UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED June 30, 2004
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission file number 000-27437
PARAGON FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 94-3227733 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
5000 Sawgrass Village Circle, 3rd Floor, Ponte Vedra Beach, FL 32082
(Address of principal executive offices and zip code)
(904) 285-0000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The total number of shares of the registrant’s common stock outstanding as of August 16, 2004: 64,066,743.
| PART I – FINANCIAL INFORMATION | ||||
| Item 1. |
||||
| Unaudited Condensed Consolidated Balance Sheets at June 30, 2004 and December 31, 2003 |
2 | |||
| 3 | ||||
| 4 | ||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
17 | ||
| Item 3. |
24 | |||
| Item 4. |
25 | |||
| PART II – OTHER INFORMATION | ||||
| Item 1. |
26 | |||
| Item 2. |
26 | |||
| Item 3. |
26 | |||
| Item 4. |
26 | |||
| Item 5. |
26 | |||
| Item 6. |
26 | |||
PART I – FINANCIAL INFORMATION
PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2004 AND DECEMBER 31, 2003
(Dollars in thousands, except share data)
| 2004 |
2003 * |
|||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 152 | $ | 70 | ||||
| Fees receivable |
84 | 80 | ||||||
| Prepaid and other current assets |
19 | 37 | ||||||
| Total current assets |
255 | 187 | ||||||
| Office property and equipment, net of accumulated depreciation of $49 and $27 |
112 | 132 | ||||||
| Goodwill |
822 | 822 | ||||||
| Other assets |
478 | 475 | ||||||
| Assets of discontinued operations |
— | 34,046 | ||||||
| TOTAL ASSETS |
$ | 1,667 | $ | 35,662 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: |
||||||||
| Short-term debt |
245 | 245 | ||||||
| Notes payable |
23 | 20 | ||||||
| Notes payable – related parties |
25 | 25 | ||||||
| Convertible debentures payable |
379 | 379 | ||||||
| Accounts payable |
465 | 290 | ||||||
| Accrued expenses – related parties |
59 | 59 | ||||||
| Accrued expenses – other |
361 | 514 | ||||||
| Total current liabilities |
1,557 | 1,532 | ||||||
| Long-term debt: |
||||||||
| Liabilities to formerly related parties, less current portion |
1,531 | — | ||||||
| Liabilities of discontinued operations |
26,154 | |||||||
| Total liabilities |
3,088 | 27,686 | ||||||
| Stockholders’ deficit: |
||||||||
| Preferred stock: Issuable in series, $0.0001 par value; 5,000,000 shares authorized: Series E, $1,000 stated value; 659 and 2,459 shares issued and outstanding, respectively |
— | — | ||||||
| Common stock, $0.0001 par value. 400,000,000 shares authorized: 64,066,743 and 116,396,478 shares issued and outstanding |
5 | 11 | ||||||
| Additional paid-in capital |
6,861 | 11,779 | ||||||
| Retained deficit |
(8,287 | ) | (3,964 | ) | ||||
| Cumulative comprehensive income |
— | 202 | ||||||
| Unearned stock-based compensation |
— | (52 | ) | |||||
| Total stockholders’ deficit |
(1,421 | ) | 7,976 | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT |
$ | 1,667 | $ | 35,662 | ||||
| * | Derived from audited consolidated financial statements filed in the Company’s 2003 Annual Report on Form 10-K. |
See accompanying notes to condensed consolidated financial statements.
