ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS As used herein the term "DFRC" or the "Company" refers to Diversified Financial Resources Corporation, its subsidiaries and predecessors, unless indicated otherwise. DFRC was incorporated in the State of Delaware on January 6, 1993, as Vaxcel, Inc. On December 19, 2000, DFRC changed its name to eLocity Networks, Inc. On August 6, 2002, DFRC changed its name to Diversified Financial Resources Corporation. DFRC currently has four organized subsidiary corporations, Diversified Holdings XIX, Inc., International Natural Resources Corp., Wichita Development Corporation, and Wichita Properties, Inc.
On August 8, 2005, Diversified Financial Resources Corp., a Delaware company, on behalf of it and its subsidiaries (the "Company") entered into a Stock Purchase and Release Agreement, as amended (the "Agreement"), with Diversified Holdings I, Inc., a Nevada corporation, West Jordan Real Estate Holdings, Inc., a Utah corporation and Hudson Consulting Group, Inc., a Nevada corporation (collectively, the "Purchaser"), whereby Diversified Holdings I would acquire the Company's interest in its majority-owned subsidiary, Salt Lake Development Corporation ("SLDC"). SLDC was the owner of a two story building of 15,000 square feet located at 268 West 400 South in Salt Lake City, Utah.
In exchange for the interest in SLDC, Purchaser agreed to (1) release the Company from principal and interest owed on promissory notes in the amounts of $230,000 and $150,000, (2) release the company from debts owed to it and its affiliates in the amount of $10,528 and (3) pay the Company $20,000 cash. The Company also retained the right to all proceeds and rights of a promissory note in the amount of $116,977.00 made payable to SLDC or its assigns, arising from the sale or transfer of four condominium units located in the City of Ogden, State of Utah.
Forward Looking Statements
The information herein contains certain forward looking statements. Investors are cautioned that all forward looking statements involve risks and uncertainty, including, without limitation, the ability of the Company to continue its expansion strategy, changes in the real estate markets, labor and employee benefits, as well as general market conditions, competition, and pricing. Although the Company believes that the assumptions underlying the forward looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward looking statements included in the Form 10-QSB will prove to be accurate. In view of the significant uncertainties inherent in the forward looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved.
General
DFRC currently operates as a Real Estate Holdings Company and Natural Resources. DFRC intends to scale back its real estate and other business development investigations or operations and focus on acquiring oil and gas operations and mining operations.
Real Estate Investments
The Company is actively pursuing the sale of its remaining real estate properties. As of September 30, 2005, the following properties were sold.
On May 10, 2005, the Company, through its subsidiary, Salt Lake Development Corp., entered into an agreement to sell its four condo units located in Ogden, UT for a purchase price of $140,000. Of this amount, $7,000 will be paid in cash at the closing, $20,400 is credited back to the buyer for the assumption of certain liabilities and closing costs, and the Company will finance the remaining balance of $112,600 over 30 years at 7.5% interest per annum. The entire unpaid balance of principal and interest is due 24 months from the date of the note. The transaction closed on July 22, 2005, consistent with all material aspects of the sale agreement.
On June 28, 2005, the Company, through its subsidiary, Diversified Holdings XIX, Inc., entered into an agreement to sell its residential property located in Murray, UT for a purchase price of $100,000. The transaction closed on July 27, 2005, and the Company received $94,000 after closing costs.
As reported in its Form 8-K filing dated November 2, 2005, on August 8, 2005, Diversified Financial Resources Corp., a Delaware company, on behalf of it and its subsidiaries (the "Company") entered into a Stock Purchase and Release Agreement, as amended (the "Agreement"), with Diversified Holdings I, Inc., a Nevada corporation, West Jordan Real Estate Holdings, Inc., a Utah corporation and Hudson Consulting Group, Inc., a Nevada corporation (collectively, the "Purchaser"), whereby Diversified Holdings I would acquire the Company's interest in its majority-owned subsidiary, Salt Lake Development Corporation ("SLDC"). SLDC was the owner of a two story building of 15,000 square feet located at 268 West 400 South in Salt Lake City, Utah.
In exchange for the interest in SLDC, Purchaser agreed to (1) release the Company from principal and interest owed on promissory notes in the amounts of $230,000 and $150,000, (2) release the company from debts owed to it and its affiliates in the amount of $10,528, and (3) pay the Company $20,000 cash. The Company also retained the right to all proceeds and rights of a promissory note in the amount of $117,000 made payable to SLDC or its assigns, arising from the sale or transfer of four condominium units located in the City of Ogden, State of Utah.
