VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2008
(UNAUDITED)
On May 30,
2008 and June 10, 2008, Velocity consummated the closings of its private
placement offering of 14% Subordinated Notes (the “Notes”) due 2011 (the
“Offering”) to accredited investors (“Investors”). The Notes were offered and
sold pursuant to exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended (the “Securities Act”).
Velocity
issued Notes in the aggregate principal amount of $700,000. Interest is payable
quarterly in arrears beginning on the last day of the month that is four months
from the date of the Notes. Velocity will pay the principal amount of the Notes
upon the earlier of maturity or redemption. The Notes will be subordinated in
liquidation preference and in right of payment to all of the Company’s existing
debt. The Notes will be senior in right of payment and in liquidation
preference to any future “long term” debt of the Company. Upon an event of
default, Velocity will pay the Note holder a late charge computed at the rate
of 18% per annum of the amount not paid. $500,000 of the Notes are being held
by a related party of the Company.
Velocity used
the net proceeds from the Offering primarily for the purchase of portfolios of
unsecured consumer receivables and for general corporate purposes, including
working capital.
NOTE 7 – COMMON STOCK
On May 6,
2008, the Company consummated an initial closing of its private placement
offering of units comprised of shares of common stock and warrants to purchase
shares of common stock to accredited investors. The Company sold an aggregate
of 800,003 shares at a purchase price of $0.90 per share with three year
warrants to purchase an aggregate of 200,001 shares of the Company’s common
stock at an exercise price of $1.125 per share.
On May 19,
2008, the Company consummated its second and final closing of its private
placement offering of Units comprised of shares of common stock and warrants to
purchase shares of common stock to accredited investors. Together with the first
closing, the Company sold an aggregate of 945,166 shares, 800,003 of which were
at a purchase price of $0.90 per share and 145,163 of which were at a purchase
price of $0.93 per share and delivered three-year warrants to purchase an
aggregate of 236,293 shares of the Company’s common stock. The Company used the
net proceeds from the offering primarily for the purchase of portfolios of
unsecured consumer receivables and for general corporate purposes, including
working capital.
The warrants
entitle the holders to purchase shares of the Company’s common stock reserved
for issuance thereunder for a period of three years from the date of issuance.
200,001 of the warrants have an exercise price of $1.125 per share and 36,292
of the warrants have an exercise price of $1.16 per share, or the holders may
receive shares pursuant to a cashless exercise provision. The warrants contain
certain anti-dilution rights on terms specified in the Warrants.
The Company
received net proceeds of $793,650 from the placement, after commissions of
approximately $61,350. The Company retained a registered FINRA broker dealer to
act as placement agent. In addition, the placement agent will receive
three-year warrants to acquire 80,000 shares of the Company’s common stock at
an exercise price of $1.125 per share.
NOTE 8 – RELATED PARTY TRANSACTIONS
The Company
received a note receivable in the amount of $205,000 in partial payment of the
$455,000 purchase price from an officer and related party, John C. Kleinert for
the assignment of membership interests in Ridgedale Avenue Commons, LLC, and
Morris Avenue Commons, LLC, previously owned by J. Holder, Inc. As of December
31, 2007, the note had a balance of $100,000 which is included in the assets of
discontinued operations, along with interest at the rate of 12% which shall
accrue only on and after December 26, 2007, and is payable by means of one lump
sum payment of principal and accrued interest on August 25, 2008. On March 14,
2008, Mr. Kleinert made a $100,000 lump sum payment to the Company and the
promissory note was retired. The Company waived $2,630 in accrued interest on
the prepayment.
On December
28, 2007, the Company paid $115,146 in withholding taxes in connection with the
vesting of 175,000 shares of restricted stock granted to James J. Mastriani. On
March 14, 2008, Mr. Mastriani returned 136,000 of such shares for cancellation
and retirement to offset this payment.
The Company
has notes payable to various related parties. Total interest expense to related
parties for the three and six months ended June 30, 2008 and 2007 was $61,639
and $58,353 and $123,278 and $116,103, respectively. For the three and six
months ended June 30, 2008 and 2007, $58,139 and $54,853 and $116,278 and
$109,103, respectively, are included in the results of operations of
discontinued operations.
10
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2008
(UNAUDITED)
The Company
engages Ragan & Ragan, PC, an entity owned by Messrs. Ragan & Ragan, a
director and officer of the Company, respectively, to pursue legal collection
of its receivable portfolios with respect to obligors and properties located in
the State of New Jersey. The fee arrangements between the Company’s subsidiaries
Velocity, J. Holder and VOM and Ragan & Ragan, P.C., each dated as of
January 1, 2005, have been reviewed and approved by all the members of a
committee appointed by the Board of Directors other than Mr. Ragan, Sr. who
abstained. John C. Kleinert and James J. Mastriani comprised the committee. In
May 2007, the fee arrangements were approved by Unanimous Written Consent of
the Board of Directors other than Mr. Ragan, Sr. who abstained.
Ragan and
Ragan, P.C. routinely advances court costs associated with their servicing of
consumer receivable portfolios, which are subsequently reimbursed by the
Company. These costs are included in the estimated court and media costs in the
condensed consolidated balance sheets.
