UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2006
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 0-5418
WALKER FINANCIAL CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 13-2637172
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
990 Stewart Avenue - Suite 650 Garden City, New York 11530
(Address of principal executive offices)
(516) 832-7000
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or 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 a checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes __ No X
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: There were a total of 28,105,540
shares of the registrant's common stock, par value $.0001 per share, outstanding
as November 10, 2006.
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
1
WALKER FINANCIAL CORPORATION
Form 10-QSB
Quarter Ended September 30, 2006
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet as of September 30, 2006 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2006 and 2005 4
Condensed Consolidated Statements of Cash Flows for the
Three and Nine Months Ended September 30, 2006 and 2005 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 14
Item 3. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits 20
Signatures 21
Exhibit Index 22
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 2006
(Unaudited)
ASSETS
Current assets
Cash $ 71,948
Accounts receivable 27,617
-----------
Total current assets 99,565
-----------
Property and equipment, net 116,328
Deferred financing costs, net 85,560
-----------
Total Assets $ 301,453
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
Current liabilities
Line of credit, bank $ 139,042
Accounts payable and accrued expenses 747,729
Bridge notes payable 340,000
Convertible bridge notes payable - current 140,625
Notes payable 113,828
10% Senior subordinated secured convertible promissory notes 50,000
Promissory notes, net of debt discount of $249,356 865,354
Due to officers-stockholders 34,520
Fair value of detachable warrants 14,600
Fair value of embedded conversion option 55,300
Discontinued liabilities 15,440
-----------
Total current liabilities 2,516,438
-----------
Long term liabilities
12% Convertible debenture, net of debt discount of $131,857 46,476
10% Convertible debenture, net of debt discount of $139,902 46,678
Convertible bridge notes payable 224,750
-----------
Total Liabilities 2,834,342
-----------
Commitments
Stockholders' deficiency
Common stock, par value $.0001 per share, 100,000,000
authorized, 16,584,020 shares issued and outstanding 1,658
Additional paid-in capital 8,032,179
Accumulated deficit (10,566,726)
----------
Total stockholders' deficiency (2,532,889)
-----------
Total liabilities and stockholders' deficiency $ 301,453
===========
<FN>
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2006 2005 2006 2005
------------ ------------ ----------- -----------
Net revenues $ 146,176 $ 85,490 $ 316,782 $ 242,583
------------ ------------ ----------- -----------
Operating expenses
Compensation 211,214 155,485 506,710 483,184
Professional fees 40,750 26,102 149,963 175,285
Consulting fees 13,750 54,000 138,750 396,100
Depreciation and amortization 23,535 17,850 69,285 67,617
General and administrative 213,509 99,924 466,611 257,206
----------- ----------- ----------- ----------
Total operating expenses 502,758 353,361 1,331,319 1,379,392
----------- ----------- ----------- ----------
Operating loss (356,582) (267,871) (1,014,537) (1,136,809)
Other income (expense):
Debt conversion charge -- -- -- (933,793)
Write off of Assets -- -- -- ( 20,806)
Change in fair value of detachable
warrants and embedded conversion option 267,800 -- 303,700 --
Gain on extinguishment of debt -- 4,450 --
Interest expense, net (132,100) ( 48,617) (451,445) (311,569)
----------- ----------- ----------- -----------
Total other income (expense) 135,700 ( 48,617) (143,295) (1,266,168)
----------- ----------- ----------- ------------
Net loss $( 220,882) $ (316,488) $(1,157,832) $(2,402,977)
=========== =========== =========== ============
Per Share Information:
Weighted average number of
common shares outstanding 16,055,079 13,687,220 14,838,260 13,476,483
=========== =========== =========== ===========
Basic and diluted net loss
per common share $ (0.01) $ (0.02) $ (0.08) $ (0.18)
=========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine
Months
Ended September 30,
--------------------------
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,157,832) $(2,402,977)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 51,831 67,617
Compensatory element of stock issuances 138,750 105,000
Compensatory element of stock issuance-interest 1,740 --
Amortization of deferred compensation -- 262,500
Debt conversion charge -- 933,793
Loss on disposal of assets 20,806
Interest - deferred financing cost 87,615 214,461
Accretion of debt discount 222,861 31,375
Amortization of imputed interest 38,644
Gain recognized in modification of debt ( 4,450) --
Change in fair value of detachable warrants (64,600) --
Change in fair value of embedded conversion
option (239,100) --
Changes in operating assets and liabilities:
Accounts receivable, net (585) (7,914)
Prepaid expenses and other current assets 1,499 4,201
Other assets - 9,949
Accounts payable and accrued expenses 151,987 244,685
Accrued interest (307) 65,744
----------- -----------
Net cash used in operating activities (771,947) (450,760)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,300) (803)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) proceeds under line of credit, bank (8,662) 6,829
Proceeds from sale of bridge notes -- 125,000
Repayment of bridge notes (35,000) --
Proceeds from convertible bridge notes -- 201,000
Repayment of convertible bridge notes ( 9,625) --
Proceeds from notes payable -- 100,000
Repayment of notes payable (91,172) --
Proceeds from promissory notes 975,000 --
Repayment of promissory notes (75,000) --
Advances from officer-stockholders -- 13,450
Repayment of advances to officer-stockholders ( 93,851) (27,000)
Proceeds from convertible debentures 346,000 --
Repayment of convertible debentures (76,087) --
Fees paid in connection with debt acquisition (123,100) ( 48,750)
Proceeds from sale of common stock -- 100,000
----------- -----------
Net cash provided by financing activities 808,503 470,529
----------- -----------
Net increase in cash 35,256 18,966
Cash - beginning of period 36,692 79,328
----------- -----------
Cash - end of period $ 71,948 $ 98,294
=========== ===========
<FN>
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine
Months
Ended September 30, 2006,
--------------------------
2006 2005
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 117,237 $ --
=========== ===========
Income taxes $ -- $ --
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Return and rescission of 85,000 shares of common
stock for the return of a finance fee deposit $ 30,000 $ --
=========== ===========
Conversion of advances to 12% convertible
debentures $ 95,000 $ --
=========== ===========
Issuance of 1,000,000 shares of common stock
with the sale of a $ 900,000 promissory note $ 94,000 $ --
=========== ===========
Reclassification of derivative liabilities
upon repayment of debt $ 66,600 $ --
=========== ===========
Issuance of 150,000 shares of common stock
for the settlement of 12% Promissory Notes $ 2,790 $ --
=========== ===========
Issuance of 346,800 shares of common stock
for the settlement of $ 17,759 of accrued
interest and a stock based compensation charge
of $ 1,740 for interest $ 19,499 $ --
=========== ===========
Issuance of 2,936,890 shares of common stock
for the settlement of $ 980,203 of 10% Senior
Subordinated Secured Convertible Promissory
Notes and accrued interest $ -- $ 980,203
=========== ===========
93,750 warrants granted in connection
with sale of $375,000 bridge notes $ -- $ 28,500
=========== ===========
187,500 warrants granted to agent in connection
with sale of $375,000 bridge notes $ -- $ 57,600
=========== ===========
175,500 warrants granted to agent in connection
with sale of $125,000 bridge notes $ -- $ 36,100
=========== ===========
17,500 warrants granted to agent in connection
with sale of $250,000 bridge notes $ -- $ 3,600
=========== ===========
<FN>
These accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Walker Financial Corporation (collectively with its subsidiaries, the "Company")
markets various insurance and trust administration services products through
three of its wholly-owned subsidiaries, National Preplanning, Inc. ("NPI"), So
Insure, Inc. ("SI") (Note 12) and American DataSource ("ADS"). NPI and SI are
insurance agencies and third party marketer of insurance products, primarily
health insurance to individuals and families, final expense insurance, to
corporations, unions and affinity groups. SI was recently established to be our
face to consumer marketing arm for the sale of a variety on insurance products,
primarily health and life insurance. In order to avoid the duplication of
licensing fees and costs it is the Company's intention to have SI become our
only licensed insurance entity over time. ADS provides trust administration
services to independent funeral homes, state master trusts and companies that
own funeral homes or cemetery for pre-need funeral and cemetery trust accounts.
