UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[X] Quarterly Report Under Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the quarterly period ending March 31, 2008
[_] 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 registrant as specified in its charter)
Florida 06-1413994
--------------------------------- ------------------
(State or other jurisdiction of incorporation) (IRS Employer ID Number)
1341 W. Mockingbird Lane, Suite 1200 West, Dallas, TX 75247
-------------------------------
(Address of principal executive offices)
(214) 670-0005
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the issuer has (1) filed all reports required to
be files by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "accelerated filer," "large accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated Accelerated filer |_| Non-accelerated Smaller reporting
filer |_| filer |_| company [X]
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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 14,071,024 shares of Common
Stock as of March 31, 2008.
1
Mortgage Assistance Center Corporation
Table of Contents
Form 10-Q
Quarter Ended March 31, 2008
Page
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets
as of March 31, 2008 (Unaudited) and December 31, 2007 (Audited).....3
Consolidated Statements of Operations and Comprehensive Loss
for the three months ended March 31, 2008 and 2007 (Unaudited).......5
Consolidated Statements of Cash Flows
for the three months ended March 31, 2008 and 2007 (Unaudited).......7
Notes to Consolidated Financial Statements.................................9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................9
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........13
ITEM 4T. CONTROLS AND PROCEDURES..........................................13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................13
ITEM 1A. Risk Factors.......................................................
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.......13
ITEM 3. Defaults Upon Senior Securities...................................14
ITEM 4. Submission of Matters to a Vote of Security Holders...............14
ITEM 5. Other Information.................................................14
ITEM 6. Exhibits..........................................................14
SIGNATURE.................................................................15
Mortgage Assistance Center Corporation
Consolidated Balance Sheets
March 31, 2008 (Unaudited) and December 31, 2007 (Audited)
ASSETS
March 31, December 31,
2008 2007
(Unaudited) (Audited)
----------- -----------
Current Assets:
Cash and cash equivalents $ 282,369 $ 616,288
Portfolio assets, at cost (net of impairment reserve
of $278,689 and $197,237 at March 31, 2008 and
December 31, 2007, respectively) 5,587,570 5,788,361
Accounts receivable - related parties 21,043 --
Prepaid expenses and other current assets 199,259 337,158
----------- -----------
Total Current Assets 6,090,241 6,741,807
----------- -----------
Property and Equipment, at cost:
Land 699,600 699,600
Building and improvements 679,168 668,840
Office furniture and equipment 406,079 422,471
----------- -----------
1,784,847 1,790,911
Less accumulated depreciation (174,073) (148,038)
----------- -----------
Net Property and Equipment 1,610,774 1,642,873
----------- -----------
Investments and Other Assets:
Deposits 25,404 25,404
----------- -----------
Total Assets $ 7,726,419 $ 8,410,084
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
3
Mortgage Assistance Center Corporation
Consolidated Balance Sheets
March 31, 2008 (Unaudited) and December 31, 2007 (Audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2008 2007
(Unaudited) (Audited)
----------- -----------
Current Liabilities:
Notes payable-individuals and others $ 3,189,011 $ 2,614,011
Advance from stockholders 1,000,000 1,000,000
Current portion of mortgages payable 24,500 24,500
Accounts payable 391,458 342,641
Accounts payable - related parties 430,104 --
Settlement costs 430,573 440,517
Accrued fees and wages 31,470 74,911
Other accrued liabilities 364,807 359,694
----------- -----------
