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EX-31.1 - EXHIBIT 31.1 - PSM HOLDINGS INCex31-1.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2010 

o TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transitional period from ______ to ______

Commission File No. 333-151807

PSM HOLDINGS, INC.
 (Exact name of registrant as specified in its charter)

Nevada
 
90-0332127
(State or other jurisdiction of incorporation of organization)
 
(I.R.S. Employer Identification Number)

1112 N. Main Street, Roswell, New Mexico 88201
(Address of principal executive office) (zip code)

(575) 624-4170
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding twelve months (or for such shorter period that the registrant was required to submit and post such files).
Yes o  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x
(Do not check if a smaller reporting company)
 

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

As of February 11, 2011, there were 14,241,334 shares of registrant’s common stock outstanding.

 
 

 

PSM HOLDINGS, INC.

TABLE OF CONTENTS

Report on Form 10-Q
For the quarter ended December 31, 2010

 
 
Page
   
PART I - FINANCIAL INFORMATION
3
   
Item 1. Financial Statements
3
   
  Consolidated Balance Sheets at December 31, 2010 (Unaudited) and June 30, 2010
3
   
  Consolidated Statements of Operations and Comprehensive Income (Loss) for the
  Three Month and Six Month Periods ended December 31, 2010 and 2009 (Unaudited)
 
4
     
  Consolidated Statements of Cash Flows for the Six Month Periods ended
  December 31, 2010 and 2009 (Unaudited)
 
5
   
  Notes to the Consolidated Financial Statements (Unaudited)
6
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
16
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
20
   
Item 4. Controls and Procedures
21
   
PART II - OTHER INFORMATION
21
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
21
   
Item 6. Exhibits
22

 
2

 
 
PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
PSM HOLDINGS, INC. AND SUBSIDIARY
 
CONSOLIDATED BALANCE SHEETS
 
   
ASSETS
December 31, 2010
   
June 30, 2010
 
 
(Unaudited)
       
Current Assets:
         
Cash & cash equivalents
$ 122,774     $ 75,763  
Accounts receivable, net
  65,208       153,563  
Marketable securities
  -       30,420  
Prepaid expenses
  -       60,000  
Other assets
  636       6,090  
Total current assets
  188,618       325,836  
               
Property and equipment, net
  13,568       16,944  
               
Loan receivable
  90,891       90,891  
               
NWBO License, net of accumulated amortization, December 31, 2010 - $277,612 and June 30, 2010 - $248,147
  547,387       576,852  
               
Total Assets
$ 840,464     $ 1,010,523  
               
          LIABILITIES AND STOCKHOLDERS' EQUITY
             
               
Current Liabilities:
             
Accounts payable
$ 160,578     $ 319,640  
Accrued liabilities
  2,374       24,897  
Total current liabilities
  162,952       344,537  
               
Long-term Liabilities:
             
Due to related party
  100,000       120,000  
Total long-term liabilities
  100,000       120,000  
               
Total Liabilities
  262,952       464,537  
               
Commitment & Contingencies
  -       -  
               
Stockholders' Equity:
             
Common stock, $0.001 par value, 100,000,000 shares authorized, 14,194,834 and 14,124,905 shares
issued and outstanding at December 31, 2010 and June 30, 2010
  14,195       14,125  
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares
issued and outstanding at December 31, 2010 and June 30, 2010
  -       -  
Treasury stock, at cost: shares held 21,600 at December 31, 2010 and June 30, 2010
  (22,747 )     (22,747 )
Additional paid in capital
  8,387,102       8,335,154  
Accumulated other comprehensive income
  -       2,666  
Accumulated deficit
  (7,801,038 )     (7,783,212 )
Total stockholders' equity
  577,512       545,986  
               
Total Liabilities and Stockholders' Equity
$ 840,464     $ 1,010,523  
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
3

 
 
PSM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
 
    For the three months ended
December 31,
    For the six months ended
December 31,
 
    2010     2009     2010     2009  
                         
Revenues   $ 1,243,410     $ 926,612     $ 2,414,314     $ 1,863,009  
                                 
Operating expenses
                               
Brokerage commission
    973,764       813,473       1,919,808       1,639,234  
Selling, general & administrative
    228,658       193,191       492,922       428,633  
Depreciation and amortization
    17,049       17,376       34,425       34,751  
Total operating expenses
    1,219,472       1,024,040       2,447,155       2,102,618  
                                 
Income (loss) from operations
    23,938       (97,428 )     (32,841 )     (239,609 )
                                 
Non-operating income (expense):
                               
Interest expense
    (2,774 )     (621 )     (4,540 )     (1,310 )
Interest and dividend
    (2,599 )     2,584       1,324       5,063  
Realized gain (loss) on sale of securities
    -       (1,014 )     5,057       (4,518 )
Other income
    11,743       -       13,174       -  
Total non-operating income (expense)
    6,370       949       15,016       (765 )
                                 
Income (loss) from continuing operations before income tax
    30,307       (96,479 )     (17,825 )     (240,374 )
                                 
Provision for income tax
    -       -       -       -  
                                 
Net income (loss)
    30,307       (96,479 )     (17,825 )     (240,374 )
                                 
Other comprehensive income (loss):
                               
Unrealized gain (loss) on marketable securities
    -       3,287       (2,666 )     13,620  
                                 
Comprehensive income (loss)
  $ 30,307     $ (93,192 )   $ (20,491 )   $ (226,754 )
                                 
Net income (loss) per common share and equivalents
  - basic and diluted loss from operations
  $ 0.00     $ (0.01 )   $ (0.00 )   $ (0.02 )
                                 
Weighted average shares of share capital outstanding
  - basic & diluted
    14,180,143       12,960,052       14,166.152       12,951,173  
 
 
Weighted average number of shares used to compute basic and diluted loss per share for the three month and six month periods ended December 31, 2010 and 2009 are the same since the effect of dilutive securities is anti-dilutive.
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
4

 
 
PSM HOLDINGS, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(UNAUDITED)
 
   
   
