We lease approximately 1,800 square feet of office space located at 3400 West MacArthur Blvd, Suite I, Santa Ana, CA 92704 for our principal executive office. This lease extends through April 2010 and is currently at $1,200 per month. The Company expects that the current leased premises will be satisfactory until the future growth of its business operations necessitates an increase in office space. There is an ample supply of office space in the Orange County, California area and we do not anticipate a problem in securing additional space if necessary.
The following selected financial data for the fiscal years ended November 30, 2009, 2008, and 2007 are derived from our audited financial statements. The results of operations for past accounting periods are not necessarily indicative of the results to be expected for any future accounting period. The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our financial statements and the related notes.
Targeted Customers: A majority of rental property owners rely on FICO credit scores to approve or deny their new applicants, and once a tenant has a blemish on their credit history it can be a struggle to improve their score and qualify for a lease. Our customers are renters with imperfect credit that don't meet the strict requirements for a typical apartment application because of their low FICO scores. Our proprietary underwriting techniques allow the company to determine which applicants are likely to become financially responsible tenants, despite their inability to meet the necessary FICO requirements for a particular rental property. There are a variety of factors that can contribute to a rental applicant's negative FICO score including divorce, personal bankruptcy, or late bill payments. And often times just one of these factors can negatively affect someone's FICO score for years and make it extremely difficult to gain approval on a lease agreement for a rental property. We recognize that this score does not necessarily reflect the most current or accurate financial picture of a potential tenant, or their ability to pay the rent each month.
Operations: Our revenue comes from the collection of the application fee, and the monthly recurring service fee paid by approved customers currently living in rental housing. The application fee is $100 and the monthly service fee is 10% of a customer’s monthly rent plus $20. The applicant is responsible for paying rent to the property owner, and our service fee is collected directly from the applicant’s credit or debit card account on the 1st of each month. After one year, the applicant’s payment history is reviewed to determine if a cosigner is still necessary, or if we will continue to retain the applicant for another 12 months with a new fee structure reflecting a reduced or elevated concern of the applicant’s financial situation. We currently have 139 approved customer accounts that we collect a service fee from each month, and new applications have increased by 15% monthly since the start of 2009. The twelve month average of new monthly applications exceeded 48 at $100 each as of the date hereof. Our total revenue has increased an average of 22% per month since November of 2008 and figures in recent months have exceeded 12%. We have developed and refined proprietary underwriting techniques to greatly reduce the risk of default among approved applicants.
Competition: We believe we are the first to market the business model of providing cosigning services for rental applicants, and have a trademark with the United States Patent and Trademark Office. Specifically, the trademark is a service mark that protects the name of WECOSIGN™ as being the first company that was engaged in providing cosigning services to tenants on a nationwide basis. Although there are no barriers to entry to compete with us, our management is not aware of and our customers and Affiliates have not informed us of any competition currently providing cosigning services similar to ours.
Revenue Recognition: We generate revenue through subscriptions and recognize revenue in accordance with Accounting Standards Codification (“ASC”) 605, formerly Staff Accounting Bulletin No. 104, Revenue Recognition, which superseded Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. ASC 605 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Application fees received from customers during the underwriting process are fully refundable if the application is denied; such fees are included in the guarantee liability. Also upon closing, the Company records a receivable for the required payments due under the contract with a corresponding increase in the guarantee liability, which represents our stand-ready obligation. Additionally, all application fees are also recorded as a stand-ready obligation. Revenues are recorded when the four conditions are met, which is based on the period the guarantee lapses. When a tenant defaults and ceases to pay its monthly fees, revenue recognition is ceased and provision for loss is evaluated. If additional liability is required, we charged the expected loss to expense.
Long-lived Assets: We continually monitor and review long-lived assets, including fixed assets and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The determination of recoverability is based on an estimate of the cash flows expected to result from the use of an asset and its eventual disposition. The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance, growth rates and other factors. If the sums of the cash flows are less than the carrying value, we recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset.
Upon incorporation, we adopted ASC 740-10-55, formerly FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes,” which prescribes a comprehensive model for the financial statement recognition, measurement, classification and disclosure of uncertain tax positions. The adoption and continued application did not have an impact on the Company’s financial statements.
