20-F/A 1 v182036_20-fa.htm Unassociated Document
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 (Mark one)
FORM 20-F/A
(Amendment No. 1)

¨
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
 

OR

þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
     
 
For the fiscal year ended December 31, 2009.
 

OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
     
 
For the transition period from __________ to ___________
 

OR

¨
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
     
 
Date of event requiring this shell company report: ________________
 

Commission file number:  001-34149

DJSP Enterprises, Inc.

(Exact name of the Registrant as specified in its charter)

British Virgin Islands

(Jurisdiction of incorporation or organization)

900 South Pine Island Road, Suite 400
Plantation, Florida 33324

(Address of principal executive offices)

Kumar Gursahaney; Tel: (954) 233-8000 ext. 2024; Fax: (954) 233-8570
900 South Pine Island Road, Suite 400; Plantation, Florida 33324
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)
 

 
Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of Each Class
Name of each exchange on which registered
   
UNITS, EACH CONSISTING OF
 
ONE ORDINARY SHARE
 
AND ONE WARRANT
The NASDAQ Stock Market LLC
   
ORDINARY SHARES
The NASDAQ Stock Market LLC
   
WARRANTS TO PURCHASE
 
ONE ORDINARY SHARE
The NASDAQ Stock Market LLC

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report (December 31, 2009):  9,166,666 ordinary shares.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 
  o Yes
  x No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 
  o Yes
 x No

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 12 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.

 
x Yes
o No

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
o Yes
o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

o  Large Accelerated filer
o  Accelerated filer
x  Non-accelerated filer
 

 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

x  US GAAP
o  International Financial Reporting Standards as issued by the International Accounting Standards Board
o  Other
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 
  o Item 17
o Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 
  o Yes
   x No



EXPLANATORY NOTE

This Amendment No. 1 on Form 20-F/A (the “Amendment”) amends the annual report of DJSP Enterprises, Inc. (the "Company") on Form 20-F for the year ended December 31, 2009 as filed with the Securities and Exchange Commission (“SEC”) on April 2, 2010 (the “Annual Report”).  The purpose of this Amendment is to respond to comments made by the SEC during their review of the Annual Report and the Company’s registration statement on Form F-1 as filed with the SEC on February 16, 2010, as follows:

 
·
Item 3.  Key Information: The Company has revised its disclosure in section D. Risk Factors, including the first and  fourth risk factors on page 1 .

 
·
Item 5. Operating and Financial Review and Prospects: The Company has revised its disclosure to, among other things, reflect segment reporting in the Company’s financial statements and changes to the Unaudited Pro Forma Condensed Combined Financial Statements.

 
·
Item 15. Controls and Procedures: The Company has revised its disclosure, including to add a description of  the report of management on internal control over financial reporting for Chardan 2008 China Acquisition Corp. as of December 31, 2009.

 
·
Item 18. Financial Statements: The Company has revised the Audited Combined Carve-Out Financial Statements of DJS Processing Division and its Combined Affiliates to, among other things,  reflect segment reporting in the Company's financial statements .

We are also updating Exhibits 12.1, 12.2, 13.1 and 13.2.

Other than as expressly set forth above, this Form 20-F/A does not, and does not purport to, amend, update or restate the information in any other Item of the Form 20-F filed on April 2, 2010, or reflect any events that have occurred after the Form 20-F was filed.

Any forward-looking statements included in this 20-F/A represent management’s view as of the filing date of the original 20-F.  Such forward-looking statements include, but are not limited to, statements regarding our or our management’s expectations, hopes, beliefs, intentions or strategies regarding periods after the date of the filing of the original 20-F and are identified by words such as words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” and similar expressions, but the absence of these words does not mean that a statement is not forward-looking.  Such forward-looking statements should not be assumed to be accurate as of any future date, including the date hereof.  Accordingly, this 20-F/A should be read in conjunction with the “Risk Factors” and the other statements contained in the original 20-F and the Company’s other filings made with the SEC subsequent to the filing date of the original 20-F.

These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements described in or implied by such statements.  Actual results may differ materially from expected results described in our forward-looking statements, including with respect to correct measurement and identification of factors affecting our business or the extent of their likely impact, the accuracy and completeness of the publicly available information with respect to the factors upon which our business strategy is based or the success of our business.

There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors” in this 20-F/A and the other statements contained in the original 20-F and the Company’s other filings made with the SEC subsequent to the filing date of the original 20-F.  Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements.  We do not undertake, and expressly disclaim, any obligation to update or alter any statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
 

 
TABLE OF CONTENTS

 
  PART I
PAGE
ITEM 3.
KEY INFORMATION
1
     
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
9
     
     
 
PART II
 
     
ITEM 15.
CONTROLS AND PROCEDURES
26
     
 
PART III
 
     
ITEM 18.
FINANCIAL STATEMENTS
F-1
     
ITEM 19
EXHIBITS
27
     
 
SIGNATURES
35





A.  Selected Financial Data
 
The following tables present selected financial data regarding the business of the DJS Processing Division and its combined affiliates.  The financial data below represent a “carve out” of the DJS Processing Division from DJS combined with the accounts of PTA and DSI as of and for the years ended December 31, 2009, 2008, 2007 and 2006 and have been derived from audited financial statements.  The financial data as of and for the year ended December 31, 2005 are not presented in the tables below because there are no selected financial statements of DJS Processing Division and its combined affiliates prior to 2006 and, therefore, the financial data for 2005 cannot be provided without unreasonable effort or expense.  The financial data below are only a summary and should be read in conjunction with, and are qualified in their entirety by, “Item 5. Operating and Financial Review and Prospects – DJS Processing And Combined Affiliates – Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the combined financial statements and notes thereto, included elsewhere in this Report.  The combined carve-out financial statements are prepared and presented in accordance with U.S. GAAP.  The financial statements contained elsewhere fully represent the financial condition and operations of DJS Processing Division and its combined affiliates; however, they are not necessarily indicative of our future performance.

Prior to January 15, 2010, the Company was a shell company, and therefore had only nominal assets and no revenue.  There are significant differences between the Company’s business prior to the Transaction, and the business of the DJS Processing Division and its combined affiliated operating companies prior to the Transaction.  Financial data for the operation of the DJS Processing Division and its combined affiliates are presented below because, after the Transaction, they represent all of our operations.

DJS PROCESSING DIVISION AND ITS COMBINED AFFILIATES
  
Selected Financial Data

   
As of December 31,
 
Combined Carve-Out Balance Sheets
 
2009
   
2008
   
2007
   
2006
 
Cash and cash equivalents
 
$
763,387
   
$
1,427,588
   
$
978,766
   
$
69,889
 
Client reimbursed costs receivable
   
6,046,760
     
26,147,837
     
15,585,345
     
4,189,833
 
Total current assets
   
33,924,395
     
50,640,222
     
35,075,548
     
7,307,063
 
Total assets
   
38,615,915
     
53,794,845
     
37,800,142
     
8,726,110
 
Total current liabilities
   
24,236,337
     
25,679,169
     
12,399,408
     
3,537,489
 
Total liabilities
   
25,595,763
     
26,329,196
     
12,655,383
     
3,694,199
 
Total shareholder's and member's equity
   
13,020,152
     
27,465,649
     
25,144,759
     
5,031,911
 
 
   
For the Years Ended December 31,
 
Combined Carve-Out Statements of Income
 
2009
   
2008
   
2007
   
2006
 
Revenue
 
$
260,268,847
   
$
199,202,701
   
$
115,500,349
   
$
40,392,317
 
Operating expenses:
                               
Client reimbursed costs
   
139,059,336
     
92,319,306
     
47,613,198
     
16,802,800
 
Compensation related expenses
   
50,085,039
     
44,356,093
     
20,268,283
     
11,006,660
 
Direct operating expenses and general and administrative expenses
   
25,435,754
     
19,078,472
     
8,668,430
     
3,811,153
 
Depreciation expense
   
1,123,564
     
594,156
     
277,926
     
193,133
 
Total operating expenses
   
215,703,693
     
156,348,027
     
76,827,837
     
31,813,746
 
Operating Income
   
44,565,154
     
42,854,674
     
38,672,512
     
8,578,571
 
Other Income
   
312
     
31,677
     
16,328
     
 
Net income (1) (2)
 
$
44,565,466
   
$
42,886,351
   
$
38,688,840
   
$
8,578,571
 

  
(1)
The DJS Processing Division and its combined affiliates have no discontinued operations; therefore, Net Income has been provided in lieu of income from continuing operations.
 
  
(2)
Ordinary shares outstanding (actual and diluted) and per share data (basic and diluted) of the DJS Processing Division and its combined affiliates have been omitted because of differences in capital structure of those entities and the Company.  Presenting such data in this report is not particularly helpful and could be misleading to readers.
  
B.  Capitalization and Indebtedness

Not required.

C.  Reasons for the Offer and Use of Proceeds

Not required.
 
1

 
D.  Risk Factors
 
An investment in our shares involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this Report, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our shares could decline, and you may lose all or part of your investment.
 
Risks Related to our Business
 
David J. Stern, our President and Chief Executive Officer, is also the sole owner of Law Offices of David J. Stern, P.A. (“DJS”), which is our primary law firm customer, and he may, under certain circumstances, have interests that differ from or conflict with the interests of our shareholders.

David J. Stern, our President and Chief Executive Officer, is the sole shareholder of DJS, which is our primary law firm client. Revenues from this relationship account for approximately 94%, 97% and 98% of our total revenues for the years ended December 31, 2009, 2008 and 2007, respectively.  As a result of this relationship with both us and DJS, Mr. Stern may encounter conflicts of interest in the execution of his duties on behalf of us. These conflicts may not be resolved in a manner favorable to us. For example, he may be precluded by his ethical obligations as an attorney or may otherwise be reluctant to take actions on our behalf that are in our best interests but are not in the best interests of DJS, or its clients. Further, as a licensed attorney, he may be obligated to take actions on behalf of DJS or its clients that are not in our best interests. Mr. Stern has other direct and indirect relationships with us that could cause similar conflicts including as our largest creditor. See Note 2 to the consolidated financial statements of the operating subsidiaries for a description of these relationships.
 
David J. Stern plays a critical role in our success and the success of DJS. Should Mr. Stern become incapacitated or die, it is likely that our business and results would be adversely affected to a significant degree.

Although we and DJS each have substantial management teams that are capable and experienced, the majority of the client relationships of DJS and our customer relationships were established and continue to be managed by Mr. Stern.  If Mr. Stern becomes unable to perform his duties under his employment agreement or dies, it is possible that the client relationships of DJS, and therefore the volume of referrals that we receive from DJS, would suffer, materially reducing our revenues and profitability.

Mr. Stern received a significant amount of cash consideration in connection with the Transaction, which may reduce his incentive to devote his full efforts to continue to develop and expand our business and the business of DJS.

Under the terms of the Transaction, Mr. Stern and his affiliates received approximately $58.5 million in initial cash in exchange for contributing their business to DAL, plus another approximately $88 million in the Stern Deferral Note (defined herein) and post-closing cash. Those amounts will be paid to the contributors of the business acquired by DAL (DJS, PTA, DSI and David J. Stern (“Stern,” together with DSI, PTA and DJS the “Stern Contributors”)) regardless of how we perform. Although he also has a substantial equity stake in DAL, which gives him an incentive to improve our operations, there can be no assurance that he will do so, or that his efforts to do so, however diligent, will succeed.

Mr. Stern has recommended four members of our Board of Directors, and Mr. Stern’s affiliates may accelerate the maturity date of indebtedness due to him upon his removal as CEO of the Company or DAL, which may make it difficult or impossible to remove him as CEO of the Company or DAL, even if that were considered desirable.

We agreed to have Mr. Stern propose four of seven directors for election by our shareholders.  In the event that Mr. Stern does not diligently and faithfully discharge his responsibilities as CEO of the Company or DAL, the fact that he chose four of our directors may make taking disciplinary action against him difficult, if not impossible, notwithstanding that all of the directors will have fiduciary duties to our shareholders to do so. In such a case, the only recourse available to our shareholders may be to bring an action against the directors for breach of their fiduciary duty, but as with any litigation, it can be costly, time-consuming and drawn out, and there is no assurance that it would succeed.

In addition, the involuntary termination of Mr. Stern by the Company or DAL is an event of default under the terms of the Stern Deferral Note and $35 million of post-closing cash due to affiliates of Mr. Stern, permitting Mr. Stern’s affiliates to accelerate the due date of such obligations.  As a result, the Company could not involuntarily terminate Mr. Stern’s employment as CEO of the Company or DAL unless it is able to repay in full these obligations.