Legal fees
paid to Ragan & Ragan, P.C., by the Company’s subsidiaries were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Three Months
|
|
Six Months
|
|
Six Months
|
|
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
|
|
June 30, 2008
|
|
June 30, 2007
|
|
June 30, 2008
|
|
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Velocity Investments, LLC
|
|
$
|
226,104
|
|
$
|
273,866
|
|
$
|
436,645
|
|
$
|
611,450
|
|
|
VOM, LLC
|
|
|
—
|
|
|
25
|
|
|
—
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
226,104
|
|
$
|
273,891
|
|
$
|
436,645
|
|
$
|
611,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 9 – EARNINGS PER SHARE
Basic earnings
per share are computed using the weighted average number of shares outstanding
during each period. Diluted earnings per share are computed using the weighted
average number of shares outstanding during each period, plus the dilutive
effects of potential convertible securities related to preferred stock,
convertible notes, options and warrants. Outstanding options and warrants to
non-employees convertible into 1,457,203 and 1,177,160 shares of common stock,
convertible preferred stock, convertible into 5,520,000 shares of common stock
and convertible notes, convertible into 940,000 and 9,890 and 940,000 and 4,945
shares for the three and six months ended June 30, 2008 and 2007, respectively,
were not included in the dilutive per share calculations because their effect
would have been anti-dilutive.
The following
table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Three Months
|
|
Six Months
|
|
Six Months
|
|
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
|
|
June 30, 2008
|
|
June 30, 2007
|
|
June 30, 2008
|
|
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
750,509
|
|
$
|
738,173
|
|
$
|
1,798,427
|
|
$
|
1,304,450
|
|
|
Preferred stock dividends
|
|
|
(345,000
|
)
|
|
(345,000
|
)
|
|
(690,000
|
)
|
|
(690,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations available to
common stockholders
|
|
|
405,509
|
|
|
393,173
|
|
|
1,108,427
|
|
|
614,450
|
|
|
Discontinued operations, net of tax
|
|
|
(452,095
|
)
|
|
(92,441
|
)
|
|
(843,297
|
)
|
|
(128,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common
shareholders - Basic and
Diluted
|
|
$
|
(46,586
|
)
|
$
|
300,732
|
|
$
|
265,130
|
|
$
|
485,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares of common stock outstanding -
Basic
|
|
|
17,488,534
|
|
|
16,163,936
|
|
|
17,267,963
|
|
|
16,151,144
|
|
|
Effect of dilutive instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
115,919
|
|
|
1,555,462
|
|
|
87,139
|
|
|
1,651,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares - Diluted
|
|
|
17,604,453
|
|
|
17,719,398
|
|
|
17,355,102
|
|
|
17,802,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and
notes thereto and the other financial information included elsewhere in this
report.
Note on Forward
Looking Statements
This quarterly report on Form 10-Q includes and incorporates by reference
“forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934 with respect to our financial condition, results of operations,
plans, objectives, future performance and business, which are usually identified
by the use of words such as “will,” “may,” “anticipates,” “believes,”
“estimates,” “expects,” “projects,” “plans,” “predicts,” “continues,”
“intends,” “should,” “would,” or similar expressions. We intend for these
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995, and are including this statement for purposes of complying
with these safe harbor provisions.
These forward-looking statements reflect our current views and expectations
about our plans, strategies and prospects, which are based on the information
currently available and on current assumptions.
We cannot give any guarantee that these plans, intentions or expectations will
be achieved. Investors are cautioned that all forward-looking statements
involve risks and uncertainties, and actual results may differ materially from
those discussed in the forward-looking statements as a result of various
factors, including those Risk Factors set forth in our Form 10-K for the year
ended December 31, 2007. Listed below and discussed elsewhere in this quarterly
report are some important risks, uncertainties and contingencies that could
cause our actual results, performances or achievements to be materially
different from the forward-looking statements included in this quarterly
report. These risks, uncertainties and contingencies include, but are not
limited to, the following:
|
|
|
|
|
|
·
|
the
availability for purchase of consumer receivable portfolios, interests in
distressed real property and tax lien certificates that satisfy our criteria;
|
|
|
|
|
|
|
·
|
competition
in the industry;
|
|
|
|
|
|
|
·
|
the
availability of debt and equity financing;
|
|
|
|
|
|
|
·
|
future
acquisitions;
|
|
|
|
|
|
|
·
|
the
availability of qualified personnel;
|
|
|
|
|
|
|
·
|
international,
national, regional and local economic and political changes;
|
|
|
|
|
|
|
·
|
general
economic and market conditions, including the current economic and housing
crisis;
|
|
|
|
|
|
|
·
|
changes in
applicable state and federal laws;
|
|
|
|
|
|
|
·
|
trends
affecting our industry, our financial condition or results of operations;
|
|
|
|
|
|
|
·
|
the timing
and amount of collections on our consumer receivable portfolios; and
|
|
|
|
|
|
|
·
|
increases in
operating expenses associated with the growth of our operations.
|
You
should read this document with the understanding that our actual future results
may be materially different from what we expect. We may not update these
forward-looking statements, even though our situation may change in the future.
We qualify all of our forward-looking statements by these cautionary
statements.
12
Overview
We were organized in the State of Delaware in December 1986 as Tele-Optics,
Inc. We were inactive until February 3, 2004, when we acquired STB, Inc. Since
that acquisition, we have engaged in the business of acquiring, managing and
servicing distressed assets, consisting of consumer receivable portfolios,
interests in distressed real property and tax lien certificates. Historically,
the business had been carried on by our three wholly-owned subsidiaries:
Velocity Investments, LLC (“VI”), which invests in non-performing consumer debt
purchased in the secondary market at a discount from face value and then seeks
to liquidate these debt portfolios through legal collection means; J. Holder,
Inc. (“JHI”), which invested in distressed real property interests, namely real
property being sold at sheriff’s foreclosure and judgment execution sales,
defaulted mortgages, partial interests in real property and the acquisition of
real property with clouded title; and VOM, LLC (“VOM”), which invested in New
Jersey municipal tax liens with the focus on realization of value through legal
collection and owned real estate opportunities presented by the current tax
environment. On December 31, 2007, the Board of Directors of the Company
unanimously approved management’s plan to discontinue the operation of the
Company’s JHI and VOM subsidiaries and to sell or dispose of the assets or
membership interests/capital stock of such subsidiaries. Accordingly, these
operations are shown as discontinued operations in the accompanying financial
statements.
