ITEM 1. BUSINESS
Overview
In operation since 2005, MortgageBrokers.com Holdings, Inc. (the “Company”, “MortgageBrokers.com”, “we”, “our” or “us”) is a mortgage brokerage operation 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 the best 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 2011, 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,
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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 95% of all received commission revenue is paid to the Company’s mortgage agents.
History
The Company 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.
Our Markets
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, Alberta and British Columbia.
Our Services and Distribution
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 95% 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. For the last couple of years the Company has cut some of its mortgage agents due to a lack of minimum mortgage origination volume.
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 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.
2011 Business Activities and Status of Publicly Announced Products and Services
Expanding upon our business model infrastructure, the Company’s focus through 2011 was towards the retention, recruitment and servicing of mortgage agents across Canada as well as a restructuring to ultimately reduce overhead expenses. 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 following provides further details highlighting our 2011 business activities and their status:
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At the beginning of 2011, we had two full time senior sales executives centrally supported by our Canadian sales president servicing sales territories across Canada, who divided their time between servicing existing agents in their territory, recruiting new books of business and promoting the Company. In May, 2011, the Company lost a senior sales executive responsible for western Canada as they pursued an alternative career path. Thereafter, sales management servicing sales territories across Canada was managed by our remaining sales management executive and our Canadian sales president servicing sales territories across Canada through the remainder of 2011.
Ø
Overall, we experienced a 26 percent decline in 2011 over 2010 in the number of licensed agents contracted with the Company. At December 31, 2011, we had 278 licensed mortgage agents operating exclusively under the Company’s brand. This net change in our national sales force was due in part to the recruitment of 96 new qualified mortgage agents throughout 2011 by our sales management team; and, the termination of approximately 193 mortgage agents either because they terminated their contracts with the Company in pursuit of contracts with competitors having more favorable commission structures or through a forced attrition program by the Company 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 while consuming Company sales management resources).
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In March 2010, the Company launched its’ Customer Relationship Management and performance management technology service to the national sales force for their use. At the end of 2011, the usage of the system by our sales agents exceeded 95%.
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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. 100% of our mortgage agents were converted to and using Compliance Workbench in December 2011.
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Through 2010, the Company continued to utilize a central services office where our mortgage agents could go for help with difficult to place mortgage transactions. The central services office was responsible for CAD $11.91 million in mortgage origination in 2011 which generated CAD $58.1 K in income for the Company after expenses, a 53% decrease over 2010 production ($25.1 million).
Our Industry
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 2011. 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 2011, describe the Canadian mortgage market within which our Company operates as follows:
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as of August 2011, there was CAD $1.08 trillion (2010: CAD $1.01 trillion , 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 economic uncertainty seems to have negatively affected home buying activity. However the year over year growth rate for 2011 remained strong at 7.2% which represents CAD $72 billion (as compared to 7.6% per year in 2010 representing CAD $71 billion and 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 or flat rates of 7.3% through 2012, 7.0 % in 2013;
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In 2011, based on survey results, on average, 27% of new mortgages were obtained with the use of a mortgage broker (32% took out new mortgages and 19% renewed or refinanced existing mortgages);
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As of September, 2011, the average resale house price in Canada is 11% higher than the pre-recession peak. By contrast, in the U.S., prices are one third below the pre-recession peak. That fact largely explains the different economic performances in Canada and the U.S.
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The rate of mortgage arrears in Canada increased during the recession, from 0.25% in 2005, but has recently eased slightly to 0.40%. It was last at these levels in 2000.
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Based on a survey, approximately 60% of mortgage holders in Canada have fixed rate mortgages and 31% have variable and adjustable rate mortgages (8% have combination mortgages);
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For homeowners, the estimated average value of their home is $316,000, and across all homeowners, the average mortgage amount is CAD $90,000 and average home equity line of credit is CAD $12,000.
