September 19, 2007
United States Securities and Exchange Commission
Division of Corporate Finance
Mail Stop 3561
Washington, D. C. 20549
RE: Mortgage Assistance Center Corporation
Form 10-KSB FYE December 31, 2006
Filed April 17, 2007
File No. 000-21627
Gentlemen:
In response to your letter to the Company dated September 6, 2007, we have
prepared for your consideration the following responses to your comments.
Form 10-KSB for Fiscal Year Ended December 31, 2006
---------------------------------------------------
Consolidated Statements of Operations and Comprehensive Loss, F-7
-----------------------------------------------------------------
1. We note your disclosure in Note 14 on F-29 that the Series A
preferred stock has a stated annual 10% cumulative dividend. In
accordance with SFAS 128, loss available to common stockholders
shall be computed by adding both dividends declared in a period
on preferred stock (whether or not paid) and the dividends
accumulated for the period on cumulative preferred stock (whether
or not earned) to net loss. Please include the preferred dividend
as an adjustment in the calculation of net loss available to
common shareholders as required by SFAS 128 and EITF 03-6, or
tell us why this guidance is not applicable.
Response: The transaction was effective 11-30-06 and the amount
of the cumulative undeclared dividends through December 31, 2006
was $12,500. The Company will note this amount in the description
of the Series A Preferred Stock on the Balance Sheet, add the
information in Footnote 14, and add to the description "Net loss
per weighted-average share of common stock outstanding,
calculated on net loss" the words "and cumulative undeclared
dividends on Preferred Stock" on the Consolidated Statements of
Operations and Comprehensive Loss. However, the addition of these
dividends to the computation will have no effect on the loss per
share for the reported periods.
Notes to Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies
General
2. Please revise your summary of significant accounting policies to
provide a detailed discussion of revenue recognition related to
servicing fees and commissions, rental income and other income.
Please cite the specific authoritative literature you used to
support your accounting treatment. Also, tell us how you
considered SFAS 140 Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, as it
relates to your obligations for servicing contracts.
Response: The following information will be added to Note 2:
Servicing fees:
Servicing fees are charged to the portfolio asset
pools for services provided by the Company
(property management, legal, administrative) in
order to maximize the value of the assets in the
portfolio. Income is recorded as the services are
performed, in accordance with the terms of the
service agreements.
Rental Income:
The Company, through one of its 50% owned joint
ventures, owns a commercial building in Dallas,
Texas that it leases. Rental income is accrued on
a monthly basis in accordance with the terms of
the lease agreement.
Other income:
Other operating income primarily consists of fees
received from individual investors, joint venture
partners, or third party entities for identifying
and acquiring asset pools as well as the
reimbursement of certain costs associated
therewith, and are recorded at the time the
acquired pools are transferred to the investors.
The above policies have been adopted by the
Company for income recognition based on the
general revenue guidance contained in Statement of
Financial Accounting Concepts No. 5.
We do not consider SFAS 140 applicable for
servicing contracts as the Company only provides a
service and does not assume any responsibility for
the repayment of the obligations of the notes it
services.
Commission Income is not applicable to any of the
reporting periods and will be removed from the
line item description.
Note 6 - Portfolio Assets, page F-21
3. We note from your disclosure on F-14 that you have adopted SOP
03-3 for all of the loans in your portfolio. Please ensure these
disclosures include information regarding the change in this
account (e.g. a roll-forward showing the balance in the account
prior year balance + current year impairment charges -
collections on prior year impairment charges = current year
balance) for each of the years presented in your financial
statements. Please revise to provide the disclosures required by
paragraphs 14-16 of SOP 03-3.
Response: We will include the following table of changes in our
reserve for impairment in the footnote:
2006 2005
------------------- --------------------
Beginning balance $ 202,691 $ --
Provision for impairment 105,000 202,691
Amounts charged off against reserve (54,182) $ --
------------------- --------------------
Ending balance $ 253,509 $ 202,691
=================== ====================
4. Please revise your footnotes to include all the disclosures
required by paragraph (13) of SOP 01-6. Please ensure to provide
detailed disclosure surrounding your policy regarding the loans
that have been classified as "held for sale" and those that have
been "held for investment."
