Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - PSM HOLDINGS INCFinancial_Report.xls
EX-10.1 - EXHIBIT 10.1 - PSM HOLDINGS INCex10-1.htm
EX-32.1 - EXHIBIT 32.1 - PSM HOLDINGS INCex32-1.htm
EX-31.1 - EXHIBIT 31.1 - PSM HOLDINGS INCex31-1.htm
EX-4.1 - EXHIBIT 4.1 - PSM HOLDINGS INCex4-1.htm

 

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 March 31, 2015

 

 

[   ]

TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transitional period from ______ to ______

 

Commission File No. 000-54988

 

PSM HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

90-0332127

(State or other jurisdiction of incorporation of organization)

(I.R.S. Employer Identification Number)

  

  

5900 Mosteller Drive, Oklahoma City, Oklahoma

73112

(Address of principal executive office)

(Zip code)

 

(Registrant’s telephone number, including area code): (405) 753-1900

 

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 twelve 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 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 (§ 229.405 of this chapter) during the preceding twelve months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]  No [   ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [   ]

Accelerated filer [   ]

Non-accelerated filer [   ]

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 [   ]  No [X]

 

As of May 20, 2015, there were 27,507,759 shares of registrant’s common stock outstanding. 

  

 
 

 

 

PSM HOLDINGS, INC.

Report on Form 10-Q

For the quarter ended March 31, 2015

 

TABLE OF CONTENTS

 

 

PART I - FINANCIAL INFORMATION  

 4

 

 

 

 Item 1.

Financial Statements

 4

 

 

 

 Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

 

 

 

 Item 3.

Quantitative and Qualitative Disclosures about Market Risk

28

 

 

 

 Item 4.

Controls and Procedures 

28

 

 

 

PART II - OTHER INFORMATION  

29

 

 

 

 Item 1A.

Risk Factors 

29

 

 

 

 Item 6.

Exhibits

30

  

 
2

 

 

Forward-Looking Statements

 

This report contains statements that plan for or anticipate the future.  Forward-looking statements include statements about the future of operations involving the mortgage brokerage or loan business, statements about our future business plans and strategies, and most other statements that are not historical in nature.  In this report, forward-looking statements are generally identified by the words “anticipate,” “plan,” “intend,” “believe,” “expect,” “estimate,” and the like.  Although management believes that any forward-looking statements it makes in this document are reasonable, because forward-looking statements involve future risks and uncertainties, there are factors that could cause actual results to differ materially from those expressed or implied.  For example, a few of the uncertainties that could affect the accuracy of forward-looking statements include the following:

 

 

The competitive and regulatory pressures faced by us in the mortgage industry;

 

The hiring and retention of key employees;

 

Expectations and the assumptions relating to the execution and timing of growth strategies;

 

The assumption of unknown risks or liabilities from past or future business combination transactions;

 

Any decline in the economy;

 

A significant increase in interest rates;

 

A failure to increase our warehouse lines of credit to facilitate additional loan originations and related revenue;

 

A loss of significant capacity in our warehouse lines of credit;

 

The loss from any default on mortgage loans originated by us before they are sold to third parties;

 

The loss of branch offices from our network;

 

Uncertainty of the secondary mortgage market;

 

Inability to expand market presence through recruiting;

 

Failure to successfully generate loan originations or otherwise market our services;

 

Failure to meet minimum capital requirements to maintain our Full Eagle or licensing with HUD or other state regulatory agencies;

 

Any default in our agreements with preferred shareholders; and

 

Failure to raise sufficient funds for operating needs during periods of reduced cash flows.

  Failure to comply with debt covenants which could result in the immediate repayment of notes payable.

 

In light of the significant uncertainties inherent in the forward-looking statements made in this report, the inclusion of this information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.

 

Introductory Comment

 

Throughout this Quarterly Report on Form 10-Q, unless otherwise designated, the terms “we,” “us,” “our,” “the Company,” and “our Company” refer to PSM Holdings, Inc., a Delaware corporation, and its consolidated subsidiaries.

 

 
3

 

  

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

PSM HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   

March 31, 2015 (Unaudited)

   

June 30, 2014

 

ASSETS

               

Current Assets:

               

Cash & cash equivalents

  $ 591,718     $ 764,931  

Accounts receivable - related party, net

    -       683,992  

Accounts receivable- non related party, net

    1,512,860       43,974  

Loans held for sale

    43,630,170       15,416,781  

Prepaid expenses

    143,505       142,096  

Other assets

    4,265       16,058  

Total current assets

    45,882,518       17,067,832  
                 

Property and equipment, net

    265,504       582,118  
                 

Cash restricted for surety bonds

    732,500       755,701  

Loans receivable

    87,778       88,898  

Employee advances

    57,099       500  

Intangible assets, net of accumulated amortization, March 31, 2015 - $117,349 and June 30, 2014 - $599,270

    2,779,512       3,122,590  

Security deposits

    46,075       44,453  
                 

Total Assets

  $ 49,850,986     $ 21,662,092  
                 
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current Liabilities:

               

Accounts payable

  $ 1,176,734     $ 602,351  

Line of credit - related party

    140,411       -  

Warehouse lines of credit payable- related party

    43,134,349       14,942,781  

Warehouse lines of credit payable- non related party

    -       474,000  

Short term financing

    8,194       15,584  

Notes payable - related party

    120,000       -  

Notes payable - non related party

    750,000       -  

Dividend payable – related party

    492,155       82,500  

Dividend payable – non related party

    265,103       51,000  

Accrued liabilities

    1,052,610       643,915  

Cash held in escrow for renovation loans

    -       23,201  

Total current liabilities

    47,139,556       16,835,332  
                 
                 

Total Liabilities

    47,139,556       16,835,332  
                 

Stockholders' Equity:

               

Preferred stock, $0.001 par value, 10,000,000 shares authorized:

               

Convertible Series A, 3,700 shares outstanding at March 31, 2015 and June 30, 2014

    4       4  

Convertible Series B, 2,000 shares outstanding at March 31, 2015 and June 30, 2014

    2       2  

Convertible Series C, 1,800 shares outstanding at March 31, 2015 and June 30, 2014

    2       2  

Convertible Series D, 1,400 shares outstanding at March 31, 2015 and June 30, 2014

    1       1  

Convertible Series E, 822.5 shares and 0 shares outstanding at March 31, 2015 and June 30, 2014

    1       -  

Common stock, $0.001 par value, 400,000,000 shares authorized, 27,507,759 and 29,257,759 shares issued and outstanding at March 31, 2015 and June 30, 2014, respectively

    27,508       29,258  

Treasury stock, at cost: shares held 21,600 at March 31, 2015 and June 30, 2014

    (22,747 )     (22,747 )

Additional paid in capital

    25,676,027       25,696,013  

Accumulated deficit

    (22,969,368 )     (20,875,773 )

Total Stockholders' Equity

    2,711,430       4,826,760  
                 

Total Liabilities and Stockholders' Equity

  $ 49,850,986     $ 21,662,092  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 
4

 

  

PSM HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

 

 

 

   

For the three months ended

March 31,

   

For the nine months ended

March 31,

 
   

2015

   

2014

   

2015

   

2014

 

Revenues:

                               

Revenues - related party

  $ -     $ 465,282     $ 234,012     $ 5,412,804  

Revenues - non related party

    5,142,485       1,858,576       11,128,925       4,473,329  

Total revenues

    5,142,485       2,323,858       11,362,937       9,886,133  
                                 

Operating expenses:

                               

Selling, general & administrative

    5,422,530       4,147,000       12,858,669       14,356,237  

Depreciation and amortization

    32,985       76,358       100,730       223,041  

Total operating expenses

    5,455,515       4,223,358       12,959,399       14,579,278  
                                 

Loss from operations

    (313,030 )     (1,899,500 )     (1,596,462 )     (4,693,145 )
                                 

Non-operating income (expense):

                               

Interest expense

    (29,969 )     (2,007 )     (48,615 )     (3,994 )

Interest and dividend income

    1,722       1,953       4,804       5,455  

Realized gain (loss) on sale or disposal of assets

    (296,941 )     (18,628 )     (453,322 )     (18,628 )

Other income

    -       38,000       -       88,500  

Total non-operating income (expense)

    (325,188 )     19,318       (497,133 )     71,333  
                                 

Loss from continuing operations before income tax

    (638,218 )     (1,880,182 )     (2,093,595 )     (4,621,812 )
                                 

Provision for income tax

    -       -       -       -  
                                 

Net loss

    (638,218 )     (1,880,182 )     (2,093,595 )     (4,621,812 )
                                 

Dividends on preferred stock

    (486,125 )     (85,500 )     (757,258 )     (256,500 )
                                 

Comprehensive loss

  $ (1,124,343 )   $ (1,965,682 )   $ (2,850,853 )   $ (4,878,312 )
                                 

Net loss per common share and equivalents - basic and diluted loss from operations

  $ (0.04 )   $ (0.07 )   $ (0.10 )   $ (0.17 )
                                 

Weighted average shares of share capital outstanding - basic & diluted

    27,507,759       29,468,259       27,530,653       29,437,446  

 

Weighted average number of shares used to compute basic and diluted loss per share for the three and nine month periods ended March 31, 2015 and 2014 is the same since the effect of dilutive securities is anti-dilutive.

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 
5

 

  

PSM HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED) 

 

   

For the nine months ended March 31,

 
   

2015

   

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net loss

  $ (2,093,595 )   $ (4,621,812 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation and amortization

    100,730       223,041  

Restricted cash

    23,201       (402,989 )

Disposition of property and equipment

    272,022       -  

Disposition of intangible assets

    296,941       -  

Stock received from sale of assets

    (124,250 )     -  

Share based payment awards

    72,573       34,837  

Stock issued to third parties in lieu of cash

    -       9,935  

Stock issued to employees in lieu of cash

    -       6,624  

(Increase) decrease in current assets:

               

Accounts receivable

    (784,894 )     336,417  

Mortgage loans held for sale

    (28,213,389 )     2,273,856  

Prepaid expenses

    (1,409 )     (144,822 )

Employee advances

    (56,599 )     11,789  

Other current assets

    11,793       (10,143 )

Increase (decrease) in current liabilities:

               

Accounts payable

    574,383       319,247  

Accrued liabilities

    408,694       (755,931 )

Renovation escrow

    (23,201 )     151,310  

Net cash used in operating activities

    (29,537,000 )     (2,568,641 )
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Purchase of property and equipment

    (10,000 )     (208,425 )

Cash received from (paid for) security deposits

    (1,621 )     (11,341 )

Net cash used in investing activities

    (11,621 )     (219,766 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Cash borrowed (paid) on short term financing

    (7,391 )     957,235  

Cash paid for preferred dividends

    (133,500 )     (256,500 )

Cash proceeds from warehouse lines of credit - non related party

    1,609,894       58,577,202  

Cash payments on warehouse lines of credit - non related party

    (2,083,894 )     (60,405,732 )

Cash proceeds from warehouse lines of credit - related party

    239,236,527       234,308,806  

Cash payments on warehouse lines of credit - related party

    (211,044,959 )     (234,722,052 )

Cash proceeds from the sale of preferred stock

    787,200       -  

Cash proceeds on loans receivable

    141,531       -  

Cash proceeds on note payable from related party

    120,000       -  

Cash proceeds on note payable from nonrelated party

    750,000       -  

Net cash provided by (used in) financing activities

    29,375,408       (1,541,041 )
                 

NET DECREASE IN CASH & CASH EQUIVALENTS

    (173,213 )     (4,329,448 )
                 

CASH & CASH EQUIVALENTS, BEGINNING BALANCE

    764,931       4,515,618  
                 

CASH & CASH EQUIVALENTS, ENDING BALANCE

  $ 591,718     $ 186,170  

 

See Note 4 - Statement of Cash Flows Additional Disclosures

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 
6

 

  

PSM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)  

 

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Company Background

As used herein and except as otherwise noted, the terms “Company” or “PSMH” shall mean PSM Holdings, Inc., a Delaware corporation.

