Attached files
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 September 30, 2009
|
|
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File Number 33-11986-LA
TAXMASTERS, INC. | ||
(Exact
name of registrant as specified in its charter)
|
NEVADA
|
91-2008803
|
|||
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|||
incorporation
or organization)
|
Identification
No.)
|
900 Town & Country Lane, Suite 400, Houston, TX 77024 | ||
(Address
of principal executive offices)
|
(281) 497-5937 | ||
(Registrant’s telephone number) |
Indicate
by check mark whether the registrant: (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the 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 o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a small reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | ||
Non-accelerated filer o | Smaller reporting company x |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
number of shares of issuer’s outstanding common stock, $0.001 par value, as of
November 23, 2009 was 339,117,105.
TAXMASTERS,
INC.
QUARTERLY
REPORT ON FORM 10-Q
QUARTER
ENDED SEPTEMBER 30, 2009
TABLE OF
CONTENTS
PART
I. FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited) | ||
Balance
Sheets as of September 30, 2009 and December 31, 2008
|
3
|
|
Statements
of Operations for the three and nine months ended September 30, 2009 and
2008
|
4
|
|
Statements
of Cash Flows for the nine months ended September 30, 2009 and
2008
|
5
|
|
Statement
of Stockholders’ Deficit for the nine months ended September 30,
2009
|
6
|
|
Notes
to Financial Statements
|
7
|
|
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations |
15
|
|
Item 4 - Controls and Procedures |
23
|
PART
II. OTHER INFORMATION
Item
1 - Legal Proceedings
|
24
|
Item
2 - Unregistered Sales of Equity Securities and Use of
Proceeds
|
24
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Item
3 - Defaults Upon Senior Securities
|
24
|
Item
4T - Submission of Matters to a Vote of Security
Holders
|
24
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Item
5 - Other Information
|
24
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Item
6 - Exhibits
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24
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SIGNATURES
|
25
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CERTIFICATIONS
|
|
2
PART I -
FINANCIAL INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
TaxMasters,
Inc.
BALANCE
SHEETS
As
of September 30, 2009 and December 31, 2008
(Unaudited)
September
30,
2009
|
December
31,
2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 4,636,172 | $ | 3,683,467 | ||||
Short-term
investments
|
735,502 | 306,414 | ||||||
Accounts
receivable trade, net
|
12,638,002 | 5,722,585 | ||||||
Deferred
tax asset
|
4,239,847 | - | ||||||
Note
receivable
|
400,000 | - | ||||||
Total
current assets
|
22,649,523 | 9,712,466 | ||||||
PROPERTY
AND EQUIPMENT, net
|
1,522,792 | 192,074 | ||||||
INVESTMENTS
|
- | 413,168 | ||||||
OTHER
ASSETS
|
17,000 | 17,000 | ||||||
TOTAL
ASSETS
|
$ | 24,189,315 | $ | 10,334,708 | ||||
LIABILITIES AND STOCKHOLDERS'
DEFICIT
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable and accrued expenses:
|
$ | 1,553,448 | $ | 1,764,996 | ||||
Accounts
payable related parties
|
385,000 | - | ||||||
Deferred
revenue
|
7,278,258 | 8,942,759 | ||||||
Capital
lease obligation
|
365,349 | 71,706 | ||||||
Note
payable to related party
|
1,000,000 | |||||||
Total
current liabilities
|
10,582,055 | 10,779,461 | ||||||
LONG
TERM DEBT
|
||||||||
Capital
lease obligations, net of current portions
|
1,111,838 | 139,193 | ||||||
Deferred
rent, net of current portions
|
257,625 | 119,888 | ||||||
Deferred
revenue, net of current portions
|
16,019,478 | 7,954,266 | ||||||
Note
payable to related party, net current portion
|
4,773,526 | - | ||||||
Total
liabilities
|
32,744,522 | 18,992,808 | ||||||
COMMITMENTS
AND CONTIGENCIES
|
||||||||
STOCKHOLDERS'
DEFICIT
|
||||||||
Preferred
stock, convertible, $0.001 par value,
|
||||||||
500,000,000
shares authorized, 1,000 shares issued
|
||||||||
and
outstanding at September 30, 2009
|
1 | 1 | ||||||
Common
stock, $0.001 par value, 1,000,000,000
|
||||||||
authorized,
338,787,105 and 301,000,000 shares issued and
|
||||||||
outstanding
at September 30, 2009 and December 31, 2008, respectively
|
338,787 | 301,000 | ||||||
Additional
paid-in capital
|
1,239,542 | (301,001 | ) | |||||
Accumulated
deficit
|
(10,133,537 | ) | (8,658,100 | ) | ||||
Total
stockholders' deficit
|
(8,555,207 | ) | (8,658,100 | ) | ||||
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$ | 24,189,315 | $ | 10,334,708 |
See accompanying notes to financial
statements.
3
TaxMasters,
Inc.
STATEMENTS
OF OPERATIONS
(Unaudited)
THREE
MONTHS ENDED
|
NINE
MONTHS ENDED
|
|||||||||||||||
SEPTEMBER
30,
|
SEPTEMBER
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
REVENUES,
net
|
$ | 8,212,414 | $ | 7,975,655 | $ | 26,970,767 | $ | 14,385,985 | ||||||||
OPERATING
COSTS AND EXPENSES:
|
||||||||||||||||
Selling,
general and administrative expenses
|
6,097,665 | 3,538,358 | 13,831,942 | 7,982,027 | ||||||||||||
Compensation
|
4,660,630 | 1,902,082 | 11,119,290 | 5,176,418 | ||||||||||||
Depreciation
|
57,387 | 26,659 | 94,617 | 79,978 | ||||||||||||
Total
operating costs and expenses
|
10,815,682 | 5,467,099 | 25,045,849 | 13,238,423 | ||||||||||||
NET
INCOME (LOSS) FROM OPERATIONS
|
(2,603,268 | ) | 2,508,556 | 1,924,918 | 1,147,562 | |||||||||||
OTHER INCOME
(EXPENSE):
|
||||||||||||||||
Interest
income
|
10,531 | 15,031 | 31,893 | 19,381 | ||||||||||||
Interest
expense
|
(11,775 | ) | (29,068 | ) | (31,153 | ) | (29,068 | ) | ||||||||
Total
other income (expense)
|
(1,244 | ) | (14,037 | ) | 740 | (9,687 | ) | |||||||||
NET INCOME
(LOSS) BEFORE INCOME TAXES
|
(2,604,512 | ) | 2,494,519 | 1,925,658 | 1,137,875 | |||||||||||
Income
tax benefit
|
(4,239,847 | ) | - | (4,239,847 | ) | - | ||||||||||
NET
INCOME
|
$ | 1,635,335 | $ | 2,494,519 | $ | 6,165,505 | $ | 1,137,875 | ||||||||
EARNINGS
PER COMMON SHARE
|
||||||||||||||||
Basic
|
$ | 0.01 | $ | 0.01 | $ | 0.02 | $ | 0.00 | ||||||||
Diluted
|
$ | 0.01 | $ | 0.01 | $ | 0.02 | $ | 0.00 | ||||||||
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES
|
||||||||||||||||
Basic
|
324,411,448 | 301,000,000 | 308,889,572 | 301,000,000 | ||||||||||||
Diluted
|
324,411,448 | 301,000,000 | 308,889,572 | 301,000,000 |
See
accompanying notes to financial statements.
4
TaxMasters,
Inc.
