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 September 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: 14,070,924 shares of Common Stock as
of September 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
SEPTEMBER 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 September 30, 2007 and December 31, 2006.....................F-3
Consolidated Statements of Operations and Comprehensive Loss
for the three months and nine months ended
September 30, 2007 and 2006........................................F-5
Consolidated Statements of Cash Flows
for the nine months ended September 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 September 30, 2007, the consolidated
statements of operations and comprehensive loss for the three-month and
nine-month periods ended September 30, 2007, and the consolidated statements of
cash flows for the nine months ended September 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
September 30, 2007. These circumstances create substantial doubt about the
Company's ability to continue as a going concern and are discussed in Note 9.
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
November 14, 2007
F-2
Mortgage Assistance Center Corporation
Consolidated Balance Sheets
September 30, 2007 (Unaudited) and December 31, 2006 (Audited)
ASSETS September 30, December 31,
2007 2006
(Unaudited) (Audited)
---------- ----------
Current Assets:
Cash and cash equivalents $ 911,561 $1,205,120
Portfolio assets, at cost (net impairment reserve of
$215,543 and $253,508 at September 30, 2007 and
December 31, 2006 respectively) 6,688,206 6,798,509
Prepaid expenses and other 265,627 194,405
---------- ----------
Total Current Assets 7,865,394 8,198,034
---------- ----------
Land 699,600 699,600
Building and improvements 639,801 606,799
Office furniture and equipment 422,471 118,670
---------- ----------
1,761,872 1,425,069
Less accumulated depreciation 122,596 73,468
---------- ----------
1,639,276 1,351,601
---------- ----------
Investments and Other Assets:
Deposits 25,404 3,450
---------- ----------
Total Assets $9,530,074 $9,553,085
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements
F-3
Mortgage Assistance Center Corporation
Consolidated Balance Sheets
September 30, 2007 (Unaudited) and December 31, 2006 (Audited)
LIABILITIES AND STOCKHOLDERS' EQUITY September 30, December 31,
2007 2006
(Unaudited) (Audited)
------------ ------------
Current Liabilities:
Current portion of notes payable to individuals $ 1,520,136 $ 1,522,315
Current portion of mortgages payable 24,500 24,400
Advances from stockholders 500,000 --
Accounts payable 34,504 241,301
Settlement costs 440,000 --
Accrued fees and wages 81,001 182,532
Accrued stock-based compensation 96,856 95,947
Other accrued liabilities 302,023 169,068
------------ ------------
Total Current Liabilities 2,999,020 2,235,563
------------ ------------
Long-term Debt:
Notes payable-individuals and others 3,679,875 1,492,768
Mortgage payable, less current portion 1,020,811 1,036,360
------------ ------------
Total Long-term Debt 4,700,686 2,529,128
------------ ------------
Minority Interests 4,204,986 5,466,543
------------ ------------
Total Liabilities 11,904,692 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; cumulative undeclared dividends of $154,110 and $12,500
respectively at September 30, 2007 and December 31, 2006) 2,000 1,500
Common stock ($0.001 par value; 50,000,000 shares
authorized; 14,070,924 and 12,725,124 shares issued and
outstanding respectively, at September 30, 2007 and December 31,
2006) 14,071 12,726
Additional paid-in capital 3,240,449 2,481,413
Retained deficit after December 31, 2004 (5,975,598) (3,518,248)
------------ ------------
(2,719,078) (1,022,609)
Subscriptions issuable 344,460 344,460
------------ ------------
Total Stockholders' Deficit (2,374,618) (678,149)
------------ ------------
Total Liabilities and Stockholders' Equity $ 9,530,074 $ 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 Nine Months Ended September 30, 2007 and 2006
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2007 2006 2007 2006
(Restated) (Restated)
----------- ----------- ----------- -----------
Operating Revenues:
Sales of portfolio assets $ 901,028 $ 1,073,470 $ 2,158,541 $ 1,849,105
Servicing fees 3,908 146,965 184,208 291,555
Rental Income 53,000 52,500 164,004 82,050
Other 6,070 5,385 179,451 13,004
----------- ----------- ----------- -----------
Gross operating revenue 964,006 1,278,320 2,686,204 2,235,714
----------- ----------- ----------- -----------
Cost of portfolio assets sold 665,712 833,545 1,542,451 1,381,570
----------- ----------- ----------- -----------
Net operating revenue 298,294 444,775 1,143,753 854,144