If the number of case files referred to us by DJS, which is our principal foreclosure processing service law firm client, do not increase, our operating results and ability to execute our growth strategy could be adversely affected.

We have one law firm customer in Florida, DJS. Each foreclosure, bankruptcy, eviction, litigation, and other mortgage default related case file referred to DJS will typically have a fixed fee associated with it that is based on a schedule established by government sponsored entities, such as Freddie Mac and Fannie Mae. We are paid a fixed fee by DJS for the services we render to DJS. Therefore, the success of our mortgage default processing services business is tied to the number of these case files that DJS receives from its mortgage lending and mortgage loan servicing firm clients and our ability to control costs. There is little or no opportunity for us to increase revenues on a per file basis unless the fee schedule that DJS has with its clients is adjusted upward. Such upward adjustments may or may not keep pace with increases in our costs. Because DJS receives a fixed fee from its clients, it has limited financial ability to pay increased fees to us. As a result, if the number of referrals that we receive through DJS decreases, it would likely result in a decrease in our revenues and profits.
 
2


The majority of file referrals to DJS come from fewer than a dozen lenders and loan servicing firms. If DJS were to lose any of these sources of business, in whole or in part, it would adversely affect our financial performance.

In 2009, the top ten clients for DJS, on an aggregate basis, accounted for 89.5% of case files referred to DJS for mortgage default and other processing services, and its largest single customer accounted for 30% of DJS’ total foreclosure file volumes for the same period. Our operating results and ability to execute our growth strategy could be adversely affected if (i) our current law firm customer, DJS, loses business from these clients; (ii) these clients are affected by changes in the market and industry or other factors that render them unable to pay for the services we have rendered; or (iii) our law firm customer is unable to attract additional business from current or new clients for any reason, including any of the following: a decline in the quality of legal services provided, the loss of key attorneys (such as David J. Stern, who has developed and maintains a substantial amount of DJS’ client relationships), the desire of the law firm’s clients to allocate files to other firms or among a larger number of firms, decreasing the share received by DJS, or a decrease in the number of residential mortgage foreclosure actions that customers initiate in Florida, our principal market, whether due to business considerations or governmental action impeding foreclosures. The reduction in work received from DJS or the inability or failure of DJS to pay us as a result of any one or more of these factors could materially reduce our cash flow, revenues and profits. Please refer to the risk factors below for more information about governmental or other voluntary action on the part of the clients of DJS that could negatively affect us.
 
We could lose our law firm customer if we materially breach the Services Agreement.

Under the terms of the Services Agreement between us and DJS, DJS has the right to terminate the Services Agreement in the event we breach the terms of that agreement. DJS may have an ethical duty to take such action if we do not provide services of a quality necessary for DJS to properly serve its clients. In addition, under the Services Agreement, if one of DJS’ clients requires DJS not to use us to provide services for their accounts, DJS may provide those services itself or use another party to do so. In the event of the occurrence of any of these events, our revenues and earnings could be materially adversely affected.

Regulation of the legal profession may constrain our operations, and numerous issues arising out of that regulation, its interpretation or evolution could impair our ability to provide professional services to customers and reduce revenues and profitability.

Each state has laws, regulations and codes of professional responsibility that govern the conduct and obligations of attorneys to their clients and the courts. Adherence to those codes of professional responsibility is a requirement to retaining a license to practice law in the licensing jurisdiction. The boundaries of the “practice of law,” however, can be indistinct, vary from one state to another and are the product of complex interactions among state law, bar association standards and constitutional law as formulated by the U.S. Supreme Court. Many states define the practice of law to include the giving of advice and opinions regarding another person’s legal rights, the preparation of legal documents or the preparation of court documents for another person. Although we are not aware of any ruling or interpretation of laws, regulations or other applicable standards that would result in the operations that we perform being considered the practice of law, we cannot say with certainty that no existing law, regulation or standard will be interpreted to produce that result, or that a new law, regulation or standard leading to that result will not be adopted in the future. In addition, all states and the American Bar Association prohibit attorneys from sharing fees for legal services with non-attorneys, so that if any aspect of our business is deemed to constitute the practice of law, it would not be possible for us to continue performing those services.

Our principal business activity involves providing foreclosure processing services, usually in connection with legal proceedings, such as foreclosure actions. Current laws, regulations and codes of professional responsibility governing the practice of law pose the following principal risks to our business:
 
·  
State or local bar associations, state or local prosecutors or other persons may claim that some portion of the services that we provide constitutes the unauthorized practice of law. Any such challenge could have a disruptive effect on our operations, including the diversion of significant time and attention of our senior management in order to respond. We may also incur significant expenses in connection with such a challenge, including substantial fees for attorneys and other professional advisors. If a challenge to the legitimacy of all or a portion of our operations were successful, such operations may need to be modified in a manner that could adversely affect our business, revenues and profitability, and we could be subject to a range of penalties and suffer damage to our reputation.
 
·  
The Services Agreement between us and DJS could be deemed to be unenforceable, in whole or in part, if a court were to determine that such agreements constitute an impermissible fee sharing arrangement between the law firm customer and us.
 
In addition, applicable laws, regulations and codes of professional responsibility, including their interpretation and enforcement, could change in a manner that restricts our operations. Any such change in laws, policies or practices could increase our cost of doing business or adversely affect our revenues and profitability.

3

 
Failure to customize the proprietary case management software system so that it can be used to serve additional law firm customers both in Florida and in new jurisdictions, could adversely affect the growth prospects of our mortgage default processing service business.

We rely heavily on a proprietary case management software system, which stores, manages and reports on the large amount of data associated with each foreclosure, bankruptcy, real estate owned liquidation or eviction case file we process, to achieve a high level of efficiency, accuracy and customer service. The system was initially developed for use in the state of Florida, and it is adapted specifically to the procedural requirements of that jurisdiction. We intend to expand our business beyond Florida, and in order to do so profitably, we will need to modify our system to accommodate the specific procedural and legal requirements associated with those additional jurisdictions. While the system we use in foreclosures processed in Puerto Rico was modified, whether the system can be modified to conform to other jurisdictions at an acceptable cost is unknown. That will depend on how significant the needed changes are and whether we can develop a volume of business in those jurisdictions that will justify the cost of making them.

We may decide to enter into a service agreement with customers in other jurisdictions prior to modifying our software systems, based on a judgment that we can do so in a timely, effective and efficient manner to fulfill our contractual obligations. It is possible that our judgment will turn out to be incorrect, notwithstanding that it was made in good faith, in which case we could find that we are unable to provide the services that we agreed to provide or that we are unable to do so profitably. If we are unable to provide the agreed upon services in a timely and effective way, the harm to our business reputation may adversely affect our business in Florida or in other markets that we seek to enter, both reducing our revenues and profits from those other jurisdictions and making future expansion more difficult.

In addition, Florida is a “judicial” foreclosure state, which means that the foreclosure process is overseen at each step by a judge in a court of law. The processing services required, and the fees generated as a result, in a judicial state are significantly greater than those in a non-judicial state, which has minimal, if any, proceedings in a court of law in processing a foreclosure. If we choose to market our services in a non-judicial state, the revenue per file will be substantially less than we are currently generating in Florida, and that decreased revenue per file may prove not to be sufficient to justify the expense of modifying our software systems to expand our business into those jurisdictions.
 
Claims, even if not valid, that the case management software system or other proprietary software products and information systems infringe on the intellectual property rights of others could increase our expenses or inhibit our business from offering certain services.

Other persons could claim that they have patents and other intellectual property rights that cover or affect our use of software products and other components of information systems on which we rely to operate our business, including the proprietary case management software system that we use to provide mortgage default processing services. Litigation may be necessary to determine the validity and scope of third-party rights or to defend against claims of infringement. Any litigation, regardless of the outcome, could result in substantial costs and diversion of resources and could have a material adverse effect on our business. If a court determines that one or more of the software products or other components of information systems used infringe on intellectual property owned by others or we agree to settle such a dispute, we may be liable for money damages. In addition, we may be required to cease using those products and components unless we obtain licenses from the owners of the intellectual property or redesign those products and components in such a way as to avoid infringement. In any event, such situations may increase our expenses or adversely affect our ability to provide services.
 
We are subject to risks relating to litigation due to the nature of our products and service offerings.

We may, from time to time, be subject to or be named as a party in legal proceedings in the ordinary course of our mortgage default processing business. We could incur significant legal expenses and management’s attention may be diverted from operations in defending against and resolving lawsuits or claims. An adverse resolution of any future lawsuits or claims against us could result in a negative perception of our business and cause the market price of our ordinary shares to decline or otherwise have an adverse effect on our operating results and growth prospects.

4

 
The Transaction may not be treated as a reverse recapitalization, resulting in adverse consequences to our financial statements.

We have accounted for the Transaction as a reverse recapitalization of the businesses operated by DJS LLC, PTA LLC and DSI LLC. However, this accounting treatment is dependent on a number of factors that we believe result in this transaction being considered a reverse recapitalization, that may be subsequently determined to have been improperly considered by management or outweighed by other factors. If our auditors or the SEC determine that the Transaction was not a reverse recapitalization, our financial results could be significantly impacted because we would have increased future amortization and depreciation charges for certain assets acquired in the Transaction with fair values in excess of their carrying values, which could reduce our profits.

Risks Relating to the Mortgage Foreclosure Industry

State and federal regulation and limitation of lenders’ ability to pursue foreclosure actions, along with voluntary foreclosure relief programs developed by lenders, loan servicers and the Hope Now Alliance, a consortium that includes loan servicers, may have an adverse effect on the volume of our mortgage default processing services and public notice operations.

The prevalence of sub-prime, Alternative A paper mortgage and other non-traditional mortgage products, rising unemployment and the increasing number of defaults and delinquencies in connection with those and other mortgages have led to the adoption of governmental regulations that incentivize lenders and loan servicers not to pursue, or restrict the ability of lenders and loan servicers to pursue, foreclosure against defaulting mortgagors. While the effects of these regulations to date have not been substantial, if new or more stringent regulations are enacted, the clients of DJS would likely be subject to these regulations, and it could adversely affect the number of mortgage default files that DJS receives from its clients and can then refer to us for processing. Similarly, these new or more stringent regulations could impose new requirements on the processing of foreclosures, which could adversely affect when foreclosure referrals are sent to us for processing. The federal government has enacted the Housing and Economic Recovery Act of 2008, which contains reforms intended to reduce the volume of mortgages in foreclosure, including the development of a refinance program for homeowners with sub-prime loans. This refinance program took effect on October 1, 2008. In September 2008, the federal government also enacted the Economic Emergency Stabilization Act, which provides funding to purchase troubled assets from financial institutions.

More recently, the federal administration announced the Homeowner Affordability and Stability Plan, an attempt to address the continuing rise in mortgage delinquencies and mortgage defaults. Under this plan, the federal government set forth detailed requirements for the “Making Home Affordable” program, which offers qualified homeowners with a loan-to-value ratio above 80% the opportunity to apply for mortgage refinancing at lower interest rates. The “Making Home Affordable” program also provided loan modification guidelines that are expected to become standard industry practice in pursuing affordable and sustainable mortgage modifications. The loan modification program guidelines are expected to work in tandem with an expanded Hope for Homeowners program. If this legislation or any other bills being considered, including the proposed bankruptcy legislation that would allow bankruptcy judges in Chapter 13 cases to revise the terms of a mortgage on a primary residence, are successful, they will likely reduce the number of mortgages going into default and, thus, the number of mortgage default files that DJS or other customers refer to us for processing. If either of these occurs, it could have a negative impact on our earnings and growth.

Furthermore, a number of lenders and loan servicers, including clients of DJS, are focusing greater attention on loss mitigation, loan modifications and similar efforts which may delay or prevent foreclosures. For example, programs have been announced to manage certain delinquent loans that banks hold in a manner that will attempt to avoid foreclosure. To the extent that lenders, loan servicers and others over whom we have no control, voluntarily, or are required to, continue these efforts, the number of files referred to DJS for mortgage default processing, and the number of foreclosure files referred to us, could decline, which would have a negative impact on our revenue and earnings. You should also refer to “Item 5. Operating and Financial Review and Prospects – DJS Processing Division and Combined Affiliates – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments – Regulatory Environment” for more information about regulatory and similar changes that could affect the volume of referrals we receive for our mortgage default processing services.

