UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10Q
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(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended June 30, 2008
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to ___________
Commission file number: 000-51139
NAVIDEC FINANICAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Colorado 13-4228144
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(State of Incorporation) (IRS Employer ID Number)
2000 South Colorado Blvd., Suite 200, Denver, Colorado 80222
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(Address of principal executive offices)
303-222-1000
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(Registrant's Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated file, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Smaller reporting 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]
Indicate the number of share outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of June 30, 2008, there were 9,024,583 shares of the registrant's common
stock issued and outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
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Consolidated Balance Sheets - June 30, 2008 and
December 31, 2007 F-1
Consolidated Statement of Operations -
Six and Three months ended June 30, 2008 and 2007 F-2
Consolidated Statement of Changes in Stockholders' Equity -
June 30, 2008 F-3
Consolidated Statement of Cash Flows -
Six months ended June 31, 2008 and 2007 F-4
Notes to Consolidated Financial Statements F-5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 1
Item 3. Quantitative and Qualitative Disclosures About Market Risk - Not Applicable
Item 4. Controls and Procedures 3
Item 4T. Controls and Procedures 3
PART II - OTHER INFORMATION
Item 1. Legal Proceedings -Not Applicable 4
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 4
Item 3. Defaults Upon Senior Securities - Not Applicable 4
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable 5
Item 5. Other Information - Not Applicable 5
Item 6. Exhibits 5
SIGNATURES 6
PART I
ITEM 1. FINANCIAL STATEMENTS
NAVIDEC FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
June 30, December 31,
2008 2007
Unaudited Audited
---------------- ----------------
ASSETS:
Current Assets:
Cash and cash equivalents $ 1,873 $ 1,424
S/T Mortgages receivable - net of allowance 6,030 2,204
S/T Note receivable - Jaguar Group LLC - net of allowance (Notes 1,4) 677 1,100
Accrued interest receivable 88 46
Advances receivable 17 5
A/R - Jaguar Group LLC (Notes 1, 4) 291 -
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Total Current Assets 8,976 4,779
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Property, equipment and software, net 68 39
Other Assets
Note receivable - (Note 4) - Aegis/Grizzle 450 450
Investment - BPZ Energy - (note 5) - 3,354
Investment - Boston Property (Note 5) 1,890 1,279
Real estate owned - net of impairment (Note 5) 791 360
Other assets - 15
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Total Other Assets 3,131 5,458
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TOTAL ASSETS $ 12,175 $ 10,276
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LIABILITIES & STOCKHOLDERS' EQUITY:
Current Liabilities:
Advances repayable - related party $ - $ 15
Accounts Payable 17 -
Short term borrowings (Note 7) 1,527 285
Accrued taxes and liabilities 870 102
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Total Current Liabilties 2,414 402
Minority Interest -
Stockholders' Equity:
Common stock, $0.001 par value, 100,000,000 shares 9 9
authorized, 9,024,583 shares issued
and outstanding at June 30, 2008 and
8,924,583 as of December 31, 2007
Additional paid-in capital 7,546 7,552
Treasury stock (150) (150)
Unrealized gain on securities - 2,149
Accumulated earnings 2,356 314
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Total Stockholders' Equity 9,761 9,874
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 12,175 $ 10,276
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The accompanying notes to the consolidated financial statements are an integral part of these statements.
F-1
NAVIDEC FINANCIAL SERVICES, INC. AND SUBSIDIARY
Statement of Operations
(In Thousands)
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2008 2007 2008 2007
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue
Sales $ 351 $ 156 $ 454 $ 380
Interest revenues 123 169
Cost of Sales 120 - 191 -
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Gross Profit 354 156 432 380
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Operating Expenses:
General and administrative 1,858 446 2,523 838
Depreciation and amortization 2 2 3 4
------------ ------------ ------------ ------------
Total operating expenses 1,860 448 2,526 842
Loss from operations (1,506) (292) (2,094) (462)
------------ ------------ ------------ ------------
Other income (expense)
Gain on sale of investments 3,052 868 5,422 1,067
Other (loss) or Gain - 52
Net rental income 8 - 7 -
Misc non-operating income/(expense) (5) (70)
Interest income 5 50 23
Interest (expense) (2) (26)
------------ ------------ ------------ ------------
Total other income 3,058 918 5,356 1,119
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Net Income before minority interest and income tax 1,552 626 3,262 657
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Minority Interest
Minority interest in consolidated subsidiary - (8)
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Net Income (Loss) before taxes 1,552 626 3,262 649
Income Taxes
Provision for income tax (941) - (1,196) -
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Net Income (Loss) $ 611 $ 626 $ 2,066 $ 649
============ ============ ============ ============
Earnings Per Share:
Basic $ 0.07 $ 0.08 $ 0.23 $ 0.08
Diluted $ 0.04 $ 0.04 $ 0.13 $ 0.04
Weighted Averge Shares Outstanding:
Basic 9,025 7,983 9,025 7,983
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Diluted 16,489 16,097 16,489 16,097
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The accompanying notes to consolidated financial statements are an integral part of these statements.
F-2
NAVIDEC FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(In Thousands)
(Unaudited)
For the Six Months Ended
June 30,
2008 2007
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Cash Flows from Operating Activities:
Net Income $ 2,066 $ 6496
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation expense 3 2
Gain on sale investments (5,412) (1,067)
Increase in reserves and impairments 1,483 -
Gain on settlement of debt - (50)
Minority interest - 8
Changes in operating assets and liabilities:
Accounts receivable - 22
Prepaid expenses and other assets (53) 42
Short term loans receivable (2,453) 450
Accounts payable 2 (22)
Accrued liabilities and other (708) (32)
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Net Cash (Used)/Provided by Operating Activities (5,072) 2
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Cash Flows from Investing Activities:
Investments (increased)/decreased
Boston real estate (1,042) -
Other real estate (627) -
Increase in fixed assets (39) -
Other assets 15 -
Unrealized gain/(loss) on securities (911) -
Proceeds from sale of equity investments 8,120 1,026
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Net Cash Provided by Investing Activities 5,516 1,026
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Cash Flows from Financing Activities:
Net increase/(decrease) in Additional Paid in Capital 5 -
Post-merger proceeds from exercise of BPZ Options - 479
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Net Cash Provided by Financing Activities 5 479
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Net Increase in Cash & Cash Equivalents 449 1,508
Beginning Cash & Cash Equivalents 1,424 179
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Ending Cash & Cash Equivalents $ 1,873 $ 1,687
=============== ================
Supplemental Disclosure of Cash Flow Information
Cash paid for Interest $ 11 -
=============== ================
Cash paid for Income Taxes $ 350 -
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The accompanying notes to consolidated financial statements are an integral part of these statements.