Total Current Liabilities 5,861,923 4,856,274
----------- -----------
Long-term Debt:
Notes payable-individuals and others 2,131,678 2,466,678
Mortgages payable, less current portion 1,009,515 1,015,019
----------- -----------
Total Long-Term Debt 3,141,193 3,481,697
----------- -----------
Total Liabilities 9,003,116 8,337,971
----------- -----------
Minority Interests 3,278,878 3,612,087
----------- -----------
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 $263,161 and $207,962 respectively at
March 31, 2008 and December 31, 2007) 915,666 867,828
Common stock ($0.001 par value, 50,000,000 shares
authorized, 14,071,024 shares issued and outstanding
at March 31, 2008 and December 31, 2007) 14,071 14,071
Additional paid-in capital 2,465,727 2,374,621
Retained earnings (deficit) after December 31, 2004 (8,295,499) (7,140,954)
----------- -----------
(4,900,035) (3,884,434)
Subscriptions issuable 344,460 344,460
----------- -----------
Total Stockholders' Equity (Deficit) (4,555,575) (3,539,974)
----------- -----------
Total Liabilities and Stockholders' Equity $ 7,726,419 $ 8,410,084
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
4
Mortgage Assistance Center Corporation
Consolidated Statements of Operations and Comprehensive Loss
Three Months Ended March 31, 2008 and 2007
(Unaudited)
March 31, March 31,
2008 2007
(Restated)
----------- -----------
Operating Revenues:
Sales of portfolio assets $ 333,767 $ 588,960
Servicing fees 4,512 114,396
Rental income 52,500 53,004
Other -- 46,365
----------- -----------
Gross operating revenues 390,779 802,725
Cost of portfolio assets sold 370,415 318,958
----------- -----------
Net operating revenues 20,364 483,767
----------- -----------
Operating Expenses:
Salaries, wages and contract labor 708,415 598,034
Selling, general and administrative expenses 399,944 324,128
Depreciation and amortization 30,278 12,113
Bad debts 88,468 107,594
----------- -----------
Total operating expenses 1,227,105 1,041,869
----------- -----------
Operating loss (1,206,741) (558,102)
----------- -----------
Other income (expense):
Interest and other income 2,955 9,949
Interest expense (147,240) (73,492)
Loss on retirement of property (2,728) --
----------- -----------
Total other income (expense) (147,013) (63,543)
----------- -----------
Loss from continuing operations before
minority interests and income taxes (1,353,754) (621,645)
The accompanying notes are an integral part of these
consolidated financial statements
5
Mortgage Assistance Center Corporation
Consolidated Statements of Operations and Comprehensive Loss
Three Months Ended March 31, 2008 and 2007
(Unaudited)
March 31, March 31,
2008 2007
(Restated)
------------ ------------
Loss from continuing operations before
minority interests and income taxes $ (1,353,754) $ (621,645)
Minority interests 199,209 (78,995)
------------ ------------
Loss from continuing operations before
income taxes $ (1,154,545) $ (700,640)
Income tax benefit (expense) -- --
------------ ------------
Discontinued Operations
(Income from Operations of Dutch Fork Capital LLC) -- 59,806
------------ ------------
Net Loss (1,154,545) (640,834)
------------ ------------
Other comprehensive income -- --
Comprehensive Loss $ (1,154,545) $ (640,834)
============ ============
Basic and fully diluted earnings (loss) per weighted
average common shares outstanding
calculated on net loss and cumulative
undeclared dividends on preferred stock:
Continuing operations $ (0.08) $ (0.05)
Net Loss $ (0.08) $ (0.05)
Weighted-average number of common stock outstanding:
Basic 14,071,024 12,725,124
============ ============
Fully diluted -- --
============ ============
The accompanying notes are an integral part of these
consolidated financial statements
6
Mortgage Assistance Center Corporation
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2008 and 2007
(Unaudited)
Three Months Ended
March 31, March 31,
2008 2007
(Restated)
----------- -----------
Cash Flows From Operating Activities
Net loss $(1,154,545) $ (640,834)
Results of discontinued operations -- (59,806)
----------- -----------
