December 31, 2008, we revised our expected estimated cash collection forecast methodology by extending the collection forecast useful life of its pools from 60 months to 84 months and adjusting the timing of expected future collections. We have observed that receivable portfolios purchased in 2003 have experienced cash collections beyond 60 months from the date of purchase. When we first developed our cash forecasting models in 2004, limited historical collection data was available with which to accurately model projected cash flows beyond 60 months. During the quarter ended March 31, 2009 we determined there was enough additional collection data accumulated over the previous several years to extend this forecast to 84 months and more accurately forecast the estimated timing of such collections. Additional factors that we have taken into consideration in extending the collection forecast from 60 to 84 months and adjusting the estimated timing are as follows:


	·	variability of timing of the legal process. As a result of geographic expansion from our original core states of New Jersey, Maryland, Delaware and New York, we are now able to more accurately forecast the state by state variance in the timing of awards of default judgments and the enforcement of such judgments;

	·	current macroeconomic conditions have resulted in less PIF/SIF (payments in full and settlements in full) and a greater percentage of debtors entering into settlement plans, effectively extending the collection curve; and

	·	current macroeconomic conditions have caused deterioration with respect to certain purchase assumptions regarding homeownership and employment resulting in a longer than expected collection curve with respect to each category of debtor.

The extension of the collection forecast is being treated as a change in estimate and, in accordance with Statement of Financial Accounting Standard No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3,” will be recognized prospectively in the consolidated financial statements.

As a result of our quarterly review of our projected and actual collections during the quarter ended June 30, 2009, we recorded an impairment of approximately $6.36 million on our consumer receivables portfolios. This impairment was primarily due to a continued shortfall in collections in certain pool groups against our forecast, primarily our 2005 through 2006 vintages. We believe that it was necessary to reassess our forecasts of the 2005 and 2006 vintages at this time based on the continued distress being experienced by the consumer as a result of the current economic crisis which has impacted our ability to meet our original collection forecasts.

The internal rate of return is estimated and periodically recalculated based on the timing and amount of anticipated cash flows using our proprietary collection models. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received. Additionally, we would use the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. Under the cost recovery method, no revenue is recognized until we have fully collected the cost of the portfolio, or until such time that we consider the collections to be probable and estimable and begin to recognize income based on the interest method as described above. We have no consumer receivable portfolios that are accounted for under the cost recovery method.

We establish valuation allowances for all acquired consumer receivable portfolios subject to Statement of Position 03-3 to reflect only those losses incurred after acquisition (that is, the present value of cash flows initially expected at acquisition that are no longer expected to be collected). Valuation allowances are established only subsequent to acquisition of the loans. At June 30, 2009 and December 31, 2008, we had $16.89 million and $8.36 of valuation allowances on our consumer receivables, respectively.

On a quarterly basis, if our management came to a different conclusion as to the future estimated collections, it could have had a significant impact on the amount of revenue that was recorded from the purchased accounts receivable. A five percent increase in the amount of future expected collections would have resulted in additional income, largely as a result of lower allowances since increases in future expected collections are recognized to the extent sufficient to recover any allowances or to increase the expected IRR.

Application of Statement of Position 03-3 requires the use of estimates to calculate a projected internal rate of return for each pool. These estimates are based on historical cash collections. If future cash collections are materially different in amount or timing than projected cash collections, earnings could be affected either positively or negatively. Higher collection amounts or cash collections that occur sooner than projected cash collections will have a favorable impact on yield and revenues. Lower collection amounts or cash collections that occur later than projected cash collections will have an unfavorable impact on operations. Consumer receivable activity for the period ended June 30, 2009 and 2008 consisted of the following:


	Six Months Ended June 30, 2009			Six Months Ended June 30, 2008

Balance at beginning of year	$	37,592,634		$	46,971,014


Acquisitions and capitalized costs, net of returns		1,083,177			1,603,082
Amortization of capitalized costs		(29,598	)		(29,598	)

		1,053,579			1,573,484


Cash collections (1)		(7,021,141	)		(9,212,925	)
Income recognized on consumer receivables (1)		6,096,846			7,494,926

Cash collections applied to principal		(924,295	)		(1,717,999	)