F-3
NAVIDEC FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2008 (In
thousands - except number of shares)
Voting Additional Unrealized Treasury Accumulated Stockholder
Common Stock Paid-in Gain Stock Profit Equity
-----------------------
Shares Amount Capital (Deficit)
----------- ---------- ---------- -------- ------------ ----------
Balances, Dec 31, 2004 6,378,048 $ 6 $ 5,911 $ 375 $ - $ (2,132) $ 4,160
----------- --------- ---------- ---------- -------- ------------ ----------
BPZ legacy options exercised 963 963
Options exercised 250,000 1 13 14
Common stock sold in private 1,322,000 1 1,323 1,324
placement -
Additional paid-in capital from 1,203 1,203
reorganization
Net loss (1,377) (1,377)
Comprehensive Income
Gain on marketable securities 450 450
Total Comprehensive gain/(loss)
----------- --------- ---------- ---------- -------- ------------ ----------
Balances, Dec 31, 2005 7,950,048 8 9,413 825 - (3,509) 6,737
Net loss (464) (464)
Comprehensive Income
Gain on marketable securities 658 658
Total Comprehensive gain/(loss)
----------- --------- ---------- ---------- -------- ------------ ----------
Balances, Dec 31, 2006 7,950,048 8 9,413 1,483 - (3,973) 6,931
Net income 4,287 4,287
Options exercised 1,000,000 1 49 50
Correct BPZ transaction 33,397 2 2
Correct private placement 10,000
Remove BPZ warrants (1,912) (1,912)
Treasury stock - Armijo settlement (68,862) (150) (150)
Comprehensive other income
Gain on marketable securities 666 666
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Balances, Dec 31, 2007 8,924,583 9 7,552 2,149 (150) 314 9,874
Net income 2,066 2,066
Warrants exercised 100,000 5 5
Comprehensive other income -
Gain on marketable securities (2,149) (2,149)
Adjust for minority interest (11) (24) (35)
----------- --------- ---------- ---------- -------- ------------ ----------
Balances - June 30, 2008 9,024,583 $ 9 $ 7,546 $ - $ (150) $ 2,356 $ 9,761
=========== ========= ========== ========== ======== ============ ==========
The accompanying notes to consolidated financial statements are an integral part of these statements
F-4
NAVIDEC FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2008 and 2007
(Unaudited)
NOTE 1 - ORGANIZATION
Navidec Financial Services, Inc. ("NFS" or "Company") was incorporated in
December 2002, as a wholly owned subsidiary of Navidec Inc. ("Old Navidec"). In
September 2004, Old Navidec consummated a reverse merger agreement with BPZ
Energy, Inc. a Texas corporation established in 2001 ("BPZ") whereby Old Navidec
transferred all of its asset, liabilities and historical operations into NFS and
Old Navidec changed its name to BPZ Energy Inc. Also pursuant to the merger
agreement, Old Navidec affected a one share of NFS for one share of Old Navidec
spin off to the shareholders of record of Old Navidec.
NFS is now a holding company that is in the business of creating or acquiring a
controlling interest in development stage enterprises with the expectation of
further developing the enterprise and then taking the enterprise public.
On September 11, 2003, Old Navidec purchased an 80% interest in Northsight
Mortgage Group, LLC ("NMG"), an Arizona mortgage broker. NFS received the 80%
interest in NMG as part of the merger agreement with BPZ. On May 4, 2005, the
Company formed Navidec Mortgage Holdings, Inc., a Colorado corporation ("NMH"),
as a subsidiary of NFS and received 2,000,000 common shares of NMH. On November
11, 2007, NMH amended its articles of incorporation in order to change its name
to Northsight, Inc. ("Northsight").
On October 12, 2007, NFS exchanged its 80% interest in NMG for 3,000,000 common
shares of Northsight to bring the total common shares of Northsight owned by NFS
to 5,000,000 shares. On October 12, 2007, Northsight then purchased the
remaining 20% minority interest in NMG from the minority member for 100,000
shares of Northsight. As a result of this transaction, NFS owns 98% of
Northsight and the former minority member of NMG owns 2% of Northsight.
On July 9, 2008, the board of directors of NFS declared a dividend distribution
of a Unit of Northsight, Inc ("Northsight"). The Units will be distributed one
Unit of Northsight for each 2.27336 shares of Navidec. Navidec currently owns
20,000,000 Units of Northsight. Navidec will distribute 4,000,000 Units to its
shareholders resulting in Navidec owning 16,000,000 after the dividend
distribution. The Northsight Units to be distributed will consist of one share
of Northsight, a Northsight A Purchase Warrant, exercisable at $2.00 per share
until July 1, 2013, and a B Purchase Warrant exercisable at $4.00 per share
until July 1, 2013.
Starting in July 2007, NFS began lending money to Northsight to enable
Northsight to make short term, first deed of trust secured loans to borrowers
who are purchasing deeply discounted or foreclosed residential real estate in
Arizona and Colorado. During the year ended December 31, 2007, NFS had lent
Northsight approximately $5,826,000. The loans to Northsight yield 12% and are
callable on demand by NFS. As of June 30, 2008, NFS had approximately $6,030,000
(net of allowance) and as of December 31, 2007 had $2,204,000 in short term
bridge loans outstanding. Short term bridge loans outstanding grew by 174% in
the six months ended June 30, 2008 compared to December 31, 2007 balances.
During the quarter ended June 30, 2008, we incurred an operating loss of
approximately $1,506,000 compared to an operating loss of $446,000 for the
quarter ending March 31, 2008. The increase in the loss is largely due to the
Company establishing reserves against notes receivable and real estate owned in
the amount of $1,483,000.
During the quarter ending June 30, 2008, the Company sold 174,813 shares of BPZ
Energy in the open market at an average price per share of $23.33. This activity
produced a onetime gain, before taxes, of approximately $3,027,000. Other income
contributed an additional approximate $6,000. During the quarter ending June 30,
2008, the Company liquidated all of their position in BPZ Energy.
Southie Development, LLC (Southie) was formed in January 2008 and is
wholly-owned by NFS. The purpose of Southie is to develop residential real
estate for resale and to own and manage residential real estate acquired via
default of real estate loans owned by NFS. Once a real estate loan defaults, NFS
transfers the property to Southie for development and management. As part of the
management and development of the properties transferred to it, Southie honors
any existing residential leases, will potentially expend monies for
rehabilitation of the property with the goal of selling the property in a short
time period, usually less than one year. However, if the Company deems the
property to be a good longer term investment, they might hold the property for
longer periods.