----------- ----------- ----------- -----------
Operating Expenses:
Salaries, wages and contract labor 560,326 218,543 1,625,490 617,107
Selling, general and 833,684 189,858 1,523,732 607,156
administrative expenses
Depreciation and amortization 25,364 5,831 49,128 17,116
Bad debts 5,000 97,509 190,674 97,509
----------- ----------- ----------- -----------
Total operating expenses 1,424,374 511,741 3,389,024 1,338,888
----------- ----------- ----------- -----------
Operating loss (1,126,080) (66,966) (2,245,271) (484,744)
----------- ----------- ----------- -----------
Other income (expense):
Interest and other income 2,408 4,334 8,689 109,942
Interest expense (128,379) (78,756) (284,314) (226,507)
Priority payments (38,121) -- (114,655) --
Loss on retirement of property -- -- (12,432) --
----------- ----------- ----------- -----------
Total other income (expense) (164,092) (74,422) (402,712) (116,565)
----------- ----------- ----------- -----------
Loss from continuing operations before
minority interests and income taxes (1,290,172) (141,388) (2,647,983) (601,309)
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 Nine Months Ended September 30, 2007 and 2006
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September30, September 30, September 30,
2007 2006 2007 2006
(Restated) (Restated)
------------ ------------ ------------ ------------
Loss from continuing operations before
minority interests and income taxes $ (1,290,172) $ (141,388) $ (2,647,983) $ (601,309)
Minority interests (65,186) (71,815) (108,934) (7,828)
------------ ------------ ------------ ------------
Loss from continuing operations before
income taxes (1,355,358) (213,203) (2,756,917) (609,137)
Income tax benefit (expense) -- -- -- --
------------ ------------ ------------ ------------
Loss from continuing operations (1,355,358) (213,203) (2,756,917) (609,137)
Discontinued operations:
Income from Operations of Dutch Fork
Capital, LLC (Including gain on
disposal of $160,128) -- -- 300,066 --
------------ ------------ ------------ ------------
Net Loss (1,355,358) (213,203) (2,456,851) (609,137)
Other comprehensive income -- -- -- --
------------ ------------ ------------ ------------
Comprehensive Loss $ (1,355,358) $ (213,203) $ (2,456,851) $ (609,137)
============ ============ ============ ============
Basic earnings (loss) per weighted
-average common shares outstanding:
Continuing operations $ (0.10) $ (0.02) $ (0.21) $ (0.06)
Discontinued operations -- -- 0.02 --
------------ ------------ ------------ ------------
Net Loss $ (0.10) $ (0.02) $ (0.19) $ (0.06)
============ ============ ============ ============
Fully diluted earnings (loss) per
weighted average common shares
outstanding calculated on net
loss and cumulative undeclared
dividends on preferred stock
Continuing operations $ (0.02) $ (0.06)
Discontinued operations -- --
------------ ------------ ------------ ------------
Net Loss $ (0.02) $ (0.06)
============ ============ ============ ============
Weighted-average number of shares
of common stock outstanding:
Basic 13,427,983 12,725,124 12,956,836 12,725,124
------------ ------------ ------------ ------------
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
Nine Months Ended September 30, 2007 and 2006
(Unaudited)
Nine Months Ended
September 30, September,
2007 2006
(Restated)
----------- -----------
Cash Flows from Operating Activities:
Net loss $(2,456,851) $ (609,137)
----------- -----------
Results from discontinued operations (300,066) --
----------- -----------
Loss from continuing operations (2,756,917) (609,137)
----------- -----------
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation 49,128 17,116
Non-cash stock based compensation 248,332 --
Minority interests in subsidiaries' net earnings 108,935 7,828
Change in assets and liabilities:
Increase in portfolio assets (2,395,768) (961,804)
Increase in prepaid expenses and other assets (93,308) (75,183)
Decrease in accounts payable (206,797) (46,193)
Increase in settlement costs 440,000 --
Increase in accrued liabilities 31,424 194,607
----------- -----------
Total adjustments (1,818,054) (863,629)
-----------
Net Cash Used by Operating Activities (4,574,971) (1,472,766)
----------- -----------
Cash Flows From Investing Activities
Purchases of property and equipment (336,803) (42,731)
----------- -----------
Net Cash Used by Investing Activities (336,803) (42,731)
----------- -----------
The accompanying notes are an integral part of these
consolidated financial statements
F-7
Mortgage Assistance Center Corporation
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2007 and 2006
(Unaudited)
Nine Months Ended
September 30, September 30,
2007 2006
(Restated)