Our consumer receivable portfolios are purchased at a discount from the amount
actually owed by the obligor. Our interests in distressed real property were
purchased following an extensive due diligence process concerning the legal
status of each property and a market analysis of the value of the property or
underlying property. Our tax lien certificates were purchased at a discount
from par following a due diligence analysis similar to that performed in
connection with the purchase of interests in distressed real property. Our
profitability as a company depends upon our ability to purchase and collect on
a sufficient volume of our consumer receivables to generate revenue that
exceeds our cost.
After careful consideration of trends in revenues and future opportunities for
growth, management has made the determination that the consumer receivables
business will be the sole operating focus of the Company in 2008. As a result,
the Company is currently considering all strategic alternatives for JHI and
VOM, including, but not limited to, the sale of some or all of each entity’s
assets, partnering or other collaboration agreements, or a merger, spin-off or
other strategic transaction. On December 31, 2007, the Board of Directors of
the Company unanimously approved management’s plan to discontinue the operation
of the Company’s JHI and VOM subsidiaries and to sell and dispose of the assets
or membership interests/capital stock of such subsidiaries. The operations of
JHI will cease upon the liquidation of all real properties, assignments and
judgments. This is expected to occur before December 31, 2008. The Company is
currently liquidating all of VOM’s tax certificates and is accepting proposals
for the sale of VOM. The Company expects the liquidation or sale to be
completed prior to December 31, 2008.
The divestiture of the businesses is consistent with the Company’s strategy of
concentrating resources in the core product area of consumer receivables. The
Company does not expect management’s plan with respect to the disposal of the
assets of the discontinued operations to have a material effect on reported
results of operations.
Critical Accounting
Policies
Our discussion and analysis of financial condition and results of operations is
based upon our consolidated financial statements which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the fair value of consumer receivables, the fair value of
properties held for sale and the reported amounts of revenues and expenses. On
an on-going basis, we evaluate our estimates, including those related to the
recognition of revenue, future estimated cash flows and income taxes. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
could differ from those estimates. We believe the following critical accounting
policies affect the significant judgment and estimates used in the preparation
of our consolidated financial statements.
13
Purchased Consumer
Receivable Portfolios and Revenue Recognition
We purchase portfolios of consumer receivable accounts at a substantial
discount from their face amounts, usually discounted at 75% to 98% from face
value. We record these accounts at our acquisition cost, plus the estimated
cost of court filing fees and account media. The portfolios of consumer
receivables contain accounts that have experienced deterioration of credit
quality between origination and our acquisition of the consumer receivable
portfolios. The discounted amount paid for a portfolio of consumer receivable
accounts reflects our determination that it is probable we will be unable to
collect all amounts due according to the contractual terms of the accounts. At
acquisition, we review the consumer receivable accounts in the portfolio to
determine whether there is evidence of deterioration of credit quality since
origination and whether it is probable that we will be unable to collect all
amounts due according to the contractual terms of the accounts. If both
conditions exist, we determine whether each such portfolio is to be accounted
for individually or whether such portfolios will be assembled into static pools
based on common risk characteristics. We consider expected prepayments and
estimate the amount and timing of undiscounted expected principal, interest and
other cash flows for each acquired portfolio of consumer receivable accounts
and subsequently aggregated pools of consumer receivable portfolios. We
determine the excess of the pool’s scheduled contractual principal and
contractual interest payments over all cash flows expected at acquisition as an
amount that should not be accreted based on our proprietary acquisition models.
The remaining amount, representing the excess of the loan’s cash flows expected
to be collected over the amount paid, is accreted into income recognized on
consumer receivables over the remaining life of the loan or pool using the
interest method.
We acquire these consumer receivable portfolios at a significant discount to
the amount actually owed by the borrowers. We acquire these portfolios after a
qualitative and quantitative analysis of the underlying receivables and
calculate the purchase price so that our estimated cash flow provides us with a
sufficient return on our acquisition costs and servicing expenses. After
purchasing a portfolio, we actively monitor its performance and review and
adjust our collection and servicing strategies accordingly.
We account for our investment in consumer receivables using the interest method
under the guidance of American Institute of Certified Public Accountants
Statement of Position 03-3, Accounting for Loans or Certain Securities Acquired
in a Transfer.” In accordance with Statement of Position 03-03 (and the amended
Practice Bulletin 6), revenue is recognized based on our anticipated gross cash
collections and the estimated rate of return over the useful life of the pool.
We believe that the amounts and timing of cash collections for our purchased
receivables can be reasonably estimated and, therefore, we utilize the interest
method of accounting for our purchased consumer receivables prescribed by
Statement of Position 03-3. Such belief is predicated on our historical results
and our knowledge of the industry. Each static pool of receivables is
statistically modeled to determine its projected cash flows based on historical
cash collections for pools with similar risk characteristics. Statement of
Position 03-3 requires that the accrual basis of accounting be used at the time
the amount and timing of cash flows from an acquired portfolio can be
reasonably estimated and collection is probable.
Where the future cash collections of a portfolio cannot be reasonably
estimated, we use the cost recovery method as prescribed under Statement of
Position 03-3. Under the cost recovery method, no revenue is recognized until
we have fully collected the initial acquisition cost of the portfolio. We
currently have no consumer receivable portfolios that are accounted for under
the cost recovery method.
Under Statement of Position 03-3, to the extent that there are differences in
actual performance versus expected performance, increases in expected cash
flows are recognized prospectively through adjustment of the internal rate of
return while decreases in expected cash flows are recognized as an impairment.