The Company purchased a home in South Boston on December 4, 2007 (Thomas Park)
and began improving the property with the intent to construct three condominium
units for resale. The purchase price was $1,200,000 plus closing costs. As of
May 19, 2008, the Company acquired a $1,200,000 line with Mt. Washington
Cooperative Bank for the development of Thomas Park. The line is due November
19, 2009, monthly interest only payments, with a prime plus 2% interest rate and
an interest rate floor of 7%. As of June 30, 2008, the balance owed on this line
was $558,000. As of June 30, 2008, the Company had invested $1,890,000 less the
bank line of $558,000. The Company estimates that construction will be completed
by October 2008.
Jaguar Group Investments, LLC
In February 2008, our subsidiary, Northsight entered into a joint venture
agreement with Jaguar Group, LLC. The purpose of this joint venture is to
provide wholesale financing loan products to the real estate mortgage industry.
Northsight purchased 50% equity and voting interest in Jaguar Investment Group,
LLC (Jaguar) and the remaining 50% is owned by Jaguar Group, LLC. Each equity
interest was purchased for $4 million dollars, to be in the form of cash, real
estate equity, and/or any form of consideration agreed by both members.
At this time, the joint venture has not been fully funded. The Company has
committed $1,100,000 toward the joint venture and recognizes this amount as a
short term note receivable. The Company also has approximately $291,000 in loans
waiting to be funded by Jaguar. The Company has reserved approximately $423,000
against the short term note receivable and the receivable. It is the Company's
intent to continue their involvement in this joint venture.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM PRESENATION
The unaudited consolidated financial statements and related notes for the six
months ended June 30, 2008, presented herein have been prepared by the
management of NFS and its subsidiaries pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. Operating results for the six months
ended June 30, 2008 are not necessarily indicative of the results that may be
expected for the full year. It is suggested that these unaudited consolidated
financial statements be read in conjunction with the December 31, 2007 audited
consolidated financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments), which are necessary for a fair presentation of operating
results for the interim period presented have been made.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of NFS
and its subsidiary, Northsight, Inc., Northsight Mortgage formerly known as
Navidec Mortgage Holdings, Inc., and Southie Development, LLC. NFS owns 98% of
Northsight and the former minority member or Northsight Mortgage Group, LLC owns
2% of Northsight, Inc. NFS owns 100% of Southie Development, LLC. All
significant inter-company balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity generally accepted
accounting principles in the United States requires management to make estimates
and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities, disclose of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ materially from
those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, NFS considers cash and cash equivalents to
include highly liquid investments with original maturities of 90 days or less.
Those are readily convertible into cash and not subject to significant risk from
fluctuations in interest rates. The recorded amounts for cash equivalents
approximate fair value due to the short-term nature of these financial
instruments.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject NFS to significant concentrations
of credit risk include cash equivalents, notes receivable and trade accounts
receivable. The Company maintains its cash and investment balances in the form
of bank demand deposits, money market accounts, commercial papers and short-term
notes with financial institutions that management believes to be of high credit
quality. Accounts receivable are typically unsecured and are derived from
transactions with and from customers primarily located in the United States.
NFS performs ongoing evaluations of its clients' financial condition and
generally does not require collateral, except for billings in advance of work
performed. Management reviews accounts receivable periodically and reduces the
carrying amount by a valuation allowance that reflects management's best
estimate of amounts that may not be collectible. Allowances, if any, for
uncollectible accounts receivable are determined based upon information
available and historical experience. There was no allowance at December 31,
2007.
However, during the three months ended June 30, 2008 management felt, based on
prevailing market conditions, that it was necessary to establish a reserve.
During the three months ended June 30, 2008, a reserve of approximately $853,000
was established for short term notes receivable and a reserve of approximately
$198,000 was established for the real estate owned by the Company.
No sales to unaffiliated customers represented 10% or more of the Company's
revenue for the six months ended June 30, 2008.
INVESTMENTS
Investments in publicly traded equity securities over which NFS does not
exercise significant influence are recorded at market value in accordance with
Financial Accounting Statement ("FAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which requires that all applicable
investments be classified as trading securities, available for sale securities
or held-to-maturity securities. The Company has investments treated as
available-for-sale securities that are restricted from sale in the open market
under Section 144 and have limited trading volume. There can be no assurance
that we will realize the recorded value of this investment due to the size of
the investment and its limited trading volume. Comprehensive income includes net
income or loss and changes in equity from the market price variations in stock
and warrants held by the Company. The Company's comprehensive gain for the
quarter ended June 30, 2008 was approximately $3,052,000.
Investments in non-publicly traded equity securities or non-marketable equity
securities are stated at the lower of cost or estimated realizable value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, trade receivables and payables
approximated their fair value because of their short-term nature. Investments in
debt securities are recorded at their amortized cost, which approximates fair
value because of their short-term maturity. Investments in marketable equity
securities are recorded at fair value based upon quoted market prices.
Investments in non-marketable equity securities are based upon recent sales of
similar securities by the investees and approximated their carrying value. The
Company's borrowings approximate their carrying amounts based upon interest
rates currently available to the Company.
REVENUE RECOGNITION
Interest Revenues
Revenues from interest are recorded at the time they are earned thus the
revenues shown are for interest actually received and the accruals for that
which is due to the Company. Interest revenues for the six months ended June 30,
2008 were approximately $169,000 ($123,000 for the three months ended June 30,
2008).
Mortgage Revenues
The Company primarily recognizes its operating revenue through its subsidiary,
Northsight, Inc., by charging origination fees from borrowers and earning
interest and penalty fees on outstanding loan balances. Northsight recognizes
fee and interest income on bridge, asset and conventional mortgage loans after
mortgage loan transactions close. Northsight accrues interest and penalty
interest income at the end of each quarter.
INCOME TAXES
Provision for income taxes represents actual or estimated amounts payable on tax
return filings each year. Deferred tax assets and liabilities are recorded for
the estimated future tax effects of temporary differences between the tax basis
of assets and liabilities and amounts reported in the accompanying balance
sheets, and for operating loss and tax credit carry forwards. The change in
deferred tax assets and liabilities for the period measures the deferred tax
provision or benefit for the period. Effects of changes in enacted tax laws on
deferred tax assets and liabilities are reflected as adjustment to the tax
provision or benefit in the period of enactment. NFS deferred tax assets have
been reduced by a valuation allowance to the extent it was deemed more likely
than not, that some or all of the deferred tax assets would not be realized.