Impairment		(8,527,097	)		—


Balance at end of period	$	29,194,821		$	46,826,499

Stock Based Compensation

We utilize the fair value recognition provisions of “Share-Based Payment” (SFAS No. 123R). The statement addresses the accounting for share-based payment transactions with employees and other third parties and requires that the compensation costs relating to such transactions be recognized in the condensed consolidated financial statements. SFAS No. 123R also requires disclosures relating to the income tax and cash flow effects resulting from share-based payments. Additionally, regarding the treatment of non-employee stock based compensation, we follow the guidance of EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”

New Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codifications and the Hierarchy of Generally Accepted Accounting Principles- a replacement of FASB Statement No. 162.” Under SFAS No. 168, The FASB Accounting Standards Codification (“Codification”) will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of the federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of SFAS No. 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. In the FASB’s views, the issuance of SFAS No. 168 and the Codification will not change GAAP, except for those nonpublic nongovernmental entities that must now apply the American Institute to Certified Public Accountants Technical Inquiry Service Section 5100, “Revenue Recognition” paragraphs 38-76. The adoption of SFAS No. 168 will not have an impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” The FSP provides additional guidance for estimating fair value in accordance with SFAS 157, “Fair Value Measurement,” when the volume and level of activity for the asset or liability have significantly decreased. The FSP also amends statement 157 to require reporting entities to disclose in interim and annual periods the inputs and valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques, if any, as well as requiring reporting entities to define major categories for equity and debt securities in accordance with the major security types as described in SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities.” The effective date of the pronouncement is for interim and annual reporting periods ending after June 15, 2009. The Company adopted this pronouncement for the period ended June 30, 2009. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.

Results of Operations

Total Revenues

Total revenues for continuing operations for the three month period ended June 30, 2009 (the “2009 Second Quarter”) were $2,964,312 as compared to $3,661,913 during the three month period ended June 30, 2008 (the “2008 Second Quarter”), representing a 19.05% decrease. The decrease in revenues was primarily attributable to reduced revenues from collections on consumer receivable portfolios as a result of the extension in the collection curve from 60 to 84 months.

Total revenues for continuing operations for the six month period ended June 30, 2009 (the “2009 Second Period”) were $6,096,850 as compared to $7,498,122 during the three month period ended June 30, 2008 (the “2008 Second Period”) representing a 18.69% decrease. The decrease in revenues was primarily attributable to reduced revenues from collections on consumer receivable portfolios as a result of the extension in the collection curve from 60 to 84 months.

Total Operating Expenses

Total operating expenses for continuing operations for the 2009 Second Quarter were $7,911,966 as compared to $2,058,118 during the 2008 Second Quarter, representing a 284.42% increase. The increase in total operating expenses was primarily attributable to an impairment of $6,364,423 on our consumer receivables portfolio. Professional fees for the 2009 Second Quarter as compared to the 2008 Second Quarter decreased from $1,401,163 to $1,010,205, representing a 27.90% decrease, primarily as a result of lower legal commissions paid to our attorney collection network as a result of a reduction in collections. General and administrative expenses in the 2009 Second Quarter were $537,338 as compared to $656,955 during the 2008 Second Quarter, representing a 18.20% decrease.

Total operating expenses for continuing operations for the 2009 Second Period were $11,726,968 as compared to $3,769,088 during the 2008 Second Period, representing a 211.14% increase. The increase in total operating expenses was primarily attributable to an impairment of $8,527,097 on our consumer receivables portfolio. Professional fees for the 2009 Second Period as compared to the 2008 Second Period decreased from $2,570,707 to $2,107,244, representing a 18.03% decrease, primarily as a result of lower legal commissions paid to our attorney collection network as a result of a reduction in collections. General and administrative expenses in the 2009 Second Period were $1,092,627 as compared to $1,198,381 during the 2008 Second Period, representing an 8.82% decrease.

Interest Expense

Interest expense from continuing operations in the 2009 Second Quarter was $241,751 as compared to $273,708 in the 2008 Second Quarter, representing a 11.68% decrease. The decrease in interest expense was primarily attributable to declining interest rates and a reduction in amounts outstanding on Velocity Investments’ line of credit with Wells Fargo Foothill, Inc.