Response: All of our loans are "held for sale," therefore most of
the provisions of SOP 01-6 do not apply to us. Disclosures that
do apply are included in our footnotes.
Note 16 - Common Stock Warrants, page F-33
5. We note that, on November 30, 2006, you entered into the Series A
Preferred Stock and Common Stock Warrant Purchase Agreement in
which you issued convertible redeemable Series A preferred stock,
warrants to purchase 4,556,694 shares of your common stock which
you valued at $1.00 per warrant share, and "back end" warrants
that enable the holder to acquire 2,700,262 shares of your common
stock, depending on whether certain financial benchmarks are
achieved by December 31, 2007. It appears from your disclosure
that no value was assigned to the attached warrants. Please cite
the specific authoritative literature you used to support your
accounting treatment. In your response, provide a narrative
discussion addressing the applicability of APB 14, EITF 00-19,
and EITF 00-27.
Response: It was determined that the Company unintentionally
misstated the actual number of investment warrants issued in
conjunction with its November 30, 2006 Series A Preferred Stock
financing. While the aggregate number of investment warrants to
be issued by the Company was 9,113,387, in light of the staged
nature of the investment, the Company and investors had
originally agreed to issue a partial allocation of investment
warrants pro rata in conjunction with each tranche of funding
actually received. However, immediately prior to the closing of
the first tranche of funding, this warrant provision was changed
to cause the entire amount of all investment warrant shares to be
issued to the investors with the first partial funding tranche,
subject to a pro-rata reduction if the anticipated subsequent
tranches were not funded. As a result, the Company inadvertently
reported in its 10-KSB for the calendar year 2006, a total of
4,556,694 investment warrants being issued pursuant to the first
tranche of funding, instead of the renegotiated amount of
9,113,387 warrant shares actually issued at closing. This change
was correctly reported in the Company's subsequent 10-QSB filing
for the first calendar quarter of 2007; however, we will correct
the information in our amended Form 10-KSB for 12/31/2006.
Notwithstanding the above, the Company has evaluated APB-14, EITF
00-19, and EITF 00-27 and concluded that the net proceeds of the
Series A Preferred Stock financing should be allocated on a
pro-rata basis to the Series A Preferred Stock and the Common
Stock Warrants (see proposed revised Statements of Changes in
Stockholders' Equity (Deficit) on Exhibit A to this letter). This
allocation was based on first determining the value of the
warrants based on the Company's valuation model, and then taking
the relative value of the Series A Preferred Stock and the
warrants individually to the total of the computed value, and
applying the individual pro-rata share to the total net capital
contribution.
The Company believes that this presentation is most consistent
with accounting guidelines, but is concerned that the result does
not accurately reflect the relative economic value of the
Preferred Stock compared to the Common Stock warrants and would
appreciate any additional guidance from the Commission.
Note 18 - Commitments, F-36
6. We noted from your disclosure under Item 2 - Properties on page 8
that you currently lease corporate office space in Dallas, Texas.
Please provide the disclosures required by paragraph (16) (b-d)
of SFAS No. 13. In addition, please revise your disclosures to
provide additional information regarding the old office space
(i.e. whether the lease will be terminated or subleased.)
Response: The following will be added to Note 18 - Commitments:
The Company leases its corporate offices in Dallas, Texas under
an operating lease expiring in September 2008. The Company is
required to pay all insurance, maintenance and repairs related to
this leased facility. The Company had no other significant
operating leases.
Rental expense under this lease was $37,491 and $40,104 for the
years ended December 31, 2006 and 2005, respectively.
At December 31, 2006, minimum future lease payments to be paid
annually under the two-year non-cancellable operating lease for
operating space were as follows:
2007 $36,540
2008 28,755
A lease termination for the previous office space had not been
negotiated as of the time the Form 10-KSB had been filed.
