December 14, 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 / Supplemental Response for Fiscal Year Ended
December 31, 2006
Filed September 30, 2007
Form 10-QSB for the Quarter Ended
June 30, 2007
Filed August 20, 2007
File No. 000-21627
Gentlemen:
In response to your letter to the Company dated November 30, 2007, we have
prepared for your consideration the following responses to your comments.
Form 10-KSB for Fiscal Year Ended December 31, 2006
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Notes to Consolidated Financial Statements
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Note 2-Summary of Significant Accounting Policies
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General
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1. We have reviewed your response to our prior comment two, noting you
record revenue for services provided to "maximize the value of the
assets." Please provide a detailed discussion of type of services you
provide, how the services impact the assets and cite the specific
authoritative literature you utilized to support your accounting
treatment.
Response: For most of the portfolio assets, the Company has entered
into a "Servicing Agreement" with the joint venture or third party
investor which provides for a standard service fee per month to be
charged in return for the Company performing certain professional
services in order to maximize the value of the note and/or underlying
real estate. For mortgage notes, these services include, but are not
limited to: (1) converting the loans from non-performing to performing
status, (2) receiving and processing payments (2) performing title and
other legal work, (3) payment of taxes, (4) reselling the notes in the
secondary market, etc. and/or, if necessary, (5) initiating
foreclosure and eviction procedures. In the case of properties that
have been foreclosed and eviction has been completed, the Company may
refurbish and/or rehabilitate the home, provide insurance coverage,
continue to keep taxes current, and perform market evaluations and
property appraisals in order to market and either rent, lease, or
resell the properties at wholesale or retail.
Income recognition for service fees are governed generally by
Financial Accounting Concepts No. 5, paragraphs 83 and 84, which refer
in general to revenues being recognized when both "realizable" and
"earned." In accordance with the terms of the servicing agreements
that have been entered into between the Company and the investors, the
Company recognizes income each month it performs the services provided
for in the agreement.
As we indicated in our previous response, we do not believe that the
provisions of SFAS No. 140 are applicable due to the fact that the
Company is not assuming responsibility for the repayment of the
obligations of the notes or properties it services, and has no control
over the portfolio assets collateralizing the notes.
Note 6 - Portfolio Assets, page F-21
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2. We have reviewed your response to our prior comment four and note that
your response does not address our comment in its entirety. Please
revise your document to provide the disclosures required by paragraph
.13(a)(4), .13(c) and .13(d) of SOP 01-6.
Response: The Company believes that the loans that it acquires have
more of the characteristics of "inventory" as opposed to "loans
receivable" due to the fact that all of the loans are non-performing
(delinquent) and the loans are acquired for resale, not for income or
investment purposes. However, the following explanations address the
specific sections identified in your comment letter:
Paragraph 13(a)(4) - Since the Company only purchases
non-performing notes, it does not classify them as "loan or trade
receivables, but as "portfolio assets" for resale; therefore,
whatever payments may be received during the period the assets
are held by the Company are recorded as a reduction in the cost
basis of the asset, not as income.
Paragraph 13(c)(1) - As noted above, the Company does not expect
to receive any income; therefore, none is accrued. Any payments
that are received are applied as a reduction in the cost basis of
the asset. All portfolio assets remain on nonaccrual status
during the entire period they are held by the Company.
Paragraph 13(c)(2) - A provision for impairment is made each year
based on historical experience; and portfolio assets are reviewed
on a quarterly basis and written off when it is determined that
there is no longer any market value of the asset. Market value is
defined as the market value of the note or the net expected
realizable value of the underlying real estate (market value less
taxes, foreclosure costs, eviction costs, etc.).
Paragraph 13(c)(3) - All notes purchased are non-performing;
however, the Company would consider any note for which payments
were made for a period of four months, and for which a loan
modification agreement was signed, to be considered a performing
loan and accounted for in a manner consistent with the applicable
guidelines.
Paragraph 13(d) - This section is not applicable since the
Company does not have any gains or losses on sales of loans or
trade receivables. "Sales of portfolio assets" and "Cost of
portfolio assets sold" are presented separately on the Company's
income statement.