----------- -----------
Cash Flows From Financing Activities
Proceeds from issuance of debt 2,586,000 1,571,500
Repayment of debt (400,982) (496,615)
Proceeds from issuance of Preferred Stock 500,000 --
Proceeds from issuance of Common Stock 13,459 --
Capital contributions from minority interests 2,015,875 402,000
Refund of capital contributions to minority interests (783,527) --
Distributions to minority interests (72,240) (220,169)
Net advance from stockholders 500,000 13,028
Repayments of mortgage loan (15,549) (5,580)
----------- -----------
Net Cash Provided by Financing Activities 4,343,036 1,264,164
----------- -----------
Net Cash Provided by Discontinued Operations 275,178 --
----------- -----------
Net Decrease in Cash (293,560) (251,333)
Cash at Beginning of Period 1,205,120 598,979
----------- -----------
Cash at End of Period $ 911,560 $ 347,646
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Period for:
Interest $ 398,969 $ 166,208
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
September 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. 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 nine months
ended September 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
September 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. All of the
assets, liabilities and applicable minority interests have been eliminated, and
the results of operations have been classified as Discontinued Operations, in
the accompanying financial statements.
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
September 30, 2007
(Unaudited)
Note 6 - Settlement Costs
----------------
In Note 6 of the Notes to Financial Statements of the Company's Quarterly Report
on Form 10-QSB for the quarter ended June 30, 2007, the Company disclosed that
it was undergoing an internal investigation with respect to certain
inappropriate practices that it had discovered during a review of its controls
and procedures.
MAC acts as the sole manager for several limited liability companies (the
"LLCs"), each of which holds loan portfolios, former REO properties or a
combination of both (the "Properties"). As manager, MAC selects the properties
to be purchased by the LLC and has obtained either loans or equity investments
from the LLC members in order to acquire the Properties. In addition, MAC has
entered into servicing agreements with the LLCs, pursuant to which MAC is to
perform services related to the Properties (the "Servicing Agreements"). Due to
MAC's operating control over these entities and its 50% interest in the profits,
each of these LLCs is consolidated in the Company's financial statements.
MAC, in the regular course of its business, also sells Properties from its
inventories to various unconsolidated individuals and entities ("Purchasers")
and enters into Servicing Agreements with these individuals and entities
pursuant to which MAC is entitled to a 50% share in the profits generated from
its servicing activities.
Through the course of the initial part of the internal investigation, the
Company discovered that (a) MAC charged various LLCs and Purchasers for services
under the Servicing Agreements, yet failed to adequately provide the applicable
services ("Service Overcharges"), and (b) MAC either, on behalf of itself or as
manager of an LLC, sold Properties (1) from its inventory to an LLC, (2) from
one LLC to another LLC, (3) from its inventory to a Purchaser, or (4) from an
LLC to a Purchaser, for prices higher than the acquisition cost of such
Properties, notwithstanding the fact that the agreements governing MAC's
management of the LLCs specifically required that any such sales of Properties
be at MAC's acquisition cost. Although there is no similar requirement under any
of the agreements with Purchasers, the investigation has uncovered some
indication that the Purchasers may have also believed that their purchase of
Properties was at MAC's acquisition cost.
Based on its findings during the internal investigation, the Company has accrued
settlement costs of $440,000 in the accompanying financial statements, which
represent its best estimate of the amount that will be sufficient to settle the
Service Overcharges and excess profits generated by the aforementioned sale of
Properties. Because the Company reports the operations of the LLCs on a
consolidated basis whereby intercompany transactions were eliminated in
consolidation, it does not believe that the impact of these Service Overcharges
and profits necessitates any adjustments with respect to the Company's
previously issued financial statements. These profits did, however, impact the
profits and losses reported by the individual LLCs to their respective
non-Company members.