 

The Company was incorporated under the laws of the State of Utah on March 12, 1987, as Durban Enterprises, Inc. On July 19, 2001, Durban Enterprises, Inc., created a wholly-owned subsidiary called Durban Holdings, Inc., a Nevada corporation, to facilitate changing the domicile of the Company to Nevada. On August 17, 2001, Durban Enterprises, Inc. merged with and into Durban Holdings, Inc., leaving the Nevada corporation as the survivor.  The Company retained the originally authorized 100,000,000 shares at $0.001 par value.

 

On May 18, 2005, Durban Holdings, Inc. completed the acquisition of all of the outstanding stock of PrimeSource Mortgage, Inc., a Texas corporation, by a stock for stock exchange in which the stockholders of PrimeSource Mortgage, Inc. received 10,250,000 shares, or approximately 92% of the outstanding stock of the Company. Following the acquisition, effective May 18, 2005, the name of the parent “Durban Holdings, Inc.”, was changed to “PSM Holdings, Inc.” For reporting purposes, the acquisition was treated as an acquisition of the Company by PrimeSource Mortgage, Inc. (reverse acquisition) and a recapitalization of PrimeSource Mortgage, Inc. The historical financial statements prior to May 18, 2005, are those of PrimeSource Mortgage, Inc. Goodwill was not recognized from the transaction.

 

On December 14, 2011, PSM Holdings, Inc., created a wholly-owned subsidiary called PSM Holdings, Inc., a Delaware corporation, to facilitate changing the domicile of the Company to Delaware. On December 29, 2011, PSM Holdings, Inc. merged with and into PSM Holdings, Inc., leaving the Delaware Corporation as the survivor. The Company retained the originally authorized 100,000,000 shares at $0.001 par value.

 

Business Activity

The Company originates mortgage loans funded either directly off its warehouse lines of credit or through brokering transactions to other third parties. Approximately 95% of the Company’s mortgage origination volume is banked off of its current warehouse lines. The Company has relationships with multiple investors who purchase the loans funded on its warehouse lines. All of the Company’s lending activities are conducted by its subsidiary, PrimeSource Mortgage, Inc., a Delaware corporation (“PSMI”).

 

Historically, a significant portion of the Company’s business has been referral based and purchase orientated (versus refinance). The Company does not directly participate in the secondary markets and further does not maintain a servicing portfolio. Approximately 75% of total loan applications are generated from business contacts and previous client referrals. Realtor referrals and other lead sources account for the balance of loan applications.

 

The Company currently operates or is licensed in the following states: Arkansas, California, Colorado, Florida, Kansas, Missouri, Montana, New Jersey, New Mexico, North Dakota, Oklahoma, Oregon, Texas and Utah.

 

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for the presentation of interim financial information, but do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. It is recommended that these consolidated financial statements be read in conjunction with the audited financial statements for the year ended June 30, 2014, which were filed with the Securities and Exchange Commission on October 14, 2014 on Form 10-K for the year ended June 30, 2014. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending June 30, 2015.

 

Summary of Significant Accounting Policies

The following summary of significant accounting policies of the Company is presented to assist in the understanding of the Company’s financial statements. The financial statements and notes are the representation of the Company’s management who is responsible for their integrity and objectivity. The financial statements of the Company conform to accounting principles generally accepted in the United States of America (GAAP). The Financial Accounting Standards Board (FASB) is the accepted standard-setting body for establishing accounting and financial reporting principles.

 

 
7

 

  

Principles of Consolidation

The consolidated financial statements include the accounts of PSM Holdings, Inc., its wholly-owned subsidiary WWYH, Inc., and WWYH's wholly-owned subsidiary Prime Source Mortgage, Inc. All material intercompany transactions have been eliminated in the consolidation.

 

Use of Estimates

Management uses estimates and assumptions in preparing financial statements.  Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.  Accordingly, actual results could differ from those estimates.  Significant estimates include the value of intangibles, estimated depreciable lives of property, plant and equipment, estimated valuation of deferred tax assets due to net operating loss carry-forwards and estimates of uncollectible amounts of loans and notes receivable.

 

Cash and Cash Equivalents

For the purposes of the statement of cash flows, cash and cash equivalents include cash on hand and cash in checking and savings accounts, and all investment instruments with an original maturity of three months or less.

 

Restricted Cash

The Company has certain cash balances set aside as collateral to secure various bonds required pursuant to the licensing requirements in some of the states in which it conducts business.

 

Accounts Receivable

Accounts receivable represent commissions earned and fees charged on closed loans that the Company has not received. Accounts receivable are stated at the amount management expects to collect from balances outstanding at period-end. The Company estimates the allowance for doubtful accounts based on an analysis of specific accounts.

 

Employee Advances and Loans Receivable

Employee advances and loans receivable are stated at the unpaid principal balance. Interest income is recognized in the period in which it is earned.

 

Loans Held For Sale

The Company originates all of its residential real estate loans with the intent to sell them in the secondary market. Loans held for sale consist primarily of residential first and second mortgage loans that are secured by residential real estate throughout the United States.

 

Although the Company does not intend to be a loan servicer, from time to time it is necessary that certain loans be serviced for a period of time. Even in these situations the Company intends to service the loan only for the amount of time necessary to get the loan sellable to a third party investor. As of March 31, 2015, the Company had four such loans that required servicing before they can be sold to an investor. Three of the four loans were performing and were carried on the books at their fair value, determined using current secondary market prices for loans with similar coupons, maturities and credit quality. One of the loans was delinquent. The delinquent loan had unpaid principle and interest of $1,415 as of March 31, 2015. The Company has been working with this borrower who has made the principal and interest payment each of the last eight months. As of March 31, 2015, the Company has not recorded any adjustment to the fair value of the remaining four loans as any accrued gain or loss would not be material to the Company. 

 

As noted above, the fair value of loans held for sale is determined using current secondary market prices for loans with similar coupons, maturities and credit quality. Loans held for sale are pledged as collateral under the Company’s warehouse lines of credit. The Company relies substantially on the secondary mortgage market as all of the loans originated are sold into this market.

 

Interest on mortgage loans held for sale is recognized as earned and is only accrued if deemed collectible. Interest is generally deemed uncollectible when a loan becomes three months or more delinquent or when a loan has a defect affecting its salability. Delinquency is calculated based on the contractual due date of the loan. Loans are written off when deemed uncollectible.

 

Prepaid Expenses

Generally, prepaid expenses are advance payments for products or services that will be used in operations during the next 12 months. However, the Company engages an independent third party to perform a five-year outreach campaign to borrowers after their loan is funded. These amounts are capitalized and amortized equally each quarter over five years. Other prepaid expenses consist of prepaid insurance, rents and prepaid services provided by outside consultants. Prepaid expenses amounted to $143,505 and $142,096 at March 31, 2015 and June 30, 2014, respectively.

 

 
8

 

  

Property and Equipment

Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets as follows. Expenditures for maintenance and repairs are charged to expense as incurred.

 

Furniture, fixtures and office equipment (years)

5

-

7

Computer equipment (years)

 

5

 

 

Goodwill and Indefinite-Lived Intangible Assets

Goodwill acquired in business combinations is assigned to the reporting entity that is expected to benefit from the combination as of the acquisition date. Goodwill impairment is determined using a two-step process. The first step of the process is to compare the fair value of a reporting unit with its carrying amount, including goodwill. In performing the first step, the Company determines the fair value of its reporting entity by using a discounted cash flow ("DCF") analysis. Determining fair value using a DCF analysis requires the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates and the amount and timing of expected future cash flows. If the fair value of a reporting entity exceeds its carrying amount, goodwill of the reporting entity is not impaired and the second step of the impairment test is not required. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is required to be performed to measure the amount of impairment, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting entity’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of the reporting entity’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

 

The impairment test for indefinite-lived intangible assets involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

 

Long-Lived Assets and Intangible Assets with Definite Lives

Long-lived assets, including property and equipment and intangible assets with definite lives are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying amount is deemed to not be recoverable, an impairment loss is recorded as the amount by which the carrying amount of the long-lived asset exceeds its fair value. Amortization of definite lived intangible assets is recorded on a straight-line basis over their estimated lives.

 

Income Taxes

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the bases of certain assets and liabilities for financial and tax reporting. The deferred taxes represent the future tax return consequences of those differences, which will either be deductible or taxable when the assets and liabilities are recovered or settled. In addition, there is the deferred tax asset which represents the economic value of various tax carryovers.

 

Taxes Collected and Remitted to Governmental Authorities

When applicable, the Company collects gross receipts taxes from its customers and remits them to the required governmental authorities. Related revenues are reported net of applicable taxes collected and remitted to governmental authorities.

 

Advertising

Advertising costs are expensed as incurred. Advertising expenses were $140,832 and $413,319 for the three and nine months ended March 31, 2015, respectively, compared to $205,833 and $567,485 for the three and nine months ended March 31, 2014, respectively. 

 

Share Based Payment Plan

The Company grants stock options and restricted stock units to certain executive officers, key employees, directors and independent contractors. Stock options have been granted for a fixed number of shares, vest equally over a three-year period and are valued using the Black-Scholes option pricing model. Stock grants have been awarded for a fixed number of shares with a value equal to the fair value of the Company’s common stock on the grant date. Stock-based compensation expense is recorded net of estimated forfeitures for the quarters ended March 31, 2015 and 2014 based on the stock-based awards that were expected to vest during such periods. Under the 2012 and 2015 Stock Incentive Plans, the Company can grant stock or options to employees, related parties, and unrelated contractors in connection with the performance of services provided to the Company by the awardees.

 

 
9

 

  

Revenue Recognition

The Company’s revenue is derived primarily from revenue earned from the origination and sale of mortgage loans. Revenues earned from origination of mortgage loans is recognized on the funding date of the loan. Loans are funded through warehouse lines of credit and are sold to investors, typically within 14 days. The gain or loss on the sale of loans is realized on the date the loans are sold.

 

Loss Per Common Share

Basic and diluted loss per common share is computed by dividing the loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share does not reflect per share amounts that would have resulted if diluted potential Common Stock had been converted to Common Stock because the effect would be anti-dilutive. The weighted average number of common shares outstanding during the three and nine months ended March 31, 2015 and 2014 were 27,507,759, 27,530,653, 29,468,259, and 29,437,446, respectively. Loss per common share from continuing operations for the three and nine months ended March 31, 2015 and 2014 was $0.04, $0.10, $0.07 and $0.17, respectively.

 

Compensated Absences

The Company records an accrual for vacation at each period end. Other compensated absences are expensed as incurred.

 

Reclassification

Certain accounts in the prior-year financial statements have been reclassified for comparative purposes to conform with the presentation in the current-year financial statements.

 

Recent Accounting Pronouncements

The Company has evaluated the possible effects on its financial statements of the accounting pronouncements and accounting standards that have been issued or proposed by FASB that do not require adoption until a future date, and determined they are not expected to have a material impact on the consolidated financial statements upon adoption.

