XOTC:PSMH PSM Holdings, Inc. Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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, 2012

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

For the transitional period from ______ to ______

Commission File No. 333-151807

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)
     
1112 N. Main Street, Roswell, New Mexico
 
88201
(Address of principal executive office)
 
(Zip code)
 
 (Registrant’s telephone number, including area code):  (575) 624-4170
 
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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 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 o

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 o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company [X]
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No [X]

As of May 15, 2012, there were 27,752,860 shares of registrant’s common stock outstanding.
 
 
 

 

PSM HOLDINGS, INC.
Report on Form 10-Q
For the quarter ended March 31, 2012

TABLE OF CONTENTS
 
PART I  FINANCIAL INFORMATION
3
   
Item 1.  Financial Statements
3
   
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
   
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
25
   
Item 4. Controls and Procedures
25
   
PART II - OTHER INFORMATION
25
   
Item 1.  Legal Proceedings
25
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
26
   
Item 5.  Other Information
26
   
Item 6.  Exhibits
26

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this report, contains forward-looking statements that involve risks, uncertainties and assumptions.  If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of PSM Holdings, Inc. and its consolidated subsidiaries (“PSMH” or the “Company”) may differ materially from those expressed or implied by such forward-looking statements and assumptions. Forward-looking statements include statements about the future of operations involving the mortgage brokerage 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 Quarterly Report 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.  Risks, uncertainties and assumptions include the following:

 
·
the competitive pressures faced by the Company in the mortgage industry;
 
·
integration and other risks associated with business combination transactions;
 
·
the hiring and retention of key employees;
 
·
expectations and assumptions relating to the execution and timing of growth strategies;
 
·
the possibility that the expected benefits of pending business combination transactions may not materialize as expected or that transactions may not be timely completed;
 
·
the assumption of unknown risks or liabilities from past or future business combination transactions;
 
·
a further decline in the economy, especially the housing market;
 
·
a significant increase in interest rates;
 
·
a failure to increase our warehouse lines of credit to generate additional loan originations and related revenue;
 
·
the loss of significant capacity in the Company’s warehouse lines of credit;
 
·
the loss from any default on mortgage loans originated by us before they are sold to third parties;
 
·
unknown risks or liabilities associated with companies acquired by us; and
 
·
a failure to successfully generate loan originations or otherwise market our services.

In light of the significant uncertainties inherent in the forward-looking statements made in this Quarterly 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.
 
 
2

 
 
PART I  FINANCIAL INFORMATION
Item 1.  Financial Statements
PSM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
   
March 31, 2012
(Unaudited)
   
June 30, 2011
 
ASSETS
           
Current Assets:
           
Cash & cash equivalents
  $ 234,646     $ 21,470  
Accounts receivable, net
    453,764       40,768  
Loans held for sale
    11,861,910       -  
Prepaid expenses
    428,253       192,000  
Other assets
    10,348       4,202  
Total current assets
    12,988,921       258,440  
                 
Property and equipment, net
    492,856       25,321  
                 
Loan receivable
    88,898       88,898  
Employee advances
    141,986       152,155  
Notes receivable
    360,000       360,000  
Intangible assets, net of accumulated amortization, March 31, 2012 - $425,796 and June 30, 2011 - $316,855
    3,585,885       1,595,576  
Security deposits
    11,968       8,375  
Total Assets
  $
                17,670,514
    $ 2,488,765  
                 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current Liabilities:
               
Accounts payable
  $ 503,677     $ 134,797  
Accrued stock payable
    -       778,000  
Warehouse lines of credit payable
    11,861,910       -  
Due to related party
    70,000       -  
Accrued liabilities
   
759,965
      39,028  
Total current liabilities
   
                  13,195,552
      951,825  
                 
Long-term Liabilities:
               
Due to related party
    -       120,000  
Total long-term liabilities
    -       120,000  
                 
Total Liabilities
   
13,195,552
      1,071,825  
                 
Commitment & Contingencies
    -       -  
                 
Stockholders' Equity:
               
Common stock, $0.001 par value, 100,000,000 shares authorized, 27,566,015 and 18,614,159 shares issued and outstanding at March 31, 2012 and June 30, 2011
    27,566       18,614  
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding at March 31, 2012 and June 30, 2011
    -       -  
Treasury stock, at cost: shares held 21,600 at March 31, 2012 and June 30, 2011
    (22,747 )     (22,747 )
Additional paid in capital
    17,390,239       11,281,710  
Accumulated deficit
   
(12,920,096
)     (9,860,637 )
Total stockholders' equity
    4,474,962       1,416,940  
                 
Total Liabilities and Stockholders' Equity
  $ 17,670,514     $ 2,488,765  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
3

 
 
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,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Revenues
  $ 3,551,378       751,058     $ 9,160,666     $ 3,165,372  
                                 
Operating expenses
                               
Selling, general & administrative
   
              4,892,228
      1,587,810      
                12,145,502
      4,000,541  
Depreciation and amortization
    80,883       16,948       178,875       51,373  
Total operating expenses
   
              4,973,111
      1,604,758      
                12,324,377
      4,051,914  
                                 
Loss from operations
   
            (1,421,733
)     (853,700 )    
                 (3,163,711
)     (886,542 )
                                 
Non-operating income (expense):
                               
Interest expense
    (1,464 )     (1,305 )     (3,781 )     (5,845 )
Interest and dividend
    2,951       2,118       8,736       3,442  
Realized gain on sale of securities
    -       -       -       5,057  
Other Income
    33,049       16,150       99,297       29,324  
Total non-operating income (expense)
    34,536       16,963       104,252       31,978  
                                 
Loss from continuing operations before income tax
   
            (1,387,197
)     (836,737 )    
                 (3,059,459
)     (854,564 )
                                 
Provision for income tax
    -       -       -       -  
                                 
Net loss
   
            (1,387,197
)     (836,737 )    
                 (3,059,459
)     (854,564 )
                                 
Other comprehensive income (loss):
                               
Unrealized loss on marketable securities
    -       -       -       (2,666 )
                                 
Comprehensive loss
  $
          (1,387,197
)   $ (836,737 )   $
               (3,059,459
)   $ (857,230 )
                                 
Net loss per common share and equivalents - basic and diluted loss from operations
  $ (0.05 )   $ (0.06 )   $ (0.13 )   $ (0.06 )
                                 
Weighted average shares of share capital outstanding - basic & diluted
    26,891,330       14,610,934       24,298,800       14,312,248  
                                 
Weighted average number of shares used to compute basic and diluted loss per share for the three month and nine months periods ended March 31, 2012 and 2011 are the same since the effect of dilutive securities is anti-dilutive.
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
4

 
 
PSM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
For the nine months ended March 31,
 
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $
                 (3,059,459
)   $ (854,564 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Bad debts
    80,303       3,907  
Depreciation and amortization
    178,875       51,373  
Share based payment awards
    674,725       545,800  
Stock issued to third parties for services
    467,590       78,001  
Stock issued to branchowners as commission
    -       25,267  
Gain on sale of marketable securities
    -       (5,057 )
(Increase) decrease in current assets:
               
Accounts receivable
    (421,508 )     95,926  
Prepaid expenses
    (236,253 )     60,000  
Other current assets
    19,556       5,382  
Increase (decrease) in current liabilities:
               
Accounts payable
    345,464       (121,886 )
Accrued liabilities
   
710,893
      (21,654 )
Net cash used in operating activities
    (1,239,814 )     (137,505 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from the sale of marketable securities
    -       32,812  
Purchase of property and equipment
    (2,992 )     (1,585 )
Cash proceeds from sale of assets
    850       -  
Cash received as part of acquisition
    170,000       13,664  
Cash received from employee advances
    10,169       1,993  
Cash proceeds for security deposits
    4,225       -  
Net cash provided by investing activities
    182,252       46,884  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Cash proceeds from sale of stock
    820,738       500,000  
Cash proceeds from exercise of warrants
    500,000       -  
Cash proceeds from related party
    70,000       -  
Cash payments on loan from related party
    (120,000 )     (20,000 )
Net cash provided by financing activities
    1,270,738       480,000  
                 
NET INCREASE IN CASH & CASH EQUIVALENTS
    213,176       389,379  
                 
CASH & CASH EQUIVALENTS, BEGINNING BALANCE
    21,470       75,763  
                 
CASH & CASH EQUIVALENTS, ENDING BALANCE
  $ 234,646     $ 465,142  
                 
See Note 4 - Statement of Cash Flows Additional Disclosures
               
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
5

 
 
PSM HOLDINGS, INC. AND SUBSIDIARY
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 term “Company” and “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
PrimeSource Mortgage, Inc., a wholly-owned subsidiary of PSM Holdings, Inc. was incorporated February 15, 1991 under the laws of the State of Texas. PrimeSource Mortgage, Inc. became a wholly-owned subsidiary of PSM Holdings, Inc., a Nevada corporation, on May 18, 2005.  On March 15, 2011, PrimeSource Mortgage Inc. completed the acquisition of United Community Mortgage Corp. (“UCMC”), a New Jersey corporation, and UCMC became a wholly-owned subsidiary of PrimeSource Mortgage, Inc.
 
