F-1/A 1 v185380_f1a.htm Unassociated Document
 
As filed with the Securities and Exchange Commission on May 18, 2010
Registration No. 333-164907


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM F-1/A
Amendment No. 3
 
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
 
DJSP ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
 
British Virgin Islands
7380
Not Applicable
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
 
900 South Pine Island Road, Suite 400
Plantation, Florida 33324
Tel: (954) 233-8000 ext. 2024
Fax: (954) 233-8570
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)
 
Kumar Gursahaney
900 South Pine Island Road, Suite 400
Plantation, Florida 33324
Tel: (954) 233-8000 ext. 2024
Fax: (954) 233-8570
(Address, including zip code, and telephone number,
including area code, of agent for service)
 
With copies to:
 
Mitchell S. Nussbaum, Esq.
Loeb & Loeb LLP
345 Park Avenue
New York, New York 10154
(212) 407-4000
(212) 407-4990 — Facsimile
 
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration statement.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨




  
CALCULATION OF REGISTRATION FEE CHART
        
Title of Each Class of Security Being Registered
 
Amount Being
Registered (1)
   
Proposed
Maximum
Offering
Price Per
Security(2)
   
Proposed
Maximum
Aggregate
Offering Price(2)
   
Amount of
Registration
Fee(3)
 
Ordinary Shares, par value $0.0001 (4)
    2,291,666       8.09       18,539,578       1,355  
Ordinary Shares, par value $0.0001 (5)
    8,266,667       8.09       66,877,336       4,889  
Ordinary Shares, par value $0.0001 (6)
    1,500,000       8.09       12,135,000       865  
Warrants to Purchase Ordinary Shares (7)
    2,291,666                   —(8 )
Ordinary Shares underlying warrants, par value $0.0001 (7)
    2,291,666       8.09       18,539,578       1,355  
Warrants to Purchase Ordinary Shares (9)
    2,000,000           $     $ —(8 )
Ordinary Shares underlying warrants, par value $0.0001 (9)
    2,000,000       8.09     $ 16,180,000     $ 1,183  
Ordinary Shares, par value $0.0001 (10)
    233,010       8.09       1,885,050       138  
Total
                          $ 9,785 *
 
(1)
Pursuant to Rule 416 of the Securities Act of 1933, as amended, the ordinary shares offered hereby also include such presently indeterminate number of shares of the Registrant’s ordinary shares as a result of stock splits, stock dividends or similar transactions.
 
(2)
Estimated solely for the purpose of calculating the registration fee.
 
(3)
Calculated pursuant to Rule 457(c) under the Securities Act of 1933, as amended, based on the average high and low price of the ordinary shares as quoted on NASDAQ on February 5, 2010.
 
(4)
Represents ordinary shares issued in a private placement of 2,291,666 underlying units consisting of 2,291,666 ordinary shares and 2,291,666 warrants being registered for resale that were issued to shareholders of the Registrant prior to its initial public offering.
 
(5)
Represents ordinary shares which may be issued upon conversion of common units of DAL Group LLC issued in connection with the Registrant’s acquisition of a controlling interest in DAL.
 
(6)
Represents ordinary shares issued in a private placement of 1,500,000 of ordinary shares of the Registrant issued to certain accredited investors in connection with the consummation of a transaction.
 
(7)
Represents warrants and ordinary shares underlying the warrants issued in a private placement of 2,291,666 underlying units consisting of 2,291,666 ordinary shares and 2,291,666 warrants being registered for resale that were issued to shareholders of the Registrant prior to its initial public offering.
 
(8)
No fee pursuant to Rule 457(a).
 
(9)
Represents warrants of the Registrant and ordinary shares underlying the warrants being registered for resale that were issued to the founding shareholders of the Registrant prior to its initial public offering.
 
(10)
Represents ordinary shares which may be issued to certain of the holders of the 2,000,000 warrants issued in a private placement in connection with their agreement to exercise or sell those warrants.
 
*
Previously Paid.
 