 

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

 

NOTE 2 – ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

Accounts receivable is presented on the balance sheet net of estimated uncollectible amounts. The Company records an allowance for estimated uncollectible accounts in an amount approximating anticipated losses. Individual uncollectible accounts are written off against the allowance when collection of the individual accounts appears doubtful. The Company did not record an allowance for doubtful accounts as of March 31, 2015 or 2014.

 

NOTE 3 – PROPERTY AND EQUIPMENT

 

Property and equipment is summarized as follows:

 

   

March 31,

         
   

2015

   

June 30,

 
   

(Unaudited)

   

2014

 

Fixtures and equipment

  $ 600,793     $ 1,724,951  

Less: Accumulated depreciation

    (335,289

)

    (1,142,833

)

Property and equipment, net

  $ 265,504     $ 582,118  

  

Depreciation expense for the three and nine months ended March 31, 2015 was $18,253 and $54,593, compared to depreciation expense for the three and nine months ended March 31, 2014 of $40,043 and $114,100.

 

 
10

 

 

NOTE 4 – STATEMENTS OF CASH FLOWS ADDITIONAL DISCLOSURES

 

Supplemental information for cash flows at March 31, 2015 and 2014 consist of:

 

   

March 31,

   

March 31,

 
   

2015

   

2014

 
   

(Unaudited)

   

(Unaudited)

 

Supplemental Cash Flow Disclosures:

               

Cash paid for interest

  $ 48,615     $ 3,994  

Stock issued for services

  $ -     $ 16,559  

Stock and stock options issued to employees as bonus

  $ 72,573     $ 34,837  

 

NOTE 5 – RELATED PARTY TRANSACTIONS

 

President/Chief Executive Officer and Director

The Company entered into an employment agreement with a Director, Kevin Gadawski, as its Interim Chief Operating and Chief Financial Officer effective February 7, 2013. Pursuant to the terms of the employment agreement, the Company agreed to pay an annual compensation of $240,000. On August 28, 2013, Mr. Gadawski assumed the role of President and Chief Executive Officer.

 

On March 26, 2015, PSM Holdings, Inc. (the “Company”) entered into an Executive Employment Agreement (the “Agreement”) with Mr. Gadawski to serve as its Chief Financial Officer, Chief Operating Officer, and Chief Executive Officer. In addition, Mr. Gadawski will also assume the roles of President, Chief Executive Officer, and Director of the Company’s wholly owned subsidiary PrimeSource Mortgage, Inc. (“PSMI”) upon approval and acceptance from the various state and federal agencies with which PSMI is licensed. The agreement is effective April 1, 2015 and the term of the Agreement is three years, ending on March 31, 2018. Under the Agreement, Mr. Gadawski’s annual base salary is $250,000 (“Base Salary”). If the Agreement is extended, the Base Salary will be reviewed no less frequently than annually, but at no time during the term of this Agreement will Mr. Gadawski’s Base Salary be decreased. If the Company is reasonably unable to pay the Base Salary for any pay period, the Company and Mr. Gadawski may agree that the Base Salary be paid with shares of common stock under the Company’s 2015 Stock Incentive Plan at a 25% discount to the fair market price of the stock at the end of the pay period. As a signing bonus for entering into the Agreement, the Company agreed to grant to Mr. Gadawski options to purchase up to 10,000,000 shares of common stock. Mr. Gadawski will be eligible to participate in any incentive bonus pool maintained for persons including executive officers of the Company. He will be eligible to receive an annual bonus as per the incentive bonus pool of up to 100% of the then applicable Base Salary, less applicable withholding taxes. In addition, the Company will provide Mr. Gadawski a car allowance in the amount of $750 per month as well as reimburse him for the cost of annual automobile insurance.

 

For the three and nine months ended March 31, 2015 the Company recorded compensation expense of $60,000 and $169,003, respectively. For the three and nine months ended March 31, 2014, the Company recorded compensation expense of $60,000 and $170,000 which included 26,494 shares of common stock received in lieu of cash compensation. The shares were discounted at 25% to the market on the date the compensation was earned. The Company also pays monthly health insurance premiums for the employee and his family currently in the amount of $292 per month.

 

Executive Vice-President and Director

The Company entered into an employment agreement with Mr. Jeff Smith, its Executive Vice-President effective January 1, 2011. Pursuant to the terms of the employment agreement, the Company agreed to pay an annual compensation of $200,000, a monthly car allowance of $700, and a monthly allowance of $1,290 for health benefits for Mr. Smith and his family. On January 1, 2014, the employment agreement was renewed for one year with annual compensation of $250,000. On December 24, 2014, the term of the employment agreement was amended to a month-to-month basis. For the three and nine months ended March 31, 2015 the Company recorded compensation expense of $23,157 and $122,636, a car allowance of $700 and $4,900, and monthly health insurance benefits currently at $292 per month. For the three and nine months ended March 31, 2014 the Company recorded $52,053 and $145,419 in compensation expense and $2,100 and $6,300 in car allowance. Effective January 31, 2015, Mr. Smith resigned from all positions with the Company and its subsidiaries, and accordingly his employment agreement was not renewed.

  

 
11

 

 

On September 12, 2014, the Company entered into a loan agreement with Mr. Smith (the “Lender”). Under the terms of the loan agreement, the Lender agreed to loan $120,000 for operating expenses of the Company and its operating subsidiary, as well as to fund growth of the Company. The funds were received by the Company on September 12, 2014. The loan is evidenced by a 10% Convertible Promissory Note which bears interest at 10% per annum and matures September 12, 2015, unless extended through mutual consent. The note is convertible at the per share rate of common stock sold pursuant to a Qualified Offering by the Company. The term “Qualified Offering” means one or more offerings (whether or not proceeds are received by the Company pursuant to such offering) of debt or equity securities of the Company to non-affiliates in the aggregate amount of at least $1,000,000 commenced after the note issuance date. The conversion price is determined by the lowest of either the offering price per common share or the conversion or exercise price for common stock in any such Qualified Offering. In addition, the Lender received four tenths (0.40) of one common stock purchase warrant for each $1.00 loaned to the Company (totaling 48,000 warrants). Each five-year warrant is exercisable at $0.40 per share, subject to adjustment in the event of the issuance of additional common shares or common stock equivalents at less than the exercise price. The warrants also provide for cashless exercise. The warrants are not transferable or assignable without the prior consent of the Company.

  

Former President/Chief Executive Officer and Director

The Company entered into an employment agreement with its former President/Chief Executive Officer effective January 1, 2011. Pursuant to the terms of the employment agreement, the Company issued 750,000 shares of Common Stock valued at $525,000 as a signing bonus to induce him to enter into the employment agreement, agreed to pay an annual compensation of $225,000, a monthly car allowance of $750, and a monthly allowance of $800 for health benefits for the officer and his family. On January 1, 2013, the annual compensation was increased to $275,000 pursuant to the terms of the employment agreement. On August 28, 2013, this individual resigned from all positions with the Company. As such, no compensation was paid for the current three and nine month periods. For the three and nine months ended March 31, 2014 the Company recorded (i) $2,696 and $140,196 in compensation expense, (ii) $0 and $4,500 in car allowance, and (iii) monthly health insurance benefits at approximately $345 per month.

 

 
12

 

 

Other Directors

On February 7, 2013, the Company entered into a two-year consulting agreement with an entity controlled by Michael Margolies, one of the Company’s directors. The agreement calls for compensation of $15,000 per month for strategic advisory and investor relation services. For the nine months ended March 31, 2015 and 2014, the Company recorded consulting expense of $0 and $60,000, respectively. In October 2013, the Company paid half of the consulting fee by the issuance of 39,741 shares of common stock that were issued at a 25% discount to the market on the date the compensation was earned.

 

In November 2013, Mr. Margolies agreed to temporarily suspend providing investor relation services to the Company. Effective April 1, 2015, the Company requested that Mr. Margolies begin providing services per the original consulting agreement. Mr. Margolies is also the managing member of the three entities that invested in the Company's Series A, Series C, and Series E preferred stock. These entities accrue dividends consistent with other investors in the Company's preferred stock. See Note 11 to the financial statements for a further discussion of the Company's preferred stock.

 

On November 13, 2014, the Company entered into a loan agreement with LB Merchant PSMH-1, LLC and LB Merchant PSMH-2, LLC, entities controlled by Michael Margolies, a director of the Company (the “Lenders”). Under the terms of the loan agreement, the Lenders agreed to loan $70,000 for operating expenses of the Company and its operating subsidiary, as well as to fund growth of the Company. The funds were received by the Company on November 13, 2014. The loan is evidenced by a 10% Convertible Promissory Note which bears interest at 10% per annum and matures November 13, 2015, unless extended through mutual consent. The note is convertible at the per share rate of common stock sold pursuant to a Qualified Offering by the Company. The term “Qualified Offering” means one or more offerings (whether or not proceeds are received by the Company pursuant to such offering) of debt or equity securities of the Company to non-affiliates in the aggregate amount of at least $1,000,000 commenced after the note issuance date. The conversion price is determined by the lowest of either the offering price per common share or the conversion or exercise price for common stock in any such Qualified Offering. The loans were repaid in December 2015 upon the completion of the Series E capital raise. In addition, the Lenders received four tenths (0.40) of one common stock purchase warrant for each $1.00 loaned to the Company (totaling 28,000 warrants). Each five-year warrant is exercisable at $0.40 per share, subject to adjustment in the event of the issuance of additional common shares or common stock equivalents at less than the exercise price. The warrants also provide for cashless exercise. The warrants are not transferable or assignable without the prior consent of the Company.

 

Mr. James Miller, one of the Company’s directors, is a principal stockholder of a management company that provides two revolving warehouse lines of credit to the Company. Amounts outstanding on the credit lines as of March 31, 2015 and June 30, 2014 were $43,134,349 and $14,942,781 which were offset by $43,630,170 and $14,942,781 of funding receivables as of March 31, 2015 and June 30, 2014, respectively (See Note 8). On December 1, 2014, the Company executed a note agreement with this management company to repay a line of credit provided by this related party. The note calls for monthly payments of $984.20 beginning December 1, 2014. The note also calls for a balloon payment on December 1, 2017. The Company made payments in December and January. The Company did not make February and March payments as it is working with the management company to reconcile amounts due between the parties. Amounts are not considered significant and both parties agree amounts will be fully reconciled and made current during the next quarter. The amount due on the line of credit at March 31, 2015 was $140,411.

 

Former Directors

On March 15, 2011, the Company entered into an employment agreement with a former director of the Company in connection with the acquisition of United Community Mortgage Corp. (now PrimeSource Mortgage, Inc.). The term of the employment agreement was for two years, with automatic one-year extensions unless notice was given by either party. The individual resigned as a director concurrent with the capital raise completed on February 5, 2013. The agreement provided for an annual base salary of $120,000 with increases based upon increases in originations at the respective branch and incentive payments upon securing additional branches for PSMI. The Company recorded total compensation expense of $17,500 and $89,590 for the three and nine months ended March 31, 2015 compared to total compensation expense of $30,000 and $90,000 for the three and nine months ended March 31, 2014.