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Changes in court practices or procedures may affect the filing and service requirements for case filings or may reduce or eliminate the amount of case filings, either of which could adversely affect our revenues, profitability and growth opportunities or adversely restrict our operations.

Florida and other jurisdictions are facing unprecedented levels of foreclosure activity in recent years, which has led to a substantial burden on the court systems in those states. It is possible that those jurisdictions, in order to relieve that burden and eliminate what has become a growing backlog of cases, will adopt modifications to their foreclosure proceedings to streamline them. Should they do so, it could reduce the amount of fees that we receive per file, thus leading to a reduction in our revenues and profits, even if foreclosure volumes remain constant or even increase.

If “judicial” foreclosure states adopted “non-judicial” procedures for filing foreclosures, mortgage foreclosure processing firms operating in “judicial” states would be materially and adversely affected. “Judicial” foreclosure states require foreclosures to follow a set of rules, compliance with which is overseen by a judge in a court of law. The level of processing fees associated with a foreclosure in a judicial state is significantly greater than would be expected in a non-judicial state. Should Florida (or another judicial state in which we choose to operate) choose to adopt a non-judicial mortgage foreclosure process in order to expedite the processing of foreclosures, it would result in a substantial reduction in the revenues derived from that jurisdiction, with an accompanying reduction in profits.

Risks Related to Our Structure

Our outstanding warrants could decrease our share price.

If our outstanding warrants are called or exercised, the underlying ordinary shares will be eligible for future resale in the public market. “Market overhang” from the warrants may cause investors to assume that there will be additional ordinary shares outstanding that were purchased at the warrant exercise price, which  will likely be below our then current  share price. That possibility could reduce the market price of our ordinary shares, even prior to a call of the warrants.
 
We have 11,166,666 warrants outstanding which were issued prior to and in connection with our initial public offering, exercisable at a price of $5.00 per share. Those warrants are now exercisable and 6,875,000 of them (the “Public Warrants”) will be callable at a price of $0.01 per warrant and upon thirty (30) days’ notice if the closing price of our shares equals or exceeds $10 for 20 out of 30 consecutive trading days. The shares underlying these 6,875,000 warrants have been registered pursuant to our registration statement filed in connection with our IPO. In the event that the Public Warrants are called, all or nearly all of them are likely to be exercised. Another 2,291,666 warrants issued prior to our IPO are not subject to a call. If any of our warrants are exercised or called, a substantial number of additional ordinary shares will be eligible for resale in the public market. Those additional shares will have been purchased at a price of $5.00, and as a result, the exercise or the prospect of the exercise or call of these warrants may reduce the market price at which our ordinary shares trade.

Immediately prior to the consummation of our initial public offering, we issued 2,000,000 warrants at a price of $0.50 to our management and their affiliates (the “Private Placement Warrants”). The Private Placement Warrants were issued on terms equivalent to those of the Public Warrants, except that (i) the Private Placement Warrants are not callable; and (ii) the Private Placement Warrants contain a “cashless” or “net” exercise provision, which allows the holders of the Private Placement Warrants to exercise them by receiving a reduced amount of our shares compared to a “cash” exercise of the warrants, in exchange for not having to pay the $5.00 exercise price. The exact terms of the cashless exercise will depend on the share price of our shares. The Company filed a registration statement on Form F-1 with the SEC on February 12, 2010 to register both the Private Placement Warrants and the shares underlying the Private Placement Warrants.  This registration statement is not yet effective. The prospect that those warrants may be exercised for $5.00 may reduce the market price at which our ordinary shares trade.

In order to generate additional cash for payment of the note issued in connection with the Transaction, certain of the holders of the Private Placement Warrants have agreed to exercise or sell those warrants to third parties who agree to exercise them beginning on the later of six months following the closing of the transaction or the date that the warrants and the shares underlying them are covered by an effective resale registration statement and provided that our ordinary shares are trading at or above $9.00. In exchange for their agreement to do so, the holders of those warrants will receive, in the aggregate, 233,010 ordinary shares. As a result of this agreement, the time at which the Private Placement Warrants will be exercised may be accelerated, thus causing the increase in the number of our issued and outstanding shares to occur at an earlier time than might otherwise have happened.
 
The 2,291,666 of our units purchased prior to our initial public offering (the “Insider Units”), each consisting of one ordinary share and one warrant to purchase one of our ordinary shares for $5.00, along with the Private Placement Warrants, are currently held in escrow. The Insider Units will be released from escrow on January 15, 2011 (i.e., one year after the closing of the Transaction). If the Public Warrants have not been called or exercised prior to that time, the release of these shares from escrow will increase our public “float” by approximately 33%, which may cause a decrease in our share price.
 
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Exchange rights held by the holders of DAL’s membership interests could reduce the market price of our ordinary shares.

The members of DAL, other than the Company, do not hold a direct ownership interest in the Company. However, the 2,700,000 DAL Common Units and 1,666,667 DAL Series A Preferred Units that they hold are exchangeable into our shares commencing one year after the Transaction was consummated (i.e., January 15, 2011).  In addition, they hold DAL Series B Preferred Units, which automatically convert into 3,900,000 additional DAL Common Units, which in turn are exchangeable for 3,900,000 ordinary shares of the Company, if the market value of the company’s ordinary shares exceeds set prices between $10.00 and $20.00 per share prior to January 15, 2015.  The exchange of the DAL Units for our shares will increase our public “float,” which may cause a decrease in our share price.
 
Risks to Our Shareholders
 
If our outstanding warrants are exercised, the underlying ordinary shares will be eligible for future resale in the public market.  “Market overhang” from the warrants as a result of that potential dilution could reduce the market price of the ordinary shares.

Outstanding warrants and unit purchase options to purchase an aggregate of 11,441,000 ordinary shares issued in connection with our initial public offering and the private placement that took place immediately prior to the initial public offering became exercisable after the Transaction on January 15, 2010.  If they are exercised, a substantial additional number of our ordinary shares will be eligible for resale in the public market, which may reduce the market price.

Because we do not intend to pay dividends on our ordinary shares, shareholders will benefit from an investment in our ordinary shares only if they appreciate in value.
 
We have never declared or paid any cash dividends on our ordinary shares. We currently intend to retain all future earnings, if any, for use in the operations and expansion of the business. As a result, we do not anticipate paying cash dividends in the foreseeable future. Any future determination as to the declaration and payment of cash dividends will be at the discretion of our Board of Directors and will depend on factors the Board of Directors deems relevant, including among others, our results of operations, financial condition and cash requirements, business prospects, and the terms of our credit facilities and other financing arrangements. Accordingly, realization of a gain on shareholders’ investments will depend on the appreciation of the price of our ordinary shares. There is no guarantee that our ordinary shares will appreciate in value.
 
We may choose to redeem our outstanding warrants at a time that is disadvantageous to our warrant holders.
 
Subject to there being a current prospectus under the Securities Act of 1933, as amended, with respect to the ordinary shares issuable upon exercise of our warrants, we may redeem our warrants issued as a part of our units at any time after such warrants become exercisable, in whole and not in part, at a price of $.01 per warrant, upon a minimum of 30 days’ prior written notice of redemption, if and only if, the last sales price of our ordinary shares equals or exceeds $10.00 per ordinary share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. In addition, we may not redeem the warrants unless the warrants and the ordinary shares underlying those warrants are covered by an effective registration statement from the beginning of the measurement period through the date fixed for the redemption. In order to accelerate the payment of the receiving cash owed to the Stern Contributors, we have agreed to call our warrants as soon as the conditions for doing so are met.
 
Redemption of the warrants could force the warrant holders: (i) to exercise the warrants and pay the exercise price at a time when it may be disadvantageous for the holders to do so, (ii) to sell the warrants at the then-current market price when they might otherwise wish to hold the warrants, or (iii) to accept the nominal redemption price which, at the time the warrants are called for redemption, is likely to be substantially less than the market value of the warrants. We expect most purchasers of our warrants will hold their securities through one or more intermediaries and consequently holders of warrants are unlikely to receive notice directly from us that the warrants are being redeemed. Holders who fail to receive notice of redemption from a third party, and whose warrants are redeemed for nominal value, will not have recourse to us.

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Risks Related to Our Corporate Structure
 
Prior to the Transaction, Chardan 2008 had not had operations, and DAL had not operated as a public company.  Fulfilling DAL’s obligations incident to being a public company will be expensive and time consuming.
 
Prior to Chardan 2008’s acquisition of DAL on January 15, 2010, Chardan 2008 had not had operations, and DAL had not operated as a public company. Each of Chardan 2008 and DAL have maintained relatively small finance and accounting staffs. Neither Chardan 2008 nor DAL currently has an internal audit group. Although Chardan 2008 has maintained disclosure controls and procedures and internal control over financial reporting as required under the federal securities laws with respect to its very limited activities, it has not been required to maintain and establish these disclosure controls and procedures and internal control as will be required with respect to businesses such as DAL with substantial operations. Under the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the U.S. Securities and Exchange Commission (“SEC”), the Company will need to implement additional corporate governance practices and adhere to a variety of reporting requirements and complex accounting rules. Compliance with these obligations will require significant management time, place significant additional demands on our finance and accounting staffs and on our financial, accounting and information systems, and increase our insurance, legal and financial compliance costs. We may also need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge.
 
We may qualify as a passive foreign investment company, or “PFIC,” which could result in adverse U.S. federal income tax consequences to U.S. investors.
 
In general, we will be treated as a PFIC for any taxable year in which either (1) at least 75% of our gross income (looking through certain 25% or more-owned corporate subsidiaries) is passive income or (2) at least 50% of the average value of our assets (looking through certain 25% or more-owned corporate subsidiaries) is attributable to assets that produce, or are held for the production of, passive income. Passive income generally includes, without limitation, dividends, interest, rents, royalties, and gains from the disposition of passive assets. If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder (as defined in the section of this Report in Item 10(E) captioned “Taxation – United States Federal Income Taxation – General”) of our ordinary shares or warrants, the U.S. Holder may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements. Based on the expected composition of our assets and income for the 2010 taxable year, we do not expect to be treated as a PFIC for our 2010 taxable year. However, our actual PFIC status for our 2010 taxable year or any subsequent taxable year will not be determinable until after the end of such taxable year. Accordingly, there can be no assurance as to our status as a PFIC for our 2010 taxable year or any future taxable year. U.S. Holders of our ordinary shares or warrants are urged to consult their own tax advisors regarding the possible application of the PFIC rules. See the discussion in Item 10(E) entitled “Taxation – United States Federal Income Taxation – Passive Foreign Investment Company Rules.”
 
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ITEM 5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
DJS Processing Division and Combined Affiliates - Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

DJSP Enterprises, Inc. (f/k/a Chardan 2008 China Acquisition Corp.) is a British Virgin Islands company limited by shares, that was incorporated on February 19, 2008, organized as a blank check company for the purpose of acquiring, engaging in a merger or share exchange with, purchasing all or substantially all of the assets of, or engaging in a contractual control arrangement or any other similar transaction with an unidentified operating business.

On August 11, 2008, we consummated our initial public offering, generating gross proceeds of $55,000,000 and net proceeds of $52,200,000.  The net proceeds were deposited into a trust account.

On January 15, 2010, we acquired a controlling interest in DAL Group, LLC (“DAL”).  Concurrently with the Transaction, we consummated a private placement of 1,500,000 ordinary shares of the Company for aggregate gross proceeds of $10,500,000, which proceeds, together with the cash in the trust account, were used to pay a portion of the Transaction consideration and related expenses.

DAL’s business is comprised of DJS Processing, LLC, a limited liability company organized under the laws of the State of Delaware (“DJS LLC”), Professional Title & Abstract Company of Florida, LLC, a limited liability company organized under the laws of the State of Delaware (“PTA LLC”) and Default Servicing, LLC, a limited liability company organized under the laws of the State of Delaware (“DSI LLC”), each of which is engaged in providing non-legal services supporting residential real estate foreclosure, other related legal actions and lender real estate owned (“REO”) services.  Each of DJS LLC, PTA LLC and DSI LLC were formed in Delaware on September 15, 2009 for the specific purpose of receiving the contribution of the assets used in providing non-legal services from businesses founded by David J. Stern (i.e., Stern Holding Company – PT, Inc. (f/k/a Professional Title and Abstract Company of Florida, Inc.) (“PTA”), Stern Holding Company – DS, Inc. (f/k/a Default Servicing, Inc.) (“DSI”) and Law Offices of David J. Stern, P.A. (“DJS”)).