STATEMENTS
OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
|
||||||||
September
30,
2009
|
September
30,
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 6,165,505 | $ | 1,137,875 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Change
in deferred tax asset
|
(4,239,847 | ) | - | |||||
Depreciation
and amortization
|
94,617 | 79,978 | ||||||
Deferred
rent
|
137,737 | 119,888 | ||||||
Common
stock issued to employees for service
|
1,578,330 | - | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(6,915,417 | ) | (2,385,577 | ) | ||||
Accounts
payable and accrued liabilities
|
(15,465 | ) | 129,460 | |||||
Accounts
payable to related parties
|
142,495 | - | ||||||
Deferred
revenue
|
6,400,711 | 4,175,428 | ||||||
Net
cash provided by operating activities
|
3,348,666 | 3,257,052 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchase
of investments
|
(15,920 | ) | (715,115 | ) | ||||
Issuance
of note receivable
|
(400,000 | ) | - | |||||
Purchase
of fixed assets
|
(26,445 | ) | - | |||||
Net
cash used in investing activities
|
(442,365 | ) | (715,115 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Repayment
of capital lease obligations
|
(86,180 | ) | (58,245 | ) | ||||
Repayment
of note payable to related party
|
(523,290 | ) | - | |||||
Distributions
to shareholders
|
(1,344,126 | ) | (1,200,142 | ) | ||||
Net
cash used in financing activities
|
(1,953,596 | ) | (1,258,387 | ) | ||||
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
952,705 | 1,283,550 | ||||||
CASH
AND CASH EQUIVALENTS—Beginning of period
|
3,683,467 | 1,650,513 | ||||||
CASH
AND CASH EQUIVALENTS—End of period
|
$ | 4,636,172 | $ | 2,934,063 | ||||
Supplemental
schedule for cash flow information
|
||||||||
Cash
paid for taxes
|
$ | - | $ | - | ||||
Cash
paid for interest
|
$ | 27,831 | $ | 29,068 | ||||
NON
CASH INVESTING AND FINANCING ACTIVITIES
|
||||||||
Purchase
of property and equipment by seller financing
|
$ | 1,398,890 | $ | 135,814 | ||||
Issuance
of note payable to related party due to conversion from S to C
corp
|
$ | 6,296,816 | $ | - |
See accompanying notes to financial
statements.
5
TaxMasters,
Inc.
Statement
of Stockholders' Deficit (Unaudited)
For the nine
months ended
September
30, 2009
Preferred Stock | Common Stock | |||||||||||||||||||||||||||
Preferred
Shares
|
Par
Value $.001
$
Amount
|
Common Shares |
Par
Value $.001
$
Amount
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Total
|
||||||||||||||||||||||
Balance
at December 31, 2008
|
1,000 | $ | 1 | 301,000,000 | $ | 301,000 | $ | (301,000 | ) | $ | (8,658,100 | ) | $ | (8,658,100 | ) | |||||||||||||
Distribution
to stockholder of undistributed tax retained earnings prior to conversion
from S to C corp
|
(7,640,942 | ) | (7,640,942 | ) | ||||||||||||||||||||||||
Effect
of recapitalization for reverse merger transaction on August 4,
2009
|
1,000 | 1 | 2,712,899 | 2,713 | (2,713 | ) | - | |||||||||||||||||||||
Stock
issued to employees for services
|
35,074,206 | 35,074 | 1,543,256 | 1,578,330 | ||||||||||||||||||||||||
Net
income
|
- | 6,165,505 | 6,165,505 | |||||||||||||||||||||||||
Balance
at September 30, 2009
|
1,000 | $ | 1 | 338,787,105 | $ | 338,787 | $ | 1,239,542 | $ | (10,133,537 | ) | $ | (8,555,207 | ) |
See
accompanying notes to financial statements.
6
TaxMasters,
Inc.
NOTES
TO THE FINANCIAL STATEMENTS
(unaudited)
Note
1 - Basis of Presentation
The
accompanying unaudited interim financial statements information reflects
financial information of Crown Partners, Inc. (now known as TaxMasters, Inc.)
(“Company”) and TaxMasters, Inc (“TaxMasters”). On August 4, 2009 the
Company (formerly known as Crown Partners, Inc.), a Nevada corporation, closed a
share exchange agreement with TaxMasters, Inc. under which all of the following
occurred: (i) the Company amended its Articles of Incorporation changing its
name to “TaxMasters, Inc”, increased authorized shares of common stock to
1,000,000,000, par value $0.001 and increased authorized shares of undesignated
preferred stock to 500,000,000, par value $0.001, (ii) the Company issued
301,000,000 shares of its common stock to the sole stockholder of TaxMasters,
Inc. (the “TaxMasters Stockholder”) in exchange for all of the issued and
outstanding shares of common stock of TaxMasters, Inc. as a result of which
TaxMasters became a wholly-owned subsidiary of the Company; (iii) the Company
issued 1,000 shares of its Control Series of Preferred Stock to the
TaxMasters Stockholder which give the TaxMasters Stockholder the authority to
designate a majority of the Company's board of directors for a five year period;
(iv) the TaxMasters Stockholder has the right to earn up to an additional
299,000,000 shares of the Company's common stock during the next five
years based on a formula calculated on the net profits of the
Company; (v) the Company's then-current board of directors and
officers resigned effective with the closing and concurrently appointed the
TaxMasters Stockholder as a director; and (vi) the Company sold all of the
shares of Crown Equity Holdings, Inc. (“Crown Equity”), which prior to the
closing was a majority-owned operating subsidiary of the Company. The
accompanying unaudited interim financial statements included herein reflect the
above transaction which has been accounted for as a reverse merger whereby Tax
Masters, Inc. is considered the accounting acquirer and the historical and
future financial statements will be those of Tax Masters, Inc. since the Company
discontinued its primary business activity conduct through Crown Equity, which
was to develop, sell, and produce computer systems which are capable of running
multiple monitors from one computer.
The
accompanying unaudited interim financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the
United States of America and the rules of the Securities and Exchange
Commission, and should be read in conjunction with the audited financial
statements of TaxMasters and notes thereto contained in the Amendment No. 1 to
Form 8-K filed with the SEC on October 20, 2009. Certain information and
note disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations. In the opinion
of management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of financial position and the results of
operations for the interim periods presented have been reflected
herein. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full
year.
Certain re-classification of prior period amounts has been made to
conform to the current presentation. The re-classification had no impact on
stockholders' deficit and net income.
Note
2 - Summary of Significant Accounting Policies
Revenue
Recognition
The
Company’s revenue is generated from the sale of our proprietary tax resolution
products and services. TaxMasters uses the proportionate completion method
for revenue recognition. With this method, we determine our revenue by
gathering the completion points of six major services rendered by the
company. These services are Consultations, Tax Returns, Automated
Collection Service (ACS), Revenue Officer Case (ROC), Collection Due Process
(CDP), and Settlement Analysis. Revenue is recognized when it is
earned, typically when our services have been rendered. Upon
execution of an agreement, if services have not been provided then the amount to
be paid under such agreement is recorded as deferred revenue on the balance
sheet and is reclassified as revenue on the statement of operations after
services have been provided and such revenue earned.
7
TaxMasters,
Inc.
NOTES
TO THE FINANCIAL STATEMENTS
(unaudited)
Note
2 - Summary of Significant Accounting Policies (continued)
Earnings Per
Share
Basic
earnings per share are computed using the weighted-average number of common
shares outstanding. Diluted earnings per share include additional dilution from
common stock equivalents, such as stock issuable pursuant to the exercise of
stock options and warrants. Common stock equivalents are not included in the
computation of diluted earnings per share when the Company reports a loss
because to do so would be anti-dilutive for the periods
presented. There were no common stock equivalents outstanding as of
September 30, 2009 and 2008.