 

On July 1, 2011, the Company entered into an employment agreement with a former director of the Company, in connection with the acquisition of Brookside Mortgage, LLC. The term of the employment agreement was for two years, with automatic one-year extensions unless notice is given by either party. The individual resigned as a director concurrent with the capital raise completed on February 5, 2013. The agreement provided for an annual base salary of $120,000 plus a bonus equal to 25% of the net profit earned by Brookside branch in excess of $400,000 annual profits earned. On November 1, 2012, the Company agreed to revise the employment agreement making the term at will with 60 days notice from either party and provided additional overrides based on production. The revised agreement was not executed.  Effective January 16, 2014, this individual resigned from all positions with the Company. As such, the Company recorded no compensation expense for either the three or nine months ended March 31, 2015. In the prior year, the Company recorded total compensation expense of $10,412 and $98,571 for the three and nine months ended March 31, 2014.

 

 
13

 

  

On August 8, 2011, the Company entered into an employment agreement with a former director of the Company in connection with the acquisition of Fidelity Mortgage Company. The term of the employment agreement was for two years, with automatic one-year extensions unless notice is given by either party. The individual resigned as a director concurrent with the capital raise completed on February 5, 2013. After the resignation, the individual remained a regional vice president of one of the Company’s corporate lending centers. The agreement provided that for each full year of employment, a bonus equal to 12.5 basis points of the loan production and 50% of net profit of the Fidelity branch in excess of $500,000 earned would be paid to the individual. Bonuses were to be earned upon closing of each loan and paid on a fixed interval basis. On January 1, 2013, the Company amended the employment agreement to provide additional bonuses based on production and removed any bonus opportunity based on profitability. In January 2014, this individual resigned from all positions with the Company. As such, no compensation expense was incurred for the three or nine months ended March 31, 2015. For the three and nine months ended March 31, 2014, the Company recorded compensation expense of $92,415 and $474,421, respectively.

 

The Company leased an office space in a building that was 100% owned by this former director. The terms of the operating lease under a non-cancellable lease agreement were to expire on September 1, 2015, and required a monthly rent of $21,720. The lease was terminated upon the resignation of this former director in January 2014. Total rent paid for the office lease for the three and nine months ended March 31, 2015 was $0. The total rent paid for the three and nine months ended March 31, 2014 was $0 and $130,320, respectively.

 

Effective November 1, 2011, the Company entered into an employment agreement with a former director of the Company in connection with the acquisition of Iowa Mortgage Professionals, Inc. The individual resigned as a director concurrent with the capital raise completed on February 5, 2013. The term of his employment agreement was for two years, with automatic one-year extensions unless notice was given by either party. The agreement provided for an annual base salary of $120,000 plus a bonus equal to 25% of the net profit earned by the branch in excess of $400,000 annual profits earned. On March 11, 2013, the Company agreed to revise the employment agreement making the term at will with sixty days notice from either party and provided additional overrides based on production. The revised agreement was not executed. On January 31, 2014, this individual resigned from all positions with the Company. As such, no compensation expense was recorded for either the three or nine months ended March 31, 2015. For the three and nine months ended March 31, 2014, the Company recorded $18,829 and $98,920 in compensation expense, respectively.

 

This individual is the principal of a third party processing company that provided processing services for loans funded in our former Iowa branch. The per file fees charged were believed to be under market pricing. The fees were paid by the borrower at closing and were not paid directly by the Company. Upon this individual’s departure from the Company, the Company ceased utilizing any services from this third party processing company.

  

Other Employees

Effective January 1, 2013, the Company amended an employment agreement with the Vice President – Mountain Division. Under the new agreement, the term was modified to at will with 60 days notice from either party. The employee was paid an annual salary of $95,000 and received bonuses based on production. Additionally, the employee was eligible to receive 50% of the net profits of the Fidelity Mortgage branch on annual net income in excess of $500,000. On January 31, 2014, this individual resigned from all positions with the Company. As such, no compensation expense was recorded for either the three or nine months ended March 31, 2015. For the three and nine months ended March 31, 2014, the Company recorded total compensation expense of $42,325 and $251,476, respectively.

 

Loans Receivable 

Loans receivable from a related party as of March 31, 2015 consists of:

 

           

Balance due

         
           

March 31,

   

Balance due

 
   

Original

   

2015

   

June 30,

 
   

Loan

   

(Unaudited)

   

2014

 

Secured loans to NWBO Corporation (NWBO)

  $ 167,000     $ 87,778     $ 88,898  
                         

Accrued interest due from NWBO

    -       3,665       10,668  
      167,000       91,443       99,566  

Less allowance for uncollectible amounts

    -       -       -  
    $ 167,000     $ 91,443     $ 99,566  

 

The Company entered into two Commercial Security Agreements dated November 16, 2006 and February 16, 2007 (the “Security Agreements”) with Nationwide By Owner, Inc. (“Nationwide”), a Texas based company engaged in the business of providing proprietary technology to generate leads, securing the loan amount of $167,000 with 150,000 shares of the Company’s own Common Stock held by Nationwide.  On June 15, 2012, the Company renegotiated the Security Agreements with Nationwide and agreed to amend (i) the annual interest rate on the Security Agreement to 6%, and (ii) the maturity date to December 31, 2013. On October 13, 2014, the Company extended the maturity date to April 15, 2015. The Company is talking with Nationwide about an additional note extension and formal repayment plan. The Company believes a formal repayment plan and note extension will be executed during the next calendar quarter. All other terms and conditions of the Security Agreement remained the same. The Company recorded interest income of $1,315 and $3,987 from the loan receivable from Nationwide for the three and nine months ended March 31, 2015 and $1,344 and $4,033 for the same periods in 2014. The principals of NWBO were also employees of the Company and notified the Company in March that they were resigning from all positions with the Company.

 

 
14

 

 

NOTE 6 –EMPLOYEE ADVANCES

 

From time to time the Company advances payroll amounts to employees. The advances are short-term in nature. Employee advances amounted to $57,099 and $500 as of March 31, 2015 and June 30, 2014, respectively.

 

NOTE 7 – INTANGIBLE ASSETS

 

Intangible assets consist of:

 

   

March 31,

         
   

2015

(Unaudited)

   

June 30,

2014

 

Intangible assets not subject to amortization:

               

FHA "Full Eagle" status

  $ 938,790     $ 938,790  

Goodwill

    1,809,429       1,809,429  

State licenses

    31,293       31,293  
      2,779,512       2,779,512  

Less: Impairments

    -       -  

Total

    2,779,512       2,779,512  
                 

Intangible assets subject to amortization:

               

Customer lists

    117,349       117,349  

Nationwide license

    -       824,999  
      117,349       942,348  

Less: Accumulated amortization – Nationwide license

    -

 

    (483,862

)

Less: Accumulated amortization – customer lists

    (117,349

)

    (115,408

)

Total

    -       343,078  
                 

Total Intangible assets, net

  $ 2,779,512     $ 3,122,590  

 

It is the Company’s policy to assess the carrying value of its intangible assets for impairment on an annual basis, or more frequently, if warranted by circumstances. The Company completed an annual impairment test of goodwill as of June 30, 2014 and no impairment losses were incurred. As of that date, the fair value of equity exceeded the carrying value (including goodwill) by 300%, indicating no impairment of goodwill. This test involved the use of estimates related to the fair value of the goodwill, and requires a significant degree of judgment and the use of subjective assumptions. The fair value of the goodwill and other intangible assets was determined using a discounted cash flow method. This method required management to make estimates related to future revenue, expenses and income tax rates.

 

The valuation methodology assumes the Company will generate an operating profit beginning in the next fiscal year ending June 30, 2015. Although the Company has made significant improvements in the last two quarters in maximizing revenue per funded loan and in reducing fixed and variable expenses, the Company has never generated an annual operating profit. The model further assumes the Company will double its current production volume over the next twelve months to levels it experienced during the fiscal fourth quarter of 2013.

 

Any of the following events or changes in circumstances, as well as the risk factors mentioned earlier in this report, could reasonably be expected to negatively affect our key assumptions:

 

 

Significant change in mortgage interest rates;

 

Loss of the Company’s primary warehouse lender;

 

Additional or new regulatory and compliance requirements that restrict our plan for growth;

 

The loss of key production personnel;

 

Continued default on our obligation to preferred shareholders; or

 

Failure to raise sufficient funds for operating needs during periods of reduced cash flows.

 

 
15

 

  

On April 14, 2006, the Company entered into a five-year renewable license agreement with Nationwide. The license agreement permits exclusive use of the technology to generate leads for the origination of mortgage applications for submission to PSMI. The initial cost of the license was $150,000 paid in cash, and issuance of 150,000 shares of the Company’s stock in favor of Nationwide and its principals, at a fair value for consideration received of $674,999 on the date of issue. The total consideration for the cost of the license amounted to $824,999. The principals of NWBO, who were also loan originators for the Company, have transitioned off of the Company’s lending platform. As such, the Company wrote off the remaining unamortized balance of this license as of March 31, 2015.

  

NOTE 8 – WAREHOUSE LINES OF CREDIT

   

The Company has three warehouse lines of credit available as of March 31, 2015 for its funding of mortgage loans for a short term period.

 

 

(i)

On August 3, 2008, the Company entered into a warehouse line of credit agreement with a related party mortgage banker for up to $1,000,000 bearing an annual interest rate of 5%. On October 13, 2013, the warehouse line of credit was increased to $75,000,000 for the purpose of funding residential mortgage loans. The warehouse line of credit matures on October 10, 2015. This line of credit did not have an outstanding balance as of March 31, 2015.

 

 

(ii)

On November 18, 2011, the Company entered into a “Repo” warehouse line of credit agreement with a related party mortgage banker for up to $5,000,000 bearing an annual interest rate of 5% for funding residential mortgage loans. Pursuant to the terms of the agreement, the Company could be required to repurchase the loan subject to certain terms and conditions. On October 13, 2013, the warehouse line of credit was increased to $75,000,000 and now matures on October 10, 2015. The outstanding balance on this line of credit as of March 31, 2015 was $43,134,349.

 

 

(iii)

On September 21, 2014, the Company entered into a warehouse line of credit with a mortgage banker for up to $1,000,000. The annual interest rate on the line is equal to the greater of either the Wall Street Journal Prime Interest Rate plus 1% or 5%. The warehouse line of credit matures on October 1, 2015. This line of credit did not have an outstanding balance as of March 31, 2015.

  

The warehouse lines of credit provide short term funding for mortgage loans originated by the Company’s branch offices. The warehouse lines of credit are repaid when the loans are sold to third party investors, typically within 14 days for most loans. Subsequent to March 31, 2015, approximately 98% of the loans outstanding on the credit lines have been purchased by the secondary investors.

 

The Company does not intend to hold and service the loans. The Company had $43,630,170 in loans held for sale against the warehouse lines of credit as of March 31, 2015. 

 

NOTE 9 – NOTES PAYABLE

 

On February 18, 2015, the Company executed a Loan Agreement, Security Agreement, and Promissory Note (collectively the “Loan”) with an unrelated third party lender. The Loan requires monthly interest only payments at fourteen percent annually (14%) beginning March 1, 2015. The principle balance will become due on February 1, 2016. The amount of the Loan is $750,000 and can be increased to $1,000,000 at the sole discretion of the lender. The Loan is secured by all the Company’s tangible and intangible assets. The Company incurred legal fees and other loan costs of $50,000 in the aggregate which were deducted from proceeds received by the Company. The Loan restricts the amount of the proceeds that can be used to settle payables already incurred.