Pursuant to Rule 429 under the Securities Act of 1933, the prospectus included in this registration statement is a combined prospectus relating also to Registration Statement No. 333-152623 declared effective by the Securities and Exchange Commission on August 11, 2008. This Registration Statement, upon effectiveness, also constitutes Post-Effective Amendment No. 1 to Registration Statement No. 333-152623, and such post-effective amendment shall hereafter become effective concurrently with the effectiveness of this Registration Statement and in accordance with Section 8(c) of the Securities Act of 1933.
 
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 
ii

 
 
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION, DATED MAY 18, 2010
 
23,733,009 Ordinary Shares
4,429,166 Warrants
 
DJSP Enterprises, Inc.
 
This prospectus relates to 23,733,009 ordinary shares and 4,429,166 warrants of DJSP Enterprises, Inc. (“DJSP,” “Company,” “we,” “our” or “us”), a British Virgin Islands company limited by shares, that may be sold from time to time by the Selling Shareholders named in this prospectus and 6,875,000 shares issuable upon exercise of our publicly traded warrants.
 
The Company will not receive any of the proceeds from the sale of the shares and warrants under this prospectus, although the Company could receive up to (i) $1,000,0000 upon the exercise of all of the warrants held by certain former officers and directors, and their affiliates prior to the Company’s initial public offering whose shares are being registered hereunder, subject to the warrants being exercised on a cashless basis, (ii) $11,458,330 upon the exercise of all of the warrants held by shareholders of the Company prior to the Company’s initial public offering underlying 2,291,666 insider units purchased by such shareholders and (iii) $34,375,000 upon the exercise of the 6,875,000 public warrants issued in our initial public offering pursuant to a prospectus dated August 11, 2008.  Any amounts we receive from such exercises will be used for general working capital purposes.
 
The prices at which the Selling Shareholders may sell their shares will be determined by the prevailing market price for the shares or pursuant to privately negotiated transactions. Information regarding the Selling Shareholders and the times and manner in which they may offer and sell the shares under this prospectus is provided under “Selling Shareholders” in this prospectus.
 
The Company's ordinary shares, warrants and units (defined as consisting of one ordinary share and one warrant to purchase one ordinary share) are traded on NASDAQ under the symbols DJSP, DJSPW, and DJSPU, respectively. On March 17, 2010, the closing sale price of the ordinary shares, warrants and units was $12.14, $7.05 and $19.34, respectively. You are urged to obtain current market quotations of the Company’s ordinary shares before purchasing any of the shares being offered for sale pursuant to this prospectus.
 
The Selling Shareholders, and any broker-dealer executing sell orders on behalf of the Selling Shareholders, may be deemed to be “underwriters” within the meaning of the Securities Act of 1933. Commissions received by any broker-dealer may be deemed to be underwriting commissions under the Securities Act of 1933.
 
INVESTING IN OUR ORDINARY SHARES IS HIGHLY RISKY. YOU SHOULD INVEST IN OUR ORDINARY SHARES ONLY IF YOU CAN AFFORD TO LOSE YOUR ENTIRE INVESTMENT. FOR A DISCUSSION OF SOME OF THE RISKS INVOLVED, SEE “RISK FACTORS” BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of the prospectus. Any representation to the contrary is a criminal offense.
 
The date of this prospectus is ______________, 2010.

 

 
 
This prospectus is not an offer to sell any securities other than the ordinary shares and warrants offered hereby. This prospectus is not an offer to sell securities in any circumstances in which such an offer is unlawful.
 
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.
 
ENFORCEABILITY OF CIVIL LIABILITIES
    1  
PROSPECTUS SUMMARY
    2  
RISK FACTORS
    4  
THE OFFERING
    12  
PER SHARE MARKET INFORMATION
    13  
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
    14  
USE OF PROCEEDS
    15  
EXPENSES RELATED TO THIS OFFERING
    15  
CAPITALIZATION
    16  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    18  
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
    30  
BUSINESS
    37  
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    55  
PRINCIPAL SHAREHOLDERS
    62  
SHARES ELIGIBLE FOR FUTURE SALE
    64  
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    65  
DESCRIPTION OF SECURITIES
    67  
SELLING SHAREHOLDERS
    71  
TAXATION
    73  
LEGAL MATTERS
    79  
EXPERTS
    79  
WHERE YOU CAN FIND ADDITIONAL INFORMATION
    79  

 
(i)

 
 
PROSPECTUS SUMMARY
 
This summary highlights key information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus. It may not contain all of the information that is important to you. You should read the entire prospectus, including “Risk Factors,” our consolidated financial statements and the related notes thereto and condensed consolidated financial statements and the related notes thereto, and the other documents to which this prospectus refers, before making an investment decision.
 
