UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB/A
(Mark one)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended March 31, 2007
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______________ to ________________
Commission file number ______________________
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Mortgage Assistance Center Corporation
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(Exact Name Of Small Business Issuer As Specified In Its Charter)
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Florida 06-1413994
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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1341 W. Mockingbird Lane, Suite 1200 West, Dallas, TX 75247
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(Address of Principal Executive Offices)
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(214) 670-0005
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
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Check whether the issuer has (1) filed all reports required to be files 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
|_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes |_| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 12,725,124 shares of Common
Stock as of March 31, 2007
Transitional Small Business Disclosure Format: Yes |_| No |X|
MORTGAGE ASSISTANCE CENTER CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
AND
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
MARCH 31, 2007
Mortgage Assistance Center Corporation
Table of Contents
Page
Report of Independent Registered Public Accounting Firm......................F-2
Financial Statements
Consolidated Balance Sheets
as of March 31, 2007 and December 31, 2006........................F-4
Consolidated Statements of Operations and Comprehensive Loss
for the three months ended March 31, 2007 and 2006................F-6
Consolidated Statements of Cash Flows
for the three months ended March 31, 2007 and 2006...............F-8
Notes to Consolidated Financial Statements.............................F-10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Mortgage Assistance Center Corporation
Dallas, Texas
We have reviewed the accompanying consolidated balance sheet of Mortgage
Assistance Center Corporation (formerly Safe Alternatives Corporation of
America, Inc., a Florida corporation) as of March 31, 2007 and the consolidated
statements of operations and comprehensive loss, and cash flows for the
three-month period ended March 31, 2007. These interim financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial statements for them to be in
conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has sustained
recurring losses from operations and had an accumulated stockholders' deficit at
March 31, 2007. These circumstances create substantial doubt about the Company's
ability to continue as a going concern and are discussed in Note 5. The
financial statements do not contain any adjustments that might result from the
outcome of these uncertainties.
F-2
The December 31, 2006 consolidated financial statements of Mortgage Assistance
Center Corporation were audited by us and we expressed an unqualified opinion in
our report dated March 30, 2007, but we have not performed any auditing
procedures since that date.
Sutton Robinson Freeman & Co., Inc.
- -----------------------------------
Sutton Robinson Freeman & Co., P.C.
Certified Public Accountants
Tulsa, Oklahoma
May 15, 2007
F-3
Mortgage Assistance Center Corporation
Consolidated Balance Sheets
March 31, 2007 (Unaudited) and December 31, 2006 (Audited)
March 31, December 31,
ASSETS 2007 2006
(Unaudited) (Audited)
----------- -----------
Current Assets:
Cash and cash equivalents $ 791,447 $1,205,120
Portfolio assets, at cost (net of impairment reserve
of $355,883 and $253,508 at March 31, 2007 and
December 31, 2006, respectively) 6,946,760 6,798,509
Prepaid expenses 234,157 194,405
---------- ----------
Total Current Assets 7,972,364 8,198,034
---------- ----------
Property and Equipment, at cost:
Land 699,600 699,600
Building and improvements 609,409 606,799
Office furniture and equipment 133,960 118,670
---------- ----------
1,442,969 1,425,069
Less accumulated depreciation 85,581 73,468
---------- ----------
Net Property and Equipment 1,357,388 1,351,601
---------- ----------
Investments and Other Assets:
Deposits 25,404 3,450
---------- ----------
Total Assets $9,355,156 $9,553,085
========== ==========
The accompanying notes are an integral part of these financial statements
F-4
Mortgage Assistance Center Corporation
Consolidated Statements of Operations and Comprehensive Loss
Three Months Ended March 31, 2007 and 2006 (Unaudited)
March 31, December 31,
LIABILITIES AND EQUITY 2007 2006
(Unaudited) (Audited)
------------ ------------
Current Liabilities:
Notes payable-individuals and others $ 1,362,315 $ 1,522,315
Current portion of mortgages payable 24,500 24,400
Accounts payable-trade 94,212 58,794
Accounts payable-others 191,140 182,507
Accrued fees and wages 106,751 182,532
Accrued stock-based compensation 96,856 95,947
Other accrued liabilities 168,230 169,068
------------ ------------
Total Current Liabilities 2,044,004 2,235,563
------------ ------------
Long-term Debt:
Notes payable-individuals and others 1,778,875 1,492,768
Note payable-stockholder -- --
Mortgages payable, less current portion 1,030,905 1,036,360
------------ ------------
Total Long-Term Debt 2,809,780 2,529,128
------------ ------------
Minority Interests 5,572,932 5,466,543
------------ ------------
Total Liabilities 10,426,716 10,231,234
------------ ------------
Stockholders' Equity (Deficit):
Series A convertible preferred stock ($0.001 par value, 3,000,000 shares
authorized, 1,500,000 shares issued and outstanding, aggregate
liquidation preference
of $1,500,000) 1,500 1,500
Common stock, ($0.001 par value; 50,000,000 shares
authorized,12,725,124 shares issued and outstanding) 12,726 12,726
Additional paid-in capital 2,728,836 2,481,413
Retained earnings (deficit) after December 31, 2004 (4,159,082) (3,518,248)
------------ ------------
(1,416,020) (1,022,609)
Subscriptions issuable 344,460 344,460
------------ ------------
Total Stockholders' Equity (Deficit) (1,071,560) (678,149)
------------ ------------
Total Liabilities and Stockholders' Equity $ 9,355,156 $ 9,553,085
============ ============
The accompanying notes are an integral part of these financial statements
F-5
Mortgage Assistance Center Corporation
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2007 and December 31, 2006
(Unaudited)
Three Months Ended
March 31, March 31,
2007 2006
(Restated)
----------- -----------
Operating Revenues:
Sales of portfolio assets $ 1,119,449 $ 235,811
Servicing fees and comissions from
affiliates and others 114,396 4,518
Rental income 53,004 3,300
Other 51,926 3,356
----------- -----------
Gross operating revenues 1,338,775 246,985
Cost of portfolio assets sold 679,994 156,183
----------- -----------
Net operating revenues 658,781 90,802
----------- -----------
Operating Expenses:
Salaries, wages and contract labor 598,034 214,493
Selling, general and administrative expenses 325,860 155,335
Depreciation and amortization 12,113 5,643
Bad debts 107,594 --
----------- -----------
Total operating expenses 1,043,601 375,471
----------- -----------
Operating loss (384,820) (284,669)
----------- -----------
Other income (expense):
Interest and other income 9,949 9,181
Interest expense (73,492) (79,523)
Nonrecurring expenses (97,357) --
----------- -----------
Total other income (expense) (160,900) (70,342)
----------- -----------
Loss before minority interests and
income taxes (545,720) (355,011)
The accompanying notes are an integral part of these consolidated
financial statements
F-6
Mortgage Assistance Center Corporation
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2007 and March 31, 2006
(Unaudited)
Three Months Ended
March 31, March 31,
2007 2006
(Restated)
------------ ------------
Loss before minority interests and
and income taxes $ (545,720) $ (355,011)
Minority interests (95,114) 46,522
------------ ------------
Loss before income taxes (640,834) (308,489)
Income tax benefit (expense) -- --
------------ ------------
Net Loss (640,834) (308,489)
Other comprehensive income -- --
------------ ------------
Comprehensive Loss $ (640,834) $ (308,489)
============ ============
Net loss per weighted-average share of common stock outstanding, calculated
on Net Loss:
Basic $ (0.05) $ (0.02)
============ ============
Fully diluted $ (0.02)
============
Weighted-average number of shares of common stock outstanding:
Basic 12,725,124 12,725,124
============ ============
Fully diluted 12,725,124
============
The accompanying notes are an integral part of these consolidated
financial statements
F-7
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
March 31, 2007
(Unaudited)
Three Months Ended
March 31, March 31,
2007 2006
(Restated)
--------- ---------
Cash Flows From Operating Activities
Net loss $(640,834) $(308,489)
--------- ---------
Adjustments to reconcile net loss to net cash provided (used) by operating
activities:
Depreciation 12,113 5,643
Non-Cash stock-based compensation 248,332 --
Minority interests in subsidiaries' net earnings (losses) 95,114 (46,522)
Change in assets and liabilities:
(Increase) decrease in portfolio assets (148,251) 144,977
(Increase) decrease in accounts receivable from related parties 10,420
(Increase) decrease in prepaid expenses and other assets (61,706) 10,440
Increase (decrease) in accounts payable-trade 35,418 69,833
Increase (decrease) in accounts payable-other 8,633 --
Increase (decrease) in accrued fees and wages (75,781) 6,615
Increase (decrease) in other accrued liabilities (838) (38,680)
--------- ---------
Total adjustments 113,034 162,726
--------- ---------
Net Cash Used by Operating Activities (527,800) (8,535)
--------- ---------
Cash Flows From Investing Activities
Purchase of property and equipment (17,900) (8,535)
--------- ---------
Net Cash Used by Investing Activities (17,900) (8,535)
--------- ---------
The accompanying notes are an integral part of these consolidated
financial statements
F-8
Three Months Ended
March 31, March 31,
2007 2006
(Restated)
----------- -----------
Cash Flows From Financing Activities
Proceeds from issuance of debt to individuals and others 385,000 50,000
Repayments of debt to individuals and others (258,893) (160,070)
Capital contributions from minority interests 550,000
Refund of capital contributions to minority interests (514,645)
Distributions to minority interests (24,080) (87,500)
Repayments of mortgage loans (5,355) (648)
----------- -----------
Net Cash Provided by Financing Activities 132,027 (198,218)
----------- -----------
Net Increase (Decrease) in Cash (413,673) (352,516)
Cash at Beginning of Period 1,205,120 598,979
----------- -----------
Cash at End of Period $ 791,447 $ 246,463
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Quarter for:
Interest $ 61,639 $ 31,379
The accompanying notes are an integral part of these consolidated
financial statements
F-9
Note 1 - Organization
Mortgage Assistance Center Corporation (formerly Safe Alternatives
Corporation of America, Inc.) (the "Company" or "MACC") was organized
in 1976, under the name Knight Airlines, Inc. In October 1978, the
Company completed an initial public offering of its common stock in
Florida, pursuant to an exemption from registration under Regulation A
promulgated under the Securities Act of 1933, as amended. The Company
ceased operations in April 1983 and was inactive through September
1995. In May 1994, the name of the Company was changed to Portsmouth
Corporation.
