ITEM 1. Business
Classified as a smaller reporting company as defined by rule 229.10 (f)(1), the following provides a description of our business over the past three years.
Form and Year of Organization
MortgageBrokers.com Holdings, Inc. (the “Company”, “MortgageBrokers.com”, “we”, “our” or “us”) was incorporated under the laws of Delaware on February 6, 2003 as MagnaData, Inc. (“MagnaData”). In February 2005, we filed articles of amendments with the State of Delaware changing the name of our Company to MortgageBrokers.com Holdings, Inc.
Over the past three year period, sales operations were conducted through our subsidiaries in Canada only:
1.
MortgageBrokers.com Inc. - an Ontario Canada provincially incorporated company that currently holds our licensure for operating as a mortgage broker in the Province of Ontario;
2.
MortgageBrokers.com Financial Group of Companies Inc. - a Canadian federally incorporated company, which currently holds our licensure for operating as a mortgage broker in the Provinces of Newfoundland, Nova Scotia, New Brunswick, Prince Edward Island, Alberta and British Columbia;
3.
MBKR Holdings Inc. - a Canadian federally incorporated company, through which the Company centralizes back office services in Canada; and,
4.
MBKR Franchising Inc. - a Canadian federally incorporated company, through which the Company acts as a franchisor in Canada of the MortgageBrokers.com business system.
Bankruptcy, Receivership or Similar Proceeding
None.
Material Reclassification, Merger, Consolidation, or Purchase or Sale of a Significant Amount of Assets
None.
Business of Issuer
Products and Services
Operating since 2005, our Company is a mortgage brokerage business whose national agency sales force and franchised sales force services the borrowing and refinancing needs of individual home buyers and owners. We have access to a full range of mortgage lenders, in excess of 50 banks, trusts and private lender sources, and our agents source and negotiate the loan with competitive rates, terms and features to meet each customer's unique needs. The Company acts as broker only and is not a lender. The Company has no mortgage lending related on or off balance sheet’ liabilities in case mortgage financing becomes default.
As a mortgage brokerage, we have access to lenders who lend mortgage funds. In 2010, we funded mortgage volumes with 55 different mortgage lenders with 96% of the mortgage volumes funded by our top 20 lenders. Outside our top 20 lenders, the remaining lenders serve very niche product offerings which subsequently results in marginal mortgage origination volumes.
We typically access most of our lenders through the software platform provided by Davis + Henderson Limited Partnership which recently acquired Filogix Limited Partnership (“Filogix”), Canada’s leading technology provider to the mortgage brokerage industry. Through this software, Filogix connects mortgage brokers with lenders by providing an electronic conduit for submission, approval and funding of mortgage transactions.
As a mortgage brokerage, our general obligations to the lender include the following:
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provide up to date, accurate and complete credit applications for all mortgage loans;
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provide all conditions required to fund, which have been reviewed by the mortgage originator for accuracy;
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conduct business in a professional and forthright manner, fully disclosing any information that may impact the lender’s decision to proceed with the transaction;
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protect the confidentiality and privacy of personal information and other information provided to, or received by, the mortgage originator in connection with any credit application for a mortgage loan; and,
Ø
maintain adequate funding ratios on all applications submitted to a lender.
Failure to maintain these general obligations can result in additional documentation required on a mortgage application, cancellation of a mortgage approval or termination of the mortgage agent and/or the brokerage relationship with the lender.
Mortgage agents are independent subcontracted mortgage consultants who work exclusively under the Company’s brokerage license to provide consumers with unbiased advice on mortgage financing. Our franchised mortgage brokers conduct business under their own licensure. Our mortgage broker agents will conduct a needs assessment from the potential borrower and find a suitable mortgage product from a suite of lenders. Mortgage broker agents will facilitate the communication between the lender and the borrower from application submission to financing.
The following describes our revenue streams from our offered products and services:
1)
For approximately 95 % of all mortgage origination deal flow at our Company, our subsidiaries generate revenue when our licensed mortgage agents place mortgages, on behalf of customers, with third party lenders who in return, pay the Company a commission fee, as follows:
a)
Most lenders pay the Company a referral commission fee (“Finder’s Fee”). This Finder’s Fee is generally a fixed percentage of the principal amount of the mortgage being placed and varies depending on the mortgage term chosen by the customer.
b)
In addition, most lenders who pay a referral finder’s fee also pay the Company a volume bonus (“Volume Bonus”) for the aggregate mortgage volumes placed with a particular lender above volume thresholds established from time to time. As the Company’s volume has grown, the Company has been able to capitalize on achieving higher Volume Bonus tiers with lenders that pay a Volume Bonus.
The aggregate sum fee for Finder's Fees and Volume Bonus typically ranges between 75 to 130 basis points (0.75 to 1.3%) of the total mortgage volume originated by the Company’s mortgage agents.
2)
For approximately 5% of all mortgage origination deal flow at our Company, commercial, alternative and sub-prime lenders may pay only a nominal referral Finder’s Fee. For these transactions, our mortgage agents may charge negotiated brokerage fees to generate revenue.
3)
We currently earn commission revenue through the referral and placement of creditor insurance with third party insurance providers. In general, when a client takes creditor insurance related to the mortgage transaction originated by the Company, the Company earns a gross commission which is, on average, estimated to be 14 basis points (0.14%) of the mortgage amount.
Generally, between 85 to 93% of all received commission revenue is paid to the Company’s mortgage agents.
Markets Served
Operations are presently conducted through our subsidiaries in Canada only. The Company is currently providing mortgage brokerage services in the Canadian provincial markets of Newfoundland, Nova Scotia, New Brunswick, Prince Edward Island, Ontario, Saskatchewan and Alberta. Late in 2010, we added British Columbia to our markets served.
Distribution Methods for our Services
The Company provides its services to the consumer through a national sales agency network. Our national agency sales force are 100% commissioned subcontractors who are registered as mortgage agents with the appropriate regulatory government agency to provide mortgage broker services to the public exclusively under the Company’s brokerage licensure and brand. Franchised brokerages provide the same services under their own licensure. Our mortgage agents regionally market themselves under the MortgageBrokers.com brand via the World Wide Web (www), newspapers, magazines, local promotion, billboards, radio, and television. Our mortgage agents operate offices or desks within real estate offices, have their own retail offices established or operate out of their homes as mobile sales professionals. The Company does not own, nor is a party to, any retail mortgage agent office leases that are currently established by our mortgage agents.
Our national agency sales force, recruited and managed centrally by our sales management staff, may operate regionally as individual businesses or they may build agency sales teams. Our national sales force is diversified with agents who provide mortgage broker services to the consumer public on a full time and part time basis and may also provide their services in association with other related business initiatives they are involved in outside of mortgage brokerage such as financial planning or real estate sales.
Generally, in the MortgageBrokers.com model, our licensed agents earn between 85 to 93% of received commission fees. In addition to earned commission fees, our business model also provides our mortgage agents with the potential to earn stock-based compensation in our Company based on their annual mortgage origination volume. This form of equity participation is intended to provide our national sales agency network a transparent career exit strategy for retirement and a retention strategy for team building purposes. It is our belief that the benefit to the Company is that we are able to build a sustainable long term operational margin contribution from Canadian operations and we are able to include our national agency sales force, responsible for executing the Company's sales strategy, into the ownership of the Company, theoretically allowing them to benefit from Company growth related directly to their contribution.
The primary services that the Company provides to our national agency and franchised sales network are:
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mortgage brokerage licensure (franchisees use their own licensure);
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a national brand and related marketing initiatives;
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a regulatory compliance service associated with our agent’s transactions;
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human resource services where we perform new agent registration, licensure, and insurance coverage;
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access to our corporately arranged group health insurance and benefits plan;
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a payroll and commission service reconciling commission fees paid by lenders and insurers and accurate and timely payroll to our agents and their referral sources with detailed payroll statements on a weekly basis;
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revenue optimization for our agents through deal flow aggregation;
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sales training, sales tools and support from our sales management team for lender support, team and business building, and consumer support;
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the establishment of market partnerships to allow our agency sales network to access a greater portion of the mortgage and refinance market;
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information technology services; and,
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the opportunity to earn stock-based compensation in our Company.
Prior to contracting with a mortgage agent, and in addition to the minimum regulatory requirements prospective mortgage agents must meet for provincial registration, MortgageBrokers.com reviews the prospective agent’s tenure and experience in the industry, credit bureau history and a minimum of 2 reference checks. Those mortgage agents that have minimal experience are obligated to work as a mortgage agent under a more senior mortgage agent (referred to within MortgageBrokers.com as a Managing Partner or a franchisee) who will sponsor, supervise and train the inexperienced agent.
It is our sales management team’s responsibility to recruit, mentor and support the mortgage broker sales force across Canada. To integrate a mortgage agent into our network, we make mandatory the licensure with the appropriate provincial regulatory body, application for membership with the Canadian Association of Accredited Mortgage Professionals (CAAMP), our national mortgage brokerage industry association, and application to our Errors and Omissions insurance plan we hold corporately.
Our mortgage agents are all licensed as contractors (not employees) working exclusively under our provincial brokerage licensure. Within each province we operate, we have a ‘broker of record’ or ‘principal broker’ under whose license we operate our business.
The following table outlines the estimated size of our sales agency network over the past three years:
The Company may also develop and be party to strategic national or regional alliances with real estate brands from time to time with a view to providing our licensed mortgage agents access, on a volume basis, to mortgage referrals in some form of revenue sharing arrangement. On January 26, 2006, and later modified on May 25, 2006, the Company entered into a referral agreement with RE/MAX Ontario-Atlantic CANADA Inc. (“RE/MAX”) in eastern Canada. For referrals to our mortgage agents leading to funded mortgages, RE/MAX receives 40 to 60% of the our Finder’s Fee commission as well as stock-based compensation from the Company based on the aggregate volume of funded referrals. The Company terminated this agreement on June 12, 2009 as the results of the program did not meet expectations. On April 12, 2006 the Company entered into a referral agreement with Maxwell Realty Inc. (“Maxwell”) in western Canada. For referrals to our mortgage agents leading to funded mortgages, Maxwell receives 25 to 40% of our Finder’s Fee commission as well as stock-based compensation from the Company based on the aggregate volume of funded referrals.
2010 Business Activities and Status of Publicly Announced Products and Services
Expanding upon our business model infrastructure, the Company’s focus through 2010 was towards recruitment and servicing of mortgage agents across Canada. Regional recruitment activities included introducing and selling the Company’s value proposition to mortgage agents and franchisees via direct presentations, trade shows and arranged meetings. Regional servicing of existing agents and franchises included team building, marketing support and services with signage and advertising, facilitating lender product training, realtor referral relationship development, consumer business development and sales training, lender relations management, and consumer servicing support. The Company also made investments in information technology systems to support our mortgage agents including developing a mortgage agent back office sales support environment.
The following provides further details highlighting our 2010 business activities and their status:
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At the beginning of 2010, we had two full time senior sales executives centrally supported by our Canadian sales president servicing sales territories across Canada. These full time senior sales executives divided their time between servicing existing agents in their territory, recruiting new books of business and promoting the Company. The Company made no changes to our sales management team through 2010.
Ø
In January of 2010, a large mortgage agent team representing approximately 27 % of the Company’s book of business at the time, terminated their agent license agreements with the Company. The Company launched a legal claim against the owners of the team for trademark infringement, passing off, breach of contract, breach of loan agreements. As of April 15, 2011 the legal proceedings are pending.
Ø
Overall, we experienced a 13 percent decline in 2010 over 2009 in the number of licensed agents registered with the Company. At December 31, 2010, we had 375 licensed mortgage agents operating exclusively under the Company’s licensure. This net change in our national sales force was due in part to the recruitment of new qualified mortgage agents throughout 2010 by our sales management team; the loss of the aforementioned large team, and the termination of approximately 200 mortgage agents in a forced attrition program based on performance (the Company also regularly reviews the production level of all of our agents and periodically will terminate our contractual agreement if mortgage agents are unable to demonstrate the ability to increase their production levels).
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In March 2010, the Company launched it’s customer relationship management and performance management technology service to the national sales force for their use. The long awaited program provided our mortgage agents an industry leading technology platform to stay connected with their customers and to measure their performance for revenue management purposes.