Overview
 
DJSP Enterprises, Inc. (“DJSP”, “We,” “us” or “our”) is a holding company whose primary business operations are conducted through three wholly owned subsidiaries, DJS Processing, LLC (“DJS LLC”), Professional Title and Abstract Company of Florida, LLC (“PTA LLC”), and Default Servicing, LLC (“DSI LLC”) of DAL, a company in which DJSP holds a controlling interest.   DAL, through its operating subsidiaries, provides non-legal services supporting residential real estate foreclosure, other related legal actions and lender owned real estate (“REO”) services, primarily in Florida.
 
We were incorporated in the British Virgin Islands on February 19, 2008 under the name “Chardan 2008 China Acquisition Corp.” 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 which has its principal business and/or material operations in China.  When the global financial crisis occurred soon after the completion of Chardan 2008’s initial public offering in August 2008, Chardan 2008’s management believed that US equity markets would be less receptive to a transaction with a Chinese company. For that reason, when the opportunity to engage in a transaction with DAL Group LLC (“DAL”)arose in early 2009, management considered it to be the best of the opportunities it had identified to that point and decided to pursue it.
 
On January 15, 2010, Chardan 2008 acquired a controlling interest in DAL in exchange for $64.8 million in cash and the assumption by DAL of approximately $4.1 million in Chardan 2008 expenses (the “Transaction”).  In particular, Chardan 2008 acquired 10,663,866 DAL Common Units, and warrants to acquire 11,441,666 Common Units (the “DAL Warrants”).

Concurrently with the Transaction, David J. Stern, the Law  Offices of David J. Stern (“DJS”), Professional Title and abstract Company of Florida, Inc. (“PTA”) and Default Servicing, Inc. (“DSI”) transferred all of their non-legal business and assets to DJS LLC, PTA LLC and DSI LLC, respectively.  Mr. Stern, DJS, PTA and DSI (the “Stern Contributors”) then transferred all of their ownership interests in DJS LLC, PTA LLC and DSI LLC to DAL.  In consideration for their contribution of their ownership interests in DJS LLC, PTA LLC and DSI LLC to DAL, the Stern Contributors received from DAL the following: (i) $58,500,080 in cash; (ii) $52,469,000 in a promissory note issued by DAL to DJS (the “Stern Deferral Note”); (iii) 1,200,000 DAL Common Units; (iv) 1,666,667 DAL Series A Preferred Units; (v) 3,133,333 DAL Series B Preferred Units; and (vi) the right to receive $35 million in post-closing cash.

As a result of the Transaction, DAL acquired membership interests in the three limited liability companies (DJS LLC, PTA LLC and DSI LLC) that together constitute a provider of non-legal residential mortgage foreclosure processing and other services, principally in the state of Florida. DAL did not acquire any portion of such companies that involves the provision of legal services.
 