On September 15, 1995, pursuant to an Asset Purchase Agreement and
Plan of Reorganization between the Company and Safe Alternatives
Corporation of America, Inc., a Delaware corporation ("SAC-Delaware"),
the Company purchased all of the assets of SAC-Delaware, and assumed
all of the liabilities of SAC-Delaware. On March 4, 1996, the Company
changed its name to Safe Alternatives Corporation of America, Inc. (a
Florida corporation).
On September 17, 2002, the Board of Directors of the Company agreed to
sell all of the Company's assets to Environmental Alternatives, Inc.
("EAI"), a privately held Vermont corporation, in exchange for EAI's
assumption of and agreement to indemnify and hold the Company harmless
from paying any and all claims that could attach to the Company as of
June 30, 2002.
From July 1, 2002 to May 2005 the Company had no assets or operating
activities.
Pursuant to a Majority Shareholder Consent, on May 14, 2004, the
Company's Board of Directors authorized a change in the Company name
to Mortgage Assistance Center Corporation. The Company's Articles of
Incorporation were amended on December 22, 2004 and became effective
January 17, 2005. The changes were made in connection with the
requirements of a Letter of Intent executed between the Company and
Mortgage Assistance Corporation ("MAC"), a Texas corporation, in which
re-organizational steps were undertaken to create a change in control
of MACC prior to the completion of a business combination agreement.
Upon completion of a definitive Business Combination Agreement in
August 2005, MACC acquired all of the issued and outstanding capital
stock of Mortgage Assistance Corporation. MAC became a wholly owned
subsidiary of MACC as described in Note 3.
F-10
Note 2 - Preparation of Financial Statements
The Company follows the accrual basis of accounting in accordance with
accounting principles generally accepted in the United States of
America and has a year end of December 31.
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.
Management further acknowledges that it is solely responsible for
adopting sound accounting practices, establishing and maintaining a
system of internal accounting control. The Company's system of
internal accounting control is designed to assure, among other items,
that 1) recorded transactions are valid; 2) valid transactions are
recorded; and 3) transactions are recorded in the proper period in a
timely manner to produce financial statements which present fairly the
financial condition, results of operations and cash flows of the
Company for the respective periods being presented.
During interim periods, the Company follows the accounting policies
set forth in its annual audited financial statements filed with the U.
S. Securities and Exchange Commission on its Annual Report on Form
10-KSB for the year ended December 31, 2006. The information presented
within these interim financial statements may not include all
disclosures required by generally accepted accounting principles, and
the users of financial information provided for interim periods should
refer to the annual financial information and footnotes when reviewing
the interim financial results presented herein.
In the opinion of management, the accompanying interim financial
statements, prepared in accordance with the U. S. Securities and
Exchange Commission's instructions for Form 10-QSB, are unaudited and
contain all material adjustments, consisting only of normal recurring
adjustments necessary to present fairly the consolidated financial
condition, results of operations and cash flows of the Company for the
respective interim periods presented. The current period results of
operations are not necessarily indicative of results, which ultimately
will be reported for the full fiscal year ending December 31, 2007.
F-11
Note 3 - Summary of Significant Accounting Policies
Description of Business:
Through MAC, the Company operates as a financial services company,
acquiring and managing pools of distressed real estate-based
mortgages. The types of mortgage pools acquired include
non-performing, charged-off, sub-prime mortgages, typically between
ninety days and two years past due and secured by residential real
estate. The Company acquires both priority ("first") and subordinate
("second") mortgage loans or "liens". Approximately 1% of the loans
acquired are subordinate liens, which bear the risk of being
reclassified as an unsecured loan should the first lien holder
foreclose on the property. The Company primarily acquires
non-performing first lien loan pools of varying amounts from banks and
other lenders at a significant discount from the loans' outstanding
legal principal amount, the total of the aggregate of expected future
sales price and the total payments to be received from obligors.
After the Company acquires the loans, the process of resolution begins
with the borrower, changing the status of the non-performing loans
into either performing loans or foreclosing on the real estate. The
Company will resell a substantial portion of its re-performing loans
in various-sized loan pools. The Company will be required to foreclose
on certain properties when loans held in its portfolio continue to be
in default. As a result, the Company will be engaged in owning
single-family dwellings and possibly other real estate. Such
foreclosed real estate will be held, rehabilitated where necessary,
and sold.
Principles of Consolidation and Basis of Presentation:
The accompanying financial statements are consolidated and include the
financial statements of MACC, MAC, and M.A. Protect, Inc., its wholly
owned subsidiaries; and seven unincorporated entities: MAP/MAC,
L.L.C., Apple Canyon Capital, L.L.C., Bluestone Capital, L.L.C.,
Canyon Ferry Capital, L.L.C., Dutch Fork Capital, L.L.C; Elf Fork
Capital, L.L.C. and 999 Metromedia Venture. All significant
intercompany accounts and transactions are eliminated in
consolidation.
The Company, through its subsidiary, MAC, has a 50% ownership interest
in each of the seven unincorporated joint ventures and acts as the
general partner of each venture and exercises control over each
venture. The limited partners in each of the ventures do not have
either (a) the substantive ability to dissolve the venture or
otherwise remove the general partner without cause, or (b) substantive
F-12
Note 3 - Summary of Significant Accounting Policies (continued)
Principles of Consolidation and Basis of Presentation: (continued)
participating rights. Based on these factors, MAC's general partner's
interest in each of the joint ventures meets the criteria for
consolidation under the provisions of Emerging Issues Task Force Issue
No. 04-5, Determining Whether A General Partner, or the General
Partners as a Group, Controls a Limited Partnership or Similar Entity
When the Limited Partners Have Certain Rights ("EITF Issue No. 04-5")
and AICPA Statement of Position 78-9, Accounting for Investments in
Real Estate ("SOP 78-9").
The consolidated financial statements include 100% of the assets and
liabilities of the seven unincorporated entities, with the ownership
interests of minority investors recorded as a noncurrent liability,
"minority interests."
Accounting Change:
Effective January 1, 2006, the Company adopted the provisions of EITF
Issue No. 04-5 and SOP 78-9 and began consolidating the accounts
MAP/MAC, L.L.C. and its other 50%-owned joint ventures. Historically
the Company had accounted for its investments in such ventures under
the equity method. The change was made to more clearly reflect the
Company's operations as a financial services company, utilizing
funding from third party investors to finance the purchase of mortgage
note receivable pools and real estate portfolios, either directly or
through unincorporated ventures. As a result of the accounting change,
all prior periods presented have been restated to reflect the
consolidation of the Company's 50%-owned joint ventures. The
accounting change did not have a material impact on the results of
operations of the Company.
Portfolio Assets:
Portfolio assets are held for sale and reflected in the accompanying
financial statements as mortgage note receivable pools or real estate
portfolios. The following is a description of each classification and
the related accounting policy accorded to each portfolio type:
Mortgage Note Receivable Pools:
Mortgage note receivable pools consist primarily of first lien
distressed real estate based mortgages. The cost basis of loan pools
acquired consists of their purchase
F-13
Note 3- Summary of Significant Accounting Policies (continued)
Mortgage Note Receivable Pools: (continued)
price from banks or other sellers plus purchase commissions, if any.
Loan pool costs are allocated to individual loans based on the face
value of the unpaid principal of the loans and their performance
status based on the note's expected cash flow. Any payments of due
diligence costs, property taxes, or insurance required are capitalized
and included in the cost basis of the individual loans involved.
Subsequent to acquisition, the adjusted cost of the mortgage note
receivable pools is evaluated for impairment on a quarterly basis. The
evaluation of impairment is determined based on the review of
estimated future cash receipts, which represents the net realizable
value of the note pool. Once it is determined that there is
impairment, a valuation allowance is established for any impairment
identified through provisions charged to operations in the period of
the impairment is identified. The Company determined that an
impairment allowance of $355,883 and $253,508 was required at March
31, 2007 and December 31, 2006, respectively.
The Company recognizes gain or loss upon the resale or other
resolution of mortgage loans pools based upon the difference between
the selling price of the loan pool and the cost basis of the
individual loans included in the pool being sold. Collections of
delinquent principal and interest payments are credited against the
cost basis of the respective loan.
The Company has adopted Statement of Position No. 03-3, Accounting for
Certain Loans or Debt Securities Acquired in a Transfer ("SOP 03-3").
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 securities acquired in a transfer
if those differences are attributable, at least in part, to credit
quality. SOP 03-3 was effective for all loans acquired after 2004;
however, all of the loans in the Company's portfolio were accounted
for in accordance with SOP 03-3, regardless of date acquired.
Real Estate Portfolios:
Real estate portfolios consist of real estate acquired by foreclosures
of individual mortgage notes receivable. Such portfolios are carried
at the lower of cost or fair value less estimated costs to sell. The
cost of foreclosed real estate consists of original loan costs plus
any costs relating to the development and improvement of Note 3-
Summary of Significant Accounting Policies (continued)
F-14
Real Estate Portfolios: (continued)
the real estate for its intended use. The costs of foreclosure and any
required refurbishment costs to bring the property to resalable
condition, as well as any maintenance, taxes and insurance costs
required during the holding period are capitalized. Income or loss is
recognized upon the disposal of real estate at the date of closing,
based on the difference between selling prices, less commissions, and
capitalized costs. Rental income, net of expenses, on real estate
portfolios is recognized when received. Accounting for portfolios is
on an individual asset-by-asset basis as opposed to a pool basis.
Subsequent to acquisition, the cost of real estate portfolios is
evaluated for impairment on a quarterly basis. The evaluation of
impairment is determined based on the review of the estimated future
cash receipts, which represents the net realizable value of the real
estate portfolio. A valuation allowance is established for any
impairment identified through provisions charged to operations in the
period the impairment is identified. The Company determined that no
allowance for impairment on real estate portfolios was required at
March 31, 2007 and December 31, 2006.
Cash and Cash Equivalents:
The Company considers all highly liquid debt or equity instruments
purchased with an original maturity at the date of purchase of 90 days
or less to be cash equivalents.