PSM Holdings, Inc., through its wholly owned subsidiaries, is engaged in the businesses of mortgage banking, in which PSMH both originates and funds mortgage loans through its own warehouse lines of credit, as well as mortgage brokerage, in which PSMH originates mortgage loans funded by third-party lenders.
 
On June 9, 2011, UCMC entered into an Agreement and Plan of Merger with Brookside Mortgage, LLC, an Oklahoma limited liability company (“Brookside”). The merger transaction closed effective July 1, 2011, and at the closing, Brookside merged into UCMC. On July 6, 2011, the Company issued 800,000 shares of its common stock valued at $720,000 as consideration for acquisition of Brookside. Post closing one of the principal owners was elected to the Company’s Board of Directors.

On June 30, 2011, UCMC entered into an Agreement and Plan of Merger with Founders Mortgage, LLC, a Missouri limited liability company (“Founders”). The merger transaction closed effective July 1, 2011 and at the closing, Founders merged into UCMC.  On July 6, 2011, the Company issued 250,000 shares of its common stock valued at $225,000 as consideration for acquisition of Founders.

On August 8, 2011, UCMC entered into an Agreement and Plan of Merger with Fidelity Mortgage Company, a Colorado corporation (“Fidelity”). The merger transaction closed effective August 1, 2011 and at the closing, Fidelity merged into UCMC. On August 18, 2011, the Company issued 1,785,714 shares of its common stock valued at $1,250,000 as consideration for acquisition of Fidelity. In January 2012, the principal owner of Fidelity was elected to the Company’s Board of Directors.

 
6

 
 
On October 13, 2011, UCMC entered into an Agreement and Plan of Merger with Iowa Mortgage Professionals, Inc., an Iowa corporation (“IMP”). The merger transaction closed effective November 1, 2011 and at the closing IMP merged into UCMC. On November 1, 2011, the Company issued 1,285,714 shares of its common stock valued at $681,428 as consideration for the acquisition of IMP. In January 2012, the principal owner of IMP was elected to the Company’s Board of Directors.
 
The Company primarily operates and is licensed in the following 13 states: Arkansas, Colorado, Florida, Iowa, Montana, Missouri, Nebraska, New Jersey, New Mexico, New York, Oklahoma, 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, 2011 which were filed with the Securities and Exchange Commission on October 13, 2011 in the Form 10-K for the year ended June 30, 2011. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the nine months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending June 30, 2012.

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 consolidated financial statements. The consolidated financial statements and notes are the representation of PSM Holdings, Inc.’s management who is responsible for their integrity and objectivity.  The consolidated 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.

Principles of Consolidation
The consolidated financial statements include the accounts of PSM Holdings, Inc., its wholly-owned subsidiary PrimeSource Mortgage, Inc., and PrimeSource Mortgage Inc.’s wholly-owned subsidiary UCMC. All material intercompany transactions have been eliminated in the consolidation.

Use of Estimates
Management uses estimates and assumptions in preparing its consolidated 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 other non-current assets, estimated depreciable lives of property, plant and equipment, estimated valuation of intangible assets and related amortization, 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 includes cash on hand and cash in checking and savings accounts, and all investment instruments with an original maturity of three months or less.

Accounts Receivable
Accounts receivable represent commissions earned on closed loans and fees charged that the Company has not yet received payment. 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 and an assessment of the customer of the branch owner’s ability to pay.

Employee Advances, Loans and Notes Receivable
Employee advances, loans and notes receivable are stated at the unpaid principal balance. Interest income is recognized in the period in which it is earned.

 
7

 
 
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.

Loans held for sale are recorded at their fair value, with the exception of any loans that have been repurchased from investors on which we did not elect the fair value option. As of March 31, 2012 and June 30, 2011, no such loans were impaired and carried on the balance sheet at the lower of cost or market value assessed on an individual loan basis.

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.

Investments in Marketable Securities
Investments consist of equity securities categorized as available-for-sale which includes securities that are not classified in either the held-to-maturity category or the trading category.  The securities are recognized at fair value, with unrealized holding gains and losses included as other comprehensive income, net of any deferred income taxes and reported as a net amount in a separate component of stockholders’ equity until realized.  Interest and dividends earned on investment securities are recognized in the period in which they are received.  Interest and dividends are reported in the non-operating income section of the Consolidated Statements of Operations and Comprehensive Income (Loss).

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
5-7 years
Computer equipment
5 years
 
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.
 
 
8

 

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 expense for the three month and nine month periods ended March 31, 2012 and 2011 were $188,741 and $372,499, and $7,620 and $12,638, respectively.

Share Based Payment Plan
Under the 2012 Stock Incentive Plan, 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. The Company uses the fair value method to account for employee stock compensation costs and to account for share based payments to non-employees.
 
Revenue Recognition
The Company’s revenue is derived primarily from revenue earned from the origination and sale of mortgage loans, revenue earned from the origination of mortgage loans is recognized on the earlier of the settlement date of the underlying transaction or the funding date of the loan. Loans are funded through warehouse lines of credit and are sold to investors, typically within 5 to 7 days. The gain or loss on the sale of loans is realized on the date the loans are sold.

The Company receives an override fee on the warehouse lines of credit on loans closed on the lines. The revenue from the override fees is recognized as earned when the loan is sold off of the warehouse line.

Reclassification
Certain accounts in the prior-period financial statements have been reclassified for comparative purposes to conform with the presentation in the current quarter 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 that are not expected to have a material impact on the consolidated financial statements upon adoption.
 
 
9

 

NOTE 2  ALLOWANCE FOR DOUBTFUL ACCOUNTS

Accounts receivable are 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 recorded an allowance for doubtful accounts of $0 as of March 31, 2012 and June 30, 2011, respectively.

NOTE 3  PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows:

   
March 31, 2012
(Unaudited)
   
June 30, 2011
 
Fixtures and equipment
 
$
1,561,818
   
$
241,894
 
Accumulated depreciation
   
(1,068,962
)
   
(216,573
)
Property and equipment, net
 
$
492,856
   
$
25,321
 

Depreciation expense for the three month and nine month periods ended March 31, 2012 and 2011 was $26,079 and $69,935, and $2,216 and $7,689, respectively.

