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

 

Company Background

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

 

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

 

On May 18, 2005, Durban Holdings, Inc. completed the acquisition of all of the outstanding stock of Prime Source Mortgage, Inc., a Texas corporation, by a stock for stock exchange in which the stockholders of Prime Source 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 Prime Source Mortgage, Inc. (reverse acquisition) and a recapitalization of Prime Source Mortgage, Inc. The historical financial statements prior to May 18, 2005, are those of Prime Source 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.

 

On November 12, 2014, the Company filed a Certificate of Amendment with the Delaware Secretary of State increasing the authorized 100,000,000 shares at $0.001 par value to 400,000,000 shares at $0.001 par value.

 

Business Activity

The Company is considered one reporting unit based on its one line of business and the way that management reviews results. 

 

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

 

Historically, a significant portion of the Company’s business has been referral based and purchase oriented (versus refinance). However, during 2015 more of the Company’s business was refinance related as the majority of loans funded in the Box Home Loan division were refinances. The Company does not directly participate in the secondary markets and further does not maintain a servicing portfolio. Approximately 75% of the Company’s total loan applications are generated from business contacts and previous client referrals. Realtor referrals and other lead sources account for the balance of loan applications.

 

PSMI is currently licensed in Arizona, Arkansas, California, Colorado, Florida, Kansas, Missouri, Montana, New Jersey, New Mexico, North Dakota, Oklahoma, Oregon, Texas, Utah, Virginia and Washington.

 

PSMI solicits and receives applications for secured residential mortgage loans. As a licensed mortgage broker/banker, PSMI offers mortgage banking services using its existing warehouse lines of credit.  The warehouse lines of credit are available for funding of mortgage loans for a short term period.  The warehouse lines are secured by the underlying mortgage loans and are renewed annually.  The warehouse lines of credit are repaid within an average of 15 days when the loan is sold to a third party.  PSMI does not intend to hold and service the loans. These lines of credit can only be used to fund mortgage loans and cannot provide operating funds for the Company.  It is estimated that approximately 95% of all of the residential mortgage loans processed by the Company are currently being closed using these available warehouse lines of credit.  Warehouse capacity with our primary warehouse provider, a related party, is adequate to support the Company’s current volumes, as well as anticipated growth.

 

   

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, 2015, which were filed with the Securities and Exchange Commission on October 13, 2015 on Form 10-K. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending June 30, 2016.

 

Summary of Significant Accounting Policies

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

 

Principles of Consolidation

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

 

Use of Estimates

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

 

Cash and Cash Equivalents

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

 

Restricted Cash

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

 

Accounts Receivable

Accounts receivable represent amounts due the Company for commissions earned and fees charged on closed loans. Accounts receivable are stated at the amount management expects to collect from balances outstanding at period-end. The Company estimates the allowance for doubtful accounts based on an analysis of specific accounts.

 

Employee Advances and Loans Receivable

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

 

Loans Held For Sale

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

 

Although the Company does not intend to be a loan servicer, from time to time it is necessary for certain loans to be serviced for a period of time. Even in these situations the Company intends to service the loan only for the amount of time necessary to get the loan sellable to a third party investor. As of March 31, 2016, the Company had ten such loans that required servicing before they could be sold to an investor. Nine of the ten loans were performing and were carried on the books at their fair value, determined using current secondary market prices for loans with similar coupons, maturities and credit quality. The Company was contacted by the borrower on the non-performing loan who informed the Company they would like to relinquish ownership of the property back to the Company. Based on the Company’s initial review of the balance owed and the estimated value of the home, the Company has not accrued any gain or loss specific to this loan. However, as of March 31, 2016, the Company has accrued loan losses in the aggregate of $50,000.

 

   

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

 

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

 

Prepaid Expenses

Prepaid expenses are advance payments for products or services that will be used in operations during the next 12 or more months. Prepaid expenses consist of prepaid insurance, prepaid rents and prepaid investor relations and other third party services provided by outside consultants and amounted to $115,351 and $98,505 at March 31, 2016 and June 30, 2015, respectively.

 

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.

