UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934
For the quarterly period ending June 30, 2007
[_] Transition Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934
For the transition period from ______________ to _____________
Commission file number
Mortgage Assistance Center Corporation
(Exact name of small business issuer as specified in its charter)
Florida 06-1413994
------- ----------
(State of incorporation) (IRS Employer ID Number)
1341 W. Mockingbird Lane, Suite 1200 West, Dallas, TX 75247
-------------------------------
(Address of principal executive offices)
(214) 670-0005
--------------
(Issuer's telephone number)
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 the Company 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 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 June 30, 2007
Transitional Small Business Disclosure Format: Yes |_| No |X|
MORTGAGE ASSISTANCE CENTER CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
AND
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
JUNE 30, 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 June 30, 2007 and December 31,
2006.........................................................................F-3
Consolidated Statements of Operations and Comprehensive Loss
for the three months and six months ended June 30, 2007 and 2006...F-5
Consolidated Statements of Cash Flows
for the six months ended June 30, 2007 and
2006.........................................................................F-7
Notes to Consolidated Financial
Statements...................................................................F-9
F-1
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 June 30, 2007, the consolidated
statements of operations and comprehensive loss for the three-month and
six-month periods ended June 30, 2007, and the consolidated statements of cash
flows for the six months ended June 30, 2007 and 2006. 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
June 30, 2007. These circumstances create substantial doubt about the Company's
ability to continue as a going concern and are discussed in Note 7. The
financial statements do not contain any adjustments that might result from the
outcome of these uncertainties.
The December 31, 2006 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., P.C.
Certified Public Accountants
Tulsa, Oklahoma
August 13, 2007
F-2
Mortgage Assistance Center Corporation
Consolidated Balance Sheets
June 30, 2007 (Unaudited) and December 31, 2006 (Audited)
ASSETS June 30, December 31,
2007 2006
(Unaudited) (Audited)
----------- -----------
Current Assets:
Cash and cash equivalents $ 1,329,000 $ 1,205,120
Portfolio assets, at cost (net impairment reserve of
$385,260 and $253,508 at June 30, 2007 and
December 31, 2006 respectively) 7,139,592 6,798,509
Prepaid expenses and other 232,280 194,405
----------- -----------
Total Current Assets 8,700,872 8,198,034
----------- -----------
Property and Equipment, at cost:
Land 699,600 699,600
Building and improvements 621,967 606,799
Office furniture and equipment 413,779 118,670
----------- -----------
1,735,346 1,425,069
Less accumulated depreciation 97,232 73,468
----------- -----------
1,638,114 1,351,601
----------- -----------
Investments and Other Assets:
Deposits 25,404 3,450
----------- -----------
Total Assets $10,364,390 $ 9,553,085
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements
F-3
Mortgage Assistance Center Corporation
Consolidated Balance Sheets
June 30, 2007 (Unaudited) and December 31, 2006 (Audited)
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, December 31,
2007 2006
(Unaudited) (Audited)
------------ ------------
Current Liabilities:
Notes payable-individuals and others $ 1,262,314 $ 1,522,315
Current portion of mortgages payable 24,500 24,400
Accounts payable-trade 30,329 58,794
Accounts payable-other 72,090 182,507
Accrued fees and wages 173,078 182,532
Accrued stock-based compensation 96,856 95,947
Other accrued liabilities 174,285 169,068
------------ ------------
Total Current Liabilities 1,833,452 2,235,563
------------ ------------
Long-term Debt:
Notes payable-individuals and others 2,328,875 1,492,768
Mortgage payable, less current portion 1,026,144 1,036,360
------------ ------------
Total Long-term Debt 3,355,019 2,529,128
------------ ------------
Minority Interests 6,068,609 5,466,543
------------ ------------
Total Liabilities 11,257,080 10,231,234
------------ ------------
Stockholders' Equity (Deficit):
Series A convertible preferred stock ($0.001 par value,