For the six months ended December 31,
 
   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (17,825 )   $ (240,374 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Bad debts
    3,907       -  
Depreciation and amortization
    34,425       34,751  
Non-cash commissions contributed by an officer
    -       1,342  
Stock issued to third parties for services
    26,751       -  
Stock issued to branch owners as commission
    25,267       58,183  
(Gain) Loss on sale of marketable securities
    (5,057 )     4,518  
(Increase) decrease in current assets:
               
Accounts receivable
    84,448       (18,394 )
Prepaid expenses
    60,000       -  
Other current assets
    5,452       452  
Increase (decrease) in current liabilities:
               
Accounts payable
    (159,062 )     54,345  
Accrued liabilities
    (22,523 )     57,865  
Net cash provided by (used in) operating activities
    35,783       (47,312 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from the sale of marketable securities
    32,812       17,667  
Purchase of property and equipment
    (1,584 )     -  
Purchase of marketable securities
    -       (17,640 )
Net cash provided by investing activities
    31,228       27  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Cash receipts on loan from related party
    -       20,000  
Cash payments on loan from related party
    (20,000 )     (10,000 )
Net cash provided by (used in) financing activities
    (20,000 )     10,000  
                 
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
    47,011       (37,285 )
                 
CASH & CASH EQUIVALENTS, BEGINNING BALANCE
    75,763       83,158  
                 
CASH & CASH EQUIVALENTS, ENDING BALANCE
  $ 122,774     $ 45,873  
 
 
See Note 4 - Statement of Cash Flows Additional Disclosures
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
5

 
PSM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

Company Background
As used herein and except as otherwise noted, the term “Company” shall mean PSM Holdings, Inc.

The Company was incorporated under the laws of the State of Utah on March 12, 1987, as Durban Enterprises, Inc. On July 19, 2001, Durban Enterprises, Inc., created a wholly-owned subsidiary called Durban Holdings, Inc., a Nevada corporation, to facilitate changing the domicile of the Company to Nevada.  On August 17, 2001, Durban Enterprises, Inc. merged with and into Durban Holdings, Inc., leaving the Nevada Corporation as the survivor.  The Company retained the originally authorized 100,000,000 shares at $0.001 par value.
 
On May 18, 2005, Durban Holdings, Inc. completed the acquisition of all of the outstanding stock of PrimeSource Mortgage, Inc., a Texas corporation, by a stock for stock exchange in which the stockholders of PrimeSource Mortgage, Inc. received 10,250,000 shares, or approximately 92% of the outstanding stock of the Company.  Following the acquisition, effective May 18, 2005, the name of the parent “Durban Holdings, Inc.”, was changed to “PSM Holdings, Inc.” For reporting purposes, the acquisition was treated as an acquisition of the Company by PrimeSource Mortgage, Inc. (reverse acquisition) and a recapitalization of PrimeSource Mortgage, Inc. The historical financial statements prior to May 18, 2005, are those of PrimeSource Mortgage, Inc. Goodwill was not recognized from the transaction.

Business Activity
PrimeSource Mortgage, Inc., the wholly-owned subsidiary of PSM Holdings, Inc. was incorporated February 15, 1991 under the laws of the State of Texas.  PrimeSource Mortgage, Inc. became a wholly-owned subsidiary of PSM Holdings, Inc., a Nevada corporation, on May 18, 2005.  PrimeSource Mortgage, Inc. acts as an agent or broker for mortgage lenders in real estate mortgage loan transactions, and solicits and receives applications for secured or unsecured loans.  PrimeSource Mortgage, Inc. establishes Independent Network Office Agreements with originators who act as an independent contractor to originate mortgage applications for submission to lenders under the terms and conditions provided in the Network Office Agreement.  PrimeSource Mortgage, Inc. pays the originators commissions and fees based on a flat fee and split schedule accepted and agreed to by PrimeSource Mortgage, Inc., the respective lenders and the originators.  The Network Office Agreements are effective for a period of 30 days, and are automatically extended for 30 day periods until they are cancelled.  The Company primarily operates and is licensed in the following 14 states:  Arkansas, California, Georgia, Idaho, Iowa, Kansas, Louisiana, Missouri, Montana, Nebraska, New Mexico, Oklahoma, Texas and Washington.

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, 2010 which were filed on September 28, 2010 in the Form 10-K for the year ended June 30, 2010. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three month and six month periods ended December 31, 2010 are not necessarily indicative of the results that may be expected for the year ending June 30, 2011.

Summary of Significant Accounting Policies
The following summary of significant accounting policies of the Company is presented to assist in the understanding of the Company’s consolidated financial statements.  The consolidated financial statements and notes are the representation of PSM Holdings, Inc.’s management who is responsible for their integrity and objectivity.  The consolidated financial statements of the Company conform to accounting principles generally accepted in the United States of America (GAAP). The Financial Accounting Standards Board (FASB) is the accepted standard-setting body for establishing accounting and financial reporting principles.
 
 
6

 
PSM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
Principles of Consolidation
The consolidated financial statements include the accounts of PSM Holdings, Inc. and its wholly-owned subsidiary PrimeSource Mortgage, Inc.  All material intercompany transactions have been eliminated in the consolidation.

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

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

Accounts Receivable
Accounts receivable represent commissions earned on closed loans and fees charged to new branch offices that the Company has not yet received payment.  Accounts receivable are stated at the amount management expects to collect from balances outstanding at period-end.  The Company estimates the allowance for doubtful accounts based on an analysis of specific accounts and an assessment of the customer of branch owner’s ability to pay.

Loan Receivable
The loan receivable is stated at the unpaid principal balance.  Interest income is recognized in the period in which it is earned.

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

Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets as follows. Expenditures for maintenance and repairs are charged to expense as incurred.
 
Furniture, fixtures and office equipment
5-7 years
Computer equipment 
5 years
 
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the bases of certain assets and liabilities for financial and tax reporting. The deferred taxes represent the future tax return consequences of those differences, which will either be deductible or taxable when the assets and liabilities are recovered or settled.  In addition, there is the deferred tax asset which represents the economic value of various tax carryovers.