Note 16 - Common Stock Warrants, page F-33
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3. We have reviewed your response to our prior comment five and it
appears that you have classified the warrants issued in conjunction
with the Series A preferred stock as equity. Please tell us how you
have considered the guidance in EITF 00-19 in your proposed accounting
for your warrants. In addition, per review of Exhibit 3.01 of your
Form 8-K filed on December 6, 2006, the preferred stock appears to be
redeemable at the option of the company and convertible under a
trigger event. It would appear that the discount from the value of the
preferred stock assigned to the warrants would need to be accreted
back over the period in which the preferred stock can be redeemed.
This accretion would be accounted for as a deemed dividend to the
preferred stock and impact the net loss available to common stock when
determining earnings per share. Please advise or revise.
Response: We considered guidance in EITF 00-19 in our proposed
accounting for the warrants issued in conjunction with the Series A
preferred stock. We have concluded that the portion of the proceeds of
the preferred stock issuance allocated to the warrants was
appropriately classified as equity rather than as a liability. This
determination was based on the following:
1) Per paragraph 3 of EITF 00-19, the Issue applies to free-standing
instruments; in our situation, the warrants in question were
imbedded in the Series A Preferred Stock and Common Stock Warrant
Purchase Agreement (the "Agreement"). Therefore, in our opinion,
EITF 00-19 is not applicable.
2) In any event, the warrants issued would be classified as equity
based on two provisions of the EITF. Per paragraph 7 of the EITF,
as the Agreement does not provide the Investors with an option
for a net cash settlement, the value assigned to the warrants was
appropriately treated as equity. Second, per paragraph 14 of the
EITF, as the Agreement permits the Company to settle in
unregistered shares, equity treatment is appropriate.
The second part of your comment refers to the discount from the value
of the preferred stock assigned to the warrants being accreted back
"over the period in which the preferred stock can be redeemed." We
believe that if accretion is required, it should be over the period of
time from the issuance date of the preferred stock (11/30/06) through
the date which the preferred stock can first be redeemed (11/30/13), a
seven year period.
Compliance with this requirement necessitates reclassifying the
carrying value of the preferred stock on the balance sheet from its
par value ($1,500) to its assigned value at issuance ($160,530). The
deemed dividend at December 31, 2007 would be $15, 946 (1/84 of
$1,339,470). The amount to accreted back over the seven year period
would be $1,339,470 ($1,500,000 - $160,530).
We have attached a proposed amended balance sheet (see Exhibit A) and
statement of stockholders' equity (see Exhibit B) for December 31,
2006 to illustrate the required changes. There would be no effect on
the amount of the reported net loss per share for the year ended
December 31, 2006. However, if this response is approved, we would
amend the loss per share disclosures on the consolidated statement of
operations to state that the basic and fully diluted loss per common
share was calculated on net loss and cumulative but undeclared
dividends on preferred stock, as well as deemed dividends (accretion
of discount) on preferred stock. In addition, the footnote disclosure
detailing the computation of net loss per share would be revised to
include both preferred stock dividend amounts to arrive at the net
loss available to common shareholders.
Form 10-QSB for the Quarter Ended June 30, 2007
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Item 3. Controls and Procedures
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4. Please describe the basis for your officers' conclusions that your
disclosure controls and procedures are effective considering you have
identified material weaknesses in your disclosure controls.
5. We note that your response to our prior comment nine did not address
our comment in its entirety, therefore it is being partially
re-issued. 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 control 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: We have revised and marked the changes on our proposed "Item
3 - Controls and Procedures" (see Exhibit C) that we believe addresses
your noted concerns.