Interest expense from continuing operations in the 2009 Second Period was $473,880 as compared to $608,779 in the 2008 Second Period, representing a 22.16% decrease. The decrease in interest expense was primarily attributable to declining interest rates and a reduction in amounts outstanding on Velocity Investments’ line of credit with Wells Fargo Foothill, Inc.

Net Income (Loss)

Net loss for the 2009 Second Quarter was ($6,499,573) as compared to net income for the 2008 Second Quarter of $298,414. The decrease in net income is attributable to $6,364,423 in impairment on our consumer receivables portfolio and a decrease in revenues as discussed above. Loss from continuing operations for the 2009 Second Quarter was ($5,448,964) as compared to income from continuing operations for the 2008 Second Quarter of $750,509. The Company had a ($1,050,609) loss from discontinued operations in the 2009 Second Quarter compared to a loss of ($452,095) in the 2008 Second Quarter.

Net loss for the 2009 Second Period was ($7,190,484) as compared to net income for the 2008 Second Period of $955,130. The decrease in net income is attributable to $8,527,097 in impairment on our consumer receivables portfolio and a decrease in revenues as discussed above, partially offset by the tax effect of these transactions. Loss from continuing operations for the 2009 Second Period was ($5,910,970) as compared to income from continuing operations for the 2008 Second Period of $1,798,427. The Company had a ($1,279,514) loss from discontinued operations in the 2009 Second Period compared to a loss of ($843,297) in the 2008 Second Period.

Liquidity and Capital Resources

The term “liquidity” refers to our ability to generate adequate amounts of cash to fund our operations, including portfolio purchases, operating expenses, tax payments and dividend payments, if any. Historically, we have generated working capital primarily from cash collections on our portfolios of consumer receivables in excess of the cash collections required to make principal and interest payments on our senior credit facility, and from offerings of equity securities and debt instruments. At June 30, 2009, we had approximately $92,333 in cash and cash equivalents, approximately $15.4 million in unused credit available from our credit facility and trade accounts payable of approximately $1,054,720. As of August 22, 2009, the Company was able to borrow approximately $300,000 on the credit facility, without making additional receivable purchases, which would be financed at a 75% advance rate. Management believes that the revenues expected to be generated from operations and our line of credit will be sufficient to finance operations through June 2010. However, in order to continue to execute our business plan and grow our consumer receivables portfolio, we will need to raise additional capital by way of the sale of equity securities or debt instruments. If, for any reason, our available cash otherwise proves to be insufficient to fund operations (because of future changes in the industry, general economic conditions, unanticipated increases in expenses, or other factors, including acquisitions), we will be required to seek additional funding. On February 26, 2009, we temporarily suspended the payment of dividends on our Series A Preferred Stock in order to preserve capital. On February 27, 2009, we withdrew our registration statement for our proposed public offering of stock and warrants and our board of directors authorized us to begin a process of exploring strategic alternatives to enhance stockholder value.

Net cash provided by operating activities was approximately $1,755,000 during the six months ended June 30, 2009, compared to net cash provided by operating activities of approximately $813,000 during the six months ended June 30, 2008. The increase in net cash provided by operating activities was primarily due to the impairment on our consumer receivables portfolio partially offset by a decrease in deferred income taxes and income taxes payable and decrease in payment of estimated court and media costs. Net cash used in investing activities was approximately $159,000 during the six months ended June 30, 2009, compared to net cash provided by investing activities of approximately $114,000 during the six months ended June 30, 2008. The decrease in net cash provided by investing activities was primarily due to a decrease in collections applied to principal on our consumer receivables portfolio. Net cash used in financing activities was approximately $1,327,000 during the six months ended June 30, 2009, compared to net cash used in financing activities of approximately $2,048,000 during the six months ended June 30, 2008. The decrease in net cash used in financing activities was primarily due to a decrease in collections of consumer receivables at Velocity Investments paying down the principal amount outstanding on the Wells Fargo Loan. Net cash used in discontinued operations was approximately $185,000 during the six months ended June 30, 2009 as compared to net cash provided by discontinued operations of approximately $1,126,000 during the six months ended June 30, 2008. The decrease in cash provided by discontinued operations was primarily due to a $1,000,000 promissory note issued by J. Holder collateralized by an investment property in Melbourne, Florida issued in the 1^st quarter of 2008.