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In July 2010, the Company launched its Compliance Workbench technology platform to the national sales force. The Compliance Workbench is a paperless system allowing our compliance operations department to receive mortgage origination files from a mortgage agent. The system automatically flags and time stamps file deficiencies to promote compliance and respond in a timely manner to any compliance issue that may arise.
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Through 2010, the Company continued to develop a central services office where its mortgage agents could go for help with difficult to place mortgage transactions. The central services office was responsible for $25.1 million in mortgage origination in 2010, a 19.5% increase over 2009 production ($21 million).
Ø
The Company did not find that the termination of its agreement with RE/MAX on June 12, 2009 had any material impact to the Company’s mortgage origination in 2010. Mortgage origination volume from RE/MAX referrals amounted to less than 4% of the Company’s total mortgage origination volume in 2009 at the time of agreement termination.
Competitive Business Conditions and our Market Positioning
The following describes our market’s competitive business conditions and our market positioning through describing existing market conditions, competitive market conditions and, our business model market positioning.
Market Conditions
To-date, all of our operations are conducted through our subsidiaries in Canada only. The U.S. mortgage industry has generally deteriorated since the latter part of 2007 through 2009. This deterioration has been a deterrent for management to consider entering the U.S. market as a mortgage brokerage at this time. As such, we are solely affected operationally by market conditions in Canada.
Highlights of the Canadian Association of Accredited Mortgage Professionals (“CAAMP”) Chief Economist report “Annual State of the Residential Mortgage Markets in Canada,” dated November 2010, describe the Canadian mortgage market within which our Company operates as follows:
Ø
as of August 2010, there was CAD $1.01 trillion (2009: CAD $$940 billion , 2007: CAD $787 billion) of outstanding residential mortgage credit in Canada;
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Growth of residential mortgage credit has slowed in the past year as the recession negatively affected home buying activity. However the year over year growth rate for 2010 remains strong at 7.6% which represents CAD $71 billion (as compared to 7.1% per year representing CAD $63 billion in 2009). The volume of residential mortgage credit outstanding is forecast to continue expanding, but at the slower rates of 7% through 2010, 6.5% in 2011, and 6% in 2012;
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Another perspective on growth is the volume of new approvals, which includes new mortgages, refinancing of existing mortgages and transfers between lenders, which amounted to CAD $244 billion in 2009 (CAD $75 billion in 2000);
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In 2010, based on survey results, on average, 23% of annual mortgages were obtained with the use of a mortgage broker (34% for new mortgages and 17% for renewed mortgages) which represents an annual mortgage origination market of approximately $50 billion (an estimated $550 million in gross revenue);
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The rate of mortgage arrears in Canada increased during the recession but has recently eased slightly to 0.42%. The improving employment situation in Canada should lead to further reductions in the arrears rate.
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Based on a survey, approximately 66% of mortgage holders in Canada have fixed rate mortgages and 29% have variable and adjustable rate mortgages (4% have combination mortgages);
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For homeowners with mortgages, the owners estimated that the average value of their home to be $291,000 and that they have approximately $146,000 in home equity (approximately 50% of their home value). For homeowners without mortgages, the average estimated value of their homes is CAD $355,000. There are approximately 3.75 million Canadian home owners without mortgages (collectively valued at an estimated CAD $820 billion) out of an estimated 9.4 million home owners in Canada.
Ø
Based on a survey, approximately 18% of mortgage holders took out equity from their homes within the last 12 months of an average amount of CAD $46,000. 30% of the take-out was for debt reconsolidation and repayment. Therefore while the amount of outstanding mortgage debt would have increased in Canada by about $13.5 billion, totals for other types of debt would be correspondingly reduced.
Ø
Overall, 22% of mortgages have an amortization of greater than 25 years (compared to 18% last year).
According to CAAMP, in most Canadian provinces, housing demand is driven by job creation and affordability - the investment motive is largely absent.
Competitive Market Conditions
Mortgage origination in Canada can be segmented into three broad categories and their estimated relative market share: (i) bank branch networks - 50%; (ii) bank mobile mortgage sales teams - 25%; and (iii) mortgage brokers - 25% (30% in 2009). Over the past decade, the relative share for the bank branch networks had decreased as consumer demand for accessibility and specialization intensify. In the past year the mortgage broker channel has lost ground to bank branch networks and bank mobile sales teams, possibly due to:
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tightening of lender credit criteria in Canada which has put the broker channel more in direct competition with the bank channels; and
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loss of many non-traditional lenders that were available to brokers resulting in less choices and less of a broker niche channel.
Our Company’s direct competition in the Canadian marketplace is the major bank mobile mortgage sales teams and the consolidating mortgage brokerages.
According to CAAMP, mortgage brokers captured 25% of the Canadian annual mortgage origination market in 2010 (30% in 2009), although if you isolate new mortgages in the past year, this number increases to 40%. Most industry sales referral relationships have been established at the individual mortgage agent level.
It is conservatively estimated by the Company that there are in excess of 11,000 active mortgage agents operating in Canada (based on a reported 11,000 membership reported in the January 2008 Mortgage Journal published by Naylor Canada Inc. for CAAMP).
The Canadian mortgage origination market is fragmented, with an estimated 50% of the market captured by five large Canadian mortgage origination companies or “Super Brokers” who also lay claim to having more than two-thirds of the active mortgage agents licensed in Canada. It is a growing trend to establish national corporate sales referral arrangements with strategic alliances, and there is significant market competition in the recruitment of mortgage agents and their associated ‘books of business’ amongst the mortgage originators.
The primary tools used by our competitor consolidating brokerages for executing a competitive strategy in recruiting mortgage agents has been increasing commission splits (which currently ranges between 75 and 95% of the total commission fees received), the development of brand and the provision of administrative and marketing services.
The competitor mobile sales teams of the major banks compete with mortgage brokers by leveraging bank brand appeal, exclusive mortgage products and leveraging a captive bank customer base, especially in the refinancing and equity take-out market.
Highlights from a 2010 Deloitte publication entitled, ”Winning Strategies in the Brokered Mortgage Marketplace”, describes the Canadian mortgage brokerage strategies expected to gain the most traction in the future as being:
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banks will continue to make investments to participate and compete in the brokerage channel;
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there will be continued consolidation in the brokerage channel into super-broker networks;
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brokers will need to evolve from ‘rate shoppers’ to advisors offering value-added benefits to succeed in a hypercompetitive marketplace; and,
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the “broker as advisor” value proposition will be the most successful approach for the broker channel.
Our Business Model Market Positioning
We have positioned ourselves in this competitive landscape to the mortgage broker industry as a very service oriented company that incorporates stock-based compensation into our value offering to attract long-term value builders within the broker sales networks. Our management team firmly believes that we have positioned ourselves to be a long term value creator in our industry and we continue to evolve our business plans, market positioning and service offerings to accommodate an ever changing industry but remain a long term value builder.
As more fully described in the previous sections discussing our distribution methods for our services and the status of our products and services to our agents, our centralized services reduce our agents overhead allowing them to focus on their core strength of sales and marketing.
We have additionally designed our business model to incorporate two principal elements which we believe will attract those mortgage agents who value ownership and a career exit strategy within the Canadian mortgage market. We also believe that mortgage brokerages have long suffered from their inability to retain their top loan originators, typically losing them to competing brokerages that offer increased commissions with very little sustainable value being returned to the mortgage agent to help them grow their businesses. In addition, in today’s consolidating environment, we believe many sales agents have seen the companies they work with sold to large financial institutions or brokerages with nothing to show from the transaction when it is they who are responsible for creating much of the value associated with the transaction. Therefore, management believes there is pent up demand within the industry for a mortgage brokerage model that will address what we believe to be the industry’s long- standing issues of agent retention and equity participation.
As Canada’s first and, at present, only publicly-traded and independent (non-bank owned) mortgage brokerage, we have strategically positioned our Company as a consolidator attracting those mortgage agents who value ownership and a career exit strategy within the Canadian mortgage market. We have developed what we believe to be a unique transparent business model that, we believe, will allow us to rapidly and sustainably develop our national sales agency and long term sales referral sources around which we can diversify our product offering and develop our brand for the consumer. There are no direct means to quantify and compare our rate of growth and the success of our strategy with our competition since they are not public companies. However, our strategy was acknowledged in the October 2008 issue of Profit Magazine where our Company was identified as the number one fastest growing Canadian emerging growth company. We reported 3,993% top-line revenue growth between 2005 and 2007 and were recognized in October 2009 as the number twenty-seventh fastest growing of Canada’s emerging growth companies with a reported 293% top-line revenue growth between 2006 and 2008. In 2009, one of our direct competitors, a private corporation, was recognized as the 25th fastest growing company in Canada of Canada’s emerging growth companies, confirming to management that our industry sector is very dynamic, healthy and exhibits strong growth opportunities.
We have designed a business model to provide mortgage agents with the potential to earn equity in our Company based on their annual mortgage origination volume. This form of equity participation is intended to provide our national sales agency network a transparent career exit strategy for retirement and a retention strategy for team building purposes. It is our belief that the benefit to the Company is that we are able to build a sustainable long term operational margin contribution from Canadian operations and we are able to include our national agency sales force, responsible for executing the Company's sales strategy, into the ownership of the Company, allowing them to benefit from any Company growth related directly to their contribution.
Generally, our stock-based compensation model is based upon the future discounted cash flow margin contribution to our Company’s bottom line of mortgage volume origination by each exclusively contracted mortgage agent. When the stock-based compensation model was initially designed, and until the Company is profitable and generating free cash flow, we made certain assumptions on a pro forma basis that a certain size funded mortgage origination volume would generate free cash flow based on our expected cost structure. The model, which made certain assumptions concerning expected growth rates, prevailing interest rates during the term of the pro forma and cost of capital determinations, was developed in 2005. In summary, the results of the model led to a management decision that granted an aggregate of approximately 11.4 basis points on an agent’s average funded mortgage origination volumes over a three to five year period to an agent in the form of stock-based compensation.
To-date we have made commitments to our existing agents to issue the stock-based compensation as warrants that would be convertible into stock (1 warrant would be convertible into 1 share). The Company is currently in the process of finalizing and formalizing the mortgage agent stock-based compensation plan, associated agreements and the registration of such a plan. Every mortgage agent registered with our company is eligible to earn stock-based compensation.
The mortgage agents are not eligible to earn stock warrants until a minimum term sales period is completed in full. The first term is three years following execution of an exclusive agency contract with the Company. In the fall of 2008, the first stock-based compensation was fully earned by our agents and 500,000 shares of restricted stock were issued to the agents by the Company. No stock warrants have been issued to our mortgage agents under this program to-date as the Company is still in the process of finalizing the plan for registration purposes.
At December 31st, 2010 the Company accrued, stock-based compensation equal to 1,499,053 common shares at $0.015 per share totalling $22,486 which is payable to our existing mortgage agents.
Patents, trademarks, licenses, franchises, Agent Agreements and Commitments
The following summarizes trademarks, agreements and arrangements we have in place to protect our market positioning:
a)
On December 3, 2009, we successfully registered a trademark (No. TMA754,451) with the Canadian Intellectual Property office of Industry Canada for our name and design as follows:
b)
The Company’s Canadian subsidiary agency sales force consists of recruited independent contractors operating regionally under the Company's licensure. Generally, in the MortgageBrokers.com model, our licensed agents earn 85-93% of received commission fees. In addition to earned commission fees, the Company provides an opportunity for our Canadian subsidiary's national agency sales force to earn stock warrants in the Company based on annual sales volumes over a period of time, typically 5 to 8 years. In practice, recruited mortgage sales agents execute an exclusive and confidential agreement with a subsidiary of MortgageBrokers.com as a third party sales subcontractor. The mortgage agents agree to operate under the terms of the sales agreement, the mortgage broker licensure, and brand of the Company and allow the Company to earn typically 15% of the commission fees payable to the mortgage agent from a mortgage lender in exchange for payroll, revenue management (volume pooling), licensure, compliance, and marketing services. No money is paid by the Company for purchase of any asset of the mortgage agent or their business including the agent’s book of business. The Company does not have an equity ownership position in the independent business of the individual mortgage agent or mortgage agent team.
c)
Per a three year renewable agreement dated April 12, 2006 and pursuant to the execution of a service level agreement by the Maxwell Franchisee, the Company is committed to issuing to Maxwell, at no cost, warrants for common stock of the Company based on referrals leading to funded mortgage origination volume. In summary, and on a pro rata basis, Maxwell has the opportunity to earn 3,000 warrants (1 warrant convertible to 1 share) for every $10,000,000 in funded mortgage origination that were a result of a Maxwell referral annually. Warrants earned between 2006 through 2011 are fully earned and vested assuming our agreement is in good standing with Maxwell on December 31, 2011. To-date the Company has not issued any warrants to Maxwell related to this program. At December 31, 2010, the Company accrued stock-based compensation payable to Maxwell. The accrual related to mortgage referral was comprised of 32,548 common shares at $0.015 per share. The valuation of such accrual was based upon the December 31, 2010 closing price of the Company’s stock and resulted in a payable to Maxwell equal to $488. To date, no stock warrants have been issued to Maxwell or its sales agents pursuant to this program. The Company is preparing to finalize the plan for registration purposes.
d)
The Company became a franchisor in the fall of 2008 offering franchise opportunities to the mortgage broker market place across Canada. In 2009, the Company sold one franchise which held a long term agreement (5 years) with a financial planning team who wished to expand their product offering to the market place and secure the territory. In 2010 the Company sold 2 more franchises with long term agreements. The Company will continue to aggressively sell franchise opportunities in Canada to stabilize it’s long term book of business and resulting revenue streams.