Taxes Collected and Remitted to Governmental Authorities
When applicable, the Company collects gross receipts taxes from its customers and remits them to the required governmental authorities.  Related revenues are reported net of applicable taxes collected and remitted to governmental authorities.
 
 
7

 
PSM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
Advertising
Advertising costs are expensed as incurred. Advertising expense for the three month and six month periods ended December 31, 2010 and 2009 were $2,123 and $5,018, and $1,167 and $2,524, respectively.

Share Based Payment Plan
Under the 2002 Stock Option/Stock Issuance Plan, the Company can grant stock or options to employees, related parties, and unrelated contractors in connection with the performance of services provided to the Company by the awardees.  The Branch Owner Stock Program provides for issuance of stock to branch owners for outstanding performance. The Company uses the fair value method to account for employee stock compensation costs and to account for share based payments to non-employees.

Revenue Recognition
The Company’s revenue is derived primarily from revenue earned from the origination of mortgage loans that are funded by third parties.  The Company has a network of independently owned branch offices that originate mortgage loans from which the Company receives either a flat fee or a percentage of the fees earned by the branch when a mortgage loan is closed or funded. Revenue is recognized as earned on the later of the settlement date or the funding date of the loan.

The Company records revenue for the fees charged to new branches when they sign up to join its network. The Company generated less than 1% of total revenues, from fees charged to new branch offices for joining the network during the three month and six month periods ended December 31, 2010 and 2009.

The Company receives an override fee on the warehouse line of credit on loans closed on the line. The revenue is recognized as earned on the earlier of the settlement date or the funding date of the loan.

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

Recent Accounting Pronouncements
The Company has evaluated the possible effects on its financial statements of the following accounting pronouncements:
 
In April 2010, the FASB issued ASU No. 2010-13, “Compensation – Stock Compensation”.  This update will clarify the classification of an employee share based payment award with an exercise price denominated in the currency of a market in which the underlying security trades.  This update will be effective for the first fiscal quarter beginning after December 15, 2010, with early adoption permitted.  The Company does not expect the provisions of ASU 2010-13 to have a material effect on the Company’s consolidated results of operations or financial condition.

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.  90% of the outstanding accounts receivable are due from one customer. The Company records an allowance for estimated uncollectible accounts in an amount approximating anticipated losses. Individual uncollectible accounts are written off against the allowance when collection of the individual accounts appears doubtful. The Company recorded an allowance for doubtful accounts of $0 and $12,500 as of December 31, 2010 and June 30, 2010, respectively.

 
8

 
PSM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows:

   
December 31,
   
June 30,
 
   
2010
   
2010
 
   
(Unaudited)
       
Fixtures and equipment
  $ 116,148     $ 114,563  
Accumulated depreciation
    (102,580 )     (97,619 )
Property and equipment, net
  $ 13,568     $ 16,944  

Depreciation expense for the three month and six month periods ended December 31, 2010 and 2009 was $2,317 and $4,960, and $2,643 and $5,286, respectively.

NOTE 4 – STATEMENTS OF CASH FLOWS ADDITIONAL DISCLOSURES

   
December 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
Cash paid for interest for the six months ended
  $ 3,102     $ 1,310  
                 
Cash paid for income taxes for the six months ended
  $ -     $ -  

NOTE 5 – INVESTMENTS IN MARKETABLE SECURITIES

Cost and fair value of marketable securities at December 31, 2010 and June 30, 2010, are as follows:

   
Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
December 31, 2010 (Unaudited)
                       
Available for sale
                       
Equity Securities
  $ -     $ -     $ -     $ -  
                                 
June 30, 2010
                               
Available for sale
                               
Equity Securities
  $ 27,754     $ 3,123     $ (457 )   $ 30,420  

Available for sale securities are carried in the financial statements at fair value. Net unrealized holding gains on available for sale securities in the amount of $0 and $2,666 as of December 31, 2010 and June 30, 2010, respectively, have been included in accumulated other comprehensive income.  Estimated income tax related to unrealized holding gains for the six month periods ending December 31, 2010 and 2009 was $0.

Proceeds from the sale of securities available for sale during the six month periods ended December 31, 2010 and 2009 was $32,812 and $17,667. Net realized gain from the sale of securities available for sale and included in the statement of operations for the three month and six month periods ended December 31, 2010 was $0 and $5,057, and net realized loss from the sale of securities available for sale is included in the statement of operations for the three month and six month periods ended December 31, 2009 was $1,014 and $4,518. The cost of securities sold is determined by specific identification.

 
9

 
PSM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
Temporary impairments
The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position at December 31, 2010 and June 30, 2010.

December 31, 2010 (Unaudited)  
Less than 12 Months
   
More than 12 Months
   
Total
 
Description of Securities
 
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
                                     
Marketable Equity
                                   
Securities
  $ -     $ -     $ -     $ -     $ -     $ -  
                                                 
Total
  $ -     $ -     $ -     $ -     $ -     $ -  
                                                 
June 30, 2010  
Less than 12 Months
   
More than 12 Months
   
Total
 
Description of Securities
 
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
                                                 
Marketable Equity
                                               
Securities
  $ 3,327     $ (326 )   $ 505     $ (131 )   $ 3,832     $ (457 )
                                                 
Total
  $ 3,327     $ (326 )   $ 505     $ (131 )   $ 3,832     $ (457 )

Marketable Equity Securities
The Company’s investments in marketable equity securities consist primarily of investments in common stock of companies engaged in a variety of industries held in mutual/Index funds. The industries and the Company’s investees are susceptible to changes in the U.S. economy and the economies of their customers. The severity of the impairments in relation to the carrying amounts of the individual investments is consistent with market developments within the various industries.  The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairments. Based on that evaluation and the Company’s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider these investments to be other than temporarily impaired at December 31, 2010. The Company’s investment in marketable equity securities at December 31, 2010 and June 30, 2010 was $0 and $30,420, respectively.
 