On January 27, 2005, VI entered into a Loan and Security Agreement with Wells Fargo, Inc., a California corporation, in which Wells Fargo agreed to provide VI with a three year $12,500,000 senior credit facility to finance the acquisition of individual pools of unsecured consumer receivables that are approved by Wells Fargo under specific eligibility criteria set forth in the Loan and Security Agreement.

Simultaneous with the Loan and Security Agreement, the following agreements were also entered into with Wells Fargo, a Continuing Guaranty, in which we unconditionally and irrevocably guaranteed our obligations under the Loan and Security Agreement; a Security and Pledge Agreement, in which we pledged all of our assets to secure the credit facility, including, but not limited to, all of our stock ownership of JHI and all our membership interests in VI and VOM; and a Subordination Agreement, in which all sums owing to us by VI as an intercompany payable for advances or loans made or property transferred to VI will be subordinated to the credit facility to the extent that their sums, when added to VI membership interest in the parent does not exceed $3,250,000. In addition, three of our executive officers, John C. Kleinert, W. Peter Ragan, Sr. and W. Peter Ragan, Jr., provided joint and several limited guarantees of VI’s obligations under the Loan and Security Agreement.

On February 27, 2006, VI entered into a First Amendment to the Loan and Security Agreement pursuant to which Wells Fargo extended the credit facility until January 27, 2009 and agreed to increase the advance rate under the facility to 75% (up from 60%) of the purchase price of individual pools of unsecured consumer receivables that are approved by the lender. Under the First Amendment to the Loan and Security Agreement, Wells Fargo also agreed to reduce the interest rate on the loan from 3.5% above the prime rate of Wells Fargo Bank, N.A. to 1.5% above such prime rate. On February 23, 2007, we entered into a Third Amendment to the Loan Agreement dated January 27, 2005. Pursuant to the Amended and Restated Loan Agreement, the Lender agreed to permanently increase our credit facility up to $17,500,000. On March 3, 2008 (effective February 29, 2008), the Lender increased the amount of credit available under the Credit Facility from $17,500,000 to $22,500,000 and extended the maturity date until January 27, 2011. The Lender also agreed to eliminate the requirement that certain executive officers of VI and us provide the Lender with joint and several limited guarantees of VI’s obligations under the Original Loan Agreement.

Use of the Credit Facility is subject to VI meeting certain restrictive covenants under the Fourth Amendment to the Loan Agreement including but not limited to: a restriction on incurring additional indebtedness or liens; a change of control of Velocity; a restriction on entering into transactions with affiliates outside the course of Velocity’s ordinary business; and a restriction on making payments to us in compliance with the Subordination Agreement. Velocity has agreed to maintain at least $14,000,000 in member’s equity and subordinated debt. The Company has also agreed to maintain at least $25,000,000 in stockholder’s equity and subordinated debt for the duration of the facility. In addition, Velocity and we covenant that net income for each subsequent quarter shall not be less than $375,000 and $200,000, respectively. We had approximately $7,138,000 outstanding on the credit line as of June 30, 2009. As a result of the impairment charge related to the consumer receivables portfolio at June 30, 2009, March 31, 2009 and December 31, 2008, we did not meet certain financial covenants contained in our Credit Facility with Wells Fargo and have requested but not obtained a waiver with respect to the June 30, 2009 covenants. As a result, Wells Fargo has the right to call the loan at any time. We are currently working with Wells Fargo to obtain a waiver and to amend the Credit Facility to restructure these financial covenants. We anticipate completion of this waiver and amendment to the Credit Facility by the end of the third quarter, however, there is no assurance that the waiver or the amendment will be obtained.

On January 25, 2008, we issued a promissory note for $1,000,000 to a financial institution. The note bears interest at a rate of 7% per annum, payable monthly in arrears, on the first day of each month with the original principal amount plus accrued interest due April 24, 2009. We are currently negotiating an extension of this promissory note with the financial institution. The note is collateralized with specified real property owned by the Company’s subsidiary, J. Holder. The Note is guaranteed by the Company and personally by certain executive officers of the Company. J. Holder has agreed to maintain a loan to value ratio of 33% at all times.