Government Licensure and Approvals
The Mortgage Brokerage industry is regulated provincially in Canada. For instance, in the province of Ontario, we are regulated by the Financial Services Commission of Ontario under the Mortgage Brokerages Lenders and Administrators Act, 2006 and in the Province of Alberta, we are governed by the Real Estate Council of Alberta under the Real Estate Act, 2000. These licensing bodies have minimum criteria for licensure of potential mortgage agents recruited to operate under the Company’s respective Provincial broker license, which include relevant educational requirements, criminal record checks and disclosure of any personal bankruptcy or court proceedings.
Our subsidiaries are currently holding licenses in good standing in the provinces of Newfoundland, Nova Scotia, New Brunswick, Prince Edward Island, Ontario and Alberta. Typically, our licensure is renewed annually.
As required for licensure in some Canadian provinces, our organization maintains an errors and omissions liability insurance policy through Encon Group Inc. The policy covers the organization and its national network of mortgage agents from legal claims that brokers are exposed to on a daily basis. Our current policy provides coverage up to CAD $5 million per incident and up to CAD $10 million in aggregate.
The Company became a Canadian franchisor near the end of 2008. The franchisor disclosure regulations are provincially regulated. In Ontario, for instance, franchisors are regulated by the Arthur Wishart Act (R.S.O., 2000). Compliance to the Ontario act generally guarantees compliance in the Province of Alberta. MortgageBrokers.com franchisees operated under their own brokerage licensure.
Effect of Existing or Probable Government Regulations on the Business
The existing government regulatory regime protects the consumer through the mortgage broker process including, but not limited to, protection of confidential information, representation, cooling off period, and disclosure. Current regulations requiring mortgage agent standards helps raise the industry’s standards and promulgates a positive consumer experience in Canada.
Canada Revenue Agency issued a Notice, pursuant to the passing of Bill C-9, the Jobs and Economic Growth Act in February 2010 that discussed modifications to the definition of “Financial Services” as it applies to the current 13 percent Canadian Harmonized Goods and Services Tax (“GST/HST”). Prior to this year, financial services agents (like mortgage brokers, insurance agents, financial advisors, etc.) were GST exempt. Finance’s legislative proposals would generally apply to services provided after December 14, 2009 and retroactively to past transactions in certain circumstances. The CRA has taken the position that it can generally assess taxpayers based on such proposals even before they become law. CAAMP says this notice raises “important and serious questions on the definition of GST/HST exempt financial services (mortgage brokers presently fall into that category, as do insurance brokers and financial advisors). CAAMP has engaged its auditors, KPMG, to seek clarification, and has also been in contact with officials in Ottawa. The concern is that broker compensation could potentially be subject to a 13 percent GST/HST tax on all revenue, payable to Revenue Canada. In March 2010, a press release from Revenue Canada on the matter suggests that the original press release was poorly worded and that CRA has no intention of changing the interpretation of Financial Services. It would appear that the mortgage brokerage industry remains GST/HST exempt.
Research and Development Activities in Past Two Years
None.
Environmental Compliance Costs and Effects
None.
Employees
At December 31, 2010, our Company had 11 employees, all of which were full-time.
ITEM 1A.
ITEM 1A. Risk Factors.
We are exempt from this reporting because we are a smaller reporting company.
ITEM 1B.
ITEM 1B. Unresolved Staff Comments.
We are exempt from this reporting because we are not an accelerated filer or a large accelerated filer, as defined in Rule 12b-2 of the Exchange Act.
ITEM 2.
ITEM 2. Properties.
The Company’s principal executive offices and subsidiaries are located at 100 King Street West, Suite 5310, Toronto, Ontario, CANADA, M5X 1E3. Our current contact information for our Ontario office is telephone number: (877) 410-4848 and fax number: (877) 410-4845. Our internet website can be found under the domain name: www.mortgagebrokers.com.
The Company negotiated and executed a lease for its corporate office in Calgary, Alberta, Canada, and is party to a five (5) year lease which commenced May 1, 2007.
The Company negotiated and executed a lease for its corporate office in Glace Bay, Nova Scotia, Canada, and is party to a twelve (12) month renewable lease which commenced November 1, 2009.
ITEM 3.
ITEM 3. Legal Proceedings.
MortgageBrokers.com Financial Group of Companies Inc. v. Mortgage Brokers City Inc.
On January 25, 2010, MortgageBrokers.com Financial Group of Companies Inc. (“FGOC”), a wholly owned subsidiary of MortgageBrokers.com Holdings Inc., commenced an action in the Ontario Superior Court of Justice in Ontario, Canada against a number of parties including Mortgage Brokers City Inc. and its principals who were former mortgage agents of the Company. The statement of claim filed by FGOC asserted a number of claims in the aggregate amount of approximately CAD $19 million, arising out of loan agreements and mortgage agent license agreements with the defendants. In addition, claims were made against the defendants for passing off their brokerage for that of the plaintiffs including continuing to operate a brokerage after agreement termination with all of the trappings they had been using to identify their brokerage when working for the plaintiffs.
The Company also sought injunctive relief from the Superior Court of Justice in Ontario for the defendants’ actions after a licensing agreement was terminated. On March 31, 2010, Mr. Justice Beaudoin dismissed the injunction.
On April 5, 2010, the defendants counter claimed against a number of parties including FGOC in the Superior Court of Justice in Ontario, Canada. The counter claim asserted a number of claims in the amount of $550,000 arising out of commission holdbacks by the Company. The counter claim was settled following the plaintiffs paying out agent commissions of $223,734 and placing $373,244 with the Court pending a resolution to the plaintiff’s original claim.
The matter is still before the courts and is expected to be heard later in 2011. The Company reasonably expects, at a minimum, to recover a portion, if not all of the funds it placed in trust with the Courts.
MortgageBrokers.com Financial Group of Companies Inc. v. Ralph Canonaco et. al.
On March 5, 2010, FGOC commenced an action in the Ontario Superior Court of Justice in Ontario, Canada against Ralph Canonaco. The statement of claim filed by FGOC asserted the failed collection of a liquidated debt in the amount of $500,000 arising out of a brokerage agreement.
On September 9, 2010, Ralph Canonaco and various other parties commenced an action in the Ontario Superior Court of Justice in Ontario, Canada against FGOC and various other related parties. The statement of claim filed by Ralph Canonaco et. al. asserted fraud, fraudulent misrepresentation and conspiracy in the amount of $35,000,000, unjust enrichment in the amount of $950,000, breach of trust and misappropriation of trust funds in the amount of $50,000, and breach of contract in the amount of $50,000, arising out of a brokerage agreement and the associated services provided.
Ralph Canonaco et. al. via their counsel have communicated to the Company to not file a defence to the counter-claim as the parties would like to settle with the Company. The actions are currently stayed pending a mediation scheduled to be held in the summer of 2011. Company management believes that the Company will recover a reasonable portion of its original claim if not all and that the counterclaim is vexatious and frivolous and has no grounds to proceed.
HSBC Bank Canada v. MortgageBrokers.com Financial Group of Companies Inc. et. al.
On February 2, 2011, HSBC Bank Canada commenced an action in the Court of Queen’s Bench of Alberta, Canada against various entities, including FGOC et. al. The statement of claim filed asserted claims of breach of agreement, conspiracy and concealment and is claiming $651,000 plus costs and interest arising out of a real estate transaction and mortgage funding.
Company management will vigorously defend itself in this action and believes that the Company has no liability in this matter. The statement of claim specifically notes that the Company had a duty to supervise the mortgage agent and in fact did so supervise that mortgage agent.
Other Matters in the Normal Course of Business
The Company or its subsidiaries is party to various other claims and proceedings arising in the normal course of business. Management does not expect the disposition of these matters to have a material adverse effect on the Company’s results of operations or financial condition.
ITEM 4.
ITEM 4. (Removed and Reserved).
PART II
ITEM 5.
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our shares of common stock are approved for quotation on the OTC Bulletin Board under the symbol “MBKR”.
The following table represents the closing high and low bid information for our common stock during the last two fiscal years as reported by the OTC Bulletin Board. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The market for our common stock is sporadic and our stock is thinly traded.
Holders
On December 31, 2010, there were 325 beneficial shareholders of record for our outstanding common stock.
Dividends
To date, we have paid no dividends on our shares of common stock and have no present intention of paying any dividends on our shares of common stock in the foreseeable future. The payment by us of dividends on the shares of common stock in the future, if any, rests solely within the discretion of our board of directors and will depend upon, among other things, our earnings, capital requirements and financial condition, as well as other factors deemed relevant by our board of directors. Although dividends are not limited currently by any agreements, it is anticipated that future agreements, if any, with institutional lenders or others may limit our ability to pay dividends on our shares of common stock.
Securities Authorized for Issuance under Equity Compensation Plan
The following table summarizes those securities authorized for issuance in 2010 in accordance with an equity compensation plan including individual compensation arrangements:
On February 6, 2003 and as amended on February 14, 2003, the Company adopted the 2003 Equity Compensation Plan to attract and retain high quality personnel. The adequacy of this plan is evaluated annually by Company management. As of December 31, 2010, no options had been issued under this plan. The disclosures made in the 2005 Audited Financial Statements (10-KSB - Item 10. Executive Compensation) and the `Amendment to License Agreement between RE/MAX and Mortgagebrokers.com Holding Inc.' dated May 25, 2006 (8-K - Schedule `A' 1. Outstanding Options) documenting the equity compensation of employees has not been implemented as of April 15, 2011. The Company is currently in the process of amending the existing employment agreements which are expected to be executed in 2011. Until the new employment contracts have been formally and legally executed, the existing employment contracts of the Company are still in effect.
On March 1, 2005 the Board of Directors approved the Service Compensation Plan ("the Service Plan"), the purpose of which is to enhance the Company’s stockholder value and maximize the available capital resources of the company through allowing non monetary transactions whereby the issuance of stock is granted for services rendered. This program is expected to support the Company in building a long term sustainable revenue pipeline, a national sales agency and referral program as well as provide incentive to service providers to establish long term relationships with the Company and to encourage stock ownership by such individuals by providing them with a means to acquire a proprietary interest in the Company’s success through stock ownership. Under the Service Plan, service providers, consultants, mortgage agents and strategic alliance partners who provide services to the Company may be granted options or warrants to acquire restricted stock of the Company. The total number of shares reserved for issuance under the Service Plan is 5,000,000, the adequacy of which will be evaluated annually.
Recent Sales of Unregistered Securities
The Company has routinely issued unregistered restricted stock in exchange for cash, services, compensation and assets. The relative pricing of our stock was valued during negotiations, and was predicated on the market price at the time the sale, purchase or contract was executed. The following summarizes these issuances over the past three years:
Exemption from Registration Claimed
The following exemptions were relied upon in the issuance of unregistered securities as referenced here-under over the past three years:
Regulation D Rule 506
The Common Stock issued in our Regulation D, Rule 506 offering was issued in a transaction not involving a public offering in reliance upon an exemption from registration provided by Rule 506 of Regulation D of the Securities Act of 1933. In accordance with Section 230.506 (b)(1) of the Securities Act of 1933, these shares qualified for exemption under the Rule 506 exemption for this offerings since it met the following requirements set forth in Reg. §§230.506:
1)
No general solicitation or advertising was conducted by us in connection with the offering of any of the Shares.