On September 29, 2005, the Company, through its subsidiary, Diversified Holdings XIX, Inc., sold a duplex located on South 565 East in Salt Lake City, UT to an unaffiliated purchaser. Proceeds from this sale after closing amounted to $89,000.
Land and Natural Resources
Mining interests. The Company signed agreements in 2004 with professionals to seek out the potential development of mining opportunities within the Country of Mexico. The Company hired professionals to locate resources and available mining claims, to prepare documents to make claims, and to perform other due diligence procedures. The Mexican mining interests are more fully set forth and described in the Company's 10-KSB/A report for the fiscal year ended December 31, 2004, filed on April 25, 2005.
At the current time, all options held by the Company to acquire mining interests in Mexico have expired of their own terms. All activities related to acquiring mining interests in Mexico were curtailed and abandoned during the second quarter of 2005.
Oil and gas interests. On September 30, 2005, the Company entered into an Investment Agreement with Sigma Energy and Exploration, whereby the Company invested $40,000.00 in an interest in Shannon GG Lease Wells 2 & 3. Pursuant to this Agreement, after certain exploration activities, Sigma will assign the Company an undivided 5.3333/32nds (11.359% net) interest in the wells, which includes a 68% net revenue interest in the property. No assignments will be given for dry holes. This investment and the sale of the Company's properties over the last two quarters reflects the Company's revised business plan, which includes moving from a real estate holding company to oil and gas investments.
The Company is currently analyzing other gold and silver mining opportunities, as well as oil and gas opportunities.
Results of Operations
The following discussion and analysis should be considered in light of recent changes in management and operational focus, and should be read in conjunction with the Financial Statements and other disclosures in Form 10KSB/A for the year ended December 31, 2004.
Continuing operations
During the three months ended September 30, 2005 and 2004, the Company had no revenues from continuing operations. During the nine months ended September 30, 2005, the Company had no revenues from continuing operations compared to $13,000 for the 2004 period. The Company is selling its real estate holdings and investing in oil and gas properties, and revenues from continuing operations have yet to be established.
During the three months ended September 30, 2005, the Company's general and administrative expenses were $112,000, representing a $939,000 decrease from the same period in 2004, when general and administrative expenses were $1.1 million. In 2005, and especially in the second quarter, the Company reduced its use of consultants and trimmed its work force. These actions significantly reduced general and administrative expense, and account for $298,000 of the decrease in general and administrative expense for the quarter. The Company also expensed $300,000 and $305,000 in the 2004 period for Director's fees and the SEC settlement, respectively, and the Company did not incur these expenses in the 2005 period which accounts for the remainder of the decrease in general and administrative expense for the 2005 period.
During the nine months ended September 30, 2005, the Company's general and administrative expenses were $752,000, representing a $3.5 million decrease from the same period in 2004, when general and administrative expenses were $4.3 million. In the first quarter of 2004, the Company issued 30,000,000 million restricted common shares to John Chapman for services rendered, and recorded $2.4 million of expense. There was no such stock compensation in the current period. The reduction in the work force accounts for $610,000 of the decrease in general and administrative expense for the 2005 period compared to the 2004 period. The Director's fees were $21,000 for the 2005 period, compared to $300,000 for the 2004 period, resulting in a $279,000 decrease in general and administrative expense for the 2005 period. The Company recorded $26,000 related to the SEC settlement in the 2005 period, compared to $305,000 in the 2004 period, resulting in a $279,000 decrease in general and administrative expense for the 2005 period.
During the three months ended September 30, 2005, the Company did not incur any expenses related to the mining activity in Mexico. During the nine months ended September 30, 2005, the Company incurred expenses related to the mining activity in Mexico totaling $197,000. The Company began incurring expenses related to the mining activity in Mexico during the fourth quarter of 2004. All activities related to acquiring mining interests in Mexico were curtailed and abandoned during the second quarter of 2005 when the Company was not able to make the $500,000 payment required pursuant to the agreements.