FlatWorld Capital, LLC (“FlatWorld Capital”) had entered into a letter of intent dated July 16, 2008 with the Stern Contributions, which was subsequently revised and extended on October 28, 2008 (the “October 28, 2008 LOI”), to acquire the business transferred by the Stern Contributors in connection with the Transaction.  Such letter of intent was subsequently contributed to DAL by FlatWorld Capital, LLC.  FlatWorld contacted Chardan 2008 to provide the equity financing required to complete the Transaction.  As a condition to FlatWorld Capital introducing Chardan 2008 to the Stern Contributors, FlatWorld Capital and Chardan 2008 entered into an agreement that precluded Chardan 2008 from pursuing a transaction with the Stern Contributors without the participation of FlatWorld Capital and its affiliates.  Because of the mutual interest of FlatWorld Capital and Chardan 2008 in pursuing a transaction with the Stern Contributors, such parties agreed to conduct the Transaction with the Stern Contributors through FlatWorld Capital’s affiliate, DAL, which then held the October 2008 LOI.  The Transaction was conducted through DAL in order to achieve the tax objectives of the Stern Contributors and FlatWorld Capital, Raj K. Gupta (“Gupta”), who serves on DAL’s Board of Managers, and Jeffrey A. Valenty (“Valenty”).  Prior to the Transaction, DAL was owned by various affiliates of Gupta and Valenty.  Immediately prior to the Transaction, DAL was owned by FlatWorld DAL LLC (“FlatWorld”) and Fortuna Capital Partners, LP (“Fortuna”), both of which were beneficially owned in their entirety by Gupta and Valenty.  DAL was a non-operating company and had never operated a business prior to the Transaction.
 
Following the Transaction, the existing members of DAL, FlatWorld and Fortuna held (i) an aggregate of 1,500,000 Common Units of DAL and (ii) an aggregate of 766,667 Series B Preferred Units in DAL. Immediately following the closing of the Transaction, Fortuna transferred its membership interest in DAL to FlatWorld; FlatWorld then immediately transferred its resulting membership interest, 60% to Nagina Partners LLC (“Nagina”) and 40% to Valenty. Nagina is beneficially owned by Gupta.
 
In connection with the Transaction, DAL and FlatWorld Consulting LLC, an affiliate of FlatWorld Capital, Nagina, Valenty, Gupta, FlatWorld, and Fortuna entered into an agreement for FlatWorld Consulting LLC to provide management consulting services consistent with those services generally performed by middle-market private equity firms, as discussed in more detail under “Certain Relationships and Related Transactions – FlatWorld Consulting LLC and Chardan Capital Markets, LLC Consulting Agreement and Other Fees” below.
 
Our public shareholders approved the Transaction at an extraordinary general meeting of shareholders held on January 11, 2010.  At that meeting, more than 50% of the shareholders approved the Transaction and fewer than 35% of our public shareholders voted against the Transaction and elected to redeem their shares, which complied with the voting requirements specified in our organizational documents.  In connection with the Transaction, the Company changed its name from “Chardan 2008 China Acquisition Corp.” to “DJSP Enterprises, Inc.”
 
Concurrently with the Transaction, the Company consummated a private placement of 1,500,000 ordinary shares of the Company for aggregate proceeds of $10,500,000, which proceeds formed a part of the Transaction consideration. As a result, following the Transaction and private placement, the Company had a total of 10,663,866 ordinary shares outstanding.

 
2

 
 
Our principal executive office is located at 900 South Pine Island Road, Suite 400, Plantation, Florida 33324.  Our phone number is (954) 233-8000.
 
David J. Stern
 
David J. Stern is our Chairman, President and Chief Executive Officer. He is also the sole shareholder of the Law Offices of David J. Stern, or “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. Although both DJS and the Company 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 for any reason or otherwise chooses not to perform such services, 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.  In addition, 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 us. For example, he may be precluded by his ethical obligations as an attorney or may otherwise be reluctant to take actions on behalf of us that are in its best interests but are not in the best interests of DJS, his law firm, 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.
  
Regardless of Mr. Stern’s importance to us, he owns no securities in us directly.  He does, however, own securities in our subsidiary, DAL Group LLC, which may be exchangeable into up to 6,000,000 of our ordinary shares.  In addition, pursuant to the terms of the Voting Agreement dated January 15, 2010 (the “Voting Agreement”) by and among David J. Stern, us and certain shareholders of the Company who are signatories thereto, the parties to the Voting Agreement other than us agree to vote all of the ordinary shares held by them (an aggregate of approximately 33% of our outstanding ordinary shares), in favor of four nominees to the Company’s Board of Directors designated by Mr. Stern (each a “Stern Designee”), two nominees designated by the Principals (each a “Principal Designee”) and Juan V. Ruiz (the “DAL Nominee”). The Voting Agreement also allows the holders of the DAL Common Units and the Series A Preferred Units (other than Chardan 2008), to designate, after the date upon which such holders have the right to exchange such units for ordinary shares, by majority vote, a number of nominees to the Company’s Board of Directors based on their ownership percentage of us, assuming their DAL Common Units and Series A Preferred Units were exchanged for ordinary shares. The Principals are able to nominate one independent Board nominee as long as they still hold ordinary shares representing 5% of our outstanding shares. The term of the Voting Agreement is five years from the closing of the Transaction, or shorter in certain other events.
  