Under both the guidance of Statement of Position 03-3 and the amended Practice
Bulletin 6, when expected cash flows are higher than prior projections, the
increase in expected cash flows results in an increase in the internal rate of
return and therefore, the effect of the cash flow increase is recognized as
increased revenue prospectively over the remaining life of the affected pool.
However, when expected cash flows are lower than prior projections, Statement
of Position 03-3 requires that the expected decrease be recognized as an
impairment by decreasing the carrying value of the affected pool (rather than
lowering the internal rate of return) so that the pool will amortize over its
expected life using the original internal rate of return.
Generally, these portfolios are expected to amortize over a five year period
based on our estimated future cash flows. Historically, a majority of the cash
we ultimately collect on a portfolio is received during the first 40 months after
acquiring the portfolio, although additional amounts are collected over the
remaining period. The estimated future cash flows of the portfolios are
re-evaluated quarterly.
14
The internal rate of return is estimated and periodically recalculated based on
the timing and amount of anticipated cash flows using our proprietary
collection models. A pool can become fully amortized (zero carrying balance on
the balance sheet) while still generating cash collections. In this case, all
cash collections are recognized as revenue when received. Additionally, we
would use the cost recovery method when collections on a particular pool of
accounts cannot be reasonably predicted.
We establish valuation allowances for all acquired consumer receivable
portfolios subject to Statement of Position 03-3 to reflect only those losses
incurred after acquisition (that is, the present value of cash flows initially
expected at acquisition that are no longer expected to be collected). Valuation
allowances are established only subsequent to acquisition of the loans. At June
30, 2008 and June 30, 2007, we had no valuation allowance on our consumer
receivables.
Application of Statement of Position 03-3 requires the use of estimates to
calculate a projected internal rate of return for each pool. These estimates
are based on historical cash collections. If future cash collections are materially
different in amount or timing than projected cash collections, earnings could
be affected either positively or negatively. Higher collection amounts or cash
collections that occur sooner than projected cash collections will have a
favorable impact on yield and revenues. Lower collection amounts or cash
collections that occur later than projected cash collections will have an
unfavorable impact on operations. Consumer receivable activity for the three
and six month periods ended June 30, 2008 and 2007 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
Six
Months Ended
|
|
|
|
|
June
30, 2008
|
|
June
30, 2007
|
|
June
30, 2008
|
|
June
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
46,606,524
|
|
$
|
40,537,990
|
|
$
|
46,971,014
|
|
$
|
38,327,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions and capitalized costs, net of returns
|
|
|
1,337,901
|
|
|
3,599,777
|
|
|
1,603,082
|
|
|
6,450,400
|
|
|
Amortization of capitalized costs
|
|
|
(14,799
|
)
|
|
(14,799
|
)
|
|
(29,598
|
)
|
|
(29,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,323,102
|
|
|
3,584,978
|
|
|
1,573,484
|
|
|
6,420,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collections (1)
|
|
|
(4,739,198
|
)
|
|
(4,534,102
|
)
|
|
(9,160,316
|
)
|
|
(8,215,905
|
)
|
|
Income recognized on consumer receivables (1)
|
|
|
3,636,071
|
|
|
3,291,023
|
|
|
7,442,317
|
|
|
6,347,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collections applied to principal
|
|
|
(1,103,127
|
)
|
|
(1,243,079
|
)
|
|
(1,717,999
|
)
|
|
(1,868,839
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
46,826,499
|
|
$
|
42,879,889
|
|
$
|
46,826,499
|
|
$
|
42,879,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Excludes
$24,002 and $52,609 derived from fully amortized pools for the three and six
months ended June 30, 2008, respectively.
Stock Based Compensation
We
have adopted the fair value recognition provisions of “Share-Based Payment”
(SFAS No. 123R), which supersedes Accounting Principles Board (APB) Opinion No.
25, “Accounting for Stock Issued to Employees.” The revised statement addresses
the accounting for share-based payment transactions with employees and other
third parties, eliminates the ability to account for share-based transactions
using APB No. 25 and requires that the compensation costs relating to such
transactions be recognized in the consolidated financial statements. SFAS No.
123R requires additional disclosures relating to the income tax and cash flow
effects resulting from share-based payments. Additionally, regarding the
treatment of non-employee stock based compensation, we have followed the
guidance of EITF 96-18, Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.”
New Accounting Pronouncements
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115 (“SFAS No. 159”).” This statement permits entities to choose
to measure many financial instruments and certain other items at fair value.
Most of the provisions of SFAS No. 159 apply only to
entities that elect the fair value option. However, the amendment to SFAS No.
115, “Accounting for Certain Investments in Debt and Equity Securities,”
applies to all entities with available-for-sale and trading securities SFAS No.
159 is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007. Management has not made an election to adopt
this pronouncement.
15
In
December 2007, FASB issued Statement of Financial Accounting Standards No.
141(R),
Business Combinations
(“SFAS 141(R)”), and Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated
Financial
Statements,
an amendment of ARB
No. 51
(“SFAS 160”). These new standards significantly change the
accounting for and reporting of business combination transactions and
noncontrolling interests (previously referred to as minority interests) in
consolidated financial statements. Both standards are effective for fiscal
years beginning on or after December 15, 2008, with early adoption prohibited.
These Statements are effective for the Company beginning on January 1, 2009.
The Company is currently evaluating the provisions of SFAS 141(R) and SFAS 160.
In
March 2008, the FASB issued Statement of Financial Accounting Standards No.
161,
Disclosures About Derivative
Instruments and Hedging Activities,
an
amendment of FASB Statement No. 133
. This new standard enhances the
disclosure requirements related to derivative instruments and hedging
activities required by
FASB Statement No. 133
.