2)
At the time of the offering we were not: (1) subject to the reporting requirements of Section 13 or 15 (d) of the Exchange Act; or (2) an “investment company” within the meaning of the federal securities laws.
3)
Neither we, nor any of our predecessors, nor any of our directors, nor any beneficial owner of 10% or more of any class of our equity securities, nor any promoter currently connected with us in any capacity has been convicted within the past ten years of any felony in connection with the purchase or sale of any security.
4)
The offers and sales of securities by us pursuant to the offerings were not attempts to evade any registration or sale requirements of the securities laws of the United States or any of its states.
5)
None of the investors are affiliated with any of our directors, officers or promoters or any beneficial owner of 10% or more of our securities.
Please note that pursuant to Rule 506, all shares purchased in the Regulation D Rule 506 offering were restricted in accordance with Rule 144 of the Securities Act of 1933. In addition, each of these shareholders were either accredited as defined in Rule 501 (a) of Regulation D promulgated under the Securities Act or sophisticated as defined in Rule 506(b)(2)(ii) of Regulation D promulgated under the Securities Act.
We have never utilized an underwriter for an offering of our securities. Other than the securities mentioned above, we have not issued or sold any securities.
Regulation S
The Company issued restricted shares of its common stock for services, cash or assets. The shares were issued by the Company relying upon the exemption from registration as set forth in Regulation S of the Securities Act for the issuance of these shares. The stockholders are not a "U.S. Person" as that term is defined in the Securities Act, and at the time of the offering and issuance of the shares, the stockholders were located outside of the United States. In addition, the stockholders took the shares for investment purposes without a view to distribution and had access to information concerning the Company and our business prospects, and were permitted access to the Company's management for the purpose of acquiring investment information, as required by the Securities Act. Further, there was no general solicitation or advertising for the issuance of the shares. The Company issued the shares without compliance with the registration requirements of the Securities Act in reliance upon the exemptions there from afforded by Regulation S.
Section 4(2) of the Securities Act
The Company issued restricted shares of its common stock. They were issued in reliance on the exemption under Section 4(2) of the Securities Act of 1933, as amended (the “Act”). These shares of our common stock qualified for exemption under Section 4(2) of the Securities Act of 1933 since the issuance shares by us did not involve a public offering. The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial number of persons involved in the deal, size of the offering, manner of the offering and number of shares offered. We did not undertake an offering in which we sold a high number of shares to a high number of investors. In addition, this shareholder had the necessary investment intent as required by Section 4(2) since they agreed to and received share certificates bearing a legend stating that such shares are restricted pursuant to Rule 144 of the 1933 Securities Act. This restriction ensures that these shares would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, we have met the requirements to qualify for exemption under Section 4(2) of the Securities Act of 1933 for these transactions
On February 5, 2008, the Company issued 50,000 restricted (Rule 144) common shares at a price of $0.19 per share, the market close price on the date of issue, for total value of $9,550 to vFinance, Inc. based on the execution of an investment banking service agreement. vFinance, Inc. is an arm’s length third party consultant. vFinance Inc. provided advisory services with respect to the review of financing term sheets and investment banking matters. The Company relied upon the exemption from registration as for these shares as set forth in Regulation S of the Securities Act as described heretofore.
On September 11, 2008, the Company issued 490,500 restricted (Rule 144) common shares under the terms of its Mortgage Service License Agreement with RE/MAX Ontario-Atlantic Canada Inc, and its franchisee and broker owners, all third parties, that participated in the private placement offering which closed on June 9, 2006. The Company relied upon the exemption from registration as for these shares as set forth in Regulation S of the Securities Act as described heretofore. The shares were valued at $0.11 per share, the share price on the date of issue.
On September 11, 2008, the Company issued 3,272,500 shares of restricted (Rule 144) Company stock to its employees based upon draft employment agreements that are expected to be executed by December 31, 2008. The Company relied upon the exemption from registration as for these shares as set forth in Regulation S of the Securities Act as described heretofore. These shares have not been released and the release is pending the finalizing and execution of employment agreements. The shares were valued at $0.11 per share, the share price on the date of issue.
On October 20, 2008, the Company issued 150,000 restricted (Rule 144) common shares at a price of $0.29 per share, based on the market price at the subscription date, and having similar rights and obligations pursuant to the terms of the 2006 Private Placement offered to executives and franchisees of RE/MAX Ontario-Atlantic Canada Inc. These shares were issued in reliance on the exemption under Regulation D, Rule 506 and Regulation S of the Securities Act of 1933, as amended (the “Act”), as described heretofore.
On October 21, 2008, the Company issued 47,078 restricted (Rule 144) common shares at a price of $0.28 per share, based on the market price at the subscription date, and having similar rights and obligations pursuant to the terms of the 2006 Private Placement offered to executives and franchisees of RE/MAX Ontario-Atlantic Canada Inc. These shares were issued in reliance on the exemption under Regulation D, Rule 506 and Regulation S of the Securities Act of 1933, as amended (the “Act”), as described heretofore.
On December 16, 2008, the Company issued 500,000 shares of restricted (Rule 144) Company stock to a group of its mortgage agents based upon agreements. These shares were issued under the Company’s Service Compensation Plan. The shares were issued at $0.16 per share, the market close share price on the date of issue. The Company relied upon the exemption from registration as for these shares as set forth in Regulation S of the Securities Act as described heretofore.
None.
None.
Repurchases of Securities
No repurchases were made by our Company or an affiliate in a month within the fourth quarter of the fiscal year 2010.
ITEM 6.
ITEM 6. Selected Financial Data.
We are exempt from reporting this item as a smaller reporting company.
ITEM 7.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following is management’s discussion and analysis of the consolidated financial condition and results of operations of MortgageBrokers.com Holdings, Inc for the fiscal years ended December 31, 2010 and 2009. The following information should be read in conjunction with the audited consolidated financial statements for the period ending December 31, 2010 and notes thereto appearing elsewhere in this Form 10K.
Significant Accounting Policies and New Pronouncements
The following are the most significant accounting policies that have a substantive impact on the underlying discussions and analysis:
Revenue Recognition
Revenue consists of mortgage brokerage fees, finders’ fees and insurance commissions. The revenue from brokerage fees and finders’ fees are recognized upon the funding of a customer’s mortgage and when the collection is reasonably assured which typically occurs when the brokerage fee or finders' fees from the lender has been advanced. Insurance commission revenues are recognized when collection is reasonably assured which typically occurs when the insurance commission fees from the insurance provider has been advanced.
Share-based Payment
The Company adopted the disclosure requirements of ASC 718 (formerly SFAS No. 123R) "Share-Based Payment" ("ASC 718") for stock options and similar equity instruments (collectively, "options") issued to employees. The Company applies the fair value base method of accounting as prescribed by ASC 718. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. For stock options, the fair value is determined using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock and the expected dividends on it, and the risk-free interest rate over the expected life of the option. For restricted stock, the fair value is determined based on the quoted market price. ASC 718 also applies to transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable, as described in note 11 of the accompanying audited consolidated financial statements.
The following are new pronouncements in accounting policies that may affect the company’s accounting policies:
Recent Accounting Pronouncements
In October 2009, the FASB issued the “Accounting Standards Update (“ASU”) 2009-13 Multiple Deliverable Revenue Arrangements a consensus of EITF” (formerly topic 08-1) an amendment to ASC 605-25. The update provides amendments to the criteria in Subtopic 605-25 for separating consideration in multiple-deliverable arrangements. The amendments in this update establish a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The amendments in this update also will replace the term “fair value” in the revenue allocation guidance with the term “selling price” in order to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. The amendments will also eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price. The update will be effective for revenue arrangements entered into or modified in fiscal year beginning on or after June 15, 2010 with earlier adoption permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In April 2010, the FASB issued ASU 2010-13, "Compensation-Stock Compensation (Topic 718) - Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force". ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades should not be considered to contain a condition that is not a market, performance or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update do not expand the recurring disclosures required by Topic 718.
Disclosures currently required under Topic 718 are applicable to a share-based payment award, including the nature and the term of share-based payment arrangements. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company does not expect the impact of adopting ASU 2010-13 on its financial position, results of operations or cash flows to be material.
In December 2010, the FASB issued ASU 2010-28, Intangibles - Goodwill and Other (Topic 350). ASU 2010-28 addresses when to perform step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments are effective for fiscal years, and interim periods within years, beginning after December 15, 2010. Early adoption is not permitted. The Company does not expect the adoption of the guidance will have a material impact on its financial statements.
Liquidity
At December 31, 2010, we had $752,422 in cash; $43,765 in prepaid expenses, $85,598 in equipment and $1,463 in capital leased equipment totalling $883,248 in assets. Comparatively, at December 31, 2009, we had $2,012,964 in cash, $2,767 in restricted cash comprised of referral fees held in trust for the Retirement Savings Plan accounts owned by RE/MAX sales agents (the funds will be released upon the completion of certain administrative agreements); $19,236 in prepaid expenses, $106,935 in equipment and $1,968 in capital leased equipment, totalling $2,143,870 in assets.
At December 31, 2010, we had $1,266,166 in accounts payable and accrued liabilities related to mortgage agent commission fees payable for deferred revenue, employee tax deductions payable equal to $231,023, related party loans payable equal to $482,832 and accrued stock-based compensation equal to $29,881. Total liabilities equalled $2,009,902. Comparatively, at December 31, 2009, the Company had accounts payable and accrued liabilities equal to $1,987,786, bank indebtedness equal to $65,104, employee tax deductions payable equal to $219,759, related party loans payable equal to $359,138, trust liability of $2,767, and accrued stock-based compensation equal to $98,199. Total liabilities equaled $2,732,753.
Management makes the following comments regarding the most significant factors affecting Company liquidity and their measured trends over the reporting period as compared to 2009:
a)
Cash and cash equivalents decreased by 63% from 2009 to $752,422. This was primarily due to a loss of cash from operating activities of $1,362,431 as a result of an overall 15% reduction in revenue, a pay-out of CAD $596,978 associated with settlement of a counter claim, paying down of accounts payable and paid out of an outstanding bank loan.
b)
Prepaid expenses increased by 128% from 2009 to $43,765. There is no trend in pre-paid expenses although as the Company grows it is expected to increase in general. Pre-paid expenses are based on the amount in a given point in time based on current business activities at that time. The pre-paid expenses are associated with ongoing legal expenses and insurance policies.
c)
During the reporting period the Company paid an outstanding credit facility of $65,104 in full.
d)
Accounts payable and accrued liabilities decreased by 36% to $1,266,166 as compared with 2009 primarily associated with paying down accounts payable and a decrease in agent commissions work in progress payables.
e)
While it appears that the Company’s employee taxes payable increased by 5% between reporting periods, in fact this was offset with a decrease in the foreign exchange rate of 5% (as all of our operations are in Canada) between periods and in fact there was little change in the outstanding employee taxes payable between periods while the company renegotiated with the Canada Revenue Agency an ongoing payment plan.
f)
Stock-based compensation accruals fluctuate year to year. The accrual is valued based on stock prices at the end of the period, grant prices and vesting terms for which the Company has no direct influence. Thus, it is difficult to analyze related trends. The Company anticipates that it will continue to negotiate stock-based compensation arrangements to maximize working capital resources.
g)
Advances from a related party increased 34% to $482,832, as compared with 2009.
Capital Resources
Total revenue for the period ending December 31, 2010 was $14,287,100 (December 31, 2009: $16,851,224). The Company realized net cash loss from operating activities of $1,362,431. Due to an approximate decrease of 18% in the Company’s mortgage origination during the reporting period as compared to 2009, with only a corresponding decrease of 8% in the Company’s total operating expenses, the Company experienced a significant net cash loss from operating activities. The Company decreased its total cash and cash equivalent position at the end of 2010 by $1.26 million or 63% as compared to the beginning of 2010. In the event of unforeseen impacts to cash flow or until the Company increases its origination volume, revenue and profitability from operations, we will continue to rely upon the issuance of common stock and additional capital contributions from shareholders and/or loans from shareholders and third-party lenders as the company’s fall-back position to meet working capital requirements if required. The Company is also exploring making a restructuring change to improve our capital resources and liquidity.