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Overall, 22% of mortgages have an amortization of greater than 25 years
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%. 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 27% of the Canadian annual mortgage origination market in 2011 (30% two years prior in 2009). 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 97% of the total commission fees received), the development of brand and the provision of administrative and marketing services. It is management’s belief that the Company’s biggest challenge in 2011 is to figure out how to compete with other brokerages offering mortgage agents higher commission splits while continuing to offer a high level of service to our national sales network.
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. Unfortunately, at the present time, the value and liquidity of our Company’s stock is undermining our long term value proposition.
Our centralized services, as more fully described in the previous section describing our distribution methods for our services and again expanded in the previous section describing the status of our products and services to our agents, reduces 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. Whether this model will work under current economic conditions remains to be proven.
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. However, under current economic conditions, executing a long-term vision has been difficult. Mortgage origination has decreased 26% since 2009, revenue has decreased 20% since 2009 and our agent count has decreased by 35% since 2009.
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 16,667 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, 2011, following a 30 to 1 reverse stock split effected on November 14, 2011, the Company accrued, stock-based compensation equal to 55,485 common shares at $0.25 per share totaling $13,872 which is payable to our existing mortgage agents and referral partners.
Intellectual Property
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:
This mark is currently the object of a legal challenge by a group of mortgage brokers from Ottawa, Ontario as being too generic to warrant being a registered trademark. The Company is vigorously defending the challenge to its registered trademark. See Item 3 on Legal Proceedings elsewhere in this Form 10K for more details.
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 85-95% 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 10% 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, 2011, subsequent to a 30 to 1 reverse stock split effected on November 14, 2011, the Company accrued stock-based compensation payable to Maxwell. The accrual related to mortgage referral was comprised of 1,183 common shares at $0.25 per share. The valuation of such accrual was based upon the December 31, 2011 closing price of the Company’s stock and resulted in a payable to Maxwell equal to $296. 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. In 2011, the Company sold three franchises with long term contracts. The Company will continue to aggressively sell franchise opportunities in Canada to stabilize its 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 currently hold licenses in good standing in the provinces of Newfoundland, Nova Scotia, New Brunswick, Prince Edward Island, Ontario, Alberta and British Columbia. 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 CDN $5 million per incident and up to CDN $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.
Government Regulations
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 (“CRA”) 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 CRA. In March 2010, a press release from CRA 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.
Employees
At December 31, 2011, our Company had 9 full-time employees and 1 full-time contract staff for a total of 10 full-time equivalent staff. In late 2010, the Company had outsourced payroll and associated administrative services to a company under common control. In 2011, salary and benefit expenses increased by 79% as compared to 2010, while the number of full time equivalent staff decreased from 12 staff in 2010 to 10 staff in 2011. The increase in costs was related to additional allocated services that the Company incurred as it commenced to restructure its corporate organization and operations for the long term viability of its’ Canadian operations. A one-time bonus was declared for the Company’s Chief Executive Officer of $437,094.
Other Information
The Company’s corporate offices are at 5310-100 King Street West, 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.
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 a smaller reporting company.
ITEM 2.
ITEM 2. PROPERTIES
The Company’s corporate offices are located 5310-100 King Street West, Toronto, Ontario, CANADA, M5X 1E3. These premises are rented on a month to month basis.
The Company rents premises on a month to month basis at 6505 Mississauga Road, Suite A, Missisauga, Ontario, L5N 1A6, where back-office operations are carried out.
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 lease for this premises, which ends on April 30, 2012, has been extended for 60 days to June 30, 2012. Thereafter, the office and associated services will be amalgamated into our Mississauga, Ontario premises and operations.
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 and which has continued to be renewed. The current term expires on October 31, 2012.
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 Mike Hapke, Frank Napolitano, Jeff Cody and York Polk 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 CDN $19 million, arising out of loan and promissory note agreements and advances made to these individuals and clauses in mortgage agent license agreements with the defendants in particular non Solicitation of Mortgage agents. 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 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 2012. The Company reasonably expects, at a minimum, to recover a portion, if not all of the funds it placed in trust with the Courts.