 

NOTE 10 – ACCRUED LIABILITIES

 

Accrued liabilities consisted of:

 

   

March 31,

         
   

2015

(Unaudited)

   

June 30,

2014

 

Credit card charges

  $ 87,580     $ 53,938  

Accrued payroll

    634,976       481,324  

Other liabilities

    330,054       108,653  
    $ 1,052,610     $ 643,915  

 

NOTE 11 – STOCKHOLDERS’ EQUITY AND ISSUANCES

 

The Company’s capitalization at March 31, 2015 was 400,000,000 authorized common shares and 10,000,000 authorized preferred shares, both with a par value of $0.001 per share.

 

 
16

 

  

Preferred Stock 

 

On November 26, 2014, the Company entered into a Stock Purchase Agreement dated effective November 24, 2014 (the “Series E SPA”) providing for the issuance and sale of up to $1,250,000 of the Company’s Series E 6% Convertible Preferred Stock (1,250 shares) at a purchase price of $1,000 per share (the “Series E Preferred Stock”). The first closing of the Series E SPA occurred on November 26, 2014, with 612.5 shares of Series E Preferred Stock being sold to LB Merchant PSMH-3, LLC, an entity controlled by Michael Margolies, a director and principal shareholder of the Company (the “Purchaser”). Each share of Series E Preferred Stock is convertible into a number of shares of common stock of the Company equal to the quotient of (i) $1,000 (subject to adjustment for stock splits, stock dividends, recapitalizations, and the like) plus the amount of accrued but unpaid dividends, divided by (ii) the conversion price then in effect. The initial conversion price is $0.01, subject to adjustment. The holders of Series E Preferred Stock are entitled to certain voting rights designated in the certificate of designation for the series. Holders of the shares of Series E Preferred Stock are entitled to receive cumulative cash dividends at the rate per share (as a percentage of the stated value per share) of 6% per annum from the date of issuance, payable quarterly in arrears on April 15, July 15, October 15 and January 15, beginning on January 15, 2015.

 

On December 15, 2014, the second closing of the Series E SPA occurred with 210 shares of Series E Preferred Stock being sold to the Purchaser. In total, the Company sold to the Purchaser 822.5 shares of Series E Preferred Stock convertible into 82,250,000 common shares. The holders of Series E Preferred Stock are entitled to certain voting rights designated in the certificate of designation for the series.

 

Holders of the Series E Preferred Stock will have demand and piggyback registration rights for the common stock issuable upon conversion of the Series E Preferred Stock. The registration rights are pari passu with the registration rights of the Company’s Series A 6% Convertible Preferred Stock (“Series A Preferred Stock”), Series B 6% Convertible Preferred Stock (“Series B Preferred Stock”), Series C 6% Convertible Preferred Stock (“Series C Preferred Stock”), and Series D 6% Convertible Preferred Stock (“Series D Preferred Stock”).

 

In connection with the first closing of the Series E SPA, the Company amended the Stock Purchase Agreement dated February 3, 2013 and amended on April 1, 2014 (the “Series A & B SPA”), entered into in connection with the sale of the Series A Preferred Stock and Series B Preferred Stock and also amended the original Stock Purchase Agreement dated April 1, 2014 (the “Series C & D SPA”), entered into in connection with the sale of the Series C Preferred Stock and Series D Preferred Stock. The amendments permitted the issuance of the Series E Preferred Stock senior to dividend and liquidation rights of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock.

 

Pursuant to the provisions of the Certificates of Designation for the Series A Preferred Stock and Series B Preferred Stock regarding adjustments in conversion price, because the Company issued and sold additional shares at a price less than the current $0.24 conversion price of the Series A Preferred Stock and Series B Preferred Stock, the conversion price was adjusted to $0.10 per share. After this adjustment to the conversion price of the Series A Preferred Stock and Series B Preferred Stock, the Series A Preferred Stock and Series B Preferred Stock would convert into a total of 57,000,000 shares of Common Stock (adjusted from 24,782,609).

 

Pursuant to the provisions of the Certificates of Designation for the Series C Preferred Stock and Series D Preferred Stock regarding adjustments in conversion price, because the Company issued and sold additional shares at a price less than the current $0.08 conversion price of the Series C Preferred Stock and Series D Preferred Stock, the conversion price was adjusted to $0.04 per share. After this adjustment to the conversion price of the Series C Preferred Stock and Series D Preferred Stock, the Series C Preferred Stock and Series D Preferred Stock would convert into a total of 80,000,000 shares of Common Stock (adjusted from 40,000,000).

 

Default on Preferred Dividends

On January 23, 2015, an event of default occurred due to the Company’s non payment of dividends due the preferred holders on October 15, 2014 and January 15, 2015. After the occurrence of the default event, the preferred dividend rate automatically, as of January 23, 2015, increased to a rate per annum of 20% of the Stated Value (as defined in the Certificates of Designation for the Preferred Stock), payable in cash on a monthly basis on the 15th day of each month until the event of default is cured, upon which the preferred dividend will return to a rate of 6% per annum of the Stated Value. The Company did not cure the default, nor make any additional or required dividend payments that were due February 15, 2015, March 15, 2015 or April 15, 2015.

 

Following is the status of the share based payment plans during the nine months ended March 31, 2015 and 2014:

  

 
17

 

 

2012 Stock Option/Stock Issuance Plan 

On December 12, 2011, the stockholders of the Company authorized and approved the 2012 Stock Incentive Plan (the “2012 Plan”) to issue up to 6,000,000 shares of Common Stock of the Company at $0.001 par value per share. The 2012 Plan became effective January 1, 2012.

 

On March 26, 2015 (the “Effective Date”) the Board of Directors of the Company approved the 2015 Stock Incentive Plan (the “Plan”). Awards may be made under the Plan for up to 40,000,000 shares of Common Stock of the Company at $0.001 par value per share. All of the Company’s employees, officers and directors, as well as consultants and advisors to the Company are eligible to be granted awards under the Plan. No awards can be granted under the Plan after the expiration of 10 years from the Effective Date, but awards previously granted may extend beyond that date. Awards may consist of both incentive and non-statutory options, restricted stock units, stock appreciation rights, and restricted stock awards.

 

Options issued during the nine months ended March 31, 2015 and 2014 under either plan were as follows:

 

On February 12, 2015, the Board of Directors granted four-year options to various employees to purchase an aggregate of 1,900,000 shares of common stock at $0.035 per share vesting over a three-year period. The options were granted under the Company’s 2012 Stock Incentive Plan. The fair value of options was determined to be $59,396 calculated using the Black-Scholes option pricing model using the assumptions of risk free discount rates of 0.33%, volatility of 175.11%, a four-year term and dividend yield of 0%. Employees who were granted 100,000 of these options left the Company before executing the grant forms and for purposes of our summary of option table below only 1,800,000 of these options are reflected as awarded. The 100,000 option grants forfeited were valued at $3,126.

 

On February 5, 2015, the Board of Directors granted four-year options to ten employees to purchase an aggregate of 325,000 shares of common stock at $0.03 per share vesting over a three-year period. The options were granted under the Company’s 2012 Stock Incentive Plan. The fair value of options was determined to be $7,368 calculated using the Black-Scholes option pricing model using the assumptions of risk free discount rates of 0.33%, volatility of 171.85%, a four-year term and dividend yield of 0%. The Company has ended its relationship with both offices represented by these 10 employees and all options issuances have been forfeited and are not shown in the totals outstanding as of March 31, 2015 or listed as awarded in the summary option table below.

 

On February 20, 2014, the Company issued 250,000 incentive options to an employee. The options were granted under the 2012 Plan. The options vest equally over three years and were valued at $20,733 using the Black-Scholes option pricing model using the assumptions of risk free discount rates of 0.33%, volatility of 117.12%, a three-year term and dividend yield of 0%. In February 2015, the Company eliminated this individual’s position and all previously issued options were forfeited.

 

On November 4, 2013, the Company issued 26,494 shares of stock to an employee and 39,741 shares of stock to a consultant (both of who are directors) under the 2012 Plan in lieu of salary and cash compensation that were due these individuals for services provided the Company in October 2013.

 

On November 4, 2013, the Company granted 225,000 options as a signing bonus to three individuals. The options were granted under the 2012 Plan. The options vest equally over three years and were valued at $37,203 using the Black-Scholes option pricing model using the assumptions of risk free discount rates of 0.33%, volatility of 110.11%, a three-year term and dividend yield of 0%.

 

On November 4, 2013, the Company granted 125,000 incentive options to an employee. The options were granted under the 2012 Plan. The options vest equally over three years and were valued at $20,668 using the Black-Scholes option pricing model using the assumptions of risk free discount rates of 0.33%, volatility of 110.11%, a three-year term and dividend yield of 0%.

 

On September 5, 2013 the Company granted 325,000 options to various employees as a signing bonus. The options vest equally over three years and were valued at $78,663 using the Black-Scholes option pricing model using the assumptions of risk free discount rates of 0.33%, volatility of 97.8%, a three-year term and dividend yield of 0%. In April of 2014, all but one of the employees left the Company forfeiting 300,000 of the previously issued options.

 

On July 8, 2013, the Company granted 250,000 options to an employee of the Company. The options vest equally over three years and were valued at $47,061 using the Black-Scholes option pricing model using the assumptions of risk free discount rates of 0.33%, volatility of 91.6%, a three-year term and dividend yield of 0%. In June 2014 this individual resigned from the Company and all previously issued options were forfeited.

 

On July 1, 2013, the Company granted 125,000 options to an employee of the Company. The options vest equally over three years and were valued at $21,664 using the Black-Scholes option pricing model using the assumptions of risk free discount rates of 0.33%, volatility of 92.2%, a three-year term and dividend yield of 0%.

 

As of March 31, 2015, the Company has granted 5,466,671 shares of Common Stock or Common Stock Options valued at $891,708 to employees and a consultant under the 2012 Plan and 533,329 common shares remained unissued and available for future issuances under the 2012 Plan and 40,000,000 shares remained unissued and available for future issuance under the 2015 Plan.

  

 
18

 

  

A summary of stock option activity for the last two years is as follows:

 

   

For the nine months ended March 31,

 
   

2015

   

2014

 
           

Weighted-

           

Weighted-

 
           

Average

           

Average

 
   

Number of

   

Exercise

   

Number of

   

Exercise

 
   

Shares

   

Price

   

Shares

   

Price

 

Options outstanding at beginning of the period

    3,160,000     $ 0.17       275,000       0.38  

Options granted

    1,800,000       0.035       1,325,000       0.28  

Options exercised

    -       -       -       -  

Options forfeited/expired

    (741,667

)

    0.24       -       -  

Options outstanding at end of the period

    4,218,333     $ 0.10       1,600,000     $ 0.30  
                                 

Options exercisable as of March 31

    233,333     $ 0.31       25,000     $ 0.40  

 

 

Other Stock Issuances

The Company did not issue any common stock for either the three or nine months ended March 31, 2015. For the nine months ended March 31, 2014, the Company issued 26,494 shares to an employee and 39,741 shares to a consultant, both directors, in lieu of cash compensation due.

 

Retirement of Stock

On July 3, 2014, the Company closed the Asset Purchase Agreement by, between, and among the Company, and two former employees, directors and related parties, whereby certain assets valued at $227,752 were sold in exchange for 1,500,000 shares of our common stock. The Company valued the shares at $0.07 which was the closing price on July 3, 2014. The Company recorded a loss on the sale of assets in the amount of $121,251. The shares were retired and returned to treasury.