Recently Adopted Accounting
Pronouncements
On April
1, 2009, the Company adopted authoritative guidance issued by the Financial
Accounting Standards Board (FASB) on interim disclosures about fair value of
financial instruments. This guidance amends prior guidance to require
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial statements.
The guidance is effective for interim reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15, 2009. An
entity may early adopt this guidance if certain requirements are met. The
guidance does not require disclosures for earlier periods presented for
comparative purposes at initial adoption. In periods after initial adoption, the
guidance requires comparative disclosures only for periods ending after initial
adoption. The adoption of this guidance did not have a material impact on the
Company’s financial statements.
On April
1, 2009, the Company adopted authoritative guidance issued by the FASB on
determining fair value when the volume and level of activity for the asset or
liability have significantly decreased and identifying transactions that are not
orderly. The guidance affirms that the
objective of fair value when the market for an asset is not active is the price
that would be received to sell the asset in an orderly transaction; clarifies
and includes additional factors for determining whether there has been a
significant decrease in market activity for an asset when the market for that
asset is not active; and eliminates the proposed presumption that all
transactions are distressed (not orderly) unless proven otherwise. The guidance
requires an entity to base its conclusion about whether a transaction was not
orderly on the weight of the evidence. In addition, this guidance requires an
entity to disclose a change in valuation technique (and the related inputs)
resulting from the application of this guidance and to quantify its effects, if
practicable. This guidance is effective for interim and annual periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009 if certain requirements are met. It must be applied prospectively
and retrospective application is not permitted. The adoption of this guidance
did not have a material impact on the Company’s financial
statements.
On July
1, 2009, the Company adopted authoritative guidance issued by the FASB
concerning the reporting of subsequent events. The guidance’s intent
is to establish general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. This guidance became
effective for financial statements issued for fiscal years and interim periods
beginning after June 15, 2009. The adoption of this guidance did
not have a material impact on the Company’s financial
statements.
In June
2009, the FASB issued authoritative guidance on accounting standards
codification and the hierarchy of generally accepted accounting principles. The
guidance authorized the FASB Accounting Standards Codification as the sole
source for authoritative United States of America Generally Accepted Accounting
Principals (“U.S. GAAP”). This guidance will be effective for
financial statements issued for reporting periods that end after September 15,
2009. The adoption of this guidance did not have a material impact on the
Company’s financial statements.
8
TaxMasters,
Inc.
NOTES
TO THE FINANCIAL STATEMENTS
(unaudited)
Recently Adopted Accounting Pronouncements (continued)
In
October 2009, the FASB issued authoritative guidance on multiple-deliverable
revenue arrangements. The guidance requires
entities to allocate revenue in an arrangement using estimated selling prices of
the delivered goods and services based on a selling price hierarchy. The
amendments eliminate the residual method of revenue allocation and require
revenue to be allocated using the relative selling price method. This guidance
removes tangible products from the scope of software revenue guidance and
provides guidance on determining whether software deliverables in an arrangement
that includes a tangible product are covered by the scope of the software
revenue guidance. This guidance will become effective for the Company beginning
July 1, 2010, with early adoption permitted. The Company is in the process of
evaluating the impact of the adoption of the guidance.
Note
3 - Certificates of Deposit
The
Company invests excess funds in Certificates of Deposits (“CDs”) issued by
domestic banks and, at times, may exceed federally insured limits. The balance
of this account consists of CDs with original maturities greater than three
months and is classified as short-term investments in balance sheet. $735,502 of
CDs matured and was rolled over into new CDs during the nine months ended
September 30, 2009.
Note
4 - Note Receivable
On May 5,
2009, the Company entered into a one year loan agreement with a non US
corporation in the amount of $400,000. The note bears a 1% interest
rate, with interest payable each six months. The note is expected to be fully
paid on or before June 30, 2010.
Note
5 - Capital Lease Obligations
The
Company acquired equipment under long-term leases with two to five year terms,
generally bearing interest rates from 2.4% to 26%. For financial
reporting purposes, the present value of the minimum lease payments has been
capitalized.
9
TaxMasters,
Inc.
NOTES
TO THE FINANCIAL STATEMENTS
(unaudited)
Note
5 - Capital Lease Obligations (continued)
September
30
|
December
31
|
|||||||||
Year
|
2009
|
2008
|
||||||||
2005
|
Capital
lease to a company in monthly installments of approximately $201 including
interest, secured by computer equipment, maturing in September
2009
|
- | $ | 455 | ||||||
2006
|
Capital
leases to a company in monthly installments of approximately $2,427
including interest, secured by computer equipment, with maturity dates
ranging from January 2009 to June 2010.
|
2,545 | 21,065 | |||||||
2007
|
Capital
leases to a company in monthly installments of approximately $4,560
including interest, secured by computer equipment, with maturity dates
ranging from January to August 2010.
|
12,706 | 83,382 | |||||||
2008
|
Capital
lease to a company in monthly installments of approximately $4,947
including interest, secured by computer equipment, with maturity dates
ranging from January 2011 to March 2012.
|
70,625 | 105,997 | |||||||
2009
|
Capital
lease to a company in monthly installments of approximately $26,363,
including 2.4% of interest, secured by equipment, with maturity dates
ranging from February to July 2014
|
1,391,311 | - | |||||||
Total Lease
Obligation
|
1,477,187 | 210,899 | ||||||||
Less: current
portion
|
365,349 | 71,706 | ||||||||
Capital
lease obligation, net of current portion
|
$ | 1,111,837 | $ | 139,193 |
Future
payments under these capital lease arrangements are as follows:
2009
|
$ | 105,434 | ||
2010
|
393,086 | |||
2011
|
336,976 | |||
2012
|
294,985 | |||
2013
|
278,530 | |||
Thereafter
|
162,476 | |||
Total
future payments
|
1,571,487 | |||
Less:
amount representing interest
|
94,300 | |||
Present
value of net minimum lease payments
|
$ | 1,477,187 |
Note
6 - Stockholders’ Deficit
Common
Stock
During
the nine months ended September 30, 2009, the Company issued
35,074,206 common shares to employees for services rendered for estimated
value of $1,578,330 and expensed as compensation in the statements of
operations. The shares were issued as follows:
10
TaxMasters,
Inc.
NOTES
TO THE FINANCIAL STATEMENTS
(unaudited)
Note 6 - Stockholders’ Deficit (continued)
●
|
On
August 4, 2009, 32,704,000 common stock shares were issued to six
executives under their employment agreements. These were
"signing bonus" shares.
|
●
|
On
August 4, 2009, 500,000 common stock shares were issued evenly to 5
directors for services.
|
●
|
On
August 4, 2009, 1,870,206 common stock shares were issued to various rank
and file employees in recognition to services to the
company.
|
Stock
Options
On August
4, 2009, the Company authorized and approved (i) the 2009 TaxMasters Stock
Option Plan of the Company (“Non-Qualified Plan”), (ii) the 2009 TaxMasters
Incentive Stock Option Plan (‘ISO Plan”) and (iii) TaxMasters 2009 Stock Bonus
Plan (“Bonus Plan”). The authorized shares and prices are still to be
determined for each plan and as of September 30, 2009, no options or stock
grants have been authorized or granted under any of the three
plans.