Mortgage Brokers City has also challenged a MortgageBrokers.com Holdings, Inc. registered trademark in the Federal Court of Canada. The claim is based on the ground that the trademark is “not distinctive” as defined under the Trade-Marks Act and should not have been registered. The Company is vigorously defending the challenge to its registered trademark. This litigation is related to the afore mentioned Mortgage Brokers City Inc. litigation in that an aspect of MortgageBrokers.com’s claim against Mortgage Brokers City is that they infringed upon MortgageBrokers.com’s registered trademarks.
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.
On December 21, 2011, FGOC filed a statement of defense and counterclaim FGOC countered for the following: (i) $500,000 in liquidated damages, plus 6% per annum interest; (ii) approximately $724,000 in damages owed pursuant to an agreement; and (iii) $2.5 million in interest and punitive damages. Company management will vigorously defend itself in this action and believes that the Company has no liability in this matter.
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 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. MINE SAFETY DISCLOSURES
None.
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”.
On July 28, 2011, the Board and majority stockholders of the Company approved a resolution to effect a thirty for one reverse stock split to be effected September 19, 2011. The principle effect of the reverse split was that the number of shares of common stock issued and outstanding was reduced from 38,854,099 to 1,295,136 with some fractional shares paid out in cash.
Price Range of Common Stock
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
As of April 16, 2012, there were 114 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 2011 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, 2011, 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, 2012.
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 166,667, the adequacy of which is evaluated annually.
Recent Sales of Unregistered Securities
None.
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
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, 2011 and 2010. The following information should be read in conjunction with the audited consolidated financial statements for the period ending December 31, 2011 and notes thereto appearing elsewhere in this Form 10K.
Plan of Operations
As noted in the past three Form 10Q reports for 2011, management has been actively exploring restructuring options to reduce overhead expenses. Based upon the 2011 financial results of operations, the Company Board of Directors, based on:
1.
current economic conditions and the ongoing loss of cash from operating activities;
2.
the high costs associated with driving a high-service value proposition in an eroding margin brokerage marketplace in Canada;
3.
current equity market conditions not being favorable for a publicly traded mortgage brokerage operation limiting the liquidity of our stock and company capitalization; and,
4.
the increasingly high costs associated with administering a publicly traded company,
has decided to privatize our Canadian operations and amalgamate them with a private company under common control. The Company is actively seeking candidate companies to for a reverse merger transaction or strategic acquisition. At the present time, the Company is in discussion with two candidate groups to complete the contemplated transaction. There is no timetable for completing this process; however, management will make best efforts to complete this restructuring by June 30, 2012.
Results of Operations
The following summarize material trends and outlooks related to our comparative income statement:
1) Gross revenue decreased by 6% from 2010 to $13,498,395;
2) Operating expenses increased in 2011 by 2% to $15,063,403 as compared with 2010; and,
3) We reported a loss of $1,565,008 in 2011 as compared to a loss of $494,009 in 2010.
Unusual or Infrequent Events that affect Reported Income
a)
The Company outsourced its payroll and support administration to a company under common control. Additionally, as part of a process to reorganize the operating subsidiaries and reduce overhead, the Company experienced one time service allocation charges associated with the building of strategic and financial plans and meeting and negotiating with candidate acquisition candidates for the public shell and associated legal expenses.
b)
The Company accrued a one-time bonus of $437,094 in 2011 (2010: $0) for the Company’s Chief Executive Officer.
c)
Financial market conditions in 2011 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 2011 and 2010.
Revenue Trend Analysis
Gross revenue in 2011 decreased by 6% from 2010 to $13,498,395. Management believes our negative revenue growth experienced between 2011 and 2011 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 26% in 2011 as compared to 2010 which would have had a direct 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 92% of the Company’s revenue in 2011 came from origination commission fees, 7% 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 by 24% from 2010 to 2011. Management attributes this to general market volatility; the lack of large real estate financings (and associated broker fees) that have taken place during the economic down turn; and, a decrease in our agent count.
c.