The Company believes that it has corrected the weaknesses in its controls and
procedures by creating additional levels of review and approval of acquisitions
and sales of portfolio assets.
F-11
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
September 30, 2007
(Unaudited)
Note 7 - 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 advised the Company that they did not intend to fund further tranches
under the Purchase Agreement.
In August 2007, after discussions with the Investors, the Company received a
proposal from the Investors with respect to an equity investment of $1,000,000
in exchange for the issuance of 267,347,556 new shares of common stock, which
will result in the Investors holding 95% of the outstanding shares of common
stock (the "Transaction"). At the time the Company received the proposal from
the Investors, Mr. Payne, through his relationship with W.C. Payne Investments,
agreed to exercise warrants to purchase 448,600 shares of common stock; and Mr.
Jones, through his relationship with FAX/MAC, agreed to purchase 897,200 shares
of common stock. Upon completion of this transaction, all additional previously
issued but unexercised warrants held by the Investors would be cancelled.
Effective September 2007, the Company entered into an agreement with the
Investors pursuant to which the Transaction described above will be consummated.
The agreement was structured as an amendment to the Purchase Agreement described
above. The Investors advanced the $1,000,000 purchase price for the 267,347,556
shares of common stock in two separate tranches of $500,000, one of which was
paid to the Company in August, 2007, prior to the entry by the parties of the
definitive agreement, and the second of which was paid to the Company in
October, 2007. Upon filing of the Amendment with the Florida Department of
State, the Company will issue the 267,347,556 shares to the Investors.
Messrs. William G. Payne and Rod C. Jones are members of the Company's Board of
Directors. Mr. Payne is also the Managing Member of W.C. Payne Investments,
L.L.C. and Mr. Jones is a limited partner in FAX/MACC, L.P., and the Managing
Member of FAX GenPar, LLC, which is the General Partner of Family Access
Exchange II, L.P, which is the General Partner of FAX/MACC, L.P.
F-12
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
September 30, 2007
(Unaudited)
Note 8 - Lender Agreement
----------------
On August 10, 2007, in connection with the transaction discussed in Note 7
above, the Company received from an investor a $300,000 bridge loan in the form
of two non-interest bearing promissory notes, a demand note in the principal
amount of $100,000, and a sixty-day term note. The investor is the sole
shareholder of a company that has provided additional funding totaling
approximately $5,000,000 to the Company for the purchase of portfolio assets
over the last two years. In connection with these notes, the Company granted to
the investor the right to receive from the Company a warrant to purchase
37,522,464 shares of common stock at an exercise price per share equal to the
closing price of a share of the common stock on the day immediately preceding
the date the warrant is issued. The Company also agreed to issue an additional
warrant providing the opportunity to receive an additional 56,283696 shares of
common stock. This warrant will become exercisable with respect to 3,752,246
shares of common stock for every $2,000,000 in additional equity or debt funding
provided to the Company by the investor or his affiliates, if and when requested
by the Company; provided that he or his affiliates have such funds available for
such purpose.
These warrants will be issuable by the Company to the investor upon filing of
the Amendment with the Florida Department of State and have a term of five years
from the date of issue. It is further anticipated that any debt funding provided
by the investor or his affiliates would bear interest at a rate equal to at
least twelve percent (12%) per annum, and could remain outstanding for no longer
than twenty-four (24) months.
Note 9 - 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 nine months ended September 30, 2007 and prior years, resulting in an
accumulated stockholders' deficit as of September 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-13
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
September 30, 2007
(Unaudited)
Note 9 - Going Concern Uncertainty (continued)
-------------------------------------
The Company continues to actively pursue alternative financing options to fund
the Company's requirements, and those options 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
(see Note 13). However, there is no guarantee that the Company will receive
sufficient funding to sustain operations or implement any future business plans.
Note 10 - 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 $38,121 and $114,655 for the three months and nine months ended
September 30, 2007, respectively, applicable to these priority payment
obligations.
Note 11 - 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. The total rental payments are being expensed on
a straight line basis over the term of the lease.