Through its wholly owned subsidiary, Kelly Color, Inc. ("Kelly Color"), the
Company operated in the film processing business through February 2004.
BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying condensed
consolidated financial statements include all adjustments (consisting of normal,
recurring adjustments) necessary to make the Company's financial position,
results of operations and cash flows not misleading as of September 30, 2006 and
for the three and nine months ended September 30, 2006 and 2005. The results of
operations for the three and nine months ended September 30, 2006, are not
necessarily indicative of the results of operations for the full year or any
other interim period. These financial statements should be read in conjunction
with the audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2005.
NOTE 2 - GOING CONCERN UNCERTAINTY
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United Sates of
America, which contemplate continuation of the Company as a going concern.
However, for the nine month period ended September 30, 2006, the Company
incurred a net loss of $1,157,832 and had a working capital deficiency at
September 30, 2006 of $2,416,873.
The Company has implemented various marketing plans to increase revenues for
both NPI, SI and ADS. Walker Financial is focusing its efforts on the marketing
of financial products and services that benefit the baby boomer, senior and
minority populations. Through its licensed subsidiary NPI Agency, Inc. and So
Insure, Inc., Walker earns insurance commissions on the sale of various
insurance products. Through its subsidiary American DataSource (``ADS''), the
Company is engaged in the business of providing a complete line of
administrative services for trust accounts. Walker is looking to expand its
product offerings by adding various financial products and services, which may
occur through acquisition opportunities, although there can be no assurance that
this will result in meaningful revenues.
The Company has commenced the operation of its direct to consumer health
insurance marketing and has hired licensed sales representatives to sell health
insurance to individuals and families that indicate a desire to purchase these
types of policies. The Company purchases qualified insurance leads from a
variety of sources. The Company insurance sales counselors contact these
individuals and guide them through the application process over the telephone
and internet. The Company earns insurance commissions that are paid by the
various insurance organizations whose product the Company sells. When a policy
is issued, The Company earns a percentage of the annual premium to be paid on
that particular policy.
The Company will attempt to raise additional capital to assist in the further
execution of its marketing plans and to fund any possible future acquisitions.
The Company believes that the cash flows from a combination of any future sale
of the Kelly Color property, the successful execution of its marketing plans
resulting in increased sales and any additional capital that the Company may
obtain through sales of its equity and debt securities will be sufficient to pay
that portion of its debt that is due within the next twelve months, as well as
to fund the Company's operations. The Company's ability to raise capital may be
affected by several factors including but not limited to default of its
outstanding debt and a lack of liquidity of the Company's common stock. As
discussed further in Note 8 to the financial statements, the Company has entered
into an agreement with Dutchess Private Equities Fund ("Dutchess" and "Dutchess
Transaction") that provides for the sale to Dutchess of up to $10,000,000 of the
common stock of the Company. The agreement limits the percentage of stock
Dutchess will hold at any particular times to 4.99% of the Company's outstanding
shares. Consequently, if Dutchess cannot sell the shares of the Company due to
the lack of liquidity in the common stock of the Company, the Company's ability
to be able to obtain money from Dutchess for acquisitions or to pay down the
Company's current debt may be hindered or limited. Additionally, the Company's
ability to raise capital outside of the Dutchess transaction may be affected by
minimal revenues, the Company's recurring losses and the stockholders'
deficiency of $2,532,889 as of September 30, 2006.
7
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
There can be no assurance that the Company will be successful in any of its
plans as discussed in this Note 2. To the extent that the Company is
unsuccessful in its plans to increase its cash position, the Company may find it
necessary to further curtail its operations and possible future acquisitions.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. However, the accompanying financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of the liabilities in the normal course of business. The
financial statements do not include any adjustments relating to the recovery of
assets or the classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Walker and its
wholly-owned subsidiaries NPI, SI, Kelly Color and ADS collectively referred to
as the "Company". All significant inter-company transactions and balances have
been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
REVENUE RECOGNITION
Administrative revenue is recognized at the time the administrative services are
performed and provided, or made available to its customers. Services are billed
monthly based upon predetermined percentage of the total assets included in the
respective pre-need funeral master trust fund.
Insurance commissions are earned by the Company from the various insurance
organizations whose product the Company sells. When a policy becomes issued,
the Company earns a percentage of the annual premium to be paid on that
particular policy. Revenue earned from commissions are recognized in the period
services are performed.
STOCK OPTIONS AND SIMILAR EQUITY INSTRUMENTS
Prior to January 1, 2006, the Company accounted for employee stock transactions
in accordance with Accounting Principle Board, APB Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company had adopted the pro forma disclosure
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
For Stock-Based Compensation."
Effective January 1, 2006, the Company adopted SFAS No. 123R "Share Based
Payment". This statement is a revision of SFAS Statement No. 123, and supersedes
APB Opinion No. 25, and its related implementation guidance. SFAS 123R addresses
all forms of share based payment ("SBP") awards including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights. Under SFAS 123R, SBP awards will result in a charge to
operations that will be measured at fair value on the awards grant date, based
on the estimated number of awards expected to vest over the service period.
As of September 30, 2006, the Company has no unvested options and did not grant
any options to employees during the nine months ended September 30, 2006. The
adoption of SFAS 123R did not effect the Company's financial position, results
of operations or cash flows for the three and nine months ended September 30,
2006, but may have a material impact if options are granted in the
future.
Prior to the Company's adoption to SFAS No. 123R, SFAS No. 123 required that the
Company provide pro-forma information regarding net earnings and net earnings
per share as if the Company's stock based awards had been determined in
accordance with the fair value method described therein. The Company had
previously adopted the disclosure portion of SFAS No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure," requiring quarterly SFAS
No. 123 pro-forma disclosure. The pro-forma charge for compensation cost related
to stock-based awards granted was recognized over the service period. For stock
options, the service period represents the period of time between the date of
grant and the date each option becomes exercisable without consideration of
acceleration provisions (e.g., retirement change of control. etc.)
The Company is using the modified prospective method. The impact of this
statement will require the Company to record a charge for the fair value of
stock options granted on a prospective basis over the vesting period in the
consolidated financial statements. No proforma disclosure has been presented for
the three and nine months ended September 30, 2005 due to the fact that all of
the employee stock options were fully vested as of December 31, 2004, and the
Company did not grant any options during the three and nine months ended
September 30, 2005.
8
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
NET LOSS PER SHARE
SFAS No. 128, "Earnings per Share." requires the presentation of basic and
diluted earnings per share ("EPS"). Basic EPS is computed by dividing loss
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS includes the potential dilution that
could occur if options or other contracts to issue common stock were exercised
or converted. The Company's outstanding options, warrants and convertible
securities, as set forth below, are not reflected in diluted earnings per share
because their effects would be anti-dilutive. Accordingly, basic and diluted
earnings per share are identical.
September 30,
--------------------------------
2006 2005
--------------- ---------------
Options -- 52,170
Warrants 2,406,156 1,643,656
Convertible debt 4,203,743 598,592
--------------- ---------------
6,609,899 2,294,418
=============== ===============
NEW ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 155, which is an amendment of SFAS No. 133 and 140. This Statement; a)
permits fair value re-measurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation, b)
clarifies which interest-only strip and principal-only strip are not subject to
the requirements of SFAS 133, c) establishes a requirement to evaluate interests
in securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, d) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives, e) amends SFAS
140 to eliminate the prohibition on a qualifying special-purpose entity from
holding a derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. This Statement is effective
for financial statements for fiscal years beginning after September 15, 2006.
Earlier adoption of this Statement is permitted as of the beginning of an
entity's fiscal year, provided the entity has not yet issued any financial
statements for that fiscal year. Management is evaluating if this Statement will
have an impact on the financial statements of the Company.