However, we will add the terms of the lease termination agreement
in the footnotes for the amended Form 10-QSB for the Quarter
ended March 31, 2007.
Form 10-QSB for the Quarter Ended June 30, 2007
Notes to Consolidated Financial Statements
Note 4 - Principles of Consolidation and Basis of Presentation, F-10
7. It appears from your disclosure the Company sold its 50% interest
in Dutch Fork Capital which was being consolidated by the
Company. Please cite the specific authoritative literature you
used to support your accounting treatment. In your response,
provide a narrative discussion addressing the applicability of
paragraphs (41-44) of SFAS No. 144.
Response: We will revise our Form 10-QSB Consolidated Statements
of Operations and Comprehensive Loss to reflect the discontinued
operations of Dutch Fork Capital according to the provisions of
paragraph 43 of SFAS No. 144 (see Exhibit B attached to this
letter).
Note 9 - Lease Obligations, F-12
8. We noted that the Company entered into a new lease agreement in
April 2007 that included scheduled rent increases over the term
of the lease. Pursuant to SFAS No. 13, it would appear rent
related to this lease should be recognized on a straight-line
basis over the lease term. Please clarify your accounting
treatment and revise if necessary.
Response: The lease was effective 5/1/2007. We expensed actual
rent paid for the period, but the difference between the amount
recorded as expense and the amount that should have been expensed
using the straight-line method was immaterial. We will indicate
the correct method of recording expense in the footnote and book
the expense properly in future periods.
Item 3. Controls and Procedures
9. We note that your disclosures do not comply with Item 307 and 308
of Regulation S-B in the following respects: o Your conclusion
should clearly state that your disclosure controls and procedures
are either effective or ineffective.
Response: We will add a statement that the Company's disclosure
controls and procedures, except for the material weaknesses
specifically identified, are effective.
o We note your statement that a "control system, no matter how well
conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the internal control
system are met." Given this qualification, the disclosure should
be revised to state clearly, if true, that your disclosure
controls and procedures are designed to provide reasonable
assurances of achieving their objectives and that your principal
executive officer and principal financial officer concluded that
your disclosure controls and procedures are effective at that
reasonable assurance level. Alternatively, the reference to the
level of assurance of your disclosure controls and procedures
should be removed.
Response: We will revise to clearly indicate that the Company's
disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives and that the
Company's principal executive officer and principal financial
officer concluded that the disclosure controls and procedures are
effective at that reasonable level.
o We note that your disclosures did not include the information
required by Item 308(c) of Regulation S-B in the following
respect. The disclosure should state clearly if there were any
changes in your internal controls over financial reporting that
occurred during the last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, your
internal control over financial reporting.
Response: The changes in internal controls that were made as a
result of the discovery of the material weakness have now been
identified and corrected.
10. We note that you have identified weaknesses in the Company's
control process. Please revise your disclosure to state when the
material weaknesses were identified, by whom they were identified
and when the material weaknesses first began. Also, disclose the
specific steps that you have taken, if any, to remediate the
material weaknesses.
Response: We will add a statement in the discussion specifying
when and how the discovery was made (second quarter of 2007) and
when the weaknesses first began (2006). As of the date of the
report, the Company had not completed its internal investigation,
which will include identifying and implementing additional
control processes to remediate the material weaknesses
identified. The proposed changes for comments 9 and 10 above have
been incorporated and marked in Exhibit C attached to this
letter.
Item 6. Exhibits
11. In accordance with Item 601 of Regulation S-B, please file an
accountant awareness letter on reviewed financial information
from your independent accountant as exhibit 25 to your Form
10-QSB.
Response: Based on our review of the requirements of Item 601 of
Regulation S-B, the Company does not believe that an accountant's
awareness letter is required to be filed under Exhibit 15 because
the interim financial statements are not being used in connection
with a registration statement.