2
PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Dollars in thousands, except share data)
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| Revenue: |
||||||||||||||||
| Loan origination fees |
$ | 637 | $ | 545 | $ | 1,219 | $ | 815 | ||||||||
| Interest, dividends, and other income |
— | — | — | — | ||||||||||||
| Total revenue |
637 | 545 | 1,219 | 815 | ||||||||||||
| Expenses: |
||||||||||||||||
| Salaries, commissions, benefits, and stock-based compensation |
571 | 466 | 1,369 | 993 | ||||||||||||
| Loan production costs |
38 | 48 | 47 | 59 | ||||||||||||
| General and administrative expenses |
207 | 558 | 443 | 591 | ||||||||||||
| Total expenses |
816 | 1,072 | 1,859 | 1,643 | ||||||||||||
| Operating loss |
(179 | ) | (527 | ) | (640 | ) | (828 | ) | ||||||||
| Interest expense, net |
25 | 100 | 43 | 209 | ||||||||||||
| Loss on disposal of segment (Note 2) |
102 | — | 102 | — | ||||||||||||
| Loss from continuing operations |
(306 | ) | (627 | ) | (785 | ) | (1,037 | ) | ||||||||
| Discontinued operations (Note 2): (Loss) income from discontinued operations before provision (benefit) for income taxes |
(666 | ) | 346 | (3,538 | ) | (167 | ) | |||||||||
| Net loss |
$ | (972 | ) | $ | (281 | ) | $ | (4,323 | ) | $ | (1,204 | ) | ||||
| Net Income Per Common Share - Basic and Diluted: |
||||||||||||||||
| Loss from continuing operations |
$ | (0.00 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | ||||
| (Loss) income from discontinued operations |
$ | (0.01 | ) | $ | 0.00 | $ | (0.03 | ) | $ | (0.00 | ) | |||||
| Basic earnings per share |
$ | (0.01 | ) | $ | (0.00 | ) | $ | (0.04 | ) | $ | (0.01 | ) | ||||
| Weighted average shares outstanding – basic and diluted |
99,037 | 116,146 | 107,642 | 106,961 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
3
PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Dollars in thousands)
| 2004 |
2003 |
|||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
| Net loss from continuing operations |
$ | (785 | ) | $ | (1,037 | ) | ||
| Adjustments to reconcile net loss to cash provided by operating activities: |
||||||||
| Depreciation |
22 | 9 | ||||||
| Loss on disposal of segment |
102 | — | ||||||
| Non-cash interest expense converted into preferred stock |
— | 13 | ||||||
| Stock-based compensation |
52 | 10 | ||||||
| Changes in operating assets and liabilities, net of acquisitions: |
||||||||
| Increase in fees receivable |
(4 | ) | (60 | ) | ||||
| Increases in prepaids and other assets |
16 | 12 | ||||||
| Decrease in accounts payable, accrued expenses and other current liabilities |
45 | 263 | ||||||
| Cash used by operating activities |
(552 | ) | (790 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
| Purchases of property and equipment |
(2 | ) | (98 | ) | ||||
| Cash acquired from purchases of business |
— | 43 | ||||||
| Proceeds from sale of websites |
30 | 48 | ||||||
| Cash used by investing activities |
28 | (7 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
| Proceeds from the issuance of warrants |
— | 13 | ||||||
| Proceeds from the issuance of debentures |
— | 231 | ||||||
| (Repayments of) proceeds from promissory notes |
(20 | ) | 160 | |||||
| Cash provided by financing activities |
(20 | ) | 404 | |||||
| Net cash provided by discontinued operations |
626 | 353 | ||||||
| Net increase in cash and cash equivalents |
82 | (40 | ) | |||||
| Cash and cash equivalents, beginning of period |
70 | 91 | ||||||
| Cash and cash equivalents, end of period |
$ | 152 | $ | 51 | ||||
See accompanying notes to condensed consolidated financial statements.
4
PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
NOTE 1. PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY – Paragon Financial Corporation (the “Company”) was incorporated in Delaware on August 27, 1999 under the name PRx Holdings, Inc. and operated as an online healthcare destination for commerce, content and community. The Company closed its online health store in March 2001. Shortly thereafter, the Company began the process of liquidating its online health store and seeking a merger partner as an alternative to complete liquidation.
Paragon Homefunding, Inc. (“Paragon Delaware”), a privately held, development-stage company based in Ponte Vedra Beach, Florida, was incorporated in Delaware on August 3, 2001, for the purpose of entering the financial services market through acquisitions. On May 31, 2002, the Company merged with Paragon Delaware.
Pursuant to the merger, the Company merged with and into Paragon Delaware, and issued 55,560,616 shares of common stock to the Paragon Delaware’s stockholders constituting 90% of the total shares of the Company’s common stock outstanding immediately after the merger. As a result of the merger, Paragon Delaware also assumed approximately $72 of the Company’s accrued liabilities, principally for legal services.
For financial reporting purposes, the merger has been accounted for as a recapitalization of Paragon Delaware with Paragon Delaware viewed as the accounting acquiror in what is commonly called a reverse acquisition. Accordingly, the financial statements presented before the merger are those of Paragon Delaware.
ACQUISITIONS - On February 2, 2003 the Company completed its merger with Paragon Homefunding, Inc. (“PHF”). PHF has been in the business of originating residential mortgage loans since 1998. Subject to the terms of the merger agreement, at closing, all of the outstanding shares of PHF’s common stock converted into 1,224,000 of shares of the Company’s common stock valued at $836 (approximately $0.6833 per share). Additionally, the Company issued promissory notes to the shareholders of PHF in the aggregate principal amount of $25. The promissory notes accrue interest at 4.92%.
The merger was accounted for as acquisitions pursuant to SFAS No. 141, Accounting for Business Combinations (“SFAS 141”). Accordingly, the Company’s results of operations include the operating results of these companies from the effective date of these mergers, February 1, 2003.
The Company’s unaudited condensed consolidated results of operations on a pro forma basis for the six
5
PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
NOTE 1. PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES (continued)
months ended June 30, 2003 as if it had consummated the merger with PHF and disposed of PGNF Home Lending Corp. (see Note 2) on January 1, 2003 are as follows (in thousands except per share data):