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 2011, the Company earned CDN $131,917 from creditor insurance sales which is flat to sales reported in 2010.
2.
In 2011, approximately 62.5% of the Company’s revenue came from multi-product depository banks and trust institutions. 32.6% of the Company’s revenue came from monoline lenders who have a single product offering and sell exclusively through the mortgage broker sales channel. 4.9% 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. Canadian mortgage brokers lost 5 depository banks and trusts since 2008 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 little 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 99.2% of our mortgage origination volume is sourced directly through our mortgage broker sales channel which consists of 278 mortgage agents (as further described in Item 1 of this Form 10-K). Approximately 0.8% of our mortgage origination volume in 2011 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 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.
72.6% of our volume in 2011 was originated from the Province of Ontario, 21.6% our volume in 2011 was originated from the Province of Alberta and 5.8% our volume in 2011 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 negative growth in mortgage origination in Ontario which declined by approximately 16% in 2011 over 2010. Mortgage origination in Alberta, which has been declining since 2008 and experienced its greatest negative growth rate in 2010 of about 15%, increased by 8% in 2011 over 2010 levels. Mortgage origination in Atlantic Canada, which has been declining since 2009 and experienced its greatest negative growth rate in 2010 of about 32%, declined by 6% in 2011 as compared to 2010 origination volume. Management believes that the downturn in mortgage origination volume in Alberta and Atlantic Canada in 2011 over 2010 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. Additionally, these regions are where the Company experienced the most attrition of registered mortgage agents.
e.
If the Company wishes to grow origination in these territories, it is management’s belief that significant investment must be made by increasing commission splits and increasing sales expenses.
Expense Trend Analysis
The Company’s operating expenses was relatively flat in 2011 over 2010. 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:
·
79% of the operating expenses in 2011 were associated with agent commissions. Agent commission fees as a percent of revenues were fairly consistent between periods increasing by 2% from 2010 to 2011.
·
16% of the operating expenses in 2011 were associated with salaries and benefits. Costs associated with salaries and benefits increased by 79% compared to 2010 related primarily to additional costs associated with the Company outsourcing its payroll administration to a service company under common control; as part of a process to reorganize the operating subsidiaries and reduce overhead, the Company experienced one time service allocation charges associated with the building of strategic and financial plans and meeting and negotiating with candidate acquisition candidates for the public shell and associated legal expenses; and, a one-time bonus of $437,094 was accrued in 2011 (2010: $0) for the Company’s controlling shareholder and Chief Executive Officer.
·
General and administrative expenses between periods decreased by 43% from 2010 to 2011, associated with an overall decrease in legal fees for the year and a decrease in operational overhead expenses.
·
Occupancy costs increased 48% from 2010 to $224,531 and is related, in part, to moving our corporate head office to another rent location.
Liquidity
At December 31, 2011, we had $909,491 in cash; $26,012 in prepaid expenses, $62,909 in equipment and $1,042 in capital leased equipment totaling $999,454 in assets. Comparatively, 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 totaling $883,248 in assets.
Management makes the following comments regarding the most significant factors affecting Company liquidity and their measured trends over the reporting period as compared to 2010:
a)
Cash and cash equivalents increased by 21% from 2010 to $909,491. This was primarily due to related party cash advances of $1,975,409 in 2011 to cover the net cash lost from operating activities of $1,796,795.
b)
Prepaid expenses decreased by 41% from 2010 to $26,012 associated with a general decline in business growth. There is no trend in pre-paid expenses although as the Company grows it is expected to increase. Prepaid expenses are based on the amount in a given point in time based on current business activities at that time. The prepaid expenses are associated with ongoing legal expenses and insurance policies.
d)
Accounts payable and accrued liabilities decreased by 16% to $1,067,351 as compared with 2010 primarily associated with paying down accounts payable and a decrease in agent commissions work in progress payables.
e)
The Company’s employee taxes payable decreased by 37% between reporting periods as the Company continued to pay down its taxes payable via an ongoing payment plan the Company negotiated with CRA.