In March 2006, the FASB issued SFAS No. 156, which amends FASB Statement No.
140. This Statement establishes, among other things, the accounting for all
separately recognized servicing assets and servicing liabilities. This Statement
amends SFAS 140 to require that all separately recognized servicing assets and
servicing liabilities be initially measured at fair value, if practicable. This
Statement permits, but does not require, the subsequent measurement of
separately recognized servicing assets and servicing liabilities at fair value.
An entity that uses derivative instruments to mitigate the risks inherent in
servicing assets and servicing liabilities is required to account for those
derivative instruments at fair value. Under this Statement, an entity can elect
subsequent fair value measurement to account for its separately recognized
servicing assets and servicing liabilities. By electing that option, an entity
may simplify its accounting because this Statement permits income statement
recognition of the potential offsetting changes in fair value of those servicing
assets and servicing liabilities and derivative instruments in the same
accounting period. This Statement is effective for financial statements for
fiscal years beginning after September 15, 2006. Earlier adoption of this
Statement is permitted as of the beginning of an entity's fiscal year, provided
the entity has not yet issued any financial statements for that fiscal year.
Management believes this Statement will not have an impact on the financial
statements of the Company once adopted.
In September 2006, the FASB issued SFAS No. 157, "Accounting for Fair Value
Measurements." SFAS No. 157 defines fair value, and establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosure about fair value measurements. SFAS No. 157 is effective for the
Company for financial statements issued subsequent to November 15, 2007. The
Company does not expect the new standard to have any material impact on the
financial position and results of operations.
In September 2006, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108 ("SAB 108") which provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
SAB 108 becomes effective in fiscal 2007. Adoption of SAB 108 is not expected to
have a material impact on the Company's consolidated financial position, results
of operations or cash flows.
9
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
RECLASSIFICATIONS
Certain accounts in the prior year's financial statements have been reclassified
for comparative purposes to conform with the presentation in the current year's
financial statements. These reclassifications have no effect on previously
reported earnings.
NOTE 4 - LINE OF CREDIT, BANK
As of September 30, 2006, the Company has a credit facility which has an
outstanding balance of approximately $139,000. The credit facility matures in
July 2007. The Line of Credit is collateralized by a building located in
North Carolina, which as of September 30, 2006, has been fully
depreciated. The Line of Credit carries a stated interest rate of approximately
8.25% per annum, the Company plans to renew its credit facility with similar
terms.
NOTE 5 - NOTES PAYABLE
On March 15, 2000, the Company issued a 6% promissory note for $150,000. Due to
insufficient operating capital, the Company has not been able to meet this
commitment and currently is not in compliance with the terms of this note. As of
September 30, 2006, the principal balance due under this note is $90,000.
On July 11, 2005, the Company sold and issued a note payable in the aggregate
principal amount of $100,000. The maturity date of the note was November 30,
2005 and has a stated interest rate of 10% per annum. Due to insufficient
operating capital, the Company has not been able to meet this commitment and
currently is not in compliance with the terms of this note. As of September 30,
2006, the principal balance due under this note is approximately $ 24,000.
During the nine months ended September 30, 2006, the Company made repayments of
approximately $ 91,200 under these notes.
NOTE 6 - BRIDGE NOTES
In May 22, 2004 and August 4, 2004, The Company issued 6% Bridge Notes for
$125,000 and $250,000, respectively. The bridge notes matured on January 15,
2006 through May 15, 2006. Due to insufficient operating capital, the Company
has not been able to meet this commitment and currently is not in compliance
with the terms of these notes.
On September 20, 2005, the Company sold a note payable for proceeds of $125,000;
the bridge note has a stated interest rate of 10% per annum. Due to insufficient
operating capital, the Company has not been able to meet this commitment and
currently is not in compliance with the terms of this note.
During the nine months ended September 30, 2006, the Company made principal
repayments due under these notes of $ 35,000. As of September 30, 2006, the
principal balances due under these notes is $340,000.
NOTE 7 - CONVERTIBLE BRIDGE NOTES
In December 2004 and February 2005, the Company issued 10% convertible
promissory notes in the aggregate principal amount of $375,000. The convertible
promissory notes matured in January 2006. Due to insufficient operating capital,
the Company has not been able to meet this commitment and currently is not in
compliance with the terms of this note. The notes are convertible into common
stock of the Company at $0.71 per share. During the nine months ended September
30, 2006, the Company repaid accrued interest of approximately $ 50,000.
On July 20, 2006, the Company entered into an allonge to the 10% Convertible
Promissory Note which (i) increased the interest rate to 16%; (ii) established
the maturity date to July 15, 2008; and (iii) removes the defaults under the
Notes. Under the terms of the allonge the Company is required to make future
minimum monthly payments that increase from $9,375 to $28,125 over the life of
the loan. As of September 30, 2006, the principal balance due under this note is
$365,375.
NOTE 8- DUTCHESS TRANSACTION
On December 23, 2005, the Company entered into two definitive agreements with
Dutchess Private Equities Fund, L.P. ["Dutchess"]. The agreements were
subsequently amended on February 20, 2006. Both agreements require the Company
to file a registration statement to register the shares of common stock
underlying such agreements. The Company filed the registration statement on
March 31, 2006, which went effective in May, 2006.
10
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
12 % CONVERTIBLE DEBENTURES:
On January 11, 2006, the Company closed its agreement providing for the sale of
$220,000 in principal amount of five-year convertible debentures. The
convertible debentures bear interest at 12% per annum and mature in December
2010. The gross proceeds of $220,000, of which $95,000 was advanced to the
Company during the year ended December 31, 2005, were recorded net of a discount
of $219,200. The debt discount was calculated using the Black Scholes option
valuation model of approximately $175,600 for the embedded conversion option and
approximately $43,600 for the 423,077 warrants granted.
On February 20, 2006, the Company modified the December 23, 2005 12% Debenture
Agreement that provided for the sale of $220,000 of five-year convertible
debentures to Dutchess. The Company reduced the conversion price from $0.13 to
$0.10 and increased the number of warrants from 423,077 to 550,000. The warrants
may be exercised for a period of five years at an exercise price of $0.10. Under
accounting guidance enumerated in EITF Issue No. 96-19 "Debtor's Accounting for
a Modification or Exchange of Debt Instruments." EITF 96-19 provides that a
substantial modification of terms in an existing debt instrument should be
accounted for like, and reported in the same manner as, an extinguishment of
debt. Further, EITF 96-19 indicates that the modification of a debt instrument
by a debtor and a creditor in a non-troubled debt situation is deemed to have
been accomplished with debt instruments that are substantially different if the
present value of the cash flows under the terms of the new debt instrument is at
least 10 percent different from the present value of the remaining cash flows
under the terms of the original instrument at the date of the modification. Upon
the effective debt modification date of February 20, 2006, the Company recorded
a debt extinguishment gain of approximately $4,500.
The modified convertible debenture was recorded net of a discount of $220,000.
The debt discount was calculated using the Black Scholes option valuation model
of approximately $219,700 for the embedded conversion option, approximately
$35,700 for the 550,000 warrants granted and a charge to the statement of
operations for $35,400 for the fair value of the remaining fair value not
attributable to the debt discount.
During the nine months ended September 30, 2006, the Company made principal
repayments of $ 41,667, as a result of the repayment the Company reclassified
$28,800 of the embedded conversion option to additional paid in capital. As of
September 30, 2006, the principal balance due under this obligation was
$178,333.
10% CONVERTIBLE DEBENTURE:
On February 20, 2006, the Company entered into an agreement providing for the
sale of and issuance of $221,000 in principal amount of its five-year
convertible debenture to Dutchess. The convertible debentures bear interest at
10% per annum. The convertible debenture is convertible into shares of the
Company's common stock, at any time, at a conversion price of $0.10 per share
The Company's obligation to repay the amounts outstanding under the Convertible
Debentures is secured by substantially all of the Company's assets. In
connection with the Convertible Debentures, the Company also granted warrants to
purchase 412,500 shares of common stock. The warrants may be exercised for a
period of five years at an exercise price of $0.10.