In addition, in connection with the Transaction, one of our subsidiaries, DJS LLC, entered into a 25 year exclusive Services Agreement with DJS under which it has the right to perform all non-legal services required to process foreclosure files and perform ancillary services. Under the terms of the Services Agreement, DJS LLC will be obligated to make payments to DJS for the first four years of the term of the Services Agreement, in the event that DJS does not earn at least $2 million of EBITDA during each year, subject to certain adjustments and conditions in exchange for supervisory services performed by DJS personnel for DJS LLC. The amount of the payments made by DJS LLC to DJS under the Services Agreement, if any, are not yet known and are expected to vary.  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.
 
See the section of this Registration statement titled, “Certain Relationships and Related Transactions” for more information about our indebtedness to Mr. Stern and the Services Agreement with DJS and the section titled, “Description of Securities – Voting Agreement” for more information about the Voting Agreement.
 
Recent Trends
 
During the first quarter of 2010 the pace of new foreclosures slowed.  RealtyTrac reported that the number of U.S. households facing foreclosure in February 2010 grew 6% from the year-ago level, which is the smallest annual increase in four years. We attribute this first quarter trend to a slowdown in the initiation of foreclosure files while banks work through mortgage foreclosure abatement programs enacted by the federal government such as the Hope for Homeowners Act of 2008 and the Emergency Economic Stabilization Act which are designed to bring relief to distressed homeowners by encouraging loan modifications rather than foreclosures and provide funds to troubled financial institutions. Further discussion and additional examples of foreclosure abatement programs are in the section of this prospectus titled, “DJS Processing Division and Combined Affiliates – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments.” As our business is primarily focused in providing mortgage foreclosure services, we expect such trends to reduce our file referrals in the near term. We anticipate that, 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 the number of foreclosure files referred to us later this year.  According to the Mortgage Bankers Association (“MBA”) National Delinquency Survey, 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. At December 31, 2009, approximately 20.4% of Florida mortgages were 90 days or more past due or already in the process of foreclosure according to MBA’s chief economist.
 
Risks Affecting DJSP
 
In evaluating purchasing securities in our Company the resale of the shares of our ordinary shares, you should carefully read this prospectus and especially consider the factors discussed in the section titled “Risk Factors” commencing on page 4.

 
3

 
 
RISK FACTORS
 
You should carefully consider the following risk factors, together with all of the other information included in this prospectus.