NOTE 4  STATEMENTS OF CASH FLOWS ADDITIONAL DISCLOSURES

Supplemental disclosures for cash flows at March 31, 2012 and 2011 consist of:
 
   
Nine months ended March 31,
 
   
2012
   
2011
 
   
(Unaudited)
   
(Unaudited)
 
Supplemental Cash Flow Disclosures:
           
Cash paid for interest
  $ 3,719     $ 5,180  
Cash paid for income taxes
  $ -     $ -  
                 
Supplemental Disclosures for Non-Cash Investing and Financing Activities were as follows:
               
                 
Acquisitions of UCMC (2011); Brookside, Founders, Fidelity and Iowa Mortgage (2012):
               
Accounts receivable, net
  $ (49,617 )   $ (250 )
Other assets
    (25,702 )     -  
Property and equipment, net
    (535,328 )     (15,625 )
Employee advances
    (22,174 )     (189,654 )
Notes receivable
    -       (360,000 )
Intangible assets
    (2,099,252 )     (1,087,432 )
Security deposit
    (7,818 )     (8,375 )
Accounts payable
    23,417       -  
Accrued liabilities
    10,046       -  
Common stock
    4,122       2,393  
Additional paid in capital
    2,872,306       1,672,607  
                 
Stock issued to employees as bonus
  $ 1,094,725     $ -  
Stock issued to consultants for services
  $ 825,590     $ -  
 
 
10

 

NOTE 5  RELATED PARTY TRANSACTIONS

President/Chief Executive Officer and Director
The Company entered into an Employment Agreement (the “Agreement”) with its President/Chief Executive Officer effective January 1, 2011. Pursuant to the terms of the Agreement, the Company agreed to issue 750,000 shares of common stock valued at $525,000 as a signing bonus to induce him to enter into the Agreement, 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, 2012, the annual compensation was increased to $250,000 pursuant to the terms of Agreement. For the three months and nine months ended March 31, 2012, the Company recorded $62,500 and $175,000 in compensation expense, $2,250 and $6,750 in car allowance and $989 and $5,334 in life and health insurance benefits, and $31,250 of the compensation remains payable at March 31, 2012. For the three months and nine months ended March 31, 2011, the Company recorded $56,250 and $56,250 in compensation expense, $0 and $0 in car allowance and $757 and $757 in health insurance benefits.
 
Executive Vice-President and Director
The Company entered into an Employment Agreement (the “EA”) with its Executive Vice-President effective January 1, 2011. Pursuant to the terms of the EA, 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 the officer and his family. For the three months and nine months ended March 31, 2012, the Company recorded $50,000 and $150,000 in compensation expense, $2,100 and $5,600 in car allowance and $1,468 and $7,318 in life and health insurance benefits and $26,667 of compensation remains payable at March 31, 2012. During the three months and nine months ended March 31, 2011, the Company recorded a compensation expense of $50,000 and $150,000, $2,100 and $5,100 in car allowance and $3,870 and $11,261 in life and health insurance benefits.
 
The Company leases office space in an office building that is 100% owned by an LLC whose members are the Company’s Executive Vice-President and his immediate family. The terms under the lease agreement is of month-to-month operating lease. Total rents paid for the office lease for the three and nine months ended March 31, 2012 and 2011were $10,259 and $30,509, and $9,865 and $29,335, respectively.

In 2008, the Company entered into an unsecured revolving line of credit arrangement with this officer to borrow funds for up to $120,000. The term of the credit arrangement is for five years at an adjustable interest rate of the Prime Rate minus 0.76%. The balance of the advance payable to this officer at March 31, 2012 was $0. The revolving credit line is still available to the Company to borrow funds up to $120,000. Interest paid to the officer for borrowings under the revolving line of credit arrangements amounted to $7 and $909, and $704 and $2,141, for the three and nine months ended March 31, 2012 and 2011, respectively.
 
Other Directors
On March 15, 2011, the Company entered into an employment agreement with a director of the Company, in connection with our acquisition of United Community Mortgage Corp. The term of his employment agreement is for two years, with automatic one-year extensions unless notice is given by either party. The agreement provides for an annual base salary of $120,000 with increases based upon increases in originations at his branch and incentive payments upon securing additional branches for PSMI. The Company recorded a compensation expense of $30,000 and $90,000 for the three months and nine months ended March 31, 2012.

On July 1, 2011, the Company entered into an employment agreement with a director of the Company, in connection with our acquisition of Brookside Mortgage. The term of his employment agreement is for two years, with automatic one-year extensions unless notice is given by either party. The agreement provides for an annual base salary of $120,000 plus bonus equal to 25% of the net profit earned by Brookside branch in excess of $400,000 annual profits earned. The Company recorded a compensation expense of $30,000 and $90,000 for the three months and nine months ended March 31, 2012.

Effective November 1, 2011, the Company entered into an employment agreement with a director of the Company, in connection with our acquisition of Iowa Mortgage Professionals, Inc. The term of his employment agreement is for two years, with automatic one-year extensions unless notice is given by either party. The agreement provides for an annual base salary of $120,000 plus bonus equal to 25% of the net profit earned by the Iowa branch in excess of $400,000 annual profits earned. The Company recorded a compensation expense of $30,000 and $50,000 for the three months and nine months ended March 31, 2012.
 
11

 

Loan receivable from a related party as of March 31, 2012 and June 30, 2011 consists of:

   
Original loan
   
Balance due
March 31, 2012
(Unaudited)
   
Balance due
June 30, 2011
 
Secured loans to NWBO Corporation (NWBO) bearing annual interest at 9.25% with no defined payment terms
 
$
167,000
   
$
88,898
   
$
88,898
 
                         
Accrued interest due from NWBO
           
8,567
     
2,584
 
   
$
167,000
   
$
97,465
   
$
91,482
 
Less allowance for uncollectible amounts
   
-
     
-
     
-
 
   
$
167,000
   
$
97,465
   
$
91,482
 

The Company entered into two Commercial Security Agreements dated November 16, 2006 and February 16, 2007 with NWBO securing the loan amount of $167,000 with 150,000 shares of the Company’s own common stock held by NWBO. The Company recorded interest income of $2,126 and $6,378 and $2,148 and $6,445, from the loan receivable from NWBO for the three months and nine months ended March 31, 2012 and 2011, respectively.

The Company conducted business with the Farmington, New Mexico Branch office which is operated by a former director of the Company. Commissions recorded as expense under the branch agreement for the three months and nine months ended March 31, 2012 and 2011 were $12,269 and $90,256, and $33,635 and $161,957, respectively. At March 31, 2012 and June 30, 2011, the Company owed $0 to the Farmington Branch in commissions. This director resigned from the Board on January 3, 2012 to concentrate on expanding his branch operations.

On March 29, 2012, one of the Company’s directors is a principal of a management company that provided a revolving line of credit to the Company in the amount of $100,000. The line of credit is unsecured, bears a 6% annual rate of interest and is due on March 20, 2013. As of March 31, 2012, the Company has borrowed $70,000 against this line of credit for its working capital requirements.

One of the Company’s directors is a principal of a management company that provides a revolving warehouse line of credit to the Company. Amounts outstanding on the credit line as of March 31, 2012 and June 30, 2011 amounted to $11,896,016 and $1,103,672 which were offset by an equal amount of funding receivable as of March 31, 2012 and June 30, 2011, respectively (See Note 9).
 
NOTE 6  NOTE RECEIVABLE AND EMPLOYEE ADVANCES

On December 1, 2010, the Company’s subsidiary UCMC executed a Promissory Note with an unrelated third party for a principal sum of $360,000. Interest shall accrue on the outstanding principal balance at a variable interest rate per annum equal to the sum of the LIBOR Rate plus 0.55%. Interest shall be paid quarterly in arrears commencing March 1, 2011 and continuing on the last business day of each fiscal quarter thereafter except that the entire unpaid interest shall be due and payable in full on or before the maturity date. The principal and unpaid interest shall be due and payable in full on December 1, 2016. The Promissory Note is secured by real estate parcels. The Company recorded an interest income of $819 and $2,341 for the three months and nine months ended March 31, 2012. Interest receivable on this note amounted to $3,160 and $1,617 as of March 31, 2012 and June 30, 2011. The Promissory Note balance recorded as of March 31, 2012 and June 30, 2011, was $360,000.

On December 31, 2010, PrimeSource Mortgage, Inc., a subsidiary of the Company, executed a Letter of Repayment with three employees in the amount of $189,654 for funds advanced to them as a loan. These loans are unsecured, non-interest bearing and due on demand. Payments of these loans are made from the portion of commissions earned by these employees. If the employees’ employment is terminated for any reason, the loan outstanding will become due and payable in full or specific arrangements will be made. The Company recorded an allowance for uncollectible advances of $33,862 as of March 31, 2012 and June 30, 2011. During the nine months ended March 31, 2012, the Company received $10,169 in payments generated by earnings for the services provided by the employees to offset against their advances. Employee advances recorded as of March 31, 2012 and June 30, 2011 were $141,986 and $152,155, respectively.
 