At June 30, 2008, the Company had an accrued income tax liability of
approximately $842,000 related primarily to profits generated on the sale of
stock assets.
ACCRUALS
The Company follows the practice of paying all bills when received and therefore
has not accrued any expenses.
STOCK BASED COMPENSATION
Beginning January 1, 2006, the Company adopted the provisions of and accounts
for stock-based compensation in accordance with Statement of Financial
Accounting Standards (SFAS) No. 123 - revised 2004 (SFAS 123R), Share-Based
Payment, which replaced SFAS No. 123 (SFAS 123), Accounting for Stock-based
Compensation, and supersedes APB Opinion No. 25 (APB 25), Accounting for Stock
Issued to Employees. Under the fair value recognition provisions of this
statement, stock-based compensation cost is measured at the grant date based on
the fair value of the award and is recognized as expense on a straight-line
basis over the requisite service period, which generally is the vesting period.
The Company elected the modified-prospective method, under which prior periods
are not revised for comparative purposes. The valuation provisions of SFAS 123R
apply to new grants and to grants that were outstanding as of the effective date
and are subsequently modified.
All options granted prior to the adoption of SFAS 123R and outstanding during
the periods presented were fully-vested at the date of adoption.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss)
available to common shareholders for the period by the weighted average number
of common shares outstanding for the period. Diluted net income (loss) per share
is computed by dividing the net income (loss) for the period by the weighted
average number of common and potential common shares outstanding during the
period.
The dilutive effect of approximately 7,464,000 options and warrants at June 30,
2008, has been included in the determination of diluted earnings per share.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income or loss and changes in equity
from the market price variations in the BPZ stock held by the Company. During
the three months ended June 30, 2008, all of the remaining shares of BPZ were
sold representing a gain of approximately $3,207,000 and a gain of approximately
$5,381,000 for the six months ending June 30, 2008.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 permits
entities to choose to measure, on an item-by-item basis, specified financial
instruments and certain other items at fair value. Unrealized gains and losses
on items for which the fair value option has been elected are required to be
reported in earnings at each reporting date. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007, the provisions of which are
required to be applied prospectively. We believe that SFAS 159 should not have a
material impact on our financial position or results of operations
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations, or SFAS No. 141R. SFAS No. 141R will change the accounting for
business combinations. Under SFAS No. 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS No. 141R will
change the accounting treatment and disclosure for certain specific items in a
business combination. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.
Accordingly, any business combinations we engage in will be recorded and
disclosed following existing GAAP until January 1, 2009. We expect SFAS No. 141R
will have an impact on accounting for business combinations once adopted but the
effect is dependent upon acquisitions at that time. We are still assessing the
impact of this pronouncement.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements--An Amendment of ARB No. 51, or SFAS No. 160".
SFAS No. 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008. We believe that SFAS 160 should not have a material impact on
our financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161 Disclosures about Derivative
Instruments and Hedging Activities. SFAS No. 161 requires additional disclosure
related to derivatives instruments and hedging activities. The provisions of
SFAS No. 161 are effective as of January 1, 2008 and the Company is currently
evaluating the impact of adoption.
NOTE 3 - INVESTMENT IN BPZ
Upon consummation of the merger transaction between Old Navidec and BPZ, BPZ
issued 604,246 shares of its common stock to NFS. These shares were issued in
consideration of NFS's assumption of all of the pre-merger business assets and
liabilities of Old Navidec. These shares qualify as "marketable securities" as
that term is defined by SFAS 115 (and as further defined in Footnote 2 to that
Statement). Under this definition, if the equity security is restricted for sale
by a governmental or other contractual requirement, but the holder of the
security has the power to cause such requirement of restriction to be met in a
manner that the security would reasonably be expected to qualify for sale within
one year, the security is not considered restricted for the purposes of SFAS
115. As such, we are required to record our investment in these securities at
their fair value.
The Company's "investments in BPZ," of 300,000 shares were valued at $3,354,000
on December 31, 2007. The Company held no shares of BPZ at June 30, 2008.
NOTE 4 - NOTES RECEIVABLE
During the year ended December 31, 2007, we entered a transaction with a former
officer of the Company, Mr. Robert Grizzle. In exchange for Mr. Grizzle's shares
in the Company, on May 3, 2007, Mr. Grizzle executed a note payable for
$450,000. The note carries an 8% interest rate and is secured by 1,000,000 Aegis
common shares, 1,500,000 Aegis preferred shares, 220,000 shares of the Company's
common stock and 200,000 options to purchase shares of the Company's common
stock at $0.05 per share held by Mr. Grizzle. The note is a limited recourse
note whereby Mr. Grizzle is personally responsible for one half the original
principal and interest. The balance owed is secured by Mr. Grizzle's Aegis
common and preferred shares and the Company's common stock. Further, the note
provides that at the earlier of one year from the date that the common stock of
the Company is publicly traded and his shares are registered for resale under an
effective registration statement filed by the Company or December 31, 2009. On
September 30, 2007, Mr. Grizzle resigned as the Chief Operating Officer and the
Chief Financial Officer of the Company.
In July 2007, Northsight, Inc. (formerly Navidec Mortgage Holdings, Inc.), a 98%
owned subsidiary of the Company, began making short term loans to purchasers of
residential properties who purchase their property as part of or after the
repossession in a foreclosure proceeding. As of June 30, 2008, the Company had
made approximately $6,030,000 in such loans. The loans are made primarily to
good credit borrowers and are secured by a first mortgage on the purchased
properties. The average numbers of days outstanding for the loans are less than
90 days, and the primary takeout on the loans is long term financing through
secondary sources such as the Federal National Mortgage Association.
As of December 31, 2007, the Company had $2,204,000 in short term bridge loans
outstanding. Short term bridge loans outstanding grew by 174% in the six months
ended June 30, 2008 compared to December 31, 2007 balances. This increase is due
to increased marketing of the short term loan offering by the Company.
In June 2008, the Company transferred the ownership of the short term loans from
Northsight, Inc. to the Company. Due to this transfer, the Company funds and
owns the loans. There is no longer an intercompany transfer of funds.