Results of Operations
The following summarize material trends and outlooks related to our comparative income statement:
1) Gross revenue decreased by 15% from 2009 to $14,287,100;
2) Operating expenses decreased in 2010 by 8% to $14,781,109 as compared with 2009; and,
3) We reported a loss of $494,009 in 2010 as compared to earnings of $863,679 in 2009.
Unusual or Infrequent Events that affect Reported Income
a)
The Company cancelled its employee stock-based compensation program at the end of 2009 and staff cancelled their outstanding stock-based compensation and accruals (which translated to a negative expense charge). The Company cancelled employee stock-based accruals in the amount of $ 1,650 in the reporting period and $264,993 in 2009.
b)
For the period ending December 31, 2009, the Company recorded in the statement of operations a recovery of legal judgment in the amount of $757,521. On October 27, 2006, Trisan Equitable Corporation (“Trisan”) commenced an action in the Ontario Superior Court in Ontario, Canada against several parties including MortgageBrokers.com Holdings, Inc. (the ``Company``) its subsidiary MortgageBrokers.com Inc., and Alex Haditaghi, our principal shareholder, sole director and chief executive officer and several corporate affiliates of Mr. Haditaghi. The statement of claim filed by Trisan asserted a number of claims in the aggregate amount of approximately CAD $1.4 million, arising out of a loan agreement with Trisan dated January 27, 2005. In January 2007, the Company filed a statement of defense, cross claim and counter claim in response to Trisan`s statement of claim. On October 3, 2007, a partial summary judgment from the Ontario Superior Court was awarded to Trisan regarding the matter in an aggregate amount of CAD $748,671 plus 500,000 shares of our common stock. The October 3, 2007 partial summary judgment was appealed by us but the judgment was upheld on appeal by the Ontario Court of Appeal on March 31, 2008. On July 8, 2009, a full and final settlement agreement was executed between Trisan and the defendants including MortgageBrokers.com Holdings, Inc. and its subsidiary, MortgageBrokers.com Inc., regarding the prior summary judgment awarded to Trisan and all outstanding and related matters. The Agreement provides for a mutual final and full release and discharge regarding the Company and our subsidiaries for all matters up to and including July 8, 2009 related to the original claim and action, counterclaim, judgment, and appeal between Trisan and the Company and its subsidiaries. The Trisan settlement agreement required a third party company, of which our Chief Executive Officer is a related party, to be encumbered with a financial arrangement. The settlement agreement does not provide for the payment of any monies, the creation of any obligations or any encumbrances in favor of Trisan, by or upon Mortgagebrokers.com Holdings Inc. or its subsidiary MortgageBrokers.com Inc. other than the release of 500,000 shares of Mortgagebrokers.com Holdings Inc. common stock which were issued in 2006 to Trisan related parties in escrow.
c)
Financial market conditions in 2009 and 2010 may have had a negative impact on the market for our securities as a perceived mortgage finance company. If so, this may have had a negative impact on the market price of our securities which would have a direct impact on reducing and reversing stock-based accrual expenses for 2009 and 2010.
d)
In January of 2010, a large mortgage agent team representing approximately 27 % of the Company’s book of business at the time terminated their agent license agreements with the Company. The Company launched a legal claim against the owners of the team related to trade mark infringement and passing off, breach of contract and breach of loan agreements and legal proceedings are pending.
Revenue Trend Analysis
Gross revenue in 2010 decreased by 15% from 2009 to $14,287,100 and this has been the Company’s first negative rate of growth year over year reported since inception. Management believes our negative revenue growth experienced between 2009 and 2010 was directly related to a reduction in the number of company mortgage agents and an overall mortgage origination malaise due to recessionary pressures despite low interest rates and a general lack of recruitment of quality mortgage brokers during recessionary times as agents do not want to undergo a brand change and possibly affect their mortgage origination further during a market down turn. As discussed in more detail in Item 1 within this Form 10-K, our sales management team experienced a decrease in the number of our mortgage agents by 13% in 2010 as compared to 2009 which would have had a negative impact to top-line revenue numbers.
The following summarizes the factors that affect our revenue and their associated trends:
1.
Currently, revenue for the Company can be divided into three streams: broker fees charged predominately to private lender customers or commercial lender customers where-in the lender does not pay an origination commission fee; origination commission fees paid by most lenders and trust institutions, and creditor life insurance commissions paid by the insurance carrier. The Table below summarizes revenue for the last four fiscal periods by revenue stream:
a.
Approximately 97% of the Company’s revenue in 2010 came from origination commission fees, 2% came from broker fees and 1% came from insurance commission fees. This break-down has been relatively consistent over the recent past.
b.
Broker Fee revenue decreased 74% from 2009 to 2010. Management attributes this decrease to the lack of large real estate financings (and associated broker fees) that have taken place during the economic down turn.
c.
In 2010, the Company received approximately 101 basis points from lenders such as banks and trust companies who pay the Company an origination commission fee. The basis point revenue has remained consistent for the past two reporting periods.
d.
We currently earn additional commission revenue through the referral and placement of creditor insurance with Benesure Canada Inc. The Company earns revenue in the form of an upfront fee as well as an on-going trailer fee. In 2010, the Company earned CAD $117,775 from creditor insurance sales which is a decrease to sales reported in 2009. Management believes that the decrease in fees is associated with, in part, recessionary pressures whereby consumers do not want to invest in creditor insurance, as well as a new arrangement with Benesure whereby the agents portion is now paid directly to the agent and does not show up on the Company’s books.
2.
In 2010, approximately 71.4% of the Company’s revenue came from multi-product depository banks and trust institutions. 23.4% of the Company’s revenue came from monoline lenders who have a single product offering and sell exclusively through the mortgage broker sales channel. 5.3% of our revenue comes from broker fees associated with private lenders. This break-down has been relatively consistent over the past three years, and the rate of negative growth, year over year, has been consistent across the market between lender types. Our contracted mortgage brokers are required to find the best terms for a customer that meet the customer’s needs. The Company has no control over directing associated deal flow. In general, the Company earns its highest fees from private lenders.
The number of financial institutions available to mortgage brokers has changed from 2008. Mortgage brokers lost 4 depository banks and trusts who lend via the mortgage broker channel such as Wells Fargo and HSBC. The greatest decrease in lenders available to the mortgage broker channel has been Monoline Lenders where the industry has lost approximately 12 lenders. There has been no relative change to the number of private lenders available to the industry.
The Table below summarizes revenue for the last three fiscal periods by lender category:
3.
The Company operates two sales channels for originating mortgages. Approximately 99.8% of our mortgage origination volume is sourced directly through our mortgage broker sales channel which consists of 375 mortgage agents (as further described in Item 1 of this Form 10-K). Approximately 0.2% of our mortgage origination volume in 2010 was sourced through our real estate sales channel wherein the Company established regional referral contracts with strategic alliance partners RE/MAX in Eastern Canada and Maxwell in Western Canada (as further described in Item 1 of this Form 10-K). In general, the Company, as well as its agents, in aggregate, earn up to 30 basis points less when deal flow is sourced through a strategic alliance partner via the real estate sales channel. The long term intended trade-off is that the Company expects to source significant mortgage origination volume through the real estate channel, although this is currently being monitored for substantiation purposes. The reported drop in mortgage originations sourced through our real estate sales channel from 2009 to 2010 is likely associated with our termination of the RE/MAX agreement in June 2009 as previously described. The Table below summarizes mortgage origination by sales channel over the past three years:
4.
The Table below summarizes mortgage origination by sales territory across Canada over the past four years and we provide the following comments:
a.
77% of our volume in 2010 was originated from the Province of Ontario, 17% our volume in 2010 was originated from the Province of Alberta and 6% our volume in 2010 was originated from Atlantic Canada;
b.
Commission fees (as described in section 1 heretofore) do not vary by geographical region as our lenders are typically federally chartered and offer the same service in each territory;
c.
There is no difference in per unit revenue on a basis point basis for origination from one sales territory to another, although the size of mortgages, in general, are greater in Alberta and Ontario than Atlantic Canada;
d.
The Company has experienced its first negative growth in mortgage origination in Ontario which declined by approximately 17% in 2010 over 2009. Mortgage origination in Alberta has been declining since 2008 and experienced its greatest negative growth rate in 2010 of about 15%. Mortgage origination in Atlantic Canada has been declining since 2009 and experienced its greatest negative growth rate in 2010 of about 32%. Management believes that the downturn in mortgage origination volume in Alberta and Atlantic Canada in 2010 over 2009 was because these regions were first most affected by a market downturn in Canada related to the North American economic recession in 2008 and 2009.
Management believes the down turn in Ontario was atypical and was related to the one-time event of losing a large mortgage origination team in January 2010. However, the effect of losing the large team in January 2010 was minimal to the Company’s bottom line as the team was receiving an elevated commission split of 95% of the lender’s commission for their origination volume.
e.
The Company is able to manage its regional sales management expenses proportionately to the respective revenue distribution by territory.
Expense Trend Analysis
The Company’s operating expenses decreased in 2010 by 8% over 2009 primarily due to a one time legal expense recovery in 2009, a reduction in agent commission fees paid (due to a reduction in overall funded mortgage origination) and a reduction in salaries and benefits expenses paid. The primary components that comprise the Company’s operating expenses are agent commissions, salaries and benefits, general and administrative expenses, occupancy costs and stock-based compensation for which the following trends are observed by management:
·
83% of the operating expenses in 2010 were associated with agent commissions. Agent commission fees as a percent of revenues were fairly consistent between periods increasing by 1% from 2009 to 2010.
·
9% of the operating expenses in 2010 were associated with salaries and benefits. Costs associated with salaries and benefits decreased by 22% compared to 2009 as the company consolidated staffing resources in consideration of an overall decrease in Company top-line origination and revenue.
·
General and administrative expenses between periods increased by 15% from 2009 to 2010, likely associated with an overall increase in legal fees for the year.
·
Occupancy costs increased a nominal 6% from 2009 to $151,266 and is related, in part, to an increase in the Canadian dollar relative to the U.S. dollar between the periods of 5%.
Off-Balance Sheet Arrangements
None
Tabular Disclosure of Contractual Obligations
We are exempt from this reporting as a smaller reporting company.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exempt from reporting this item as a smaller reporting company.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data.
The financial statements of the Company appear at the end of this report beginning with the Index to Financial Statements on page.
ITEM 9.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
The following describes changes in and disagreements with accountants on accounting and financial disclosures through 2009 and 2010. On May 11, 2008, the board of directors of the Company approved the engagement of McGovern, Hurley, Cunningham, LLP, as its new independent accountant. During the two most recent fiscal years and through the date hereof, neither the Company nor any one on behalf of the Company has consulted with McGovern, Hurley, Cunningham, LLP regarding the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, or any other matters or reportable events required to be disclosed under Regulation S-K.
ITEM 9A.
ITEM 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company’s principal executive officer and principal financial officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d -15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on their evaluation of the Company’s disclosure controls and procedures, the Company’s principal executive officer and principal financial officer, with the participation of the Company’s management, have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2010, to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is(a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosure.
Management’s Annual Report on Internal Controls Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2010 based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2010. Through the use of external consultants and the review process, management believes that the financial statements and other information presented herewith are materially correct.
This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this Annual Report.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting during our fourth quarter ended December 31, 2010, or in other factors that could significantly affect these controls, that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. Directors, Executive Officers and Corporate Governance.
Registrant Director and Executive Officer
The following table sets forth, as of December 31, 2010, the name and age of our sole director and executive officer. The director will hold such office until the next annual meeting of shareholders and until his successor has been elected and qualified.
Business Experience
The following summarizes the occupation and business experience of our sole director and executive officers:
Alex Haditaghi, President, Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and Chairman of the Board of Directors
Alex Haditaghi has been working in the mortgage industry in Canada since 1999 and has extensive experience in both residential and commercial mortgages. Mr. Haditaghi formed Lending Tree Canada Inc., a private mortgage brokerage operating in Canada, in 2000. He served as President for five years until he founded MortgageBrokers.com in January 2005. Since then, Mr. Haditaghi has been the CEO, CFO and sole director of MortgageBrokers.com Holdings, Inc. and President of its two subsidiaries. Mr. Haditaghi is responsible for the business vision, expansion, capital resources, hiring the executive management team, establishing corporate policy and providing overall leadership to the organization
Significant Contributing Management
The following table sets forth, as of December 31, 2010, the names and ages of our Canadian operations management team.