 
12

 

NOTE 7  ACQUISITIONS OF ENTITES

Brookside Mortgage, LLC
On June 9, 2011, the Company entered into an Agreement and Plan of Merger with Brookside Mortgage, LLC, an Oklahoma limited liability company. At the closing, Brookside Mortgage merged into United Community Mortgage Corp., a wholly-owned subsidiary of PrimeSource Mortgage, Inc., which is our wholly-owned subsidiary. The merger transaction closed effective July 1, 2011. The shareholders of Brookside received a total of 800,000 shares of our common stock valued at $720,000 in exchange for all the outstanding stock of Brookside. The common stock issued was valued at the fair value of the stock on the date of closing. The common shares issued to the shareholders of Brookside have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
 
Estimated fair value of the assets acquired on July 1, 2011:

Cash and cash equivalents
 
$
30,000
 
Accounts receivable
   
8,689
 
Deposits
   
21,011
 
Employee advances
   
10,130
 
Other assets  - Escrow
   
225
 
Furniture & equipment, net
   
77,350
 
Security deposits
   
3,443
 
     
150,848
 
Liabilities assumed
   
(25,975
)
Net assets acquired
   
124,873
 
Goodwill
   
297,564
 
Intangible asset – Customer List
   
297,563
 
Total consideration paid
 
$
720,000
 

Founders Mortgage, LLC
On June 30, 2011, the Company entered into an Agreement and Plan of Merger with Founders Mortgage, LLC, a Missouri limited liability company. At closing, Founders merged into United Community Mortgage Corp., a wholly-owned subsidiary of PrimeSource Mortgage, Inc., which is our wholly-owned subsidiary. The merger transaction closed effective July 1, 2011. The shareholder of Founders received 250,000 shares of our common stock valued at $225,000 in exchange for all of the outstanding stock of Founders. The common stock issued was valued at the fair value of the stock on the date of closing. The common shares issued to the shareholder of Founders have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
 
 
13

 
 
Estimated fair value of the assets acquired on July 1, 2011:
 
Cash and cash equivalents
 
$
90,000
 
Employee advances
   
12,044
 
Office Equipment
   
37,387
 
Security deposits
   
4,375
 
Other assets
   
1,083
 
     
144,889
 
Liabilities assumed
   
-
 
Net assets acquired
   
144,889
 
Intangible asset – Customer List
   
80,111
 
Total consideration paid
 
$
225,000
 

Fidelity Mortgage Company
On August 8, 2011, the Company entered into an Agreement and Plan of Merger with Fidelity Mortgage Company, a Colorado Corporation. At the closing, Fidelity merged into United Community Mortgage Corp., a wholly-owned subsidiary of PrimeSource Mortgage, Inc., which is our wholly-owned subsidiary. The merger transaction closed effective August 1, 2011. On August 8, 2011, the closing was held for the Merger Agreement with Fidelity. The shareholders of Fidelity received 1,785,714 shares of our common stock valued at $1,250,000 in the merger transaction in exchange for all the outstanding stock of Fidelity. The common stock issued was valued at the fair value of the stock on the date of closing. The common shares issued to the principal shareholders of Fidelity have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
 
Estimated fair value of the assets acquired on August 1, 2011:

Accounts receivable
 
$
40,929
 
Furniture and equipment, net
   
349,739
 
     
390,668
 
Liabilities assumed
   
-
 
Net assets acquired
   
390,668
 
Goodwill
   
859,332
 
Total consideration paid
 
$
1,250,000
 

Iowa Mortgage Professionals, Inc.
On October 18, 2011, the Company entered into an Agreement and Plan of Merger with Iowa Mortgage Professionals, Inc., an Iowa Corporation.  At the closing, IMP merged into United Community Mortgage Corporation, a wholly-owned subsidiary of PrimeSource Mortgage, Inc., which is our wholly-owned subsidiary.  The merger transaction closed effective November 1, 2011. On November 1, 2011, the closing was held for the Merger Agreement with IMP.  The shareholder of IMP received 1,285,714 shares of our common stock valued at $681,428 in the merger transaction in exchange for all the outstanding stock of IMP.  The common stock issued was valued at the fair value of the stock on the date of closing.  The common shares issued to the principal shareholder of IMP have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
 
 
14

 

Estimated fair value of the assets acquired on November 1, 2011:

Cash and cash equivalents
 
$
50,000
 
Other current assets
   
3,383
 
Furniture and equipment, net
   
70,852
 
     
124,235
 
Liabilities assumed
   
(7,487
)
Net assets acquired
   
116,748
 
Goodwill
   
564,680
 
Total consideration paid
 
$
681,428
 

The purchase price allocation for the assets acquired and liabilities assumed for Brookside, Founders, Fidelity, and IMP (“Acquirees”) recorded in the accompanying financial statements at March 31, 2012, are based on their estimated fair values at the date of their acquisition. Immediately after the closing of mergers, the Company obtained effective control over the Acquirees. Accordingly, the operating results of the Acquirees have been consolidated with those of the Company beginning the closing dates of the mergers of Acquirees through March 31, 2012.

The fair value of the shares issued by the Company in connection with the acquisition of the Acquirees exceeded the fair market value of the net assets acquired. Thus, identifiable intangible assets customer lists and goodwill were generated, and these amounts are recorded as a non-current asset on the Balance Sheet at March 31, 2012.

NOTE 8  INTANGIBLE ASSETS

Intangible assets consist of:

   
March 31, 2012
(Unaudited)
   
June 30, 2011
 
Intangible assets not subject to amortization:
           
FHA "Full Eagle" Status Permit
 
$
938,790
   
$
938,790
 
Goodwill
   
1,721,576
     
-
 
State Licenses
   
31,293
     
31,293
 
     
2,691,659
     
970,083
 
Less: Impairments
   
-
     
-
 
Balance
 
$
2,691,659
   
$
970,083
 
                 
Intangible assets subject to amortization:
               
Customer list
 
$
495,023
   
$
117,349
 
NWBO License
   
824,999
     
824,999
 
     
1,320,022
     
942,348
 
Less: accumulated amortization
   
(425,796
)
   
(316,855
)
Balance
 
$
894,226
   
$
625,493
 
                 
Total Intangible Assets, net
 
$
3,585,885
   
$
1,595,576
 

It is the Company’s policy to assess the carrying value of its intangible assets for impairment on a quarterly basis, or more frequently, if warranted by circumstances. Management has determined that the intangible assets acquired as a result of acquisitions are not impaired because the Company accumulated a positive regulatory reputation for running a well-documented, process oriented mortgage lending operation with Full Eagle status in place. The Company acquired two profitable operations effective July 1, 2011, one effective August 1, 2011, and one effective November 1, 2011 because of its attaining Full Eagle status. Therefore, no impairment of intangible assets was recorded in the accompanying financial statements as of March 31, 2012.
 
 
15

 
 
The amount allocated for the purchase of Customer List as a result of its acquisitions of UCMC, Brookside, Founders, Fidelity, and IMP amounted to $495,023. The Company amortizes Customer Lists over a period of 3 to 8 years. Amortization expense recorded for the three and nine months ended March 31, 2012 and 2011 was $21,581 and $64,744, and $14,732 and $44,197, respectively. Management re-evaluated the amortization period of Customer List and increased the amortization period from 5 to 8 years based upon the Company’s historical experience with returning clients obtaining loans for funding new purchases and refinances. Amortization expense to be recognized for the year ending June 30, 2012 was $21,581, for 2013 and 2014 was $86,326, and for each of the years from 2015 to through 2019 was $47,209.

On April 14, 2006, the Company entered into a five-year renewable license agreement with Nationwide By Owner, Inc. (“NWBO”), a Texas based company engaged in the business of marketing real property for sale by owners. In the course of its business, NWBO generates a proprietary system which produces a database of sales leads containing home buyer and home seller information for persons seeking financing on the purchase or refinancing of real property. The license agreement permits exclusive use of the database to be used to generate leads for the origination of mortgage applications for submission to PrimeSource Mortgage, Inc. The initial cost of the license was $150,000 paid in cash, and issuance of 150,000 shares of PSM Holdings, Inc. stock in favor of NWBO 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 license amounted to $824,999. The Company is amortizing the cost of the license over fourteen years, which is the initial five-year period of the agreement, plus three automatic three year renewal terms. Amortization expense recorded for each of the three and nine months ended March 31, 2012 and 2011 was $14,732 and $44,197, and $14,732 and $44,197, respectively. Amortization expense to be recognized for the year ending June 30, 2012 was $14,732, and for each of the years ending June 30, 2013 through 2019 is $58,929 and for the year ending June 30, 2020 is $46,652.
 