Distributions
For the
nine months ended September 30, 2009, the Company or its wholly-owned
subsidiary, TaxMasters, made distributions to the TaxMasters Stockholder of
$1,344,126, before the reverse merger transaction. For the nine
months ended September 30, 2008, the Company made distributions to the
TaxMasters formerly known as TMIRS Enterprises, LP Stockholder of $1,200,142,
respectively. In addition to the current year distributions,
the company distributed prior year’s undistributed previously taxed earnings, in
amount of $6,296,816, and this amount was then loaned back to the Company.
During the nine months ended September 30, 2009, $523,290 was distributed
as payment of this loan. (see Note 7 below for details).
Note 7 - Note Payable to Related
Party
In August
2009, the Chief Executive Officer, loaned the Company $6,296,816, at an interest
rate of prime plus 1%. The note is unsecured and is due on demand,
with covenants that limit demand rights. The covenants limited demand rights to
$1 million annually as long as the company is achieving certain financial
targets and the Company has the cash for repayment. For the nine
months ended September 30, 2009 the Company repaid
$523,290. Interest expense is accrued and expensed
monthly.
Note 8 - Income Taxes
As part
of the process of preparing the financial statements, the Company is required to
estimate its income taxes. The process incorporates an assessment of
the current tax exposure together with temporary differences resulting from
different treatment of transactions for tax and financial statement
purposes. Such differences may result in deferred tax assets and/or
liabilities, which are included within the balance sheet. Prior to
the reverse merger of August 4, 2009, the Company was taxed as a Sub-S
corporation and was not subject to corporate taxes which created a
deferred tax asset when the Sub-S corporation was converted to a C corporation
and converted from cash basis to accrual basis for tax purposes.
11
TaxMasters,
Inc.
NOTES
TO THE FINANCIAL STATEMENTS
(unaudited)
Note 8 - Income Taxes
(continued)
The
components of the current tax asset are as follows:
Calculation
of 481 tax regulation adjustment:
|
||||
Account
Receivable on July 31, 2009
|
$ | 9,253,479 | ||
Deferred
Revenue on July 31, 2009
|
(21,485,678 | ) | ||
Accounts
Payable on July 31, 2009
|
(762,587 | ) | ||
Estimate
loss for Corporation
|
(12,994,786 | ) | ||
Estimate
tax rate
|
34 | % | ||
Deferred
Tax Asset – current
|
$ | (4,418,227 | ) | |
Income
tax payable
|
$ | 178,380 | ||
Deferred
Tax Asset – net & current
|
$ | (4,239,847 | ) |
Current
tax liability:
|
||||
Income
before taxes
|
$ | 1,925,658 | ||
Adjustments
:
|
||||
Income
not subject to Corporate tax
|
(2,979,349 | ) | ||
Stock
base compensation
|
1,578,330 | |||
Adjusted
income subject to corporate tax
|
524,639 | |||
34 | % | |||
Income
tax payable
|
$ | 178,380 |
Income
taxes provisions (benefits):
|
||||
Current
deferred tax benefit
|
$ | (4,418,227 | ) | |
Current
provision for income tax
|
178,380 | |||
Income
tax provision (benefit)
|
$ | (4,239,847 | ) |
The
Company will treat for tax purposes any of the unused benefit through the 2009
tax year as a net operating tax loss carry forward. The Company
periodically assesses the likelihood that it will be able to recover its
deferred tax assets and determines if a valuation allowance is
necessary. As a result of this analysis the Company concluded that it
is more likely than not that its deferred tax assets will ultimately be
recovered and, accordingly, no valuation allowance was recorded as of September
30, 2009.
12
TaxMasters,
Inc.
NOTES
TO THE FINANCIAL STATEMENTS
(unaudited)
Note
9 - Related Party Transactions
The
Company incurs certain business development and entertainment expenses related
to brand image development, employee retention, necessary entertainment, and
certain expenses related to its community relations activities that are paid to
companies owned by one or more of the corporate executives. It is
believed that these costs are reasonable and approximate the costs of similar
activities with unrelated parties.
The
Company is affiliated, through common ownership, with another company that
provides the Company with advertising. The affiliated company charged
$671,530 and $225,000 for the nine months ended September 30, 2009 and 2008,
respectively, for advertising costs incurred. In addition, the
outstanding balance due to the affiliated company as of September 30, 2009 was
$385,000.
In
addition, the Company has marketing services provided by a related entity that
is owned by the Company’s management. Marketing expenses were
$427,280 and $209,393 for the nine months ended September 30, 2009 and 2008,
respectively. There were no outstanding balances due to this related
entity as of September 30, 2009.
Note
10 - Commitments and Contingencies
Leases
The
Company has two separate lease agreements. The Company leased its
main office space in Houston, Texas under a lease agreement that commenced in
December 2006 and expires February 2014. In addition, there were two
expansion leases entered into for this property in January and March 2008 which
both expire in May 2014. The aggregate monthly lease payments are
$25,162. In July 2009, The Company entered into an additional lease
agreement for office space in Houston, Texas through December 31,
2014 Monthly lease payment under this agreement are $0 for the
first six months, $67,431 for the months seven through twenty-six, $74,422 for
months twenty-seven through forty-six, and $85,413 thereafter.
The
future minimum lease payments are as follows:
Year
Ended:
|
||||
2009
|
$ | 75,484 | ||
2010
|
1,043,679 | |||
2011
|
1,141,125 | |||
2012
|
1,211,881 | |||
2013
|
1,290,022 | |||
Thereafter
|
1,184,930 | |||
|
$ | 5,947,121 |
Total
rent expense for the nine months ended September 30, 2009 and 2008 was
approximately $394,638 and $174,580, respectively.
13
TaxMasters,
Inc.
NOTES
TO THE FINANCIAL STATEMENTS
(unaudited)
Note 10 - Commitments and Contingencies (continued)
Deferred
Rent
The
Company recognizes rent, including rent holidays, and escalating rent
provisions, on a straight-line basis over the terms of the lease. The
difference between the cash paid to the landlord and the amount recognized as
rent expense on a straight-line basis is included in deferred rent. The current
portion of deferred rent is included in accrued expenses. Cash
reimbursements received from landlords for leasehold improvements and other
incentives are also recorded as deferred rent and amortized on a straight-line
basis over the lease term as an offset to rent expense.
Legal
Proceedings
From time
to time, the Company is involved in various legal proceedings in the ordinary
course of business. The Company has recorded an expense of $67,363 in
the financial statements for potential loss resulting from legal proceeding for
the nine months ended September 30, 2009. Management believes that no other
pending legal proceedings will have a material adverse effect on the financial
condition, results of operations or cash flows of the Company.
Note
11 - Subsequent Events
On
November 12, 2009, the Company issued 330,000 common shares to a
non-employee for services rendered and valued at $379,500.
These
interim financial statements were approved by management and the Company’s Board
of Directors and were issued on November 23, 2009. Subsequent events
have been evaluated through this date.
14
ITEM
2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion of the financial condition and results of operations of the
Company should be read in conjunction with the financial statements and the
related notes thereto included in this document.
Forward
Looking Statements
The
following discussion of the financial condition and results of operations should
be read in conjunction with the consolidated financial statements and related
notes thereto. The words or phrases "would be," "will allow," "expect to",
"intends to," "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements". Such statements include those concerning
our expected financial performance, our corporate strategy and operational
plans. Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of risks and uncertainties,
including: (a) our ability to retain and add qualified personnel with
the proper tax and IRS experience and business acumen, (b) our ability to
execute our business plan, (c) our ability to successfully compete against
numerous competitors, some of whom are larger and better financed than us, (d)
the amount and timing of operating costs and capital expenditures relating to
the expansion of our business, (e) the implementation of our marketing programs
and (f) general economic conditions specific to our industry.