Business Experience
The following summarizes the occupation and business experience of our Canadian operations subsidiary management team:
Dong Lee, Vice President of Operations
Dong Lee has been vice president of operations at our Company’s Canadian subsidiary since joining us in April, 2005. Mr. Lee is responsible for managing our mortgage agent and referral commission and compliance operations and responsible for overall business model development.
Prior to joining MortgageBrokers.com, Mr. Lee was Senior Manager-Alternate Delivery Channels, for Scotiabank where he oversaw the strategic development of both Scotiabank's mobile mortgage sales team and mortgage broker delivery channels. In this position, Lee was responsible for the strategic marketing and development of sales programs. Mr. Lee worked at Scotiabank from January 2001 to April 2005. Before joining Scotiabank, Mr. Lee spent several years as the Business Development Officer for Canada Mortgage & Housing Corporation (“CMHC”), where he managed and grew the market share of CMHC's largest lender portfolio. Before specializing in the mortgage sector, Lee spent several years with TD Bank Financial group as Manager of Korean banking. Under that position, Lee envisioned, launched and managed the Korean Banking Centre, establishing a multi million dollar referral network with several of the largest banks in Korea.
Mr. Lee is a graduate from Queen's University's undergraduate business program. During his time at Queen's, Mr. Lee studied international business at Herstmonceux Castle in Hailsham, England. Mr. Lee completed his MBA in 2007 through Dalhousie University.
Robert Hyde, Vice President of Finance & Administration
Mr. Hyde joined MortgageBrokers.com’s Canadian subsidiary in April of 2005. His responsibilities include corporate development, finance and reporting, agreement preparation and administration, administration of warrant, option and other capital structure programs, regulatory and legal liaison, private placement memorandum and registration statement preparation, and accounting support.
Prior to joining MortgageBrokers.com, Mr. Hyde had a 17 year career in the engineering, software and management consulting industries servicing the real estate, financial services and petrochemical industries with significant business building experience and leadership roles in Canada, the US, and the EU. Most recently, Robert was Managing Director of Paladin Capital Ventures. Paladin Capital Ventures provided early stage technology based companies with business model development, strategic planning, finance and capital planning, facilitating venture capital and private placement, and providing strategic market planning services. From 1998 to 2004, Robert was the founder and managing director of eRealVantage Incorporated, a real estate investment portfolio securitization technology company servicing the REIT and pension fund portfolio market place. From 1992 to 1998, he was President of Enviro Cheq Corporation and Vice President of the knowledge-based environmental risk management company, Trillium Environmental Corporation.
Mr. Hyde graduated from the Richard Ivey School of Business, University of Western Ontario (MBA) in 2003 and received his Masters of Engineering degree from University of Windsor in 1990. He has been a licensed Professional Engineer in the Province of Ontario for 10 years and has completed numerous executive training courses including the Art of Negotiation.
Daniel Putnam, President of Sales - Canada
Since joining our Company’s Canadian subsidiary in November, 2008, Daniel Putnam has been President of our Canadian sales organization and currently directs our sales management staff to service, recruit and manage our national mortgage sales agency. Mr. Putnam directs a marketing manager responsible for developing advertising, information brochures, and sales support materials. Mr. Putnam also directs our senior Information System / Information Technology staff responsible for developing www-based technology back office systems to service the mortgage sales agency. Mr. Putnam was formerly President of Mortgage Centre Canada - a Division of CIBC Mortgages Inc. and more recently was President of Originations for Macquarie Financial.
David Mercer, Vice President Sales - Alberta
David Mercer is the Company’s vice president of Sales for Alberta and joined us September of 2005. Prior to joining MortgageBrokers.com, Mr. Mercer, a 23 year veteran of the real estate and mortgage broker industry, was President of Lending Source Canada Inc. Previously, Mr. Mercer spent 4 years as a top producing regional manager for The Mortgage Alliance Company of Canada, who today claims to be the largest independent mortgage originator in Canada. Through his career in the industry, Mr. Mercer has been responsible for the recruitment, training and mentorship of over 300 Mortgage Brokers across Canada. Mr. Mercer has also served as President of the Alberta Mortgage Brokers Association, and for many years served as the Chair for the Communications and Ethics committees. Mr. Mercer also currently teaches for the Alberta Real Estate Association through Mt. Royal College, Alberta.
Family Relationships
None.
Involvement in Certain Legal Proceedings
See Item 3 of this Form 10-K.
Promoters and Control Persons
None.
Code of Ethics
The Company has adopted a Code of Ethics applicable to its Chief Executive Officer and Chief Financial Officer which has been filed as an exhibit to our Annual Report on Form 10-KSB on March 31, 2005.
Directors and Committees
The Company currently has only one director and, as such, has no nominating, audit or other committees of its board of directors. The sole director of the Company does not qualify as an “audit committee financial expert.” To-date, no formal board meetings have taken place.
Shareholder Communications
The Company has retained an investor relations Company to communicate and respond to shareholders. Shareholders may also correspond directly to our Director.
Compliance with Section 16(A) of the Exchange Act
Mr. Haditaghi has yet to file a Form 5 for 2009 and 2010 but plans to in the very near future.
ITEM 11.
ITEM 11. Executive Compensation.
The following summarizes the Companies named officer and director, as identified in Item 10 of this Firm 10-K, compensation:
Footnotes:
1: The executive’s base salary was paid in Canadian dollars. In Canadian dollars, the base salary was $0 in 2010 and $0 with a bonus of $300,000 in 2009. It was converted to USD for presentation in the table as required using the conversion factor (USD $1.0 = CAD $1.14), the annual average exchange rate for 2009 as reported by the Bank of Canada.
Narrative Disclosure to the Summary Compensation Table
The employment agreements for executive officers are presently being prepared. The disclosures made in the 2005 Audited Financial Statements (10-KSB - Item 10. Executive Compensation) and the `Amendment to License Agreement between RE/MAX and Mortgagebrokers.com Holding Inc.' dated May 25, 2006 (8-K - Schedule `A' 1. Outstanding Options) documenting the equity compensation of employees has not been implemented as of April 1, 2011. The company is currently in the process of preparing employment agreements which are expected to be executed in 2011.
Compensation of Directors
No additional compensation is paid to Alex Haditaghi, our sole director.
Stock Option Grants In The Past Fiscal Year
We have not issued any grants of stock options in the past fiscal year to any officer or director. As at December 31, 2010, no options to Company employees, officers or directors are outstanding.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
(1) Based on 38,854,099 shares of common stock issued and outstanding as of December 31, 2010.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence.
As of December 31, 2010, the controlling shareholder and Chief Executive Officer of the Company had advanced $482,832 (December 31, 2009 - $359,138) to fund the working capital of the Company. The advances are unsecured, non-interest bearing and due on demand.
ITEM 14.
ITEM 14. Principal Accounting Fees and Services.
Audit Fees
For the Company's fiscal year ended December 31, 2010, we have incurred $86,500 for professional services rendered for the audit and reviews of our financial statements.
For the Company's fiscal year ended December 31, 2009, we had incurred $69,535 for professional services rendered for the audit and reviews of our financial statements.
For the Company's fiscal year ended December 31, 2010, there were no other audit related fees.
Tax Fees
To-date, for the Company's fiscal year ended December 31, 2008, the Company has not incurred expenses for professional services rendered for tax compliance, tax advice, and tax planning.
All Other Fees
None.
PART IV
ITEM 15.
ITEM 15. Exhibits, Financial Statement Schedules.
The following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.
___________________________
Footnotes:
(1)
This exhibit was filed with our Registration Statement on Form SB-2 filed on June 2, 2003 (SEC Filed No. 333-117718) and is incorporated herein by this reference.
(2)
This exhibit was filed with our Current Report on Form 8-K filed on March 22, 2005 and is incorporated herein by this reference.
(3)
This exhibit was filed with our Current Report on Form 8-K filed on February 1, 2006 and is incorporated herein by this reference.
(4)
This exhibit was filed with our Current Report on Form 8-K filed on June 13, 2006 and is incorporated herein by this reference.
(5)
This exhibit was filed with our Annual Report on Form 10-KSB on March 31, 2005 and is incorporated herein by this reference.
(6)
This exhibit was filed with our Annual Report on Form 10-K on April 15, 2008 and is incorporated herein by this reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
MORTGAGEBROKERS.COM HOLDINGS, INC.
By: /s/ Alex Haditaghi
Alex Haditaghi
Principal Executive Officer,
Principal Accounting Officer,
President, Secretary and Director
Dated: April 15, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME
TITLE
DATE
/s/ Alex Haditaghi
President, Secretary and Director
April 15, 2011
Alex Haditaghi
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
AUDITED
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Mortgagebrokers.com Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Mortgagebrokers.com Holdings, Inc. and Subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations and comprehensive (loss) income, statements of stockholders’ deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mortgagebrokers.com Holdings, Inc. and Subsidiaries as at December 31, 2010 and 2009 and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s operating losses, negative working capital, and total capital deficiency raise substantial doubt about its ability to continue as a going concern. Note 1 also describes management’s plans to address these financial matters. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
McGOVERN, HURLEY, CUNNINGHAM, LLP
/s/ McGOVERN, HURLEY, CUNNINGHAM, LLP
Chartered Accountants
Licensed Public Accountant
TORONTO, Canada
April 6, 2011
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 31, 2010 and 2009
(The accompanying notes are an integral part of these consolidated financial statements.)
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive (Loss) Income
Years Ended December 31, 2010 and 2009
(The accompanying notes are an integral part of these consolidated financial statements.)
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
Years Ended December 31, 2010 and 2009
(The accompanying notes are an integral part of these consolidated financial statements.)
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2010 and 2009
(The accompanying notes are an integral part of these consolidated financial statements.)
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
1. Nature of Business and Going Concern
Nature of Business
MortgageBrokers.com Holdings, Inc., and Subsidiaries (the “Company”) was organized under the laws of the State of Delaware on February 6, 2003.
Mortgage brokerage operations are presently conducted through the Company’s subsidiaries, Mortgagebrokers.com Inc. (an Ontario, Canada company), MortgageBrokers.com Financial Group of Companies, Inc., MBKR Franchising Inc. and MBKR Holdings Inc. (Canadian federal companies), in Canada only. The planned operations of the Company consist of becoming a financial services company centered around mortgage finance, brokerage, sales and consulting in Canada, the United States and the European Union (“E.U.”).
Going Concern
The Company’s consolidated financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the year ended December 31, 2010, the Company generated a net loss of $494,009 (for the year ended December 31, 2009, the Company generated net income of $863,679). Certain conditions noted below raise substantial doubt about the Company’s ability to continue as a going concern.
The Company’s ability to continue as a going concern is contingent upon its ability to secure additional debt or equity financing, continue to grow sales of its services and achieve profitable operations. Management’s plan is to secure additional funds through future debt or equity financings. Such financings may not be available or may not be available on reasonable terms to the Company. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.
The Company has devoted substantially all of its efforts to establishing its current business. Management continues to develop and execute its business model, business plans and strategic marketing plans which includes: organization of the Company and divisions; identification of the Company’s sales channels and associated supply chain; development of strategic marketing plans and sales execution strategies; preparation of a financial plans, risk and capital structure planning models, and mortgage origination ‘book of business’ models; hiring mortgage sales agents to build its national sales force and continuing to develop our referral relationship; developing cash flow forecasts and an operating budget; identifying markets to raise additional equity capital and debt financing; embarking on research and development activities; performing employment searches and preparing agent contracts; and, recruiting and hiring technicians, management and industry specialists.