NOTE 6 – RELATED PARTY TRANSACTIONS

The Company leases office space in a building that is 100% owned by an entity whose members are the Company’s President and his immediate family.  The terms under the lease agreement are of a month-to-month operating lease. Total rents paid for the office lease during the three month and six month periods ended December 31, 2010 and 2009 were $9,735 and $19,470, and $9,360 and $18,720, respectively.  The Company rents a vehicle that is owned by the Company’s President.  The rental is on a month-to-month basis and is cancellable at any time.  Monthly rental payments are $500.  During the three month and six month periods ended December 31, 2010 and 2009, the Company paid $1,500 and $3,000 for each period for the vehicle rent.

 
10

 
PSM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
The Company had the following loan outstanding to a related party:

   
Original loan
   
Balance due
December 31, 2010
   
Balance due
June 30, 2010
 
         
(Unaudited)
       
                   
Secured loans to NWBO Corporation (NWBO) bearing interest at 9.25% annually
with no defined payment terms
  $ 167,000     $ 90,891     $ 90,891  
                         
Accrued interest due from NWBO
    -       637       6,090  
    $ 167,000     $ 91,528     $ 96,981  
Less allowance for uncollectible amounts
    -       -       -  
    $ 167,000     $ 91,528     $ 96,981  

At December 31, 2010 and June 30, 2010, the Company had an outstanding payable to NWBO for commissions amounting to $5,753 and $0, respectively.

The Company conducted business with the Farmington, New Mexico branch office, owned by a director of the Company during the six month period ended December 31, 2010. The branch owner currently serves on the Company’s Board of Directors. For the three month and six month periods ended December 31, 2010 and 2009, commissions paid to the branch owner under the branch agreement were $76,448 and $128,332, and $31,021 and 80,060, respectively. At December 31, 2010 and June 30, 2010, the Company did not owe the Farmington branch office any commissions. There were no share based payments during the three month and six month periods ended December 31, 2010 and 2009.

The Company conducted business with the Ruidoso, New Mexico Branch office which is owned by a director of the Company. For the three month and six month periods ended December 31, 2010 and 2009, commissions paid under the branch agreement were $0 and $0, and $115 and $7,637, respectively. At December 31, 2010 and June 30, 2010, the Company did not owe the Ruidoso Branch any commissions. There were no share based payments during the three month periods ended December 31, 2010 and 2009.
 
On January 24, 2008, the Company entered into an unsecured revolving line of credit arrangement with the Company’s President for up to $120,000. The term of the credit arrangement is for five years at an adjustable interest rate of the Prime Rate minus 0.76%. For the three month and six month periods ended December 31, 2010 and 2009, the Company recorded interest expense of $704 and $1,437, and $621 and $1,257, respectively. During the six month period ended December 31, 2010, the Company paid to the President $20,000 towards the revolving credit line. The balances payable to the Company’s President towards the revolving credit line at December 31, 2010 and June 30, 2010 were $100,000 and $120,000, respectively.

NOTE 7 – STOCK ISSUANCE

Following is the status of the share based payment plans during the six month period ended December 31, 2010.

2002 Stock Option/Stock Issuance Plan
The Company has authorized 3,000,000 shares of common stock for non-statutory and incentive stock options and stock grants under the plan which are subject to adjustment in the event of stock split, stock dividends, and other situations.
 
 
11

 
PSM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
   
Number of Shares
 
       
Shares authorized
    3,000,000  
         
Shares issued and outstanding, June 30, 2010
    1,342,913  
    Issued
    38,814  
    Exercised
    -  
    Forfeited
    -  
    Expired
    -  
Shares issued and outstanding, December 31, 2010
    1,381,727  
         
Shares available for issuance, December 31, 2010
    1,618,273  

During the six month period ended December 31, 2010, the Company issued under the 2002 Stock Option/Stock Issuance Plan, 38,814 shares of common stock valued at $26,751 to consultants for services. The shares were issued at their fair value on the date of issuance. The Company uses the fair value method to account for employee stock compensation costs and to account for share based payments to non-employees.

Other Stock Issuances
On September 2, 2010 and November 29, 2010, the Company issued 18,930 and 12,185 common shares to the branch owners for brokerage commissions valued at $25,267, earned during the six month period ended December 31, 2010. The shares were issued at their fair value when such commissions were earned by the branches.

Total common shares issued and outstanding under all stock plans at December 31, 2010 were 14,194,834.

During the six month period ended December 31, 2010, there were no stock options granted under the 2002 Stock Option/Stock Issuance Plan.

NOTE 8 – COMMITMENTS
 
Nationwide By Owners License
On April 14, 2006, the Company entered into a five-year renewable license agreement with Nationwide By Owner, Inc. (“NWBO”), a Texas based company engaged in the business of marketing real property for sale by owners.  In the course of its business, NWBO generates a proprietary system which produces a database of sales leads containing home buyer and home seller information for persons seeking financing on the purchase or refinancing of real property. The license agreement permits exclusive use of the database to be used to generate leads for the origination of mortgage applications for submission to PrimeSource Mortgage, Inc.

The initial cost of the license was $150,000 cash, plus the issuance of 150,000 shares of PSM Holdings, Inc. stock in favor of NWBO and its principals, at a fair value for consideration received of $674,999 on the date of issue.  The Company is amortizing the cost of the license over fourteen years, which is the initial five-year period of the agreement, plus three automatic three year renewal terms.  Amortization expense recorded during the three month and six month periods ended December 31, 2010 and 2009 was $14,732 and $29,465, and $14,732 and $29,465, respectively. Amortization expense to be recognized for each of the years ending June 30, 2011 through 2019 is $58,929 and for the year ending June 30, 2020 is $46,497.
 