Based on our prior discussions, 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 Commission's comments. 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
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Ronald E. Johnson
Chief Executive Officer
Exhibit A
Mortgage Assistance Center Corporation
Consolidated Balance Sheets
December 31, 2006 and 2005
LIABILITIES AND STOCKHOLDERS' EQUITY
2006 2005
(Restated)
------------ ------------
Current Liabilities:
Notes payable-individuals and others $ 1,522,315 $ 1,794,288
Current portion of mortgages payable 24,400 10,100
Accounts payable-trade 58,794 183,405
Accounts payable-other 182,507 289,784
Accrued fees and wages 182,532 13,675
Accrued stock-based compensation 95,947 --
Other accrued liabilities 169,068 215,551
------------ ------------
Total Current Liabilities 2,235,563 2,506,803
------------ ------------
Long-term Debt:
Notes payable-individuals and others 1,492,768 639,105
Note payable-stockholder -- 60,574
Mortgages payable, less current portion 1,036,360 1,061,504
------------ ------------
Total Long-Term Debt 2,529,128 1,761,183
------------ ------------
Minority Interests 5,466,543 691,453
------------ ------------
Total Liabilities 10,231,234 4,959,439
------------ ------------
Stockholders' Equity (Deficit):
Series A convertible preferred stock ($0.001 par value;
3,000,000 shares authorized; 1,500,000 shares issued
and outstanding; aggregate liquidation preference
of $1,500,000; $12,500 cumulative undeclared dividends) 176,476 --
Common stock ($0.001 par value, 50,000,000 shares
authorized, 12,725,124 shares issued and outstanding) 12,726 12,726
Additional paid-in capital 2,306,437 173,663
Retained earnings (deficit) after December 31, 2004 (3,518,248) (1,508,073)
------------ ------------
(1,022,609) (1,321,684)
Subscriptions issuable 344,460 102,160
------------ ------------
Total Stockholders' Equity (deficit) (678,149) (1,219,524)
------------ ------------
Total Liabilities and Stockholders' Equity $ 9,553,085 $ 3,739,915
============ ============
EXHIBIT B
MORTGAGE ASSISTANCE CENTER CORPORATION
Amended Statements of Changes in Stockholders' Equity (Deficit)
Years Ended December 31, 2006 and 2005
Series A Common Stock Additional
Preferred ------------ paid-in Accumulated Subscriptions
Stock Shares Par Value capital deficit issuable Total
----------- ----------- ----------- ------------ ------------ ----------- -----------
Balances at
December 31, 2004 $ -- 12,625,124 $ 12,626 $ 23,971,949 $(23,798,786) $ 2,160 $ 187,949
Issuances of common stock
for legal services -- 100,000 100 500 -- -- 600
Stock issuable to fund
partnership investment -- -- -- -- -- 100,000 100,000
Quasi-reorganization
effective
December 31, 2004 -- -- -- (23,798,786) 23,798,786 -- --
Net loss for the year -- -- -- -- (1,508,073) -- (1,508,073)
----------- ----------- ----------- ------------ ------------ ----------- -----------
Balances at
December 31, 2005 -- 12,725,124 12,726 173,663 (1,508,073) 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 -- -- -- -- -- 160,530
Common Stock Warrants -- -- -- 1,252,485 -- -- 1,252,485
Deemed dividend (accretion of
discount) on Preferred Stock 15,946 -- -- (15,946) -- -- --
Stock-based compensation expense -- -- -- 896,235 -- -- 896,235
Net loss for the year -- -- -- -- (2,010,175) -- (2,010,175)
----------- ----------- ----------- ------------ ------------ ----------- -----------
Balances at
December 31, 2006 $ 176,476 12,725,124 $ 12,726 $ 2,306,437 $ (3,518,248) 344,460 $ (678,149)
=========== =========== =========== ============ ============ =========== ===========
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, design and operation of the disclosure controls and
procedures pursuant to Rule 13a-15(b) 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, management identified the following weakness in its
disclosure controls and procedures - the Company did not have adequately
designed procedures that provided senior management, including the Company's
Chief Executive Officer, 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 and procedures
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.
Solely as a result of the material weakness discussed above, management
concluded that the Company's disclosure controls and procedures were not
effective during the entire period ending June 30, 2007; however, as a result of
the changes made upon the discovery of such weakness, the Chief Executive
Officer and the Chief Financial Officer concluded that, as of June 30, 2007, the
Company's disclosure controls and procedures were effective at that reasonable
assurance level described above in timely alerting them to material information.
Other than the identification and corrective action taken during the quarter
with respect to the material weakness discussed above, there was no change in
internal control over financial reporting during the quarter ended June 30,
2007, that materially affected, or is reasonably likely to materially affect
internal control over financial reporting.