 

  

Goodwill and Indefinite-Lived Intangible Assets

Goodwill and other intangible assets with an indefinite useful life are not subject to amortization but are reviewed for impairment annually or more frequently whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. The annual evaluation for impairment of goodwill and indefinite-lived intangibles is based on valuation models that incorporate assumptions and internal projections of expected future cash flows and operating plans by using a discounted cash flow ("DCF") analysis. Determining fair value using a DCF analysis requires the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates and the amount and timing of expected future cash flows. If the fair value of a reporting entity exceeds its carrying amount, goodwill of the reporting entity is not impaired and the second step of the impairment test is not required. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is required to be performed to measure the amount of impairment, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting entity’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of the reporting entity’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

 

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

  

Long-Lived Assets and Intangible Assets with Definite Lives

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

 

Income Taxes

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

 

Taxes Collected and Remitted to Governmental Authorities

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

 

   

Advertising

Advertising costs are expensed as incurred. Advertising expenses were $178,511 and $467,618 for the three and nine months ended March 31, 2016, respectively, compared to $140,832 and $413,319 for the three and nine months ended March 31, 2015, respectively. 

 

Share Based Payment Plan

The Company grants stock options and restricted stock to certain executive officers, key employees, directors and independent contractors. Stock options have been granted for a fixed number of shares, vest equally over a three-year period and are valued using the Black-Scholes option pricing model. Stock grants have been awarded for a fixed number of shares with a value equal to the fair value of the Company’s common stock on the grant date. Stock-based compensation expense is recorded net of estimated forfeitures for the three and nine months ended March 31, 2016 and 2015 based on the stock-based awards that were expected to vest during such periods. Under the 2012 and 2015 Stock Incentive Plans, the Company can grant restricted stock, restricted stock units, options, or other equity based awards to employees, related parties, and unrelated contractors in connection with the performance of services provided to the Company by the awardees.

 

Revenue Recognition

The Company’s revenue is derived primarily from revenue earned from the origination and sale of mortgage loans. Revenues earned from origination of mortgage loans is recognized on the 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 15 days. The realized gain or loss on the sale of loans, if any, is realized on the date the loans are sold.

   

Loss Per Common Share

Basic and diluted loss per common share is computed by dividing the loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share does not reflect per share amounts that would have resulted if diluted potential common stock had been converted to common stock because the effect would be anti-dilutive. The weighted average number of common shares outstanding during the three and nine months ended March 31, 2016 and 2015 were 42,354,648, 41,478,736, 27,507,759 and 27,530,653, respectively. Loss per common share from continuing operations for the three and nine months ended March 31, 2016 and 2015 was $(0.03), $(0.09), $(0.04) and $(0.09), respectively.

 

Compensated Absences

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

 

Reclassification

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

 

Recent Accounting Pronouncements

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

 

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

 

NOTE 2 – ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

Accounts receivable is presented on the balance sheet net of estimated uncollectible amounts. Accounts receivable consist of commissions earned on funded loans waiting to be purchased. The Company records an allowance for estimated uncollectible accounts in an amount approximating anticipated losses. Individual uncollectible accounts are written off against the allowance when collection of the individual accounts appears doubtful. The Company did not record an allowance for doubtful accounts as of March 31, 2016 or June 30, 2015.

 

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NOTE 3 – PROPERTY AND EQUIPMENT

 

Property and equipment is summarized as follows:

 

		March 31, 201 6 (Unaudited)				June 30, 2015
Fixtures and equipment		$	656,078			$	623,834
Less: Accumulated depreciation			(402,383	)			(345,829	)
Property and equipment, net		$	253,695			$	278,005

  

Depreciation expense for the three and nine months ended March 31, 2016 was $20,892 and $61,287, respectively compared to depreciation expense for the three and nine months ended March 31, 2015 of $18,253 and $54,593, respectively.

 

NOTE 5 – RELATED PARTY TRANSACTIONS

 

President/Chief Executive Officer and Director

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

 

For the three and nine months ended March 31, 2016, the Company recorded compensation expense of $62,500 and $187,500, respectively and a car allowance of $2,250 and $6,750, respectively, pursuant to the Agreement. For the three and nine months ended March 31, 2015, the Company recorded compensation expense of $60,000 and $169,003, respectively.

 

Other Directors

Jim Miller, one of the Company’s directors is a principal stockholder and director of a management company that provides two revolving warehouse lines of credit to the Company. Amounts outstanding on the credit lines as of March 31, 2016 and June 30, 2015 were $14,680,421 and $24,836,939 which were offset by $14,551,205 and $25,459,142 of funding receivables as of March 31, 2016 and June 30, 2015, respectively (See Note 8).

 

This entity also provided a line of credit to the Company that had an outstanding balance of $132,436 and $135,263 as of March 31, 2016 and June 30, 2015, respectively.