3,000,000 shares authorized, 2,000,000 and 1,500,000
shares issued and outstanding, aggregate liquidation
preference of $2,000,000 and $1,500,000, respectively
at June 30, 2007 and December 31, 2006) 2,000 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 3,228,335 2,481,413
Retained deficit after December 31, 2004 (4,480,211) (3,518,248)
------------ ------------
(1,237,150) (1,022,609)
Subscriptions issuable 344,460 344,460
------------ ------------
Total Stockholders' Deficit (892,690) (678,149)
------------ ------------
Total Liabilities and Stockholders' Equity $ 10,364,390 $ 9,553,085
============ ============
The accompanying notes are an integral part of these consolidated
financial statements
F-4
Mortgage Assistance Center Corporation
Consolidated Statements of Operations and Comprehensive Loss
Three and Six Months Ended June 30, 2007 and 2006
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
(Restated) (Restated)
----------- ----------- ----------- -----------
Operating Revenues:
Sales of portfolio assets $ 1,519,753 $ 539,347 $ 2,639,202 $ 775,635
Servicing fees and commissions 65,904 139,320 180,300 144,590
Rental Income 58,000 26,250 111,004 29,550
Other 421,522 4,739 313,319 7,619
----------- ----------- ----------- -----------
Gross operating revenue 2,065,179 709,656 3,243,825 957,394
----------- ----------- ----------- -----------
Cost of portfolio assets sold 1,221,925 391,842 1,901,919 548,025
----------- ----------- ----------- -----------
Net operating revenue 843,254 317,814 1,341,906 409,369
----------- ----------- ----------- -----------
Operating Expenses:
Salaries, wages and contract labor 467,130 184,072 1,065,164 398,565
Selling, general and 366,952 254,527 692,812 410,615
administrative expenses
Bad debts 78,080 -- 185,674 --
Depreciation and amortization 24,083 5,642 36,196 11,285
----------- ----------- ----------- -----------
Total operating expenses 936,245 444,241 1,979,846 820,465
----------- ----------- ----------- -----------
Operating loss (92,991) (126,427) (637,940) (411,096)
----------- ----------- ----------- -----------
Other income (expense):
Interest and other income 99,250 89,766 171,970 98,948
Interest expense (179,798) (68,250) (155,932) (147,773)
Priority payments (58,607) -- (155,964) --
----------- ----------- ----------- -----------
Total other income (expense) (139,155) 21,516 (139,926) (48,825)
----------- ----------- ----------- -----------
Loss before minority interests and
income taxes (232,146) (104,911) (777,866) (459,921)
The accompanying notes are an integral part of these consolidated
financial statements
F-5
Mortgage Assistance Center Corporation
Consolidated Statements of Operations and Comprehensive Loss
Three and Six Months Ended June 30, 2007 and 2006
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
(Restated) (Restated)
-------------- ------------ ------------ ------------
Loss before minority interests and (232,146) (104,911) (777,866) (459,921)
income taxes
Minority interests (88,983) 17,466 (184,097) 63,987
-------------- ------------ ------------ ------------
Loss before income taxes (321,129) (87,445) (961,963) (395,934)
Income tax benefit (expense) -- -- -- --
-------------- ------------ ------------ ------------
Net Loss (321,129) (87,445) (961,963) (395,934)
Other comprehensive income -- -- -- --
-------------- ------------ ------------ ------------
Comprehensive Loss $ (321,129) $ (87,445) $ (961,963) $ (395,934)
============== ============ ============ ============
Net loss per weighted-average
share of common stock outstanding,
calculated on net loss:
Basic $ (0.03) $ (0.01) $ (0.09) $ (0.03)
============== ============ ============ ============
Fully diluted $ (0.01) $ (0.03)
============ ============
Weighted-average number of
shares of common stock
outstanding:
Basic 12,725,124 12,725,124 12,725,124 12,725,124
============== ============ ============ ============
Fully diluted 12,725,124 12,725,124
============ ============
The accompanying notes are an integral part of these consolidated
financial statements
F-6
Mortgage Assistance Center Corporation
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2007 and 2006
(Unaudited)
Six Months Ended
June 30, June 30,
2007 2006
(Restated)
----------- -----------
Cash Flows from Operating Activities:
Net loss $ (961,963) $ (395,934)
----------- -----------
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation 23,764 11,285
Non-cash stock based compensation 248,332 --