NOTE 9 WAREHOUSE LINES OF CREDIT

The Company has six warehouse lines of credit available 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 mortgage banker for up to $1,000,000 bearing an annual interest rate of 5%. On November 1, 2011, the warehouse line of credit was increased to $5,000,000 for the purpose of funding residential mortgage loans, (ii) On June 11, 2009, the Company entered into a warehouse line of credit with a mortgage banker for up to $1,000,000 which was modified on June 19, 2009 to increase the credit line to up to $4,000,000. The annual interest rate on the new line is Wall Street Journal Prime Interest Rate plus 1% with a floor of 5.75%, (iii) On September 30, 2010, the Company entered into a warehouse line of credit with a mortgage banker for up to $1,000,000 for a one year term, unconditionally guaranteed for payment by its Executive Vice-President. The warehouse line was renewed for a one year term expiring on September 30, 2012. The unpaid balance on the lines of credit bears an interest rate equal to prime interest rate plus 2% with a floor of 7%, (iv) On September 30, 2011, the Company entered into a warehouse line of credit with a mortgage banker for up to $500,000 bearing interest equal to Prime Interest Rate plus 2% and in no event be less than 7% per annum; (v) On February 13, 2012, the Company entered into a warehouse line of credit with a mortgage banker for up to $500,000 for a one year term, unconditionally guaranteed for payment by its Executive Vice-President. The unpaid balance on the line of credit bears an annual interest rate equal to prime plus 2% with a floor of 7%; and (vi) On November 18, 2011, the Company entered into a “Repo” warehouse line of credit agreement with a mortgage banker for up to $5,000,000 bearing an annual interest rate of 5% for funding residential mortgage loans. Per the terms of the agreement, the company could be required to repurchase the loan subject to certain terms and conditions.

The lines of credit provide short term funding for mortgage loans originated by the branch offices. The lines of credit are repaid within 5 to 7 days when the loan is sold to third party investors. The Company does not intend to hold and service the loans. The lines are used strictly to fund mortgage loans and not to provide operating funds for the Company. The Company had $11,861,910 in loans outstanding against the warehouse lines of credit, and had obtained commitments from the third party investors to purchase the loans outstanding against this line of credit, thus offsetting the loans payable on this line against the loans receivable of the same amounts from the third party investors as of March 31, 2012. The Company has recorded the amounts receivable against the loans and related liability against the lines of credit of the same amount in the accompanying financial statements as of March 31, 2012. The Company has not borrowed funds from the credit line (ii) stated above as of March 31, 2012.
 
NOTE 10  STOCKHOLDERS’ EQUITY AND ISSUANCES

The Company’s capitalization at March 31, 2012 was 100,000,000 authorized common shares and 10,000,000 authorized preferred shares, both with a par value of $0.001 per share.
 
 
16

 

Following is the status of the share based payment plans during the nine months ended March 31, 2012:

2002 Stock Option/Stock Issuance Plan
In December 2011, the Company increased the number of shares authorized under the Company’s 2002 Stock Option/Stock Issuance Plan to 3,250,000 shares of common stock for non-statutory and incentive stock options and stock grants under the plan which is subject to adjustment in the event of stock split, stock dividends, and other situations. This plan expired on December 31, 2011, although pursuant to the terms of the plan any options and unvested stock issuances outstanding at that time under the plan will continue to have full force and effect in accordance with the provisions of the documents evidencing such options or issuances. In November 2011, the Company granted 199,000 shares of its common stock to its employees as stock awards under the plan, valued at $159,200, and such shares were issued to employees on February 3, 2012. At March 31, 2012, 138,806 shares remained unissued and cancelled under this plan.

On December 12, 2011, the shareholders of the Company authorized and approved 2012 Stock Incentive Plan (the “2012 Plan”) to issue up to 6,000,000 shares of common stock of the Company of $0.001 par value per share. The 2012 Plan became effective January 1, 2012. No awards shall be granted under the 2012 Plan after the expiration of 10 years from the effective date, but awards previously granted may extend beyond that date. As of March 31, 2012, the Company granted 304,100 shares of common stock to employees under 2012 Plan, of which the Company has issued 158,100 shares to the employees as stock awards valued at $126,480 on the date of grant.
 
Other Stock Issuances
On July 6, 2011, the Company issued 1,050,000 shares of restricted common stock valued at $945,000 for acquisition of Brookside and Founders Mortgage. The shares were issued to the shareholders of Brookside and Founders for acquiring their 100% ownership interest, and were valued at the closing share price on the date of closing of the transaction.
 
On August 18, 2011, the Company issued 1,785,714 shares of restricted common stock valued at $1,250,000 for acquisition of Fidelity Mortgage Company. The shares were issued to the shareholders of Fidelity for acquiring their 100% ownership interest, and were valued at the closing share price on the date of closing of the transaction.

On September 30, 2011, the Company issued 1,000,000 shares of its common stock to two accredited investors, one of which is a director of the Company, and received cash proceeds of $500,000 upon their exercise to purchase warrants at $0.50 per share.

On November 1, 2011, the Company issued 1,285,714 shares of restricted common stock valued at $681,428 for acquisition of Iowa Mortgage Professionals, Inc. The shares were issued to the shareholder of IMP for acquiring its 100% ownership interest, and were valued at the closing share price on the date of closing of the transaction.

On January 13, 2012, the Company issued 125,000 shares of its common stock valued at $66,250, to a consultant for providing investor/public relations services. The shares were valued at their fair value on the contractual agreement date.

On February 2, 2012 and March 8, 2012, the Company issued 125,000 shares and 550,000 shares of its common stock valued at $32,500 and $357,500 to a consultant for providing investor relations and business advisory services. The common shares issued were valued at the contractual agreement date of February 1, 2012.
 
In July 2011, the Company commenced a private placement offering to raise up to $975,000 through the sale of up to 13 Units at $75,000 per Unit, with each Unit consisting of 100,000 shares of common stock and 100,000 warrants. The warrants issued in conjunction with the offering are exercisable at $1.00 per share and are exercisable starting on the closing date of the offering and expiring September 14, 2014. Through March 31, 2012, the Company sold 1,094,328 shares to accredited investors for cash proceeds of $820,747.

Total common shares issued and outstanding under all stock plans at March 31, 2012 were 27,566,015.

During the nine months ended March 31, 2012, there were no stock options granted under the 2002 Stock Option/Stock Issuance Plan and 2012 Stock Incentive Plan.

Warrant issuances
On March 28, 2011, the Company granted 500,000 warrants to a director and 500,000 warrants to an accredited investor/shareholder in conjunction with purchasing 1,000,000 units at $0.50 per unit, each unit comprising of one common share and one warrant. The warrants were exercisable at any time through September 30, 2011. On September 30, 2011, the accredited investor and the director exercised their warrants and the Company received cash proceeds of $500,000.

 
17
,

 

During the nine months ended March 31, 2012, the Company issued to accredited investors 1,094,328 warrants to purchase 1,094,328 shares of common stock at an exercise price of $1.00.  The warrants are exercisable at any time through September 14, 2014. The fair value of warrants was $350,397 calculated using the Black-Scholes option pricing model using the assumptions of risk free discount rates of 0.20% to 0.51%, volatility between 119.07% to 181.38%, 3 years term and dividend yield of 0%. Since the warrants were issued in conjunction with capital raising, no expense was recorded in the accompanying financial statements as of March 31, 2012.

On March 25, 2010, the Company granted 2,000,000 warrants to the Chairman of the Board of Directors and 2,000,000 warrants to the President of the Company for their past services, at the exercise price of $1.00 per share for a five-year term.

The Company has 5,094,328 warrants outstanding as of March 31, 2012 at an exercise price of $1.00.