This standard is effective for fiscal years and interim periods beginning after
November 15, 2008, with early adoption encouraged. The Company is currently
evaluating the potential impact, if any, of the adoption of SFAS 161 and does
not believe that it will have a significant impact on its condensed
consolidated financial position and results of operations.
In
May 2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles generally accepted in the United States. SFAS 162 is
effective sixty days following the SEC’s approval of PCAOB amendments to AU
Section 411, “The Meaning of ‘Present Fairly in Conformity With Generally
Accepted Accounting Principles’”. The Company expects that the adoption of this
standard would have no impact on its condensed consolidated financial position
and results of operations.
Results of Operations
Total
revenues for continuing operations for the three month period ended June 30,
2008 (the “2008 Second Quarter”) were $3,661,913 as compared to $3,296,214
during the three month period ended June 30, 2007 (the “2007 Second Quarter”),
representing an 11.09% increase. Revenues in the six month period ended June
30, 2008 (the “2008 Period”) were $7,498,122 as compared to $6,371,089 in the
same period in the prior year (the “2007 Period”), representing a 17.69%
increase. The increase in revenues was primarily attributable to an increase in
our consumer receivables portfolio and resulting revenues from collections on
consumer receivables.
Total
Operating Expenses
Total
operating expenses for continuing operations for the 2008 Second Quarter were
$2,058,118 as compared to $1,794,170 during the 2007 Second Quarter,
representing a 14.71% increase. Total operating expenses for the 2008 Period
were $3,769,089 as compared to $3,530,497 during the 2007 Period, representing
a 6.76% increase. The increase in total operating expenses was primarily
attributable to increased professional fees incurred as a result of an increase
in collections and a corresponding increase in legal commission expenses as a
result of the expansion of operations at our Velocity Investments’ subsidiary.
General and administrative expenses also increased as a result of our
increasing due diligence expenses and electronic search fees for Velocity
Investments and an increase in payroll expense.
Interest
Expense
Interest
expense in the 2008 Second Quarter was $273,708 as compared to $394,049 in the
2007 Second Quarter, representing a 30.54% decrease. Interest expense in the
2008 Period was $608,778 as compared to $739,367 in the 2007 Period,
representing a 17.66% decrease. The decrease in interest expense was primarily
attributable to declining interest rates and a reduction in amounts outstanding
on Velocity Investments’ line of credit with Wells Fargo Foothill, Inc.
16
Net Income
(Loss)
Net
income for the 2008 Second Quarter was $298,414 as compared to net income for
the 2007 Second Quarter of $645,732, a 53.79% decrease. The decrease in net
income is primarily attributable to a comparatively significantly higher
provision for income taxes and a loss of $452,095 at our discontinued
operations. Income from continuing operations for the 2008 Second Quarter was
$750,509 as compared to income from continuing operations for the 2007 Second
Quarter of $738,173, a 1.67% increase. The Company had a $452,095 loss from
discontinued operations in the 2008 Second Quarter compared to a loss of
$92,441 in the 2007 Second Quarter. Net income for the 2008 Period was $955,130
as compared to net income of $1,175,540 for the 2007 Period, an 18.75%
decrease. Income from continuing operations for the 2008 Period was $1,798,427
as compared to income from continuing operations for the 2007 Period of
$1,304,450, a 37.87% increase. The Company had a $843,297 loss from
discontinued operations in the 2008 Period compared to a loss of $128,910 in
the 2007 Period. The loss from discontinued operations in the 2008 Second
Quarter and 2008 Period was primarily attributable to an impairment of
approximately $400,000 in the 2008 Second Quarter in connection with an
investment property in Melbourne, Florida.
Liquidity and
Capital Resources
The term “liquidity” refers to our ability to generate adequate amounts of cash
to fund our operations, including portfolio purchases, operating expenses, tax
payments and dividend payments, if any. Historically, we have generated working
capital primarily from cash collections on our portfolios of consumer
receivables in excess of the cash collections required to make principal and
interest payments on our senior credit facility, and from offerings of equity
securities and debt instruments. At June 30, 2008, the Company had
approximately $170,000 in cash and cash equivalents, approximately $11,000,000
in credit available from our credit facility and trade accounts payable of
approximately $360,000. Management believes that the revenues expected to be
generated from operations, the May 2008 equity offering discussed below and the
Company’s line of credit will be sufficient to finance operations through the
end of the fiscal year. However, in order to continue to execute our business
plan and grow our consumer receivables portfolio, the Company will need to
raise additional capital by way of the sale of equity securities or debt
instruments. If, for any reason, our available cash otherwise proves to be
insufficient to fund operations (because of future changes in the industry,
general economic conditions, unanticipated increases in expenses, or other
factors, including acquisitions), we will be required to seek additional
funding.
On December 31, 2007, the Board of Directors of the Company unanimously approved
management’s plan to discontinue the operation of the Company’s JHI and VOM
subsidiaries. The Company does not expect management’s plan with respect to the
disposal of assets of the discontinued operations to have a material effect on
the Company’s liquidity. The discontinued operations have no employees and
management believes that it will require an immaterial amount of general and
administrative expense to execute management’s plan.
Net cash provided by operating activities was approximately $813,000 during the
six months ended June 30, 2008, compared to net cash provided by operating
activities of approximately $314,000 during the six months ended June 30, 2007.
The increase in net cash provided by operating activities was primarily due to increase in income from continuing operations and income taxes offset by
payment of estimated court and media costs and a decrease in accounts
payable and accrued expense.