Minority interests in subsidiaries' net earnings 184,097 (63,987)
Change in assets and liabilities:
(Increase) decrease in portfolio assets (341,083) (684,144)
(Increase) decrease in prepaid expenses and other (59,829) 11,789
----------- -----------
assets
Increase (decrease) in accounts payable-trade (28,465) 52,727
Increase (decrease) in accounts payable-other (110,417) (89,784)
Increase (decrease) in accrued fees and wages (9,454) 28,115
Increase (decrease) in other accrued liabilities 5,217 97,277
----------- -----------
Total adjustments (87,838) (636,722)
----------- -----------
Net Cash Provided (Used) by Operating Activities (1,049,801) (1,032,656)
----------- -----------
Cash Flows From Investing Activities
Purchases of property and equipment (310,278) (27,354)
----------- -----------
Net Cash Used by Investing Activities (310,278) (27,354)
----------- -----------
The accompanying notes are an integral part of these consolidated
financial statements
F-7
Mortgage Assistance Center Corporation
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2007 and 2006
(Unaudited)
Six Months Ended
June 30, June 30,
2007 2006
(Restated)
----------- -----------
Cash Flows From Financing Activities
Proceeds from issuance of debt to individuals and others 935,000 651,000
Repayment of debt to individuals and others (358,705) (230,625)
Proceeds from issuance of Preferred Stock 500,000 --
Capital contributions from minority interests 2,117,326 350,000
Refund of capital contributions to minority interests (1,651,286) --
Distributions to minority interests (48,160) (137,149)
Net advance from stockholder -- 17,011
Repayments of mortgage loan (10,216) (799)
----------- -----------
Net Cash Provided (Used) by Financing Activities 1,483,959 649,438
----------- -----------
Net Increase (Decrease) in Cash 123,880 (410,572)
----------- -----------
Cash at Beginning of Period 1,205,120 598,979
----------- -----------
Cash at End of Period $ 1,329,000 $ 188,407
=========== ===========
Supplemental Disclosures of Cash Flow Information
- -------------------------------------------------
Cash Paid During the Period for:
Interest $ 140,541 $ 105,896
Income taxes -- --
The accompanying notes are an integral part of these consolidated
financial statements
F-8
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2007
(Unaudited)
Note 1 - Organization
- ---------------------
Mortgage Assistance Center Corporation, a Florida 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.
In January 2005, the Company changed its name to Mortgage Assistance Center
Corporation, and through a series of corporate reorganizations completed in
August 2005, the Company acquired Mortgage Assistance Corporation ("MAC"), a
Texas corporation, and MAC is now a wholly owned subsidiary of MACC as described
in Note 4.
Note 2 - Basis of Presentation
- ------------------------------
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-QSB and
Regulation S-B. They do not include all information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements. However, except as disclosed herein, there has
been no material change in the information disclosed in the notes to the
financial statements for the year ended December 31, 2006 included in the
Company's Annual Report on Form 10-KSB, as filed with the Securities and
Exchange Commission. The interim unaudited financial statements should be read
in conjunction with those financial statements included in the Form 10-KSB. In
the opinion of management, all adjustments considered necessary for a fair
presentation, consisting solely of normal recurring adjustments, have been made
and certain prior period amounts have been reclassified to conform to current
period presentation. Operating results for the three months and six months ended
June 30, 2007 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2007.
Note 3 - Description of Business
- --------------------------------
Through MAC, the Company operates as a financial services company, acquiring and
managing pools of distressed real estate-based mortgages and real estate
acquired by foreclosures of mortgage notes. 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 resells a substantial portion of its loans in various-sized pools,
or it forecloses when loans held in its portfolio continue to be in default. As
a result, the Company may be engaged in owning single-family dwellings and
possibly other real estate. Such foreclosed real estate is held, rehabilitated
where necessary, and sold.