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.
Capital Resources
Total revenue for the period ending December 31, 2011 was $13,498,395 (December 31, 2010: $14,287,100). The Company realized net cash loss from operating activities of $1,796,795. Due to an approximate decrease of 13% in the Company’s mortgage origination during the reporting period as compared to 2010, with an increase of 2% in the Company’s total operating expenses, the Company experienced a significant net cash loss from operating activities. The Company increased its total cash and cash equivalent position at the end of 2011 by $157,069 or 21% as compared to the beginning of 2011. 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.
Off-Balance Sheet Arrangements
None
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.
The following are new pronouncements in accounting policies that may affect the company’s accounting policies:
Recent Accounting Pronouncements
In May 2011, the FASB issued an accounting standards update that clarifies and amends the existing fair value measurement and disclosure requirements. This guidance will be effective prospectively for interim and annual periods beginning after December 15, 2011, which will be the Company’s fiscal year 2012, with early adoption prohibited. The Company does not expect that the adoption of the guidance will have a material impact on the Company’s consolidated financial statements.
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
None.
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, 2011, 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, 2011 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, 2011. 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 registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm as we are a smaller reporting company and not required to provide the 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, 2011, 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
Director and Executive Officer
The following table sets forth, as of December 31, 2011, 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.
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, 2011, the names and ages of our Canadian operations management team.
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 multimillion 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.
Daniel Putnam employment was terminated with the company on April 6, 2012.
Employment Agreements
The Company has no employment agreements with its officers or director.
Family Relationships
None.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years:
·
been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
·
had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
·
been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
·
been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
·
been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
·
been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the Commission.
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.
Section 16(a) Beneficial Ownership Reporting Compliance
Under Section 16(a) of the Exchange Act, our directors and certain of our officers, and persons holding more than 10 percent of our common stock are required to file forms reporting their beneficial ownership of our common stock and subsequent changes in that ownership with the United States Securities and Exchange Commission.
Mr. Haditaghi has yet to file a Form 5 for 2010 and 2011 but plans to in the very near future.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following summary compensation table sets forth all compensation awarded to, earned by, or paid to the named executive officers paid by us during the years ended December 31, 2011, and 2010.
Compensation of Directors
No additional compensation was 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, 2011, 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
The following table sets forth certain information regarding our shares of common stock beneficially owned as of April 16, 2012, for (i) each stockholder known to be the beneficial owner of 5% or more of our outstanding shares of common stock, (ii) each named executive officer and director, and (iii) all executive officers and directors as a group. A person is considered to beneficially own any shares: (i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (ii) of which such person has the right to acquire beneficial ownership at any time within 60 days through an exercise of stock options or warrants. Unless otherwise indicated, voting and investment power relating to the shares shown in the table for our directors and executive officers is exercised solely by the beneficial owner or shared by the owner and the owner’s spouse or children.
For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of common stock that such person has the right to acquire within 60 days of April 16, 2012. For purposes of computing the percentage of outstanding shares of our common stock held by each person or group of persons named above, any shares that such person or persons has the right to acquire within 60 days of April 16, 2012 is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership.
(1)
Unless otherwise provided, the address of all beneficial owners is c/o Mortgagebrokers.com Holdings, Inc., 100 King Street West, Suite 5310, Toronto, Ontario M5X 1E3.
(2)
Based on 1,294,993 shares of common stock issued and outstanding as of April 16, 2012.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Advances
As of December 31, 2011, the controlling shareholder and Chief Executive Officer of the Company and a company controlled by this same individual had advanced $2,409,646 (as at December 31, 2009 - $482,832) to fund the working capital of the Company. The advances are unsecured, non-interest bearing and due on demand.