Loss from continuing operations (1,154,545) (700,640)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation 30,278 12,113
Non-cash stock-based compensation 138,944 248,332
Minority interests in subsidiaries' net earnings (losses) (199,209) 78,995
Loss on sale of assets 2,728 --
Change in assets and liabilities:
Decrease in portfolio assets 200,791 (443,962)
Increase in accounts receivable from related parties (21,043) (7,971)
Decrease in prepaid expenses and other assets 137,899 (61,706)
Increase in accounts payable 62,807 44,051
Increase in accounts payable - related parties 416,114 --
Decrease in settlement costs (9,944) --
Increase in accrued fees and wages 53,415 (75,781)
Decrease in other accrued liabilities (91,743) (838)
----------- -----------
Total adjustments 721,037 (206,767)
----------- -----------
Net Cash Provided (Used) by Operating Activities (433,508) (907,407)
----------- -----------
Cash Flows From Investing Activities
Proceeds from Sale of property and equipment 10,000 --
Additions to property and equipment (10,907) (17,900)
----------- -----------
Net Cash Provided (Used) by Investing Activities (907) (17,900)
----------- -----------
The accompanying notes are an integral part of these
consolidated financial statements
7
Mortgage Assistance Center Corporation
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2008 and 2007
(Unaudited)
Three Months Ended
March 31, March 31,
2008 2007
----------- -----------
Cash Flows From Financing Activities
Proceeds from issuance of debt to individuals and others $ 335,000 $ 385,000
Repayments of debt to individuals and others (95,000) (258,893)
Capital contributions from minority interests -- 550,000
Refunds of capital contributions to minority interests (117,933) (128,315)
Distributions to minority interests (16,067) (67,767)
Repayments of mortgage loans (5,504) (5,355)
----------- -----------
Net Cash Provided by Financing Activities 100,496 474,670
----------- -----------
Net Cash Provided by Discontinued Operations -- 36,964
----------- -----------
Net Decrease in Cash (333,919) (413,673)
Cash at Beginning of Period 616,288 1,205,120
----------- -----------
Cash at End of Period $ 282,369 $ 791,447
=========== ===========
Supplemental Disclosures of Cash Flow Information
- -------------------------------------------------
Cash Paid During the Quarter for:
Interest $ 16,637 $ 61,639
The accompanying notes are an integral part of these
consolidated financial statements
8
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
March 31, 2008 (Unaudited)
Note 1 - Organization
------------
Mortgage Assistance Center Corporation (formerly Safe Alternatives Corporation
of America, Inc.) (the "Company" or "MACC") was organized in 1976 under the name
Knight Airlines, Inc. The Company completed an initial public offering in 1978
of its common stock in Florida. The Company has also operated under the names of
Portsmouth Corporation, SAC-Delaware and Environmental Alternatives, Inc. From
July 1, 2002 to May 2005 the Company had no assets or operating activities.
The Company changed its name on May 14, 2004 to Mortgage Assistance Center
Corporation. The change was made in connection with the requirements of a Letter
of Intent executed between the Company and Mortgage Assistance Corporation
("MAC"), a Texas corporation, in which re-organizational steps were undertaken
to create a change in control of MACC prior to the completion of a business
combination agreement.
Upon completion of a definitive Business Combination Agreement in August 2005,
MACC acquired all of the issued and outstanding capital stock of Mortgage
Assistance Corporation and MAC became a wholly owned subsidiary of MACC.
Note 2 - Basis of Presentation and Principles of Consolidation
------------------------------------------------------
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-Q and
Regulation S-K. 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, 2007 included in the
Company's Annual Report on Form 10-K, 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-K. 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 interim periods are not
necessarily indicative of the results that may be expected for the complete
year.