F-9
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2007
(Unaudited)
Note 4 - Principles of Consolidation and Basis of Presentation
- --------------------------------------------------------------
The accompanying financial statements are consolidated and include the financial
statements of MACC and its wholly owned subsidiary; and a number of
unincorporated entities. 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 unincorporated joint ventures and acts as the manager of each venture and,
as such, exercises control over each venture. The other members of each of the
ventures do not have either (a) the substantive ability to dissolve the venture
or otherwise remove the manager without cause, or (b) substantive participating
rights. Based on these factors, MAC's interest in each of the joint ventures
meets the criteria for consolidation under the provisions of Emerging Issues Tax
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 unincorporated entities, with the ownership interests of minority
investors recorded as a noncurrent liability, "Minority Interests."
On May 17, 2007, MAC sold its 50% interest in the future profits of Dutch Fork
Capital, LLC ("Dutch Fork") to the other 50% partner in that venture for
$300,000 cash. Two of MACC's directors have indirect ownership interests in
Dutch Fork. The sale has been recorded as other income, and all of the assets
and applicable minority interests have been eliminated in the accompanying
financial statements as of that date.
Note 5 - 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.
F-10
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2007
(Unaudited)
Note 6 - Contingent Liability
- -----------------------------
During the reporting period ended, June 30, 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 and design and operation of the disclosure controls and
procedures pursuant to Rule 13a-15(3) 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.
During this evaluation, weaknesses in the Company's disclosure control processes
were discovered that prevented the Company's senior management, including the
Company's Chief Executive Officer, from obtaining information regarding certain
operational aspects related to the Company's joint ventures. While the Company's
management believes that it has corrected these weaknesses in its disclosure
controls, management is currently unable to estimate, with reasonable certainty,
the possible loss, or range of loss, if any, for the previously unknown
operational issues. While the Company does not, at this time, believe that the
ultimate resolution of these operational issues will necessitate any adjustments
with respect to the Company's current or previously issued financial statements,
it is reasonably possible that there may be a material adverse effect on the
Company's financial position and results of operations, both in the near and
long term.
The internal investigation is ongoing, and the Company's executive management
and legal counsel are working expeditiously to complete the internal
investigation as soon as practicable. The Company's management will then
complete a qualitative assessment of all identified issues and determine the
resulting effects, including possible monetary effects, of the issues under
investigation.
Note 7 - 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
the six months ended June 30, 2007 and prior years, resulting in an accumulated
stockholders' deficit as of June 30, 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.
F-11
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2007
(Unaudited)
Note 7 - Going Concern Uncertainty (continued)
- ----------------------------------------------
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, of which
$500,000 was received during the first quarter of 2007 (see Note 11).
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
opportunities to secure additional sources of debt financing as a means of more
cost effectively acquiring pools of mortgage notes and foreclosed properties.
However, there is no guarantee that the Company will receive sufficient funding
to sustain operations or implement any future business plans.
Note 8 - Priority Payments
- --------------------------
Two of the Company's joint venture agreements provide for the investors to
receive a nine percent cumulative return on invested capital. The Company has
expensed $58,607 and $155,964 for the three months and six months ended June 30,
2007, respectively, applicable to these priority payment obligations.
Note 9 - Lease Obligations
- --------------------------
In April, the Company entered into a lease agreement for new corporate office
space. The lease is for eighty-four months commencing May 1, 2007, with monthly
rents commencing at $15,001 per month for the first twelve months escalating to
$21,954 per month for the final twelve months, for a total of approximately
$1,629,000 over the lease term.
Note 10 - 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.
At June 30, 2007, the Company has 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 of 1,023,891 shares. All outstanding options and
warrants were granted on or
F-12
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2007
(Unaudited)
Note 10 - Share-Based Compensation (continued)
- ----------------------------------------------
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 six months ended June 30, 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 and there was no
additional expense for the quarter ended June 30, 2007. The result reflects no
related tax benefit due to the Company's full valuation allowance on its
deferred tax assets. As of June 30, 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.