In connection with the Transaction, DJS, PTA and DSI contributed DJS LLC, PTA LLC and DSI LLC, respectively, to DAL in exchange for cash, a promissory note, an obligation for a post-closing cash payment and a minority interest in DAL.  The members of DAL prior to the Transaction also retained a minority interest in DAL.

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In connection with the Transaction, DJS LLC entered into a long-term exclusive Services Agreement with DJS under which it will have the right to perform all non-legal services required to process foreclosure files and perform ancillary services.  Pursuant to a facilities sharing agreement, DJS LLC will furnish corporate and back-office services to DJS, such as finance, accounting, IT and other administrative functions.  DJS LLC will be the exclusive processing firm for all business undertaken by DJS, and DJS will be precluded from pursuing any material business not requiring the use of DJS LLC’s processing capabilities, subject to limited exceptions.  However, DJS LLC will not be restricted from pursuing business with other law firms, whether in Florida or other jurisdictions.  All of our revenues from foreclosure services are derived from this Services Agreement.  PTA LLC provides title searches and examinations related to services provided by DJS and defendant location services to third party processors engaged by DJS.  DSI LLC provides REO liquidation related services directly to customers.  Currently, DSI LLC provides such services nationwide for a single customer.

We generate revenue by charging for the services performed by our three operating subsidiaries as described above, each of which is a separate reportable segment. See Note 10 to Notes to the Combined Carve-out Financial Statements of DJS Processing Division and Combined Affiliates. The revenues generated from our foreclosure services, conducted through DJS LLC, are directly related to the volume of mortgage foreclosures being referred to DJS which, in turn, is directly related to the number of foreclosures occurring in our principal market of Florida.  This volume varies based on a number of factors including general economic conditions as well as government sponsored programs to reduce mortgage foreclosures which are discussed below.  Virtually all of our title related services, conducted through PTA LLC, are performed in connection with the foreclosure files we process; therefore, the revenues we receive for title related services are also directly related to the volume of mortgage foreclosures in our principal market.  The revenues generated by our REO liquidation services, conducted through DSI LLC, are related to the volume of REO business referred to us by our sole customer.  As with the other services we provide, this volume is directly related to the volume of real estate foreclosures in our primary market as well as real estate foreclosures nationwide as our REO liquidation business also handles transactions related to real estate foreclosures outside of our primary market.

Initially, we believe our opportunities for future growth will come from increases in foreclosure volumes in Florida and an increase in files referred to our primary client, DJS, by its clients.  Because the average cycle time on a foreclosure file, except cases that are fully litigated, ranges from 220 to 240 days, with approximately half of the revenue earned within the first month after the referral, and the remainder near the end of the process, the number of current referrals is an indicator of revenue levels for the following year, with high levels of file referrals indicative of strong revenues.  We are currently forecasting foreclosure volumes and file referrals to increase for at least the next few years.  As a result of DJS’ position as a leading residential foreclosure law firm, it now participates in two “direct source” programs and seeks to increase that number in the future.  These programs permit DJS to capture more file referrals and ancillary services from its clients.  We also believe there are opportunities for the growth of our business in Puerto Rico as a result of increased referrals to DJS from its existing clients and increase our file volumes and the capacity of DJS’ referral law firm in Puerto Rico to handle significant additional volume.  In addition, we intend to offer our REO liquidation services to additional customers, who are already using DJS for their foreclosures.  We do not believe that pursuing these opportunities will require significant additional investments by us.

We look to adapt our infrastructure platform to support foreclosure servicing in other states and expand our business into those states.  The cost to do so will vary from state to state and we have not yet developed specific estimates of such costs.  We may enter new states through acquisitions of existing processing businesses operating in those states.  These activities may require significant investments by us, although  initially we believe we can fund those from our operating cash and, in the case of acquisitions, through issuances of our equity.

On a longer-term basis, we also see opportunities for growth by expanding the services we offer to include others related to the foreclosure industry such as publication, document retrieval, lien searches, automotive default services and foreclosure services for commercial real estate mortgages.  A possible long-term challenge we face is to expand into counter-cyclical markets before there is a cyclical decline in foreclosure volumes.  Our long-term plans; therefore, could include plans to enter the counter-cyclical markets such as providing mortgage origination services. We are currently reviewing the development of a national title insurance platform, which could allow us to expand our service offerings in that area beyond those supporting our foreclosure processing services and into new counter-cyclical markets, such as mortgage origination.  Each of these activities would likely represent new service offerings for us, requiring us to develop new processes and procedures to provide these services or to acquire businesses already providing them.  Such activities could require significant investments by us.

Because of the preliminary nature of our consideration of these growth initiatives, the amount of such investments is not known, nor do we know whether we can fund these investments from our operating cash flows or would have to seek debt financing from third parties.  Any such debt financing, if available to us on reasonable terms, would have to be approved by our existing lenders.

The following discussion and financial information reflects the combined carve-out performance of the DJS Processing Division, PTA and DSI for the periods presented, each of which ended prior to the Transaction.  For 2009, total revenues increased $61.1 million, or 30.7%, from $199.2 million for 2008.  The total revenues of $260.3 million for 2009 primarily resulted from an increase in the number of mortgage foreclosures taking place in the principal market of the business, Florida, and as a result of the expansion of REO activities of DSI.

 
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Recent Developments

Regulatory Environment
 
Federal, state and local governments have recently proposed, and in some cases enacted, legislation or have taken other action that may have an adverse impact on the number of mortgage defaults that go into foreclosure, and therefore on the number of case files referred to DJS for processing. The federal government enacted the Hope for Homeowners Act of 2008 and the Emergency Economic Stabilization Act to bring relief to distressed homeowners and provide funds to troubled financial institutions, respectively. The Federal Housing Finance Agency, Fannie Mae and Freddie Mac announced the Streamlined Modification Program, which is designed to make mortgage payments more affordable, and Fannie Mae announced the temporary suspension of foreclosure sales. Further, various lender and mortgage servicers have voluntarily focused their attention on loss mitigation, loan modification and similar efforts, including moratoria on certain foreclosure sales, in an attempt to reduce the number of mortgage defaults and resulting foreclosures.
 
These programs have met with limited success to date, based on, among other things, the fact that they only reduce the interest to be paid by borrowers, not principal owed. While addressing affordability in the near-term, they do not address the willingness to continue to pay a mortgage on a property that has negative equity, nor does it deal with the inability to pay as a result of unemployment or other factors.
 
The Obama administration also proposed a $75 billion Mortgage Modification Plan in March 2009 for borrowers facing foreclosure. The Home Affordable Refinance Program (“HARP”) is meant to help homeowners who have an existing mortgage owned by Fannie Mae or Freddie Mac to refinance to a lower rate or to a fixed rate mortgage to improve the affordability of the loan. The program is mainly aimed at borrowers who are under water. Borrowers owing up to 125% of their home’s value are eligible for refinancing /assistance, and the borrowers must not be more than 30 days delinquent on payments. The Home Affordable Modification Program (“HAMP”), which is scheduled to end on December 31, 2012, is meant to help homeowners who are at risk of foreclosure to modify their loan to reduce their monthly mortgage payments.
 
In October 2008, we created a team dedicated to the offering of loss mitigation services to our clients. These services provide our clients with alternatives to foreclosure such as loan modification or forbearance, which allow the borrower to continue to own the property; and short sales and deed-in-lieu of foreclosure which transfer the ownership of the property to the lender outside of the foreclosure process. Management believes that in addition to capturing revenues from this service offering that it is well positioned to receive the foreclosure referral stemming from the re-default of the modified loans and capture additional revenues, as we will have familiarity with the file.
 
In February 2010, President Obama announced an additional $1.5 billion for five state housing finance agencies to come up with new programs to address the foreclosure problem locally. The funds will be directed to states such as Florida and California, which RealtyTrac Inc. data show had the highest number of foreclosures in 2009.

2009 Compared to 2008

Revenues increased by $61.1 million, or 30.7%, for 2009, as compared to 2008, as a result of the increase in mortgage foreclosures related activities in our principal market, Florida, and as a result of the expansion of our REO business. For 2009, we received 70,382 foreclosure files, compared to 70,328 foreclosure files received in 2008. The number of foreclosure files received in 2009 was impacted by the slowdown in foreclosure files while banks work through the programs discussed in the “Recent Developments Regulatory Environment” section above. The programs mentioned above, however, result in additional fee revenues for us in areas of loan modifications and loss mitigations. Additionally, unless the real estate market and unemployment improve, many of the loans that are in the modification process will likely result in re-default, thus increasing our foreclosure volume.  According to the Mortgage Bankers Association (MBA) National Delinquency Survey, the percentage of loans in the foreclosure process at the end of the fourth quarter was 4.58%, an increase of 11 basis points from the third quarter of 2009 and 128 basis points from one year prior. The combined percentage of loans in foreclosure or with at least one payment past due nationally was 15.02 % on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey.  According to RealtyTrac, over 3.5 million homes are expected to enter some phase of foreclosure nationally this year.  Florida continues to be the worst state in terms of delinquencies.  Approximately 20.4% of Florida mortgages are 90 days or more past due or already in the process of foreclosure according to MBA’s chief economist.

During 2009, revenues from mortgage foreclosure related services, net of revenue from client reimbursements, increased by $7.2 million, or 7.0% to $110.0 million, compared to $102.8 million for 2008.  This consists of (i) an increase in revenues from DJS LLC’s mortgage foreclosure segment, net of revenue from client reimbursements, of $10.3 million, or 13.3%, to $87.8 million for 2009, compared to $77.5 million for 2008 which is primarily due to the increase in mortgage foreclosure related activities in our principal market, Florida and (ii) a decrease in revenues from PTA LLC’s title related services of $3.1 million, or 12.4%, to $22.2 million for 2009, compared to $25.3 million for 2008 due to the decrease in the fee per mortgage foreclosure file.  Revenues from client-reimbursed costs increased by $46.8 million to $139.1 million in 2009, as compared to $92.3 million in 2008.
 
During 2009, DSI LLCs REO liquidation business became an increasingly significant source of revenue, generating approximately 9.4% of our total revenue excluding client costs during that period, and it was a leading cause of the increase in revenues during that period. In 2009, we produced revenues of $11.2 million compared to revenue of $4.1 for 2008, representing a 175% growth from the previous period. We intend to offer DSI LLC services to additional customers as a means of increasing its contribution to revenues and profits.  As an added benefit resulting from the increase in the share of the revenues produced by DSI LLC, because these REO services follow the completion of the foreclosure process, they will have the effect of helping to sustain our revenues even if foreclosure volumes stabilize or begin what is expected to be a slow decline following 2012.

The principal operating expenses of the operating subsidiaries consist of the following:
 
 
·
Court filing fees and other client-reimbursed costs;

 
·
Compensation related expense, which consists primarily of the salaries, related benefits and payroll taxes paid to or on behalf of our employees that are engaged in operations;

 
·
Depreciation expense, which represents the cost of fixed assets and software allocated over the estimated useful lives of these assets, ranging from one to thirty years;

 
·
Direct operating expense, which consists primarily of direct cost such as freight and postage;
 
 
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·
Other general and administrative expenses which consist primarily of rent and other facilities-related expenses, as well as office supplies and other administrative expenses; and

 
·
Interest expense.

Client reimbursed costs, as a percentage of revenues, increased to 53.4% in 2009, as compared to 46.3% during 2008. In dollar terms, the client reimbursed costs increased by $46.7 million to $139.1 million from $92.3 million in 2008. We experienced an increase in client reimbursed costs directly as a result of increases in the underlying cost on a per file basis. Because these costs are reimbursed by DJS clients, they do not impact our profitability.

Compensation related expense decreased to 19.2% of revenues in 2009, as compared to 22.3% in 2008. In dollar terms, the compensation related expense increased by $5.7 million, from $44.4 million in 2008 to $50.1 million in 2009. These increases primarily occurred due to an increase in headcount needed to process the growth in foreclosure volume. We had 950 employees on December 31, 2009, compared to 860 on December 31, 2008. We are in the process of examining our processes and implementing strategies to improve our efficiency, including upgrades to our technology infrastructure.