 

On July 14, 2014, the Company closed the Asset Purchase Agreement by, between, and among the Company, and a former employee, director and related party, whereby certain assets valued at $44,271 were sold in exchange for 250,000 shares of our common stock. The Company valued the shares at $0.071 which was the closing price on July 14, 2014. The Company recorded a loss on the sale of assets in the amount of $26,521. The shares were retired and returned to treasury.

 

Total common shares issued and outstanding at March 31, 2015 was 27,507,759

 

Warrant issuances

On September 12, 2014, the Company entered into a loan agreement with Jeffrey R. Smith, a director of the Company (the “Lender”). Under the terms of the loan agreement, the Lender agreed to loan $120,000 for operating expenses of the Company and its operating subsidiary, as well as to fund growth of the Company. The funds were received by the Company on September 12, 2014. The loan is evidenced by a 10% Convertible Promissory Note which bears interest at 10% per annum and matures September 12, 2015, unless extended through mutual consent. The note is convertible at the per share rate of common stock sold pursuant to a Qualified Offering by the Company. The term “Qualified Offering” means one or more offerings (whether or not proceeds are received by the Company pursuant to such offering) of debt or equity securities of the Company to non-affiliates in the aggregate amount of at least $1,000,000 commenced after the note issuance date. The conversion price is determined by the lowest of either the offering price per common share or the conversion or exercise price for common stock in any such Qualified Offering. In addition, the Lender received four tenths (0.40) of one common stock purchase warrant for each $1.00 loaned to the Company (totaling 48,000 warrants). Each five-year warrant is exercisable at $0.40 per share, subject to adjustment in the event of the issuance of additional common shares or common stock equivalents at less than the exercise price. The warrants also provide for cashless exercise. The warrants are not transferable or assignable without the prior consent of the Company.

 

Pursuant to the Preferred Series E Stock transaction in November and December 2014, and in accordance with the placement agent agreement, the Company issued warrants to purchase 13,160,000 shares of the Company’s Common Stock to the placement agent and its associates as placement fees in the above transaction. The warrants are exercisable at $0.011 and expire on November 26, 2019. The fair value of warrants was determined to be $124,698 calculated using the Black-Scholes option pricing model using the assumptions of risk free discount rates of 0.88%, volatility of 174.98%, a five-year term and dividend yield of 0%. Since the warrants were issued in conjunction with the capital raise, no expense was recorded in the accompanying financial statements as of March 31, 2015.

   

The 454,000 Common Stock Purchase Warrants issued in February and March 2014, as amended, contained provisions requiring adjustment to the exercise price in the event the Company were to issue or sell additional shares of Common Stock pursuant to convertible securities or Common Stock equivalents at a price per share less than the exercise price of these warrants. Given the exercise price of the Series E Preferred Stock of $0.01 (less than the exercise price of the Common Stock Warrants of $0.24), the adjusted exercise price of these warrants became $0.10 at the first closing of the Series E SPA.

 

The 76,000 Common Stock Purchase Warrants issued in September and November 2014 contained provisions requiring adjustment to the exercise price in the event the Company were to issue or sell additional shares of Common Stock pursuant to convertible securities or Common Stock equivalents at a price per share less than the exercise price of these warrants. Given the exercise price of the Series E Preferred Stock of $0.01 (less than the exercise price of the Common Stock Warrants of $0.40), the adjusted exercise price of these warrants became $0.125 at the first closing of the Series E SPA.

 

The Company has a total of 18,030,000 warrants outstanding as of March 31, 2015 at a weighted average exercise price of $0.05.

  

 
19

 

  

NOTE 12 – INCOME (LOSS) PER COMMON SHARE

 

The Company’s outstanding options and warrants to acquire common stock and unvested shares of restricted stock totaled 22,248,333 as of March 31, 2015. These common stock equivalents may dilute earnings per share.

 

Basic and diluted loss per common share is computed by dividing the loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share does not reflect per share amounts that would have resulted if diluted potential Common Stock had been converted to Common Stock because the effect would be anti-dilutive. The weighted average number of common shares outstanding during the three and nine months ended March 31, 2015 and 2014 was 27,507,759, 27,530,653, 29,468,259 and 29,437,446, respectively. Loss per common share from continuing operations for the three and nine months ended March 31, 2015 and 2014 was $0.04, $0.10, $0.07 and $0.17, respectively.

 

NOTE 13 – COMMITMENTS

 

Nationwide By Owners License

The agreement between Nationwide and the Company calls for the establishment of a National Processing Center for the collection, origination and tracking of the sales lead database. Upon completion of a National Processing Center, the Company has also committed to provide year-end bonuses under the license agreement which the parties can elect to take in cash, stock, or any combination of the two. Bonus cash will be calculated by multiplying the annual net profit of the National Processing Center by the following percentage rates: 15% for the initial five-year term of the license agreement, 20% for the first automatic renewal term, 25% for the second automatic renewal term, and 30% for the third automatic renewal term and all subsequent annual renewal terms. Should the parties elect to take all or part of the bonus in common stock, the number of shares awarded will be calculated according to the base value of the shares as defined in the agreement. No accrual has been recorded for the year-end bonuses because the National Processing Center has not been established. As agreed to by Nationwide and the Company, the National Processing Center has been delayed indefinitely while Nationwide rolls out its new product offering and strategy discussed below.

 

Also, pursuant to the agreement with Nationwide, the Company has committed to pursue obtaining, in good faith and diligently, the appropriate licenses to originate mortgages in all 50 states of the United States.

 

Nationwide has dramatically evolved from their original model which focused solely on sale by owners.  The revised model is now focused around a consumer-centric realtor model with a significant focus on mobile technology tools and social media marketing strategies. Nationwide expanded its initial Smart Sign technology into a proprietary software called eNfoDeliveredTM, which is now a lead acquisition, lead development, and lead delivery platform.  A second proprietary software called Path2Sell SystemsTM was launched in August of 2013.  These two platforms combine to provide PSMI access to the feature-rich toolkit of marketing tools mentioned above as well as training, administration, and support.  While helping to add to a loan origination pipeline, Path2Sell SystemsTM allows a much greater focus on tools deliverable in each lending center/branch; tools specific to create greater leverage with local realtor and home builder contacts.

 

As of March 31, 2015, the Company was informed that the principals of Nationwide, who also managed a loan origination office for the Company, were resigning from employment with the Company. As such, during the period, we recorded a charge for the full unamortized balance of the license agreement in the amount of $296,941.

 

Employment agreements

The Company’s practice is to revise employment agreements as they become due to make the agreements at will requiring no more than 60 days termination notice by either party. The Company’s President & CEO has a three year employment agreement that became effective as of April 1, 2015.  

 

Lease commitments

On April 8, 2013, the Company executed a five-year lease on approximately 4,000 square feet of office space for its corporate office location in Oklahoma City. The lease requires an initial deposit of $90,000 for build out of the office space and a monthly lease payment of $8,132 in year one, increasing to $8,636 in year five.

 

The Company leases office space for its branches and property and equipment under cancellable and non-cancellable lease commitments. The current monthly rent for office premises and property and equipment is $74,388. The leases expire between April 2015 and December 2018. Total rent expense recorded for the three and nine months ended March 31, 2015 was $218,442 and $557,243, respectively. Total rent expense recorded for the three and nine months ended March 31, 2014 was $190,674 and $730,820, respectively.

 

Total minimum lease commitments for branch offices and property and equipment leases at March 31, 2015 are as follows:

 

   

Amount

 

For the year ended June 30,

       

2015

  $ 152,246  

2016

    317,718  

2017

    146,219  

2018

    149,067  

2019

    27,636  

Total

  $ 792,886  

 

 
20

 

  

NOTE 14 – FAIR VALUE MEASUREMENTS

 

The Company uses a hierarchy that prioritizes the inputs used in measuring fair value such that the highest priority is given to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy are described below:

 

Level 1

Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

 

Level 2

Inputs to the valuation methodology include:

 

 

Quoted prices for similar assets or liabilities in active markets;

 

Quoted prices for identical or similar assets or liabilities in inactive markets;

 

Inputs other than quoted prices that are observable for the asset or liability; and

 

Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.

 

Level 3

Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used maximize the use of observable inputs and minimize the use of unobservable inputs. See Note 1 for discussion of valuation methodologies used to measure fair value of investments.

 

The valuation methodologies described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

 

Other than cash, which is determined using Level 1 inputs, and intangible assets, which were determined using Level 3 inputs, the fair value of the assets and liabilities was determined using Level 2 inputs. The carrying amounts and fair values of the Company’s financial instruments at March 31, 2015 and June 30, 2014 are as follows:

 

   

March 31, 2015

(Unaudited)

   

June 30, 2014

 
   

Carrying

   

Fair

   

Carrying

   

Fair

 
   

Amount

   

Value

   

Amount

   

Value

 

Financial assets:

                               

Cash and cash equivalents

  $ 591,718     $ 591,718     $ 764,931     $ 764,931  

Restricted cash

    732,500       732,500       755,701       755,701  

Accounts receivable - related party

    -       -       683,992       683,992  

Accounts receivable - non related party

    1,512,860       1,512,860       43,974       43,974  

Loans held for sale

    43,630,170       43,630,170       15,416,781       15,416,781  

Prepaid expenses

    143,505       143,505       142,096       142,096  

Loans receivable

    87,778       87,778       88,898       88,898  

Intangible assets

    2,779,512       2,779,512       3,122,590       3,122,590  

Security deposits

    46,075       46,075       44,453       44,453  
                                 

Financial liabilities:

                               

Accounts payable

  $ 1,176,734     $ 1,176,734     $ 602,351     $ 602,351  

Warehouse lines of credit - non related party

    -       -       474,000       474,000  

Warehouse lines of credit - related party

    43,134,349       43,134,349       14,942,781       14,942,781  

Preferred dividends payable- related party

    492,155       492,155       82,500       82,500  

Preferred dividends payable- non related party

    265,103       265,103       51,000       51,000  

Notes payable – related party

    120,000       120,000       -       -  

Notes payable – non related party

    750,000       750,000       -       -  

Accrued liabilities

    1,052,610       1,052,610       643,915       643,915  

 

 
21

 

  

NOTE 15 - INDUSTRY RISKS AND GOING CONCERN

 

These unaudited consolidated financial statements have been prepared by management on the basis of U.S. GAAP applicable to a going concern, which assumes the Company will continue to operate for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. The Company is not current in paying all the costs and expenses of the parent company. Further, there is some uncertainty as to the Company’s ability to pay the dividends required to the Series A, B, C, D, and E preferred shareholders. Although dividends were paid as required through June 30, 2014 the Company did not make the dividend payments due by October 15, 2014 or January 15, 2015 in the amount of $133,500 and $137,633, respectively. As a result of missing two dividend payments, the Company is in default on the agreements and the preferred shareholders could exercise certain rights including increasing their board representation to board majority. While the dividends remain in default, the dividend rate increase from 6% to 20%. As such, for the three months ended March 31, 2015, an additional $486,125 in unpaid dividends were accrued. The Company has no immediate plans to cure the default of accrued dividends. These factors give rise to uncertainty about the Company’s continuing as a going concern.

 

In addition, the Company is dependent on the operations of its wholly owned subsidiary PSMI to generate the cash needed to meet the expenses of the Company. The mortgage industry has experienced significant change over the past several years including increased regulatory and compliance requirements, increases in historically low interest rates and the tightening of credit standards. All of this has led to flat origination volumes and a highly competitive recruiting environment for qualified and successful loan originators. These factors have also made it increasingly difficult for the Company’s wholly owned subsidiary, PSMI, to execute its recruiting strategies at the pace originally contemplated by management. The Company’s plan for sustainability involves cutting costs throughout the organization while growing revenue at PSMI to help support the costs and expenses of the parent.