The accompanying financial statements are consolidated and include the financial
statements of MACC and its wholly owned subsidiary, MAC. All significant
intercompany accounts and transactions are eliminated in consolidation
The Company through its subsidiary, MAC, has a 50% ownership interest in certain
unincorporated joint ventures and acts as the manager of each joint 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
9
Note 2 - Basis of Presentation and Principles of Consolidation (continued)
-----------------------------------------------------
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 these unincorporated entities, with the ownership
interests of minority investors recorded in a noncurrent caption, "Minority
Interests." The financial statements for the quarter ended March 31, 2007 have
been revised to reflect the priority payments to the limited partners of certain
joint ventures as preferential distributions of profit rather than as expenses,
consistent with the accounting treatment in the Company's Form 10-K for the year
ended December 31, 2007. In addition, effective January 1, 2008, the balance of
the ownership interests of minority interests, where applicable, were revised to
reflect 100% of the cumulative losses through December 31, 2007, in accordance
with the provisions of the individual joint venture agreements. Prior periods
have not been restated for this change as the impact was not material. 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 former directors have indirect ownership interests in Dutch Fork.
At March 31, 2007 and December 31, 2007, and for the periods then ended, all of
the assets, liabilities and applicable minority interests were eliminated, and
the results of operations were classified as Discontinued Operations. The
Company has a minority interest in certain unconsolidated joint ventures that
have been funded through a Venture Funding Agreement entered into effective
October 22, 2007 for acquiring various pools of distressed real estate and
mortgage notes. The funding agreement is further explained in Note 17 of the
December 31, 2007 10-K. The consolidated financial statements do not include the
assets and liabilities of these entities as the Company's ownership interests
are reported using the equity method of accounting according to the terms of the
joint venture agreements. As of March 31, 2008,the Company has not earned any
income associated with the operations of these ventures and has therefore
assigned no value to its equity in these unconsolidated joint ventures as of
that date.
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.
Note 4- 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
10
Note 4- Going Concern Uncertainty (continued)
-------------------------
operating losses for quarter ended March 31, 2008 and prior years, resulting in
an accumulated stockholders' deficit as of March 31, 2008. These factors, among
others, may indicate that the Company will be unable to continue as a going
concern for a reasonable period of time. The financial statements do not include
any adjustments relating to the recoverability of assets and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern. The Company's continuation as a going concern is dependent upon
its ability to generate sufficient cash flow to meet its obligations on a timely
basis, to obtain additional financing or refinancing as may be required, and
ultimately to sustain profitability. The Company continues to actively pursue
alternative financing plans to fund the Company's requirements, and those plans
include, but are not limited to, additional equity sales or debt financing under
appropriate market conditions, allegiances or partnership agreements, or other
business transactions which could generate adequate working capital. In
addition, the Company continues to explore opportunities to secure additional
sources of debt or other financings 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 and/or implement any future business plans.
Note 5 - 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 March 31, 2008, the Company had stock options for a total of 2,482,000 shares
outstanding under its 2006 Equity Incentive Plan. All of these options were
granted on or after November 28, 2006. The total compensation cost that has been
charged against income for all such options was $138,944 for the three months
ended March 31, 2008 and $248,332 for the three months ended March 31, 2007. The
share-based compensation expense increased the basic loss per share by $0.01 for
the quarter ended March 31, 2008. The result reflects no related tax benefit due
to the Company's full valuation allowance on its deferred tax assets. As of
March 31, 2008, there was $146,235 of compensation expense related to non-vested
share awards that is expected to be recognized over a period of three years.
The Company entered into two year employment agreements upon the hiring of a new
President and Chief Financial Officer in February and March 2007, respectively.
The new officers were granted incentive stock options for 1,750,000 shares of
common stock under the Plan, with one third of such options exercisable upon
execution of the employment agreements, and the remaining two thirds becoming
exercisable, one third upon each successive anniversary date, provided that the
officers are employed by the Company on each anniversary date. The fair value of
these options was determined by a commercially available software value of these
options was determined by a commercially available software product utilizing a
proven trinomial lattice valuation methodology. Based on this analysis, the
weighted-average value of the options at grant was determined to be
approximately $.43. Allowing for potential future forfeitures, non-cash
compensation expense of $246,371 was recorded for the quarter ended March 31,
2007, with the remaining compensation expense to occur in future
11
Note 5 - Share-Based Compensation (continued)
------------------------
years pursuant to vesting. The amount reflected for March 31, 2008 is for
vesting of prior issued stock options.