Unless
otherwise required by applicable law, we do not undertake, and we specifically
disclaim any obligation, to update any forward-looking statements to reflect
occurrences, developments, unanticipated events or circumstances after the date
of such statement.
Recent
Developments
On
November 10, 2009, TaxMasters, Inc. announced the commencement of its
implementation of a proprietary system to increase productivity and improve
customer service. The system, known as P3, cataloged and analyzed
TaxMasters’ internal Processes, Procedures, and Policies (P3) in an effort to
identify and target opportunities to increase efficiency. The P3
Report was finalized in April 2009 and consists of a comprehensive assessment
including efficiency recommendations linked to objective standards and
measurable criteria. After experimental implementation of the recommended
changes in the early second quarter of 2009, TaxMasters has seen steady
improvements in workflow, speed of service, and customer service management
throughout the second and third quarters of 2009.
Overview
History
We are
TaxMasters, Inc., a Nevada corporation formerly known as Crown Partners, Inc.
(the “Company” or “we”, “our” or “us”). On August 4, 2009, the
Company acquired all of the outstanding shares of common stock of TaxMasters,
Inc., (the "Target"), a Nevada corporation, in an exchange of shares of its
common stock and certain preferred stock for all of the issued and outstanding
shares of the Target under Section 368(a)(1)(B) of the Internal Revenue Code
(the “Share Exchange”). As a result of the Share Exchange the sole
stockholder of the Target acquired control of the Company through the receipt of
approximately 99.1% of the Company’s 303,712,899 then-issued and outstanding
shares of common stock. As a result of the Share Exchange, the Target
became a wholly-owned subsidiary of the Company.
Our
Company
We are a
tax resolution company engaged in the business of assisting taxpayers with
matters at the Internal Revenue Service (“IRS”), especially the resolution of
disputes and assessments and the settlement of tax liabilities. We
are a firm of experienced tax professionals that help our clients solve their
Federal tax problems, ranging from filing delinquent tax returns to settling tax
debts. Our tax professionals include tax attorneys, Certified Public
Accountants, Former IRS agents, Licensed Tax Preparers and other tax
professionals who are authorized to practice before the IRS. Our tax
professionals are experienced in analyzing and providing solutions to even the
most complicated tax problems and guiding clients through the bureaucracy of the
IRS.
15
Our tax
professionals have the skill and knowledge to reduce our client’s tax
liabilities and solve their IRS tax problems. We use the rules
established by the Internal Revenue Code and IRS regulations to help our clients
resolve matters at the IRS. Our tax professionals help our clients
reduce taxes, eliminate penalties and get representation before the
IRS. We help our clients understand how they developed their tax
problems they have and help them fix the entire problem that caused their tax
debt. We can often reduce the tax our clients owe even before
attempting to develop a tax strategies with the IRS.
Through
our tax professionals, we offer the following services:
●
|
Get
our clients into compliance with their obligation to file income tax
returns and pay back taxes due;
|
●
|
Reduce
taxes by reducing penalties and interest on tax debts;
|
●
|
Settle
our client’s tax debt for the lowest amount possible under the
law;
|
●
|
Stop
IRS wage garnishments;
|
●
|
Stop
IRS property seizure;
|
●
|
Defend
our client in an IRS audit or IRS criminal
investigation;
|
●
|
Recover
seized funds; and
|
●
|
Remove
an IRS levy or lien.
|
Description
of Revenues
We offer
our clients a no-charge initial consultation regarding their tax
problems. The free initial consultation enables our tax consultants
to get information from the potential client about his or her tax problem and
understand the nature of the problem. From the initial consultation,
we can determine what services and forms the client will need and we can present
a cost estimate for the client.
We charge
our clients a fee based on the type of tax problem we are addressing and the
service we are providing: (i) an IRS collection matter, (ii)
preparing or amending tax returns (including schedules), (iii) negotiated
settlements and/or (iv) audits. In addition, some of our rates will
vary depending on whether our client is an individual or a
business. Built into all of our fees are the initial consultation we
have with the IRS to determine all of the client’s problems and the preparation
by us of a findings letter outlining the tax problems. In addition to
the fee, certain services will require our tax consultants to interact with the
IRS, such as a settlement negotiation or an audit, for which we charge our
clients additional consulting fees. We may provide our services on a
“pay-as-you-go” basis and an installment plan.
The
Company’s revenue is generated from the sale of our proprietary tax resolution
products and services. The Company uses the proportionate completion
method for revenue recognition. With this method, we determine our revenue
by gathering the completion points of six major services rendered by the
Company. These services are Consultations, Tax Returns, Automated
Collection Service (ACS), Revenue Officer Case (ROC), Collection Due Process
(CDP), and Settlement Analysis. Revenue is recognized when it is
earned, typically when our services have been rendered. Upon
execution of an agreement, if services have not been provided then the amount to
be paid under such agreement is recorded as deferred revenue on the balance
sheet and is reclassified as revenue on the statement of operations after
services have been provided and such revenue earned.
Description
of Expenses
Our
expenses include the following: (i) Costs of services, which consists primarily
of salaries and benefits to our tax consultants, customer service consultants,
outside services and professional fees used to provide our tax services,
including associated marketing expenses; (ii) Marketing costs (a significant
portion of which consists of our advertising expense); and (iii) General
administrative costs, which consists of overhead expenses, such as rent,
utilities and telecommunications.
16
We
currently have no material research and development expenses.
Results
of Operations
The
following table sets forth selected statement of operations data as a percentage
of total revenues for the periods indicated
Nine
Months ended September 30,
|
||||||||||||||||
Statement of Operations
Data:
|
2009
|
2008
|
||||||||||||||
Total
revenue
|
$
|
26,970,767
|
100.0%
|
|
$
|
14,385,985
|
100.0
|
%
|
||||||||
Operating
Costs and Expenses:
|
||||||||||||||||
Selling,
general and Administrative
|
13,831,942
|
51.3
|
%
|
7,982,027
|
55.5
|
%
|
||||||||||
Compensation
|
11,119,290
|
41.2
|
%
|
5,176,418
|
36.0
|
%
|
||||||||||
Depreciation
|
94,617
|
0.4
|
%
|
79,978
|
0.6
|
%
|
||||||||||
Total
Operating expenses
|
25,045,849
|
92.9
|
%
|
13,238.423
|
92.0
|
%
|
||||||||||
Interest
income
|
31,893
|
0.1
|
%
|
19,381
|
0.1
|
%
|
||||||||||
Interest
expense
|
(31,153
|
) |
(0.1
|
)%
|
(29,068
|
) |
(0.2
|
)%
|
||||||||
-
|
-
|
|||||||||||||||
Net
income from operations
|
$
|
1,925,658
|
7.1
|
%
|
$
|
1,137,875
|
7.9
|
%
|
Results
for the three months ended September 30, 2009 versus the three months ended
September 30, 2008.
Revenues. Revenues
for the three months ended September 30, 2009 increased by $236,759, or
3.0%, from $7,975,655 for the three months end September 30, 2008
to $8,212,414 for the same period in 2009. This increase in
sales was due to increased sales volume attributable to an increase in our
advertising expense.