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 another key
employee, were fully vested at the grant date.
The lattice (trinomial) option -pricing model was used to estimate the fair
value 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
the 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 intent to pay cash
dividends.
F-13
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2007
(Unaudited)
Note 10 - Share-Based Compensation (continued)
- ----------------------------------------------
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.
Note 11 - 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") pursuant to which 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 9,111,387
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 increments of 500,000, conditioned
on the satisfaction on March 31, June 30 and September 30, 2007 of certain
financial benchmarks set forth in the Purchase Agreement.
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. The Company
did not achieve its benchmarks for the period ended June 30, 2007 and the
Investors have advised the Company that they do not intend to fund further
tranches under the Purchase Agreement.
Note 12 - Subsequent Events
- ---------------------------
As mentioned in prior reports, the Company has historically been unable to
generate sufficient cash from operations to meet its ongoing financial
obligations, and has continued to rely on additional borrowings and sales of
stock to provide adequate liquidity. In August, the Company
F-14
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2007
(Unaudited)
Note 12 - Subsequent Events (continued)
- ---------------------------------------
received a proposal from the Investors with respect to an equity investment of
$1,000,000 in exchange for the issuance of an aggregate number of new shares
sufficient to result in the Investors holding 95% of the outstanding shares of
common stock. In connection with this transaction, all outstanding warrants and
shares of preferred stock would either be cancelled or exercised or converted
into shares of common stock by the Investors and counted toward the aggregate
numbers of shares held by the Investors. The proposed investment is also subject
to several conditions including, but not limited to, (1) the approval of the
transaction by the Company's Board of Directors, (2) the approval of an
amendment to the Articles of Incorporation to increase the number of authorized
shares of common stock, and (3) the Company obtaining a bridge loan of $300,000
from one of our joint venture investors, who agreed to immediately fund the
proposed bridge loan subject to the Company accepting the proposed equity
financing. Upon receiving the proposal, a special meeting of the Company's Board
of Directors was held to discuss the proposal. As no other financing
alternatives were made known during the meeting, the Board of Directors approved
the proposed financing, subject to any alternative financing becoming
immediately available to the Company. As no other sources of funding could be
obtained by the Company within the time frame required to meet its payroll and
other obligations, the Company is in the process of finalizing its financing
agreement with the Investors.
F-15
Item 2. Management's Discussion and Analysis or Plan of Operation
Forward Looking Statements:
From time to time, certain information provided by Mortgage Assistance Center
Corporation ("MACC" or the "Company"), including written or oral statements made
by its representatives, may contain forward-looking information as defined in
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance and underlying assumptions and other statements, which are
other than statements of historical facts. Certain statements in this Form
10-QSB are forward-looking statements. Words such as "expects", "believes",
"anticipates", "may", "intends", "projects", "estimates" and similar expressions
are intended to identify forward-looking statements. The Company's expectations,
beliefs and projections are expressed in good faith and are believed by the
Company to have a reasonable basis, including without limitation, management's
examination of historical operating trends, data contained in the Company's
records and other data available from third parties, but there can be no
assurance that management's expectation, beliefs or projections will be achieved
or accomplished. However, forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. Such risks and uncertainties include, but are not limited to, limited
operating history, historical operating losses and the uncertainty of the
Company's profitability in the future, the need to raise additional capital to
sustain operations and implement its future business plan, and other factors
that may be beyond the Company's control. These factors include changes in
regulations or legislation, adverse determination with respect to litigation or
other claims, ability to recruit and retain employees, availability of mortgage
note portfolios at acceptable prices, and increases in operating costs. A more
comprehensive discussion of risk factors is included in the Company's Form
10-KSB for the year ended December 31, 2006. The Company has no obligation to
publicly update or revise these forward-looking statements to reflect the
occurrence of future events or circumstances.