 
12

 
PSM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
The agreement between NWBO and the Company calls for the establishment of a National Processing Center for the collection, origination and tracking of the sales lead database. As agreed to by NWBO and the Company, the National Processing Center has been delayed until a written approval has been obtained between NWBO and a national marketing company. There have been several on-going negotiations taken place, but no agreement has been executed.  NWBO continues to provide the platform that produces a database of sales leads containing home buyer and home seller information for persons seeking financing on the purchase or refinancing of real property for exclusive use by the Company. Upon completion of a National Processing Center, the Company has also committed to provide year-end bonuses under the license agreement which the parties can elect to take in cash, stock, or any combination of the two.  Bonus cash will be calculated by multiplying the annual net profit of the National Processing Center by the following percentage rates: 15% for the initial five year term of the license agreement, 20% for the first automatic renewal term, 25% for the second automatic renewal term, and 30% for the third automatic renewal term and all subsequent annual renewal terms.  Should the parties elect to take all or part of the bonus in common stock, the number of shares awarded will be calculated according to the base value of the shares as defined in the agreement. No accrual has been recorded for the year-end bonuses because the National Processing Center has not been established.
 
Pursuant to the agreement with NWBO, the Company has also committed to pursue obtaining, in good faith and diligently, the appropriate licenses to originate mortgages in all 50 states of the United States of America.

Historically the Company has not gathered data on the number of leads and loans closed, and commissions earned and paid, relating to the NWBO license since the branch offices are independently owned and operated and may choose not to use these lead generating opportunities.  Because some of the branches have taken advantage of the NWBO opportunity, management has recently begun tracking some of the results from those offices.  From the seven offices that have used the NWBO technology, management believes there are approximately 20% of the loans being derived from the NWBO signs.  However, management also believes there are other benefits from the association for the branches in the form of marketing exposure and the control of a transaction.  If a prospective buyer calls the telephone number on the NWBO sign while looking for a property, and if they are not already working with a realtor, the branch office has the opportunity not only to generate the loan business, but may also refer a lead prospect to a producing realtor in the market area.

The Company has developed a method to measure the value of the NWBO license. The method is a computation based on income from new and existing branches and an estimate of the value NWBO brings to each of the branches. The computation is prepared each quarter.  The computed value of the license is compared to the book value of the license at the end of each quarter to determine if there is any impairment in the carrying value of the license.  The book value is determined by the original cost of the license less accumulated amortization as of the end of the quarter.  The value of the license recorded on the balance sheet is book value. The book value of the license was less than the computed value at December 31, 2010.

Lease commitments
The Company leases office space in an office building that is 100% owned by an LLC whose members are the Company’s President and his immediate family.  The terms under the lease agreement is of month-to-month operating lease, and there are no future non-cancelable lease commitments due by the Company. Total rents paid during the three month and six month periods ended December 31, 2010 and 2009 were $9,735 and $19,470, and $9,360 and $18,720, respectively.
 
The Company rents property and equipment under a rental agreement with cancellable terms. Total rent recorded as expense under the agreement during the three month and six month periods ended December 31, 2010 and 2009 were $1,246 and $2,798, and $0 and $1,802, respectively.  

NOTE 9 – LOSS PER COMMON SHARE
 
Basic and diluted loss per common share is computed by dividing the loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted loss per share does not reflect per share amounts that would have resulted if diluted potential common stock has been converted to common stock because the effect would be anti-dilutive.  The weighted average number of common shares outstanding during the three month and six month periods ended December 31, 2010 and 2009 were 14,180,143 and 14,166,152 and 12,960,052 and 12,951,173, respectively. Loss per common share for the three month and six month periods ended December 31, 2010 and 2009 was $0.00 and $0.00 and $0.01 and $0.02, respectively.

 
13

 
PSM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
NOTE 10 – LINES OF CREDIT

The Company has three warehouse lines of credit available for its funding of mortgage loans for a short term period. (i) On August 3, 2008, the Company entered into a warehouse line of credit agreement for up to $1,000,000 bearing an annual interest rate of 5%, (ii) On June 11, 2009, the Company entered into an additional warehouse line of credit for up to $1,000,000 which was modified on June 19, 2009 to increase the credit line to up to $4,000,000. The annual interest rate on the new line is Wall Street Journal Prime Interest Rate plus ½ %, and (iii) On September 30, 2010, the Company entered into a warehouse line of credit for up to $1,000,000 for a one year term, unconditionally guaranteed for payment by its President. The unpaid balance on the line of credit bears an interest rate equal to prime interest rate plus 2% with a floor of 7%. The lines of credit provide short term funding for mortgage loans originated by the branches. The lines of credit are repaid within 5 to 7 days when the loan is sold. The Company does not intend to hold and service the loans.  The lines are used strictly to fund mortgage loans and not to provide operating funds for the Company.  As of December 31, 2010 and June 30, 2010, the Company did not have any amounts outstanding for payment against the lines of credit.
 
NOTE 11 – 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.

 
14

 
PSM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
The fair value of  marketable securities was determined using Level 1 inputs.  The fair value of the remaining assets and liabilities was determined using Level 2 inputs. The carrying amounts and fair values of the Company’s financial instruments at December 31, 2010 and June 30, 2010 are as follows:
 
   
December 31, 2010
   
June 30, 2010
 
   
Carrying Amount
   
Fair Value
   
Carrying Amount
   
Fair Value
 
   
(Unaudited)
             
Financial assets:
                       
Cash and cash equivalents
  $ 122,774     $ 122,774     $ 75,763     $ 75,763  
Accounts receivable
    65,208       65,208       153,563       153,563  
Marketable securities
    -       -       30,420       30,420  
Prepaid expenses
    -       -       60,000       60,000  
Loan receivable
    90,891       90,891       90,891       90,891  
                                 
Financial liabilities:
                               
Accounts payable
  $ 160,578     $ 160,578     $ 319,640     $ 319,640  
Accrued liabilities
    2,374       2,374       24,897       24,897  
Due to a related party
    100,000       100,000       120,000       120,000  

NOTE 12 – INDUSTRY RISKS

The Company continues to build on its plan to add additional branches to increase bottom line revenues while continuing its relationship with NationWide By Owner (NWBO).  However, the Company continues to post losses through the end of its fiscal years ended June 30, 2010 and 2009 and for the six months period ended December 31, 2010. The development of the national processing center remains temporarily on hold while NWBO and a business partner attempt to reach an agreement with each other.  NWBO is instrumental in soliciting new branches for the Company and that is where management is focusing their attention. The Company has signed four additional branches during the six months ended December 31, 2010, however, should those branches not produce, or the Company is unsuccessful in acquiring additional branches enough to achieve profitability, they may be forced to reduce to the level of services necessary to operate the remaining branches in the network.