NOTE 11  COMMITMENTS

Nationwide By Owners License
The agreement between NWBO and the Company calls for the establishment of a National Processing Center for the collection, origination and tracking of the sales lead database. As agreed to by NWBO and the Company, the National Processing Center has been delayed until a written approval has been obtained between NWBO and a national marketing company. There are on-going conversations taking place at this time, but no agreement has been executed. NWBO continues to provide the platform that produces a database of sales leads containing home buyer and home seller information for persons seeking financing on the purchase or refinancing of real property for exclusive use by the Company. 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.

Pursuant to the agreement with NWBO, the Company has also committed to pursue obtaining, in good faith and diligently, the appropriate licenses to originate mortgages in all 50 states of the United States of America.

Historically the Company has not gathered data on the number of leads and loans closed, and commissions earned and paid, relating to the NWBO license since the branch offices are managed independently and may choose not to use these lead generating opportunities. Because some of the branches have taken advantage of the NWBO opportunity, management has recently begun tracking some of the results from those offices. Based on this limited information, management believes there are approximately 207% of the loans being derived from the NWBO signs. However, management also believes there are other benefits from the association for the branches in the form of marketing exposure and the control of a transaction. If a prospective buyer calls the telephone number on the NWBO sign while looking for a property, and if they are not already working with a realtor, the branch office has the opportunity not only to generate the loan business, but may also refer a lead prospect to a producing realtor in the market area.

The Company has developed a method to measure the value of the NWBO license. The method is a computation based on income from new and existing branches and an estimate of the value NWBO brings to each of the branches. The computation is prepared each quarter. The computed value of the license is compared to the book value of the license at the end of each quarter to determine if there is any impairment in the carrying value of the license. The book value is determined by the original cost of the license less accumulated amortization as of the end of the quarter. The value of the license recorded on the balance sheet is at its book value. The book value of the license estimated was less than the computed value at March 31, 2012 and June 30, 2011.
 
 
18

 
 
Lease commitments
The Company leases office space in an office building that is 100% owned by an LLC whose members are the Company’s Executive Vice-President and his immediate family. The terms under the lease agreement is of month-to-month operating lease and there are no future non-cancelable lease commitments due by the Company. Total rents paid for the office lease for the three months and nine months ended March 31, 2012 and 2011 were $10,259 and $30,509, and $9,865 and $29,335, respectively.

The Company rents property and equipment under a rental agreement with cancellable term. Total rent recorded as expense under the agreement for the three months and nine months ended March 31, 2012 and 2011 were $23,587 and $51,067, and $2,866 and $5,664, respectively.

The Company leases office space for its branches and property and equipment under cancellable and non-cancellable lease commitments. The monthly rent for office premises and property and equipment is $69,611. The leases expire between August 2012 and December 2016. Total rent expense recorded for the three and nine months ended March 31, 2012 and 2011was $208,274 and $482,905, and $14,565 and $34,035, respectively.

Total minimum lease commitments for branch offices and property and equipment leases at March 31, 2012 are as follows:

For the year ended June 30,
 
Amount
 
       
2012
 
$
172,341
 
2013
   
234,119
 
2014
   
181,431
 
2015
   
178,654
 
2016
   
170,648
 
After 2016
   
85,002
 
Total
 
$
968,865
 

NOTE 12  LOSS PER COMMON SHARE

Basic and diluted loss per common share is computed by dividing the loss available to common shareholders 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 has 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, 2012 and 2011were 26,891,330 and 24,298,800, and 14,610,934 and 14,312,248, respectively. Loss per common share for the three and nine months ended March 31, 2012 and 2011was $0.05 and $0.13, and $0.06 and $0.06, respectively.

NOTE 13  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;
●     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.
 
 
19

 

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.

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, 2012 and June 30, 2011are as follows:

   
March 31, 2012
(Unaudited)
   
June 30, 2011
 
   
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
Financial assets:
                       
Cash and cash equivalents
 
$
234,646
   
$
234,646
   
$
21,470
   
$
21,470
 
Accounts receivable
   
453,764
     
453,764
     
40,768
     
40,768
 
Loans held for sale
   
11,861,910
     
11,861,910
     
-
     
-
 
Prepaid expenses
   
428,253
     
428,253
     
192,000
     
192,000
 
Loan receivable
   
88,898
     
88,898
     
88,898
     
88,898
 
Notes receivable
   
360,000
     
360,000
     
360,000
     
360,000
 
                                 
Financial liabilities:
                               
Accounts payable
 
$
503,677
   
$
503,677
   
$
134,797
   
$
134,797
 
Warehouse line of credit
   
11,861,910
     
11,861,910
     
-
     
-
 
Accrued stock payable
   
-
     
-
     
778,000
     
778,000
 
Accrued liabilities
   
759,965
      759,965      
39,028
     
39,028
 
Due to a related party
   
70,000
     
70,000
     
120,000
     
120,000
 

NOTE 14  INDUSTRY RISKS

The mortgage industry has gone through a significant consolidation over the past four years. The foreclosures in 2011 and 2010 have caused a credit tightening, making qualifying for loans more difficult for borrowers. The Company has not experienced credit losses because the Company either has sold the loan prior to or shortly after closing or simply does not fund the loans they originate. The U.S. housing market as a whole has undergone a significant contraction with lenders and investors tightening their credit standards, making the mortgage origination volumes flat in 2011 and 2010. The lower rates in 2010 and 2011 have brought the market back to some degree. Because of the Company's long standing practices of dealing primarily with buyers who qualify for loans in the standard market, having their loans sold in advance, and forming relationships with quality lenders, management believes the impact of the current industry crisis on the Company will be minimal, although it cannot be determined with any certainty.

The mortgage industry is experiencing significant regulatory changes which began during 2011 and are continuing through 2012 requiring mortgage brokers to significantly modify their operations or seek out merger or sale opportunities in order to comply with the new regulations.  Operations of the Company have been modified to ensure continued compliance with the new requirements.  To keep up with the regulatory changes in the mortgage industry, the Company changed its growth strategy and attained Full Eagle status by acquiring UCMC, acquired four additional operating entities since July 2011 with past profitability performance, which required a significant investment of resources over the last nine months to facilitate the acquisitions and their integration into the operations of the Company.  Although every effort is being made to consolidate operations, cut costs and increase revenue, the Company cannot predict with certainty that these entities will perform at the same or better profitable level in the future based upon the consolidation and regulatory compliance in the mortgage and housing industry.
 
NOTE 15  SUBSEQUENT EVENTS
 
Subsequent events have been evaluated through May 15, 2012, the date these financial statements were issued.
 
On April 17, 2012, UCMC changed its domicile to the State of Delaware and changed its name to PrimeSource Mortgage, Inc.
 
 
20

 

On April 23, 2012, the Company issued 31,495 shares of its common stock valued at $26,400 to vendors for providing legal and consulting services. The shares issued were valued at the fair value on the date of issuance.

On April 23, 2012, the Company issued 30,350 shares of its common stock valued at $24,887 to employees as bonus for achieving their sales targets for the quarter ended March 31, 2012. The shares were valued at the fair value on the date of issuance.

On April 30, 2012, the Company issued 125,000 shares of its restricted common stock valued at $66,250 to a consultant for providing public relations and investor relation services for the Company.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with the Unaudited Consolidated Condensed Financial Statements and the related notes that appear elsewhere in this document.
 
Overview
 
PSM Holdings, Inc. (“PSMH” or the “Company”), through its wholly owned subsidiaries, is engaged in the business of mortgage banking, in which PSMH both originates and funds mortgage loans through its own warehouse lines of credit which currently accounts for about 90% of closed loans, as well as mortgage brokerage, in which PSMH originates mortgage loans funded by third-party lenders. PSMH immediately sells these loans to its third-party lenders or into the secondary mortgage market. PSMH offers a full range of mortgage loan products, including adjustable rate mortgages, fifteen, twenty, and thirty-year fixed rate loans, and balloon loans with a variety of maturities, as well as refinancing, construction loans, second mortgages, debt consolidation, and home equity loans.
 