On May 30, 2008, June 10, 2008 and October 29, 2008, our VI subsidiary consummated closings of a private placement offering of 14% subordinated notes due in 2011 to accredited investors. The notes were offered and sold pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended. VI has issued notes in the aggregate principal amount of $1,300,000 in the offering. Interest is payable quarterly in arrears beginning on the last day of the month that is four months from the date of the notes. VI is obligated to pay the principal amount of the notes upon the earlier of maturity or redemption. The notes are subordinated to all of our existing debt. The notes are senior to any future “long term” debt of VI. Upon an event of default, VI is obligated to pay the note holder a late charge computed at the rate of 18% per annum of the amount not paid. Of the $1,300,000 principal amount of notes that were issued, $900,000 in principal amount are held by related parties to us, including a note in the amount of $150,000 payable to our chief executive officer, John C. Kleinert, and notes in the aggregate of $750,000 to immediate family members of John C. Kleinert. VI used the net proceeds from the offering primarily for the purchase of portfolios of unsecured consumer receivables and for general corporate purposes, including working capital.

On February 26, 2009, we temporarily suspended the payment of dividends on our Series A Preferred Stock in order to preserve capital. On February 27, 2009, we withdrew our registration statement for our proposed public offering of stock and warrants and that our board of directors has authorized us to begin a process of exploring strategic alternatives to enhance stockholder value. To this end, the board of directors expects to form a special committee comprised of independent board members which will assist management in this effort. In making the announcement, we stated that our board of directors has not approved placing us or any of our assets up for sale, and we do not have any commitments or agreements with respect to any particular transaction. We also stated that there can be no assurance that the exploration of strategic alternatives will result in a transaction. Subject to regulatory requirements, we do not intend to disclose developments with respect to the exploration of strategic alternatives unless and until our board of directors has approved a specific transaction. Such strategic alternatives may be in the form of private placement or public offerings, and may include common stock, debt securities or other equity based securities. Such transactions could include the sale of equity at less than the market price of our common stock at the time of such transaction, although we have no present intention to undertake below market transactions, and could be for gross proceeds of as low as $1,000,000 to approximately $10,000,000 or more. The terms of any such capital raising transaction would be considered by our board of directors at the time it is proposed by management.

Supplementary Information on Consumer Receivables Portfolios:

The following tables show certain data related to our entire owned portfolio. These tables describe the purchase price, cash collections and related multiples. We utilize a long-term legal approach to collecting our portfolios of consumer receivables. This approach has historically caused us to realize significant cash collections from pools of consumer receivables years after they are initially acquired. Effective December 31, 2008, we revised its expected estimated cash collection forecast methodology by extending the collection forecast useful life of its pools from 60 months to 84 months and adjusting the timing of expected future collections. We have observed that receivable portfolios purchased in 2003 have experienced cash collections beyond 60 months from the date of purchase. When we first developed our cash forecasting models in 2004, limited historical collection data was available with which to accurately model projected cash flows beyond 60 months. During the quarter ended December 31, 2008 we determined there was enough additional collection data accumulated over the previous several years to extend this forecast to 84 months and more accurately forecast the estimated timing of such collections. In addition, we have concluded that there would likely be shortfalls in certain pools as a result of the current economic crisis. As a result, on December 31, 2008, March 31, 2009, and June 30, 2009 we recorded impairments of approximately $8.36 million, $710 thousand and $6.41 million on our consumer receivables portfolios, respectively. These impairments were primarily due to a combination of an extension of the collection curve from 60 to 84 months and a shortfall in collections in certain pool groups against our forecast, primarily our 2005 and 2006 vintages. The following tables show certain data related to our entire owned portfolios. These tables describe the purchase price, cash collections and related multiples. We utilize a long-term legal approach to collecting our portfolios of consumer receivables. This approach has historically caused us to realize significant cash collections from pools of consumer receivables years after they are initially acquired.

The following table shows the changes in consumer receivables, including amounts paid to acquire new portfolios of consumer receivables for the six months ended June 30, 2009 and 2008.