Direct operating and general and administrative expenses, as a percentage of revenues, increased to 9.8% in the twelve months ended December 31, 2009, as compared to 9.6% in the same period in 2008. In dollar terms, the direct operating expense increased by $6.4 million.  We experienced an increase in direct operating expense and other general and administrative expenses primarily as a result of increase costs for liability insurance and loss claims, outside professional fees, and freight and postage charges.  The increased costs were attributable in part to the increased volume of files handled.  In addition, as the time to complete an average case file has extended, there is a higher frequency of certain direct operating charges such as freight and postage.

Total operating expenses as a percentage of revenues increased to 82.9% in the twelve months ended December 31, 2009, as compared to 78.5% in the same period in 2008, primarily due to increases in client reimbursed costs. Total operating expenses (excluding client reimbursed costs) as a percentage of fee revenues increased to 63.2% in the twelve months ended December 31, 2009, as compared to 59.9% in the same period in 2008.
 
Total operating expenses of DJS LLC’s mortgage foreclosure segment increased by $65.1 million to $199.3 million in 2009, from $134.2 million in 2008 primarily due to an increase in wages and client costs due to an increase in the number of foreclosure files, in addition to an increase in attorney fees relating to the Transaction.  Total operating expenses of this segment (excluding client reimbursed costs) as a percentage of fee income from this segment was 68.5% for 2009, as compared to 54.0% for 2008.  This increase was primarily due to higher wage expense resulting from hiring additional employees to accommodate the increase in the number of foreclosure files and an increase in attorney fees relating to the Transaction, partially offset by an increase in fee revenue.
 
Total operating expenses of PTA LLC’s title related services segment decreased by $5.7 million to $15.0 million in 2009, from $20.7 million in 2008 primarily due to a decrease in wages and outside title agents in states that require a physical presence outside Florida.  Total operating expenses of this segment as a percentage of revenue from this segment was 67.8% for 2009, as compared to 81.8% for 2008, primarily due to a decrease in wages and outside title agent expenses in states that require a physical presence outside Florida, partially offset by a decrease in fee revenue.
 
Total operating expenses of DSI LLC’s REO liquidation services segment remained consistent at approximately $1.4 million in 2009 and 2008.  Total operating expenses of this segment as a percentage of revenue from this segment was 12.5% for 2009, as compared to 36.5% for 2008.  This decrease was primarily due to an increase in fee income.
 
Adjusted EBITDA, which is a non-GAAP financial measure discussed in more detail below, increased by $10.1 million, or 16.9%, to $69.9 million in 2009, as compared to $59.8 million in 2008.

Net income increased by $1.7 million, or 3.9%, to $44.5 million in 2009, as compared to $42.9 million in 2008.  Adjusted net income, which is a non-GAAP financial measure discussed in more detail below, increased by $6.1 million or 15.9% to $44.6 million in 2009, as compared to $38.5 million in 2008.

Adjusted EBITDA and adjusted net income adjust EBITDA and net income, respectively to eliminate income and/or expense items that are not expected to be incurred in periods following the Transaction, primarily relating to payments made in periods prior to the Transaction to an affiliate of the former shareholders of the acquired companies.
  
2008 Compared to 2007
 
For the year ended December 31, 2008, revenues increased by $83.7 million, or 72%, as compared to the same period in 2007, primarily as a result of the increase in mortgage foreclosures taking place in our major market of Florida. For the year ended December 31, 2008, we received 70,328 foreclosure files, an increase of 57% from 44,733 foreclosure files received in 2007.
 
Revenues from DJS LLC’s mortgage foreclosure segment increased by $70.8 million to $169.8 million in 2008, as compared to $99.0 million in 2007, principally due to an increase in revenues from client-reimbursed costs and, to a lesser extent, an increase in fees, in both cases due to the increase in the number of foreclosure of files.  Revenues from client-reimbursed costs increased by $44.7 million to $92.3 million in 2008, as compared to $47.6 in 2007, while revenue excluding client-reimbursed costs increased by $26.2 million to $77.5 million in 2008, as compared to $51.3 in 2007.
 
Revenues from PTA LLC’s title related services segment increased by $10.5 million to $25.3 million in 2008, as compared to $14.8 million in 2007, principally due to an increase in the number of foreclosure files.
 
Revenues from DSI LLC’s REO liquidation segment increased by $2.4 million to $4.1 million in 2008, as compared to $1.7 million in 2007, principally due to an increase in REO liquidation files referred to DSI LLC.
 
Client reimbursed costs, as a percentage of revenues, increased to 46.3% in fiscal 2008 as compared to 41.2% in fiscal 2007. In dollar terms, the client reimbursed costs increased by $44.7 million. We experienced an increase in client reimbursed costs principally as a result of continuing growth in foreclosure case volume as well as variances in the underlying expenses themselves.
 
Compensation-related expense, as a percentage of revenues, increased to 22.3% in fiscal 2008 as compared to 17.6% in fiscal 2007. In dollar terms, the compensation related expense increased by $24.1 million. The increase in compensation related expense is as a result of an increase in headcount to handle the increased volume of foreclosures and the related recruiting and training costs incurred to support the growth of the our operations. Between fiscal 2007 and 2008, we built capacity both to meet its growing demand and in anticipation of continued growth in foreclosure volume. It had approximately 600 employees on December 31, 2008 compared to approximately 350 on December 31, 2007. As stated above, we are now implementing strategies to improve efficiency and reduce costs as a percentage of revenues.
 
Direct operating expense, as a percentage of revenues, increased to 3.5% in fiscal 2008 as compared to 3.1% in fiscal 2007. In dollar terms, the direct operating expense increased by $3.4 million.  We experienced an increase in direct operating expense primarily as a result of increase in freight and postage charges. The increased costs were primarily attributable to increases in the underlying expenses. In addition, as the time to complete an average case file has extended, there is a higher frequency of incurring certain direct operating charges such as freight and postage.
 
Other general and administrative expense, as a percentage of revenues, increased to 6.1% in fiscal 2008 as compared to 4.4% in fiscal 2007. This increase was primarily attributable to the higher rent and relocation costs associated with our new facilities in Plantation, Florida, as well as increased marketing expenses. In dollar terms, the other general and administrative expense increased by $7.0 million.

 
12

 

Total operating expenses as a percentage of revenues increased to 78.5% in fiscal 2008 as compared to 66.5% in fiscal 2007. Total operating expense (excluding client reimbursed costs) as a percentage of fee revenues increased to 59.0% in fiscal 2008 as compared to 44% in fiscal 2007. The increase in total operating expense primarily was due to a ramp up in staff in order to continue to deliver a level of customer service to its clients in light of continued strong demand for foreclosure related services. In addition, we incurred larger fixed costs associated with rent and facilities as it moved its headquarters into a larger facility.
 
Adjusted EBITDA, which is a non-GAAP financial measure discussed in more detail below, increased by $16.1 million, or 36.8%, to $59.8 million in 2008, as compared to $43.7 million in 2007, primarily as a result of the increase in revenues discussed above.
 
Net income increased by $6.2 million or 10.8%, to $42.9 million in 2008, as compared to $36.7 million in 2007.

Adjusted net income, which is a non-GAAP financial measure discussed in more detail below, increased by $10.2 million or 36.3% to $38.5 million in 2008, as compared to $28.2 million in 2007.

Adjusted EBITDA and adjusted net income adjust EBITDA and net income, respectively, to eliminate income and/or expense items that are not expected to be incurred in periods following the Transaction, primarily relating to payments made, in periods prior to the Transaction, to the former shareholders of the acquired companies and their affiliates.
 
Total operating expenses of DJS LLC’s mortgage foreclosure segment increased by $66.9 million to $134.2 million in 2008, from $67.3 million in 2007 primarily due to an increase client costs.  Total operating expenses of this segment (excluding client reimbursed costs) as a percentage of fee income from this segment was 54.0% for 2008, as compared to 38.4% for 2007.  This increase was primarily due to an increase in wages and rent expense.
 
Total operating expenses of PTA LLC’s title related services segment increased by $11.7 million to $20.7 million in 2008, from $9.0 million in 2007 primarily due to an increase in wages and outside title agent expenses in states that require a physical presence outside Florida.  Total operating expenses of this segment as a percentage of revenue from this segment was 81.8% for 2008, as compared to 60.4% for 2007, primarily due to an increase in wages and outside title agent expenses in states that require a physical presence outside Florida, partially offset by an increase in fee revenue.
 
Total operating expenses of DSI LLC’s REO liquidation services segment increased by $970,000 to $1.5 million in 2008, from $530,000 in 2007 and total operating expenses of this segment as a percentage of revenue from this segment was 36.5% for 2008, as compared to 31.4% for 2007.  These increases were due to higher wage expense due to the hiring of additional employees to accommodate the increased number of REO liquidation files referred to DSI LLC and a unreimbursed loss recognized in connection with a client, partially offset by increase revenue attributable to the increased number of files.
 
Financial Condition
   
The following table sets forth the major balance sheet accounts at December 31, 2009 and 2008 (in thousands):

   
December 31,
 
   
2009
   
2008
 
             
Assets:
           
Cash and cash equivalents
 
$
763
   
$
1,428
 
Accounts receivable
   
33,074
     
49,166
 
Property, equipment and improvement, net
   
4,692
     
3,155
 
Liabilities:
               
Accounts payable – client reimbursed costs
 
$
6,047
   
$
20,425
 
Line of credit
   
10,656
     
 
 
 
13

 
  
Cash and Cash Equivalents decreased to $0.8 million at December 31, 2009 compared to $1.4 million at December 31, 2008.

Accounts receivable decreased by $16.1 million, or 32.7%, to $33.1 million as of December 31, 2009, compared with $49.2 million as of December 31, 2008. The decrease in accounts receivables is as a result of strong efforts to collect from clients.

Property, equipment and improvement, net increased at December 31, 2009 to $4.7 million from $3.2 million at December 31, 2008, or 48.7%, as a result of new office space leased and office furniture being purchased for the new offices.

Accounts payable – client reimbursed costs decreased by $14.4 million to $6.0 million at December 31, 2009 from $20.4 million at December 31, 2008, as a result of the implementation of new billing practices which allow for the reimbursement of client related costs more rapidly, thereby allowing for faster payment of such costs to our vendors, and the use of line of credit borrowings to fund the payments of these accounts payable.

Line of credit borrowings were obtained from a bank and were secured by customer receivables.  The line of credit was drawn primarily due to the increase in filing fees per case file.  DJS LLC pays the initial filing fee and bills the customer for the amount.  Eventually, DJS LLC is reimbursed for the filing fee, but in periods of high growth, an increase of available cash is necessary to cover the initial filing fees.  At the time of the closing of the Transaction, the line of credit was repaid in full using the proceeds of Senior Financing Notes that were issued simultaneously with the closing.  On March 23, 2010, we obtained a new $15 million line of credit from a bank that is secured by customer receivables.  Approximately $12.6 million of the line was immediately drawn.  Simultaneously, the principal and interest outstanding on all but three of the Senior Financing Notes were repaid, leaving an aggregate outstanding principal balance for the Senior Financing Notes of $3 million.  The new line of credit will be used for the same purposes as the one paid in full at the closing of the Transaction, as well as for other working capital needs.

Our working capital needs will fluctuate primarily based upon a number of factors, including (i) revenues, (ii) account and notes receivables changes and (iii) case files started. Historically, income from continuing operations has funded the account receivables growth, but with the recent increase in filing fees, the Company may need to borrow funds from third parties from time to time to fund its cash requirements, such as from the new line of credit described above.

Liquidity and Capital Resources

The following table sets forth certain historical information with respect to our statements of cash flows (in thousands):

   
Year Ended December 31,
 
   
2009
   
2008
   
2007
 
                   
Net cash provided by operating activities
 
$
48,345
   
$
43,363
   
$
20,897
 
Net cash used in investing activities
   
(2,652
)
   
(2,274
)
   
(1,302
)
Net cash used for financing activities
   
(46,357
)
   
(40,640
)
   
(18,686
)
Net increase (decrease) in cash and cash equivalents
 
$
(664
)
 
$
449
   
$
909
 

During 2009, we generated positive operating cash flows of $48.3 million. These cash flows related primarily to net income of $45 million, adjusted for non-cash charges for depreciation of $1.1 million. These operating cash inflows are partially offset by an aggregate decrease in cash flow from our operating assets and liabilities of $2.7 million. Our investing activities used $2.7 million of cash, consisting primarily of the expenditure of $2.7 million for the purchase of property and equipment required to support our expanded file volumes and related personnel.  Our financing activities used cash of $46.4 million, which was primarily used to pay profit and tax distributions to our pre-Transaction sole shareholder partially offset by advances on our line of credit of $9.5 million.