Property and Equipment:
Property and equipment acquired are recorded at cost. Depreciation of
property and equipment is determined by the straight line and
double-declining balance methods over estimated useful lives of thirty
years for buildings and improvements, and ranging from two to seven
years for office furniture and equipment.
Upon sale, retirement or other disposal of property and equipment, the
related cost and accumulated depreciation are removed from the
accounts. All gains or losses arising from the sale, retirement or
other disposition of property or equipment are reflected in earnings.
Maintenance, repairs, renewals and betterments, in general, are
charged to
F-15
Note 3- Summary of Significant Accounting Policies (continued)
Property and Equipment: (continued)
expense as incurred, except that of major renewals and betterments
which extend the life on an asset or increase the value thereof are
capitalized.
Share-Based Compensation
The Company recognizes expense for its share-based compensation based
on the fair value of awards that are granted in accordance with
Statement of Financial Accounting Standards No. 123r, Share-Based
Payments. The fair value of common stock options or warrants is
estimated at the date of grant by a third party consultant using a
commercially available software product was developed for use in
estimating the fair value of common stock options and warrants that
are fully transferable, and takes into consideration several criteria,
including volatility, expected term, dividend yield, and risk-free
rate of return. It was the Company's determination that the trinomial
lattice valuation methodology is the preferred and most accurate
options valuation methodology available. Option valuation methods
require the input of highly subjective assumptions, including the
expected stock price volatility. The measured compensation cost is
recognized ratably over the vesting period of the related share-based
compensation award.
Income Taxes:
The Company accounts for income taxes based on Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"), Accounting for Income
Taxes. SFAS No. 109 requires the recognition of deferred tax assets
and liabilities for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. In
addition, SFAS No. 109 requires the recognition of future tax
benefits, such as net operating loss carry forwards, to the extent
that realization of such benefits is more likely than not. The amount
of deferred tax liabilities or assets is calculated by applying the
provisions on enacted tax laws to determine the amount of taxes
payable or refundable currently or in future years.
Valuation allowances are established, when necessary, to reduce
deferred tax assets when it is more likely than not that all or a
portion of the deferred tax asset will not be realized.
F-16
Note 3- Summary of Significant Accounting Policies (continued)
Net Loss Per Common Share:
The Company computes net income (loss) per share in accordance with
SFAS No 128, Earnings per Share, and SEC Staff Accounting Bulletin No.
98 ("SAB 98"). Under the provisions of SFAS No. 128 and SAB 98, basic
net income (loss) per common shares is based on the weighted-average
outstanding common shares. Diluted net income (loss) per common share
is based on the weighted-average outstanding shares adjusted for the
dilutive effect of option and warrants to purchase common stock and
convertible debentures. Due to the Company's losses, such potentially
dilutive securities are anti dilutive for the quarter ended March 31,
2007. The weighted average number of potentially fully dilutive shares
was 19,917,267 for the quarter ended March 31, 2007.
Note 4 - Business Combination
On May 14, 2004, the Company's President, at that time, Dale Hensel,
executed a Letter of Intent with Mortgage Assistance Corporation
("MAC"), a Texas corporation controlled by Mr. Hensel, whereby MAC
offered to be acquired by the Company. Under the terms and conditions
of the letter of intent the MACC board obtained a majority shareholder
consent in lieu of a special meeting according to the Florida Business
Corporation Statutes and approved the following actions:
1. The reverse split of the Company's common shares on a One for Two
Hundred Fifty (1:250) basis;
2. The corporate name change from Safe Alternatives Corporation of
America, Inc. to Mortgage Assistance Center Corporation;
3. The change in the authorized number of common stock shares from
175,000,000 to 50,000,000 shares;
4. Authorized a business combination whereby the Company exchanged
12,000,000 post reverse split common shares for all of the issued
and outstanding common stock of MAC; and
5. Any such further recommendations as may be considered reasonable
and in the best interest of the shareholders.
In May 2004, a majority shareholder action approved the reverse stock
split and the reduction in the authorized number of common shares.
On May 10, 2005, the Company entered into a Business Combination
Agreement
F-17
Note 4 - Business Combination (continued)
to acquire all of the issued and outstanding capital stock of Mortgage
Assistance Corporation, a Texas corporation, consisting of 7,500,000
shares, in exchange for twelve million (12,000,000) shares of MACC
stock. The Company issued 1.6 MACC shares for each MAC share held by
the 34 shareholders of MAC in an exempt transaction under Section 4(2)
and Regulation D Rule 506 of the Securities Act of 1933, as amended
(the "Securities Act"). These shares are restricted securities and may
not be publicly resold absent registration with the Securities and
Exchange Commission (SEC) or exemption from the registration
requirements of the Securities Act. MAC became a wholly owned
subsidiary of MACC upon MACC's complete acquisition of all the MAC
shares.
As of May 10, 2005, MACC received 6,896,556 MAC shares (92%) and
caused 11,034,489 (87.1%) of the Company shares to be issued to three
individuals who comprise a control group consisting of Dale Hensel,
Dan Barnett and Michelle Taylor. Together they control 86.7% of the
voting common stock of the Company. Dale Hensel was the sole officer
and director of the Company. Mr. Hensel was also the President and
director of MAC. Mr. Barnett was the Vice President and director of
MAC. Ms. Taylor is a contract consultant of MAC. Subsequently, the
remainders of the MAC shares were surrendered and 12,000,000 shares
were issued for 100% of MAC.
A conflict of interest existed in May 2004 when Mr. Hensel recommended
that the Company acquire all of the issued and outstanding capital
stock of MAC because Mr. Hensel was the Company president and director
and also the president, director and shareholder of MAC. The decisions
to acquire MAC, change the corporate name, implement the reverse split
and capital change were actions over which Mr. Hensel had exercised
degrees of control and in which he had a financial interest by virtue
of being a shareholder of MAC. All of these transactions were
disclosed to, authorized and approved by the written consent of the
Company's majority shareholders who held 75.9% of the voting stock. At
the time of voting, Mr. Hensel was not a shareholder of the Company
and did not vote for approval of these transactions.
The number of shares authorized for issuance in the business
combination transaction between MACC and the MAC shareholders was
negotiated between Mr. Hensel and MAC management in a transaction with
management. The management of MACC and MAC shared a common director
and officer in Dale Hensel. The transaction did not represent an
arms-length transaction.
At the date of the merger, MAC expensed $295,000 of legal fees and
other costs related to the acquisition. These costs had previously
been capitalized pending
F-18
Note 4 - Business Combination (continued)
successful completion of a merger. At that time a market value for
MACC's common shares was difficult to ascertain because of the limited
and illiquid market for the Company shares. There was no active market
for MACC common stock at that time.
The acquisition of MAC constituted an exchange of equity interests
between entities under common control and resulted in a change in the
reporting entity. This type of transaction is not a business
combination under Statement of Financial Accounting Standards Number
141 and, consequently, has been accounted for in a manner similar to a
pooling of interests rather than as a purchase. Accordingly, the
equity interests that were issued to MAC shareholders in May 2005 in
exchange for the net assets of MAC were given effect as of January 1,
2005, based on the net book value of MAC on a historical cost basis.
Note 5 - Going Concern Uncertainty
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of
business. As shown in the financial statements, the Company has
incurred significant operating losses for quarter ended March 31, 2007
and prior years, resulting in an accumulated stockholders' deficit as
of March 31, 2007. These factors, among others, may indicate that the
Company will be unable to continue as a going concern for a reasonable
period of time. The financial statements do not include any
adjustments relating to the recoverability of assets and
classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely
basis, to obtain additional financing or refinancing as may be
required, and ultimately to sustain profitability.
The Company completed a $1,500,000 preferred stock financing
transaction on November 30, 2006, which required the Company to
restructure the majority of its existing short-term debt. The
financing agreement contains provisions which could provide additional
preferred stock financing up to $1,500,000 (See Note 14).
The Company is actively pursuing alternative financing plans to fund
the Company's requirements, and those plans include, but are not
limited to, additional equity sales or debt financing under
appropriate market conditions, allegiances or partnership agreements,
or other business transactions which could generate adequate funding
opportunities. The Company continues to explore
F-19
Note 5 - Going Concern Uncertainty (continued)
opportunities to secure additional sources of debt financing as a
means of more cost effectively acquiring pools of mortgage notes and
foreclosed properties.
While the Company is confident in its ability to secure additional
capital in the future, there is no guarantee that the Company will
receive sufficient funding to sustain operations or implement any
future business plans.
Note 6 - Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 154, Accounting Changes and
Error Corrections (SFAS 154), which replaces APB Opinion No. 20,
Accounting Changes, and FASB Statement 3, Reporting Accounting Changes
in Interim Financial Statements. This statement changes the
requirements for the accounting for and reporting of a change in
accounting principle, including all voluntary changes in accounting
principles. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. This statement requires
voluntary changes in accounting principles be recognized
retrospectively to prior periods' financial statements, rather than
recognition in the net income of the current period. Retrospective
application requires restatements of prior period financial statements
as if that accounting principle had always been used. This statement
carries forward, without change, the guidance contained in Opinion 20
for reporting the correction of an error in previously issued
financial statements and a change in accounting estimate. The
provisions of SFAS No. 154 is beginning January 1, 2006. It had no
effect on the accompanying financial statements.
In March 2006, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 156, Accounting for Servicing of
Financial Assets(SFAS 156), which amends SFAS 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS 156 permits, but does not require, an entity to
choose either the amortization method or the fair value measurement
method for measuring each class of separately recognized servicing
assets and servicing liabilities. The provisions of SFAS No. 156 are
effective for fiscal years beginning after September 15, 2006. The
Company does not expect the adoption of SFAS 156 to have a material
effect on its financial statements and related disclosures.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" (SFAS 157). SFAS 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about
fair-value measurements required under
F-20
Note 6 - Recent Accounting Pronouncements (continued)
other accounting pronouncements, but does not change existing guidance
as to whether or not an instrument is carried at fair value. SFAS 157
is effective for the Company's fiscal year 2008. The Company is
currently evaluating the impact of adopting SFAS 157.
Note 7 - Portfolio Assets
Portfolio assets were comprised of the following at March 31, 2007:
Mortgage note receivable pools $1,977,608
Real Estate portfolios 5,038,603
Tax liens and other 286,432
----------
Total portfolio assets 7,302,643
Less valuation allowance for impairment 355,883
----------
Net portfolio assets $6,946,760
==========
Certain portfolio assets are pledged to secure non-recourse notes
payable to individuals and others (See Note 8).