	Portfolio Purchases/Collections
Reporting Period	Initial Outstanding Amount		Portfolios Purchased	Purchase Price		Gross Cash Collections Per Period


Six Month Period Ended June 30, 2009	$	26,706,689	6	$	634,478	$	7,021,141

Six Month Period Ended June 30, 2008	$	13,905,258	5	$	788,261	$	9,212,925


Portfolio Purchases and Performance

Year	Total # Portfolios	Initial Outstanding Amount ⁽¹⁾		Purchase Price ⁽²⁾		Gross Cash Collections ⁽³⁾		Gross Cash Collections as a % of Cost ⁽⁴⁾		Average Price Per Dollar Outstanding ⁽⁵⁾


2003	5	$	11,497,833	$	2,038,950	$	8,836,593	433.39	%	$	0.1773

2004	10	$	9,511,088	$	1,450,115	$	3,662,935	252.60	%	$	0.1525

2005	22	$	133,103,213	$	11,449,557	$	19,595,138	171.14	%	$	0.0860

2006	26	$	199,042,032	$	15,367,940	$	19,778,940	128.70	%	$	0.0772

2007	19	$	129,892,667	$	9,316,779	$	8,629,072	92.74	%	$	0.0717

2008	8	$	17,920,530	$	1,115,983	$	942,303	84.44	%	$	0.0623

2009	6	$	26,706,689	$	634,478	$	33,161	5.23	%	$	0.0238


(1)	Initial Outstanding Amount represents the original face amount purchased from sellers and has not been reduced by any adjustments including payments and returns. (“Returns” are defined as purchase price refunded by the seller due to the return of non-compliant accounts, such as deceased and bankrupt accounts.)

(2)	Purchase Price represents the cash paid to sellers to acquire portfolios of defaulted consumer receivables, and does not include certain capitalized acquisition costs.

(3)	Gross Cash Collections include gross cash collections on portfolios of consumer receivables as of June 30, 2009.

(4)	Gross Cash Collections as a Percentage of Cost represents the gross cash collections on portfolios of consumer receivables as of June 30, 2009 divided by the purchase price such portfolios in the related calendar year.

(5)	Average Price Per Dollar Outstanding represents the Purchase Price of portfolios of consumer receivables divided by the Initial Outstanding Amount of such portfolios purchased in the related calendar year.

The prices we pay for our consumer receivable portfolios are dependent on many criteria including the age of the portfolio, the type of receivable, our analysis of the percentage of obligors who owe debt that is collectible through legal collection means and the geographical distribution of the portfolio. When we pay higher prices for portfolios that may have a higher percentage of obligors whose debt we believe is collectible through legal collection means, we believe it is not at the sacrifice of our expected returns. Price fluctuations for portfolio purchases from quarter to quarter or year over year are indicative of the economy or overall mix of the types of portfolios we are purchasing.

During the six months ended June 30, 2009, we acquired 6 portfolios of consumer receivables aggregating approximately $26.7 million in initial outstanding amount at a purchase price of approximately $634,000 bringing the aggregate initial outstanding amount of consumer receivables under management as of June 30, 2009 to approximately $528 million, an increase of 6.02% as compared to approximately $498 million as of June 30, 2008. For the six months ended June 30, 2009, we posted gross collections of approximately $3.48 million, compared to gross collections of $4.76 million in the six month period ended June 30, 2008, representing a 26.89% decrease.

Trends

As a result of our line of credit, notes payable, Preferred Stock offering and other potential capital markets transaction, we anticipate that we may incur significant increases in interest expense and preferred dividend payments offset, over time, by expected increased revenues from consumer receivable portfolios purchased utilizing funds under such line of credit and the proceeds from the Preferred Stock offering. No assurance can be given that the expected revenues from such purchased portfolios will exceed the additional interest expense and preferred dividends. While we are not presently aware of any other known trends that may have a material impact on our revenues, we are continuing to monitor our collections to assess whether the current economic and housing crisis will have a long term impact on the collection environment and revenues from collections on consumer receivables. We believe that the short term effect of the current economic crisis has been a decrease in lump some payments from obligors and an increase in court enforced settlement plans. The continuing effects of the current economic crisis has resulted in a change in the timing of expected collections, a resulting extension in our expected collections, and an update in our forecasts which has caused us to recognize an additional significant impairment loss. We do not believe that the recent decreases in interest rates, nor the anticipated gradual increases in interest rates, has had or will have a material adverse effect upon our business.