Shared services
During 2011, Pacific Mortgage Group Inc. (“PMGI”), charged the Company rent of $157,500 (2010 - $Nil). PMGI and the Company are under common control. The related cost is included in occupancy costs on the consolidated statement of operations and comprehensive (loss).
Broker Reward Programs
Radius Financial Inc. (“Radius”), a company under common control, funds a rewards program to compensate mortgage brokers under contract to the Company. During the year ended December 31, 2011, the Company received broker rewards of $24,887 (2010 - $Nil) for its brokers from Radius which is included in accounts payable and accrued liabilities on the consolidated balance sheets.
Mortgage loan origination
The Company originates mortgages through its mortgage broker networks, earning the commissions related to these mortgage originations. During the year ended December 31, 2011, Radius paid $410,000 (2010- $Nil) in broker commissions to the Company. These amounts are recorded as revenues on the consolidated statement of operations and are calculated and paid on normal commercial terms.
Bonus
During the year ended December 31, 2011, the Company declared a bonus of $437,094 (2010 - $Nil), to the controlling shareholder and Chief Executive officer. The related cost is included in salaries and benefits on the consolidated statement of operations and comprehensive (loss).
These transactions are entered into in the normal course of business and are recorded at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
Director Independence
Because our common stock is not currently listed on a national securities exchange, we have used the definition of “independence” of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the Company or any other individual having a relationship which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be considered independent if:
·
the director is, or at any time during the past three years was, an employee of the company;
·
the director or a family member of the director accepted any compensation from the company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service);
·
a family member of the director is, or at any time during the past three years was, an executive officer of the company;
·
the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the company made, or from which the company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions);
·
the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the company served on the compensation committee of such other entity; or the director or a family member of the director is a current partner of the company’s outside auditor, or at any time during the past three years was a partner or employee of the company’s outside auditor, and who worked on the company’s audit.
We do not have any independent directors. We do not have an audit committee, compensation committee or nominating committee.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
For the Company's fiscal year ended December 31, 2011, we have incurred $67,745 for professional services rendered for the audit and reviews of our financial statements.
For the Company's fiscal year ended December 31, 2010, we had incurred $86,500 for professional services rendered for the audit and reviews of our financial statements.
Audit Related Fees
For the Company's fiscal year ended December 31, 2011, there were no other audit related fees.
Tax Fees
The Company has accrued expenses in 2011 for professional services rendered for Canadian tax compliance, tax advice, and tax planning in the amount of $5,867 for 2008, 2009 and 2010 inclusive.
All Other Fees
None.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
(1)
Financial Statements:
The audited balance sheet of the Company as of December 31, 2011 and December 31, 2010, the related condensed statements of operations, changes in stockholders’ deficiency and cash flows for the years then ended, the footnotes thereto, and the report of McGovern, Hurley, Cunningham, LLP., independent auditors, are filed herewith.
(2)
Financial Schedules:
None
Financial statement schedules have been omitted because they are either not applicable or the required information is included in the financial statements or notes hereto.
(3)
Exhibits:
The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Report.
(b) The following are exhibits to this Report and, if incorporated by reference, we have indicated the document previously filed with the SEC in which the exhibit was included.
Certain of the agreements filed as exhibits to this Report contain representations and warranties by the parties to the agreements that have been made solely for the benefit of the parties to the agreement. These representations and warranties:
·
may have been qualified by disclosures that were made to the other parties in connection with the negotiation of the agreements, which disclosures are not necessarily reflected in the agreements;
·
may apply standards of materiality that differ from those of a reasonable investor; and
·
were made only as of specified dates contained in the agreements and are subject to subsequent developments and changed circumstances.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date that these representations and warranties were made or at any other time. Investors should not rely on them as statements of fact.
The following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.
(1)
Filed as an exhibit on Form SB-2 with the SEC on June 2, 2003.
(2)
Filed as an exhibit on Form 10-KSB with the SEC on March 31, 2005.