The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
2. Summary of Significant Accounting Policies
These accounting policies of the Company are in accordance with the accounting principles generally accepted in the United States of America, and their basis of application is consistent. Outlined below are those policies considered particularly significant:
a) Basis of Consolidation and Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company, its wholly-owned subsidiaries Mortgagebrokers.com Inc., Mortgagebrokers.com Financial Group of Companies, Inc., MBKR Franchising Inc. and MBKR Holdings, Inc. All significant inter-company transactions and balances have been eliminated upon consolidation.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
2. Summary of Significant Accounting Policies(Continued)
b) Cash and Cash Equivalents
Cash and cash equivalents consist of cash on account and short-term investments with remaining maturities at acquisition of three months or less.
c) Equipment, net
Equipment is stated at cost. Depreciation is calculated using the following annual rates and methods based on the estimated useful lives of the assets:
Furniture and equipment
20% declining
Computer equipment
30% declining
Computer software
30% declining
Leasehold improvements
Over the remaining term of the lease
d) Revenue Recognition
Revenue consists of mortgage brokerage fees, finders’ fees and insurance commissions. The revenue from brokerage fees and finders’ fees are recognized upon the funding of a customer’s mortgage and when the collection is reasonably assured which typically occurs when the brokerage fee or finders fees from the lender has been advanced. Insurance commission revenues are recognized when collection is reasonably assured which typically occurs when the insurance commission fees from the insurance provider has been advanced.
e) Use of Estimates
Preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and related notes to financial statements. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Actual results may ultimately differ from estimates, although management does not believe such changes will materially affect the consolidated financial statements in any individual year. Significant estimates in these consolidated financial statements include the going concern assumption, stock-based compensation, future income tax assets and liabilities and contingencies.
f) Financial Instruments
In accordance with ASC 825-10-50, (formerly SFAS No. 107), "Disclosures About Fair Value of Financial Instruments" ("SFAS No. 107"), the estimated fair value of financial instruments has been determined by the Company using available market information and valuation methodologies. Considerable judgment is required in estimating fair value. Accordingly, the estimates may not be indicative of the amounts the Company could realize in a current market exchange. As of December 31, 2010, the carrying value of accounts payable and accrued liabilities, advances from related party and all other current liabilities approximate their fair value because of the limited terms of these instruments.
In accordance with ASC 820-10, (formerly SFAS No. 157), “Defining Fair Value Measurement”, the Company adopted the standard which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
2. Summary of Significant Accounting Policies (cont'd)
g) Impairment of Long-lived Assets
In accordance with ASC 360-10-05 (formerly SFAS No. 144), "Accounting for the Impairment or Disposal of Long-Lived Assets", long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company evaluates whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value of asset less cost to sell. As described in note 1, the long-lived assets have been valued on a going concern basis; however, substantial doubt exists as to the ability of the Company to continue as a going concern. If the Company ceases operations, the asset values may be materially impaired.
h) Share-based Payment
The Company adopted the disclosure requirements of ASC 718 (formerly SFAS No. 123R) "Share-Based Payment" ("ASC 718") for stock options and similar equity instruments (collectively, "options") issued to employees. The Company applies the fair value base method of accounting as prescribed by ASC 718. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. For stock options, the fair value is determined using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock and the expected dividends on it, and the risk-free interest rate over the expected life of the option. For restricted stock, the fair value is determined based on the quoted market price. ASC 718 also applies to transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
i) Income Taxes
The Company accounts for income taxes pursuant to ASC 740-10, (formerly SFAS No. 109), Accounting for Income Taxes. Deferred tax assets and liabilities are recorded for differences between the financial statements and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is recorded for the amount of income tax payable or refundable for the year increased or decreased by the change in deferred tax assets and liabilities during the year.
j) Earnings or Loss Per Share
The Company accounts for earnings per share pursuant to ASC 260-10-05 (formerly SFAS No. 128), Earnings per Share, which requires disclosure on the financial statements of "basic" and "diluted" earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net (loss) income by the weighted average number of common stock outstanding for the year. Diluted earnings (loss) per share is computed by dividing net (loss) income by the weighted average number of common stock outstanding plus potentially dilutive securities (if dilutive) related to stock options and warrants for the year.
k) Foreign Currency Translation
The Company accounts for foreign currency translation pursuant to ASC 830-10,(formerly SFAS No. 52), “Foreign Currency Translation”. The Company’s functional currency is the Canadian dollar. All assets and liabilities are translated into United States dollars using the exchange rates prevailing at the end of the period. Revenues and expenses are translated using the average exchange rates prevailing throughout the year.
Unrealized foreign exchange amounts resulting from translations at different rates according to their nature are included in accumulated other comprehensive income.
Realized foreign currency transaction gains and losses are recognized in operations.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
2. Summary of Significant Accounting Policies (cont'd)
l) Comprehensive Income or Loss
The Company adopted ASC 220-10, (formerly SFAS No. 130) which establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income is presented in the statements of stockholders’ deficit, and consists of net loss and unrealized gains (loss) on available for sale marketable securities; foreign currency translation adjustments and changes in market value of future contracts that qualify as a hedge; and negative equity adjustments recognized in accordance with ASC 715-10 (formerly SFAS No. 87). ASC 220-10 requires only additional disclosures in the financial statements and does not affect the Company’s financial position or results of operations.
m) Concentration of Credit Risk
ASC 815-10, (formerly SFAS No. 105) “Disclosure of Information About Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk”, requires disclosure of any significant off-balance sheet risk and credit risk concentration. The Company does not have significant off-balance sheet risk or credit concentration.
n) Recent Accounting Pronouncements
In October 2009, the FASB issued the “Accounting Standards Update (“ASU”) 2009-13 Multiple Deliverable Revenue Arrangements a consensus of EITF” (formerly topic 08-1) an amendment to ASC 605-25. The update provides amendments to the criteria in Subtopic 605-25 for separating consideration in multiple-deliverable arrangements. The amendments in this update establish a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The amendments in this update also will replace the term “fair value” in the revenue allocation guidance with the term “selling price” in order to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. The amendments will also eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price. The update will be effective for revenue arrangements entered into or modified in fiscal year beginning on or after June 15, 2010 with earlier adoption permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In April 2010, the FASB issued ASU 2010-13, "Compensation-Stock Compensation (Topic 718) - Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force". ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades should not be considered to contain a condition that is not a market, performance or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update do not expand the recurring disclosures required by Topic 718.
Disclosures currently required under Topic 718 are applicable to a share-based payment award, including the nature and the term of share-based payment arrangements. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company does not expect the impact of adopting ASU 2010-13 on its financial position, results of operations or cash flows to be material.
In December 2010, the FASB issued ASU 2010-28, Intangibles - Goodwill and Other (Topic 350). ASU 2010-28 addresses when to perform step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments are effective for fiscal years, and interim periods within years, beginning after December 15, 2010. Early adoption is not permitted. The Company does not expect the adoption of the guidance will have a material impact on its financial statements.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
3. Referral Fees Held in Trust and Trust Liability
Pursuant to service agreements, a portion of RE/MAX referral fees charged to the Company were payable to RE/MAX agents and were paid into a Registered Retirement Savings Plan ("RRSP") account on behalf of the respective agent, administered as the RE/MAX Agent Retirement Plan by Manulife Financial. The aforementioned referral fees were deposited into a temporary in-trust account that has signing officers from both the Company & RE/MAX, until the Manulife Financial administered program was fully established for new entrants to the program. This program was cancelled in 2009 and final payments were reconciled and paid out in the first quarter of 2010.
4. Equipment, net
5. Equipment Under Capital Leases
The equipment under the capital leases is depreciated on a 30% declining balance.
6. Bank Indebtedness
On November 22, 2005, the Company obtained a line of credit in the amount of CAD $150,000. The line of credit beared interest at the Royal Bank of Canada's prime rate plus 0.5% per annum, and was collateralized by a general security agreement in all assets except real property. On November 20, 2008, the credit facility was converted to a 24 month term loan whereby the Company paid principal of CAD $6,250 per month plus interest at the Royal Bank of Canada prime rate plus 1.5% per annum. The loan was paid in full in November 2010.
7. Advances from Related Party
As of December 31, 2010, the controlling shareholder and Chief Executive Officer of the Company and a company controlled by this same individual had advanced $482,832 (as at December 31, 2009 - $359,138) to fund the working capital of the Company. The advances are unsecured, non-interest bearing and due on demand.
8. Employee Tax Deductions Payable
The Company is in arrears on the tax withholdings due to Canada Revenue Agency (“CRA”) related to employee source deductions on salaries. CRA has registered a Certificate in the Canadian Federal Court and the Property Register of Ontario for the amount owing to CRA. The liability currently bears interest at 9% annually.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
9. Stock-based Compensation Accrual
The Company has accrued expenses for stock-based compensation:
a.
As of December 31, 2010, the Company has accrued, as stock-based compensation payable, 493,000 (2009 - 493,000) common shares at a price of $0.015 (2009- $0.04) per share for a total of $7,395 (2009- $19,720) payable to the parties referred to in note 17c.
b.
As of December 31, 2010, the Company has accrued employee stock-based compensation of Nil (2009 -15,000) common shares at a price of $0.015 (2009 - $0.04) for a total of $Nil (2009 - $1,650) under its Equity Compensation Plan referred to in note 10. In December 2009 and November 2010, all employees returned and canceled all previously issued stock and cancelled all 2009 employee stock based compensation. Employee stock based compensation was valued at the fair market value at the date of grant.
c.
As of December 31, 2010, the Company has accrued, as stock-based compensation 1,499,053 (December 31, 2009 - 1,970,729) common shares at a price of $0.015 (December 31, 2009 - $0.04) per share for a total of $22,486 (2009 - $76,829) payable to the parties referred to in note 17a, 17b and 17c.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
10. Capital Stock
Preferred Stock
The Company has 5,000,000 shares authorized of preferred stock with a par value of $0.0001. The Company has issued none of these shares as of December 31, 2010.
Common Stock
On November 9, 2010, the Company cancelled 4,085,000 of its common shares. The Company received signed agreements from various employees agreeing to cancel 4,085,000 common shares for Nil consideration and to terminate any past and future stock-based compensation accrual arrangements without further consideration.
On June 9, 2006, the Company completed an offering in which it issued a total of 2,112,470 shares of its common stock to accredited investors including RE/MAX Ontario-Atlantic Canada Inc., its executives and franchisees, at a price per unit of $1.00 for an aggregate offering price of $2,112,470. Purchasers of these securities receive the following additional rights and privileges:
i.
the purchaser received a warrant (1 warrant = 1 share) to further purchase up to the total number shares of common stock purchased through the private placement exercisable at a rate of 20% each year following the anniversary date of the private placement closure. The warrants are exercisable at a price 30% below the 30 day fair market price preceding the date such warrants are exercised. Warrants expire if not exercised within 30 days of such anniversary date.
The following summarizes the warrants issued, outstanding, exercisable, expired and exercised related to the company’s private placement that closed on June 9, 2006:
ii.
further, pursuant to the execution of a service level agreement, on the anniversary date of the private placement closure, the Company has agreed to issue a number of shares of common stock equal to 25% of the number of common shares purchased in the private placement for ten consecutive anniversary dates. The receipt of such shares is dependent on the execution and maintenance in good standing of the terms of a service level agreement for each of the ten years. The service level agreement included the provisions of marketing, servicing and promotional services.
The following is a summary of stock-based compensation issuances associated with our January 30, 2006 agreement with RE/MAX which was modified on May 25, 2006:
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
10. Capital Stock(cont’d)
Based upon the sale of 2,112,470 shares in our placement which closed on June 9, 2006, and pursuant to the January 30, 2006 agreement with RE/MAX which was modified on May 25, 2006, a maximum number of 528,117 shares could be issued each anniversary of the placement closing date for a total of 5,281,170 shares over 10 years. As at December 31, 2010, the Company has issued 968,500 of these common shares. The issuance of the anniversary shares is subject to the good standing of the RE/MAX January 30, 2006 and amended May 25, 2006 agreements for RE/MAX affiliates as well as the continued good standing of a one year renewable service level agreement for the RE/MAX Franchisee. The Company and RE/MAX terminated the agreement June 9, 2009 and as such the obligation to issue anniversary shares following this period has been removed from the Company.
Equity Compensation Plan
On February 6, 2003 and as amended on February 14, 2003, the Company adopted the 2003 Equity Compensation Plan to attract and retain high quality personnel. The adequacy of this plan is evaluated annually by Company management. As of December 31, 2010 , no options had been issued under this plan. The disclosures made in the 2005 Audited Financial Statements (10-KSB - Item 10. Executive Compensation) and the `Amendment to License Agreement between RE/MAX and Mortgagebrokers.com Holding Inc.' dated May 25, 2006 (8-K - Schedule `A' 1. Outstanding Options) documenting the equity compensation of employees has not been implemented as of December 31, 2010. The Company is currently in the process of amending the existing employment agreements which are expected to be executed in 2011. Until the new employment contracts have been formally and legally executed, the existing employment contracts of the Company are still in effect.