The gross proceeds of $221,000 have been recorded net of a debt discount of
$221,000. The debt discount was calculated using the Black Scholes option
valuation model of approximately $190,800 for the embedded conversion option,
approximately $35,600 for the 412,500 warrants granted for and a charge to the
statement of operations for $5,400 for the fair value of the remaining fair
value not attributable to the debt discount.
During the nine months ended September 30, 2006, the Company made principal
repayments of $ 34,420, as a result of the repayment the Company reclassified
$37,800 of the embedded conversion option to additional paid in capital. As of
September 30, 2006, the principal balance due under this obligation was
$186,580.
The warrants and the embedded conversion option were accounted for under EITF
issue No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock" and EITF 05-4, view A "The effect
of a Liquidated Damages Clause on a Freestanding Financial Instrument." Due to
certain factors and the liquidated damage provision in the registration rights
agreement, the Company determined that the embedded conversion option and the
warrants are derivative liabilities. Accordingly, the warrants and the embedded
conversion option will be marked to market through earnings at the end of each
reporting period. The warrants and the conversion option are valued using the
Black-Scholes valuation model. For the nine month period ended September 30,
2006, the Company reflected a gain of approximately $344,500 representing the
change in the value of the warrants and embedded conversion option.
11
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
INVESTMENT AGREEMENT:
On December 23, 2005, the Company entered into an investment agreement with
Dutchess Such agreement was subsequently amended on February 20, 2006. The
amended investment agreement provides for the sale and issuance from time to
time of up to $10,000,000 in shares of Common Stock for a period of up to 36
months from the date the registration statement is declared effective. The
maximum number of shares that the Company may put to Dutchess at any one time
shall be equal to, at the Company's election, either:
(a) 200% of the average daily volume in the U.S. market of the Common Stock for
the ten trading days prior to the date the Company notifies its intent to
sell shares, multiplied by the average of the three daily closing bid
prices immediately preceding the date a put notice is delivered, or
(b) a number of shares having a value of $200,000. The Company may not submit a
new put notice until after the completion of a previous sale under the
investment agreement.
The purchase price for the common stock to be sold shall be equal to 93% of the
lowest closing best bid price of the common stock during the five-day period
following the date the Company delivers a put notice. Under the terms of the
investment agreement Dutchess is limited to owning more than 4.99% of the
Company's total common stock outstanding.
The Company is obligated to file a registration statement for the registration
of the shares of common stock issuable upon conversion of the convertible
debentures, exercise of the warrants and upon the sale of common shares under
the investment agreement. The Company filed the registration statement on March
31, 2006 which was declared effective in May 2006.
For the nine months ended September 30, 2006, the Company has not received any
proceeds under the Investment Agreement and has issued 496,800 shares of its
common stock for the settlement of obligations owed to Dutchess aggregating
approximately $22,300.
DUTCHESS PROMISSORY NOTES
During the nine months ended September 30, 2006, the Company issued to Dutchess
promissory notes aggregating $1,125,000. The promissory notes consisted of the
following.
PROMISSORY NOTE - MAY 25, 2006:
On May 25, 2006, the Company sold and issued to Dutchess, for gross proceeds of
$750,000 promissory note in the principal amount of $900,000 and therefore, the
promissory note was recorded at a discount of $150,000. The debt discount of
$150,000 will accrete to interest expense over the life of the debt; the
effective interest rate was approximately 12%. In addition, the Company issued
1,000,000 shares of the Company's common stock. The fair value of the common
stock was valued at $94,000 and recorded as a deferred debt discount which will
accrete to interest expense over the life of the debt. The promissory note is
secured by substantially all of the assets of the Company. The promissory note
matures on December 21, 2007. Payments made in satisfaction of the promissory
note shall be drawn from each put under the February 20, 2006 investment
agreement. The Company shall make payments to Dutchess in the amount of the
greater of:
a) 50% of each put given to Dutchess from the Company; or,
b) $75,000 until the face amount is paid in full, minus any fees due.
The first payment was due on July 1, 2006. Each subsequent payment will be
made at the closing of each put until the debenture is paid in full, with a
minimum amount of $75,000 per month.
In the event that on the maturity date the Company has any remaining amounts
unpaid, Dutchess can exercise its right to increase the face amount by 10% as an
initial penalty and an additional 2.5% per month as liquidated damages. In
the event of default, at the option of Dutchess, the promissory note is
convertible into an 18% convertible debenture. The convertible debenture is
convertible at the lesser of either
(i) 75% of the lowest closing bid price during the 15 trading days immediately
preceding the notice of conversion, or
(ii) 100% of the lowest bid price for the 20 trading days immediately preceding
the date of default.
During the nine month period ended September 30, 2006, the Company made
principal repayments of $75,000. As of September 30, 2006, the principal balance
owed under this obligation is $825,000.
In addition, as per the agreement Dutchess is entitled at any time to request
up to an additional 1,225,000 shares of common stock from the Company,
provided, however, that their issuance does not result in Dutchess owning more
than 4.99% of the Company's total common stock outstanding. The option does not
have a stated expiration date.
Under accounting guidance provided by EITF issue No. 00-19 "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock", the 1,225,000 incentive shares were identified as an
instrument settled in a fixed amount of shares of the Company's common stock.
The Company has determined that the recording of a liability is not required for
the shares since the instrument can be settled in unregistered shares; the
Company has sufficient authorized shares; the instrument calls for a
determinable amount of fixed shares and there are no provisions in the agreement
that require cash payments for liquidating damages.
PROMISSORY NOTE - AUGUST 15, 2006:
On August 15, 2006, the Company sold and issued to Dutchess, for gross proceeds
of $225,000,(a) a 0% promissory note in the principal amount of
$292,500 and therefore, the promissory note was recorded at a discount of
$67,500. The debt discount of $67,500 will accrete to interest expense over the
life of the debt; the effective interest rate was approximately 27%. The
promissory note is secured by substantially all of the assets of the
Company. The promissory note matures on August 15, 2007. Payments made in
satisfaction of the promissory note shall be drawn from each put under the
February 20, 2006 investment agreement. The Company shall make payments to
Dutchess in the amount of the greater of:
a) 50% of each put given to Dutchess from the Company; or,
b) $20,000 until the face amount is paid in full, minus any fees due.
In the event that on the maturity date the Company has any remaining amounts
unpaid, Dutchess can exercise its right to increase the face amount by 10% as an
initial penalty and an additional 2.5% per month for liquidated damages. In the
event of default, at the option of Dutchess the debenture is converted to an 18%
convertible debenture. The convertible debenture is convertible at the lesser
of either
(i) 75% of the lowest closing bid price during the 15 trading days immediately
preceding the notice of conversion, or
(ii) 100% of the lowest bid price for the 20 trading days immediately preceding
the date of default.
As of September 30, 2006, the Company owed $289,710 under this obligation.
NOTE 9 - RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 2006, the Company repaid
approximately $ 93,900 of the advances previously advanced for working capital
purposes. As of September 30, 2006, the total amount due to the
officers-stockholders was $ 34,520.
The Company had an employment agreement with Mitchell Segal to serve as the
Company's president and chief executive officer through December 31, 2005. The
Company has indicated it expects to renew the employment agreement with Mr.
Segal to serve as the Company's president and chief executive officer through
2010. As of September 30, 2006, the Company was in arrears in payment of Mr.
Segal's salary in the amount of approximately $214,280 which is included on the
consolidated balance sheet as part of accounts payable and accrued expenses.
The Company has an employment agreement with Peter Walker through March 18,
2012. As of September 30, 2006, the Company was in arrears under Mr. Walker's
employment agreement in the amount of approximately $154,120, which is included
on the consolidated balance sheet as part of accounts payable and accrued
expenses.