On December 13, 2007, Northsight, Inc. (formerly Navidec Mortgage Holdings,
Inc.) entered into a loan agreement with Welend Associated Group, LLC, a
Colorado limited liability company and Jaguar Group, LLC, (Jaguar) a Colorado
limited liability company, each with joint and severable liability, in the
amount of $1,100,000. The note carries an interest rate of 0% and has a maturity
date of six months from the date of the note. As consideration for making the
loan to Jaguar, the Company received is able to utilize Jaguar's line funding
capabilities through third party lenders. Security for the note is a first
security interest in the debtor's warehouse line of credit with Colorado State
Bank. As of June 30, 2008 there is an additional receivable from Jaguar for
approximately $291,000 which represents loans funded by NFS but not yet funded
by Jaguar. Further, as of June 30, 2008, there $968,200 in payables to Jaguar
representing loans made by NFS that are owed to Jaguar.
Subsequent to June 30, 2008, NFS became aware of operational issues at Jaguar.
Based on this concern, management decided to reserve for the net receivable owed
from Jaguar, which, as for June 30, 2008 was the note receivable from Jaguar or
$1,100,000, the account receivable from Jaguar of $291,323, less the payable
owing to Jaguar of $968,200, for a net reserve of $423,132.
NOTE 5 - INVESTMENTS
In December 2007, Northsight, Inc. (a 98% owned subsidiary of the Company)
purchased a 3 unit property in Boston, Massachusetts. The objective is to
rehabilitate the property and then sell it. During the quarter ending June 30,
2008, this property was transferred to Southie Development, LLC (a 100% owned
subsidiary of the Company). As of June 30, 2008, the Company and subsidiaries
had invested a total of approximately $1,890,000 in the property. Part of this
investment is funded by a $1,200,000 line of credit from Mt. Washington
Cooperative Bank, which $558,000 was due on this line as of June 30, 2008.
On December 20, 2007, the subsidiary, Northsight, Inc. repossessed a property
with a value of $359,564 securing one of its short term loans due to
non-payment. During the quarter ended March 31, 2008, the Company took back a
second property with a value of $280,663 for non-payment. During the quarter
ended June 30, 2008, the Company acquired another property via repossession for
$305,000 and recognized at the loan balance and placed the property into its
inventory. The Company has expended fix up costs on these properties and have
added the cost to the valuation. All of these properties are held as inventory
and provide rental income to the Company. The properties may be held to rent or
may be sold in the future. For the quarter ending June 30, 2008, the valuation
of these real estate owned properties is $988,711 less a reserve of $197,742,
for a net inventory balance of $790,969. It is management's belief that the
carrying value of these properties is less than the fair market value.
During the quarter ending June 30, 2008, the Company transferred these
properties from its subsidiary, Northsight, Inc. to its other subsidiary,
Southie Developments LLC.
NOTE 6 - CAPITAL LEASES OBLIGATIONS
NFS acquired no property under capital lease arrangements during the six months
ended June 30, 2008 or 2007.
NOTE 7 - SHORT TERM BORROWINGS
During the six months ended June 30, 2008, the Company's subsidiary Northsight,
Inc. arranged for a bank line of credit. During the three months ended March 31,
2008, the subsidiary had drawn a total of approximately $155,000 against a total
line of $3,000,000. During the three months ended June 30, 2008, the Company
paid the outstanding amount on the line and at June 30, 2008 owes nothing on
this line. The line expires on August 31, 2008, and it is the Company's intent
not to renew this line.
During the quarter ending June 30, 2008, the Company arranged for a construction
line of credit for $1,200,000, due November, 2009. Proceeds from this line are
used strictly for the renovation of the property in Boston with the intent to
resale. As for June 30, 2008, the balance outstanding was $558,336. See also
Note 5.
NOTE 8 - SUBSIDIARIES
The accompanying consolidated financial statements include the accounts of NFS
and its subsidiary, Northsight, Inc. (formerly called Navidec Mortgage Holdings,
Inc), its subsidiary Northsight Mortgage Group, LLC. of Phoenix, Arizona, and is
subsidiary, Southie Development, LLC. All significant inter-company balances and
transactions have been eliminated in consolidation.
We are currently operating in the mortgage services sector. During the six
months ended June 30, 2008, the revenues for the mortgage services and brokerage
business were approximately $454,000 ($351,000 for the three months ended June
30, 2008). During the six months ended June 30, 2007, mortgage services
generated approximately $156,000 in revenues. During the three months ended June
30, 2008, we incurred a loss from operations of $1,506,000. During the six
months ended June 30, 2007, we incurred a loss from operations of approximately
$2,094,000.
Northsight is focused on the Arizona and Colorado mortgage markets and is
primarily engaged in the business of marketing and brokering mortgages secured
by real estate with an emphasis on providing credit worthy individuals with
interim financing for the purchase of repossessed or auctioned residential
properties.
Operating results for each of the segments of the Company are as follows:
For the Six Months Ended For the Six Months Ended
June 30, 2008 June 30, 2007
(Data in thousands) (Data in thousands)
--------------------------------------- --------------------------------------
Navidec Northsight Southie Navidec Northsight Southie
Financial Inc LLC Financial Inc LLC
Services Services
------------- ------------- ----------- ------------- ------------- ----------
Revenue
Sales $ - $ 623 $ - $ 380 $ -
Cost of Sales 191
------------- ------------- ----------- ------------- ------------- ----------
Gross Profit - 432 - - 380 -
Operating Expenses
General and Administrative 1,917 408 198 378 460
Depreciation 3 4
------------- ------------- ----------- ------------- ------------- ----------
Total Operating Expenses 1,917 411 198 382 460 -
Other Income/(Expense)
Gain on sale of investments 5,422 1,067
Net rental Income 7
Interest income 23 52
Interest expense (3) (23)
Other income/(expense) (70) -
------------- ------------- ----------- ------------- ------------- ----------
Total Other Income/(Expense) 5,372 (23) 7 1,119 - -
Income Taxes (1,196)
Net Income (Loss) $ 2,259 $ (2) $ (191) 737 (80) -
============= ============= =========== ============= ============= ==========
NOTE 9 - EQUITY TRANSACTIONS
COMMON STOCK
During the three months ended June 30, 2008, the Company did not issue any
shares of its common stock.
STOCK OPTIONS
During the six months ended June 30, 2008, a shareholder of the Company
exercised options exercisable for 100,000 shares of the Company's restricted
common stock at $0.05 per share.
During the six months ended June 30, 2008, no options expired.
At June 30, 2008, all outstanding and exercisable options were fully vested. The
aggregate intrinsic value of outstanding fully-vested options as of June 30,
2008 was approximately $1,165,000.