 

On February 7, 2013, the Company entered into a consulting agreement with an entity controlled by Michael Margolies, one of the Company’s directors. The agreement calls for monthly compensation of $15,000 per month for strategic advisory and investor relations services for each month that services are provided. For the three and nine months ended March 31, 2016 and 2015, the Company recorded consulting expense of $67,500, $105,000, $0 and $60,000, respectively. This director has at times agreed to suspend providing strategic consulting services to the Company to assist in the Company’s cash needs. Thus there was no expense for months when services were not provided. As of March 31, 2016, the Company has prepaid $15,000 of this consulting fee. Additionally, the Company pays for health insurance for Mr. Margolies which is currently at $3,700 per month.

 

   

On February 8, 2016, the Company, entered into short-term loan agreements each dated February 8, 2016 with Jim Miller and Richard Carrington, a shareholder of the Company. Under the terms of the loan agreements, the lenders each agreed to loan $125,000 for operating expenses of the Company and its operating subsidiary, as well as to fund growth of the Company. The funds were received by the Company on February 9, 2016. Each loan is evidenced by a one-year 10% Convertible Promissory Note which each bear interest at 10% per annum. The notes are convertible at the lowest per share rate of common stock or common stock equivalents sold in a Qualified Offering by the Company. For purposes of this transaction, the term “Qualified Offering” means one or more offerings of debt or equity securities by the Company to non-affiliates in the aggregate amount of at least $1,000,000. In addition, each lender received one common stock purchase warrant for each $2.50 loaned to the Company. Each five-year warrant is exercisable at $0.011 per share, subject to adjustment in the event of the issuance of additional common shares or common stock equivalents at less than the exercise price. The warrants also provide for cashless exercise. The warrants are not transferable or assignable without the prior consent of the Company. See Subsequent Events Note 17.

 

On November 13, 2014, the Company entered into a loan agreement with LB Merchant PSMH-1, LLC and LB Merchant PSMH-2, LLC, entities who are owners of convertible preferred stock and controlled by Mr. Margolies, a director of the Company. Under the terms of the loan agreement, the lenders each agreed to loan $70,000 for operating expenses of the Company and its operating subsidiary, as well as to fund growth of the Company. The funds were received by the Company on November 13, 2014. The loan is evidenced by a 10% Convertible Promissory Note which bears interest at 10% per annum with a maturity date of November 13, 2015, unless extended through mutual consent. The loan was repaid from proceeds received by the Company from the sale of Series E preferred stock in December 2014. In addition, the lenders received four tenths (0.40) of one common stock purchase warrant for each $1.00 loaned to the Company (totaling 28,000 warrants). Each five-year warrant is exercisable at $0.40 per share, subject to adjustment in the event of the issuance of additional common shares or common stock equivalents at less than the exercise price. The warrants also provide for cashless exercise. The warrants are not transferable or assignable without the prior consent of the Company.

 

Former Directors

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

 

On September 12, 2014, the Company entered into a loan agreement with Mr. Smith. Under the terms of the loan agreement, Mr. Smith loaned $120,000 to the Company for its operating expenses and the expenses of its operating subsidiary, as well as to fund growth of the Company. The funds were received by the Company on September 12, 2014. The loan is evidenced by a 10% Convertible Promissory Note which bears interest at 10% per annum and matures September 12, 2016, unless extended through mutual consent. The note is convertible at the per share rate of common stock sold pursuant to a Qualified Offering by the Company. The term “Qualified Offering” means one or more offerings (whether or not proceeds are received by the Company pursuant to such offering) of debt or equity securities of the Company to non-affiliates in the aggregate amount of at least $1,000,000 commenced after the note issuance date. The conversion price is determined by the lowest of either the offering price per common share or the conversion or exercise price for common stock in any such Qualified Offering. In addition, Mr. Smith received four tenths (0.40) of one common stock purchase warrant for each $1.00 loaned to the Company (totaling 48,000 warrants). Each five-year warrant is exercisable at $0.40 per share, subject to adjustment in the event of the issuance of additional common shares or common stock equivalents at less than the exercise price. The warrants also provide for cashless exercise. The warrants are not transferable or assignable without the prior consent of the Company. Effective September 12, 2015, the Company executed a one year note extension with Mr. Smith. As part of the extension, the Company made a principal reduction payment in the amount of $5,000. The balance of the loan, $106,304, accrues interest at 10% annually.