Note 12 - 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 September 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 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 nine months ended September 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 quarters ended June 30, 2007 and September 30,
2007. The result reflects no related tax benefit due to the Company's full
valuation allowance on its deferred tax assets. As of
F-14
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
September 30, 2007
(Unaudited)
Note 12 - Share-Based Compensation (continued)
------------------------------------
September 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.
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-15
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
September 30, 2007
(Unaudited)
Note 13 - Subsequent Events
-----------------
Effective October 22, 2007, the Company, MAC, and HBK Fund MS LLC, a Delaware
limited liability company ("HBK") entered into a Venture Funding Agreement (the
"Venture Funding Agreement") pursuant to which the Company may receive up to
$75,000,000 in joint venture funding to acquire various pools of distressed real
estate and mortgage notes (collectively, the "Property Portfolios"). Under the
Venture Funding Agreement, HBK would provide equity funding to enable newly
created joint venture entities (collectively, the "Joint Ventures"), each of
which would be owned 75% by HBK and 25% by the Company, to acquire Property
Portfolios, and the Joint Ventures would acquire, manage and sell the distressed
real estate and mortgage notes. A new Joint Venture would be created for each
Property Portfolio funded by HBK. Any funding required by the Joint Venture in
excess of the initial equity funding by HBK would be provided by HBK in the form
of promissory notes with maturities of no less than one year and bearing an
interest rate of eight percent (8%) per annum, and any required debt service
associated with the promissory notes would take precedence over any profit
distributions described below.
Upon acquisition of a Property Portfolio, the Company would receive a sourcing
fee equal to three percent (3%) of the purchase price of the Property Portfolio.
MAC, under the terms of a servicing agreement between the parties, would service
the Property Portfolio. Profit distributions from the Joint Venture would be
made first to HBK until it received repayment of its capital investment in the
Joint Venture; second to HBK for its 8% priority return as defined in the Joint
Venture agreement; third to MAC for an amount equal to the 8% return received by
HBK; and remaining profits of the venture would be split in proportion to the
parties' equity ownership.
In connection with the Venture Funding Agreement, the Company has issued a
warrant to purchase shares of our common stock that would, when, if exercised in
full, result in the warrant holder holding 33% of the outstanding shares of
common stock.
F-16
Item 2. Management's Discussion and Analysis or Plan of Operation
Forward Looking Statements:
From time to time, certain information provided by 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, and 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.
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:
The Company 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 September 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
- -------------------------------
Cash and cash equivalents totaled $911,560 as of September 30, 2007,
compared with $1,205,120 as of December 31, 2006.
Net cash provided by operating activities
- -----------------------------------------
Net cash used in operating activities was $ (4,562,539) for the nine months
ended September 30, 2007, compared with $ (1,472,766) for the nine months
ended September 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 $ (349,235) for the nine months
ended September 30, 2007, compared with $ (42,731) for the nine months
ended September 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 $100,000 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 $4,343,036 for the nine
months ended September 30, 2007, compared with $1,264,164 for the nine
months ended September 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 $2,586,000 of additional promissory notes, and the
net capital contributions from minority interests.
Cash requirements
- ----------------------
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.
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 advised the
Company that they do not intend to fund further tranches under the Purchase
Agreement.
On August 10, 2007, the Company received from an investor a $300,000 bridge
loan in the form of two promissory notes, a demand note in the principal
amount of $100,000, and a sixty-day term note. The notes are non-interest
bearing; outstanding principal was due and payable upon maturity of the
notes; and the demand note was repaid on October 3, 2007 and the term note
was repaid on October 10, 2007.
In August 2007, after discussions with the Investors, the Company received
a proposal from the Investors with respect to an equity investment of
$1,000,000 in exchange for the issuance of 267,347,556 new shares of common
stock, which will result in the Investors holding 95% of the outstanding
shares of common stock (the "Transaction"). In connection with this
transaction, all previously issued but unexercised warrants held by the
Investors would be cancelled.
Effective September 2007, the Company entered into an agreement with the
Investors pursuant to which the Transaction described above will be
consummated. The Investors funded the $1,000,000 purchase price for the
267,347,556 shares of common stock in two separate tranches of $500,000,
one of which was paid to the Company in August, 2007, prior to the entry by
the parties of the definitive agreement, and the second of which was paid
to the Company in October, 2007. Upon filing of the Amendment with the
Florida Department of State, the Company will issue the 267,347,556 shares
to the Investors.