F-21
Note 8 - Notes Payable
At March 31, 2007, notes payable to individuals and others were
comprised of the following:
Non-interest bearing loan payable to minority interest
partner in MAP/MAC, L.L.C., due upon demand $1,320,136
Loans payable to One Source Mortgage Investments,
Inc., due interest only monthly or semiannually
at 12%, maturing September 2008 - March 2009 1,011,500
Loans payble to various individuals, due principal and
accrued interest at 12% at maturity in October-
November 2008 444,175
Loan payable to Kirtland Realty Group, L.P., due
interest only monthly at 14%, maturing November 2008 223,200
Loan payble to individual, due interest only
quarterly at 12%, maturing November 2008 100,000
Non-interest bearing loans payable to joint venture
partners, payable out of joint venture distributions 42,179
----------
Total 3,141,190
Less portion due within one year 1,362,315
----------
$1,778,875
==========
F-22
Note 8 - Notes Payable (continued)
Certain real estate mortgage note receivable pools secure the loans
from individuals and others.
In connection with the issuance of 1,500,000 shares of the Company's
Series A Preferred Stock (See Note 14), the Company restructured
certain of its loans payable to individuals and others to long-term
obligations maturing October-November 2008, while retiring other loans
with a portion of the proceeds from the preferred stock issuance.
Principal installments due on notes payable to individuals and others
are due $42,179 in 2008 and 385,000 in 2009, with the remaining
$1,320,136 consisting of amounts due to the minority interest partner
in MAP/MAC, L.L.C., payable at an undeterminable future date as
explained in the following paragraphs.
On September 30, 2004, Mortgage Assistance Corporation, a Texas
corporation ("MAC") and Mortgage Acquisition Partners, L.L.C., a
Missouri limited liability company ("MAP," and collectively, the
"Parties") jointly formed MAP/MAC, L.L.C., ("MAP/MAC") a Texas limited
liability company for the express purpose of purchasing, servicing,
and selling nonperforming mortgage notes and properties. Pursuant to
the terms of the operating agreement for this entity, MAP/MAC issued a
Promissory Note to the minority interest partner, MAP for $233,000.
The loan payable to the minority interest partner in the MAP/MAC,
L.L.C. joint venture consisted of non-interest bearing advances used
to purchase mortgage loan portfolios. Certain of the Company's
officers and stockholders have guaranteed repayment of fifty percent
(50%) of the initial loan advances of $233,000. This initial note was
due and payable no later than thirty (30) days after receipt of a
written demand by the payee, MAP.
Pursuant to the terms of the operating agreement of this entity, MAC
will periodically and from time to time issue distributable cash to
MAP consisting of proceeds from the sale of mortgage notes and
properties owned by MAP/MAC, net of all costs and fees incurred in the
acquisition, servicing and sale of such assets. By agreement of the
Parties, such distributable cash may be reinvested by MAP back into
MAP/MAC for the purchase of additional pools of mortgage notes. As of
March 31, 2007, MAP has elected to reinvest three profit distribution
payments back into MAP/MAC for a total non-interest bearing loan
payable amount of $1,320,136. Proceeds from these cash distribution
payments subsequently reinvested in MAP/MAC were used for the
acquisition of
F-23
Note 8 - Notes Payable (continued)
additional mortgage notes, which are in the process of being serviced
and sold. Pursuant to the terms of the MAP/MAC operating agreement, no
interim payments of principal are due prior to the sale of the
underlying assets. Upon sale of the underlying assets, MAC is
obligated to repay the non-interest bearing note, from proceeds of the
sale, and equally distribute remaining net profits, if any, to MAC and
MAP individually.
For all subsequent advances under this loan, including cash
distributions subsequently reinvested in MAP/MAC, and in the event
MAP/MAC does not fully repay and satisfy such advances with the
proceeds from the sale or other distribution of the related loan
portfolios, MAC has guaranteed repayment of fifty percent (50%) of the
shortfall.
Note 9 - Mortgages Payable
At March 31, 2007 the balance in this caption was comprised of the
following:
Installment note payable to Legacy Texas Bank, due $8,714
monthly beginning July 2006, interest at 2.75% above the Federal
Home Loan
Bank (FHLB) rate, maturing June 2016. $ 985,117
Other 70,288
-------------
Total 1,055,405
Less Current portion 24,500
-------------
$ 1,030,905
=============
The mortgage loan payable to Legacy Texas Bank (the "Bank") is
collateralized by certain rental real estate located in Dallas, Texas,
which comprises the Company's land, buildings and improvements in the
accompanying consolidated balance sheets, as well as the personal
guarantees of two of the Company's principal officers and
stockholders. The interest rate on this loan is an adjustable
F-24
Note 9- Mortgages Payable (continued)
rate which was fixed on June 1, 2006 and will be subsequently
recalculated, adjusted and fixed by the Bank every three (3) years
thereafter. From the inception of this loan (December 2005) through
June 1, 2006, the loan was payable interest only at 1% above a
specified prime rate.
Estimated principal installments due on all mortgage loans for each of
the five years subsequent to March 31, 2007 are as follows:
2008 24,500
2009 28,600
2010 31,500
2011 33,700
2012 35,900
Note 10 - Minority Interests
(Minority interests on the Company's consolidated balance sheets
represent the 50% ownership interest in the net assets of seven
subsidiaries: MAP/MAC L.L.C., Apple Canyon Capital L.L. C., Bluestone
Capital L.L.C., Canyon Ferry Capital L.L.C., Dutch Fork Capital
L.L.C., Elf Fork Capital L.L.C., and 999 Metromedia Venture, not owned
by the Company.)
Changes to minority interests for the period ended March 31, 2007
consisted of the following:
Balance, beginning of period $ 5,466,543
Minority interests in net earnings (losses)
of subsidiaries 95,114
Capital contributions from minority interests 550,000
Refund of capital contributions to minority interests (514,645)
Distributions to minority interests (24,080)
-----------
Balance, end of year $ 5,572,932
===========
F-25
Note 11 - Related Party Transactions
One of the Company's principal officers and stockholders made cash
advances of $60,574 to the Company under two unsecured loans, bearing
interest at 18%, during 2005, and additional loans of $15,512 in 2006
at an interest rate of 12%. All outstanding advances were repaid on
November 30, 2006. Interest expense on these loans amounted to $2,793
for the 3 months ended March 31, 2006.
MACC's two newly appointed directors have indirect ownership interests
in 50% of Dutch Fork Capital, L.L.C., a 50%-owned subsidiary of the
Company. The Company is the manager of Dutch Fork, and as such is
deemed to control the entity.
Note 12 - Income Taxes
The components of income tax (benefit) expense, on continuing
operations, for the three months ended March 31, 2007 and March 31, 2006 ,
respectively, are as follows:
Three Months Ended
March 31, March 31,
2007 2006
--------------- ---------------
Federal:
Current $ - $ -
Deferred - -
--------------- ---------------
- -
--------------- ---------------
State:
Current - -
Deferred - -
--------------- ---------------
Total $ - $ -
=============== ===============
The Company's income tax expense for the three months ended March 31,
2007 and March 31, 2006, respectively, differed from the statutory tax
rate of 34.0% as follows:
F-26
Note 12 - Income Taxes (continued)
Three Months Ended
March 31, March 31,
2007 2006
Statutory rate applied to income
before income taxes $(217,900) $(104,900)
Increase (decrease) in income taxes
resulting from:
State income taxes -- --
Other, including reserve for deferred tax
asset and application of net operating loss
loss carryforward 217,900 104,900
--------- ---------
--------- ---------
Income tax expense $ -- $ --
========= =========
Deferred tax assets and liabilities consisted of the following at March
31, 2007 and December 31, 2006:
March 31, December 31,
2007 2006
----------- -----------
Deferred tax assets
Net operating loss carryforwards $ 4,056,000 $ 3,327,000
Less valuation allowance (4,056,000) (3,327,000)
----------- -----------
Net Deferred Tax Asset $ -- $ --
=========== ===========
As of March 31, 2007, the Company had a net operating loss carry
forward of approximately $11,900,000 to offset future taxable income.
Subject to current regulations, this carryforward will begin to expire
in 2007. Due to the reverse acquisition transaction with MAC in May
2005, the usage of the Company's net operating loss carryforward will
be severely limited. The amount and availability of the net operating
loss carryforwards may be subject to limitations set forth by Section
338 of the Internal Revenue Code. Factors such as the number of shares
ultimately issued within a three year look-back period; whether there
is a deemed more than 50 percent change in control; the applicable
long-term tax exempt bond rate; continuity of historical business; and
subsequent income of the Company all enter into the annual computation
of allowable annual utilization of the carryforwards.
A 100% valuation allowance has been established related to the
deferred tax asset resulting from the net operating loss carryforward,
reflecting the uncertainty of the future realization of this asset.
F-27
Note 13 - Common Stock Transactions
On May 14, 2004, the stockholders approved an amendment to the
Company's Articles of Incorporation, which increased the par value of
each share of common stock from $0.0001 per share to $0.001 per share
and decreased the number of authorized common shares from 175,000,000
shares to 50,000,000 shares. The stockholders also approved a
one-for-two hundred fifty (1:250) reverse stock split. Pursuant to
authorization by the Board of Directors, the reverse stock split
became effective for stockholders of record as of November 22, 2004.
Stock certificates representing pre-split denominations could be
exchanged for stock certificates representing the post-split
denominations, at the election of stockholders, as mandatory
certificate exchange was not required. Common stock and additional
paid-in capital at December 31, 2004 were restated to reflect this
split. The number of common shares issued at December 31, 2004, after
giving effect to the split, was determined to be 664,007 (165,853,058
shares issued before the split), including 595 shares estimated to be
issued to fractional stockholders.
In connection with a Business Combination Agreement between the
Company and MAC on May 10, 2005 (See Note 3), the Company issued
12,000,000 post- split shares to the MAC shareholders in exchange for
all of the issued and outstanding shares of MAC. As the acquisition of
MAC represented an exchange of equity interests between entities under
common control, the equity interests issued were recorded at
approximately $257,000, representing the net book value of MAC on a
historical basis as of January 1, 2005, the beginning of the period in
which the transaction occurred.