 

On March 15, 2011, the Company entered into an employment agreement with a director of the Company at the time in connection with the acquisition of United Community Mortgage Corporation, now PSMI. The term of the employment agreement was for two years, with automatic one-year extensions unless notice is given by either party. The individual resigned as a director of the Company concurrent with the capital raise completed on February 5, 2013. The agreement provided for an annual base salary of $120,000 with increases based upon increases in originations at the respective branch and incentive payments upon securing additional branches for PSMI. In January 2015, the Company amended the agreement reducing the base compensation and adding in incentive compensation for recruiting. For the three and nine months ended March 31, 2016 and March 31, 2015, the Company recorded total compensation expense of $18,785, $88,204, $17,500 and $89,590, respectively.

 

   

Loans Receivable  

Loans receivable from a former related party as of March 31, 2016 consists of:

 

		Original Loan				Balance due March 31, 201 6 (Unaudited)				Balance due June 30, 2015
Secured loans to NWBO Corporation (NWBO)		$	167,000			$	86,888			$	87,778
Accrued interest due from NWBO			-				8,175				4,228
			167,000				95,063				92,006
Less allowance for uncollectible amounts			-				-				-
		$	167,000			$	95,063			$	92,006

 

The Company entered into two Commercial Security Agreements dated November 16, 2006 and February 16, 2007 with Nationwide By Owner (“NWBO”) securing the loan amount of $167,000 with 150,000 shares of the Company’s common stock held by NWBO.  On June 15, 2012, the Company renegotiated the security agreements with NWBO and agreed to amend (i) the annual interest rate on the security agreements to 6%, and (ii) the maturity dates to September 30, 2013. On May 13, 2014, the Company extended the maturity dates to October 15, 2014. All other terms and conditions of the Security Agreements remained the same. On September 8, 2015, the Company executed a note extension and general release agreement with NWBO which contains a general agreement among the parties that no further commitments are required by either side. It further allows NWBO to utilize its technology with other companies. Finally, the note extension calls for quarterly principal payments based on how many “installations” of the NWBO technology exist during the quarter.

 

The interest recorded for the three and nine months ended March 31, 2016 and March 31, 2015 was immaterial for all periods.

 

NOTE 6 – EMPLOYEE ADVANCES

 

From time to time the Company advances payroll amounts to employees. The advances are short-term in nature. Employee advances amounted to $70,294 and $56,851 as of March 31, 2016 and June 30, 2015, respectively.

 

NOTE 7 – INTANGIBLE ASSETS

 

Intangible assets consist of:

 

		March 31, 201 6 (Unaudited)				June 30, 2015
Intangible assets not subject to amortization:
FHA "Full Eagle" status		$	938,790			$	938,790
Goodwill			1,809,429				1,809,429
State licenses			31,293				31,293
			2,779,512				2,779,512
Less: Impairments			-				-
Total			2,779,512				2,779,512
Intangible assets subject to amortization:
Customer lists			117,349				117,349
Less: Accumulated amortization – customer lists			(117,349	)			(117,349	)
Total			-				-
Total Intangible assets, net		$	2,779,512			$	2,779,512

 

It is the Company’s policy to assess the carrying value of its intangible assets for impairment on an annual basis, or more frequently, if warranted by circumstances. The Company completed an annual impairment test of goodwill as of June 30, 2015 and no impairment losses were incurred. As of that date, the fair value of equity exceeded the carrying value (including goodwill) by 300%, indicating no impairment of goodwill. This test involved the use of estimates related to the fair value of the goodwill, and requires a significant degree of judgment and the use of subjective assumptions. The fair value of the goodwill and other intangible assets was determined using a discounted cash flow method. This method required management to make estimates related to future revenue, expenses and income tax rates.

 

   

The valuation methodology assumes the Company will generate an operating profit beginning in the fiscal year ending June 30, 2016. Although the Company has made significant improvements in the last six quarters in maximizing revenue per funded loan and in reducing fixed and variable expenses, the Company has never generated an annual operating profit.

 

Any of the following events or changes in circumstances could reasonably be expected to negatively affect the Company’s key assumptions:

 

	●	Significant change in mortgage interest rates;
	●	Loss of the Company’s primary warehouse lender;
	●	Additional or new regulatory and compliance requirements that restrict its plan for growth;
	●	The loss of key production personnel; or
	●	Any default on our obligation to preferred shareholders or secured note holders.