 

Due to the full implementation of the fully delegated platform business model and cost cutting efforts, the Company’s operating results have improved over the prior periods. Even with these significant improvements in operations there exists doubt that anticipated growth will occur at the rate necessary to generate the additional cash required to service the obligations of the parent company. Management has implemented a fully delegated lending platform that generates increased revenue per loan, at the same time reducing costs throughout the organization including ceasing operations in locations that were not generating a profit.

 

Management is continuing to implement cost reduction strategies. Management may also pursue additional capital raises, which if successful, would be highly dilutive to the holdings of the current common shareholders.

 

NOTE 16 - CONCENTRATIONS

 

Concentration of Customer

The Company entered into two warehouse line of credit agreements with a mortgage banker whose Executive Vice President is a member of the Board of Directors of the Company, for up to $75,000,000 each, bearing annual interest rates of 5% each, for funding residential mortgage loans. Per the terms of the agreements, the Company could be required to repurchase the loans subject to certain terms and conditions. The outstanding combined balance on these two warehouse lines of credit as of March 31, 2015 was $43,134,349. Subsequent to March 31, 2015, approximately 98% of the loans outstanding on the credit lines have been purchased by investors.

 

Historically, the Company has recorded a significant portion of its total revenues from one investor, who is a related party. In October 2013, the Company began funding loans on its delegated platform which includes delivery options to multiple investors. This has significantly decreased the reliance on any one investor. As an example, for the nine months ended March 31, 2015, approximately 2.1% of total revenue was from loans sold to this related party investor, while during the same nine month period last year 54.8% of the Company’s revenue came from loans sold to this related party investor.

 

Concentration of Credit Risk

The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. The Company has not experienced any losses in such accounts through March 31, 2015. As of March 31, 2015, the Company’s bank balances in some instances exceed FDIC insured amounts.

 

 
22

 

  

NOTE 17 – SUBSEQUENT EVENTS

 

 

Issuance of Stock Options

Pursuant to the employment agreement executed with Mr. Gadawski effective April 1, 2015, the Company issued Mr. Gadawski 10,000,000 stock options. The options were granted under the 2015 Plan. The options vest equally over three years and were valued at $337,798 using the Black-Scholes option pricing model using the assumptions of risk free discount rates of 0.97%, volatility of 186.90%, a three-year term and dividend yield of 0%.

 

Pursuant to the Consulting Agreement executed, effective April 7, 2015, the Company issued a consultant 1,000,000 stock options. The options were granted under the 2015 Plan. The options vest equally over three years and were valued at $52,904 using the Black-Scholes option pricing model using the assumptions of risk free discount rates of 0.97%, volatility of 190.82%, a three-year term and dividend yield of 0%..

 

 
23

 

   

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of our balance sheets and statements of income.  This section should be read in conjunction with our Annual Report on Form 10-K for the year ended June 30, 2014, and our interim financial statements and accompanying notes to these financial statements filed with this report.

 

Overview

 

PSM Holdings, Inc. (the “Company” or “PSMH”) originates mortgage loans funded either directly off our warehouse lines of credit or through brokering transactions to other third parties. Approximately 95% of our mortgage origination volume is banked off of our current warehouse lines. We have relationships with multiple investors who purchase the loans funded on our warehouse lines. All of our lending activities are conducted by our subsidiary, PrimeSource Mortgage, Inc. (“PSMI”).

 

Historically, a significant portion of our business has been referral based and purchase orientated (versus refinance). We do not directly participate in the secondary markets and further do not maintain a servicing portfolio. Approximately 75% of total loan applications are generated from business contacts and previous client referrals. Realtor referrals and other lead sources account for the balance of loan applications.

 

We have retail offices located around the United States from which we derive revenue from the loan origination volume from these offices. We are able to leverage our warehouse lines of credit relationships with related parties in order to provide us the funding capacity to support our anticipated growth. PSMI is licensed in 16 states and operates out of approximately 22 offices around the country.

 

Current Environment

 

Regulatory changes from federal and state authorities have placed a significant amount of pressure on mortgage companies across the United States. The regulatory changes have applied operational pressure for deeper and more disciplined internal processes, limitations on loan officer compensation and increased compliance requirements all making it difficult for small to mid-market mortgage firms to operate profitably as independent businesses. This dynamic has spurred consolidation in the industry as many firms feel the need to join larger more established platforms. This industry shift has forced the remaining mortgage businesses to either make the financial investments in their business to operate in today’s environment or become part of a more stable, mature operation that is better suited to compete in a contracting market.

 

Plan of Operation

 

In May 2014, we rolled out our delegated lending platform to all of our field offices. Under our delegated model, we generate income in multiple ways including yield spread on originated loans, file fees and volume bonus or delivery incentives from investors. Our Capital Markets and field operations team is based in Murrieta, CA. We closed our first loan as a fully delegated lender in October 2013.

 

Like most lenders in our industry, our production volumes have fluctuated greatly over the last three years. The following table represents a production matrix reflecting our past production by number of loans and dollar volume:

 

Nine months ended March 31,

 

Number of

   

Dollar

 
   

Loans

   

Production

 

2015

    1,072     $ 239,236,527  

2014

    1,620     $ 292,886,008  

2013

    2,812     $ 499,859,078  

 

Some of this decline in volume was intentional as the Company has shut down or ended relationships with under-performing offices, some of which accounted for significant production in prior periods. 

 

As a result of the market consolidation in the mortgage banking industry, we continue to recruit and onboard new entities, as well as work with existing offices to increase their loan originators, locations, and production.  During the three months ended March 31, 2015, we added a total of two locations (Lindon, Utah and Chula Vista, California).

 

 
24

 

  

We will continue to recruit loan originators and existing mortgage banking or broker operations as we believe our current infrastructure can support a significant scaling of our operations without the need for additional resources or capital.

 

Results of Operations

 

Our consolidated results of operations for the three and nine months ended March 31, 2015, include the operating results of our wholly-owned subsidiary WWYH, Inc. (an inactive company) and results of operations of PrimeSource Mortgage, Inc. since its acquisition, effective March 16, 2011.

 

We reported a net loss of $638,218 and $2,093,595 for the three and nine months ended March 31, 2015 compared to a loss of $1,880,182 and $4,621,812 for the same period ended March 31, 2014.  The decrease in our net loss is directly attributable to the migration to our delegated lending platform, the closure of under performing branches, continued cost containment and the addition of several productive and profitable offices.

 

Revenues

Total revenues increased by $2,818,627 and $1,476,804 to $5,142,485 and $11,362,937 for the three and nine months ended March 31, 2015, as compared to $2,323,858 and $9,886,133 for the same period in 2014.  We closed 1,072 loans for a total loan production of $239,236,527 during the nine months ended March 31, 2015, as compared to 1,620 loans for a total production of $292,886,008 for the comparable prior year period.  Our production was lower in the current fiscal year primarily due to reduced origination volumes throughout the industry as well as our closing certain production offices that were originating loans in the prior period. Our revenue per loan increased by $4,397, or 72% to $10,500 in the current period, compared to $6,103 in the prior period. The increase in revenue per loan in the current year is a direct result of more loans being originated and funded on our delegated platform. It is expected that our revenue per loan will continue to increase in future periods as our delegated lending platform continues to evolve.

   

Operating Expenses

Our total operating expenses increased by $1,232,157 and decreased $1,619,879 for the three and nine months ended March 31, 2015, to $5,455,515 and $12,959,399 as compared to $4,223,358 and $14,579,278 for the comparable periods in the prior year. The increase for the three month period is a direct result of our new Box Home Loans division we opened during the quarter. The decrease in operating expenses for the nine month period was primarily related to decreases in certain variable expenses such as commissions that were directly tied to revenue and production. Commission expense decreased by $1,940,302 for the nine months ended March 31, 2015, to $2,317,703. As a percentage of revenue, commission expense decreased to 20% from 43% in the prior nine-month period. The decrease in commission expense as a percentage of revenue is directly related to the Company making more commissions on each loan (higher revenue per loan) and due to the fact that the Company has moved more originators, especially branch managers, to salary only compensation plans. Salaries were $4,606,174 for the nine months ended March 31, 2015 compared to salaries of $4,387,707 for the comparable prior year period. The current period included salaries and costs associated with operational personnel, including underwriters, closers, shippers and funders required on our delegated lending platform. These individuals were only with the Company for part of the time during the prior period. These increases were offset somewhat by the elimination of salaries associated with the lending centers we closed in early 2014.

 

Advertising expense relates primarily to costs associated with generating leads and post-closing programs designed to maintain contact with borrowers. Advertising expenses were $140,832 and $413,319 for the three and nine months ended March 31, 2015, respectively, compared to $205,833 and $567,485 for the three and nine months ended March 31, 2014, respectively. The decrease was a result of lower loan volume and the termination of underperforming offices which were not on our platform during the current three and nine month periods. Total rent expense was $557,243 for the nine months ended March 31, 2015 compared to $730,820 for the nine months ended March 31, 2014. Professional and legal fees increased by $414,493 to $827,790 for the current nine month period versus $413,296 for the prior period. The increase was due to contract services the Company hired for its new Box Home Loans division in January 2015. Depreciation and amortization were $100,730 and $223,041 for the nine months ended March 31, 2015 and 2014, respectively. The reduction in both non cash charges is a result of the office closures in January and February of 2014, in which the Company wrote off certain intangible assets including customer lists, and then sold assets which were located in these offices in July 2014. Computers and systems expense was $244,874 for nine months ended March 31, 2015 compared to $275,292 for the prior period. Prior period expenses were higher due to having more loan originators.

 

Non-operating income (expense)

We incurred non-operating expense of $325,188 and $497,133 for the three and nine months ended March 31, 2015. The majority of this non-operating expense was for assets sold or disposed of at offices that have transitioned off the Company’s platform. The Company recorded a loss of $156,381 related to the sale of assets used by branch offices the Company closed in the first calendar quarter of 2014. We sold assets we were no longer using, with a book value of $278,881, for the return of 1,750,000 shares of our common stock that were valued at $0.07 per share based on the dates the sale agreements were executed. The Company also wrote off the unamortized balance of its license agreement with NWBO as the principals of NWBO, who were also employees of the Company, left the Company. The unamortized charge the Company incurred in the current quarter amounted to $296,941. There was no other significant non-operating income or expense transactions in either periods presented.

 

 
25

 

 

Liquidity and Capital Resources

 

Our cash and cash equivalents were $591,718 as of March 31, 2015, compared to $764,931 as of June 30, 2014. As shown in the accompanying consolidated financial statements, we recorded a net loss of $2,093,595 for the nine months ended March 31, 2015, compared to a net loss of $4,621,812 for the comparable prior year period. Our current assets were less than our current liabilities by $1,257,038 as of March 31, 2015. We have never generated an annual net income. We believe certain cost saving initiatives, closing of certain offices and originating and funding loans on our delegated platform will allow us to reduce our losses and ultimately achieve profitability. Our growth strategy includes adding additional branch offices and loan officers. There is no assurance that our current working capital will allow us to pursue our growth strategy and in order to expand our business we may need to sell additional shares of our Common Stock or borrow funds from private lenders to help finance the anticipated growth. There are no assurances that we can raise additional capital if necessary, and as such, our liquidity and capital resources may be adversely affected. 