The mortgage industry has gone through a significant consolidation over the past three years.  The foreclosures in 2009 and 2010 have caused a credit tightening, making qualifying for loans more difficult for borrowers.  PrimeSource Mortgage, Inc. has not experienced credit losses because the Company either has either sold the loan prior to or shortly after closing, or simply does not fund the loans they originate. 
 
The U.S. housing market as a whole has undergone a significant contraction with lenders and investors tightening their credit standards, making the mortgage origination volumes decrease in 2009 and 2010.  The lower rates in 2009 and 2010 have brought the market back to some degree.  Because of the Company's long standing practices of dealing primarily with buyers who qualify for loans in the standard market, having their loans sold in advance, and forming relationships with quality lenders, management believes the impact of the current industry crisis on the Company will be minimal, although it cannot be determined with any certainty.

NOTE 13 – SUBSEQUENT EVENTS

Subsequent events have been evaluated through February 11, 2011, the date these financial statements were issued.

On January 12, 2011, the Company issued 5,500 common shares valued at $4,250 to six speakers as compensation for speaking at the Company’s 2011 Annual Conference. In addition, the Company issued 5,000 common shares to a consultant valued at $8,250 for providing consulting services to the Company. The shares were issued at their fair value when such services were earned by the consultants.

On February 3, 2011, the Company issued 26,000 common shares valued at $21,840 to four employees as compensation for working at the Company’s 2011 Annual Conference. The Company also issued 10,000 common shares to a consultant for providing business and advisory services to the Company. The shares were issued at their fair value when such services were earned by the employees and the consultant.

 
15

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of its management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors currently known to Management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our services, fluctuations in pricing for materials, and competition.

 The following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes thereto as filed with this report.

Overview

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

We conduct all of our business operations through our wholly-owned subsidiary, PrimeSource Mortgage, Inc., which we acquired in May 2005. Since 1991, PrimeSource Mortgage has been engaged in the mortgage brokerage business and since 2008 has also conducted business as a mortgage banker using two warehouse lines of credit, $1,000,000 secured by CBB, Inc. and $4,000,000 secured by First Funding. We generate revenues through mortgage brokerage services by originating mortgage loans that are funded directly by third parties selected by us from various institutional lenders.  We also generate revenues through mortgage banking services with mortgage loans originated and funded by us through our warehouse lines of credit.  These loans are immediately sold to third parties.  We have a number of independently owned branch offices from which we derive revenue based on a percentage of commissions, or a flat fee generated on loans originated by these branch offices.  We make available to these branch offices our institutional lenders for the mortgage brokerage business and our warehouse lines of credit for the mortgage banking business in order to assist them in originating and closing new loans thereby generating commission revenue for us.  We are licensed as a mortgage brokerage and banking firm in 14 states and we currently operate primarily in the southwest in the states of New Mexico, Oklahoma, and Texas.

On April 14, 2006, we entered into a five-year renewable license agreement with Nationwide By Owner, Inc. (“Nationwide”), a Texas based company engaged in the business of marketing real property for sale by owners and others.  In the course of its business, Nationwide operates a proprietary system which produces a database of sales leads containing home buyer and home seller information for persons seeking financing on the purchase or refinancing of real property. The license agreement permits us exclusive use of the database which we use to generate leads for the origination of mortgage applications for submission to us.  We have also agreed to establish a national processing center to expand nationally the collection, organization and tracking of sales leads obtained from the database.  We have agreed with Nationwide to delay the establishment of the processing center until Nationwide secures a national marketing agreement. Nationwide is involved in multiple discussions to accomplish this in the next year.

 
16

 
 
At the present time we have no record of how many mortgage loan applications are received.  Each branch office maintains its own record-keeping system for applications and whether to retain this information or not.  During the years ended June 30, 2009 and 2010, we closed 909 loans and 890 loans, respectively. The slight decrease in production during the year ended June 30, 2010 was due to the extreme changes in the mortgage market environment during the fiscal year. The Company increased its loan production by closing 497 loans during the six month period ended December 31, 2010 as compared to closing 477 loans during the comparable prior year period. This resulted in a slight increase due to our branches closing loans due to the low interest rate environment that existed in the market place.

The branches were compensated by receiving 80% percent of the commission earned on each loan they originate in cash and 10% in our common shares through most of fiscal year ended June 30, 2010. Management made the decision to offer a program to charge a flat fee of $500 to be paid to us for our services for each closed conventional loan, and $550 for each government loan as a compensation option. The majority of the branch offices have adopted the compensation plan by June 30, 2010. An increase in branch production increases our revenue. Increases in production through adding branches or increasing the production of existing branches further increase our revenue. We continue to recruit new branches and work with existing branches to increase their production.

We have failed to generate a profit for the fiscal years ended June 30, 2010 and 2009 and for the six months ended December 31, 2010.  Management believes the primary reason for the losses over the past few years was that after the decision was made to take the company public through a reverse acquisition in 2005, five of the top producing branch offices banded together and demanded more ownership and a more beneficial split in revenue.  Management made the decision not to negotiate to the demands of five top producing branches and agreed to let these branches leave the network. Our reduction in revenue was the primary reason of the extensive losses from 2007 through 2009. By the beginning of fiscal year 2010, we had positioned ourselves with enough branches to reflect profits; however the market took a dramatic historical turn for the worse. Mortgage brokers and lenders across the country took an extraordinary hit because few people were willing to consider refinancing or purchasing a home. This over-reaction continued to have a negative impact on mortgage originations over the winter of fiscal year ended June 30, 2010. A recovery began to take place in the final quarter of fiscal year ended June 30, 2010, and we reflected a profit in that final quarter.