  

NOTE 8 – WAREHOUSE LINES OF CREDIT

   

The Company has two warehouse lines of credit available as of March 31, 2016 for its funding of mortgage loans for a short term period.

 

(i)

On August 3, 2008, the Company entered into a warehouse line of credit agreement with a related party mortgage banker for up to $1,000,000 bearing an annual interest rate of 5%. On October 13, 2013, the warehouse line of credit was increased to $75,000,000 for the purpose of funding residential mortgage loans.  The warehouse line of credit matures on October 10, 2016. The outstanding balance on this line of credit as of March 31, 2016 was $912,216; and

  

(ii)

On November 18, 2011, the Company entered into a “Repo” warehouse line of credit agreement with a related party mortgage banker for up to $5,000,000 bearing an annual interest rate of 5% for funding residential mortgage loans. Pursuant to the terms of the agreement, the Company could be required to repurchase the loan subject to certain terms and conditions. On October 10, 2013, the warehouse line of credit was increased to $75,000,000 and now matures on October 10, 2016. The outstanding balance on this line of credit as of March 31, 2016 was $13,768,205.

  

The warehouse lines of credit provide short term funding for mortgage loans originated by the Company’s branch offices. The warehouse lines of credit are repaid when the loans are sold to third party investors, typically within 15 days for most loans. Subsequent to March 31, 2016, approximately 98% of the loans outstanding on the credit lines have been purchased by the secondary investors.

 

The Company does not intend to hold and service the loans. The Company had $14,551,205 in loans held for sale against the warehouse lines of credit as of March 31, 2016. 

 

NOTE 9 – NOTES PAYABLE

 

On February 18, 2015, the Company executed a loan agreement, security agreement, and promissory note with an unrelated third party lender. The loan requires monthly interest only payments at 14% annually beginning March 1, 2015. The principle balance was originally set to mature on February 1, 2016. The original amount of the loan was $750,000 and could be increased to $1,000,000 at the sole discretion of the lender. The loan is secured by all the Company’s tangible and intangible assets, except as such assets are needed to meet the minimum net worth requirement of HUD. The Company incurred legal fees and other loan costs of $50,000 in the aggregate which were deducted from proceeds received by the Company. The loan restricts the amount of the proceeds that can be used to settle payables already incurred.

 

On October 1, 2015, the Company executed modifications to the loan agreement and related documents with the third-party lender. The modified documents exclude from the loan collateral any acceptable assets of PSMI that are necessary to satisfy the minimum net worth requirements as stipulated by HUD guidelines. The modifications also increased the interest rate to 18% annually.

 

   

On January 28, 2016, the Company, PSMI and WWYH entered into the Second Amendment to the Loan Agreement with the lender whereby the following amendments to the loan agreement were made:

 

	●	The lender waived certain breaches of the loan agreement;
	●	The maturity date of the note was changed to June 30, 2016;
	●	The Company agreed to pay to the lender an amount equal to 0.50% of the principal amount of the note then outstanding immediately prior to any payoff;
	●	Section 6(b)(ii) of the loan agreement was deleted in its entirety and amended and restated to revise the fixed charge coverage ratio terms;
	●	Section 6(b)(iii) was added to the loan agreement to allow for a monthly loan production covenant; and
	●	Section 6(s) was added to the loan agreement to require the Company to raise additional funds through debt or equity by specific dates.

 

The loan agreement amendment provided for a disbursement to the Company from the lender in the amount of $250,000 and for the issuance of warrants to the lender to purchase 100,000 shares of Common Stock of the Company exercisable at $0.011 terminating on January 28, 2021.

 

In connection with entering into the loan agreement amendment, the Company agreed to pay to the lender a loan modification fee of $7,500 and an origination fee of $12,500. The loan agreement amendment also included a full release of the lender from any claims as of the effective date of the loan agreement amendment.

 

In conjunction with the loan agreement amendment, on January 28, 2016, the Company entered into the Second Note Modification Agreement with the lender whereby the maturity date of the note was amended to June 30, 2016.

 

NOTE 11 – STOCKHOLDERS’ EQUITY AND ISSUANCES

 

The Company’s capitalization at March 31, 2016 was 400,000,000 authorized common shares and 10,000,000 authorized preferred shares, both with a par value of $0.001 per share.

 

Common Stock

On October 23, 2015, holders of the Series D preferred shares converted 80 shares into 2,000,000 shares of common stock.