A summary of the option plan is as follows:
2008
Weighted Average
Shares Exercise Price
Outstanding, January 1, 2008 3,681,510 $ 1.18
Granted - -
Cancelled - -
Expired - -
Exercised (100,000) -
--------- ---------
Outstanding, June 30, 2008 3,581,510 $ 1.18
========= =========
Options Exercisable , June 30, 2008 3,581,510 $ 1.18
========= =========
WARRANTS
At June 30, 2008, the following warrants to purchase common stock were
outstanding:
Number of common
shares covered by warrants Exercise Price Expiration Date
1,332,500 $ 4.00 August 2010
1,332,500 2.00 August 2010
150,000 1.00 July 2010
-----------
2,815,000
During the six months ended June 30, 2008 the Company did not issue any
warrants.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
In February 2008, the Company along with its subsidiary, Northsight opened
offices at 2000 S. Colorado Blvd, Suite 200, Denver, Colorado. The lease for
this office is approximately $4,601 per month. The lease has a term of
approximately 3 years.
DEFINED CONTRIBUTION PLAN
NFS has a 401(k) profit sharing plan (the "Plan"). Subject to limitations,
eligible employees may make voluntary contributions to the Plan. The Company
may, at its discretion, make additional contributions to the Plan. The Company
did not contribute during the quarter ended June 30, 2008.
NOTE 11 - SUBSEQUENT EVENTS
On July 1, 2008, the Company awarded options to purchase 200,000 shares of the
Company's stock at $2.00 per share to a newly appointed director. One-third of
these shares vest upon the granting date, 1/3 of the shares in 12 months from
the grant date and the remaining amount in two years from the grant date. The
term of the option agreement is 10 years.
On July 28, 2008, the Company awarded options to purchase 200,000 shares of the
Company's stock at $2.00 per share to a new employee. One-third of the shares
vest in 12 months of the grant date, 1/3 of the shares vest in 24 months of the
grant date and the remaining vest in 36 months from the grant date. The term of
the option agreement is 10 years.
On July 9, 2008, The Board of Directors of Navidec declared two dividend
distributions for its shareholders as of September 8, 2008, record date.
The first dividend is a distribution of two Navidec Warrants to purchase common
shares of Navidec, $.001 par value, for each share of Navidec. The Units consist
of an A Warrant, exercisable at $2.00 per share until July 1, 2013, and a B
Warrant exercisable at $4.00 per share until July 1, 2013.
The second dividend is distribution of a Unit of Northsight, Inc ("Northsight").
The Units will be distributed one Unit of Northsight for each 2.27336 shares of
Navidec. Navidec currently owns 20,000,000 Units of Northsight. Navidec will
distribute 4,000,000 Units to its shareholders resulting in Navidec owning
16,000,000 after the dividend distribution. The Northsight Units to be
distributed will consist of one share of Northsight, a Northsight A Purchase
Warrant, exercisable at $2.00 per share until July 1, 2013, and a B Purchase
Warrant exercisable at $4.00 per share until July 1, 2013.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our unaudited
financial statements and notes thereto included herein. In connection with, and
because we desire to take advantage of, the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, we caution readers regarding
certain forward looking statements in the following discussion and elsewhere in
this report and in any other statement made by, or on our behalf, whether or not
in future filings with the Securities and Exchange Commission. Forward-looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control and many
of which, with respect to future business decisions, are subject to change.
These uncertainties and contingencies can affect actual results and could cause
actual results to differ materially from those expressed in any forward looking
statements made by, or on our behalf. We disclaim any obligation to update
forward-looking statements.
OVERVIEW
NFS is a holding company that is in the business of creating or acquiring a
controlling interest in development stage enterprises with the expectation of
further developing the enterprise and then taking the enterprise public.
NFS owns 98% of its subsidiary, Northsight, Inc. ("Northsight"). Northsight is
focused on the Arizona (through its subsidiary Northsight, Mortgages Group, LLC)
and Colorado mortgage markets and is primarily engaged in the business of
marketing and brokering mortgages secured by real estate with an emphasis on
providing credit worthy individuals with interim financing for the purchase of
repossessed or auctioned residential properties.
In February 2008, our subsidiary, Northsight entered into a joint venture
agreement with Jaguar Group, LLC. Northsight purchased 50% equity and voting
interest in Jaguar Investment Group, LLC ("Jaguar Investment Group") and the
remaining 50% is owned by Jaguar Group, LLC. Each equity interest was purchased
for $4 million dollars, in the form of cash, real estate equity, and/or any form
of consideration agreed by both members. The joint venture is to provide whole
sale financing loan products to the real estate mortgage industry.
In January 2008, the Company formed Southie Development, LLC (Southie) as a
wholly-owned subsidiary of NFS. The purpose of Southie is to develop residential
real estate for resale and to own and manage residential real estate acquired
via default of real estate loans owned by NFS. Once a real estate loan defaults,
NFS transfers the property to Southie for development and management. As part of
the management and development of the properties transferred to it, Southie
honors any existing residential leases, will potentially expend monies for
rehabilitation of the property with the goal of selling the property in a short
time period, usually less than one year.
On July 1, 2008, Ms. Jolee Henry was appointed to the Board of Directors. Ms.
Henry received an option exercisable for 200,000 shares of the Company's stock
at $2.00 per share. One-third of these shares vest upon the granting date, 1/3
of the shares in 12 months from the grant date and the remaining amount in two
years from the grant date. The term of the option agreement is 10 years.
On July 9, 2008, The Board of Directors of Navidec declared two dividend
distributions for its shareholders as of September 8, 2008, record date.
The first dividend is a distribution of two Navidec Warrants to purchase common
shares of Navidec, $.001 par value, for each share of Navidec. The Units consist
of an A Warrant, exercisable at $2.00 per share until July 1, 2013, and a B
Warrant exercisable at $4.00 per share until July 1, 2013.
The second dividend is distribution of a Unit of Northsight, Inc ("Northsight").
The Units will be distributed one Unit of Northsight for each 2.27336 shares of
Navidec. Navidec currently owns 20,000,000 Units of Northsight. Navidec will
distribute 4,000,000 Units to its shareholders resulting in Navidec owning
16,000,000 after the dividend distribution. The Northsight Units to be
distributed will consist of one share of Northsight, a Northsight A Purchase
Warrant, exercisable at $2.00 per share until July 1, 2013, and a B Purchase
Warrant exercisable at $4.00 per share until July 1, 2013.
On July 31, 2008, President Bush signed into law a package of housing
legislation called the Federal Housing and Economic Recovery Act that is largely
focused on safeguarding Fannie Mae and Freddie Mac. While it still is too early
to gauge the impact of this legislation on the Company, management believes it
would have no material negative impact, and could assist in mortgage operations
going forward.