In accordance with SEC Release 33-8238, Exhibit 32.1 is being furnished and not filed.
* Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
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
President and Secretary
(Principal Executive Officer)
(Principal Financial Officer)
Dated: April 16, 2012
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 16, 2012
Alex Haditaghi
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
AUDITED
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
CONTENTS
2005 Sheppard Avenue East, Suite 300
Toronto, Ontario
M2J 5B4, Canada
Phone 416-496-1234
Fax 416-496-0125
Web www.mhc-ca.com
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 at December 31, 2011 and 2010 and the related statements of operations and comprehensive (loss), stockholders’ deficit and cash flows for each of the years in the two-year period ended December 31, 2011. Mortgagebrokers.com Holdings, Inc. and Subsidiaries’ management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
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 consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for purpose of 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, 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 of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated 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 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
TORONTO, Canada
April 13, 2012
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 31, 2011 and 2010
(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)
Years Ended December 31, 2011 and 2010
(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, 2011 and 2010
(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, 2011 and 2010
(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, 2011 and 2010
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, 2011, the Company generated a net loss of $1,565,008 (2010 - $494,009). 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 could result in a significant dilution in the equity interests of current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase 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 the 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, 2011 and 2010
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
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, 2011, 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, 2011 and 2010
2. Summary of Significant Accounting Policies (continued)
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, 2011 and 2010
2. Summary of Significant Accounting Policies (continued)
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 May 2011, the FASB issued an accounting standards update that clarifies and amends the existing fair value measurement and disclosure requirements. This guidance will be effective prospectively for interim and annual periods beginning after December 15, 2011, which will be the Company’s fiscal year 2012, with early adoption prohibited. The Company does not expect that the adoption of the guidance will have a material impact on the Company’s consolidated financial statements.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
3. Equipment, net
4. Equipment Under Capital Leases
The equipment under the capital leases is depreciated on a 30% declining balance.
5. Advances from Related Party
As of December 31, 2011, the controlling shareholder and Chief Executive Officer of the Company and a company controlled by this same individual had advanced $2,409,646 (as at December 31, 2010 - $482,832) to fund the working capital of the Company. The advances are unsecured, non-interest bearing and due on demand.
6. 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.
7. Stock-based Compensation Accrual
The Company has accrued expenses for stock-based compensation:
a.
As of December 31, 2011, the Company has accrued, as stock-based compensation payable, 16,433 (2010 - 16,433) common shares at a price of $0.25 (2010- $0.45) per share for a total of $4,108 (2010- $7,395) payable to certain parties whose agreement was cancelled in 2009.
b.
As of December 31, 2011, the Company has accrued, as stock-based compensation payable, 55,485 (2010 - 49,968) common shares at a price of $0.25 (2010- $0.45) per share for a total of $13,872 (2010- $22,486) payable to parties referred to in notes 14a and 14b.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
8. 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, 2011.
Common Stock
On November 9, 2010, the Company cancelled 136,167 common shares. The Company received signed agreements from various employees agreeing to cancel 136,167 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 70,416 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 $30.00 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:
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, 2011, 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, 2011. Until the new employment contracts have been formally and legally executed, the existing employment contracts of the Company are still in effect.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
8. Capital Stock (continued)
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 166,667, the adequacy of which will be evaluated annually.
9. Additional Paid-in Capital - Warrants
On June 9, 2006, accredited investors including RE/MAX Ontario-Atlantic Canada Inc., its executives and franchisees purchased 70,416 units of the Company for aggregate proceeds of $2,112,470 as a part of a 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% and an expected warrant life of 1 year. As of December 31, 2011, 7,770 of the warrants were exercised at an average price of $8.40. During the year ended December 31, 2011, 14,083 (2010 - 14,083) warrants expired with a value of $175,365 (2010 - $159,818) and have been allocated to Additional Paid in Capital. As of December 31, 2011, 62,646 warrants have expired, 7,770 warrants have been exercised and no warrants remain outstanding.