On June 23, 2005, the Company issued 100,000 post-split shares for
legal services pursuant to a certain Legal Services Compensation
Agreement.
Note 14 - Series A Preferred Stock Financing Agreement
On November 30, 2006, the Company entered into a Series A Preferred
Stock and Common Stock Warrant Purchase Agreement ("Purchase
Agreement") with W.C. Payne Investments, L.L.C. and FAX/MACC, L.P.
(the "Investors") pursuwhich the Company sold to Investors 1,500,000
shares of the Company's Series A Preferred Stock at a price of $1.00
per share, as well as warrants to purchase 9,113,387 shares of the
Company's common stock at an exercise price of $0.01 per warrant
share. Under the terms of the Purchase Agreement, the Investors
purchased 1,500,000 of the preferred shares on November 30, 2006, with
an additional 1,500,000 preferred shares to be purchased in three
increments of 500,000, conditioned on the satisfaction of certain
financial benchmarks set forth in the Purchase Agreement on March 31,
June 30, and September 30, 2007.
F-28
Note 14 - Series A Preferred Stock Financing Agreement (continued)
Holders of the preferred stock are entitled to receive cumulative cash
dividends, out of any assets legally available, at the rate of 10% per
annum (of the original per share issue price of $1.00) per share of
preferred stock, accrued and compounded on a quarterly basis. Such
dividends will have preference over any payment or declaration of a
dividend or other distribution on the Company's common stock. The
preferred stock is also subject to a mandatory conversion provision
whereby, upon the determination that a holder of the preferred stock
is a "Non-Participating Holder", as defined in the Purchase Agreement,
any preferred stock of such holder will be automatically converted
into shares of common stock on a 1:1 basis.
The Company did not achieve its benchmarks for the period ended March
31, 2007; however, the Investors waived the benchmarks for this period
and during April the Company received the first of the three
subsequent tranches of $500,000 in cash as contemplated by the
November 30, 2006 financing transaction.
Effective November 30, 2006, in connection with the Purchase
Agreement, the Company entered into a Series A Preferred Stock
Investors' Rights Agreement ("Investors' Rights Agreement") with the
Investors. Pursuant to the Investors' Rights Agreement, the Company
agreed to file a registration statement covering the resale of all
issued shares of the Company's common stock and shares of common stock
issuable upon conversion or exercise of any convertible securities,
warrants, or options that are held by the Investors to be effective
within eighteen (18) months of the effective date of the Investors'
Rights Agreement; and the Company also granted piggy-back registration
rights with respect to the resale of any issued shares of common
stock, or shares of common stock issuable upon conversion or exercise
of any convertible securities, warrants or options held by the
Investors but not covered by the above-mentioned registration
statement.
The Company also entered into a Stockholders' Agreement between the
Company, the Investors, and the Company's three principal common
stockholders ("Stockholders") which provides, among other things:
a) The Investors and the Company will have first offer rights,
providing that, with limited exceptions, should a Stockholder
desire to transfer any of his shares, such Stockholder must first
offer shares to the Investors and then to the Company.
b) The Investors are to be granted a co-sale right, giving them the
option to include their shares in any proposed sale of common
F-29
Note 14 - Series A Preferred Stock Financing Agreement (continued)
stock that, when aggregated with all other transfers of common
stock, represents at least ten percent (10%) of the outstanding
shares of the Company's common stock.
c) Any Investor or group of Investors desiring to transfer to a
third party substantially all of the shares and common stock
equivalent shares held by them, which shares of common stock
equivalent shares represent at least fifty percent (50%) of each
of their respective classes of the Company's stock, hold a
compelled sale right providing that, in the case of such a sale,
any non-selling minority stockholders will, at the election of
the selling Investors, be required to transfer their shares to
the third-party purchaser upon the same terms and conditions as
the selling Investors.
d) All Stockholders and Investors are to be granted preemptive
rights, providing that, with limited exceptions, if at any time
the Company proposes to issue and sell any common stock, the
Company must first offer such common stock to each Stockholder
and Investor.
Note 15 - Incentive Plan
In October 2006, the stockholders of the Company adopted the
Mortgage Assistance Center Corporation 2006 Equity Incentive Plan
(the "Plan"), which allows the Company to grant stock options,
restricted stock and performance awards to officers, directors,
key employees and consultants. The Plan will be administered by
the Company's board of directors or committees thereof. Subject
to adjustment as provided in the Plan, the maximum aggregate
number of shares that may be issued under the Plan is 4,250,000
shares of common stock, provided, however, that (i) the aggregate
number of shares that may be issued as restricted stock may not
exceed 1,062,500 and (ii) the aggregate number of shares that may
be issued under statutory stock options may not exceed 2,000,000,
and (iii) the aggregate number of shares that may be issued under
non-statutory stock options may not exceed 1,187,500. Subject to
adjustment as provided in the Plan, the aggregate number of
shares that may be issued to any individual under the Plan,
whether issued under options or restricted stock, shall not
exceed 1,000,000. The Plan will continue in effect until
terminated; however, no incentive stock options or other awards
will be granted under the Plan after 10 years from the date the
Plan was approved by the Company's stockholders.
F-30
Note 15 - Incentive Plan (continued)
The per share exercise price for shares to be issued pursuant of
the exercise of an option will be determined by the Board;
however, each option will be granted at an exercise price equal
to no less than the fair market value of a share on the date of
grant, except that the case of an incentive stock option granted
to an employee who, at the time the option is granted, owns stock
possessing more than 10 percent of the total combined voting
power of all classes of stock of the Company or any Parent or
Subsidiary, each incentive stock option shall be granted at an
exercise price equal to no less than 110% of the fair market
value of a share on the date of grant.
Under the provisions of the Plan, and pursuant to Board of
Directors approval on November 28, 2006, the Company granted
statutory options (e.g. incentive stock options) for 223,400
shares of common stock to various employees in consideration for
employment with and services provided to the Company. These
options were issued with an exercise price of $0.85 which was the
closing trading price per share on the date of the grant. These
options were 100% fully vested and exercisable at the date of the
grant, and may be exercised at any time through November 28,
2011. The fair value of these options was determined by a
commercially available software product utilizing a proven
trinomial lattice valuation methodology. Based on this analysis,
the value of the options at grant was determined to be
approximately $0.37. Allowing for potential future forfeitures, a
non-cash compensation expense of $83,571 was recorded for 2006.
Under the provisions of the Plan, and pursuant to Board of
Directors approval on November 28, 2006, the Company granted
non-statutory options (e.g. non- qualified stock options) for
834,800 shares of common stock to various individuals in
consideration for prior employment and / or consulting services
provided to the Company. These options were issued with an
exercise price of $0.85 which was the closing trading price per
share on the date of the grant. These options were 100% fully
vested and exercisable at the date of the grant, and may be
exercised at any time through November 28, 2011. The fair value
of these options was determined by a commercially available
software product utilizing a proven trinomial lattice valuation
methodology. Based on this analysis, the value of the options at
grant was determined to be approximately $0.38. Allowing for
potential future forfeitures, a non-cash compensation expense of
$318,466 was recorded for 2006.
In connection with three year employment agreements entered into
between the Company and two of its principal officers and
stockholders on November 30, 2006, the officers were granted
incentive stock options for 600,000 shares of common stock under
the Plan. One third of such incentive stock options will Note 15
- Incentive Plan (continued)
F-31
become exercisable upon each successive anniversary date of the
employment agreements, provided that the officers are employed by
the Company on each such anniversary date. The fair value of
these options was determined by a commercially available software
product utilizing a proven trinomial lattice valuation
methodology. Based on this analysis, the value of the options at
grant was determined to be approximately $0.45. All non-cash
compensation expense for this issuance will occur in future years
pursuant to vesting.
The company entered into two year employment agreements upon the
hiring of a new President and Chief Financial Officer in February
and March 2007, respectively. The new officers were granted
incentive stock options for 1,750,000 shares of common stock
under the Plan, with one third of such options exercisable upon
execution of the employment agreements, and the remaining two
thirds becoming exercisable, one third upon each successive
anniversary date, provided that the officers are employed by the
Company on each anniversary date. The fair value of these options
was determined by a commercially available software product
utilizing a proven trinomial lattice valuation methodology. Based
on this analysis, the weighted-average value of the options at
grant was determined to be approximately $0.43. Allowing for
potential future forfeitures, non-cash compensation expense of
$246,371 was recorded for the quarter ended March 31, 2007, with
the remaining compensation expense to occur in future years
pursuant to vesting.
Note 16 - Common Stock Warrants
On November 30, 2006, the Company entered into a Series A
Preferred Stock and Common Stock Warrant Purchase Agreement (See
Note 14), in which warrants to purchase 9,113,387 shares of the
Company's common stock at an exercise price of $.01 per share
were issued to the Investors. The warrants may be exercised at
any time through November 30, 2016. The fair value of these
warrants was determined by a commercially available software
product utilizing a proven trinomial lattice valuation
methodology. Based on this analysis, the value of the warrants at
grant was determined to be $1.00 per warrant share. In addition
to the above warrants, the Company issued "Back-End Warrants" to
the Investors to purchase 2,700,262 shares of the Company's
Common stock at an exercise price of $0.01 per share. However,
the Back-End warrants are only exercisable to the extent that the
Company fails to achieve certain financial benchmarks as of
December 31, 2007.
In addition to the warrants described above, the Company issued
150,000 warrants to the Investors in connection with their
appointment to the Company's
F-32
Note 16 - Common Stock Warrants (continued)
board of directors. These warrants have an exercise price of $.39
per share, which price may be adjusted with the terms of the
warrants. The Company ascribed a value of $0.62 per warrant share
to these warrants using previously noted trinomial lattice
valuation model. These warrants expire November 30, 2016.
The Company also issued warrant certificates for 467,000 shares
of common stock to its legal counsel and for 150,000 shares to a
financial advisor, both at an exercise price of $0.39 per share,
subject to adjustment in accordance with the terms of the
warrants. The Company valued these warrants at $0.62 per warrant
share using the trinomial lattice valuation methodology and
recorded them as a component of additional paid-in-capital. These
warrants expire on November 30, 2011.