Net cash provided by investing activities was approximately $114,000 during the
six months ended June 30, 2008, compared to net cash used in investing
activities of approximately $4,594,000 during the six months ended June 30,
2007. The decrease in net cash used in investing activities was primarily due
to a decrease in acquisition of consumer receivables portfolios. Net cash used
in financing activities was approximately $2,048,000 during the six months
ended June 30, 2008, compared to net cash provided by financing activities of
approximately $4,322,000 during the six months ended June 30, 2007. The decrease
in net cash provided by financing activities was primarily due to collections
of consumer receivables at Velocity Investments paying down the principal
amount outstanding on the Wells Fargo Loan, partially offset by proceeds of the
May 2008 equity offering. Net cash provided by discontinued operations was
approximately $1,126,000 during the six months ended June 30, 2008 as compared
to net cash used in discontinued operations of approximately $397,000 during
the six months ended June 30, 2007. The increase in cash provided by
discontinued operations was primarily due to a $1,000,000 promissory note
issued by J. Holder collateralized by an investment property in Melbourne,
Florida.
17
On January 27, 2005, VI entered into a Loan and Security Agreement with Wells
Fargo, Inc., a California corporation, in which Wells Fargo agreed to provide
VI with a three year $12,500,000 senior credit facility to finance the
acquisition of individual pools of unsecured consumer receivables that are
approved by Wells Fargo under specific eligibility criteria set forth in the
Loan and Security Agreement.
Simultaneous with the Loan and Security Agreement, the following agreements
were also entered into with Wells Fargo, a Continuing Guaranty, in which we
unconditionally and irrevocably guaranteed our obligations under the Loan and
Security Agreement; a Security and Pledge Agreement, in which we pledged all of
our assets to secure the credit facility, including, but not limited to, all of
our stock ownership of JHI and all our membership interests in VI and VOM; and
a Subordination Agreement, in which all sums owing to us by VI as an
intercompany payable for advances or loans made or property transferred to VI
will be subordinated to the credit facility to the extent that their sums, when
added to VI membership interest in the parent does not exceed $3,250,000. In
addition, three of our executive officers, John C. Kleinert, W. Peter Ragan,
Sr. and W. Peter Ragan, Jr., provided joint and several limited guarantees of
VI’s obligations under the Loan and Security Agreement.
On February 27, 2006, VI entered into a First Amendment to the Loan and
Security Agreement pursuant to which Wells Fargo extended the credit facility
until January 27, 2009 and agreed to increase the advance rate under the
facility to 75% (up from 60%) of the purchase price of individual pools of
unsecured consumer receivables that are approved by the lender. Under the First
Amendment to the Loan and Security Agreement, Wells Fargo also agreed to reduce
the interest rate on the loan from 3.5% above the prime rate of Wells Fargo
Bank, N.A. to 1.5% above such prime rate. On February 23, 2007, we entered into
a Third Amendment to the Loan Agreement dated January 27, 2005. Pursuant to the
Amended and Restated Loan Agreement, the Lender agreed to permanently increase
our credit facility up to $17,500,000. On March 3, 2008 (effective February 29,
2008), the Lender increased the amount of credit available under the Credit
Facility from $17,500,000 to $22,500,000 and extended the maturity date until
January 27, 2011. The Lender also agreed to eliminate the requirement that
certain executive officers of VI and the Company provide the Lender with joint
and several limited guarantees of VI’s obligations under the Original Loan
Agreement.
Use of the Credit Facility is subject to VI meeting certain restrictive
covenants under the Fourth Amendment to the Loan Agreement including but not
limited to: a restriction on incurring additional indebtedness or liens; a
change of control of Velocity; a restriction on entering into transactions with
affiliates outside the course of Velocity’s ordinary business; and a
restriction on making payments to the Company in compliance with the Subordination
Agreement. Velocity has agreed to maintain at least $14,000,000 in member’s
equity and subordinated debt. The Company has also agreed to maintain at least
$25,000,000 in stockholder’s equity and subordinated debt for the duration of
the facility. In addition, Velocity and the Company covenant that net income
for each subsequent quarter shall not be less than $375,000 and $200,000,
respectively. The Company had $11,627,437 outstanding on the credit line as of
June 30, 2008.
18
On January 25, 2008, the Company issued a promissory note for $1,000,000 to a
financial institution. The note bears interest at a rate of 7% per annum,
payable monthly in arrears, on the first day of each month with the original
principal amount plus accrued interest due October 25, 2008. The note is
collateralized with specified real property owned by the Company’s subsidiary,
J. Holder. The Note is guaranteed by the Company and personally by certain
executive officers of the Company. J. Holder has agreed to maintain a loan to
value ratio of 33% at all times.
In
May 2008, the Company consummated several closings of its private placement
offering of units comprised of shares of common stock and warrants to purchase
shares of common stock to accredited investors. The Company sold an aggregate
of 800,003 shares at a purchase price of $0.90 per share and 145,163 at $0.93
per share and 200,001 warrants at an exercise price of $1.125 per share and
36,292 warrants at an exercise price of $1.16 per share, or the holders may
receive shares pursuant to a cashless exercise provision. The Company intends
to use the net proceeds from the offering primarily for the purchase of
portfolios of unsecured consumer receivables and for general corporate
purposes, including working capital.
The
warrants contain certain anti-dilution rights on terms specified in the
warrants.
The
Company received net proceeds of $793,650 from the placement, after commissions
of approximately $61,350. The Company retained a registered FINRA broker dealer
to act as placement agent. In addition, the placement agent will
receive three-year warrants to acquire 80,000 shares of the Company’s common
stock at an exercise price of $1.125 per share.
The
Company anticipates that it will be undertaking additional financing from time
to time to increase its working capital and to increase its ability to purchase
additional pools of consumer receivables. Such financings may be private
placement or public offerings, and may include common stock, debt securities or
other equity based securities. Although we have no specific capital raising
transactions currently under negotiation, we may determine to undertake such
transactions at any time. Such transactions could include the sale of equity at
less than the market price of our common stock at the time of such transaction,
although we have no present intention to undertake below market transactions,
and could be for gross proceeds of as low as $1,000,000 to approximately $10,000,000
or more. The terms of any such capital raising transaction would be considered
by the Board of Directors at the time it is proposed by management.