Exchange Act Filings
12. Please amend your other Exchange Act filings, as necessary, to
reflect changes resulting from the comments above.
Response: We would like to wait for a response from the
Commission on the adequacy of the proposed revisions prior to
amending the Company's Form 10-KSB for the year ended December
31, 2006, the Form 10-QSB for the quarter ended March 31, 2007,
and the Form 10-QSB for the quarter ended June 30, 2007 to
reflect the changes resulting from the comments above. However,
if necessary, we will be prepared to submit to you a marked draft
of the proposed amended filings.
Mortgage Assistance Center Corporation understands it is responsible
for the adequacy and accuracy of its disclosures in its filings with
the Securities and Exchange Commission. We further understand that
staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filings; and that the Company may not assert staff comments as a
defense in any proceeding initiated by the Commission or any person
under the federal securities laws of the United States.
If there are any additional questions or comments, please contact the
Company's Chief Financial Officer, Richard Coleman, at 214-635-3750.
Sincerely,
/s/ Ronald Johnson
------------------
Ronald E. Johnson
Chief Executive Officer
EXHIBIT A
MORTGAGE ASSISTANCE CENTER CORPORATION
Amended Statements of Changes in Stockholders' Equity (Deficit)
Years Ended December 31, 2006 and 2005
Common Stock
------------
Series A Additional
Preferred paid-in Accumulated
Stock Shares Par Value capital deficit
---------- ------------ ------------ ------------ ------------
Balances at
December 31, 2004 $ -- 12,625,124 $ 12,626 $ 23,971,949 $(23,798,786)
Issuances of common stock
for legal services -- 100,000 100 500 --
Stock issuable to fund partnership investment -- -- -- -- --
Quasi-reorganization effective December 31, 2004 -- -- -- (23,798,786) 23,798,786
Net loss for the year -- -- -- -- (1,508,073)
---------- ------------ ------------ ------------ ------------
Balances at
December 31, 2005 -- 12,725,124 12,726 173,663 (1,508,073)
Stock issuable to fund retirements
of notes payable -- -- -- -- --
Issuance of preferred stock with warrants attached
net of issuance costs of $86,985 -- -- -- --
Preferred stock @ $0.001 par value per share 1500 -- -- 159,030 --
Common Stock Warrants -- -- -- 1,252,485 --
Stock-based compensation expense -- -- -- 896,235 --
Net loss for the year -- -- -- -- (2,010,175)
---------- ------------ ------------ ------------ ------------
Balances at
December 31, 2006 $ 1,500 12,725,124 $ 12,726 $ 2,481,413 $ (3,518,248)
========== ============ ============ ============ ============
MORTGAGE ASSISTANCE CENTER CORPORATION
EXHIBIT A
Amended Statements of Changes in Stockholders' Equity (Deficit)
Years Ended December 31, 2006 and 2005
Subscriptions
issuable Total
------------ ------------
Balances at
December 31, 2004 $ 2,160 $ 187,949
Issuances of common stock
for legal services -- 600
Stock issuable to fund partnership investment 100,000 100,000
Quasi-reorganization effective December 31, 2004 -- --
Net loss for the year -- (1,508,073)
------------ ------------
Balances at
December 31, 2005 102,160 (1,219,524)
Stock issuable to fund retirements
of notes payable 242,300 242,300
Issuance of preferred stock with warrants attached
net of issuance costs of $86,985 -- --
Preferred stock @ $0.001 par value per share -- 160,530
Common Stock Warrants -- 1,252,485
Stock-based compensation expense -- 896,235
Net loss for the year -- (2,010,175)
------------ ------------
Balances at
December 31, 2006 $ 344,460 $ (678,149)
============ ============
EXHIBIT B
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, 2007 June 30, 2006 June 30, 2007 June 30, 2006
(Restated) (Restated)
----------- ----------- ----------- -----------
Operating Revenues:
Sales of portfolio assets $ 688,553 $ 539,347 $ 1,257,513 $ 775,635
Servicing fees 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 1,213,979 709,656 1,862,136 957,394
----------- ----------- ----------- -----------
Cost of portfolio assets sold 557,781 391,842 876,739 548,025