RESULTS OF OPERATIONS
For the Three Months Ended June 30, 2008 compared to the Three Months Ended June
30, 2007
During the three months ended June 30, 2008, we recognized sales of
approximately $351,000 from the activities of our subsidiary Northsight and its
subsidiary Northsight Mortgage Group, LLC. The sales are a result of
Northsight's originating residential mortgage loans. During the three months
ended June 30, 2007, we recognized sales of $156,000. The increase of $195,000
was a result of the development of a new bridge loan program that enables
purchasers to acquire discounted residential real estate.
During the three months ended June 30, 2008, we incurred $120,000 in cost of
sales. During the period ended June 30, 2007, we did not recognize any costs in
connection with our sales.
During the three months ended June 30, 2008, we recognized a gross profit margin
of $354,000 compared to $156,000 for the three months ended June 30, 2007. The
increase of $198,000 was a result of increased mortgage loan activity, but
reduced by a change in accounting policies whereby we now recognize salaries and
consulting services as part of the cost of sales in Northsight's mortgage
operations.
During the three months ended June 30, 2008, we incurred total operating
expenses of $1,860,000 compared to $448,000 during the three months ended June
30, 2007. The increase of $1,412,000 is a result of establishing loan loss and
real estate own reserves totaling approximately $1,483,000. During the three
months ended June 30, 2008 we incurred general and administrative expense of
$1,858,000 compared to $446,000 during the three months ended June 30, 2007.
During the three months ended June 30, 2008, we recognized net income of
$611,000 compared to $626,000 during the three months ended June 30, 2007. The
decrease of $15,000 was largely the result of the $3,052,000 gain less tax
accrual of $941,000 on the sale of shares we hold for investment, including BPZ
Petroleum and the establishment of loan reserves of $1,483,000. During the three
months ended March 31, 2008, we sold 150,000 shares of BPZ for cash of
approximately $2,385,000 and during the three months ended June 30, 2008 we sold
184,813 shares of BPZ for a gain of $3,207,000. Proceeds were used to expand
Northsight's mortgage operations, create our bridge loan product and increase
our bridge loan portfolio.
For the Six Months Ended June 30, 2008 compared to the Six Months Ended June 30,
2007
During the six months ended June 30, 2008, we recognized sales of $454,000 from
the activities of our subsidiary Northsight and its subsidiary Northsight
Mortgage Group, LLC. The sales are a result of Northsight's originating
residential mortgage loans. During the six months ended June 30, 2007, we
recognized sales of $380,000. The increase of $74,000 was a result of the
development of a new bridge loan program that enables purchasers to acquire
discounted residential real estate.
During the six months ended June 30, 2008, we incurred $191,000 in cost of
sales. During the period ended June 30, 2007, we did not recognize any costs in
connection with our sales.
During the six months ended June 30, 2008, we recognized a gross profit margin
of $432,000 compared to $380,000 for the six months ended June 30, 2007. The
increase of $52,000 was a result of increased mortgage activity offset by a
change in accounting policies whereby we now recognize salaries and consulting
services as part of the cost of sales in Northsight's mortgage operations.
During the six months ended June 30, 2008, we incurred total operating expenses
of $2,526,000 compared to $842,000 during the six months ended June 30, 2007.
The increase of $1,684,000 is result of establishing a loan loss reserve of
$1,483,000 and a redirection of Northsight's mortgage operations to include an
emphasis on short term bridge loans and the opening of Northsight's offices in
Colorado and focus on the Colorado market, as seen in the increase of $1,685,000
in general and administrative expenses. During the six months ended June 30,
2008 we incurred general and administrative expense of $2,523,000 compared to
$838,000 during the six months ended June 30, 2007.
During the six months ended June 30, 2008, we recognized net income of
$2,066,000 compared to $649,000 during the six months ended June 30, 2007. The
increase of $1,417,000 was a result of the $5,381,000 gain less tax accrual of
$1,196,000 on the sale of shares we hold in BPZ Petroleum. During the three
months ended March 31, 2008, we sold 150,000 shares of BPZ for cash of
approximately $2,385,000 and during the three months ended June 30, 2008 we sold
184,813 shares of BPZ for a gain of $3,207,000. Proceeds were used to expand
Northsight's mortgage operations, create our bridge loan product and increase
our bridge loan portfolio.
LIQUIDITY
Net cash used by operating activities during the six months ended June 30, 2008
was $5,072,000, compared to net cash provided in operating activities during the
six months ended June 30, 2007 of $2,000. During the six months ended June 30,
2008, the net cash provided represented net income of $2,066,000, adjusted for
the non-cash item of depreciation expense of $3,000, a gain on the sale of
investments of $5,412,000, and impairments of $1,483,000.
During the six months ended June 30, 2007, the net cash used represented net
income of $649,000, adjusted certain non-cash items consisting of depreciation
expense of $2,000, a gain on the sale of investments of $1,067,000, gain on
settlement of debt for $50,000, and a minority interest of $8,000.
During the six months ended June 30, 2008, we provided $5,516,000 in cash in
investing activities. We invested $39,000 in fixed assets, $1,042,000 in real
estate in Boston, Massachusetts, $627,000 (net of impairments) in real estate
owned, $15,000 in other assets and a net of $7,209,000 from the sale of equity
investments.
During the six months ended June 30, 2007, we received cash of $1,026,000 from
our investment activities, consisting solely of the sale of equity investments.
During the six months ended June 30, 2008, net cash provided from financing
activities was $5,000. During the six months ended June 30, 2007, we recognized
$479,000 from the post-merger proceeds from exercise of BPZ options.
At June 30, 2008, we had total current assets of $8,976,000, consisting of cash
of $1,873,000, net mortgage receivables of $6,030,000, a net note receivable of
$677,000, accrued interest receivable of $88,000, accounts receivable of
$291,000 and an advance receivable of $17,000. At June 30, 2008, we had total
current liabilities of $2,414,000, consisting of an accounts payable of $17,000,
short term borrowings of $1,527,000 and accrued taxes and liabilities of
$870,000. Current assets exceed current liabilities by $6,562,000.
CRITICAL ACCOUNTING POLICIES
NFS has identified the policies below as critical to NFS business operations and
the understanding of NFS results from operations. The impact and any associated
risks related to these policies on the Company's business operations is
discussed throughout Management's Discussion and Analysis of Financial
Conditions and Results of Operations where such policies affect NFS reported and
expected financial results. For a detailed discussion on the application of
these and other accounting policies, see Note 2 in the Notes to the Consolidated
Financial Statements beginning on page F-6 of this document. Note that the
Company's preparation of this document requires NFS to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of NFS financial
statements, and the reported amounts of revenue and expenses during the
reporting period. There can be no assurance that actual results will not differ
from those estimates.