Compensation
expense. Compensation expense, which is comprised of salaries
and payroll taxes and fees and charges taken for equity-based compensation, for
the three months ended September 30, 2009 was approximately $4,660,630, which
was an increase of approximately $2,758,548, or 145.0%, from the compensation
expense of approximately $1,902,082 for the three months ended September 30,
2008. The increase in compensation expense was mainly due to (i) an
increase in the number of tax consultant personnel hired to support our increase
in the number of clients (and, therefore, sales volume) and (ii) charges taken
for grants of restricted stock made pursuant to employment agreements with our
executives. Salaries alone increased to approximately $1.2 million
for the three months ended September 30, 2009. The Company took a
charge of $1,578,330 for equity-based compensation for the three months ended
September 30, 2009.
Selling, general and administrative
costs. Selling, general and administrative costs increased by
approximately $2,559,307, or 72.3%, from approximately $3,538,358 for the three
months ended September 30, 2008 to approximately $6,097,665 for the same period
in 2009. Selling expenses, which consists mainly of advertising
expenses and cost of customer service personnel, increased approximately
219%. Advertising expense for the three months ended September 30,
2009 was approximately $3,775,000, an increase of approximately 257% from the
same period in 2008. Outside service and professional fees for the
three months ended September 30, 2009 was approximately $178,000, an increase of
approximately 476% from the same period in 2008. This increase in
such fees was due to services to keep abreast of the latest tax law development
and higher legal and accounting fees incurred in connection with being a public
company that resulted from the Share Exchange. The remaining expenses
in general and administrative costs consisted of overhead expenses, such as
utilities, customer telecommunication expenses and insurance
costs. Other general administrative was approximately $1,647,000 for
the three months ended September 30, 2009. The increase was mainly
due to the increase in sales volume. Rent increased approximately
$310,000, or 293%, from $105,800 for the same period in 2008.
17
Total Operating
Expenses. Total operating expenses for the three months ended
September 30, 2009 were approximately $10,815,682, an increase of
approximately$5,348,583, or 97.8%, from total operating expenses of $5,467,099
for the same period in 2008. Total operating expenses for the three
months ended September 30, 2009 increased due to increases in compensation and
advertising expenses as described above.
Total Other Income
and Expenses. Total other income and other expenses
consist of interest income and interest expense. Interest expense for
the three months ended September 30, 2009 was approximately
$11,775, a 59.5% decrease from the same period in
2008. Interest income for the three months ended September 30, 2009
was approximately $10,531, a decrease of approximately $4,500, a 29.9%
decline.
Income taxes benefit.
Total income taxes provision was a benefit of $4,239,847, for
the three months ended September 30, 2009. Prior to the reverse
merger of August 4, 2009, the Company was taxed as a limited partnership, then
changed to Subchapter S corporation and was not subject to corporate taxes which
has created a deferred tax asset.
Net (Loss)
Income. Net income for the three month period ended September
30, 2009 was approximately $1,635,335 as compared to net income of approximately
$2,494,519 for the three months period ended September 30, 2008, a decrease of
approximately $859,184, or 34.4%. Operating net loss for the three
months period ended September 30, 2009 was approximately $2,603,268 as compared
to operating net income of approximately $2,508,556 for the three months period
ended September 30, 2008, a decrease of approximately $5,111,824, or 103.8%,
mainly due increase compensation costs due to increased headcount and common
stock grants compensation discussed above.
Results
for the nine months ended September 30, 2009 versus the nine months ended
September 30, 2008.
Revenues. Revenues
for the nine months ended September 30, 2009 increased by approximately
$12,584,782, or 87.5%, from approximately $14,385,985 for the nine months end
September 30, 2008 to approximately $26,970,767 for the same period in
2009. This increase in sales was due to increased sales volume
attributable to an increase in our advertising expense.
Compensation
expense. Compensation expense, which is comprised of salaries
and payroll taxes and fees and charges taken for equity-based compensation, for
the nine months ended September 30, 2009 was $11,119,290, which was an
increase of $5,942,872, or 114.8%, from the compensation expense
of $5,176,418 for the nine months ended September 30, 2008. The
increase in compensation expense was mainly due to an increase in the number of
tax consultant personnel hired to support our increase in the number of clients
(and, therefore, sales volume) and (ii) charges taken for grants of restricted
stock made pursuant to employment agreements with our
executives. Salaries alone increased to approximately $9.5 million
for the nine months ended September 30, 2009. The Company took a
charge of $1,578,330 for equity-based compensation during the third quarter of
2009.
Selling, general and administrative
costs. Selling, general and administrative costs increased
by $5,849,915, or 73.3%, from $7,982,027 for the nine months ended
September 30, 2008 to $13,831,942 for the same period in
2009. Selling expenses, which consists mainly of advertising expenses
and cost of customer service personnel, increased approximately
265%. Advertising expense for the nine months ended September 30,
2009 was approximately $8,867,000, an increase of approximately $6.4 million, or
358%, from the same period in 2008. Outside service and professional
fees for the nine months ended September 30, 2009 was approximately $733,000, an
increase of approximately 168% from the same period in 2008. This
increase in such fees was due to services to keep abreast of the latest tax law
development and higher legal and accounting fees incurred in connection with
being a public company that resulted from the Share Exchange. The
remaining expenses in general and administrative costs consisted of overhead
expenses, such as utilities, customer telecommunication expenses and insurance
costs. Other general administrative was approximately $3,569,000 for
the nine months ended September 30, 2009. The increase was
mainly due to the increase in sales volume. Rent increased to
approximately $253,000, or 188%, from $134,000 for the same period in
2008.
18
Total Operating
Expenses. Total operating expenses for the nine months ended
September 30, 2009 were approximately $25,045,849, an increase of approximately
$11,807,426, or 89.2%, from total operating expenses of $13,238,423 for the same
period in 2008. Total operating expenses for the nine months ended
September 30, 2009 increased due to increases in compensation and advertising
expenses as described above.
Total Other Income
and Expenses. Total other income and other expenses
consist of interest income and interest expense. Interest expense for
the nine months ended September 30, 2009 was approximately
$31,153, a 7.2% increase from the same period in
2008. Interest income for the nine months ended September 30, 2009
was $31,983, an increase of approximately $12,512, a 65.0%
increase. The increase in interest income is mainly due to surplus in cash
that is invested in short-term CD investments.
Income taxes benefit.
Total income taxes provision was a benefit of $4,239,847, for
the nine months ended September 30, 2009. Prior to the reverse merger
of August 4, 2009, the Company was taxed as a limited partnership, then changed
to Subchapter S corporation and was not subject to corporate taxes which has
created a deferred tax asset.
Net Income. Net
income for the nine months period ended September 30, 2009, was approximately
$6,165,505 as compared to net income of approximately $1,137,875 for the nine
months period ended September 30, 2008, an increase of approximately $5,027,630,
or 441.8%. Net income from operations for the nine months period
ended September 30, 2009 was approximately $1,925,658 as compared to net income
from operations of approximately $1,137,875 for the nine months period ended
September 30, 2008, an increase of $787,783, or 69.2%, mainly due increase
sales revenue due to increase volume. The increases in sales were
off-set by increase in operating expenses mainly due to increases in
compensation costs due to increased headcount and common stock grants
compensation discussed above.
Liquidity
and Capital Resources
As of
September 30, 2009, the Company had total current assets of approximately
$22,649,523 and total current liabilities of approximately $9,582,055, resulting
in working capital of $13,067,468. At September 30, 2009, the
Company's current assets consisted of approximately $4.6 million in cash, $0.7
million in short-term investments and approximately $12.6 million in net
accounts receivable.