At March 31, 2007, the Company had an obligation to a financial
consultant pursuant to a June 19, 2006 Consulting Agreement for
an equity compensation fee of $96,856, representing five percent
(5%) of the amount of monies loaned to the Company by lenders
procured by the consultant. The equity compensation fee is to be
converted to a share basis according to the closing trading price
per share on the date each individual funding tranche closes and
paid in the form of five-year common stock purchase warrants of
the Company with an aggregate fair market value equivalent to the
equity compensation fee earned. The warrants when issued will
have an exercise price of $.10 per share. The warrant
certificates for this obligation have not yet been issued.
Note 17 - Share-Based Compensation
At March 31, 2007, the Company had granted stock options for a
total of 3,508,200 shares of common stock under its 2006 Equity
Incentive Plan and had also granted common stock purchase
warrants for 914,674 shares (See Notes 15 and 16). All
outstanding options and warrants were granted on or after
November 28, 2006. Any previous agreements with employees, former
employees or consultants were cancelled. The total compensation
cost that has been charged against income for all such options
and warrants granted was $248,332 for the quarter ended March 31,
2007 and $992,182 for the year ended December 31, 2006. The
share-based compensation expense increased the basic loss per
share by $0.02 for the quarter ended March 31, 2007. The result
reflects no related tax benefit due to the Company's full
valuation allowance on its deferred tax assets. As of March 31,
2007, there was $823,341 of compensation expense related to
non-vested share awards that is expected to be recognized over a
period of three years.
F-33
Note 17 - Share-Based Compensation (continued)
All of the options and warrants granted, with the exception of
the options for 2,450,000 shares under employment agreements with
four officers and an employee, were fully vested at the grant
date.
The lattice (trinomial) option-pricing model was used to estimate
the fair value of options and warrants at grant date in 2006 and
2007. The weighted-average grant date fair value of options and
warrants granted in 2006 and 2007 and the significant assumptions
used in determining the underlying fair value of each option or
warrant grant, on the date of the grant were as follows:
Weighted-average grant date
fair value of options and warrants
granted $0.80
Assumptions:
Risk-free rate of return 5.0%
Expected life 5 years
Weighted-average volatility 91.7%
Expected dividend yield 0.0%
The risk-free rate of return is estimated based on the yield
curve of Constant Maturity Treasury ("CMTs") as published by the
U.S. Treasury Department. These rates are projected over a range
of future maturity dates based on the closing market bid yields
on actively traded Treasury securities in the over-the-counter
market.
The Company's assumed dividend yield of zero is based on the fact
that it has never paid cash dividends and has no present
intention to pay cash dividends.
Since adoption of SFAS 123(R) on January 1, 2006, the expected
share-price volatility assumption used by the Company has been
based on a blend of implied volatility in conjunction with
calculations of the Company's historical volatility as determined
by various mathematical models for calculating volatility. These
values are then adjusted over a five-year period coinciding with
the anticipated life of the options. Based on counsel provided by
a third-party consultant, the Company believes this methodology
will result in the best estimate of expected volatility.
The lattice option-pricing model also allows assumptions for the
sub-optimal exercise of vested shares prior to the full
expiration term of the option.
F-34
Note 17 - Share-Based Compensation (continued)
The Company's assumption for this parameter has been based on published
research which establishes the sub-optimal exercise event as a multiple
of the exercise price of vested shares.
Note 18 - Commitments
Consulting Contracts:
The Company had contracted with RJ Falkner & Company, Inc. to
provide consulting services in regard to preparation of a
Research Profile on the Company, distribution of such reports,
identification of potential institutional investors and other
matters related to investor relations. The contract was for
twelve months, and was to continue monthly after January 15, 2006
unless cancelled by either party. Under the terms of the
contract, RJ Falkner & Company, Inc. was to be compensated $3,000
monthly and issued 50,000 shares of MACC common stock. MACC had
agreed to register these shares with the SEC upon the
registration of any other shares or within twenty-four months,
whichever occurred first. This contract has been terminated and
the parties are engaged in a current legal proceeding to achieve
a resolution. The potential amount of any likely settlement or
legal remedy is not anticipated to be a materially significant
amount.
Mortgage Assistance Center Corporation signed a Letter Agreement
dated November 29, 2006 with Michael Caolo & Associates,
Attorneys and Counselors ("Caolo") as a non-exclusive legal and
business advisor and consultant in the position of General
Counsel for MACC from the date of the Letter Agreement through
the calendar year 2007 to provide legal and business advice,
counsel and services in connection with the coordination of all
legal matters of MACC, including coordination with special
securities counsel for S. E. C. reporting requirements, and
including but not limited to possible private placements,
mergers, consolidations, recapitalizations, acquisitions or
purchases of assets or equity interests, or similar transactions.
The Letter Agreement can be automatically renewed after December
2007 on the same basis unless either party provides thirty days
prior written notice of termination to the other party. For
services rendered, MACC agreed to pay Caolo a monthly retainer
fee of $6000 per month during the term of this agreement. In
consideration for the effort expended, the quality services
rendered, the results achieved and the new resources developed
for MACC, Caolo is entitled to additional compensation of equity
in MACC ("Equity Fee") in the form of a five year common stock
purchase warrant for four hundred sixty-seven thousand (467,000)
shares of common stock of MACC for no additional consideration
other than an exercise
F-35
Note 18 - Commitments (continued)
Consulting Contracts: (continued)
price of fair market value to be paid by Caolo whenever such
common stock purchase warrant is exercised. The Letter Agreement
establishes that this common stock purchase warrant for 467,000
shares of common stock of MACC is partially being made in lieu of
and as a replacement for that certain previous common stock
purchase warrant for 317,000 shares of common stock of MAC which
was, through mutual mistake, erroneously set forth in the
previous Agreement dated September 1, 2005, between Michael Caolo
& Associates and MAC, the subsidiary, instead of MACC, the parent
corporation, which was the intended proper party.
On November 27, 2006, the Company executed a Letter Agreement to
retain Parkwood Advisors, L.L.C. ("Parkwood") as a non-exclusive
financial and business advisor to MACC. Scope of the consulting
services contemplated under this agreement include providing
counsel and services to support the turnaround leadership of
MACC; capitalization and financing; use of cash and use of
investment proceeds; business plan and financial projections; SEC
filings; and other special projects related to supporting the
growth of the business including M&A, compliance, and internal
business process improvements as mutually agreed. This Agreement
established a term commencing on December 1, 2006, through
December 31, 2007, unless either party provides thirty days prior
written notice of termination to the other party. For services
rendered MACC will pay Parkwood a monthly retainer of three
thousand dollars ($3000) per month. In consideration for the
effort expended, the quality services rendered and the results
achieved, Parkwood shall be entitled to additional compensation
of equity in MACC ("Equity Fee") in the form of a five year
common stock purchase warrant for one hundred fifty thousand
(150,000) shares of common stock of for no additional
consideration other than an exercise price of fair market value
to be paid by Parkwood whenever such common stock purchase
warrant is exercised. The Letter Agreement establishes that this
common stock purchase warrant for 150,000 shares of common stock
of MACC is partially being made in lieu of and as a replacement
for that certain previous common stock purchase warrant for
100,000 shares of common stock of Mortgage Assistance Center
Corporation which was set forth in the previous Letter Agreement
dated May 5, 2006, between Parkwood Advisors, LLC and MACC.
F-36
Item 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto, and other financial
information included elsewhere in this Form 10-QSB. This report contains
forward-looking statements that involve risks and uncertainties. Actual results
in future periods may differ materially from those expressed or implied in such
forward-looking statements as a result of a number of factors, including, but
not limited to, the risks reported under the heading "Risk Factors" in the
Company's annual report Form 10-KSB for the year ended December 31, 2006.
Business Overview:
On May 10, 2005, Mortgage Assistance Center Corporation ("MACC" or the
"Company") entered into a Business Combination Agreement with Mortgage
Assistance Corporation ("MAC"), a Texas corporation. MAC became a wholly owned
subsidiary of MACC upon MACC's complete acquisition of all MAC shares in August
2005. MACC buys, sells and manages distressed single-family real estate and
non-performing mortgages secured by single-family residential real estate in the
secondary market in the United States through its subsidiary, MAC.
MAC purchases non-performing, charged-off, sub-prime first and second lien
mortgages. These mortgages are secured by real estate, and are typically 90 days
to 2 years past due at the time of purchase. These mortgages are purchased in
pools or portfolios of assets from major lending institutions and usually at a
substantial discount to the outstanding principal balance. This business model
enables MAC to provide assistance to borrowers and to provide liquidity to
lenders that need to remove non-performing loans from their books in order to
restore their lending power or comply with government rules regarding
non-performing loans.
The Company generates revenue through three primary activities including: (a)
immediate resale of its mortgage notes to other investors; (b) rehabilitating
the note to performing status and reselling it to a secondary investor; and (c)
foreclosing or obtaining a deed-in-lieu of foreclosure on properties that
continue to be non-performing and then either renting or selling the real
estate. Historically, the proportion of the Company's revenue generating
activities has been heavily weighted toward the immediate resale of mortgage
notes to other investors. Over time and with increased capitalization, the
Company's expects its revenue mix will include more instances of reforming
notes, collecting "short-sale" payments where the owner-occupant successfully
pays off the note, and foreclosure activity. The Company believes that current
and future market conditions signal an increasing rate of foreclosures of
residential properties. Accordingly, the Company anticipates increased business
opportunities from this segment.
Secondarily, MAC generates additional revenue via servicing fees charged to its
various partnerships through which MAC maintains an equity ownership position in
a commonly owned note pool. After the Company acquires a loan or pool of loans,
the process of resolution begins with the borrower, changing the status of the
non-performing loans into either performing loans or foreclosing on the real
estate. The Company may resell a portion of its re-performing loans in
various-sized loan pools. The Company may foreclose on certain properties when
loans held in its portfolio continue to be in default. As a result, the Company
will be engaged in owning single-family dwellings and possibly other real
estate. Such foreclosed real estate may be held, rehabilitated where necessary,
and sold. The Company has historically sustained recurring losses from
operations and had an accumulated stockholders' deficit as of March 31, 2007.
The Company has historically financed the acquisition of its loan pools through
various profit participation entities directly with investors and by issuing
promissory notes to individuals and investment entities. These circumstances
create substantial risk regarding the Company's ability to continue as a going
concern and are discussed in this section and elsewhere in this Form 10-QSB.