Operations are carried out by the Company’s two wholly-owned subsidiaries, PrimeSource Mortgage, Inc. (“PSMI”) and United Community Mortgage Corp. (“UCMC”). Through its subsidiaries, PSMH operates and is licensed in the following 13 states: Arkansas, Colorado, Florida, Iowa, Missouri, Montana, Nebraska, New Jersey, New Mexico, New York, Oklahoma, Texas and Utah.
 
At the beginning of 2011, PSMH developed a new strategy to adapt to changes in federal regulations regarding mortgage banking and brokerage that became effective on January 1, 2011 and April 1, 2011. The Company’s new business model involves rapidly expanding its loan production capacity through acquisitions and improving profit margins of acquired companies by migrating them to PSMH’s higher margin lending platform. The acquisition targets are generally mature, profitable businesses that have a well-established presence in the real estate markets in which they operate. PSMH has acquired five operating companies since March 15, 2011, for which it has issued approximately 6.5 million shares. In addition, management is in discussions with additional target operating companies.
 
PSMH’s new business model involves owning branch offices, rather than maintaining a network of independently operated branch offices as PSMH previously did under its old legacy business model. Management believes this will have significant implications for PSMH’s revenue and expense streams going forward.
 
Under the old business model, operations were conducted by PSMH’s wholly-owned subsidiary, PrimeSource Mortgage, Inc. (PSMI), through 30 independently operated branch offices located in 17 states, primarily in the southwestern states of New Mexico, Oklahoma, and Texas, under an Independent Network Office Agreement. Theis exclusive agreement provided that PSMI shares commissions with branch offices, PSMI received a $500 to $550 flat fee per loan closed.
 
 
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Under the new current business model, our business operations are conducted by PSMI’s wholly-owned subsidiary UCMC. All branch revenue flows directly to PSMI through UCMC, and PSMH through PSMI. UCMC is responsible for all branches operating expenses, and all acquired branch offices are still  managed on a day-to-day basis by existing management to take advantage of their expertise and knowledge of local real estate markets.
 
In April 2012,  management restructured the Company by merging PSMI into UCMC and changing the domicile of UCMC from the State of New Jersey to the State of Delaware.  As a result of the restructuring, PSMH will have a single wholly-owned subsidiary, UCMC, which has undergone a name change to PrimeSource Mortgage, Inc., and  conducting all business operations under both the old and new business models. As the new business model gains traction, management expects the contribution from the old business model to account for an increasingly smaller proportion of revenue and expenses.
 
Approximately 75% of loan applications are generated from business contacts and previous client referrals at each of the branch offices, while realtor referrals generate another 15%.  Approximately 10% come from other advertising and marketing efforts, including roughly 7% from Nationwide By Owner, Inc. (“NWBO”).
 
PSMI has an exclusive license agreement with NWBO, a Texas-based company that provides proprietary software that produces a database of sales leads containing home buyer and home seller information for persons seeking financing on the purchase or refinancing of real estate. NWBO derives its leads from individuals in approximately 17 states selling their homes personally rather than through a real estate agent or through real estate agents that have relationships with PSMI’s branch offices.
 
The agreement with NWBO, originally signed on April 14, 2006, and recently renewed for an additional five years on April 14, 2011, is automatically renewable for two successive three-year periods and thereafter for successive one-year terms, unless either party notifies the other of its intent not to renew the agreement prior to the third automatic renewal term. The agreement is also terminable by either party for breach by the other party or change of control of the other party. PSMH paid cash of $150,000 and issued 150,000 shares of common stock valued at $675,000 to NWBO and its owners for this license, which is being amortized over 14 years.
 
The NWBO license agreement also obligates PSMI to create a National Processing Center for the collection, organization, and tracking of the sales leads database generated by NWBO, provided that NWBO is successful in securing an agreement or arrangement to market its smart signs through a national marketing company or a national retail distributor. Since this has not yet occurred, the center remains in the planning stage. Once the National Processing Center has been established, 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. Bonuses 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.
 
More recently, PSMH announced that its subsidiary, UCMC, has been approved as one of ten lenders designated as preferred mortgage lenders on the Costco Mortgage Services Platform (the “MSP”) that began in January 2010, and is operated and managed by First Choice Bank.  UCMC’s office in Tulsa, Oklahoma, began providing mortgage services on December 1, 2011 to Costco members. Initially, UCMC will service leads originated in Oklahoma, Texas, New Mexico, and Missouri, and management anticipates that other states will likely be added in the future.  UCMC has initially committed to take approximately 1,000 leads per month for the Costco MSP, but expects to increase this to 4,000 and then to 5,000 leads by the beginning of the fiscal fourth quarter. UCMC believes it can manage this level of leads with its current infrastructure. Margins on loans originated under the Costco MSP are expected to be lower than those on loans originated under the new business model.
 
 
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Results of Operations

Our consolidated results of operations for the three and nine months ended March 31, 2012 and 2011 include the operating results of PSM Holdings, Inc., operating results of our wholly-owned subsidiary PrimeSource Mortgage, Inc., and results of operations of PSMI’s wholly-owned subsidiary United Community Mortgage Corp. since its acquisition effective March 16, 2011.

We reported a net loss of $1,387,197 and $3,059,459 for the three and nine months ended March 31, 2012 compared to a net loss of $836,737 and $857,230 for the same comparable prior year periods. The increase in loss was principally attributable to the Company’s acquisition of four mortgage companies, investment in the human resources of each of those acquistions, and investment in recruiting experienced mortgage executives which resulted in the Company incurring significant general and administrative expenses as compared to the expenses incurred in comparable prior period in 2011. The fluctuations in revenues and expenses are more fully explained below.
 
Management believes a large part of the loss associated during the three month and nine month periods ended March 31, 2012 was related to the fact that the Company had incurred costs in setting up the infrastructure for additional acquisitions which have not occurred since November 2011.  The reason for the lack of acquisitions was that UCMC had to process a name change and a domicile change which took in excess of four months to complete. During this time period, no additional license applications and registration in various states could be initiated, and thus, no new acquisitions could be completed.  Since the name change and domicile change have recently been completed, management expects to move forward with the identified new acquisitions over the next six months and increase its revenue with minimal increase in costs

Revenues
Our total revenues increased by $2,800,320 or 373% to $3,551,378 for the three months period ended March 31, 2012, and increased by $5,995,294 or 189% to $9,160,666 for the nine months period in 2012, as compared to the same comparable periods in 2011. Our revenues for the three and nine months period increased due to the net increase of five acquisitions in our operations and as a result closing 1587 loans during the nine months period ended March 31, 2012 as compared to 645 loans closed for the comparable prior year period, an increase of 946 loans (146%).  Some of our existing branches also increased their production during this time period as their businesses matured. Management believes adding acquisitions with strong producing branches is a viable way to continue to grow our business and increase revenues.  Presently, our network can expect to add 3 to 5 new acquisitions with no added management expense.

Operating Expenses
Our total operating expenses increased by $3,368,353 or 210% to $4,973,111 and increased by $8,272,463 or 204% to $12,324,377 for the three and nine month periods ended March 31, 2012, as compared to the same comparable periods in 2011. Operating expenses for the three and nine months ended March 31, 2012 included (1) an increase in our selling, general and administrative expenses of $3,304,418 (208%) and $8,144,961 (204%) as compared to the comparable prior year periods primarily due to a) an increase in payroll and brokerage commission expense of $2,392,681 and $4,919,488 which included $187,295 and $674,817 of stock bonuses granted to employees, and due to the increase in headcount as a result of acquisition of five entities, additional increase in payroll expense due to investment in recruiting experienced mortgage executives, b) increase in advertising and investor relations expense of $363,054 and $327,857, c) an increase in rent expense of $223,709 and $448,870 due to additional entities acquired, d) increase in website and information technology maintenance expense $46,325 and $36,092, e) other administrative overhead incurred due to the acquisition of five entities. Depreciation and amortization expense increased by $63,935 to $80,883 and increased by $127,502 to $178,875 for the three and nine months ended March 31, 2012 as compared to the comparable prior year periods, primarily due to the change in the amortization period from 5 to 8 years of identifiable intangible assets (customer lists) acquired as a result of four acquisitions during the three and nine months ended March 31, 2012.

Total operating expenses as a percentage of revenues were 140% and 135% for the three month and nine month periods ended March 31, 2012 as compared to 214% and 128% for the comparable prior year periods.