Risks Related to our Business

David J. Stern, the President and Chief Executive Officer of DAL, 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, DAL’s 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 behalf of us that are in its best interests but are not in the best interests of DJS, his law firm, 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. Certain of the agreements between Mr. Stern, DJS and their affiliates and the Company and its affiliates specifically provide for the manner in which these conflicts will be resolved. For instance, the DAL limited liability company agreement provides that, in the event that a majority of the members of DAL’s Board of Managers not nominated by Mr. Stern or his affiliates have a conflict of interest with respect to any matter involving DAL, they may designate another person to represent DAL with respect to that matter. Because the Company’s operations are conducted through DAL and its subsidiaries, this allows the members of the DAL Board of Managers not nominated by Mr. Stern and his affiliates to designate a party independent of Mr. Stern to represent the interests of DAL and its subsidiaries in all of DAL’s dealings with Mr. Stern and his affiliates, including as a customer, equity holder and lender. This agreement also provides that, so long as the Company owns more than fifty (50) percent of the outstanding membership interests of DAL, the DAL Board of Managers cannot take certain actions without the approval of a majority of the Company’s Board of Directors other than those nominated by Mr. Stern or his affiliates or Mr. Ruiz. Among the actions subject to this restriction are entering into, amending or waiving any contract with a member of DAL or its affiliates, such as Mr. Stern and his affiliates, declaring or making distributions, including distributions that benefit Mr. Stern or his affiliates, or amending or waiving the DAL limited liability company agreement, including amendments or waivers that benefit Mr. Stern or his affiliates. Mr. Stern’s employment agreement provides that if DJS defaults under the services agreement between DJS and DJS LLC, the Board of Managers of DJS LLC may appoint a committee of independent members of DJS LLC to direct DJS LLC’s activities in response to the default and suspend Mr. Stern’s responsibilities relating to the default. In other situations, not covered by the agreements discussed above, pursuant to the Company’s code of conduct and ethics, Mr. Stern is required to resolve conflicts of interests involving his affiliates and him that may arise from time to time under guidelines or resolutions approved by the Company’s Board of Directors, a majority of whom are independent directors under NASDAQ rules. In addition, under the Company’s Audit Committee Charter, among the duties of the Company’s Audit Committee, all of the members of which are independent directors under NASDAQ rules, are to review and approve all related-party transactions and to review and approve all payments made to the Company’s officers, directors and affiliates.
 
David J. Stern plays a critical role in the success of both DJS and the Company. Should Mr. Stern become unwilling or unable to perform his duties for either entity, it is likely that our business and results would be adversely affected to a significant degree.

Although both DJS and the Company 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 or unwilling to perform his duties under his employment agreement, 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 has recommended four members of the Board, 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 DJS LLC by DJS, which is its principal foreclosure processing service law firm client, do not increase, our operating results and ability to execute our growth strategy could be adversely affected.

DJS LLC has 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. DJS LLC will be paid a fixed fee by DJS for the services it renders 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 DJS LLC’s and DAL’s ability to control costs. During calendar years 2007, 2008 and 2009, DJS referred to us case files totaling 61,480, 96,509 and 98,259, respectively. Revenues from our mortgage foreclosure segment increased in 2009, even though case referral levels only increased slightly primarily because of the timing of revenue recognition for such files, which is discussed further in the section entitled “DJS Processing Division and Combined Affiliates – Management’s Discussion and Analysis of Financial Condition and Results of Operations – 2009 Compared to 2008.” While there has been a slowdown in foreclosure activity in early 2010 because of recent government programs, we expect the level of case files referred to us in future quarters to increase because we believe the recent government programs to aid homeowners will have only limited success. However, such programs may have more success than we expect or new programs may be implemented that are more successful, which could reduce case file referrals to us.  You should also refer to “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. There is little or no opportunity for DJS LLC 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 DJS LLC’s costs. Because DJS receives a fixed fee from its client, it has limited financial ability to pay increased fees to DJS LLC. As a result, if the number of referrals that we receive through DJS decreases, it would likely result in a decrease in revenues and profits for DJS LLC.

 
4

 

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 2008, the top ten clients for DJS, on an aggregate basis, accounted for 94% of its case files referred to DJS for mortgage default and other processing services; and its largest single customer, accounted for 21% 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’s 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 the customers experience a decrease in the number of residential mortgage foreclosure actions that they 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 DJS LLC as a result of any one or more of these factors could materially reduce DAL’s 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 DJS LLC and in turn negatively affect DAL.

DJS LLC could lose its law firm customer if DJS LLC materially breaches the Services Agreement.

Under the terms of the Services Agreement with DJS LLC, DJS has the right to terminate the Services Agreement in the event DJS LLC breaches the terms of that agreement. DJS may have an ethical duty to take such action if DJS LLC does 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 require DJS not to use DJS LLC 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 DJS LLC’s, PTA LLC’s and DSI LLC’s s 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 are 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 DJS LLC will 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 DJS LLC, PTA LLC or DSI LLC to perform those services.