Effective October 22, 2007, the Company, Mortgage Assistance Center, a
Texas corporation and our wholly-owned subsidiary ("MAC"), and HBK Fund MS
LLC, a Delaware limited liability company ("HBK") entered into a Venture
Funding Agreement (the "Venture Funding Agreement") pursuant to which the
Company may receive up to $75,000,000 in joint venture funding to acquire
various pools of distressed real estate and mortgage notes (collectively,
the "Property Portfolios"). Under the Venture Funding Agreement, HBK would
provide equity funding to enable newly created joint venture entities
(collectively, the "Joint Ventures"), each of which would be owned 75% by
HBK and 25% by the Company, to acquire Property Portfolios, and the Joint
Ventures would acquire, manage and sell the distressed real estate and
mortgage notes.
Upon acquisition of a Property Portfolio, the Company would receive a
sourcing fee equal to three percent (3%) of the purchase price of the
Property Portfolio. MAC, under the terms of a servicing agreement between
the parties, would service the Property Portfolio. Profit distributions
from the Joint Venture would be made first to HBK until it received
repayment of its capital investment in the Joint Venture; second to HBK for
its 8% priority return as defined in the Joint Venture agreement; third to
MAC for an amount equal to the 8% return received by HBK; and remaining
profits of the venture would be split in proportion to the parties' equity
ownership.
The Company continues to actively pursue alternative financing options to
fund the Company's requirements, and those options 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.
Results of Operations
- ---------------------
Gross Operating Revenue from Continuing Operations
- --------------------------------------------------
Gross operating revenue for the three months ended September 30, 2007 was
$964,006 compared with $1,278,320 for the three months ended September 30,
2006, a decrease of $314,314, or 24.6%. Gross operating revenue has
decreased from the first two quarters due to the sale of the Company's
interest in Dutch Fork Capital, LLC.
Gross operating revenue for the nine months ended September 30, 2007 was
$2,686,204 compared with $2,235,714 for the nine months ended September 30,
2006, an increase of $450,490, or 20.1%.
Net Operating Revenue from Continuing Operations
- ------------------------------------------------
Net operating revenue, as a percentage of sales, was 31% and 35% for the
three months ended September 30, 2007 and September 30, 2006, respectively.
Margin contribution dollars decreased 33% as a result of the decrease in
gross operating revenue during this period. For the nine months ended
September 30, 2007 and September 30, 2006, respectively, net operating
revenue, as a percentage of sales, was 43% and 38%. Margin contribution
dollars increased to $1,143,753 from $854,144, an increase of $429,547, or
34%.
Operating expenses from Continuing Operations
- ---------------------------------------------
Operating expenses, as a percentage of gross operating revenue, were 148%
and 115% for the three months ended September 30, 2007 and September 30,
2006, respectively. The operating expenses, as a percentage of sales, were
127% and 60% for the nine months ended September 30, 2007 and September 30,
2006, respectively. The Company continues to invest in the infrastructure
and other resources required to support the anticipated additional asset
pools.
Income from Discontinued Operations
- -----------------------------------
Income of $300,066 for the nine months ended September 30, 2007 was
applicable to Dutch Fork Capital, LLC. The Company sold its equity interest
in this joint venture in April 2007.
Net loss
- --------
Net loss was $ (1,355,358) and $ (213,203) for the three months ended
September 30, 2007 and September 30, 2006, respectively. Net loss was $
(2,456,851) and $ (609,137) for the nine months ended September 30, 2007
and September 30, 2006, respectively.
Item 3. Controls and Procedures
During the period ended September 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.
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.
During the quarter, the Company addressed the weaknesses previously disclosed in
its Form 10-QSB for the period ending June 30, 2007 and its Form 8-K dated
August 10, 2007 by creating additional levels of review and approval of
acquisitions and sales of portfolio assets.
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 relating to the Company required to be included in the Company's
period SEC filings.
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: November 14, 2007 By: /s/ Ron Johnson
----------------------------------------
Ron Johnson
President and Chief Executive Officer
Date: November 14, 2007 By: /s/ Richard D. Coleman
----------------------------------------
Richard D. Coleman
Chief Financial Officer
(principal financial officer)