Non-operating income (expense)
Our total net non-operating income increased by $17,573 to $34,536 and increased by $72,274 to $104,252 for the three and nine months ended March 31, 2012, as compared to the comparable prior year periods. The increase resulted primarily due to receipt of contributions, sponsorship and advertising funds received for our annual trade conference in 2012 as compared to 2011.
 
 
23

 
 
Other comprehensive income or loss
Our unrealized loss on marketable securities for the three and nine months ended March 31, 2012 was $0 and $0 as compared to $0 and $2,666 for the comparable prior year periods. Unrealized loss resulted due to the decrease in the market value of the marketable securities held at March 31, 2011 and 2010, respectively.  We did not own any marketable securities at March 31, 2012.

Liquidity and Capital Resources

Our cash and cash equivalents were $234,646 at March 31, 2012. As shown in the accompanying consolidated financial statements, we recorded a net loss of $3,059,459 for the nine months ended March 31, 2012, compared to a net loss of $854,564 for the comparable prior year period. Our current liabilities exceeded our current assets by $206,631 at March 31, 2012, and our net cash used in operating activities for the nine months ended March 31, 2012 was $1,239,814. We expect to complete seven acquisitions during the current fiscal year (four of which we have already completed since July 1, 2011), while our existing branches continue to strengthen and mature due to the anticipated recovery in mortgage business. In order to expand our business we may need to sell additional shares of our common stock or borrow funds from private lenders.

Operating Activities
Net cash used in operating activities for the nine months ended March 31, 2012 was $1,239,814 and resulted primarily due to an increase in accounts receivable of $421,508, an increase in prepaid expenses of $236,253, a decrease in other current assets of $19,556, an increase in accounts payable of $345,464 and an increase in accrued liabilities of $710,893. We recorded a net loss of $3,059,459 for the nine months ended March 31, 2012 as compared to a net loss of $854,564 for the comparable prior period. The increase in loss was primarily attributable due to increase in payroll expenses due to increase in headcount as a result of acquisition of four entities, increase in brokerage commissions, increase in website and information technology maintenance expense, and increase in advertising and investor relations expenses when compared to the prior year comparable period.

Investing Activities
Net cash provided by investing activities for the nine months ended March 31, 2012, was $182,252 as a result of net cash of $170,000 received as part of acquisition of four branches, cash used to purchase property and equipment of $2,992, cash received from sale of assets of $850, cash proceeds for security deposits of $4,225, and cash received from employee advances of $10,169. 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, 2012was $1,270,738 consisting of cash proceeds of $820,738 from sale of our common stock to accredited investors, cash proceeds of $500,000 received from the exercise of warrants, and cash proceeds of $70,000 received from a related party for funding our operations, and cash payment of $120,000 to repay a loan received from a related party.

As a result of the above activities, we experienced a net increase in cash and cash equivalents of $213,176 for the nine months ended March 31, 2012. We believe our future success is dependent upon acquiring profitable and stable mortgage companies, expanding the business of our existing branches, capitalizing on the leads from mortgage bankers and NWBO and closing them into mortgage loans, obtaining additional financing from mortgage bankers with increased warehouse credit lines, and from sale of our securities to accredited investors.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of its financial condition and results of operations are based upon our 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 consolidated financial statements, “Summary of Significant Accounting Policies”). We believe that the following paragraphs reflect accounting policies that currently affect our financial condition and results of operations:

Share Based Payment Plan
Under the 2012 Stock Option/Stock Issuance Plan, 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. The stock issuance plans provide for issuance of stock to branch employees for outstanding performance. The Company uses the fair value method to account for employee stock compensation costs and to account for share based payments to non-employees.
 
 
24

 

Revenue Recognition
Our revenue is derived primarily from revenue earned from the origination of mortgage loans that are funded by third parties. Revenue is recognized as earned on the earlier of the settlement date or the funding date of the loan. In addition, we receive supplemental compensation from our warehouse line providers based on achieving certain production levels which is recognized as revenue when the loans are sold off the warehouse lines.

Recent Accounting Pronouncements
The Company has evaluated and implemented all new accounting pronouncements and accounting standards that are in effect and that may impact its consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

Off-Balance Sheet Arrangements

As part of our ongoing business, we have not participated in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.  As of March 31, 2012, we are not involved in any material unconsolidated SPEs.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Not required under Regulation S-K for “smaller reporting companies.”

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rule 15d-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, Ron Hanna, 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.

 (b) 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. We identified an area where internal control was inadequate surrounding month-end cut-off procedures and a lack of properly documented management review controls. Management continues to strengthen, review and assess the internal controls surrounding month-end cut-off procedures and has implemented procedures and assigned personnel to cure this deficiency. We have recently recruited a contracted financial controller and implemented an online accounting and reporting system which will help alleviate recording month-end cut-off procedures.  Further changes may include such activities as providing additional training for the employees to new accounting and reporting system, consolidating activities, and migrating processes. There were no other changes in our internal control over financial reporting except as identified above, that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
PART II - OTHER INFORMATION

Item 1.  Legal Proceedings
 
During the quarter ended March 31, 2012, we received notification from Michael Lucey’s counsel alleging violations of employment laws in the State of New Jersey, defamation of Mr. Lucey, and tortuous interference with his economic advantages. Our legal counsel in New Jersey is evaluating the merits of the claims and has informed Mr. Lucey’s counsel that we intend to vigorously defend against any action to enforce these claims.
 
 
25

 
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
In July 2011, the Company commenced a private placement offering to raise up to $975,000 through the sale of up to 13 Units at $75,000 per Unit, with each Unit consisting of 100,000 shares of common stock and 100,000 warrants. The warrants issued in conjunction with the offering are exercisable at $1.00 per share and are exercisable starting on the closing date of the offering and expiring September 14, 2014. During the quarter ended March 31, 2012, we sold approximately 1.4 units consisting of 143,332 shares and 143,332 warrants to six accredited investors for gross cash proceeds of $107,500. The securities were issued without registration under the Securities Act by reason of the exemption from registration afforded by the provisions of Section 4(a)(5) and/or Section 4(a)(2) thereof, and Rule 506 promulgated thereunder, as a transaction by an issuer not involving any public offering.  These securities have not been and will not be registered under the Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. Each investor delivered appropriate investment representations with respect to these issuances and consented to the imposition of restrictive legends upon the stock and warrant certificates representing the Units. Each investor represented that he or she had not entered into the transaction with us as a result of or subsequent to any advertisement, article, notice, or other communication published in any newspaper, magazine, or similar media or broadcast on television or radio, or presented at any seminar or meeting. Each investor was afforded the opportunity to ask questions of our management and to receive answers concerning the terms and conditions of the transaction. No underwriting discounts or commissions were paid in connection with the sales of the Units.

Item 5.  Other Information

On April 17, 2012, United Community Mortgage Corporation, a subsidiary of PrimeSource Mortgage, Inc., our wholly owned Texas subsidiary, completed a change of its domicile from the State of New Jersey to the State of Delaware and changed its name to PrimeSource Mortgage, Inc.  We are currently in the process of changing the name of our Texas subsidiary.

Item 6.  Exhibits

31.1
 
Rule 15d-14(a) 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

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 15, 2012
By:
 /s/ Ron Hanna
 
   
Ron Hanna, President
Chief Executive and Principal Financial Officer
 
 
 
 

XOTC:PSMH PSM Holdings, Inc. Quarterly Report 10-Q Filling

PSM Holdings, Inc. XOTC:PSMH Stock - Get Quarterly Report SEC Filing of PSM Holdings, Inc. XOTC:PSMH stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XOTC:PSMH PSM Holdings, Inc. Quarterly Report 10-Q Filing - 3/31/2012
Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol |  Title Star Rating |  Category |  Total Assets |  Top Holdings |  Top Sectors |  Symbol |  Name Title |  Date |  Author |  Collection |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol / Ticker |  Title Star Rating |  Category |  Total Assets |  Symbol / Ticker |  Name Title |  Date |  Author |  Collection |  Popularity |  Interest Title |  Date |  Company |  Symbol |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Title |  Date |  Company |  Symbol |  Interest |  Popularity

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