----------- ----------- ----------- -----------
Net operating revenue 656,198 317,814 985,397 409,369
----------- ----------- ----------- -----------
Operating Expenses:
Salaries, wages and contract labor 467,130 184,072 1,065,164 398,565
Selling, general and 365,920 254,527 690,048 410,615
administrative expenses
Bad debts 78,080 -- 185,674 --
Depreciation and amortization 24,083 5,642 36,196 11,285
----------- ----------- ----------- -----------
Total operating expenses 935,213 444,241 1,977,082 820,465
----------- ----------- ----------- -----------
Operating loss (279,015) (126,427) (991,685) (411,096)
----------- ----------- ----------- -----------
Other income (expense):
Interest and other income (60,878) 89,766 6,281 98,948
Interest expense (179,798) (68,250) (155,932) (147,773)
Priority payments (32,847) -- (76,534) --
----------- ----------- ----------- -----------
Total other income (expense) (273,523) 21,516 (226,185) (48,825)
----------- ----------- ----------- -----------
Loss from continuing operations before
minority interests and income taxes (552,538) (104,911) (1,217,870) (459,921)
EXHIBIT B
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, 2007 June 30, 2006 June 30, 2007 June 30, 2006
(Restated) (Restated)
----------- ----------- ----------- -----------
Loss from continuing operations before (552,538) (104,911) (1,217,870) (459,921)
minority interests and income taxes
Minority interests (8,851) 17,466 (44,159) 63,987
----------- ----------- ----------- -----------
Loss from continuing operations before
income taxes (561,389) (87,445) (1,262,029) (395,934)
Income tax benefit (expense) -- -- -- --
----------- ----------- ----------- -----------
Loss from continuing operations (561,389) (87,445) (1,262,029) (395,934)
Discontinued operations:
Income from Operations of Dutch Fork
Capital, LLC (Including gain on
disposal of $160,128) 240,260 -- 300,066 --
----------- ----------- ----------- -----------
Net Loss (321,129) (87,445) (961,963) (395,934)
Other comprehensive income -- -- -- --
----------- ----------- ----------- -----------
Comprehensive Loss (321,129) (87,445) (961,963) (395,934)
=========== =========== =========== ===========
Basic earnings (loss) per weighted-
average common shares outstanding:
Continuing operations
(0.05) (0.01) (0.10) (0.03)
Discontinued operations 0.02 -- 0.02 --
----------- ----------- ----------- -----------
Net Loss (0.03) (0.01) (0.08) (0.03)
=========== =========== =========== ===========
Fully diluted earnings (loss)
per weighted average
common shares outstanding
calculated on net loss and
cumulative but undeclared
dividends on preferred
stocks
Continuing operations
(0.01) (0.03)
Discontinued operations -- --
----------- -----------
Net Loss (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
----------- ----------- ----------- -----------
Diluted 12,725,124 12,725,124
----------- -----------
The accompanying notes are an integral part of these consolidated
financial statements
EXHIBIT C
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. These weaknesses
were discovered in April, 2007, by the Company's new Chief Financial Officer
during an evaluation of the Company's real estate portfolio transactions and it
is believed that these weaknesses first began in 2006. While the Company's
management believes that it has corrected these weaknesses in its disclosure
controls by creating additional levels of review and approval of acquisitions
and sales of portfolio assets, management is currently unable to estimate, with
reasonable certainty, the possible loss, or range of loss, if any, for the
previously unknown control weaknesses. 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.
Management, including the Chief Executive Officer and Chief Financial Officer,
believe that the Company's disclosure controls and procedures are designed to
provide reasonable assurance of achieving their objectives and, based upon the
aforementioned evaluation, our Chief Executive Officer and the Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective at that reasonable assurance level in timely alerting them to material
information.