DJS LLC’s 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 DJS LLC’s business:

 
5

 
 
State or local bar associations, state or local prosecutors or other persons may claim that some portion of the services that DJS LLC provides constitute 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. DJS LLC, PTA LLC, DSI LLC or DAL 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 DJS LLC’s or another operating subsidiary’s operations were successful, the service operations may need to be modified in a manner that could adversely affect our business and DAL’s revenues and profitability, DJS LLC, PTA LLC, DSI LLC, and DAL could be subject to a range of penalties and suffer damage to our reputation; and
 
The Services Agreement to which DJS LLC is a party 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 DJS LLC.
 
In addition, applicable laws, regulations and codes of professional responsibility, including their interpretation and enforcement, could change in a manner that restricts DJS LLC’s operations. Any such change in laws, policies or practices could increase our cost of doing business or adversely affect our revenues and profitability.

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.

DAL relies heavily on a proprietary case management software system, which stores, manages and reports on the large amount of data associated with each foreclosure, bankruptcy, REO 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.
 
 
6

 
 
We have experienced significant growth in caseload over the last few years and if we are unable to maintain the quality of our work-product with increasing volumes, our clients will not continue to refer us additional cases.
 
From 2006 to 2009, our foreclosure case load increased from 15,332 to 70,382.  This rapid increase in caseload required us to hire additional personnel to help ensure that case materials were prepared and submitted properly.  In addition, we were required to hire additional personnel to maintain our internal control over financial reporting given the substantial increase in caseload.  If we did not hire sufficient personnel in the past or if we do not or are unable to hire personnel in the future to keep pace with future growth, the quality of our work product may suffer, resulting in dissatisfaction on the part of DJS' financial institution clients that may then choose to reduce the amount of business they conduct with DJS which would result in reduced business for us. In addition, failure to adequately staff our operations in light of increased caseload could put stress on our internal control over financial reporting which could compromise its effectiveness.
 
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. It 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.

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 the business of DJS and our business.

Under the terms of the Acquisition Agreement, 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 Note and Post-Closing Cash. Those amounts will be paid to the contributors of the business acquired by DAL (Professional Title and Abstract Company of Florida, Inc. (“PTA”), Default Servicing, Inc. (“DSI”) and the Law Offices of David J. Stern, P.A. (“DJS”) 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.

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 Business Acquisition 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 acquisition with fair values in excess of their carrying values, which could reduce our profits.
 
In connection with the Transaction, we and our subsidiaries issued approximately $103 million of debt, which, if we defaulted on the payments related to such debt, could result in our lenders acting to acquire our assets in satisfaction of the debt and our ceasing operations.

In connection with the Transaction, we and our subsidiaries issued approximately $103 million of debt.  The issuance of this debt resulted in our having negative equity and retained earnings post-Transaction.  In addition, if we are unable to make payments on such debt, our lenders may take action to seize our assets in satisfaction of our debt.  If this were to occur, we might not be able to continue running our business and be forced to cease operations.
 
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 LLC would likely be subject to these regulations, and it could adversely affect the number of mortgage default files that DJS LLC 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 DJS LLC for processing. In the past year, 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 government also enacted the Economic Emergency Stabilization Act, which provides funding to purchase troubled assets from financial institutions.

 
7

 

Most recently, the new 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 announced 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 DJS LLC 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 DJS LLC, could decline, which would have a negative impact on our revenue and earnings. You should also refer to “Item 7 — 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.

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 its 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 in order to streamline them. Should they do so, it could reduce the amount of fees that DJS LLC receives 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.
 
The Supreme Court of Florida has recently taken steps to insure that proper documentation is filed in foreclosure actions, and if DJS does not comply with the new rules and procedures the foreclosure actions on which they are working may be dismissed, which may result in DJS receiving fewer referrals, and, since they are our primary client, reduced revenues for us.
 
The Supreme Court of Florida has recently taken an active role in ensuring that proper documentation is filed in a foreclosure action by amending several rules of civil procedure and pertinent forms related to foreclosure actions filed in Florida.  The amendments are aimed at addressing certain concerns courts have recently had regarding foreclosure filings and create more stringent standards to be followed by plaintiffs and plaintiffs' counsel.  DJS, our primary client, has taken certain steps to insure that the more stringent standards are met.  However, DJS may not be successful in complying with these new rules.  If DJS is not successful in doing so, they may receive fewer cases to work on from their  financial institution clients, and, since they provide us with the vast majority of the cases on which we work, our case-load would significantly decline as well.  Any significant reduction in our caseload will significantly reduce our revenues and results of operations.
 