Service Compensation Plan
On March 1, 2005 the Board of Directors approved the Service Compensation Plan ("the Service Plan"), the purpose of which is to enhance the Company’s stockholder value and maximize the available capital resources of the company through allowing non monetary transactions whereby the issuance of stock is granted for services rendered. This program is expected to support the Company in building a long term sustainable revenue pipeline, a national sales agency and referral program as well as provide incentive to service providers to establish long term relationships with the Company and to encourage stock ownership by such individuals by providing them with a means to acquire a proprietary interest in the Company’s success through stock ownership. Under the Service Plan, service providers, consultants, mortgage agents and strategic alliance partners who provide services to the Company may be granted options or warrants to acquire restricted stock of the Company. The total number of shares reserved for issuance under the Service Plan is 5,000,000, the adequacy of which will be evaluated annually.
11. Additional Paid-in Capital - Warrants
On June 9, 2006, accredited investors including RE/MAX Ontario-Atlantic Canada Inc., its executives and franchisees purchased 2,112,470 units of the Company for aggregate proceeds of $2,112,470 as a part of private placement. Each unit consisted of one common share and one common share purchase warrant. The warrants are exercisable at a price 30% below the 30 day fair market price preceding the date such warrants are exercised. One-fifth of such warrants must be exercised (executed to purchase shares) within 30 days following each successive anniversary date of the private placement closing of the offering. Warrants expire if not exercised within 30 days of such anniversary date. The warrants were relatively valued at $732,605. The fair value of the warrants was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions: expected dividend yield of 0%, expected stock volatility of 64.7%, risk-free interest rate of 4.00% and an expected warrant life of 1 year. As of December 31, 2010, 233,078 of the warrants were exercised at an average price of $0.28. During the year ended December 31, 2010, 422,494 (2009 - 422,494) warrants expired with a value of $159,818 (2009 - $146,520) and have been allocated to Additional Paid in Capital. As of December 31, 2010, 1,456,898 warrants have expired, 233,078 warrants have been exercised and 422,494 warrants remain outstanding.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
12. Treasury Stock
During 2010, the Company acquired 38,800 common shares of the Company on the open market, at an average price of $0.05 per share for a total of $2,052. In 2007, the Company acquired 12,500 common shares of the Company, on the open market, at an average price of $0.60 per share for a total of $7,455. In 2006, the Company acquired 31,600 common shares of the Company, on the open market, at an average value of $0.56 per common share, for a total of $17,779. The total treasury stock held at December 31, 2010 is 82,900 (2009 - 44,100) at a total price of $27,286 (2009 - $25,234).
13. Occupancy Costs - Related Party
On August 1, 2007, the Company’s current office space was sold to a related party of the Chief Executive Officer, the Company`s majority shareholder. The Company’s lease agreement obligation was extended from two to five years. Please see note 17(f) for further details.
14. Income Taxes
The Company has paid no federal, state or provincial income taxes. As of December 31, 2010, the Company had net operating loss carry forwards for federal income tax reporting purposes of approximately $4,520,000 which, if unused, will expire in various years. The tax effect of the operating loss carry forwards and temporary differences at December 31, 2010 and 2009 are as follows:
The following is a reconciliation of the income tax benefit computed using the combined Canadian federal and provincial statutory rate of 31% (2009 - 33%) rate to the provision for income taxes:
Due to the losses incurred since inception and expected future operating results, management has determined that the Company does not meet the 'more likely than not' criteria that the deferred tax assets resulting from the tax losses available for carry forward and the differences in tax bases of assets will be realized through the reduction of future income tax payments, accordingly a 100% valuation allowance has been recorded for deferred income tax assets.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
14. Income Taxes(cont’d)
Effective January 1, 2007, we adopted the provisions of FASB Accounting Standards Codification Topic 740, Accounting for Uncertainty in Income Taxes. ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. The standard prescribes a recognition and measurement method for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The standard also provides guidance on recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes.
Based on a review of our tax positions, the Company was not required to record a liability for unrecognized tax benefits as a result of adopting ASC 740 on January 1, 2007. Further, there has been no change during the years ended December 31, 2010 and 2009. Accordingly, the company has not accrued any interest and penalties through December 31, 2010.
15. Earnings or Loss Per Share
The Company calculates basic earnings per common share using net income divided by the weighted-average number of common shares outstanding. The Company calculates diluted earnings per common share in the same manner as basic, except we use the weighted-average number of diluted common shares outstanding in the denominator, when the stock options and warrants are not anti-dilutive.
16. Comparative Figures
Certain figures for the year have been reclassified to conform to the current year’s financial statement presentation.
17. Commitments and Contingencies
Commitments
The Company has entered into agreements with various parties, whereby the Company is committed to issue compensatory warrants and stock as part of the “Service Compensation Plan” to mortgage agents and strategic alliance partners.
The effective date (“Effective Date”), when mentioned below, is the date the independent mortgage agent entered into a Mortgage Agent Agreement with the Company; or, is the date the RE/MAX Ontario-Atlantic Canada Inc. (“RE/MAX”) or Maxwell Realty Inc. (“Maxwell”) Franchisee entered into a Service Level Agreement with the Company and is also the date that the strike price (“Strike Price”) of the warrants is established. The strike price is the greater of $1 per share or the twenty day average closing price following the Effective Date.
Since the conversion ratio of dollar value of warrants into shares is fixed, but the share price fluctuates, the accrual to expense the value of the warrants earned by the mortgage agents and strategic alliance partners will fluctuate with the share price at the end of each period.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
The Company has entered into agreements with the following parties:
a) Independent Mortgage Agents/Loan Officers
Pursuant to a 5 year Mortgage Agent Agreement, the Company is committed to issuing warrants, at no cost, for common stock of the Company in two series to mortgage agents licensed with the Company based on their annual mortgage origination sales volume, which are summarized as follows based on current formulae:
Series I Warrants
“Average Volume”:
defined as the average best three out of five years in funded mortgage origination volume
Number of Warrants:
$8,257 worth of warrants divided by the Strike Price, per CAD $10 million in Average Volume, adjusted on a pro rata basis, no minimum or maximum thresholds. The warrants are convertible in common shares on a 1:1 basis.
Earnings Period:
Series I warrants are earned in the first 5 years following the Effective Date;
Additional Vestment:
all SERIES I warrants are fully vested on the 5th anniversary of the Effective Date
Determination Date:
5 year anniversary of Effective Date
Series II Warrants
“Annual Volume”:
defined as the total mortgage origination volume executed per 12 month period following the Effective Date and subsequent 12 month periods following the anniversary dates of the Effective Date
Number of Warrants:
$1,651 worth of warrants divided by the Strike Price per CAD $10 million in Annual Volume, adjusted on a pro rata basis, no minimum or maximum thresholds. The warrants are convertible in common shares on a 1:1 basis.
Earnings Period:
Series II warrants are earned in the first 5 years following the Effective Date
Additional Vestment:
All SERIES II Warrants fully vest 3 years following the Determination Date
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
17. Commitments and Contingencies(cont’d)
b) Maxwell Realty Inc.
Per a three year renewable agreement dated April 12, 2006 and pursuant to the execution of a service level agreement by the Maxwell Franchisee, the Company is committed to issuing to Maxwell at no cost, warrants for common stock of the Company based on referrals leading to funded mortgage origination volume. The Maxwell Warrant-Based Compensation Program, which issue warrants (“SERIES III Warrants”) that are divided amongst the Maxwell Franchisor, Franchisee and referring Sales Agent.
Annual Volume:
defined as the total funded mortgage origination volume from Maxwell lead referral executed per 12 month period following the Effective Date and subsequent 12 month periods following the anniversary dates of the Effective Date
Number of Warrants:
$3,000 worth of warrants divided by the Strike Price per CAD $10 million in Annual Volume, adjusted on a pro rata basis, no minimum or maximum thresholds. The warrants are convertible in common shares on a 1:1 basis.
Earnings Period:
Series III warrants are earned in the first 5 years following the Effective Date
Additional Vestment:
SERIES III warrants are fully vested on the fifth anniversary of the Effective Date
c) REMAX
Pursuant to the ten year licensing agreement dated January 30, 2006 and amended May 25, 2006, and pursuant to the execution of a one year renewable service level agreement by the RE/MAX franchisee, the Company had committed to issuing, at no cost, an aggregate of 528,118 common shares of the Company on each of the 10 year anniversary dates of the licensing agreement to those RE/MAX executives and franchisees that participated in the company’s private placement which closed on June 9, 2006. The REMAX agreement was cancelled in June 2009, therefore the Company is no longer committed to issuing common shares on the anniversary dates after June 2009.
d) The Company has signed lease agreements for computer and office equipment. Committed annual payments are as follows:
$
4,118
$
3,642
e) On February 8, 2007, the Company entered into a lease to rent office space in Calgary, Alberta, Canada for maintaining the Company's western Canada operations. The agreement is effective commencing May 1, 2007 for a five year term
Annual minimum lease payments (excluding utilities, taxes and common area maintenance expenses) are as follows:
$
10,515
$
3,505
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
17. Commitments and Contingencies (Cont’d)
f)
On March 27, 2007, the Company entered into a lease to rent office space in Concord, Ontario, Canada for maintaining the Company's Canadian head office. The agreement is effective commencing April 1, 2007 for a five year term.
Annual minimum lease payments (excluding utilities, taxes and common area maintenance expenses) are as follows:
$
105,365
$
61,463
h)
Contingencies
On January 25, 2010, MortgageBrokers.com Financial Group of Companies Inc. (“FGOC”), a wholly-owned subsidiary of MortgageBrokers.com Holdings Inc., commenced an action in the Ontario Superior Court of Justice in Ontario, Canada against a number of parties including Mortgage Brokers City Inc. and its principals, who were former mortgage agents of the Company. The statement of claim filed by FGOC asserted a number of claims in the aggregate amount of approximately CAD $19 million, arising out of loan agreements and mortgage agent license agreements with the defendants. In addition, claims were made against the defendants for passing off their brokerage for that of the plaintiffs including continuing to operate a brokerage after agreement termination, with all of the trappings they had been using to identify their brokerage when working for the plaintiffs. On April 5, 2010, the defendants counter claimed against a number of parties including FGOC in the Superior Court of Justice in Ontario, Canada. The counter claim asserted a number of claims in the amount of $550,000 arising out of commission holdbacks by the Company. The counter claim was settled following the Company paying out agent commissions of $223,734 and placing $373,244 with the Court pending a resolution to the Company’s original claim. The matter is still before the courts and is expected to be heard later in 2011. Company management will vigorously defend itself in this action and believes that the Company has no liability in this matter.
On March 5, 2010, FGOC commenced an action in the Ontario Superior Court of Justice in Ontario, Canada against Ralph Canonaco. The statement of claim filed by FGOC asserted the failed collection of a liquidated debt in the amount of $500,000 arising out of a brokerage agreement. On September 9, 2010, Ralph Canonaco and various other parties commenced an action in the Ontario Superior Court of Justice in Ontario, Canada against FGOC and various other related parties. The statement of claim filed by Ralph Canonaco et. al. asserted fraud, fraudulent misrepresentation and conspiracy in the amount of $35,000,000, unjust enrichment in the amount of $950,000, breach of trust and misappropriation of trust funds in the amount of $50,000, and breach of contract in the amount of $50,000, arising out of a brokerage agreement and the associated services provided. Ralph Canonaco et. al. via their counsel have communicated to the Company to not file a defence to the counter-claim as the parties would like to settle with the Company. The actions are currently stayed pending a mediation scheduled to be held in the summer of 2011. Company management will vigorously defend itself in this action and believes that the Company has no liability in this matter.
On February 2, 2011, HSBC Bank Canada commenced an action in the Court of Queen’s Bench of Alberta, Canada against various entities, including FGOC et. al. The statement of claim filed asserted claims of breach of agreement, conspiracy and concealment and is claiming $651,000 plus costs and interest arising out of a real estate transaction and mortgage funding. Company management will vigorously defend itself in this action and believes that the Company has no liability in this matter.
The Company is party to various other claims and proceedings arising in the normal course of business. Management does not expect the disposition of these matters to have a material adverse effect on the Company’s results of operations or financial condition.