 

Preferred Stock  

On February 17, 2016, the Company entered into a Stock Purchase Agreement with an unrelated party providing for the issuance and sale of $350,000 of the Company’s Series E 6% Convertible Preferred Stock (350 shares) at a purchase price of $1,000 per share (the “ Series E Preferred Stock ”). Each share of Series E Preferred Stock is convertible into a number of shares of common stock of the Company equal to the quotient of (i) $1,000 (subject to adjustment for stock splits, stock dividends, recapitalizations, and the like) plus the amount of accrued but unpaid dividends, divided by (ii) the conversion price then in effect. The conversion price is $0.01, subject to adjustment, and the 350 shares issued in the first closing would be convertible into 35,000,000 common shares. If all of the shares of Series E Preferred Stock being offered were converted at the present conversion price, the Company would be obligated to issue 138,225,800 shares of common stock to the holders of the Series E Preferred Stock. The holders of Series E Preferred Stock are entitled to certain voting rights designated in the Second Amended & Restated Certificate of Designation for the series. Holders of the shares of Series E Preferred Stock are entitled to receive cumulative cash dividends at the rate per share (as a percentage of the stated value per share) of 6% per annum from the date of issuance, payable quarterly in arrears on April 15, July 15, October 15 and January 15. The offering of the Series E Preferred Stock will terminate not later than March 31, 2016.

 

Wilmington Capital Securities, LLC (the “ Placement Agent ”) acted as exclusive placement agent for the offering. In accordance with the placement agent agreement for the offering, warrants to purchase 8% of the common stock into which the Series E Preferred Stock, sold in the offering, may be converted (the “ Warrants ”) will be issued in connection with the offering. The Warrants will be exercisable at $0.011 per share and will expire five years from their issuance date.

 

   

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

 

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

 

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

 

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

 

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

 

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

 

Default on Preferred Dividends

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

 

Following is the status of the share based incentive plans during the nine months ended March 31, 2016 and 2015:

  

2012 Stock Incentive Plan and 2015 Stock Incentive Plan

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

 

   

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

 

On March 17, 2016, the Board of Directors granted four-year options to various employees to purchase an aggregate of 2,000,000 shares of common stock at $0.055 per share vesting over a three-year period. The options were granted under the Company’s 2015 Plan. The fair value of options was determined to be $37,694 calculated using the Black-Scholes option pricing model using the assumptions of risk free discount rates of 0.33%, volatility of 209.49%, a four-year term and dividend yield of 0%. The options were executed subsequent to the end of the quarter.

 

On December 21, 2015, the Board of Directors granted four-year options to various employees to purchase an aggregate of 1,650,000 shares of common stock at $0.134 per share vesting over a three-year period. The options were granted under the Company’s 2015 Plan. The fair value of options was determined to be $145,517 calculated using the Black-Scholes option pricing model using the assumptions of risk free discount rates of 0.33%, volatility of 145.32%, a four-year term and dividend yield of 0% and forfeiture rate of 50%. The options were executed during the current quarter.

 

On July 8, 2015, the Board of Directors granted four-year options to various employees to purchase an aggregate of 150,000 shares of common stock at $0.181 per share vesting over a three-year period. The options were granted under the 2015 Plan. The fair value of options was determined to be $12,321 calculated using the Black-Scholes option pricing model using the assumptions of risk free discount rates of 0.33%, volatility of 130.6%, a four-year term and dividend yield of 0%.

 

On August 17, 2015, the Board of Directors granted four-year options to various employees to purchase an aggregate of 100,000 shares of common stock at $0.18 per share vesting over a three-year period. The options were granted under the Company’s 2015 Plan. The fair value of options was determined to be $7,805 calculated using the Black-Scholes option pricing model using the assumptions of risk free discount rates of 0.33%, volatility of 118.47%, a four-year term and dividend yield of 0%.

 

On September 14, 2015, the Board of Directors granted four-year options to various employees to purchase an aggregate of 500,000 shares of common stock at $0.187 per share vesting over a three-year period. The options were granted under the 2015 Plan. The fair value of options was determined to be $50,051 calculated using the Black-Scholes option pricing model using the assumptions of risk free discount rates of 0.33%, volatility of 112.19%, a four-year term and dividend yield of 0%.