During 2008, we generated positive operating cash flows of $43.4 million. These cash flows related primarily to net income of $42.9 million, adjusted for, among other things, non-cash charges for depreciation and disposal of leasehold improvements of $2.3 million. These operating cash inflows are partially offset by an aggregate decrease in cash flow from our operating assets and liabilities of $1.8 million. Our investing activities used $2.3 million of cash, consisting primarily of the expenditure of $2.3 million for the purchase of property and equipment required to support our expanded file volumes and related personnel. Our financing activities used cash of $40.7 million, which was primarily used to pay profit and tax distributions to our pre-Transaction sole shareholder.

During 2007, we generated positive operating cash flows of $20.9 million. These cash flows related primarily to net income of $38.7 million, adjusted for depreciation of $278 thousand. These operating cash inflows are partially offset by an aggregate decrease in cash flow from our operating assets and liabilities of $18.1 million. Our investing activities used $1.3 million of cash, consisting primarily of the expenditure of $1.3 million for the purchase of property and equipment required to support our expanded file volumes and related personnel. Our financing activities used cash of $18.7 million, which was primarily used to pay profit and tax distributions to our pre-Transaction sole shareholder.

 
14

 
  
In connection with the Transaction, we issued the following notes on January 15, 2010:

 
·
A note in the amount of $52,469,000 issued to DJS (the “Stern Deferral Note”) which has an interest rate of 3.0% per annum and a maturity date of 36 months after January 15, 2010;

 
·
Notes in the aggregate amount of $1,100,000 relating to deferred compensation issued to the underwriters of the Company’s initial public offering, which have an interest rate of 5% per annum and are payable upon the earlier of (i) the one year anniversary of the repayment of the Stern Deferral Note, or (ii) January 15, 2012;

 
·
A note in the aggregate amount of $500,000 relating to certain deferred compensation owing by the Company to Rodman & Renshaw, LLC which has an interest rate of 5% per annum and is payable upon the earlier of (i) the one year anniversary of the repayment of the Stern Deferral Note, or (ii) January 15, 2012;

 
·
A note in the amount of $250,000 relating to deferred compensation owing by the Company to Chardan Capital Markets, LLC which has an interest rate of 5% per annum and is payable upon the earlier of (i) the one year anniversary of the repayment of the Stern Deferral Note, or (ii) January 15, 2012; and

 
·
Notes in the aggregate amount of $15,188,736 relating to a senior financing facility (the “Senior Financing Notes”) entered into in connection with the Transaction and which have interest rates of 15% per annum and are payable by January 15, 2011.

In March 2010, we obtained a new $15 million line of credit from Bank of America.  Approximately $12.6 million of the line was immediately drawn.  Simultaneously, the principal and interest outstanding on all but three of the Senior Financing Notes were repaid, leaving an aggregate outstanding principal balance for the Senior Financing Notes of $3 million.  The new line of credit will be used for the same purposes as the one paid in full at the closing of the Transaction, as well as for other working capital needs.  See the section of this Report titled, “Item 10(C). Additional Information – Material Contracts – Contracts Related to Company Operations – Line of Credit Loan Agreement” for more information about the terms of the new line of credit.
 
We anticipate that we will have adequate sources of working capital in the foreseeable future, although, as indicated above, we may need to borrow funds from time to time to fund those needs, in addition to the new line of credit described above.  We may elect in the future to obtain additional funding to expand and grow our operations, which may include borrowings from financial institutions and/or the sale of equity.

Adjusted EBITDA/Adjusted Net Income

The adjusted EBITDA measure presented consists of income (loss) from continuing operations before (a) interest expense; (b) income tax expense; (c) depreciation and amortization; and (d) income and/or expense items that are expected to be at reduced levels in future periods. The adjusted EBITDA margin is the ratio of adjusted EBITDA to total revenues. We are providing adjusted EBITDA, a non-GAAP financial measure, along with GAAP measures, as a measure of profitability because adjusted EBITDA helps us to evaluate and compare our performance on a consistent basis with the lower operating cost structure that will be in place after consummation of the Transaction, reflecting the effects of that lower cost structure on profitability. In the calculation of adjusted EBITDA, we exclude from expenses the compensation paid to Stern that exceeds the base compensation that he is entitled to receive after completion of the Transaction, since after such time the Company does not have any arrangement with Stern that would require any payments to him at a comparable level. Stern does not have an incentive plan arrangement providing for pay above base compensation. In addition, we excluded the payroll taxes associated with such compensation, as well as travel expenses incurred on behalf of Stern in prior periods that are not being provided after the Transaction.
 
15

  
In the calculation of adjusted net income measure presented, we deduct the depreciation and amortization amounts from adjusted EBITDA calculation and then subtracts assumed income tax expense, calculated at the expected going forward tax rate of 35%.  For periods prior to the Transaction, we were not subject to income tax and so did not record income tax expense.  We are providing adjusted net income, a non-GAAP financial measure, along with GAAP measures, as a measure of profitability because adjusted net income helps us to evaluate and compare our past performance on a consistent basis with the taxable structure in place after consummation of the Transaction, reflecting the effects of that taxable structure on profitability.

The following table provides reconciliations of net income (US GAAP) to Adjusted EBITDA (Non-GAAP) and adjusted net income (Non-GAAP).

Reconciliations Of Net Income (US GAAP) To Adjusted EBITDA (Non-GAAP)
and Adjusted Net Income (Non-GAAP)
 
   
Years Ended December 31,
 
   
2009
   
2008
   
2007
 
Net Income
 
$
44,565
   
$
42,886
   
$
38,689
 
Adjustments
                       
Compensation related
   
12,262
     
15,887
     
4,710
 
Non-recurring travel
   
6,372
     
385
     
 
Adj. to fee to processing
   
3,631
     
     
 
Transaction related
   
260
     
     
 
Interest, depreciation & amortization
   
1,297
     
594
     
278
 
Other
   
1,486
     
     
 
Total adjustments
   
25,308
     
16,866
     
4,988
 
Adjusted EBITDA
 
$
69,873
   
$
59,752
   
$
43,677
 
Interest, depreciation & amortization
   
1,297
     
594
     
278
 
Income taxes estimate at 35%
   
24,002
     
20,705
     
15,189
 
Adjusted Net Income
 
$
44,574
   
$
38,453
   
$
28,210
 

Adjusted EBITDA and adjusted net income are non-GAAP financial measures that have limitations because they do not include all items of income and expense that affect our operations. These non-GAAP financial measures are not prepared in accordance with, and should not be considered an alternative to, measurements required by GAAP, such as operating income, net income (loss), net income (loss) per share, cash flow from continuing operating activities or any other measure of performance or liquidity derived in accordance with GAAP. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the most directly comparable GAAP measures. In addition, it should be noted that companies calculate adjusted EBITDA and adjusted net income differently and, therefore, adjusted EBITDA and adjusted net income as presented for us may not be comparable to the calculations of adjusted EBITDA and adjusted net income reported by other companies.

Contractual Payment Obligations

The following is a summary of our known contractual obligations as of December 31, 2009.

   
Payments due by period
 
Contractual Obligations
 
Total
   
Less than
1 year
   
1-3 years
   
4-5 years
   
More than
5 years
 
Operating lease obligations (1)
 
$
17,251
   
$
2,711
   
$
5,895
   
$
6,137
   
$
2,508
 
Capital  lease obligations
   
566
     
191
     
303
     
70
     
-
 
Total
 
$
17,817
   
$
2,902
   
$
6,198
   
$
6,207
   
$
2,508
 

 
(1)
We are obligated for leases of office space under non-cancellable operating lease agreements which expire at times ranging from September 2012 through October 2018. Rent expense is recognized on a straight line basis over the terms of the leases based on the aggregate amount of payments due over the lease terms.
 
 
16

 
 
Critical Accounting Policies and Estimates
  
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect both the reported amounts of assets, liabilities, revenue and expenses during the reporting period, and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.

Revenue Recognition

Substantially all of DJS LLC’s and PTA LLC’s revenues are generated from services rendered ultimately to the clients of DJS. A substantial portion of the accounts receivable are generated from DJS, DJS LLC’s only customer for foreclosure and related services, at the time DJS bills its clients. DSI LLC has independent relationships with its clients for REO liquidation services and does not receive file referrals directly from DJS.

The estimated average file processing time for all foreclosure files, except cases that are fully litigated, ranges from 220 to 240 days. The fee income for foreclosure processing is recognized utilizing the proportional performance method during the file processing period based on the achievement of various processing milestones. DJS LLC bills DJS for services performed and recognizes revenue for services performed but not yet billed, reporting them as unbilled receivables at the end of each reporting period.

Revenue related to all types of services other than foreclosure is recognized using the completed performance method. Revenue is recognized once the services are performed and the Company has no further fulfillment responsibilities related to these services. Accounts receivable for title services is presented net of an allowance for estimated uncollectible accounts based on management’s experience and expectations.

The per-file fee negotiated between DJS LLC and DJS is based on negotiations between related parties. There can be no assurances that the per file fees or the level of profitability achieved would be the same if the fees had been negotiated between unrelated entities.

Expense Allocation

Management has allocated certain expenses of DJS to the operating subsidiaries based on its estimate of expenses the operating subsidiaries would have incurred on a stand-alone basis during the periods reported; however, there can be no assurance that these expenses represent the expenses of the operating subsidiaries on a stand-alone basis, or that the allocations are fully inclusive of the functions necessary to operate the operating subsidiaries on a stand-alone basis. The following is a summary of the methodology used to allocate expenses in some major categories.

 
·
Certain executive officers of DJS are substantially involved with the operating subsidiaries’ operations. Their salaries, bonuses, payroll taxes and related auto, travel, meals, entertainment and professional expenses are allocated to the operating subsidiaries based on the estimated percentage of time the executive officers spent on the activities of the operating subsidiaries.

 
·
Employee benefits, including health insurance, pension/profit sharing, workers’ compensation, incentives and training, are allocated based on the number of employees specifically assigned to the operating subsidiaries in relation to the total number of employees of DJS (“the employee ratio method”).

 
·
Equipment lease expense is allocated based on the employee ratio method.

 
·
Certain facilities lease expenses are allocated based on the employee ratio method.

 
·
Depreciation is computed based on the equipment and leasehold improvements utilized by the operating subsidiaries as determined by the above allocation methods.
 
 
17

 
 
 
·
Postage and delivery is allocated based on the employee ratio method.

 
·
Advertising, marketing and professional fees are allocated based on the estimated percentages that apply to our business activities.

 
·
All other general and administrative expenses were allocated based on the employee ratio method.

In the opinion of management, the proceeding expense allocations are a reasonable basis for determining the costs associated with the carve-out processing division.

Income Taxes

Because DJS LLC, PTA LLC and DSI LLC are limited liability companies, they will not be subject to income taxes. Because they are pass-through entities, the taxable income of these three entities will be passed through to each company’s sole member, DAL. DAL will pass through this taxable income to its members, including the Company.  Prior to the Transaction, DJS, PTA and DSI were not subject to income taxes under federal or state tax laws. Instead, the taxable income of these entities was passed through to the owner of the companies and was taxable to the owner on an individual level. Therefore, the financial statements presented through December 31, 2009 do not reflect an allocation of federal and state income taxes.

Recently Issued Accounting Pronouncements

See the section entitled “Nature of Business and Significant Accounting Policies” in Note 1 to the combined financial statements of the operating subsidiaries, which is incorporated herein by reference.
  
Market Risk

As of December 31, 2009, the Company did not have instruments subject to market risk. After the Transaction, our functional currency is the U.S. dollar and so are virtually all of our revenues and operating costs; therefore, we do not expect to be exposed to any significant extent to the impact of changes in foreign currency exchange rates. Furthermore, most of our debt carries a fixed rate of interest, so we do not expect to be exposed to any significant extent to the impact of changes in market interest rates.

Seasonality

Seasonality has not historically impacted our operating results.

Impact of Inflation

Inflation has not historically been a significant factor impacting our operating results.
 
 
18

 
 
Chardan 2008 Financial Condition and Results of Operations
 
The following discussion and financial information reflects the performance of Chardan 2008 for periods prior to the Transaction.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that both the reported amounts of assets, liabilities, revenue and expenses during the reporting period, and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could materially differ from those estimates. We have identified the following as our critical accounting policies:

Cash and cash equivalents.  We consider all highly liquid investments, including short-term money market instruments with original maturities of three months or less when purchased, to be cash equivalents.