12
WALKER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
NOTE 10 - 10% SENIOR SUBORDINATED SECURED CONVERTIBLE PROMISSORY NOTES
In December 2003, the Company sold and issued 10% senior subordinated secured
convertible promissory notes. The notes were initially convertible into shares
of the Company's common stock at conversion prices of $0.71 per share through
December 5, 2005 and $1.25 thereafter. The notes carried a penalty and default
interest provision at a stated monthly rate of 1.5% of the principal balance. As
of September 30, 2006, the Company has a remaining principal balance of $50,000
due to the holders and is in default with the terms of the note.
NOTE 11 - CAPITAL STOCK/STOCKHOLDERS' DEFICIENCY
On December 20, 2005, in connection with the Dutchess Transaction, the Company
was required to remit payment of $15,000 for due diligence fees. The Company
opted to issue 85,000 shares of its common stock valued at approximately $30,000
as a deposit. In February 2006 the shares have been returned to the Company and
the $15,000 fee was settled with the proceeds received from the convertible
debentures.
On May 23, 2006, the Company amended its certificate of incorporation to
decrease its par value from $0.10 to $0.0001; the decrease has been
retroactively restated for all periods presented.
On May 29, 2006, the Company issued 500,000 shares of common stock to a
consultant for services provided. The common stock was valued using the
market value of such shares at $62,500. The shares vested immediately.
On June 5, 2006, the Company issued 500,000 shares of common stock to a
consultant for services provided. The common stock was valued using the
market value of such shares at $62,500. The shares vested immediately.
On July 25, 2006, the Company issued 30,000 shares of common stock for the
settlement of $3,000 of accrued interest.
On August 8, 2006, the Company issued 78,000 shares of common stock for the
settlement of $7,800 of accrued interest.
On August 31, 2006, the Company issued 250,000 shares of common stock to a
consultant for services provided. The common stock was valued using the market
value of such shares at $13,750.
On August 31, 2006, the Company issued 153,800 shares of common stock for the
settlement of $4,577 of accrued interest and a stock based compensation charge
of $ 1,144 as a redemption fee.
On September 11, 2006, the Company issued 45,000 shares of common stock for the
settlement of $1,339 of accrued interest and a stock based compensation charge
of $335 as a redemption fee.
On September 18, 2006, the Company issued 40,000 shares of common stock for the
settlement of $1,043 of accrued interest and a stock based compensation charge
of $261 as a redemption fee.
On September 27, 2006, the Company issued 150,000 shares of common stock for
the settlement of $2,790 of the 12% Promissory Notes.
NOTE 12 - SO INSURE, INC.
On June 16, 2006 the Company formed a new corporation under the state laws of
Texas, So Insure, Inc., a wholly owned subsidiary, for the purpose of marketing
and selling health insurance policies.
NOTE 13 - ECONOMIC DEPENDENCY
MAJOR CUSTOMERS
The following table sets forth the percentages of revenue derived by the Company
from those customers which accounted for at least 10% of revenues during the
applicable periods
THREE MONTHS ENDED SEPTEMBER 30,
2006 % 2005 %
----------- ----- ----------- -----
Customer A $ 58,050 40% $ 59,250 69%
Customer B $ -- --% $ 14,690 17%
Customer C $ -- --% $ 9,146 11%
NINE MONTHS ENDED SEPTEMBER 30,
2006 % 2005 %
----------- ----- ----------- -----
Customer A $ 175,750 55% $ 161,158 66%
Customer B $ 42,020 13% $ 44,556 18%
Customer C $ -- --% $ 27,670 11%
As of September 30, 2006, the Company's total accounts receivable, due from
those customers is represented by the following table which sets forth balances
owed from customers which accounted for at least 10% of accounts receivable.
AMOUNT %
------------- -----
Customer A $19,350 70%
Customer B $ 4,970 18%
Customer C $ 3,129 11%
NOTE 14 - SUBSEQUENT EVENTS
- - On October 4, 2006, the Company issued 1,344,086 shares of common stock for
the repayment of $25,000 of certain debt obligations owed to Dutchess.
- - On October 5, 2006, the Company issued 2,454,434 shares of common stock to
Dutchess for net cash proceeds of $34,287.
- - On October 20, 2006, the Company issued 550,000 shares of common stock for
the repayment of $5,610 of certain debt obligations owed to Dutchess.
- - On October 26, 2006, the Company issued 405,000 shares of common stock for
the repayment of $3,405 of certain debt obligations owed to Dutchess.
- - On October 30, 2006, the Company issued 2,920,000 shares of common stock
for the settlement of $24,528 of certain debt obligations owed to Dutchess
- - On November 6, 2006, the Company issued 3,848,000 shares of its common
stock for the settlement of $43,098 of certain debt obligations owed to
Dutchess.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
INTRODUCTORY COMMENT - TERMINOLOGY
Throughout this Quarterly Report on Form 10-QSB, the terms the "we," "us," "our"
and "our company" refers to Walker Financial Corporation ("Walker") and, unless
the context indicates otherwise, includes, on a consolidated basis, Walker's
wholly-owned subsidiaries, National Preplanning, Inc. ("NPI"), American
DataSource, Inc. ("ADS") So Insure, Inc. ("SoInsure") and Kelly Color, Inc.
("Kelly Color").
INTRODUCTORY COMMENT - FORWARD-LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-QSB include
"forward-looking statements". Forward-looking statements involve known and
unknown risks, uncertainties and other factors which could cause actual
financial or operating results, performances or achievements expressed or
implied by such forward-looking statements not to occur or be realized. Such
forward-looking statements generally are based on our best estimates of future
results, performances or achievements, predicated upon current conditions and
the most recent results of the companies involved and their respective
industries. Forward-looking statements may be identified by the use of
forward-looking terminology such as "may," "will," "could," "should," "project,"
"expect," "believe," "estimate," "anticipate," "intend," "continue,"
"potential," "opportunity" or similar terms, variations of those terms or the
negative of those terms or other variations of those terms or comparable words
or expressions. Potential risks and uncertainties include, among other things,
such factors as:
o the success of our business strategies and future plans of operations,
o general economic conditions in the United States and elsewhere, as well as
the economic conditions affecting the industry in which we operate,
o changes in the nature and enforcement of laws and regulations affecting our
products, services, customers, suppliers and sales agents,
o the competitive environments within the insurance, employee benefit,
mortgage services areas.
o our ability to raise additional capital, if and as needed,
o the cost-effectiveness of our product and service development activities,
o political and regulatory matters affecting the industry in which we
operate,
o the market acceptance, revenues and profitability of our current and future
products and services,
o the extent that our sales network and marketing programs achieve
satisfactory response rates,
o our ability to acquire additional companies operating the insurance and
financial services industry and ability to successfully integrate such
acquirees, if any, into our operations, and
o the other risks detailed in this Quarterly Report on Form 10-QSB and, from
time to time, in our other filings with the Securities and Exchange
Commission. Readers are urged to carefully review and consider the various
disclosures made by us in this Quarterly Report on Form 10-QSB, our Annual
Report on Form 10-KSB for the year ended December 31, 2005 and our other
filings with the SEC. These reports attempt to advise interested parties of
the risks and factors that may affect our business, financial condition and
results of operations and prospects. The forward-looking statements made in
this Form 10-QSB speak only as of the date hereof and we disclaim any
obligation to provide updates, revisions or amendments to any
forward-looking statements to reflect changes in our expectations or future
events.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of those financial statements requires us to make estimates and
judgments that affect the reported amount of assets and liabilities at the date
of our financial statements. Actual results may differ from these estimates
under different assumptions or conditions.
Critical accounting policies are those that reflect significant judgments or
uncertainties, and potentially result in materially different results under
different assumptions and conditions.
REVENUE RECOGNITION
Revenue is recognized at the time the administrative services are performed and
provided, or made available to its customers. Services are billed monthly based
upon predetermined percentage of the total assets included in the respective
pre-need funeral master trust fund. Commission revenue is recognized when the
Company receives such revenue.