Item 3. Quantitative and Qualitative Disclosure About Market Risks

Not applicable.

Item 4(T). Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, at June 30, 2009, such disclosure controls and procedures were not effective due to the fact that we were unable to complete our Annual Report on Form 10-K by April 15, 2009, the extended due date for such Annual Report, and our Quarterly Reports on Form 10-Q by May 20, 2009 and August 19, 2009, the extended due dates for such Quarterly Report.

During the quarterly review for the period ended June 30, 2009 management identified a material weakness in internal controls related to revenue recognition. Effective December 31, 2008 (using collection data up to March 31, 2009), the Company revised its expected estimated cash collection forecast methodology by extending the collection forecast useful life of its pools from 60 months to 84 months and adjusted the timing of expected future cash collections. Revenue recognition under SOP 03-3 requires thorough evaluation and documentation to ensure revenue is properly accounted for in accordance with GAAP. During our quarter-end closing process for the period ended June 30, 2009, management determined that the revised 84 month revenue recognition model understated revenue by 45 days in the first three months of the model, as a result, errors in our recognition of revenue during the quarter ended March 31, 2009 had occurred. Efforts to remediate the material weakness related to revenue recognition are detailed below in “Changes in Internal Control over Financial Reporting.”

Effective December 31, 2008, as a result of the current economic crisis, we revised our expected cash collection forecast methodology by extending the collection forecast of our pools from 60 months to 84 months and adjusting the timing of expected future collections. This resulted in impairment of approximately $8.36 million on our consumer receivables portfolios. This impairment was primarily due to a combination of an extension of the collection curve from 60 to 84 months and a shortfall in collections in certain pool groups against our forecast, primarily our 2005 through 2006 vintages. The increase in the collection forecast from 60 to 84 months was applied effective December 31, 2008, to each portfolio for which we could forecast through such term.

Effective June 30, 2009, the continuing effects of the current economic crisis has resulted in a change in the timing of expected collections, a resulting extension in our expected collections, and an update in our forecasts which has caused us to recognize an additional significant impairment loss. This analysis required additional time to prepare our quarterly financial statements.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

In connection with the material weakness in internal control related to revenue recognition, the following remediation actions are being taken by the Company to reduce the risk of a similar material weakness occurring in the future:

•

Proper documentation of the Company’s revenue recognition model is prepared and maintained to support accounting for consumer receivable transactions in accordance with GAAP.

•

An evaluation of any revisions in expected collections and related revenue recognition model is performed by management with the proper skill and experience levels necessary to ensure revenue is recognized and accounted for in accordance with GAAP, and then reviewed by an independent third party controller.

Though these changes in internal control over financial reporting have occurred in the second quarter of 2009, the reason the Company’s disclosure controls and procedures regarding revenue recognition are not effective as of June 30, 2009 is that the changes in internal control over financial reporting described above have not functioned for a sufficient period of time to consider them remediated.

Except as noted above, there were no changes in the Company’s internal control over financial reporting during the Company’s second fiscal quarter of 2009 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION


	Item 1	Legal Proceedings

In the ordinary course of our business we are involved in numerous legal proceedings. We regularly initiate collection lawsuits against consumers using our network of third party law firms. Also, consumers may occasionally initiate litigation against us in which they allege that we have violated a Federal or state law in the process of collecting on their account. We do not believe that these ordinary course matters are material to our business and financial condition.

As of June 30, 2009, there are presently no material pending legal proceedings to which we or any of our subsidiaries is a party or to which any of our property is the subject and, to the best of our knowledge, no such actions against us is contemplated or threatened.


	Item 2	Unregistered Sales of Securities and Use of Proceeds

		None.

	Item 3	Defaults Upon Senior Securities

		None.

	Item 4	Submission of Matters to a Vote of Security Holders

		None.

	Item 5	Other Information

		None.

	Item 6	Exhibits

	31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350

	32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.

In accordance with the requirements of the Securities Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


	VELOCITY PORTFOLIO GROUP, INC.

Dated: September 4, 2009	By:	/s/ John C. Kleinert

		John C. Kleinert
		Chief Executive Officer and President

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

Velocity Portfolio (VPGI) 10-Q2009 Q2 Quarterly report

Content analysis