19
Supplementary Information on Consumer
Receivables Portfolios:
The
following tables show certain data related to our entire owned portfolios.
These tables describe the purchase price, cash collections and related
multiples. We utilize a long-term legal approach to collecting our portfolios
of consumer receivables. This approach has historically caused us to realize
significant cash collections from pools of consumer receivables years after
they are initially acquired. When we acquire a new pool of consumer
receivables, our estimates typically result in a 60 month projection of cash
collections.
The
following table shows the changes in consumer receivables, including amounts
paid to acquire new portfolios of consumer receivables for the three and six
months ended June 30, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Purchases/Collections
(dollar amounts in thousands)
|
|
|
|
|
Reporting
Period
|
|
Initial Outstanding
Amount
|
|
Portfolios
Purchased
|
|
Purchase
Price
|
|
Gross Cash
Collections
Per Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month
Period Ended June 30, 2008
|
|
$
|
13,905
|
|
5
|
|
|
$
|
788
|
|
$
|
4,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month
Period Ended June 30, 2007
|
|
$
|
37,937
|
|
7
|
|
|
$
|
3,040
|
|
$
|
4,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month
Period Ended June 30, 2008
|
|
$
|
15,866
|
|
7
|
|
|
$
|
957
|
|
$
|
9,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month
Period Ended June 30, 2007
|
|
$
|
79,798
|
|
13
|
|
|
$
|
4,792
|
|
$
|
8,216
|
|
20
Portfolio Purchases and Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Total #
Portfolios
|
|
Initial
Outstanding
Amount
(1)
|
|
Purchase
Price
(2)
|
|
Gross Cash
Collections
(3)
|
|
Gross Cash
Collections
as a % of Cost
(4)
|
|
Average Price
Per Dollar
Outstanding
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
5
|
|
|
$
|
11,497,833
|
|
$
|
2,038,950
|
|
$
|
8,538,113
|
|
418.75
|
%
|
|
$
|
0.1773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
10
|
|
|
$
|
9,511,088
|
|
$
|
1,450,115
|
|
$
|
3,357,464
|
|
231.53
|
%
|
|
$
|
0.1525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
22
|
|
|
$
|
133,103,213
|
|
$
|
11,449,557
|
|
$
|
16,658,730
|
|
145.50
|
%
|
|
$
|
0.0860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
26
|
|
|
$
|
199,042,032
|
|
$
|
15,367,940
|
|
$
|
13,305,371
|
|
86.58
|
%
|
|
$
|
0.0772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
19
|
|
|
$
|
129,892,667
|
|
$
|
9,316,779
|
|
$
|
4,028,691
|
|
43.30
|
%
|
|
$
|
0.0717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
7
|
|
|
$
|
15,865,914
|
|
$
|
956,882
|
|
$
|
60,113
|
|
6.28
|
%
|
|
$
|
0.0603
|
|
|
|
|
|
(1)
|
Initial
Outstanding Amount represents the original face amount purchased from sellers
and has not been reduced by any adjustments including payments and returns.
(“Returns” are defined as purchase price refunded by the seller due to the
return of non-compliant accounts, such as deceased and bankrupt accounts.)
|
|
|
|
|
(2)
|
Purchase
Price represents the cash paid to sellers to acquire portfolios of defaulted
consumer receivables, and does not include certain capitalized acquisition
costs.
|
|
|
|
|
(3)
|
Gross Cash
Collections include gross cash collections on portfolios of consumer receivables
as of June 30, 2008.
|
|
|
|
|
(4)
|
Gross Cash
Collections as a Percentage of Cost represents the gross cash collections on
portfolios of consumer receivables as of June 30, 2008 divided by the
purchase price such portfolios in the related calendar year.
|
|
|
|
|
(5)
|
Average
Price Per Dollar Outstanding represents the Purchase Price of portfolios of
consumer receivables divided by the Initial Outstanding Amount of such
portfolios purchased in the related calendar year.
|
The
prices we pay for our consumer receivable portfolios are dependent on many
criteria including the age of the portfolio, the type of receivable, our
analysis of the percentage of obligors who owe debt that is collectible through
legal collection means and the geographical distribution of the portfolio. When
we pay higher prices for portfolios that may have a higher percentage of
obligors whose debt we believe is collectible through legal
collection means, we believe it is not at the sacrifice of our expected
returns. Price fluctuations for portfolio purchases from quarter to quarter or
year over year are indicative of the economy or overall mix of the types of
portfolios we are purchasing.
During
the six months ended June 30, 2008, we acquired 7 portfolios of consumer receivables
aggregating approximately $16 million in initial outstanding amount at a
purchase price of approximately $957,000, bringing the aggregate initial
outstanding amount of consumer receivables under management as of June 30, 2008
to approximately $500 million, an increase of 15.5% as compared to
approximately $433 million as of June 30, 2007. For the six months ended June
30, 2008, we posted gross collections of approximately $9.2 million, compared
to gross collections of $8.2 million in the six month period ended June 30,
2007, representing a 12.2% increase.
21
Trends
As
a result of our line of credit, notes payable and Preferred Stock offering, we
anticipate that we will incur significant increases in interest expense and
preferred dividend payments offset, over time, by expected increased revenues
from consumer receivable portfolios purchased utilizing funds under such line
of credit and the proceeds from the Preferred Stock offering. No assurance can
be given that the expected revenues from such purchased portfolios will exceed
the additional interest expense and preferred dividends. While we are not
presently aware of any other known trends that may have a material impact on
our revenues, we are continuing to monitor our collections to assess whether
the current economic and housing crisis will have a long term impact on the
collection environment and revenues from collections on consumer receivables. We do not believe that the
recent decreases in interest rates, nor the anticipated gradual increases in
interest rates, has had or will have a material adverse effect upon our
business.