Guarantees: The Company provides guarantees to landlords on behalf of their tenants. Such guarantees generally cover the monthly rent payable by the tenant. The Company’s exposure to credit loss, in the event of nonperformance by the tenant, is represented by the amounts stipulated in the rental contract. Commitments made by the Company to guarantee lease agreements are first approved through an underwriting process which is there to mitigate the risk of nonpayment by a tenant. The Company’s guarantees generally have fixed expiration dates which mirror the tenant’s lease term which range from six months to a year. Since many of the guarantees are expected to expire without being drawn upon, the total guarantee amounts do not represent future cash requirements. The Company evaluates each customer’s credit and payment worthiness on a case-by-case basis. The landlord does not pay the Company a fee for the guarantee. Fees paid by tenants to the Company consist of up-front $100 application fee, a monthly service fee of $20, and a recurring monthly fee over the guarantee period, which is based on 10% of the monthly lease cost to the tenant. Application fees paid are fully refundable by the Company in the event an application is denied.
When we provide a guarantee to the landlord, we record the receivable for the payments to be received by us from the tenant. We view this as our stand-ready obligation, which we believe represents the estimated fair value of such guarantees. Additionally, all application fees are also recorded as a stand-ready obligation. Changes in fair value of these guarantees will be recorded in operations. We immediately charge-off all specific leases that have defaulted as an operating expense. Additionally, at the end of the reporting period, we comply with the guidance in ASC 450-20-25 (formerly SFAS 5) and ASC 460-10 (formerly FIN 45) by reviewing all of our tenants under contract to determine if there is a probable chance of a default, and if so, provide a reasonable estimate for losses.
Stock-Based Compensation: We follow ASC 718 Compensation - Stock Compensation, formerly SFAS No. 123(R), which establishes standards for the accounting of all transactions in which an entity exchanges its equity instruments for goods or services, including transactions with non-employees and employees. ASC 718 requires an entity to measure the cost of non-employee and employee services received in exchange for an award of equity instruments, including stock options, based on the grant date fair value of the award, and to recognize it as compensation expense over the period service is provided in exchange for the award, usually the vesting period. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our statement of operations. Our accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of ASC 718 (Emerging Issues Task Force (“EITF”) 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”). The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor's performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the service period.
Fees Paid to Affiliates: As of December 30, 2008, the Company began paying a $30 finder’s fee to affiliates for each approved application they refer to the Company. In addition, the Company pays the Affiliate 10% of each established monthly fee that is received from the tenant. Fees paid to Affiliates amounted to approximately $1,864 during the twelve months ended November 30, 2009 and were expensed as Cost of Revenue since they were deemed insignificant. However, prospectively such costs will be capitalized and amortized over a period which is expected to be consistent with the related tenant revenue earned.
The Company reported a net loss of $663,911 or $.01 per common share, for 2009, which included gross profit of $38,470. As of November 30, 2009, the Company’s accumulated deficit totaled $924,726. During the fiscal year 2009, the Company used $528,908 of cash for operations. At February 22, 2010, we had cash and cash equivalents of approximately $107,000 and accounts payables of approximately $25,000. We will continue to review and evaluate various marketing strategies to increase sales and other alternatives to streamline our operations, improve efficiencies and reduce costs.
General and Administrative: Our general and administrative professional fees of $243,280 during the twelve months ended November 30, 2009, primarily consisted of fees incurred in connection with preparing the Company’s registration statement. During the twelve months ended November 30, 2009, professional fees consisted of $88,000 to Triton Capital for investment banking services, and $65,000 in cash and $25,000 in common stock to Anslow & Jaclin, LPP for legal services rendered. Additional professional fees paid during the fiscal year ending November 30, 2009 amounting to approximately $56,000 for audit and review services. Our general and administrative consisted of allocated salaries of approximately $281,000. Additional amounts primarily consisted of supplies, depreciation, allocated rent and utilities. The total general and administrative increase of $472,942, or 323%, between the twelve months ended November 30, 2009 the same period in 2008 was primarily attributable to the increase in expense due to fees incurred in connection with preparing the Company’s registration statement and the commencement of operations.
Sales & Marketing: Our Sales & Marketing expense of $79,774 during the twelve months ended November 30, 2009, primarily consisted of allocated payroll, marketing, supplies, and allocated rent. The increase of $57,833, or 264%, between the twelve months ended November 30, 2009 the same period in 2008 was primarily attributable to the increase in staffing due to the commencement of operations.
Cash used in investing activities was $34,185 for the twelve months ended November 30, 2009 compared to $11,567 for the same period in 2008. Investing cash flows for both periods reflect primarily purchases of capital assets, such as furniture and fixtures, used in our operations.
Contractual Obligations and Contingent Liabilities and Commitments: The Company leases its facility under non-cancelable operating lease arrangements for office space to serve as its corporate office in Santa Ana, California. The lease will expire at April 29, 2010 and has a rental rate of approximately $1,200 per month. The lease agreement required a security deposit of $1,200. The following table summarizes future minimum payments for this lease as of November 30, 2009:
The financial statements required by this item are included in Part IV, Item 15 of this Annual Report on Form 10-K and are presented beginning on page.