14
ACCOUNTING FOR STOCK-BASED COMPENSATION
Prior to January 1, 2006, the Company accounted for employee stock transactions
in accordance with Accounting Principle Board, APB Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company had adopted the pro forma disclosure
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
For Stock-Based Compensation."
Effective January 1, 2006, the Company adopted SFAS No. 123R "Share Based
Payment". This statement is a revision of SFAS Statement No. 123, and supersedes
APB Opinion No. 25, and its related implementation guidance. SFAS 123R addresses
all forms of share based payment ("SBP") awards including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights. Under SFAS 123R, SBP awards will result in a charge to
operations that will be measured at fair value on the awards grant date, based
on the estimated number of awards expected to vest over the service period.
We account for the fair value of options and warrants for non-employees in
accordance with SFAS No. 123R, which requires that compensation cost be measured
after the grant date based on the value of the award and is recognized over the
service period, which is also the vesting period. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model.
The Black-Scholes option-pricing model is used to estimate the fair value of a
stock option. The model calculates the theoretical fair value based on a number
of assumptions utilizing, the stock price, strike price, expiration date,
risk-free rate of return, and the standard deviation (volatility) of the stock's
return. Stock based compensation valuations may differ significantly if the
Company used a different option model, based on the before mentioned assumptions
and the alternative model's formula driven calculations. The Company has not
relied on any other option pricing models for the issuance of its options or
warrants as the Black-Scholes option-pricing model is currently the model most
widely used for reporting companies. The uncertain assumptions estimating the
valuation of these equity transactions may have a material effect on our
financial performance during the reported periods.
ACCOUNTING FOR DEBT INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS
In June 2005, the FASB ratified EITF Issue No. 05-2, "The Meaning of
`Conventional Convertible Debt Instrument' in EITF No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock" ("EITF No. 05-2"), which addresses when a convertible debt
instrument should be considered "conventional" for the purpose of applying the
guidance in EITF No. 00-19. EITF No. 05-2 also retained the exemption under EITF
No. 00-19 for conventional convertible debt instruments and indicated that
convertible preferred stock having a mandatory redemption date may qualify for
the exemption provided under EITF No. 00-19 for conventional convertible debt if
the instrument's economic characteristics are more similar to debt than equity.
The Emerging Issues Task Force ("EITF") Issue No. 05-4 "The Effect of a
Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF
Issue No. 00-19, `Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock" ("EITF No. 05-4") addresses
financial instruments, such as stock purchase warrants, which are accounted for
under EITF 00-19 that may be issued at the same time and in contemplation of a
registration rights agreement that includes a liquidated damages clause.
In September 2005, the FASB ratified EITF Issue No. 05-7, "Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues" ("EITF No. 05-7"), which addresses whether a modification to a
conversion option that changes its fair value affects the recognition of
interest expense for the associated debt instrument after the modification and
whether a borrower should recognize a beneficial conversion feature, not a debt
extinguishment, if a debt modification increases the intrinsic value of the debt
(for example, the modification reduces the conversion price of the debt).
Based on the interpretive guidance and due to certain factors and the liquidated
damage provision in the registration rights agreement, the Company determined
that the embedded conversion option and the warrants are derivative liabilities.
15
FINANCIAL CONDITION AND LIQUIDITY
We have negative working capital of $ 2,416,873 at September 30, 2006 compared
to negative working capital of $1,569,072 at December 31, 2005. Our working
capital deficiency is the result of borrowings used to support our business
capital needs which are currently due or will become due within the next 12
months, in addition to an increase in our accounts payable as the result of the
accrual of management compensation not paid.
Net cash used in operating activities was approximately $ 771,947 for the nine
months ended September 30, 2006 compared to net cash used in operating
activities of $450,760 for the nine months ended September 30, 2005.
There was $ 1,300 used in investing activities for the nine months ended
September 30, 2006, as compared to $803 cash used in investing activities for
the nine months ended September 30, 2005. Investing activities were limited to
the purchase of property and equipment.
Net cash provided by financing activities was approximately $ 808,503 for the
nine months ended September 30, 2006 as compared with $ 470,529 for the nine
months ended September 30, 2005. The increase is a result of net proceeds
received from various debt borrowings.
As a result of these activities, our cash and cash equivalents increased to $
71,948 as of September 30, 2006 compared to an increase to
$ 98,294 at September 30, 2005.
On December 23, 2005, the Company entered into two definitive agreements with
Dutchess Private Equities Fund, L.P. ["Dutchess"]. The agreements were
subsequently amended on February 20, 2006. Both agreements require the Company
to file a registration statement to register the shares of common stock
underlying such agreements. The registration statement was declared effective
during May, 2006.
On December 23, 2005, the Company entered into an agreement providing for the
sale of $220,000 in principal amount of five-year convertible debentures. The
convertible debentures bear interest at 12% per annum and mature in December
2010. The Company's obligation to repay the amounts outstanding under the
convertible debentures is secured by substantially all of the Company's assets.
Additionally, on December 23, 2005, the Company entered into an investment
agreement (the "Investment Agreement") providing for the sale and issuance from
time to time of up to $10,000,000 in shares of Common Stock for a period of up
to 36 months from the date the registration statement is declared effective. The
maximum number of shares that the Company may put to Dutchess at any one time
shall be equal to, at the Company's election, either:
(a) 200% of the average daily volume in the U.S. market of the Common Stock for
the ten trading days prior to the date the Company notifies its intent to sell
shares, multiplied by the average of the three daily closing bid prices
immediately preceding the date a put notice is delivered, or (b) a number of
shares having a value of $200,000. The Company may not submit a new put notice
until after the completion of a previous sale under the investment agreement.
The purchase price for the common stock to be sold shall be equal to 93% of the
lowest closing best bid price of the common stock during the five-day period
following the date the Company delivers a put notice.
Under the terms of the investment agreement Dutchess is limited to owning more
than 4.99% of the Company's total common stock outstanding.
Under the Investment Agreement, the Company is obligated to file a registration
statement by January 13, 2006 for the registration of the shares of common stock
issuable upon conversion of the convertible debentures, exercise of the warrants
and upon a sale under the Investment Agreement. The Company is further obligated
to use its best efforts to cause the SEC to declare the registration statement
effective within 90 days after the filing date of the registration statement.
The Company filed the registration agreement on January 11, 2006, and was
declared effective in May, 2006.
Subsequent to the year ended December 31, 2005, the Company amended the Dutchess
Transaction as follows:
On February 20, 2006, the Company modified the December 23, 2005 Debenture
Agreement that provided for the sale of $220,000 of five-year convertible
debentures to Dutchess.
The amendment changes the following terms:
Convertible at any time at the lesser of (i) the lowest closing bid price of the
Common Stock between December 12, 2005 and the date of filing of the
Registration Statement, or (ii) $0.10. Additionally, the amendment removes the
ability of Dutchess to switch the conversion price of the Debenture from a fixed
price to one that is based on the market price of the Company's stock in the
event of default and removes the right to use proceeds from the Investment
Agreement to redeem the Convertible Debenture.
The Investment Agreement with Dutchess provides for the sale and issuance to
Dutchess from time to time of up to $10,000,000 in shares of common stock for a
period of up to 36 months from the date the registration statement is declared
effective.
The amendment removes Dutchess's obligation under the investment agreement to
take the shares under the agreement on the condition that the shares be free
trading under the cover provisions of the Investment Agreement.
16
On February 20, 2006, the Company entered into a second agreement providing for
the sale of and issuance of $221,000 in principal amount of its five-year
convertible debenture to Dutchess. The convertible debentures bear interest at
10% per annum. The debenture is convertible into shares of the Company's Common
Stock, at any time at the lesser of (i) the lowest closing bid price of the
common stock between February 20, 2006 and the date of filing of a registration
statement covering the resale of the shares underlying this convertible
debenture, or (ii) $0.10.