Page 1 of 14
Liquidity and Capital Resources:
As of March 31, 2007, the Company lists cash on hand in banks of $791,447
compared to cash on hand of $1,205,120 reported as of December 31, 2006. Total
assets of $9,355,156 are recorded as of March 31, 2007, compared to total assets
of $9,553,085 reported as of December 31, 2006.
Of the total assets of MACC, the portion consisting of portfolio assets (which
includes purchased sub-prime and non-performing mortgage notes and other
foreclosed property which the Company subsequently reforms or resells) is listed
at the total actual acquisition cost basis, plus accrued servicing costs and
payments, if any. As of March 31, 2007, the Company reports portfolio assets of
$6,946,760, net of an impairment reserve of $355,883. This represents a slight
increase of $148,251 over the net portfolio assets reported as of December 31,
2006. On a fully consolidated basis, if MACC's total portfolio assets were to be
stated at an estimated fair market value of the underlying properties, the
Company anticipates that these properties would have an estimated fair market
value of approximately $17,400,000.
As a function of its ongoing operations, the Company acquired various pools of
mortgage notes from various sources throughout the year. These acquisitions
included both mortgage notes and properties on a real estate owned basis
("REOs") acquired for the Company's own portfolio as well as mortgage notes and
REOs acquired directly by the Company's various investment partnerships for
their respective portfolios. In total, these combined acquisitions during the
first calendar quarter of 2007 included a total of 25 mortgage notes or REOs.
The total aggregate initial acquisition costs, including closing costs and
administrative fees, for mortgage notes and REOs acquired during the quarter
were approximately $770,000.
Based on current market conditions and anticipated future market conditions, the
Company expects an increasing number of large pools of mortgage notes and
foreclosed properties to become available for purchase over the next several
years. The Company's ability to participate at a meaningful level in this market
is dependent on adequate capitalization.
In addition to the Company's portfolio assets maintained for sale, the Company
also lists property and equipment including land, building improvements, and
office furniture and equipment of $1,357,388, net of accumulated depreciation of
$85,581. Going forward, the Company anticipates investing approximately $200,000
during the second calendar quarter for capital expenditures associated with its
move into a new corporate office (including certain information technology
improvements) and expects to invest an additional $200,000 during the remainder
of the year for upgrades to its information systems.
As of March 31, 2007, the Company reported total liabilities of $10,426,716,
including total current liabilities of $2,044,004; long-term debt of $2,809,780;
and minority interests in investment partnerships of $5,572,932. The $5,572,932
in minority interests reflects the fifty percent (50%) ownership interest in the
various joint ventures, single-purpose entities or profit participation
agreements that the Company actively manages and materially participates in. The
accounting treatment for these minority interests is discussed in greater detail
in the Notes to the Financial Statements and elsewhere in this Form 10-QSB.
Included in the current liabilities of $2,044,004 are two, non-interest bearing
loans from minority interest partners in one of the Company's investment
partnerships. First, $1,320,136 of the total current notes payable amount is
attributed to MAP/MAC, L.L.C. Principal from this note is to be repaid through
the distribution of net proceeds derived from the sale of mortgage notes and
properties owned by this entity. This note does not have a set maturity date and
the Company anticipates that the principal will be repaid over time through
normal operations. Second, an additional $42,179 of the total current notes
payable amount is attributed to a similarly structured profit participation
agreement with an individual investor who will be repaid from the proceeds of
Page 2 of 14
sales of the underlying jointly-owned assets when and if these are sold. This
second note is due during 2007.
Other current liabilities reported as of March 31, 2007, include $24,500 for the
current portion of mortgages payable; $285,352 in accounts payable to trade
vendors and others; $106,751 in accrued fees and wages; $96,856 in accrued
stock-based compensation; and $168,230 in other accrued liabilities.
Long-term debt consists of notes payable to individuals and others, and
mortgages payable. The long-term notes payable include promissory notes issued
for the purpose of acquiring pools of non-performing mortgage notes and
properties. Historically, the Company has financed the purchase of its mortgage
notes and properties through two primary means: first, through the issuance of
debt to individuals or small investment partnerships; and second, by forming and
materially participating in various investment partnerships. Pursuant to the
terms of the Company's Series A Preferred Stock financing transaction described
in the Notes to the Financial Statements and elsewhere in this Form 10-QSB, the
Company successfully completed the restructuring or elimination of certain
promissory notes and other short-term loans with current or past-due maturities.
This restructuring of the Company's prior promissory notes, as well as the
continued issuance of new long-term promissory notes, results in a balance of
$1,778,875 in long-term notes payable as of March 31, 2007. These notes have
various maturity dates, the earliest of which occurs in September 2008. A
detailed schedule of these long-term notes and their respective terms is
provided in the Notes to the Financial Statements section of this Form 10-QSB.
As further described in Note 9 in the Financial Statements, the Company reports
total mortgages payable of $1,030,905, which includes a long-term portion
consisting of $985,117 for the remaining mortgage balance due on the Metromedia
property; a $70,288 mortgage balance due for an individual residential property
the Company currently owns and intends to sell; less, a current portion of
mortgages payable of $24,500.
The equity section of the balance sheet shows the effect of the recent Series A
Preferred Stock financing, with 1,500,000 shares of Series A Convertible
Preferred Stock ("Preferred Stock") issued and outstanding corresponding to a
preferred capital stock entry of $1,500. The Company also has a total of
12,725,124 shares of common stock issued and outstanding as of March 31, 2007,
with a corresponding common capital stock entry of $12,726; and additional
paid-in capital of $2,728,836. As of March 31, 2007, and as a result of the
continued operating losses during the quarter, the Company shows a retained
earnings deficit of ($4,159,082) and a total stockholders' equity deficit of
($1,071,560), bringing the total liabilities and stockholders' equity balance to
$9,355,156.
Management's Plans to Raise Capital:
The continued operations of the Company will be largely influenced by its
ability to raise capital for the acquisition of mortgage pools and to provide
working capital to fund operating expenses of the Company until the Company can
achieve consistent earnings performance. As a fundamental part of the Company's
financing strategy, the Company entered into a Series A Preferred Stock and
Common Stock Warrant Purchase Agreement ("Purchase Agreement") on November 30,
2006 with W.C. Payne Investments, L.L.C. and FAX/MACC, L.P. (the "Investors")
pursuant to which the Company sold to Investors 1,500,000 shares of Preferred
Stock at a price of $1.00 per share, as well as warrants to purchase 9,113,387
shares of the Company's common stock at an exercise price of $0.01 per warrant
share. Under the terms of the Purchase Agreement, the Investors purchased
1,500,000 shares of Preferred Stock on November 30, 2006, with an additional
1,500,000 preferred shares to be purchased in three increments of 500,000 shares
each, conditioned on the satisfaction, on March 31, June 30, and September 30,
2007, of certain financial benchmarks set forth in the Purchase Agreement.
Holders of the Preferred Stock are entitled to receive cumulative cash
dividends, out of any assets legally available, at the rate of 10% per annum (of
Page 3 of 14
the original per share issue price of $1.00), accrued and compounded on a
quarterly basis. Such dividends will have preference over any payment or
declaration of a dividend or other distribution on the Company's common stock.
The Company did not achieve its benchmarks for the period ended March 31, 2007;
however, the Investors waived the benchmarks for this period and during April
2007, the Company received the first of the three subsequent tranches of
$500,000 in cash as contemplated by the November 30, 2006 financing transaction.
The Company continues to explore opportunities to secure additional sources of
debt financing as a means of more cost effectively acquiring pools of mortgage
notes and foreclosed properties. The Company anticipates that it will continue
to depend on external financing in the foreseeable future, and it cannot be
assured that adequate financing will be available at all or at terms acceptable
to management. These conditions are described in more detail in this section and
elsewhere throughout this Form 10-QSB and previous filings.
Previously, on October 20, 2005, the Company executed two agreements with
Mercatus & Partners, L.P. providing for the purchase of a combined total of
1,532,568 shares of common stock (currently held in escrow by the investment
banking firm of Brown Brothers Harriman) and the combined gross proceeds to the
Company of $2,000,000 through a complex overseas transaction involving a number
of European banking institutions. This agreement is subject to and contingent
upon a substantial number of conditions beyond the control of the Company, and
as of the date of this filing, the Company has received no funding from these
agreements. Consequently, the Company considers these transactions to be void
for reasons of the non-performance of Mercatus & Partners, L.P., and the
Company's legal counsel has initiated the termination of these agreements.
Results of Operations:
Revenues
For the quarter ended March 31, 2007, the Company recorded gross operating
revenues of $1,338,775. This includes total sales of portfolio assets of
$1,119,449; servicing fees and commissions from affiliates and others of
$114,396; rental income of $53,004; and other miscellaneous income of $51,926.
The Company reports net operating revenue by deducting the cost of portfolio
assets sold from gross operating revenues. For the quarter ended March 31, 2007,
the Company lists $658,781 in net operating revenues. This compares to gross
operating revenues for the same quarter in the prior year ended March 31, 2006,
of $246,985 and net operating revenues of $90,802.
Operating Expenses
The Company records $1,043,601 in total operating expenses for the quarter ended
March 31, 2007. Total salaries, wages and contract labor expenses for the first
calendar quarter of 2007 were $598,034 compared to $214,493 recorded during same
calendar quarter ended March 31, 2006. This increase is driven primarily by the
addition of key management team members and by the non-cash compensation expense
recognized by the Company for various grants of options awarded to key
management employees and contractors under the Company's Equity Incentive Plan
and as disclosed in the Notes to the Financial Statements and elsewhere in this
Form 10-QSB. Going forward the Company anticipates the need to hire additional
key sales and operations personnel to drive growth and increase productivity.
Other miscellaneous operating expenses recorded for the quarter include
depreciation and amortization expense of $12,113, and a charge for bad debts
expense of $107,594.
Other selling, general and administrative expenses for the quarter ended March
31, 2007, were $325,860 compared to $155,335 for the first calendar quarter of
2006. This increase is driven primarily by the non-cash compensation expense
Page 4 of 14
recognized by the Company for various grants of warrants issued to advisors,
consultants and Directors as disclosed in the Notes to the Financial Statements
and elsewhere in this Form 10-QSB. This increased SG&A expense also reflects the
impact of additional transaction-related costs incurred pursuant the Series A
Preferred Stock financing and scaling of other normal and customary SG&A
expenses.