Results of Operations

2009.  For the period from January 1, 2009 to December 31, 2009, we had net income/(loss) of  $(446,904), which consisted of interest income of $47,286 earned on the Trust Account investment of approximately $54,300,000, offset by filing and listing fees of $54,043,  management fees of $90,000 and $259,721 for travel-related expenses, and other miscellaneous administrative fees.

2008.  For the period from February 19, 2008 (inception) to December 31, 2008, we had net income/(loss) of ($59,789), which consisted of interest income of $484,894 earned on the trust account investment of $54,564,894, offset by filing fees of $87,471, $65,000 for D&O insurance, $172,616 for travel-related expenses and other miscellaneous administrative fees.

Liquidity and Capital Resources

The funds held in the trust account were available for use only to: (i) engage in an acquisition transaction; (ii) redeem up to one ordinary share less than 35% of the shares voted against an extension of the period of time to consummate an acquisition if an extended period was approved by the shareholders; (iii) redeem up to one ordinary share less than 35% of the shares owned by the public shareholders that voted against an acquisition transaction if the transaction was approved and completed; or (iv) distribute to the public shareholders in the event Chardan 2008 had failed to complete an acquisition transaction within the time available to it and liquidated and dissolved, subject to certain exceptions.

At December 31, 2009, Chardan 2008 had approximately $54,302,000 held in the trust account, and cash outside of the trust account of approximately $24,000.  Chardan 2008 has since used these funds to cover expenses incurred in identifying, evaluating and performing due diligence with respect to the Transaction, as well as for legal, accounting and other expenses associated with structuring, negotiating and documenting the Transaction. Prior to the Transaction, Chardan 2008 also incurred regular expenses to meet its obligations under applicable securities laws, to maintain directors’ and officers’ insurance coverage and to pay a monthly $7,500 administrative expense to Chardan Capital, LLC, an affiliate of Li Zhang, former chairman of Chardan 2008’s board of directors.

Off-Balance Sheet Arrangements

Prior to its acquisition of a controlling interest in DAL on January 15, 2010, Chardan 2008 never entered into any off-balance sheet financing arrangements, never established any special purpose entities, and had not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
 
Contractual Obligations

Prior to its acquisition of a controlling interest in DAL on January 15, 2010, Chardan 2008 did not have any long-term debt, capital lease obligations, operating lease obligations, purchase obligations or other long-term liabilities. However, as discussed above, Chardan 2008 paid Chardan Capital, LLC a monthly rental of approximately $7,500, for office space and administrative services up until the acquisition of DAL.

Inflation

Inflation has not impacted the results of Chardan 2008.
 
 
19

 
 
Unaudited Pro Forma Condensed Combined Finacial Statements
 
The following unaudited pro forma condensed combined financial information has been prepared assuming that the Transaction, including the acquisition by us of a controlling interest in DAL, DAL’s acquisition of the membership interests of DJS LLC, PTA LLC and DSI LLC and the Stern Contributors transfer of non-legal business, assets and liabilities to DJS LLC, PTA LLC and DSI LLC, all of which occurred concurrently with the closing of the Transaction on January 15, 2010, occurred (i) at the beginning of each of the applicable periods for the pro forma statements of operations and (ii) at December 31, 2009 for the pro forma balance sheet.

The unaudited pro forma condensed combined financial information is provided for illustrative purposes only. The historical financial information has been adjusted to give effect to pro forma events that are directly attributable to the Transaction, are factually supportable, and are expected to have a continuing impact on the combined results.

You should not rely on the unaudited pro forma condensed combined balance sheet as being indicative of the historical financial position that would have been achieved had the transactions contemplated by the Transaction been consummated as of December 31, 2009, or the unaudited pro forma condensed combined statements of operations as being indicative of the historical financial results of operations that would have been achieved had the Transaction been consummated on the first day of each of the respective operating periods. See “Item 3(D). Risk Factors” for further details.

We are providing the following information to aid in the analysis of the operations of the Company after the Transaction. The historical financial information of the operating subsidiaries was derived from the audited combined financial statements of DJS Processing Division and Affiliates for the year ended December 31, 2009 and the notes thereto included elsewhere in this Report. The historical financial information of Chardan 2008 was derived from the audited financial statements of Chardan 2008 for the year ending December 31, 2009 and the notes thereto included elsewhere herein. This information should be read together with such financial statements and related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for DJS Processing Division and Affiliates and Chardan 2008, and other financial information included elsewhere in this Report.

Actual results could differ from the pro forma information presented and depend on several variables, including the actual timeline of the conversion of the DAL Series B Preferred Units.

The Transaction was accounted for as a reverse capitalization, due to, among other things, the fact that the owner of DJS, PTA and DSI will have significant representation on the Board of Directors (initially four out of seven members), and the management of the acquired business became the management of DAL and the Company. This treatment also disregards DAL for accounting purposes for the reason that it serves principally to issue equity interests in connection with the Transaction, and it did not have significant operations prior to its role in the Transaction, along with the fact that the equity interests in DAL held by the Stern Contributors and the then existing members of DAL and their assignees are exchangeable for comparable securities in the Company.
 
 
20

 
 
DJSP ENTERPRISES, INC. (FORMERLY KNOWN AS CHARDAN 2008 ACQUISITION CORP.)
AND DJS PROCESSING DIVISION AND COMBINED AFFILIATES
Unaudited Pro Forma Condensed Combined Balance Sheet
Year Ended December 31, 2009
(In thousands of U.S. Dollars, except share and per share amounts)
 
   
DJSP Enterprises, Inc.
                                 
   
(formerly known as
   
DJS Processing
                     
  
 
Chardan 2008
   
Division
                         
  
 
China
   
and
   
Pro Forma
   
Pro Forma
 
  
 
Acquisition
   
Combined
   
Adjusting and Eliminating Entries
   
Combined
 
   
Corp.)
   
Affiliates
   
Debit
   
Credit
   
Companies
 
                               
Assets
                               
Current assets:
                             
Cash
 
 $
                            23
   
 $
               763
     
          10,500
(4)
   
                3,568
(7)
 
$
                  3,360
 
                     
          15,589
(11)
   
                4,198
(9)
       
                             
              15,750
(11)
       
Funds held in trust
   
                     54,302
     
                  -
             
              54,302
(1)(9)
   
                       -
 
Accounts receivable
   
                             -
     
          33,074
             
                     -
     
                33,074
 
Prepaid expenses and other current assets
   
                       1,364
     
                 87
             
                     -
     
                  1,451
 
Total current assets
   
                     55,689
     
          33,924
                     
                37,884
 
Equipment and Leasehold Improvements, net
           
            4,692
                     
                  4,692
 
Total assets
 
 $
                     55,689
   
 $
          38,616
                   
$
                42,576
 
                                         
Liabilities
                                       
Current liabilities:
                                       
Accounts payable - reimbursed client costs
 
 $
                             -
   
 $
            6,047
                   
$
                  6,047
 
Accounts payable
   
                       1,401
     
            1,506
                     
                  2,907
 
Current portion of capital lease
   
                             -
     
               192
                     
                     192
 
Deferred revenue
   
                             -
     
               225
                     
                     225
 
Due to related party
   
                          125
     
                  -
                     
                     125
 
Accrued expenses
   
                             -
     
            1,201
     
            3,568
(7)
   
                8,838
(8)
   
                  6,470
 
Accrued compensation
   
                             -
     
            1,863
                     
                  1,863
 
Current portion of deferred rent
   
                             -
     
            1,020
                     
                  1,020
 
Deferred underwriting fees
   
                       1,430
     
                  -
     
            1,430
(3)
           
                       -
 
Notes Payable & Client Trust Account - Current
   
                             -
     
          13,203
     
          15,750
(11)
   
                2,547
(2)
   
                       -
 
Total current liabilities
   
                       2,957
     
          25,256
                     
                18,849
 
                                         
Deferred rent, less current portion
           
                 78
                     
                       78
 
Capital lease obligation, less current portion
           
               262
                     
                     262
 
Senior Secured Notes
   
                             -
     
                  -
             
              15,589
(11)
   
                15,589
 
Stern Notes
   
                             -
     
                  -
             
              87,469
(9)
   
87,469
 
Total liabilities
   
                       2,957
     
          25,596
                     
              122,247
 
                                         
Ordinary shares, subject to possible redemption
   
                     18,985
     
                  -
     
          18,985
(5)
           
                       -
 
                                     
                       -
 
Stockholders' equity
                                   
                       -
 
Preferred shares Series A, $0.0001 par value
   
                             -
     
                  -
                     
                       -
 
Preferred shares Series B, $0.0001 par value
   
                             -
     
                  -
                     
                       -
 
Ordinary shares, $0.0001 par value
   
                              1
     
                   1
                     
                         2
 
Additional paid-in capital
   
                     34,253
     
            8,671
     
            8,838
(8)
   
18,985
(5)
   
                61,948
 
                     
               507
(10)
   
1,430
(3)
       
                     
            2,547
(2)
   
10,500
(4)
       
Retained earnings
   
                         (507)
     
            4,348
     
        145,969
(9)
   
                   507
(10)
   
            (145,502)
 
                     
            3,881
(6)
               
Total DJSP Enterprises, Inc.'s equity
   
                     33,747
     
          13,020
                     
(83,552)
 
Noncontrolling interest
   
                             -
     
                  -
             
                3,881
(6)
   
                  3,881
 
Total Equity
   
                     33,747
     
          13,020
                     
              (79,671)
 
Total liabilities and stockholders' equity
 
 $
                     55,689
   
 $
          38,616
                   
$
                42,576
 
 
21

  
Pro Forma Adjustments and Eliminations (In thousands of U.S. Dollars, except for share and per share data, unless otherwise noted):

 
(1)
To liquidate investments held in trust.

 
(2)
To adjust actual closing payments on line of credit to amount outstanding at balance sheet date and to eliminate client trust accounts which were not transferred in the Transaction.

 
(3)
To record payment of deferred underwriting fees of $1,430 as part of Footnote (8).

 
(4)
To record $10,500 gross proceeds of a simultaneous to close Private Placement equity investment in DJSP Enterprises, Inc. of 1,500 shares at $7.00 per share.

 
(5)
To reclassify ordinary shares no longer subject to redemption, and related deferred interest, because substantially all shareholders approve of the proposed acquisition.

 
(6)
Net assets attributable to noncontrolling interests of 29.05%.

 
(7)
To record payment of costs related to the Transaction.

 
(8)
To accrue balance of estimated costs of raising capital based upon engagement letters, actual invoices and/or currently updated fee estimates as follows:

Investment banking fees
 
$
4,800
 
Financial due diligence
   
115
 
Legal fees
   
3,220
 
Accounting fees
   
296
 
Out of pocket fees
   
134
 
Other fees
   
271
 
Total estimated costs
   
8,838
 
Less costs incurred to-date
   
-
 
Balance to accrue
 
$
8,838
 
 
22

  
Total estimated costs includes contingent underwriters fees of approximately $2,200 that are payable upon consummation of the Transaction. These costs were originally incurred in connection with DJSP Enterprises, Inc.’s initial public offering and were recorded in Additional Paid-In Capital but will be subsequently recorded as an expense.

 
(9)
To record payment of Initial Cash to the Stern Contributors in the Transaction, calculated as follows:
 
Cash Consideration Purchase Price
$
145,969
 
Less: Stern Note
   
52,469
 
Less: Post-Closing Cash
   
     35,000
 
Initial Cash
 
$
     58,500
 
Deferred consideration - Stern Notes
   
     87,469
 

 
(10)
To eliminate historical retained earnings of accounting acquiree.
 
 
(11)
To reflect a senior secured round of private financing at 15% to replace the existing line of credit until a new line of credit could be established at DJS Processing, LLC.

 
(12)
To record the issuance of Series B units by DAL to the Stern Contributors and Existing Members which will expire unless the below share price targets for the Company's ordinary shares are met for at least 10 out of 30 trading days:
 
Subclass
 
Conversion
Price
   
Number
of Units
 
Series B Preferred 1
 
$
10.00
     
750,000
 
Series B Preferred 2
 
$
12.50
     
750,000
 
Series B Preferred 3
 
$
15.00
     
800,000
 
Series B Preferred 4
 
$
17.50
     
800,000
 
Series B Preferred 5
 
$
20.00
     
800,000
 

Upon meeting the share price target, the Series B units will automatically be exchanged for common units of DAL and will subsequently be convertible into Chardan 2008 ordinary shares on a 1:1 basis. If after 60 months following the closing of the Transaction any portion of the Series B units have not been exchanged for DAL common units, DAL will have the right to redeem the unconverted Series B units by paying the holders $0.001 per unit.