In addition, a total of 1,143,891 warrants were granted and outstanding as of
March 31, 2008. These warrant shares were issued to consultants or advisors to
the company and were fully vested at grant.
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 $0.25
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.
12
Note 6 - Related Party Transactions
--------------------------
From time to time, advances are made between the Company and the joint ventures
to cover costs on services that the Company has as the Managing Member of the
joint ventures. As of March 31, 2008, the amount in transition was $21,043 in
receivables from Strategic Equity Investments, whose CEO was named as a director
on May 15, 2008, and $430,104 in payables applicable to other unconsolidated
joint ventures.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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-Q 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-K for the year
ended December 31, 2007. 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 ninety
days to two 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.
14
Additionally, MAC generates revenue through 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 March 31, 2008. These circumstances,
along with others discussed in this section and elsewhere in this Form 10-Q
creates substantial risk regarding the Company's ability to continue as a going
concern.
Liquidity and Capital Resources
- ------------------------------------------
Cash and cash equivalents totaled $282,369 as of March 31, 2008, compared
with $616,288 as of December 31, 2007.
Net cash provided by operating activities
- ----------------------------------------------------
Net cash used in operating activities was $433,508 for the three months
ended March 31, 2008, compared with $907,407 for the three months ended
March 31, 2007. 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 $907 for the three months ended
March 31, 2008, compared with $17,900 for the three months ended March 31,
2007. The increase in net cash used in investing activities represents an
increase in cash proceeds from the sale of property and equipment.
Due to the Company's limited available working capital, it projects that it
will invest minimal amounts in additional capital expenditures during the
remainder of the year, only investing in maintenance capital critical to
its continuing operations; such amounts may be increased 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 $100,496 for the three months
ended March 31, 2008, compared with $474,670 for the three months ended
March 31, 2007.
15
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.
The Company continues to actively pursue alternative financing options to
fund the Company's working capital 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 also 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 March 31, 2008 was
$390,779 compared with $802,725 for the three months ended March 31, 2007,
a decrease of $411,946, or 51%.
As discussed in Note 2 to the accompanying consolidated financial
statements, the results of operations applicable to the joint ventures in
which the Company has less than a 50% ownership interest are not
consolidated; and therefore the gross operating revenues are not included
in the Consolidated Statement of Operations.
Net Operating Revenue from Continuing Operations
- --------------------------------------------------------------------
Net operating revenue, as a percentage of sales, was 5% and 49% for the
three months ended March 31, 2008 and March 31, 2007, respectively. Margin
contribution dollars decreased from $483,767 to $20,364, a decrease of
$463,403, or 90%.
Net operating revenue decrease for the reason noted above.
Operating Expenses from Continuing Operations
- ---------------------------------------------------------------
Operating expenses, as a percentage of gross operating revenue, were 314%
and 130% for the three months ended March 31, 2008 and March 31, 2007,
respectively. The Company continues to invest in the operating
infrastructure and other resources required to support the anticipated
additional asset pools.
Net loss
- ---------------
Net loss was $ (1,154,545) and $ (640,834) for the three months ended March
31, 2008 and March 31, 2007, respectively.
16
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide this information.
Item 4T. Controls and Procedures
Controls and Procedures
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, does not expect that 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.
Disclosure Controls and Procedures
As of the end of the March 31, 2008 reporting period, the Company carried out an
evaluation, under the supervision of and with the participation of the
management, including the Company's Chairman and Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-15(e) of the
Securities Exchange Act of 1934 (the "Exchange Act"), which disclosure controls
and procedures are designed to insure that information required to be disclosed
by a company in the reports that it files under the Exchange Act is recorded,
processed, summarized and reported within required time periods specified by the
SEC's rules and forms. Based upon that evaluation, 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.