Business Overview:
On May 10, 2005, 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 consummation of the transaction under this
agreement 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 mortgage notes are secured by real estate, are typically 90
days to 2 years past due at the time of purchase, and in many cases have been
foreclosed upon. 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 and to the current market value of the underlying
real estate. This business model enables MAC to provide assistance to borrowers
and 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 though four 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; (c)
foreclosing or obtaining a deed-in-lieu of foreclosure on properties that
continue to be non-performing; or (d) purchasing real estate that has gone
through the foreclosure process and then either renting or selling the real
estate. The Company believes that current and future market conditions signal an
increasing rate of foreclosures on residential properties. Accordingly, the
Company anticipates increased business opportunities from this segment.
Additionally, MAC generates revenue via fees charged to manage and service
mortgage notes for its joint ventures and other investors. When the Company
acquires a loan or pool of loans, the process of resolution begins with the
borrower, changing the status of non-performing loans into either performing
loans or foreclosing on the real estate. The Company may resell a portion of its
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 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. In addition, the
Company has historically sustained recurring losses from operations and had an
accumulated stockholders' deficit as of June 30, 2007. These circumstances,
along with others discussed in this section and elsewhere in this Form 10-QSB
create substantial risk regarding the Company's ability to continue as a going
concern.
Liquidity and Capital Resources
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Cash and cash equivalents totaled $1,329,000 as of June 30, 2007, compared
with $1,205,120 as of December 31, 2006.
Net cash provided by operating activities
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Net cash used in operating activities was $ 1,049,801 for the six months
ended June 30, 2007, compared with $1,032,656 for the six months ended June
30, 2006. The net loss discussed below was the primary factor in the net
cash used in operations.
Net cash used in investing activities
- -------------------------------------
Net cash used in investing activities was $310,278 for the six months ended
June 30, 2007, compared with $27,354 for the six months ended June 30,
2006. The increase in net cash used in investing activities represents
leasehold improvements associated with the relocation of the Company's
corporate offices and additional computer hardware and software
acquisitions.
The Company projects that it will invest approximately $200,000 in
additional capital expenditures during the remainder of the year, primarily
to continue to upgrade its information technology; however, such amounts
will be dependent on the Company's ability to generate cash flow from
operations and/or acquire additional funds through future financing
activities.
Net cash provided by financing activities
- -----------------------------------------
Net cash provided by financing activities was $1,483,959 for the six months
ended June 30, 2007, compared with $649,438 for the six months ended June
30, 2006. The increase over the prior year was primarily due to the
issuance of $500,000 of additional Series A Preferred Stock, the issuance
of $935,000 of additional promissory notes, and the net capital
contributions from minority interests.
Cash requirements
- -----------------
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. As a fundamental part of the
Company's financing strategy, the Company entered into an agreement to sell
$1,500,000 of Series A Preferred Stock to W. C. Payne Investments, LLC and
FAX/MACC, LP (the "Investors") in November, 2006. The agreement also
provided that the Investors purchase an additional $1,500,000 of Series A
Preferred Stock in three increments of $500,000 each, conditioned on the
satisfaction, on March 31, June 30, and September 30, 2007, of certain
financial benchmarks and other terms set forth in the agreement. The
Company did not achieve its benchmarks for the period ended March 31, 2007
or June 30, 2007. The Investors waived the benchmarks for the period ended
March 31, 2007, and the Company received the first of the three subsequent
tranches of $500,000 in cash in April as contemplated by the agreement.
However, as a result of missing the benchmarks for the period ended June
30, 2007, the Investors have advised the Company that they do not intend to
fund further tranches under the Purchase Agreement.