The Company's obligation to repay the amounts outstanding under the Convertible
Debentures is secured by substantially all of the Company's assets.
In connection with the Convertible Debentures, the Company also granted warrants
to purchase 412,500 shares of common stock. The warrants may be exercised for a
period of five years at an exercise price of $0.10.
On May 25, 2006, the Company issued a promissory note to an accredited investor
for an aggregate principal amount of $ 750,000. The note is non-interest
bearing and is due on December 21, 2007. The obligation of the Company for
payment of principal and interest under the note is secured by substantially all
of the Company's assets. In connection with the note the Company granted to the
Investor 1,000,000 shares of unregistered, restricted common stock. At a future
date the Investor is entitled to request an additional 1,225,000 shares of
common stock from the Company, provided, however, that their issuance does not
result in the Investor owning more than 4.99% of the Company's total common
stock outstanding.
On July 20, 2006, the Company entered into an allonge to the 10% Convertible
Promissory Note which (i) increased the interest rate to 16%; (ii) established
the maturity date to July 15, 2008; and (iii) removes the defaults under the
Notes.
On August 15, 2006, the Company sold and issued to Dutchess, for gross proceeds
of $225,000,(a) a 12% promissory note in the principal amount of
$292,500 and therefore, the promissory note was recorded at a discount of
$67,500. The debt discount of $67,500 will accrete to interest expense over the
life of the debt; the imputed interest rate was approximately 12%. The
promissory note is secured by substantially all of the assets of the
Company. The promissory note matures on August 15, 2007. Payments made in
satisfaction of the promissory note shall be drawn from each put under the
February 20, 2006 investment agreement. The Company shall make payments to
Dutchess in the amount of the greater of a) 50% of each put given to
Dutchess from the Company; or, b) $20,000 until the face amount is
paid in full, minus any fees due.
There can be no assurance that the Company will be successful in any of its
plans as discussed. To the extent that the Company is unsuccessful in its plans
to increase its cash position, the Company may find it necessary to further
curtail its operations and possible future acquisitions. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
PLAN OF OPERATIONS
Walker Financial is focusing its efforts on the marketing of financial products
and services that benefit the baby boomer, senior and minority populations.
Through its licensed subsidiaries NPI Agency, Inc. and So Insure, Inc., Walker
earns insurance commissions on the sale of various insurance products. Through
its subsidiary American DataSource (``ADS''), the Company is engaged in the
business of providing a complete line of administrative services for trust
accounts. Walker is looking to expand its product offerings by adding various
financial products and services, which may occur through acquisition
opportunities, although there can be no assurance that this will occur.
We have commenced the operation of our direct to consumer health insurance
marketing and have hired ten licensed sales representatives to sell health
insurance to individuals and families that indicate a desire to purchase these
types of policies. The Company purchases qualified insurance leads from a
variety of sources. Our insurance sales counselors contact these individuals and
guide them through the application process over the telephone and internet. The
Company earns insurance commissions that are paid by the various insurance
organizations whose product we sell. When a policy becomes issued, we earn a
percentage of the annual premium to be paid on that particular policy.
We are seeking to expand our business by hiring additional licensed insurance
counselors in addition to adding other insurance products.
Although we have established a worksite and affinity marketing strategy by
positioning the prearrangement of death care and other pre-need products as a
voluntary or contributory benefit for corporations, unions, and affinity groups
to offer their employees or members, it has not resulted in many sales and we
have decided, for the time being, to slow down our efforts in this area and
concentrate more on our most recent health insurance marketing.
Our other subsidiary, American Datasource, Inc. is involved in the
administration of monies in trust that are used for the payment of prearranged
funerals upon the death of an individual. These trust accounts are created by an
individual entering into a prearrangement contract with a funeral director.
Instead of funding a prearrangement with a preneed insurance policy as discussed
above some funeral directors suggest that an individual place monies into trust.
That trust account is professionally money managed by unaffiliated third party's
and the account is assigned to the funeral home, similar to the preneed
insurance policy, and used by the funeral director to cover the funeral costs of
that individuals funeral upon their death. American DataSouce provides
accounting and administrative functions in reporting annually on the monies in
each trust account in addition to the administration of the monies upon an
individuals death.
In addition to the health insurance products we are currently marketing, the
Company is desirous of adding other employee benefit products and services to
market that benefit the baby boomer and senior populations. Products may
include other insurance related products such as disability insurance, long term
care, legal plans, reverse mortgages and other voluntary benefits. The Company
may seek to acquire agencies and companies that currently market these other
products.
The Company entered the marketing of funeral funding products through its merger
in March, 2002 with National Preplanning, Inc. and American DataSource, Inc. The
Company was previously engaged in non-digital photographic development
Most of the marketing that is currently planned for National Preplanning's
products are marketing that directs potential consumers to the company's
enrollment website as well as its partners web enrollment site. Although the
internet has seen a lot of growth in its use for the sale of various products on
various websites, the use of the internet and websites for the sale of voluntary
benefit products is relatively new. The Company will closely monitor the
success or lack thereof of its enrollment and marketing philosophy.
NPI has only generated minimal revenues from its worksite marketing efforts and
there can be no assurance that it will ever generate any substantial revenues
from its worksite marketing efforts. It has however in conjunction with the
Company's So Insure subsidiary begun to achieve revenue growth from the sale of
various health insurance products to individuals and families. The Company may
decide to revert its National Preplanning marketing strategy to a more common
approach such as print, radio and television advertising directed at individuals
outside of worksite and affinity marketing
Whereas, NPI originally sought to acquire direct third party marketers of
pre-arranged death care which market pre-arranged death care services primarily
by direct mail, as well as run the pre-arrangement office in many funeral home
locations the Company has changed its focus on potential acquisitions in the
employee benefit, insurance, mortgage and worksite marketing areas which allow
for the cross selling of its products in addition to other businesses which
market products and services which benefit the baby boomer and senior population
segments.
Currently, ADS administers approximately $40 million in trust funds. In
September, 2003, ADS lost a great deal of its business when its largest client,
Service Corporation International, the largest funeral home and cemetery
operator in the country removed approximately $ 70,000,000 of trust assets that
ADS administrated and placed said administration overseas. SCI removed all trust
assets under administration from a variety of outside vendors such as ADS. As a
result, ADS has increased its efforts to administer trust funds held by various
state funeral association trusts, establish and market master trusts to the
independent funeral home community and to acquire existing trust administration
companies.
There can be no assurance that we will achieve successful and profitable results
from our distribution and marketing efforts or that we will be able to complete
acquisitions within the worksite marketing and employee benefit sectors.
We intend any acquisitions to be accomplished through issuances of stock, debt
and cash, or a combination of such forms of consideration. Accordingly, any
future merger or acquisition may have a dilutive effect on our stockholders as
of the time of such mergers and acquisitions. Additionally, our ability to
accomplish any future acquisitions may depend on our cash position, our ability
to raise capital, the stock price of our common stock, and our ability to
service any debt we may incur. Our ability to accomplish any acquisitions is
dependent upon our ability to raise capital for said acquisitions. Our ability
to raise capital may be affected by several factors including but not limited to
certain debt defaults and a lack of liquidity of our common stock. The Dutchess
Capital transaction, which provides the Company with a means of potentially
raising capital, may not be sufficient for the Company to accomplish these
potential acquisitions. The Dutchess documents provide limitations on the
percentage of stock Dutchess can hold at particular times and in no event may
Dutchess hold greater than 4.99% of the outstanding common stock of the Company.
Consequently, if Dutchess cannot sell our shares due to the lack of liquidity in
our common stock, our ability to be able to obtain money from Dutchess Capital
for acquisitions or to pay down our current debt may be hindered or limited.
Additionally our ability to raise capital outside of the Dutchess transaction
may be affected by our minimal revenues, the losses that we incur, and our
financial picture including our working capital deficit. Potential capital
sources may require us to pay off existing indebtedness before providing any
capital to the Company and the Company may be unable to do so.