During the three months ended September 30, 2005, the Company's net loss from continuing operations was $84,000, representing a $1.0 million improvement from the same period in 2004, when the net loss from continuing operations was $1.1 million. During the nine months ended September 30, 2005, the Company's net loss from continuing operations was $962,000, representing a $3.5 million improvement from the same period in 2004, when the net loss from continuing operations was $4.5 million. The net loss from continuing operations in the 2004 periods included the loss on the trustee sale of a commercial building of $273,000. The improvement in the 2005 net loss from continuing operations for both periods, excluding the loss on property sale, comes from lower general and administrative expenses, which were offset by the increase in expenses related to the mining activity in Mexico.
Discontinued operations
The net income from discontinued operations during the three months ended September, 30, 2005 was $771,000, compared to a net loss from discontinued operations of $20,000 for the 2004 period. The net income from discontinued operations during the nine months ended September 30, 2005 was $715,000, compared to a net loss from discontinued operations of $86,000 for the 2004 period. The Company sold its Salt Lake Development subsidiary, and three of its residential properties during the three months ended September 30, 2005, and recorded a gain of $844,000 on these sales. The Company has two more residential properties that are for sale.
Liquidity and Capital Resources
As of September 30, 2005, the Company had current assets of $114,000 compared to current assets of $431,000 as of December 31, 2004. During the nine months ended September 30, 2005, we collected the receivables from employees of $141,000, collected the receivable from Finance 500 of $27,000, redeemed our money market funds of $55,000, and used existing cash balances and proceeds from the sale of properties to help fund operations during the period.
We had a working capital deficit of $2.2 million as of September 30, 2005, compared to a working capital deficit of $1.8 million as of December 31, 2004. The working capital deficit increased because the purchase price payable of $1.0 million is now classified as current pursuant to the terms of the agreement, and this was offset by the reduction in notes payable associated with the sale of the Salt Lake Development subsidiary. The lines of credit are classified as current liabilities at September 30, 2005 and December 31, 2004, due to our inability to make timely monthly payments.
Total stockholders' deficit was $1.9 million as of September 30, 2005, compared to $2.1 million as of December 31, 2004, and the improvement is the net effect of the current loss from operations and the gain on the sale of the properties in discontinued operations.
Net cash flows used by continuing operating activities were $491,000 for the nine months ended September 30, 2005, compared to $829,000 for the same period in 2004. The decrease in cash flows used by continuing operating activities in the current period relates to our limited use of consultants and work force reduction and our attempt to control all costs.
Net cash flows provided by continuing investing activities were $39,000 for the nine months ended September 30, 2005, compared to net cash flows used for continuing investing activities of $5,000 for the same period in 2004. The increase of net cash flows provided by continuing investing activities relates primarily to our liquidation of money funds, which we used to fund operations in 2005.
Net cash flows provided by continuing financing activities were $123,000 for the nine months ended September 30, 2005, compared to net cash flows provided by continuing financing activities of $876,000 for the same period in 2004. We had more option activity in 2004 than in 2005, resulting in decreased cash flows in the current period.
Due to our debt service on the remaining real estate holdings and anticipated expenses related to other operating activities, we may experience cash flow shortages throughout 2005. We plan to raise additional funds through the sale of common stock or issuance of debt to fund such shortages. Our ability to raise additional funds in the future is uncertain, and we may be forced to curtail certain activities if we are not successful in raising additional funds.
Ability to continue as a going concern
Our ability to continue as a going concern is in doubt. We incurred a loss from continuing operations of approximately $962,000 for the nine months ended September 30, 2005; had an accumulated deficit of approximately $20.9 million at September 30, 2005; and had a stockholders' deficit of approximately $1.9 million at September 30, 2005.
To date, we financed operations primarily through the issuance of common stock, and more recently through the proceeds from the sale of certain real estate properties. The common stock issuances were made either pursuant to the exercise of stock options or the issuance of stock for services.
We will need to substantially increase operating income, and raise significant additional capital to continue as a going concern. There is no assurance that we will be able to increase operating income or raise additional capital in order to continue as a going concern over the next 12 months. See Note 2 to the financial statements.
Other
On June 13, 2005, Diversified Financial Resources Corp. entered into a fee agreement for legal services. Pursuant to this agreement, the company issued 20,000 shares of common stock (when adjusted for the 2,000 to 1 reverse stock split on August 25, 2005) and options to purchase 1,000,000 shares of common stock at an exercise price of $.05 per share. These options expire Dec. 31, 2010.
-------------------- money for nothing!!
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