During
the fifteen month period ending December 31, 2010, the Company expects to
generate positive cash flow from its operations. We believe that our
existing cash and expected cash flow from operations will be sufficient to meet
our projected operating expenses at least through December 31, 2010 as well as
to fund the full implementation of our P3 system to increase productivity and
improve customer service.
Operating
Activities
Net cash
provided by operating activities was approximately $3,348,666 for the nine
months ended September 30, 2009 compared to approximately $3,257,052 for the
nine months ended September 30, 2008, an increase of $91,614, or
2.8%.
19
Investing
Activities
Net cash
used in investing activities was approximately $442,365 for the nine months
ended September 30, 2009 compared to net cash used in investing activities of
approximately $715,115 for the nine months ended September 30, 2008, a decrease
in cash used of approximately $272,750, or 38.1%. The primary
reason for the change in investing activities for the nine months ended
September 30, 2009 was reduction of investment purchases
of approximately $0.7 million, the issuance of a promissory note in
the amount of $400,000 and the purchase of property and
equipment for approximately $26,000. During the nine months
ended September 30, 2009, the Company purchased CD investments in the amount of
approximately $719,582.
Financing Activities
Net cash
used in financing activities was approximately $1,953,596 for the nine months
ended September 30, 2009 compared to approximately $1,258,387 for the nine
months ended September 30, 2008, an increase in cash used in financing
activities of approximately $695,209, or 55.2%. The primary reasons for the
increase was an increase in shareholders distribution prior to the reverse
merger of approximately $1.3 million and the repayment of $523,240 of the
note payable from a related party within the Company. The Chief
Executive Officer of the Company loaned the Company $6,296,816, at an interest
rate of prime plus 1% (the “CEO Note”). The CEO Note is unsecured and
is due on demand, with covenants that limit demand rights. The
covenants in the CEO Note limit demand rights to $1 million annually so long as
the Company is achieving certain financial targets and has the cash for
repayment. This loan was a non-cash transaction. Undistributed earnings prior to
the reverse merger transaction was distributed to the Chief Executive Officer of
the Company who loaned the funds back to the Company.
Commitments
and Contingencies
We
currently have two separate lease agreements for our office space under an
operating lease through May 2014. Our monthly lease payment under
these agreements amounts to approximately $25,162 and $67,431. Total obligation
through 2014 under these agreements is approximately $5,947,121.
We also
lease certain computer equipment under capital leases. Our obligation
under these leases continues until July 2014. Our total obligation under these
leases is approximately $1,571,000.
We
currently plan to utilize both lease office spaces through 2010 and will
evaluate office space needs in 2011 to determine if a sublet option or
termination of a lease is appropriate.
On July
31, 2009, we entered into a lease agreement for approximately 107,890 square
feet of office space, which we expect to occupy in late first quarter or early
second quarter of 2010. This lease has a term of 66 months and
expires in late first quarter or early second quarter of 2015, depending on the
date we occupy the space. Under this lease, upon the commencement
date we will not pay any rent until for the first six months, we will pay a
monthly rent of $67,431 for months 7 to 26, which after 20 months will increase
to $74,422 for the following 20 months. During the last 20 months of
the lease our monthly rent will be $85,413. The Company has the right
to extend the term of the lease for one additional term of five
years.
These
obligations are summarized in the table below:
20
Contractual
Obligations
The
following table presents future contractual obligations due by fiscal period as
of September 30, 2009:
2009
|
2010-2011 | 2012-2013 |
2014
and
Thereafter
|
Total
|
||||||||||||||||
Operating
lease commitments
|
$
|
75,484
|
$
|
2,184,804
|
$
|
2,501,903
|
$
|
1,184,930
|
$
|
5,947,121
|
||||||||||
Capital
& Equipment leases
|
105,434
|
730,062
|
573,515
|
162,476
|
1,571,487
|
|||||||||||||||
Total
|
$
|
180,918
|
$
|
2,914,866
|
$
|
3,075,418
|
$
|
1,347,406
|
$
|
7,518,608
|
Off-Balance
Sheet Arrangements
We
currently have no off-balance sheet arrangements.
Critical
Accounting Policies
The
preparation of our financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and judgments that affect our reported assets, liabilities, revenues, and
expenses, and the disclosure of contingent assets and liabilities. We base our
estimates and judgments on historical experience and on various other
assumptions we believe to be reasonable under the
circumstances. Future events, however, may differ markedly from our
current expectations and assumptions. While there are a number of significant
accounting policies affecting our consolidated financial statements, we believe
the following critical accounting policies involve the most complex, difficult
and subjective estimates
and judgments:
Revenue
Recognition
The
Company’s revenue is generated from the sale of our proprietary tax resolution
products and services. TaxMasters uses the proportionate completion method
for revenue recognition. With this method, we determine our revenue by
gathering the completion points of six major services rendered by the
company. These services are Consultations, Tax Returns, Automated
Collection Service (ACS), Revenue Officer Case (ROC), Collection Due Process
(CDP), and Settlement Analysis. Revenue is recognized when it is
earned, typically when our services have been rendered. Upon
execution of an agreement, if services have not been provided then the amount to
be paid under such agreement is recorded as deferred revenue on the balance
sheet and is reclassified as revenue on the statement of operations after
services have been provided and such revenue earned.
Flat fees
charged for services are recognized as revenue in the same period the services
are rendered. Fees received prior to services being rendered are
initially deferred and not until the services are completed are they recognized
as revenue.
In
addition to the flat fee, certain services require our tax consultants to
interact with the IRS, such as a settlement negotiation or an audit, for which
we charge our clients additional consulting fees. We provide our
services on a “pay-as-you-go” basis and an installment plan. These
consulting fees are recognized when the services are rendered.
Any
contracts where revenue earned is expected to take longer than twelve months is
classified on the balance sheet as a liability until earned. Revenue
under the contract that is expect to take less than twelve months to be earned
is classified as a current liability and revenue under such contract that is
expect to take more than twelve months to be earned is classified as a long term
liability.
21
Trade Receivables
Trade
accounts receivable are stated at the amount the Company expects to
collect. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments. Management considers the following factors when determining
the collectability of specific customer accounts: customer
credit-worthiness, past transaction history with the customer, current economic
and industry trends, and changes in customer payment terms. If the
financial condition of the Company’s customers were to deteriorate,
adversely affecting their ability to make payments, additional allowances would
be required. The Company provides for estimated uncollectible amounts
through a charge to earnings and an increase to a valuation
allowance. Balances that remain outstanding after the Company has
used reasonable collection efforts are written off through a charge to the
valuation allowance and a credit to accounts receivable.
The
Company’s trade receivables are generally unsecured. The Company has
no concentration of revenue with any one or any few customers that the loss of
any one or a few customers could impact its operations materially unless such a
loss of customers were a general loss of customers.
Recent
Accounting Pronouncements
On April
1, 2009, the Company adopted authoritative guidance issued by the Financial
Accounting Standards Board (FASB) on interim disclosures about fair value of
financial instruments. This guidance amends prior guidance to require
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial statements.
The guidance is effective for interim reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15, 2009. An
entity may early adopt this guidance if certain requirements are met. The
guidance does not require disclosures for earlier periods presented for
comparative purposes at initial adoption. In periods after initial adoption, the
guidance requires comparative disclosures only for periods ending after initial
adoption. The adoption of this guidance did not have a material impact on the
Company’s financial statements.