As a result of the new flat fee program that is in place, the increased number of branch offices that have joined the network over the past couple of years, and the slight recovery in the mortgage origination industry, management believes that we will continue towards the profitability trend in the fiscal year ending June 30, 2011. For the three months ended December 31, 2010, we recorded $1,243,410 in revenues and earned a net profit of $30,307.

Operating expenses consist primarily of commissions paid to independent brokers on mortgage loans generated by us or our branch offices, development costs associated with adding new branch offices and servicing existing branch offices, legal and professional fees related to us becoming a public company, and the costs of putting on our annual convention.  The annual convention provides training for branch owners and markets our company to potential branch owners that attend. Overhead expenses include wages, rent of office space, and other administrative expenses.  Licensing costs to conduct business in each state are included in taxes and licenses.

From time to time management has been engaged in preliminary discussions with a potential merger candidate in this industry. On June 14, 2010, we signed a Letter of Intent (the “LOI”) to acquire CBB, Inc. (“CBB”), an Oklahoma based management company, that operates a successful regional mortgage banking firm in the Southwest. The LOI expired on September 30, 2010. We have continued in preliminary discussions to negotiate a potential transaction with CBB and others but have not entered into another letter of intent or definitive agreement.

On October 19, 2010, we filed a registration statement on Form S-8 with the Securities and Exchange Commission to register the remaining 1,634,587 unissued shares in our 2002 Stock Option/Stock Issuance Plan.

On October 20, 2010, we filed a post-effective amendment to our S-1 registration statement which deregistered 991,600 shares of common stock from registration which remained unsold at the end of the offering represented by this registration statement.

 
17

 
 
Results of Operations

Our consolidated results of operations for the three month and six month periods ended December 31, 2010 and 2009 include the operating results of our wholly-owned subsidiary PrimeSource Mortgage, Inc.
 
We reported a net profit of $30,307 for the three month period ended December 31, 2010 and a net loss of $17,825 for the six months ended December 31, 2010 compared to a net loss of $96,479 and $240,374 for the same periods ended December 31, 2009. The decrease in loss was principally attributable to the increase in loan production during the three month and six month periods ended December 31, 2010 as compared to the comparable period of 2009. Starting July 2010, we made the decision to offer a flat fee of $500 to be paid to us for our services for each loan conventional loan closed and $550 for each government loan closed. This resulted in a reduced brokerage commission expense payable to our branches. In addition, we made a concerted effort to manage our selling, general and administrative expenses during the three month and six month periods ended December 31, 2010 as compared to the same comparable periods in 2009. The increase in revenues and decrease in expenses is more fully explained below.
 
Revenues

Our total revenues increased by $316,798 or 34% to $1,243,410 for the three month period, and by $551,305 or 30% to $2,414,314 for the six month period ended December 31, 2010, as compared to the same periods in 2009 (the “comparable prior year period”). Our revenues for the three month and six month periods ended December 31, 2010 increased primarily due to a net increase of four branches in operation and as a result closing 497 loans during the six month period ended December 31, 2010 as compared to 477 loans closed for the comparable prior year period.  Some of the existing branches also increased their production during this time period as their businesses matured. Management believes adding strong producing branches is a viable way to continue to increase revenues. Presently, our network can expect to add 10 to 15 producing offices without an appreciable increase in expenses.

Operating Expenses
 
Our total operating expenses increased by $195,432 or 19% to $1,219,472 for the three month period and by $344,537 or 16% for the six month period ended December 31, 2010, as compared to the comparable prior year period. The overall increase in operating expenses for the three month and six month period ended December 31, 2010 included (i) an increase of $160,291 or 20% for the three month period and an increase of $280,574 or 17%  in brokerage commissions earned by branches due to the increase in branch revenues during the three month and six month periods ended December 31, 2010, as compared to the comparable prior year periods, and (ii) an increase in our selling, general and administrative expenses of $35,467 or 18% for the three month period and $64,289 or 15% for the six month ended December 31, 2010 as compared to the comparable prior year period. The increase in the three month and six month period was primarily due to an increase in brokerage commissions, professional and legal fees, and consulting fees when compared to the prior comparable period. Operating expenses as a percentage of revenues were 98% and 101% for the three month and six month period ended December 31, 2010 as compared to 111% and 113% for the comparable prior year periods.
 
Non-operating income (expense)

Our total non-operating income increased by $5,421 and $15,781 for the three month and six month periods ended December 31, 2010, as compared to the comparable prior year periods. This overall increase during the three month and six month periods ended December 31, 2010 was primarily due to the increase in other income from receiving sponsorship funding from the vendors for the Company’s 2011 Annual Conference compared to the comparable prior year period.

Other comprehensive income or loss

Our unrealized loss on marketable securities for the three month and six month periods ended December 31, 2010 was $0 and $2,666 as compared to unrealized gain of $3,287 and $13,620 for the comparable prior year periods. Unrealized gains and losses resulted due to the increase and decrease in the market value of the marketable securities held at December 31, 2010 and 2009, respectively. We did not own any marketable securities at December 31, 2010.
 
 
18

 
 
Liquidity and Capital Resources

Our cash and cash equivalents were $122,774 at December 31, 2010. As shown in the accompanying consolidated financial statements, we recorded a net loss of $17,825 for the six month period ended December 31, 2010, compared to a net loss of $240,374 for the comparable prior year period. Our current assets exceeded our current liabilities by $25,666 at December 31, 2010, and our net cash provided by operating activities for the six month period ended December 31, 2010 was $35,783. We expect to open ten additional branches during the current fiscal year (four of which have opened since July 1, 2010), while our existing branches continue to strengthen and mature due to the upcoming recovery in mortgage business. In order to expand our business we may need to sell additional shares of our common stock or borrow funds from private lenders. Although we were successful in executing two warehouse lines of credit for $4 million and $1 million for the interim funding to close customer loans, we have no present agreements or arrangements to secure additional funding for customer loans and/or funding for expansion or operations.