We believe that our operating results may fluctuate greatly quarter to quarter
due to several factors, including the success of our merger and acquisition
strategy and the impact of any increases in our results of operations as we
pursue new business in the death care services industry.
17
RESULTS OF OPERATIONS
Three Months Ended September 30, 2006
Net sales for the three months ended September 30, 2006 was $ 146,176 which was
generated by NPI/So Insure revenues of $63,409 and ADS revenue of $82,767 as
compared to $ 85,490 for the three months ended September 30, 2005, all of which
was which was generated by ADS. All of the revenues generated by NPI and So
Insure were commissions from the sale of various health insurance products.
Operating expenses for the three months ended September 30, 2006 were $ 502,758
as compared to 353,361 for the three months ended September 30, 2005. Operating
expenses for the three months ended September 30, 2006 were composed of $
211,214 of compensation expense, $ 40,750 of professional fees, consulting fees
of $ 13,750, general and administrative expense of $ 213,509 and depreciation of
$ 23,535. Operating expenses for the three months ended September 30, 2005 were
composed of $ 155,485 of compensation expense, $ 26,102 of professional fees,
consulting fees of $ 54,000, general and administrative expense of $ 99,924 and
depreciation of $ 17,850.
Our increase in operating expenses is primarily attributed to our implementation
of NPI/So Insure marketing sales plan and the issuance of common stock to
certain consultants and professional fees for legal and accounting fees.
The operating loss for the three months ended September 30, 2006 was $ 356,582
as compared to $ 267,871 for the three months ended September 30, 2005.
Although NPI and SI have begun to generate revenues the Company continues to
incur losses relating to its infrastructure costs and other administrative
costs.
Interest expense for the three months ended September 30, 2006 were $ 132,100 as
compared to interest expense for the three months ended September 30, 2005 of $
48,617. Interest expense is derived by the costs of borrowing funds. The
increase is primarily attributed to the additional loan borrowings from the
prior year to support our business capital requirements.
As a result of the foregoing, we incurred a net loss of $ 220,882 for the three
months ended September 30, 2006 or $ .01 per share, compared to a net loss of $
316,488 for the three months ended September 30, 2005 or $ .02 per share.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2006
Net sales for the nine months ended September 30, 2006 were $ 316,782 of which
$66,409 was generated by NPI and SI and $250,373 was generated by ADS. Net
sales for the nine months ended September 30, 2005 were $ 242,583, all of which
was generated by ADS. Although National Preplanning has entered into several
strategic relationships which allows for the marketing of its products by third
parties, the marketing of NPI's worksite marketing products has not resulted in
any material revenues being achieved. Although American DataSource has achieved
positive cash flow it still is achieving a net loss and seeks to increase its
revenues to halt this loss.
Operating expenses for the nine months ended September 30, 2006 were $
1,331,319. Operating expenses for the nine months ended September 30, 2005 were
$ 1,379,392.
Interest expense for the nine months ended September 30, 2006 was approximately
$ 451,445 as compared to interest expense for the nine months ended September
30, 2005 of $ 311,569. The increase from the prior year relates to our interest
expense relate primarily to additional loan borrowings to support our business
capital requirements.
As a result of the foregoing, we incurred a net loss of approximately $
1,157,832 for the nine months ended September 30, 2006 or $ .08 per share as
compared to a net loss of $ 2,402,977 or $ .18 per share for the nine months
ended September 30, 2005. Of the loss incurred for the nine months ended
September 30, 2006, $ 506,710 was compensation expense, $ 149,963 were
professional fees, $ 138,750 were related to consulting expenses and $ 466,611
were general and administrative expenses and $ 69,285 was depreciation expense.
Of the loss for the nine months ended September 30, 2005, $ 483,184 was
compensation expense, $ 175,285 were professional fees, $ 396,100 were related
to consulting expenses and $ 257,206 were general and administrative expenses
and $ 67,617 was depreciation expense, in addition $ 933,793 is attributable to
a non recurring debt conversion charge and $ 311,569 is attributable to interest
expense.
The lower net loss for the nine months ended September 30, 2006 versus 2005 is
primarily attributed to the non recurring charge of $933,793 attributable to a
debt conversion charge offset by a positive charge in fair value from detachable
warrants and an embedded conversion option related to our borrowings.
18
ITEM 3. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Securities Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive and financial
officer, to allow timely decisions regarding required disclosure. In designing
and evaluating the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
as ours are designed to do, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
As of September 30, 2006, an evaluation was performed under the supervision and
with the participation of our management, including our chief executive and
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon that evaluation, our chief
executive and financial officer concluded that our disclosure controls and
procedures were effective except for those material weaknesses discussed in the
following paragraph.
During November 2004, our independent auditors, Marcum & Kliegman LLP, advised
us that the auditors had identified a deficiency in internal controls, which was
designated a "material weakness." The material weakness indicated that there is
inadequate structure within our accounting operations. We have no central
corporate accounting department. Each subsidiary independently maintains its own
books and records and all disbursements are done at the subsidiary level. This
decentralizes the accounting function and limits the effectiveness of the
internal control procedures to detect potential misstatements and fraudulent
accounting and financial reporting. The subsidiary accounting departments do not
have the sophistication to critically evaluate and implement new accounting
pronouncements. Stock-based transactions for options, warrants and common stock
at times are recorded improperly and require additional procedures and review
and audit adjustments to be made by our auditors. We believe this material
weakness resulted from continued cost cutting efforts and a failure to generate
cash flows from operations. We have implemented certain procedures to help
minimize the risks associated with this material weakness, including using an
accountant/bookkeeper to review, compile and consolidate our financial
statements on a quarterly and annual basis. Additionally, we expect to hire a
chief financial officer with public company experience and relieve our chief
executive officer of his current chief financial officer duties.
CHANGES IN INTERNAL CONTROLS
Our certifying officer believes that we have sufficient compensating controls to
minimize the risks associated with the material weakness identified by our
independent auditors and discussed in the immediately preceding section of this
Item 3. In such regard, we expect to hire a chief financial officer with public
company experience within the next twelve months and relieve our chief executive
officer of his current chief financial officer duties. There were no changes to
internal controls during the quarter ended September 30, 2006 that have
materially or that are reasonably likely to affect the internal controls.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Reference is hereby made to Item 3 of our Annual Report on Form 10-KSB, for the
fiscal year ended December 31, 2005, filed with the Securities and Exchange
Commission on March 24, 2006 (Commission File No.: 0-5418), and to the
references made in such Item, for a discussion of all material pending legal
proceedings to which we or any of our subsidiaries are parties.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On August 31, 2006, the Company issued 250,000 shares of common stock to a
consultant for services provided.
We believe the issuance of such common stock, convertible debenture and warrants
are exempt from the registration requirements of the Securities Act pursuant to
the provisions of Section 4(2) of the Securities Act.
19
ITEM 3. DEFAULTS ON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
Set forth below is a list of the exhibits to this Quarterly Report on Form
10-QSB.
Exhibit
Number Description
- -------- -----------
31.1 Certification pursuant to Exchange Act Rule 13a-14(a) of Mitchell S. Segal
in his capacity as chief executive officer and chief financial officer of
the registrant.
32.1 Certification pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 of
Mitchell S. Segal in his capacity as chief executive officer and chief
financial officer of the registrant.
20
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 14, 2006
WALKER FINANCIAL CORPORATION
By: /s/ Mitchell S. Segal
-------------------------------------
Mitchell S. Segal, President
21
Exhibit
Number Description
- -------- -----------
31.1 Certification pursuant to Exchange Act Rule 13a-14(a) of Mitchell S. Segal
in his capacity as chief executive officer and chief financial officer of
the registrant.
32.1 Certification pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 of
Mitchell S. Segal in his capacity as chief executive officer and chief
financial officer of the registrant.
22