 

Operating Activities

Net cash used in operating activities for the nine months ended March 31, 2015 was $(29,537,000) resulting primarily from our increase in loans held for sale of $(28,213,389). Other items impacting our cash used in operating activities was our net loss of $(2,093,595), disposition of property and equipment of $272,022, disposition of intangible assets of $296,941, an increase in our accounts receivable of $(784,894) and increases in accounts payable and accrued liabilities of $574,383 and 408,694, respectively. In the prior nine month period, net cash used in operating activities was $(2,568,641), which included a net loss from operations of $(4,621,812). The prior period loss included non-cash charges for depreciation and amortization of $223,041, collection of accounts receivable of $336,417, sale of loans held for sale of $2,273,856, a reduction in accrued liabilities of $(755,931) and an increase in accounts payable of $319,247.

 

Investing Activities

Net cash used in investing activities for the nine months ended March 31, 2015, was $(11,621) compared to net cash used in investing activities of $(219,766) in the prior period. During the nine months ended March 31, 2015, we purchased property and equipment amounting to $(10,000) and were refunded security deposits of $(1,621). For the nine months ended March 31, 2014, we purchased property and equipment amounting to $(208,425) and paid security deposits of $(11,341). We do not currently have material commitments for capital expenditures and do not anticipate entering into any such commitments during the next twelve months.

 

Financing Activities

Net cash provided by financing activities for the nine months ended March 31, 2015, amounted to $29,375,408 compared to net cash used in financing activities of $(1,541,041) for the prior year. Cash paid for preferred dividends amounted to $(133,500) and $(256,500) for the nine months ended March 31, 2015 and 2014, respectively. In terms of our warehouse lines of credit for the nine months ended March 31, 2015, we received cash proceeds of $240,846,421 to fund our loan originations and made cash repayments of $(213,128,853) when loans were sold. In the prior nine month period, we received cash proceeds of $292,886,008 from our warehouse lines of credit and made cash payments of $(295,127,784). During the nine months ended March 31, 2015, we received cash proceeds of $120,000 on loans from related parties, $750,000 in loan proceeds from an unrelated party and $787,200 in proceeds from the sale of Series E preferred stock.  

 

As a result of the above activities, we experienced a net decrease in cash of $173,213 for the nine months ended March 31, 2015. Our ability to continue as a going concern is still dependent on our success in attracting profitable and stable mortgage businesses to join our lending platform, expanding the business of our existing branches, our ability to raise temporary operating cash and controlling our costs as we execute our growth and expansion plans.  During the past 15 months, we ended our relationship with three of our larger lending centers and eight smaller offices. These locations accounted for a significant portion of our total volume, and further accounted for a significant portion of our fixed overhead based on their heavy expense structure. At the time of their departure, none of the locations were generating enough volume to cover their expense structure and thus these operations contributed significantly to our decrease in cash and cash equivalents during the periods.

 

Critical Accounting Policies and Estimates

 

Management’s discussion and analysis of its financial condition and results of operations are based upon our unaudited consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles.  Our financial statements reflect the selection and application of accounting policies which require management to make estimates and judgments.  (See Note 1 to our unaudited consolidated financial statements, “Nature of Business and Summary of Significant Accounting Policies”).  We believe that the following paragraphs reflect accounting policies that currently affect our financial condition and results of operations:

 

 
26

 

  

Share Based Payment Plan

Under the 2012 and 2015 Stock Incentive Plans, we can grant stock or options to employees, related parties, and unrelated contractors in connection with the performance of services provided to us by the awardees. We use the fair value method to account for employee stock compensation costs and to account for share based payments to non-employees.

 

Revenue Recognition

Our revenue is derived primarily from revenue earned from the origination of mortgage loans that are funded on our warehouse lines of credit and sold to third party investors.  Revenue is recognized as earned on the date the loan is funded.  

 

Recent Accounting Pronouncements

We have evaluated the possible effects on it financial statements of the following accounting pronouncements:

 

Accounting Standards Update 2014-15 – Presentation of Financial Statements – Going Concern

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern. The amendments in this update provide guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In doing so, the amendments should reduce diversity in the timing and content of footnote disclosures. The amendments in ASU 2014-15 are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. We are currently evaluating the guidance under ASU 2014-15 and have not yet determined the impact, if any, on our consolidated financial statements.

 

Accounting Standards Update 2014-04 – Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure

In January 2014, the FASB issued ASU 2014-14, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. The amendments in this update should reduce diversity in practice by providing guidance on how to classify and measure certain government-guaranteed mortgage loans upon foreclosure. The amendments in ASU 2014-14 are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. We are currently evaluating the guidance under ASU 2014-04 and have not yet determined the impact, if any, on our consolidated financial statements.

 

Accounting Standards Update 2014-12 – Compensation—Stock Compensation (Topic 718) Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period

In June 2014, the FASB issued ASU 2014-12, Compensation—Stock Compensation (Topic 718) Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments in this update require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. For all entities, the amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. We are currently evaluating the guidance under ASU 2014-12 and have not yet determined the impact, if any, on our consolidated financial statements.

 

Accounting Standards Update 2014-14 – Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure

In June 2014, the FASB issued ASU 2014-14, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this update are intended to reduce diversity in practice by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate property recognized. The amendments in ASU 2014-14 are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. We are currently evaluating the guidance under ASU 2014-14 and have not yet determined the impact, if any, on our consolidated financial statements.

 

Accounting Standards Update 2013-11 – Income Taxes (Topic 740) Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740) Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in this update are expected to reduce diversity in practice by providing guidance on the presentation of unrecognized tax benefits and will better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are currently evaluating the guidance under ASU 2013-11 and have not yet determined the impact, if any, on our consolidated financial statements.

 

 
27

 

  

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, result of operations, liquidity, capital expenditures or capital resources.

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

This item is not required under Regulation S-K for “smaller reporting companies.”

 

Item 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer, who is also our principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, Kevin Gadawski, our principal executive officer and principal financial officer, concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to PSM Holdings, Inc., including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 
28

 

 

PART II - OTHER INFORMATION

 

Item 1A. Risk Factors

 

We incurred a consolidated net operating loss from continuing operations of $2,093,595 for the nine months ended March 31, 2015. We have never achieved an annual profit. Unless we are able to reverse or mitigate the losses through onboarding profitable operations and making all current office locations profitable, we may not be able to be profitable or to continue operations under our current operating model.

 

Operating losses as reported in our current unaudited financial statements will make it more difficult to attract and onboard additional mortgage operations. If we are unable to onboard a significant number of new profitable operations, we may not generate sufficient revenues to continue current operations.

 

There are no assurances that we will be able to successfully recruit additional profitable mortgage operations to our platform, or that we will be able to successfully modify our current cost structure. If we are unsuccessful in these initiatives, our revenue and profitability may continue to decline and we may not have enough capital to continue to implement our growth plans. Further, we may be required to raise additional operating capital which would require the issuance of additional equity securities which would dilute our current shareholders.

 

We incurred a consolidated net operating loss from continuing operations of $2,093,595 for the nine months ended March 31, 2015. Unless we are able to reverse or mitigate these losses we may not be able to repay our current obligations including the Loan, dated February 18, 2015, which non-payment could result in the foreclose and sale of all of the Company’s (and all its subsidiaries’) assets.

 

If our revenue and profitability continue to decline we may not have enough capital to repay the February 18, 2015 loan with an unrelated third party lender (the “Loan”). The Loan requires monthly interest only payments at 14% beginning March 1, 2015. The principle balance will become due on February 1, 2016. The amount of the Loan is $750,000 and can be increased to $1,000,000 at the sole discretion of the lender. The Loan is secured by all of the assets of the Company (including intellectual property rights and licenses) and its subsidiaries as agreed to in the Security Agreement dated February 18, 2015, between the Company, and its subsidiaries, and the lender (the “Security Agreement”). Upon the occurrence of an event of default, the Lender has the right to foreclose on the assets of the Company. The security interest granted to the lender is guaranteed by the Company’s wholly-owned subsidiaries, WWYH, Inc., a Texas corporation (“WWYH”), and PrimeSource Mortgage, Inc., a Delaware corporation (“PSMI”), pursuant to the Guaranty Agreements dated February 18, 2015. Our failure to perform the obligations under the Loan could result in the forfeiture and sale of all of the Company’s and its subsidiaries assets.

 

An event of default occurred on our outstanding shares of preferred stock which grants the holders of Series A, C, and E Preferred Stock the right to control our board of directors.

 

On October 15, 2014, we failed to make mandatory dividend payments in the aggregate totaling $133,500 to the holders of Series A, B, C, and D Preferred Stock. On January 23, 2015, we failed to make mandatory dividend payments in the aggregate totaling $137,633 to the holders of Series A, B, C, D, and E Preferred Stock (the “Preferred Stock”). We did not have the cash available to pay the dividends we elected to allocate current cash flow to the on-boarding of new offices. The non-payment of these two dividends constitutes an event of default under the Certificates of Designation for the Preferred Stock.

 

Under the Certificates of Designation for the Preferred Stock, any unpaid dividends will accrue and the non-payment of dividends for two quarters constitutes an event of default. A one-time five business day cure period is allowed for the second non-payment. This is the second quarter we have failed to make dividend payments. If an event of default occurs, the holders of the Series A Preferred Stock, the Series C Preferred Stock, and the Series E Preferred Stock, voting together as a separate class, have the right to increase the number of directors of the Company to seven persons and then have the right to elect or appoint, remove and re-appoint four directors of the Company. Directors appointed by the holders of Series A Preferred Stock, Series C Preferred Stock, and the Series E Preferred Stock may only be removed by the holders of a majority of the Series A Preferred Stock, Series C Preferred Stock, and the Series E Preferred Stock voting jointly.

  

 
29

 

 

As a result of the event of default on the Preferred Stock, the dividend rate payable on the Preferred Stock has increased and we are subject to damages caused to the holders of the Preferred Stock.

 

After the occurrence of the event of default on the Preferred Stock, the preferred dividend rate automatically, as of January 23, 2015, increased to a rate per annum of 20% of the Stated Value (as defined in the Certificates of Designation for the Preferred Stock), payable in cash on a monthly basis on the 15th day of each month until the event of default is cured, upon which event the preferred dividend will return to a rate of 6% per annum of the Stated Value. We are unable to make the required dividend payments and the increased dividend rate will substantially increase our payables to the holders of these shares of Preferred Stock. In addition, the holders of the Preferred Stock are entitled to legal and equitable remedies for damages caused by the failure to pay the dividends. Enforcement of these remedies by the holders of the Preferred Stock would have a detrimental effect on our financial condition and could negatively affect our ability to implement our current business plan or conduct operations.

 

See also “Item 1A – Risk Factors” as disclosed in Form 10-K for the year ended June 30, 2014, as filed with the Securities and Exchange Commission on October 14, 2014.

 

Item 6.  Exhibits

 

4.1

2015 Stock Incentive Plan

10.1

Executive Employment Agreement with Kevin Gadawski, dated March 26, 2015

31.1 Rule 13a-14 Certification by Principal Executive Officer and Principal Financial Officer

32.1

Section 1350 Certification of Principal Executive Officer and Principal Financial Officer

101.INS 

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

 
30

 

  

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  

PSM HOLDINGS, INC.

  

  

  

  

Date: May 20, 2015

By:

/s/ Kevin Gadawski

  

  

  

Kevin Gadawski, President, CEO & CFO

(Principal Executive and Financial Officer)

  

 

 

31