Pro Forma Notes (In thousands of U.S. Dollars, except for share and per share data, unless otherwise noted):

 
(A)
Pro forma entries are recorded to the extent they are a direct result of the Transaction, are factually supportable, and are expected to have a continuing impact on the combined results.
  
 
23

 

DJSP ENTERPRISES, INC. (FORMERLY KNOWN AS CHARDAN 2008 ACQUISITION CORP.)
AND DJS PROCESSING DIVISION AND COMBINED AFFILIATES
Unaudited Pro Forma Condensed Combined Statement of Operations
Year Ended December 31, 2009
(In thousands of U.S. Dollars, except share and per share amounts)

   
DJSP
Enterprises,
Inc.
(formerly
known as
Chardan
2008 China
Acquisition
   
DJSP
Processing
Division
and
Related
   
Pro Forma
Adjustments and
Eliminations
 
Pro Forma
 
   
Corp.)
   
Entities
   
Debit
   
Credit
   
Combined
 
                               
Net sales
 
$
-
   
$
260,269
               
$
260,269
 
                                     
Cost of sales
   
-
     
-
                 
-
 
                                     
Gross profit
   
-
     
260,269
                 
260,269
 
                                     
Operating expenses
                                   
General and administrative
   
489
     
215,704
           
23,751
(2)
   
192,442
 
Total operating expenses
   
489
     
215,704
                   
192,442
 
                                       
Income (loss) from operations
   
(489
)
   
44,565
                   
67,827
 
                                   
-
 
Other income (expense)
                                          
-
 
Interest income (expense)
   
47
     
-
     
4,485
(1)(5)
           
(4,437
)
Other Income (expense)
   
(5
)
   
0
                     
(5
)
                                         
Income before income taxes
   
(447
)
   
44,565
                     
63,384
 
                                         
Income taxes
   
-
     
-
     
22,185
(4)
           
22,185
 
Income from continuing operations
   
(447
)
   
44,565
                     
41,200
 
                                         
Net income
   
(447
)
   
44,565
                     
41,200
 
                                         
Less net income attributable to non controlling  interests
   
-
     
-
     
12,062
(3)
           
12,062
 
                                         
Net income attributable to  DJSP Enterprises
   
-
     
-
                     
29,138
 
Preferred share dividends declared
   
-
     
-
                     
-
 
Net income available to the ordinary shareholder
 
$
(447
)
 
$
44,565
                   
$
29,138
 
                                         
Net income per ordinary share -
                                       
Basic
                                 
$
2.73
 
Diluted
                                 
$
1.67
 
                                         
Weighted average number of ordinary shares outstanding (Note B) -
                                       
Basic
                                   
10,666,666
 
Diluted
                                   
24,717,108
 
 
24

  
Pro Forma Adjustments and Eliminations (In thousands of U.S. Dollars, except for share and per share data, unless otherwise noted):

 
(1)
To eliminate interest income earned on funds held in trust and related income tax expense, as DJSP Enterprises, Inc. used all funds from the trust account for the transaction.

 
(2)
To record lower officer’s salaries per the Stern Employment Agreement and other costs not expected to be incurred post-Transaction resulting in a reduction in operating expenses by $23,751 in fiscal year 2009.

 
(3)
To provide for the noncontrolling interest associated with the post- Transaction capital structure of 29.05%

 
(4)
To account for the incremental expense of DJSP Enterprises, Inc. being taxed at the corporate level at an estimated tax rate of 35%.

 
(5)
To account for the increased interest expense associated with the Transaction financing composed of a seller’s note of $87,469 using an assumed interest rate of 3% for the first 18 months on the $52,469 note and 0% for the first six months and 3% for the months six through 18 on the $35,000 note as well as 15% on a senior secured note of $15,589.

Pro Forma Notes (In thousands of U.S. Dollars, except for share and per share data, unless otherwise noted):

 
(A)
Pro forma entries are recorded to the extent they are a direct result of the Transaction, are factually supportable, and are expected to have a continuing impact on the combined results.

 
(B)
As the transaction is being accounted for as a reverse acquisition, the calculation of weighted average shares outstanding for basic and diluted earnings per share assumes that the shares issued in conjunction with the Transaction have been outstanding for the entire period.  Basic and diluted weighted average number of ordinary shares outstanding is calculated as follows:

   
Pro forma
Balance Sheet
Entry No.
   
Shares
 
Actual number of ordinary shares outstanding
         
9,166,666
 
Pro forma shares to be issued:
             
Shares issued in connection with Private Placement financing
   
(4
)
   
1,500,000
 
Pro forma weighted average number of ordinary shares outstanding - Basic
           
10,666,666
 
Common stock equivalents:
               
Shares retained by noncontrolling interest and convertible to DJSP Enterprises, Inc. shares
           
8,266,667
 
Shares issued to warrantholders upon exercise of private placement warrants
           
233,010
 
Shares issuable from actual “in the money” warrants outstanding
               
From Public Offering warrants
           
6,875,000
 
From Founder’s units
           
2,291,666
 
From Private Placement warrants
           
2,000,000
 
From UPO
           
275,000
 
Less number of shares available “on the market” pursuant to the treasury stock method
           
(5,890,901
)
Number of “new” shares to be issued pursuant to the treasury shares method
           
14,050,442
 
Pro forma weighted average number of ordinary shares outstanding - Diluted
           
24,717,108
 
 
25

 
 
ITEM 15.  CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, as of December 31, 2009.  Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2009, the end of the period covered by this Report, at a reasonable assurance level and, accordingly, provide reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
Management’s Annual Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: 
 
 
·
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transaction and dispositions of the assets of the company;
 
 
 
·
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
 
 
 
·
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use of disposition of the company’s assets that could have a material effect on the financial statements.
 
            Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of Chardan 2008’s internal control over financial reporting as of December 31, 2009.  In making this assessment, the company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
 
Based on our assessment, management believes that, as of December 31, 2008, Chardan 2008’s internal control over financial reporting is effective based on those criteria.
 
This Report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this Report.
 
This Report does not contain a report by management on internal control over financial reporting or an attestation report of our registered public accounting firm for the DJS Processing Division and its combined affiliates.  Under normal circumstances, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), we would be required to furnish a report by management on internal control over financial reporting, which must contain, among other things, an assessment of the effectiveness of our internal control over financial reporting as of the end of the year, including a statement as to whether or not our internal control over financial reporting is effective.  However, in Compliance and Disclosure Interpretation No. 215.02 (the “CD&I”), dated April 24, 2009, the staff of the SEC (the “Staff”) acknowledged that in a the case of a reverse merger between an issuer and a private operating company, it might not always be possible to conduct an assessment of the private operating company’s (or for accounting purposes, the acquirer’s) internal control over financial reporting in the period between the consummation date of the reverse acquisition and the date of management’s assessment of internal control over financial reporting.  The Staff also recognized that in many of these transactions, such as those in which the legal acquiror is a non-operating public shell company, the internal controls of the legal acquiror may no longer exist as of the assessment date or its assets, liabilities, and operations may be insignificant when compared to the consolidated entity.  The Staff states that in such situations, it would not object if the surviving issuer were to exclude management’s assessment of internal control over financial reporting in the annual report covering the fiscal year in which the transaction was consummated.
 
Prior to the Transaction, Chardan 2008 was a blank check company formed for the purpose of acquiring an unidentified operating business and it had limited operations and no assets other than cash.  Following the Transaction, we now own DAL and its operating company subsidiaries.  Prior to the Transaction, none of DAL and its operating subsidiaries were required to file any periodic or other reports with the SEC, nor were they subject to the reporting requirements of Section 15(d) of the Exchange Act.  While the CD&I specifically states that management’s assessment of internal control over financial reporting is not required in the annual report covering the fiscal year in which the transaction is consummated, the same reasoning should apply in our case in which the Transaction occurred soon after the end of the fiscal year.

Management acknowledges its responsibility for establishing and maintaining adequate internal controls over financial reporting.  In order to comply with Section 404 of Sarbanes Oxley, management has begun the necessary system and process documentation and evaluation and will include its report on internal control over financial reporting in its future annual reports beginning with its annual report for the fiscal year ending December 31, 2010.
 
Changes in Internal Control over Financial Reporting
 
Other than changes in our internal control over financial reporting associated with the acquisition of DAL and its operating subsidiaries in connection with the Transaction, there has been no change in our internal control over financial reporting during the year ended December 31, 2009, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
26


PART III

 
INDEX TO FINANCIAL STATEMENTS
 
DJS Processing Division and its Combined Affiliates
Audited Combined Carve-Out Financial Statements as of December 31, 2009 and 2008 and for the Years Ended December 31, 2009, December 31, 2008 and December 31, 2007
 
   
Page
 
Report of Independent Registered Public Accounting Firm
   
F-2
 
Combined Carve-Out Balance Sheets
   
F-3
 
Combined Carve-Out Statements of Income
   
F-4
 
Combined Carve-Out Statements of Changes in Shareholder's and Member's Equity  
   
F-5
 
Combined Carve-Out Statements of Cash Flow    
   
F-6
 
Notes to the Combined Carve-Out Financial Statements   
   
F-7
 
 
Chardan 2008 China Acquisition Corp.
Audited Financial Statements as of December 31, 2009 and 2008 and for the Year Ended December 31, 2009 and the period from February 19, 2008 (inception) to December 31, 2008
 
   
Page
 
Report of Independent Registered Public Accounting Firm
   
F-13
 
Balance Sheets
   
F-14
 
Statements of Operations    
   
F-15
 
Statements of Changes in Shareholders’ Equity
   
F-16
 
Statements of Cash Flows 
   
F-17
 
Notes to Audited Financial Statements
   
F-18
 
 
F-1

 
Report of Independent Registered Public Accounting Firm

To the Member and Shareholder
DJS Processing Division and its Combined Affiliates

We have audited the accompanying combined carve-out balance sheets of DJS Processing Division and its Combined Affiliates (the “Company”) as of December 31, 2009 and 2008, and the related combined carve-out statements of income, changes in shareholder’s and member’s equity, and cash flows for each of the three years in the period ended December 31, 2009.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the combined carve-out financial statements referred to above present fairly, in all material respects, the financial position of DJS Processing Division and its Combined Affiliates as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

The combined carve-out financial statements include the accounts of a division of an entity and the amounts included therein are based on significant estimates and judgments made by management. See Note 1 for further discussion.
 
As discussed in Note 10, the Company has restated their combined carve-out financial statements to include segment disclosures.
 
 
/s/ McGladrey & Pullen, LLP

Orlando, Florida
April 1, 2010, except for Note 10, as to which the date is April 22, 2010
 
F-2

 
DJS PROCESSING DIVISION AND ITS COMBINED AFFILIATES
(A Division of The Law Offices of David J. Stern, P.A.)
COMBINED CARVE-OUT BALANCE SHEETS
December 31, 2009 and 2008
 
   
2009
   
2008
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
 
$
763,387
   
$
1,427,588
 
Accounts receivable
               
Related party
               
Client reimbursed costs
   
6,046,760
     
26,147,837
 
Fee income, net
   
15,636,734
     
9,604,603
 
Unbilled receivables
   
10,591,850
     
11,210,565
 
Total related party accounts receivable
   
32,275,344
     
46,963,005
 
Fee income receivable, net
   
798,350
     
2,202,690
 
Total accounts receivable
   
33,073,694
     
49,165,695
 
Prepaid expenses
   
87,314
     
46,939
 
Total current assets
   
33,924,395
     
50,640,222
 
Equipment and leasehold improvements, net (Note 3)
   
4,691,520
     
3,154,623
 
Total assets
 
$
38,615,915
   
$
53,794,845
 
 
 
LIABILITIES AND SHAREHOLDER'S AND MEMBER'S EQUITY
 
Current Liabilities
               
Accounts payable – client reimbursed costs
 
$
6,046,760
   
$
20,425,337
 
Accounts payable
   
1,505,861
     
742,601
 
Accrued compensation
   
1,863,436
     
2,207,094
 
Accrued expenses
   
1,200,650
     
976,643
 
Current portion of capital lease obligations (Notes 3 and 4)
   
191,786