Operating Activities

Net cash provided by operating activities for the six month period ended December 31, 2010 was $35,783 resulted primarily due to a decrease in accounts receivable of $84,448, a decrease in prepaid expenses of $60,000, a decrease in other current assets of $5,452, a decrease in accounts payable of $159,062 and a decrease in accrued liabilities of $22,523. We experienced a net loss of 17,825 for the six month period ended December 31, 2010 as compared to a net loss of $240,374 for the comparable prior period. The reduction in loss was primarily attributable due to (i) the increase in revenues as a result of increase in branches and by charging override commission on the warehouse line of credit on loans closed on the line, (ii) the Company offering flat fee brokerage commission upon closing of the loans, and (iii) the Company making a concerted effort to control its selling, general and administrative expenses.  

Investing Activities

Net cash provided by investing activities for the six month period ended December 31, 2010, was $31,228 as a result of net cash of $32,812 realized from the sale of marketable securities and cash used to purchase property and equipment of $1,584. We do not currently have material commitments for capital expenditures and do not anticipate entering into any such commitments during the next twelve months.
 
Financing Activities

Net cash used in financing activities for the six month period ended December 31, 2010 was $20,000 consisting of cash payments made against the loan outstanding to the related party.

As a result of the above activities, we experienced a net increase in cash of $47,011 for the six month period ended December 31, 2010. The President and the Chairman of the Board of Directors have provided support to fund our operations with cash in the past but are not obligated to do so in the future.  We believe our success is dependent upon  opening new branches, maturing the business of existing branches, capitalizing on the leads from NWBO and closing them into mortgage loans, and obtaining additional financing from financial institutions and from investors through the sale of our securities.

Critical Accounting Policies and Estimates

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

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

Share Based Payment Plan

Under the 2002 Stock Option/Stock Issuance Plan, the Company can grant stock or options to employees, related parties, and unrelated contractors in connection with the performance of services provided to the Company by the awardees.  The Branch Owner Stock Program provides for issuance of stock to branch owners for outstanding performance.  The Company uses the fair value method to account for employee stock compensation costs and to account for share based payments to non-employees.

Revenue Recognition

Our revenue is derived primarily from revenue earned from the origination of mortgage loans that are funded by third parties. We have a network of independently owned branch offices that originate mortgage loans from which we receives either a flat fee or a percentage of the fees earned by the branch when a mortgage loan is closed or funded. Revenue is recognized as earned on the later of the settlement date or the funding date of the loan.

We record revenue for the fees charged to new branches when they sign up to join our network. We generated less than 1% of total revenues, from fees charged to new branch offices for joining our network during the three month and six month periods ended December 31, 2010 and 2009.

The Company charges an override fee on the warehouse line of credit on loans closed on the line. The revenue is recognized as earned on the earlier of the settlement date or the funding date of the loan.

Recent Accounting Pronouncements

The Company has evaluated the possible effects on it financial statements of the following accounting pronouncements:

In April 2010, the FASB issued ASU No. 2010-13, “Compensation – Stock Compensation”.  This update will clarify the classification of an employee share based payment award with an exercise price denominated in the currency of a market in which the underlying security trades.  This update will be effective for the first fiscal quarter beginning after December 15, 2010, with early adoption permitted.  The Company does not expect the provisions of ASU 2010-13 to have a material effect on the Company’s consolidated results of operations or financial condition.

Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required under Regulation S-K for “smaller reporting companies.”
 
 
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Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.
 
 We maintain “disclosure controls and procedures,” as such term is defined in Rules 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

As of December 31, 2010, Jeffrey R. Smith, our principal executive and financial officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, Mr. Smith concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in our periodic reports is recorded, processed, summarized and reported, within the time periods specified for each report and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting.

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes. There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In September 2010 we issued 18,930 shares to our branch owners under our Commission Plan B program which represented commissions earned for the quarter ended June 30, 2010.  This offering was terminated effective December 31, 2010. These shares were issued without registration under the Securities Act by reason of the exemption from registration afforded by the provisions of Section 4(2) thereof, and Rule 506 promulgated thereunder, as a transaction by an issuer not involving any public offering.  There were a total of one accredited investor and three sophisticated investors as defined Regulation D.  Each investor delivered appropriate investment representations with respect to these issuances and consented to the imposition of restrictive legends upon the stock certificates representing the shares.  Each investor represented that he or she had not entered into the transaction with us as a result of or subsequent to any advertisement, article, notice, or other communication published in any newspaper, magazine, or similar media or broadcast on television or radio, or presented at any seminar or meeting.  Each investor was provided a private placement memorandum containing information required pursuant to Regulation D.  Each participant was also afforded the opportunity to ask questions of our management and to receive answers concerning the terms and conditions of the transaction.  No underwriting discounts or commissions were paid in connection with the stock sale.

 
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During the three months ended December 31, 2010 we issued 5,000 shares to a consultant for performing consulting services for our Company.  We issued 5,000 shares under our 2002 Stock Option/Stock Issuance Plan (the “Plan”) to Deb Erickson for performing business advisory and consulting services. These shares were issued without registration under the Securities Act by reason of the exemption from registration afforded by the provisions of Sections 4(2) thereof, and Rule 506 promulgated thereunder, as a transaction by an issuer not involving any public offering.  Ms. Erickson was not an accredited investors as defined in Regulation D but had access to information normally provided in a prospectus. She delivered appropriate investment representations with respect to this issuance and consented to the imposition of restrictive legends upon the stock certificates representing the shares.  Ms. Erickson represented that she had not entered into the transaction with us as a result of or subsequent to any advertisement, article, notice, or other communication published in any newspaper, magazine, or similar media or broadcast on television or radio, or presented at any seminar or meeting.  She was also afforded the opportunity to ask questions of our management and to receive answers concerning the terms and conditions of the transaction.  No underwriting discounts or commissions were paid in connection with the stock sale.
 
Item 6. Exhibits
 
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
     
31.2
 
Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
     
32.1
 
Certification of Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
SIGNATURES

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

 
PSM HOLDINGS, INC.
 
       
Date: February 11, 2011
By:
/s/ JEFFREY R. SMITH
 
   
Jeffrey R. Smith, President
Chief Executive and Principal Financial Officer
 
 
 
 
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