Changes in Internal Control Over Financial Reporting
During an evaluation of the effectiveness of the Company's internal controls
over financial reporting conducted in connection with the Company's Annual
Report on Form 10-K. Based on this assessment, management determined that the
Company's internal control over financial reporting as of December 31, 2007 was
not effective as the Company had ineffective segregation of duties between its
accounting and check signing process which could result in material
misstatements to annual or interim financial statements that would not be
prevented or detected. Remediation to address this material weakness was
completed during the quarter ended March 31, 2008, having segregated duties
between signing checks and having access to the computer system. Other than this
remediation effort, there was no change in the Company's internal control over
17
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. The Company's internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.
Management conducted an evaluation of the effectiveness of the internal controls
over financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over
financial reporting as of March 31, 2008. Based on management's assessment and
those criteria, management believes that the internal control over financial
reporting as of March 31, 2008 was effective.
Managements internal control report was not subject to attestation by the
Corporation's independent registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Corporation to provide only management's report.
18
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 1A. Risk Factors.
As a smaller reporting company, we are not required to provide this information.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Effective February 12, 2008, the Company entered into two agreements (the "Note
Agreements") pursuant to which the Company may borrow up to an aggregate of
$600,000 (the "Funding Commitment") through one or more advances. The Note
Agreements provide that the Company may, from time to time, request advances up
to the Funding Commitment; provided, among other things, that (a) no more than
two advances may be requested during any calendar month, and (b) no advance
shall be less than $25,000. The first advances under the Note Agreements, in an
aggregate amount of $300,000, were received by the Company on February 12, 2008.
Amounts outstanding under the Note Agreements bear interest at the rate of
fifteen percent per annum, compounded monthly. All outstanding principal and
accrued interest on advances is due and payable upon demand.
Repayment of advances under the Note Agreements is secured by pledge of the
membership of other equity interests held by the Company in various joint
ventures formed by the Company for the purpose of acquiring and holding
portfolios of distressed, single-family real estate and non-performing mortgages
that the Company manages.
In connection with the Note Agreements, the Company has granted to each lender
thereunder, the right, exercisable at any time after the earlier to occur of (a)
a going private transaction, or (b) February 12, 2009, to purchase 12.5% of the
capital stock of the Company for a nominal consideration (an "Option"). The
issuance by the Company of each Option was made in reliance upon the exemption
available from registration under Section 4(2) of the Securities Act of 1933.
CSSF Master Fund, LP, one of the lenders under the Note Agreements, is also a
member in Canyon Ferry Capital LLC, a joint venture previously established by
the Company's subsidiary, Mortgage Assistance Corporation, to acquire a
portfolio of real estate properties. MAC is also a member of the joint venture,
serves as its manager and services the real estate portfolio. Pursuant to the
terms governing this joint venture, MAC receives a share in the profits of the
joint venture once its venture partners have received the amount of their
capital contribution to the venture, plus a preferred return on such capital.
At the time the Company entered into the Note Agreements, Mr. Payne was one of
our directors and was an employee of the investment advisor for CSSF Master
Fund. In such capacity, Mr. Payne may receive bonus compensation from this
investment advisor based on the performance of CSSF Master Fund.
19
Item 3. Defaults upon Senior Securities.
N/A
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
Directors and Officers
- ----------------------
Change of Directors and Executive Officers
- ------------------------------------------
The Board of Directors accepted the resignation of Mr. Rod Jones as Director on
March 17, 2008. On April 8, 2008, the Board accepted the resignation of Mr. Bill
Payne as director. On April 30, 2008, the Board accepted the resignation of Mr.
Dan Barnett as director. The Board also accepted the resignation of Mr. Richard
Coleman as the Company's Chief Financial Officer on February 4, 2008.
Mr. Dennis Downey. Effective April 6, 2008, the Board appointed Mr. Dennis
Downey as our Chief Operating Officer and as a director to fill one of the
vacancies on the Board.