22
Item 3. Quantitative and Qualitative
Disclosure About Market Risks
Not
applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and
Procedures
Our
Chief Executive Officer and Chief Financial Officer, are responsible for
establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”).
Internal
control over financial reporting is promulgated under the Exchange Act as a
process designed by, or under the supervision of, our CEO and CFO and effected
by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:
|
|
|
|
·
|
Pertain to
the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of our assets;
|
|
|
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States and that our receipts and
expenditures are being made only in accordance with authorizations of our
management and directors; and
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·
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Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition or disposition of our assets that could have a material effect on
the financial statements.
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Readers
are cautioned that internal control over financial reporting, no matter how
well designed, has inherent limitations and may not prevent or detect
misstatements. Therefore, even effective internal control over financial
reporting can only provide reasonable assurance with respect to the financial statement
preparation and presentation.
Our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of our disclosure controls and procedures as defined in Exchange Act Rules
13a-15(e) and15d-15(e) as of the end of the period covered by this Report based
upon the framework in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based
upon that evaluation and for the reasons discussed below, our Chief Executive
Officer and our Chief Financial Officer concluded that as of the end of the
three month period ended June 30, 2008, our disclosure controls and procedures
were effective as of the period covered by this report in timely alerting them
to material information relating to Velocity Asset Management, Inc. required to
be disclosed in our periodic reports with the Securities and Exchange
Commission. In addition, our Chief Executive Officer and our Chief Financial
Officer concluded that as of the end of such period, our disclosure controls
and procedures are also effective to ensure that information required to be
disclosed in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosure.
As
a result of an evaluation of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by our periodic report on Form
10-Q for the period ended March 31, 2008, with the participation of our Chief
Executive Officer and Chief Financial Officer, we identified a material
weakness in our internal controls over financial reporting relating to the
compliance of certain related party transactions to the Sarbanes-Oxley Act.
23
A
material weakness is a control deficiency, or a combination of control
deficiencies, that results in a more than remote likelihood that a material
misstatement of the Company’s annual or interim financial statements will not
be prevented or detected. Management has concluded that material weaknesses
existed in the following areas with respect to Compliance with Section 402 of
the Sarbanes Oxley Act for the three months ended March 31, 2008:
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The Company
received a note receivable in the amount of $205,000 in partial payment of
the $455,000 purchase price from an officer and related party, John C.
Kleinert, for the assignment of membership interests in Ridgedale Avenue
Commons, LLC, and Morris Avenue Commons, LLC, previously owned by J. Holder,
Inc. As of December 31, 2007, the note had a balance of $100,000, along with
interest at the rate of 12% which shall accrue only on and after December 26,
2007, and is payable by means of one lump sum payment of principal and
accrued interest on August 25, 2008. As of March 14, 2008, Mr. Kleinert made
a $100,000 lump sum payment to the Company and the promissory note was
retired.
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·
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On December
28, 2007, the Company paid $115,146 in withholding taxes in connection with
the vesting of 175,000 shares of restricted stock granted to James J.
Mastriani. As of March 14, 2008, Mr. Mastriani has returned 136,000 of such
shares for cancellation and retirement in order to offset such payment.
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The
following remedial actions were undertaken immediately.
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·
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The Company
has engaged BDO Seidman, LLP as Sarbanes-Oxley consultant to advise and
assist the Company in its compliance with internal controls over financial
reporting in the future.
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·
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Prior to
presenting any related party transaction to the Board of Directors for
approval, management of the Company will submit any such transition to
securities law counsel for review to ensure compliance with applicable
securities law.
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Velocity
Asset Management, Inc. continues the process to complete a thorough review of
its internal controls as part of its preparation for compliance with the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Section 404
requires our management to report on, and our external auditors to attest to,
the effectiveness of our internal control structure and procedures for
financial reporting. As a non-accelerated filer under Rule 12b-2 of the
Exchange Act, our first report under Section 404 as a smaller reporting company
will be contained in our Form 10-K for the period ended December 31, 2009.
Changes
in Internal Control over Financial Reporting
There
were no changes in the Company’s internal control over financial reporting
during the second quarter that materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
24
PART II -
OTHER INFORMATION
In
the ordinary course of our business we are involved in numerous legal
proceedings. We regularly initiate collection lawsuits against consumers using
our network of third party law firms. Also, consumers may occasionally initiate
litigation against us in which they allege that we have violated a Federal or
state law in the process of collecting on their account. We do not believe that
these ordinary course matters are material to our business and financial
condition.
As of June 30, 2008, there are presently no material pending legal
proceedings to which we or any of our subsidiaries is a party or to which any
of our property is the subject and, to the best of our knowledge, no such
actions against us is contemplated or threatened.
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Item 2
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Unregistered Sales of Securities and Use of Proceeds
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None,
other than as disclosed by the Company in its filings on Form-8K during the
period ended June 30, 2008.
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Item 3
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Defaults Upon Senior Securities
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None.
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Item 4
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Submission of Matters to a Vote of Security Holders
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None.
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Item 5
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Other Information
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None.
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Item 6
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Exhibits
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31.1
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Certification
of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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31.2
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Certification
of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
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32.1
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Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350
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32.2
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Certification
of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.
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25
In
accordance with the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
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VELOCITY
ASSET MANAGEMENT, INC.
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Dated:
August 14, 2008
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By:
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/s/ John C.
Kleinert
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John C.
Kleinert
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Chief Executive
Officer and President
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26
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