 

As of March 31, 2016, the Company has granted 5,450,004 shares of common stock or stock options to employees and a consultant under the 2012 Plan and 549,996 common shares remained unissued and available for future issuances under the 2012 Plan. Under the 2015 Plan, the Company has granted 20,975,000 options and 19,025,000 remained unissued and available for future issuance under the 2015 Plan  

 

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

 

		For the nine months ended March 31,
		201 6								201 5
		Number of Shares				Weighted- Average Exercise Price				Number of Shares				Weighted- Average Exercise Price
Options outstanding at beginning of the period			24,760,000			$	0.13				3,160,000			$	0.17
Options granted			4,400,000				0.11				1,800,000				0.035
Options exercised			-				-				-				-
Options forfeited/expired			(3,983,334	)			0.20				(741,667	)			0.24
Options outstanding at end of the period			25,176,666			$	0.12				4,218,333			$	0.10
Options exercisable as of March 31			5,078,333			$	0.07				233,333			$	0.31

 

Other Stock Issuances

The Company did not issue any common stock for either the three or nine months ended March 31, 2016 or 2015, except for the conversion of preferred shares, as described above.

 

   

Repurchase of Stock

On July 3, 2014, the Company purchased 1,500,000 shares of its common stock from two former employees, directors and related parties. The Company paid for the shares by exchanging certain assets valued at $227,752. The shares are reflected as treasury stock on the accompanying balance sheet.

 

On July 14, 2014, the Company purchased 250,000 shares of its common stock from a former employee, director and related party. The Company paid for the shares by exchanging certain assets valued at $44,271. The shares are reflected as treasury stock on the accompanying balance sheet.

 

Total common shares issued and outstanding at March 31, 2016 was 42,354,648.

 

Warrant issuances

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

 

On September 12, 2014, the Company entered into a loan agreement with Mr. Smith, as described in Note 5. In connection with entering into the loan agreement, Mr. Smith received four tenths (0.40) of one common stock purchase warrant for each $1.00 loaned to the Company (totaling 48,000 warrants). Each five-year warrant is exercisable at $0.40 per share, subject to adjustment in the event of the issuance of additional common shares or common stock equivalents at less than the exercise price. The warrants also provide for cashless exercise. The warrants are not transferable or assignable without the prior consent of the Company.

   

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

 

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

 

The Company has a total of 3,782,810 warrants outstanding as of March 31, 2016 at exercise prices ranging between $0.011 and $0.44. The warrants have expiration dates ranging from February 5, 2018 through February 8, 2021.

  

NOTE 12 – INCOME (LOSS) PER COMMON SHARE

 

The Company’s outstanding options and warrants to acquire common stock totaled 28,959,476 as of March 31, 2016. These common stock equivalents may dilute earnings per share.

 

Basic and diluted loss per common share is computed by dividing the loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share does not reflect per share amounts that would have resulted if diluted potential common stock had been converted to common stock because the effect would be anti-dilutive. The weighted average number of common shares outstanding during the three and nine months ended March 31, 2016 and 2015 were 42,354,648, 41,478,736, 27,507,759 and 27,530,653, respectively. Loss per common share from continuing operations for the three and nine months ended March 31, 2016 and 2015 was $(0.03), $(0.09), $(0.04) and $(0.09), respectively.

 

NOTE 13 – COMMITMENTS

 

Assets pledged as security

On February 17, 2015, the Company executed a note in the amount of up to $1,000,000 and a related security agreement with Quintium Private Opportunities Fund, LP. As of March 31, 2016, $1,000,000 of the note has been disbursed and is outstanding. The original loan documents contained a pledge of all the assets of the Company’s wholly owned subsidiaries, including PSMI. On October 1, 2015, the first loan amendment was executed. Per the amendment, the pledge of assets now excludes any such assets as are needed to maintain PSMI’s adjusted net worth as required by HUD.

 

   

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. 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.

 

On September 8, 2015, the Company executed a note extension (effective April 15, 2015) with NWBO in which the maturity date was extended until September 30, 2016 and NWBO agreed to fixed payments of principal based on the number of installations of the NWBO technology. In addition, the Company executed a termination agreement in which NWBO and the Company mutually released one another from any obligations under the original license agreement.

 

Lease Commitments

The Company leases approximately 2,181 square feet of office space in Edmond, Oklahoma, which is used for the principal executive offices and as the operating location of PSMI. The one-year lease was executed May 7, 2015, and the monthly lease payments are $3,464.

 

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 $90,268. The leases expire between March 2016 and December 2018. Total rent expense recorded for the three and nine months ended March 31, 2016 and 2015 was $217,351, $690,019, $218,442 and $557,243, respectively.