10. Treasury Stock
During 2010, the Company acquired 1,293 common shares of the Company on the open market, at an average price of $1.50 per share for a total of $2,052. In 2007, the Company acquired 417 common shares of the Company, on the open market, at an average price of $18 per share for a total of $7,455. In 2006, the Company acquired 1,053 common shares of the Company, on the open market, at an average value of $16.80 per common share, for a total of $17,779. The total treasury stock held at December 31, 2011 is 2,763 (2010 - 2,763) at a total price of $27,286 (2010 - $27,286).
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
11. Income Taxes
The Company has paid no federal, state or provincial income taxes. As of December 31, 2011, the Company had net operating loss carry forwards for federal income tax reporting purposes of approximately $5,833,000 which, if unused, will expire in various years beginning in 2015. The tax effect of the operating loss carry forwards and temporary differences at December 31, 2011 and 2010 are as follows:
The following is a reconciliation of the income tax benefit computed using the combined Canadian federal and provincial statutory rate of 28% (2010 - 31%) 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.
Effective January 1, 2007, the Company 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. The Company considers many factors when evaluating and estimating the tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes.
Based on a review of the tax positions, the Company was not required to record a liability for unrecognized tax benefits as a result of adopting ASC 740. Further, there has been no change during the years ended December 31, 2011 and 2010. Accordingly, the Company has not accrued any interest and penalties through December 31, 2011.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
12. 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.
13. Comparative Figures
The financial statements have been retroactively reclassified to reflect a 30 to 1 reverse stock split that occurred on
November 14, 2011. Such reclassifications had no impact on net (loss) and total comprehensive (loss).
14. 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 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 $30 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, 2011 and 2010
14. Commitments and Contingencies (continued)
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, 2011 and 2010
14. Commitments and Contingencies (continued)
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) The Company has signed lease agreements for computer and office equipment. Committed annual payments are as follows:
$
3,601
d) 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:
$
3,465
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
14. Commitments and Contingencies (continued)
e)
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 $19,000,000 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 counterclaim asserted a number of claims in the amount of $550,000 arising out of commission holdbacks by the Company. The counterclaim 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. 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. On December 21, 2011, FGOC filed a statement of defence and counterclaim. FGOC countered for the following: (i) $500,000 in liquidated damages, plus 6% per annum interest; (ii) approximately $724,000 in damages owed pursuant to an agreement; and (iii) $2,500,000 in interest and punitive damages. 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.
MORTGAGEBROKERS.COM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
15. Related Party Transactions
a)
Shared services
During 2011, Pacific Mortgage Group Inc. (“PMGI”), charged the Company rent of $157,500 (2010 - $Nil). PMGI and the Company are under common control. The related cost is included in occupancy costs on the consolidated statement of operations and comprehensive (loss).
b)
Broker Reward Programs
Radius Financial Inc. (“Radius”), a company under common control, funds a rewards program to compensate mortgage brokers under contract to the Company. During the year ended December 31, 2011, the Company received broker rewards of $24,887 (2010 - $Nil) for its brokers from Radius which is included in accounts payable and accrued liabilities on the consolidated balance sheets.
c)
Mortgage loan origination
The Company originates mortgages through its mortgage broker networks, earning the commissions related to these mortgage originations. During the year ended December 31, 2011, Radius paid $410,000 (2010- $Nil) in broker commissions to the Company. These amounts are recorded as revenues on the consolidated statement of operations and are calculated and paid on normal commercial terms.
d)
Bonus
During the year ended December 31, 2011, the Company declared a bonus of $437,094 (2010 - $Nil), to the controlling shareholder and Chief Executive officer. The related cost is included in salaries and benefits on the consolidated statement of operations and comprehensive (loss).
The transactions are entered into in the normal course of business and are recorded at the exchange amount, which is the amount of consideration established and agreed to by the related parties.