Mr. Downey has 22 years of commercial real estate financing and real estate
investment experience. From 2004 to 2008 Mr. Downey was the founder and chairman
of Downey Capital Corporation, a Financial Intermediary for clients and
Investment Bankers. From 1997 to 2004 Mr. Downey was Senior Vice President for
PW Funding where he led the firm's national commercial lending marketing efforts
including Fannie Mae and Freddie Mac loan programs in the Southwest. Mr. Downey
earned his Bachelor of Arts degree from California State University -
Sacramento.
Mr. Downey is employed by the Company on an at-will basis, at a salary of
$180,000 per year.
Mr. Robert Mangold. Effective May 15, 2008, the Board appointed Mr. Robert
Mangold as a director to fill one of the vacancies on the Board.
Mr. Mangold is the President and Chief Executive Officer of Money Mastery
Advisors, LLC since 2007, One Source Realty, One Source Mortgage & Investments
and Insurance Affiliates of Arizona since 2001, all of which are based in
Scottsdale, AZ. Mr. Mangold has been involved in the real estate/lending and
investment industry since 1992 and has been an active real estate investor since
1981. He has been recognized by National Relocation Magazine as an expert on
real estate and investment strategies. In addition, Mr. Mangold frequently
appears on local radio as a guest on changes and trends in the real estate and
mortgage markets. He has taught Equity Management Seminars all over the country
to some of the top mortgage and real estate companies. He frequently does
consulting work with lending institutions and builders across the country.
Mr. Mangold attended Purdue University and earned his Bachelor degree in
business.
As a director, Mr. Mangold will receive no compensation, but will be reimbursed
for expenses incurred in connection with travel to and from board meetings.
20
Prior to being appointed to the Company's board of directors, Mr. Mangold,
through one or more affiliates, and the Company entered into several
transactions pursuant to which Mr. Mangold or such affiliates invested in real
estate portfolio joint ventures, purchased properties from the Company, or
otherwise provided funding to the Company. In connection with these
transactions, since January 1, 2007, Mr. Mangold has received approximately
$309,177 from the Company in commissions, $4,661 in profits from joint ventures,
and warrants to receive 309,177 shares of the Company's common stock.
In addition, on August 10, 2007, in connection with a $300,000 bridge loan, the
Company agreed to issue to Mr. Mangold 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 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 Mr. Mangold 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. On August 10, 2007, Mr. Mangold's right to receive the
aforementioned warrants was mutually terminated.
Sandra Valiquette. Effective February 12, 2008, the Company appointed Sandra
Valiquette as the Company's Principal Financial Officer and Controller. Ms.
Valiquette previously served as the Company's Controller from 2004 through 2006
and most recently served as the Company's principal accounting officer. Prior to
joining the Company, Ms. Valiquette served in various capacities with companies
in both insurance and the savings & loan industry. From 1999 to 2002 Ms.
Valiquette was Senior Staff Accountant and Controller for Reliant American
Insurance Company, a startup insurance company. From 1996 to 1999 Ms. Valiquette
was Vice President and Corporate Controller for Summit Global Partners, Inc, a
startup insurance broker. Ms. Valiquette is a graduate of Texas Wesleyan
University in Fort Worth, Texas where she majored in accounting and business.
She is a licensed Texas CPA.
Ms. Valiquette is employed by the Company on an at-will basis, at a salary of
$80,000 per year.
There are no family relationships between or among Messrs. Downey and Mangold or
Ms. Valiquette and the Company's other officers or members of its board of
directors.
21
Item 6. Exhibits.
31.1 Chief Executive Officer - Section 302 Certification pursuant to the
Sarbanes-Oxley Act of 2002.
3.1.2 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
22
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: May 20, 2008 By: /s/ Ronald E. Johnson
--------------------------------------
Ronald E. Johnson
President and Chief Executive Officer
Date: May 20, 2008 By: /s/ Sandra Valiquette
--------------------------------------
Sandra Valiquette
Controller
(Principal Financial Officer)
23