On April
1, 2009, the Company adopted authoritative guidance issued by the FASB on
determining fair value when the volume and level of activity for the asset or
liability have significantly decreased and identifying transactions that are not
orderly. The guidance affirms that the
objective of fair value when the market for an asset is not active is the price
that would be received to sell the asset in an orderly transaction; clarifies
and includes additional factors for determining whether there has been a
significant decrease in market activity for an asset when the market for that
asset is not active; and eliminates the proposed presumption that all
transactions are distressed (not orderly) unless proven otherwise. The guidance
requires an entity to base its conclusion about whether a transaction was not
orderly on the weight of the evidence. In addition, this guidance requires an
entity to disclose a change in valuation technique (and the related inputs)
resulting from the application of this guidance and to quantify its effects, if
practicable. This guidance is effective for interim and annual periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009 if certain requirements are met. It must be applied prospectively
and retrospective application is not permitted. The adoption of this guidance
did not have a material impact on the Company’s financial
statements.
On July
1, 2009, the Company adopted authoritative guidance issued by the FASB
concerning the reporting of subsequent events. The guidance’s intent
is to establish general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. This guidance became
effective for financial statements issued for fiscal years and interim periods
beginning after June 15, 2009. The adoption of this guidance did
not have a material impact on the Company’s financial statements.
In June
2009, the FASB issued authoritative guidance on accounting standards
codification and the hierarchy of generally accepted accounting principles. The
guidance authorized the FASB Accounting Standards Codification as the sole
source for authoritative United States of America Generally Accepted Accounting
Principals (“U.S. GAAP”). This guidance will be effective for
financial statements issued for reporting periods that end after September 15,
2009. The adoption of this guidance did not have a material impact on the
Company’s financial statements.
22
In
October 2009, the FASB issued authoritative guidance on multiple-deliverable
revenue arrangements. The guidance requires
entities to allocate revenue in an arrangement using estimated selling prices of
the delivered goods and services based on a selling price hierarchy. The
amendments eliminate the residual method of revenue allocation and require
revenue to be allocated using the relative selling price method. This guidance
removes tangible products from the scope of software revenue guidance and
provides guidance on determining whether software deliverables in an arrangement
that includes a tangible product are covered by the scope of the software
revenue guidance. This guidance will become effective for the Company beginning
July 1, 2010, with early adoption permitted. The Company is in the process of
evaluating the impact of the adoption of the guidance.
ITEM
4T. CONTROLS
AND PROCEDURES
(a) Disclosure Controls and
Procedures. Our management, with the participation
of our principal executive officer (chief executive officer) and principal
financial officer (chief financial officer), conducted an evaluation of the
effectiveness of the design and operation of our 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”), as of December 31, 2008
and updated the evaluation as of the end of the period covered by this report
(the “Evaluation Date”). Based on this evaluation, and due to the
material weaknesses in our internal control over financial reporting (as
described in the December 31, 2008 “Management’s Annual Report on
Internal Control over Financial Reporting” which was filed in our annual
report on Form 10-K for the year ended December 31, 2008), our chief executive
officer and chief financial officer concluded that as of September 30, 2009, our
disclosure controls and procedures were not effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms.
The
material weakness relates to the lack of segregation of duties in financial
reporting, as our financial reporting and all accounting functions are performed
by external consultants with no oversight by a professional with accounting
expertise. Our CFO does not possess accounting expertise and our company
does not have an accounting staff with public company audit experience.
This weakness is due to the fact that prior to the Share Exchange the Target was
a privately held company and its staff, overall, had minimal experience in
public company matters, including public company accounting. To
remedy this material weakness, we intend to engage accountant personnel to
assist with financial reporting as promptly as possible.
(b) Internal Controls Over Financial
Reporting. There was no change in our internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the fiscal quarter to which this report
relates that has materially affected or is reasonably likely to materially
affect our internal control over financial reporting.
23
PART
II – OTHER INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
On August
4, 2009, pursuant to the Share Exchange Agreement by and among the Company,
TaxMasters and Patrick Cox, the Company acquired all of the issued and
outstanding shares of common stock of TaxMasters in exchange for the issuance by
the Registrant to Mr. Cox of (a) 1,000 shares of “Control Series of Preferred
Stock” and (b) 301,000,000 shares of the Company’s common stock. This
issuance was considered exempt pursuant to the provisions of Section 4(2) of the
Securities Act of 1933 as a sale of securities not involving a public offering
in that Mr. Cox is an accredited investor as defined under Rule 501, there was
no public solicitation or advertisement and the Company has a reasonable basis
to believe that Mr. Cox was acquiring his shares for investment purposes and not
with a view to resale or distribution.
Pursuant
to employment agreements, each dated August 4, 2009, the Company issued an
aggregate of 32,403,000 shares of common stock to seven of its executives in
varying amounts. These shares were issued as signing bonuses to such
executives. Each of the executives represented and warranted in his
or her employment agreement that such executive was acquiring his or her bonus
shares for personal investment purposes and not with a view to resale or
distribution. The issuance of the shares to these executives was an
exempt transaction under Section 4(2) of the Securities Act of 1933 as a sale of
securities not involving a public offering in that the executives are accredited
investors as defined under Rule 501(a)(4) (an executive officer of the issuer),
there was no public solicitation or advertisement and the Company has a
reasonable basis to believe that the executives were acquiring their shares for
investment purposes and not with a view to resale or distribution.
Additionally,
during the three month period ended September 30, 2009, the Company also issued
100,000 shares of its common stock to each of its five directors for their
service on the board of directors of the Company. The issuance of the
shares to the directors was an exempt transaction under Section 4(2) of the
Securities Act of 1933 as a sale of securities not involving a public offering
in that the directors are accredited investors as defined under Rule 501(a)(4)
(director of the issuer), there was no public solicitation or advertisement and
the Company has a reasonable basis to believe that the directors were acquiring
their shares for investment purposes and not with a view to resale or
distribution.
During
the three month period ended September 30, 2009, the Company issued 2,171,000
shares of common stock to various non-executive employees of the Company to
reward them for their service to the Company. Such issuances were an
exempt transaction under Section 2(a)(3) as a transaction not involving an offer
or sale of securities in that no consideration was given by any of the employees
for the receipt of their shares.
ITEM
3. DEFAULTS
UPON SENIOR SECURITIES
Not
applicable.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not
applicable.
ITEM
5. OTHER
INFORMATION
None.
24
ITEM 6. EXHIBITS
Number
|
Description
|
10.1
|
Employment
Agreement, dated as of August 4, 2009, by and between the registrant and
Patrick R. Cox.
|
10.2
|
Employment
Agreement, dated as of August 4, 2009, by and between the registrant and
Glenn A. Clamon.
|
10.3
|
Employment
Agreement, dated as of August 4, 2009, by and between the registrant and
Renee Anderson-Miller.
|
10.4
|
Employment
Agreement, dated as of August 4, 2009, by and between the registrant and
Chirstopher J. Koscinski.
|
10.5
|
Employment
Agreement, dated as of August 4, 2009, by and between the registrant and
Michael Wallace.
|
10.6
|
Employment
Agreement, dated as of August 4, 2009, by and between the registrant and
Paulette Kitson.
|
10.7
|
Employment
Agreement, dated as of August 4, 2009, by and between the registrant and
Kevin L Schmidt.
|
10.8
|
Employment
Agreement, dated as of August 4, 2009, by and between the registrant and
Frederick V. Hackett.
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
25
SIGNATURE
PAGE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
TAXMASTERS,
INC.
|
|
Dated:
November 23, 2009
|
|
By:
/s/ PATRICK R.
COX
|
|
Chief
Executive Officer
|
|
(Principal
Executive Officer)
|
26