 

Total minimum lease commitments for branch offices and property and equipment leases at March 31, 2016 are as follows:

 

For the year ended June 30,		Amount
2016		$	136,770
2017			185,947
2018			153,997
2019			32,119
2020			3,834
Total		$	512,667

  

NOTE 14 – FAIR VALUE MEASUREMENTS

 

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

 

Level 1

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

 

Level 2

Inputs to the valuation methodology include:

	●	Quoted prices for similar assets or liabilities in active markets;
	●	Quoted prices for identical or similar assets or liabilities in inactive markets;
	●	Inputs other than quoted prices that are observable for the asset or liability;
	●	Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

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

 

Level 3

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

   

 

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

 

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

 

The fair value of all the assets and liabilities, other than those specifically discussed in the following sentences, we determined using level 2 inputs. Warehouse lines of credit and loans held for sale which were both determined using level 1 inputs, while intangible assets which were determined using level three inputs. The carrying amounts and fair values of the Company’s financial instruments at March 31, 2016 and June 30, 2015 are as follows:

 

		March 31, 2016								June 30, 2015
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Financial assets:
Cash and cash equivalents		$	496,110			$	496,110			$	898,200			$	898,200
Restricted cash			732,500				732,500				732,500				732,500
Accounts receivable			661,141				661,141				987,635				987,635
Loans held for sale			14,551,205				14,551,205				25,459,142				25,459,142
Prepaid expenses			115,351				115,351				98,505				98,505
Loans receivable			86,888				86,888				87,778				87,778
Employee advances			70,294				70,294				56,851				56,851
Security deposits			45,891				45,891				56,017				56,017
Intangible assets			2,779,512				2,779,512				2,779,512				2,779,512
Financial liabilities:
Accounts payable		$	1,071,278			$	1,071,278			$	1,077,788			$	1,077,788
Line of credit – related party			132,436				132,436				135,263				135,263
Warehouse lines of credit - related party			14,680,421				14,680,421				24,836,939				24,836,939
Notes payable – related party			355,453				355,453				120,000				120,000
Notes payable – non related party			1,000,000				1,000,000				750,000				750,000
Preferred dividends payable – related party			1,753,256				1,53,256				801,333				801,333
Preferred dividends payable – non related party			937,024				937,024				442,050				442,050
Accrued liabilities			416,473				416,473				596,940				596,940
Borrower escrows			32,244				32,244				76,660				76,660

 

NOTE 15 - INDUSTRY RISKS AND GOING CONCERN

 

The Company is not current in paying all the costs and expenses on a current basis. The Company is currently in default of its agreement with preferred shareholders and it is unlikely that the Company will be able to cure the default and pay current the dividends due the Series A, B, C, D and E preferred shareholders. Further, the Company may be unable to pay the principal balance of the Quintium note when due on June 30, 2016 and there is no assurance that the lender will be willing to extend the maturity on acceptable terms if at all.

 

In addition, the Company is dependent on either the operations of its wholly owned subsidiary PSMI to generate the cash needed to meet the expenses of the Company or in raising capital. PSMI has been successful in attracting new groups to their platform, which could increase volume and revenue in future quarters. If PSMI is unable to develop these new offices into profitable offices and the Company is unable to raise additional capital if necessary, the Company will not be able to meet its obligations and these factors would give rise to uncertainty about the Company’s continuing as a going concern.

 

Management is continuing to implement cost reduction strategies. The Board has authorized management to pursue an additional capital raise which, if successful, would be highly dilutive to the holdings of the current common shareholders. See subsequent events Note 17.

 

There is no certainty that the Company will be successful in these initiatives in a timely enough manner to curtail the continuing consolidated losses and meet short-term debt obligations.

 

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NOTE 16 - CONCENTRATIONS

 

Concentration of Warehouse Lenders

The Company entered into two warehouse line of credit agreements with a mortgage banker whose former Executive Vice President is a member of the Board of Directors of the Company, for up to $75,000,000 each, bearing annual interest rates of 5% each, for funding residential mortgage loans. Per the terms of the agreements, the Company could be required to repurchase the loans subject to certain terms and conditions. The outstanding combined balance on these two warehouse lines of credit as of March 31, 2016 was $14,680,421. Subsequent to March 31, 2016, approximately 98% of the loans outstanding on the credit lines have been purchased by investors.

 

Concentration of Credit Risk

The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. The Company has not experienced any losses in such accounts through March 31, 2016. As of March 31, 2016, the Company’s bank balances in some instances exceed FDIC insured amounts.