As a result, the Company recorded an operating loss for the calendar quarter
ended March 31, 2007, of ($384,820) compared to an operating loss of ($284,669)
for the calendar quarter ended March 31, 2006.
Other Income and Expense
The Company reports $9,949 in interest and other income; along with ($73,492) in
interest expense and ($97,357) in other nonrecurring expenses, for a net total
other income and expense of ($160,900) for the calendar quarter ended March 31,
2007.
Net Loss
The Company records a loss before minority interests and income taxes of
($545,720) and an additional loss of ($95,114) attributed to the minority
interests' share of net income of investment partnerships and joint ventures for
the quarter, for a net loss of ($640,834) during the first calendar quarter of
2007. This compares to a net loss of ($308,489) during the first calendar
quarter of 2006. On a weighted-average basis of the number of shares of common
stock outstanding for the year, this equals a net loss per share of ($.05)
during the first calendar quarter of 2007, compared to a net loss per share of
($.02) during the first calendar quarter of 2006.
Cash Flows:
During the three-month period ended March 31, 2007, the Company lists net cash
used by operating activities of ($527,800). This includes a net loss for the
quarter of ($640,834) plus total adjustments of $113,034 to reconcile net loss
to net cash provided by or (used by) operating activities, as follows: increase
in portfolio assets, ($148,251); increase in prepaid expenses and other assets
of ($61,706); a decrease in accrued fees, wages and other accrued liabilities of
($76,619); depreciation, $12,113; non-cash stock-based compensation, $248,332;
profit in minority interests in subsidiaries' net earnings of $95,114; and an
increase in accounts payable to trades and others of $44,051.
During this period, the company reports net cash used by investing activities of
($17,900) which was the result of various purchases of property and equipment
for use in operating the business.
During the three-month period ended March 31, 2007, the Company lists net cash
provided by financing activities of $132,027. This includes the following
sources of cash from financing activities: the proceeds from issuance of debt to
individuals and others in the amount of $385,000; and total capital
contributions from minority interests ($550,000). This includes the following
uses of cash from financing activities: repayments of debt to individuals and
others, ($258,893); refund of capital contributions to minority interests of
($514,645); distributions to minority interests, ($24,080); and repayments of
mortgage loans, ($5,355).
The sources and uses of cash from operating, investing and financing activities
result in a net decrease in cash of ($413,673) for the calendar quarter ended
March 31, 2007, and results in total cash at the end of the period of $791,447.
Critical Accounting Policies and Estimates:
Page 5 of 14
Management's discussion and analysis of results of operations and financial
condition are based on the Company's consolidated financial statements that have
been prepared in accordance with accounting principles generally accepted in the
U.S. The preparation of these financial statements requires that management make
estimates and assumptions that affect the amounts reported for revenues,
expenses, assets, liabilities and other related disclosures. Actual results may
or may not differ from these estimates. These key accounting policies include
revenue recognition, income taxes, insurance, stock options, and valuation of
long-lived assets.
Revenue Recognition:
The Company recognizes revenue from real estate and mortgage product sales when
title and risk passes to the buyer and when the conditions to the sales contract
are satisfied. Provisions for certain sales incentives, trade promotions and
discounts to customers are accounted for as reductions in determining sales in
the same period the related sales are recorded.
Long-Lived and Intangible Assets:
The Company assesses changes in economic conditions and makes assumptions
regarding estimated future cash flows in evaluating the value of the Company's
inventory of notes, real estate, fixed assets, goodwill and other non-current
assets. As these assumptions and estimates may change over time, it may or may
not be necessary for the Company to record impairment charges. Under Generally
Accepted Accounting Principles, the value of portfolio assets on the balance
sheet is recorded based on actual acquisition costs, not the face value of the
unpaid principle balance of the mortgage notes receivable or value of the
underlying real estate. If assets are deemed impaired, those assets will be
discounted to the net realizable value. Since the Company's business model
consists of buying non-performing assets at a substantial discount to the face
value of the existing mortgage note or property, the acquisition cost basis of
the Company's portfolio assets has the effect of substantially understating the
estimated true market value of the assets when sold at retail or wholesale
values.
Insurance:
The Company carries directors' and officers' insurance in addition to standard
liability and casualty insurance for the Company and its offices. Property
hazard insurance on other real estate is carried on properties that the Company
deems significant, but is not carried on certain low value properties where it
is uneconomic to do so.
Off Balance Sheet Arrangements:
Not applicable.
Quantitative and Qualitative Disclosures about Market Risk:
The Company does not issue or invest in financial instruments or their
derivatives for trading or speculative purposes. The operations of the Company
are conducted primarily in the United States, and, are not subject to material
foreign currency exchange risk. Although the Company has outstanding debt and
related interest expense, market risk of interest rate exposure in the United
States is currently not material.
Item 3. Controls and Procedures
Page 6 of 14
As of the end of the reporting period, March 31, 2007, the Company carried out
an evaluation, under the supervision and with the participation of management,
including the Company's Chief Executive Officer and the Chief Financial Officer,
of the effectiveness of the design and operation of the disclosure controls and
procedures pursuant to Rule 13a-15(e) of the Securities Exchange Act of 1934
(the "Exchange Act"), which disclosure controls and procedures are designed to
insure that information required to be disclosed by a company in the reports
that it files under the Exchange Act is recorded, processed, summarized and
reported within required time periods specified by the SEC's rules and forms.
Based upon that evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that the disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company required to
be included in the Company's period SEC filings. There were no changes in the
Company's internal control over financial reporting during the three months
ended March 31, 2007 that materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Management, including the Chief Executive Officer and Chief Financial Officer,
does not expect that the disclosure controls or internal controls over financial
reporting will prevent all errors or all instances of fraud. A control system,
no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system's objectives will be met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and any design may not succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures. Because of the inherent
limitation of a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not aware of any material legal proceeding to which, any
director, officer, partnership interest of the Company, or any owner of record
or beneficial owner of more than 5% of the Company common stock is a party to
and which would be adverse to the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
N/A
Item 3. Defaults Upon Senior Securities.
N/A
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
Page 7 of 14
Appointment of Chief Financial Officer
The Company has retained the services of Mr. Rick Coleman as its new Senior Vice
President and Chief Financial Officer. The Company and Mr. Coleman entered into
an employment agreement, effective March 1, 2007, pursuant to which Mr. Coleman
will receive an annual base salary of one hundred, seventy-five thousand dollars
($175,000) and a cash bonus equal to fifty percent (50%) of his base salary,
contingent upon the Company's meeting or exceeding the annual financial budget
projection approved by the Board for the applicable fiscal year, in addition to
any bonuses or incentive compensation granted by the Board in its sole
discretion. The Company and Mr. Coleman subsequently amended his employment
agreement to provide that he would serve as Senior Vice President, Finance until
June 1, 2007, at which time he would become the Company's Chief Financial
Officer.
Upon execution of the Coleman Employment Agreement, Mr. Coleman was granted
incentive options for a total of seven hundred, fifty thousand (750,000) shares
of the Company's common stock under the Company's stock option plan (the
"Incentive Stock Options"). One third of such Incentive Stock Options became
exercisable upon the full execution of the employment agreement, and the
remaining two thirds of such Incentive Stock Options shall become exercisable
with one half of the two thirds being exercisable on each of the subsequent two
successive anniversary dates of the employment agreement, provided that Mr.
Coleman is employed by the Company on each such anniversary date.
Mr. Coleman's employment agreement has a term of two (2) years, and
automatically renews for successive one-year periods as of each successive
anniversary date. Either party may terminate the agreement upon the provision of
90 days' prior written notice to the other party. However, should the Coleman
Employment Agreement be terminated by the Company without good cause, Mr.
Coleman is entitled to receive all compensation and benefits provided under the
employment agreement for the remainder of the calendar year in which the
termination occurs and for the succeeding calendar year.
The Company believes that Mr. Coleman's prior experience will be essential for
supporting the Company's growth objectives. Brief highlights of Mr. Coleman's
prior experience includes serving as the President and Chief Financial Officer
of Industrial Cleaning Management, LLC from August 2002 through May 2005, and
over fifteen years serving in various senior management, financial and
accounting positions in the retail industry.
There is no family relationship between or among Mr. Coleman and any of our
other officers or directors.
Departure of Executive Vice President
On May 16, 2007, the Company released Mr. Dan Barnett, the Company's Executive
Vice President, Secretary and Treasurer. Mr. Barnett was serving under the terms
of a three-year employment agreement with the Company. Under the terms of Mr.
Barnett's employment agreement, if he is released without "Good Cause" as
defined in the employment agreement, Mr. Barnett would be entitled to receive
payment of salary and benefits as if the employment agreement was not
terminated. As Mr. Barnett's release by the Company was not for "Good Cause",
Mr. Barnett will continue to receive payments of salary and benefits through
December 31, 2010. Pursuant to the terms of the Series A Preferred Stock
Financing Agreement, Mr. Barnett was named a Director of the Company and he will
continue to serve in this capacity.
Page 8 of 14
Item 6. Exhibits.
Exhibit No. Exhibit Name:
10.1 Elf Fork Capital, L.L.C. - Operating & Servicing Agreement
Template
31.1 Chief Executive Officer - Section 302 Certification pursuant to
the Sarbanes-Oxley Act of 2002
31.2 Chief Financial Officer - Section 302 Certification pursuant to
the Sarbanes-Oxley Act of 2002
32.1 Chief Executive Officer - Section 906 Certification pursuant to
the Sarbanes-Oxley Act of 2002
32.2 Chief Financial Officer - Section 906 Certification pursuant to
the Sarbanes-Oxley Act of 2002
Page 9 of 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Act of 1933, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
MORTGAGE ASSISTANCE CENTER CORPORATION
Date: May 21, 2007 By: /s/ Ron Johnson
---------------------------------
Ron Johnson,
President and
Chief Executive Officer
Date: May 21, 2007 By: /s/ Dale Hensel
---------------------------------
Dale Hensel,
Chief Financial Officer
(principal accounting officer)
Page 10 of 14