As mentioned in prior reports, the Company has historically been unable to
generate sufficient cash from operations to meet its ongoing financial
obligations, and has continued to rely on additional borrowings and sales
of stock to provide adequate liquidity. In August, the Company received a
proposal from the Investors with respect to an equity investment of
$1,000,000 in exchange for the issuance of an aggregate number of new
shares sufficient to result in the Investors holding 95% of the outstanding
shares of common stock. In connection with this transaction, all
outstanding warrants and shares of preferred stock would either be
cancelled or exercised or converted into shares of common stock by the
Investors and counted toward the aggregate numbers of shares held by the
Investors. The proposed investment is also subject to several conditions
including, but not limited to, (1) the approval of the transaction by the
Company's Board of Directors, (2) the approval of an amendment to the
Articles of Incorporation to increase the number of authorized shares of
common stock, and (3) the Company obtaining a bridge loan of $300,000 from
one of our joint venture investors, who agreed to immediately fund the
proposed bridge loan subject to the Company accepting the proposed equity
financing. Upon receiving the proposal, a special meeting of the Company's
Board of Directors was held to discuss the proposal. As no other financing
alternatives were made known during the meeting, the Board of Directors
approved the proposed financing, subject to any alternative financing
becoming immediately available to the Company. As no other sources of
funding could be obtained by the Company within the time frame required to
meet its payroll and other obligations, the Company is in the process of
finalizing its financing agreement with the Investors.
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.
The Company's ability to continue to operate as a going concern will be
largely influenced by 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 to ultimately sustain profitability.
Results of Operations
- ---------------------
Gross Operating Revenue
- -----------------------
Gross operating revenue for the three months ended June 30, 2007 was
$2,065,179 compared with $709,656 for the three months ended June 30, 2006,
an increase of $1,355,523, or 191%.
Gross operating revenue for the six months ended June 30, 2007 was
$3,243,825 compared with $957,394 for the six months ended June 30, 2006,
an increase of $2,286,431, or 239%.
Net Operating Revenue
- ---------------------
Net operating revenue, as a percentage of sales, was 40.83% and 44.78% for
the three months ended June 30, 2007 and June 30, 2006, respectively.
Margin contribution dollars increased to $843,254 from $317,814, an
increase of $525,440, or 165%. For the six months ended June 30, 2007 and
June 30, 2006, respectively, net operating revenue, as a percentage of
sales, was 41.37% and 42.76%. Margin contribution dollars increased to
$1,341,906 from $409,369, an increase of $932,537, or 228%.
Operating expenses
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Operating expenses, as a percentage of sales, were 45% and 63% for the
three months ended June 30, 2007 and June 30, 2006, respectively. The
operating expenses, as a percentage of sales, were 61% and 86% for the six
months ended June 30, 2007 and June 30, 2006, respectively. The decrease,
as a percentage of sales, was primarily due to the leveraging impact of the
significant increase in gross operating revenue.
Net loss
- --------
Net loss was $321,129 and $87,445 for the three months ended June 30, 2007
and June 30, 2006, respectively. Net loss was $961,963 and $395,934 for the
six months ended June 30, 2007 and June 30, 2006, respectively.
Item 3. Controls and Procedures
During the reporting period ended, June 30, 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 and design and operation of the disclosure controls and
procedures pursuant to Rule 13a-15(3) 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.
During this evaluation, weaknesses in the Company's disclosure control processes
were discovered that prevented the Company's senior management, including the
Company's Chief Executive Officer, from obtaining information regarding certain
operational aspects related to the Company's joint ventures. While the Company's
management believes that it has corrected these weaknesses in its disclosure
controls, management is currently unable to estimate, with reasonable certainty,
the possible loss, or range of loss, if any, for the previously unknown
operational issues. While the Company does not, at this time, believe that the
ultimate resolution of these operational issues will necessitate any adjustments
with respect to the Company's current or previously issued financial statements,
it is reasonably possible that there may be a material adverse effect on the
Company's financial position and results of operations, both in the near and
long term.
The internal investigation is ongoing, and the Company's executive management
and legal counsel are working expeditiously to complete the internal
investigation as soon as practicable. The Company's management will then
complete a qualitative assessment of all identified issues and determine the
resulting effects, including possible monetary effects, of the issues under
investigation.
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.
None
Item 6. Exhibits.
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
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 ASSITANCE CENTER CORPORATION
Date: August 20, 2007 By: /s/ Ron Johnson
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Ron Johnson
President and
Chief Executive Officer
Date: August 20, 2007 By: /s/ Richard D. Coleman
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Richard D. Coleman
Chief Financial Officer
(principal accounting officer)