REVENUE RECOGNITION
NFS follows very specific and detailed guidelines in measuring revenue; however,
certain judgments may affect the application of NFS revenue policy. Revenue
results are difficult to predict, and any shortfall in revenue or delay in
recognizing revenue could cause NFS operating results to vary significantly from
quarter to quarter and could result in future operating losses.
REVENUES BUSINESS DEVELOPMENT SERVICES
Revenue from NFS business development services is generally derived from time
and materials contracts and is recognized as the work is completed. Revenue
recognition for time and materials contracts is not significantly impacted by
judgments and estimates. Within the business development division a small amount
of the work is performed based on fixed price agreements. When this occurs the
projects are generally of a short duration and revenue is recognized when the
project is completed.
REVENUES FROM MORTGAGE SERVICES
Revenues from mortgage brokerage operations are generally related to
transaction-based fees and are recognized at the consummation of the
transactions, generally when mortgage transactions close.
In July 2007 Navidec Mortgage Holdings, Inc., a wholly owned subsidiary of the
Company, in conjunction with Northsight Mortgage, and 80% owned subsidiary of
the Company began making short term loans to purchasers of residential
properties who purchase their property as part of or after the repossession in a
foreclosure proceeding. As of June 30, 2008, the Company had made $7,453,000 in
such loans that have yet to be placed outside the Company in a permanent loan
takeout. The loans are secured by first deeds of trust on residential real
estate properties.
As of June 30, 2008, the Company also holds $570,000 in escrow for the benefit
of the property owners recognized under short term loans. This is recognized as
a reduction on the total amount of short term loans, for a net short term
mortgage receivable of $6,030,000. This balance includes a reserve for
uncollectible of $853,000.
RESERVES FOR BAD DEBT
NFS receivables are recorded net of an allowance for doubtful accounts which
requires management to estimate amounts due which may not be collected. This
estimate requires consideration of general economic conditions, overall
historical trends related to the Company's collection of receivables, customer
specific payment history, and customer specific factors affecting their ability
to pay amounts due. Management routinely assesses and revises its estimate of
the allowance for doubtful accounts.
For the quarter ending June 30, 2008 NFS established a reserve against bad debts
as follows:
Reserve for short term mortgages receivables $853,000
Reserve for Real Estate Owned $198,000
Reserve for amounts owed from Jaguar $423,000
GOODWILL AND INTANGIBLE ASSETS
Intangible assets are amortized on a straight-line basis over their estimated
useful lives. Goodwill is evaluated quarterly to determine if its value has been
impaired. On September 11, 2003, Old Navidec entered into a purchase agreement
with Northsight and its sole member that provided for the transfer of 80% of the
issued and outstanding membership units of Northsight to Old Navidec resulting
in the realization of $190,000 of goodwill. This membership interest was
transferred to NFS pursuant to the terms of the merger agreement. Management
determined that Goodwill should be written off as an asset on its books during
the six months ended June 30,, 2008.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NFS is exposed to the impact of interest rate changes and change in the market
values of the Company's investments. Based on NFS's market risk sensitive
instruments outstanding as of June 30, 2008, as described below, it has
determined that there was no material market risk exposure to the Company's
consolidated financial position, results of operations, or cash flows as of such
date. NFS does not enter into derivatives or other financial instruments for
trading or speculative purposes.
INTEREST RATE RISK - At June 30, 2008, the Company's exposure to market rate
risk for changes in interest rates relates primarily to its mortgage services
business. NFS has not used derivative financial instruments in its credit
facilities. A hypothetical 10% increase in the Prime rate would not be
significant to the Company's financial position, results of operations, or cash
flows.
INVESTMENT RISK - In addition to the Company's investments in securities of BPZ,
from time to time NFS has made investments in equity instruments in companies
for business and strategic purposes. These investments, when held, are included
in other long-term assets and are accounted for under the cost method since
ownership is less than twenty percent (20%) and NFS does not assert significant
influence.
INFLATION -- NFS does not believe that inflation will have a material impact on
its future operations.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES
Disclosures Controls and Procedures
We have adopted and maintain disclosure controls and procedures (as such term is
defined in Rules 13a 15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) that are designed to ensure that
information required to be disclosed in our reports under the Exchange Act, is
recorded, processed, summarized and reported within the time periods required
under the SEC's rules and forms and that the information is gathered and
communicated to our management, including our Chief Executive Officer (Principal
Executive Officer) and Principal Financial Officer, as appropriate, to allow for
timely decisions regarding required disclosure.
As required by SEC Rule 15d-15(b), Mr. McKowen, our Chief Executive Officer and
Principal Accounting Officer, carried out an evaluation under the supervision
and with the participation of our management, of the effectiveness of the design
and operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 15d-14 as of the end of the period covered by this report. Based on the
foregoing evaluation, Mr. McKowen has concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in our periodic SEC filings and to ensure that
information required to be disclosed in our periodic SEC filings is accumulated
and communicated to our management, including our Chief Executive Officer, to
allow timely decisions regarding required disclosure as a result of the
deficiency in our internal control over financial reporting discussed below.
ITEM 4T. CONTROLS AND PROCEDURES
Management's Quarterly Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting for the company in accordance with as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our 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. Our internal control over financial reporting includes
those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of our assets;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation
(iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized
Management's assessment of the effectiveness of the small business issuer's
internal control over financial reporting is as of the quarter ended June 30,
2008. We believe that internal control over financial reporting is effective. We
have not identified any, current material weaknesses considering the nature and
extent of our current operations and any risks or errors in financial reporting
under current operations.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. 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.
This quarterly report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.
There was no change in our internal control over financial reporting that
occurred during the fiscal quarter ended June 30, 2008, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
During the period of April 1, 2008 through June 30, 2008, the Company did not
make any sales of its unregistered securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
ITEM 5. OTHER INFORMATION
NONE.
ITEM 6. EXHIBITS
Exhibits. The following is a complete list of exhibits filed as part of this
Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of
Item 601 of Regulation S-K.
Exhibit 31 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act
Exhibit 32 Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NAVIDEC FINANCIAL SERVICES, INC.
(Registrant)
Dated: August 12, 2008 By: /s/ John McKowen
-------------------------------
John McKowen, President &
Chief Accounting Officer