8

 

Risks Related to our Structure
 
Our outstanding Chardan 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 that 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 the Company’s IPO are not subject to a call. If any of the Company’s 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 its initial public offering, Chardan 2008 issued 2,000,000 warrants at a price of $0.50 to the management of Chardan 2008 and their affiliates (the “Private Placement Warrants”) which are being registered under the registration statement of which this prospectus forms a part. 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 shares underlying the Private Placement Warrants were also registered pursuant to our registration statement, and the prospect that those warrants may be exercised for $5.00 may reduce the market price at which the our ordinary shares trade.

In order to generate additional cash for payment of the note issued in connection with the Transaction (“Stern Note”), 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 units of Chardan 2008 securities purchased prior to the initial public offering (the “Insider Units”), each consisting of one ordinary share and one warrant to purchase an ordinary share of Chardan 2008 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
.
 
9

 

Registration rights held by the holders of DAL’s membership interests could reduce the market price of ours ordinary shares.

The original members of DAL prior to the Transaction do not hold a direct ownership interest  in the Company. However, the DAL Common Units and DAL Series A Preferred Units that the original members hold are convertible into comparable ownership interests in the Company commencing one year after the Transaction was consummated (i.e., January 15, 2011).  This prospectus includes the ordinary shares which may be issued if those DAL ownership interests are converted into DJSP ordinary on Series A Preferred shares.
 
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 6,875,000 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.
 
If certain price targets are met, up to 3,900,000 Series B Preferred Units of DAL Group LLC, our subsidiary, will be automatically exchanged for common units of DAL Group, LLC, which will then be convertible into our ordinary shares, which  will be eligible for future resale in the public market. “Market overhang” from the Series B Preferred Units as a result of that potential dilution could reduce the market price of the ordinary shares.

DAL Group LLC issued 3,900,000 Series B Preferred Units in connection with our acquisition of it.  The Series B Preferred Units are automatically exchangeable for common units of DAL Group LLC if our share price reaches certain thresholds.  Once converted into common units of DAL Group LLC, beginning January 15, 2011, once certain conditions are met, the common units will be convertible into our ordinary shares.  If they are converted, a substantial additional number of our ordinary shares will be eligible for resale in the public market, which may reduce the market price. On March 23, 2010 the 750,000 Series B-1 Preferred Units converted into DAL Group LLC common units. On May 3, 2010, the 750,000 Series B-2 Preferred Units also converted into common units of DAL Group LLC.
 
Because we do not intend to pay dividends on our ordinary shares, shareholders will benefit from an investment in our ordinary shares only if it appreciates 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 you are unlikely to receive notice directly from us that the warrants are being redeemed. If you fail to receive notice of redemption from a third party and your warrants are redeemed for nominal value, you will not have recourse to us.

 
10

 
 
Risks Related to Our Corporate Structure
 
Prior to Chardan 2008’s acquisition of DAL in January 2009, 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 Chardan 2008’s and DAL’s finance and accounting staffs and on their financial, accounting and information systems, and increase their insurance, legal and financial compliance costs. Chardan 2008  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 prospectus 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 the assets and income of us and DAL 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 the section entitled “Taxation—United States Federal Income Taxation—Tax Consequences to U.S. Holders of Ordinary Shares and Warrants—Passive Foreign Investment Company Rules.”

 
11

 
 
ENFORCEABILITY OF CIVIL LIABILITIES
 
DJSP Enterprises, Inc. is a British Virgin Islands company (the “Company”).  As a result of its recent the Transaction, the Company’s primary business operations are currently located in the United States.  All of the officers and directors of the Company reside in the United States.  Investors may bring actions under the civil liability provisions of the U.S. federal securities laws against the Company. The disclosure must address the following matters:  Since the principal offices of the Company are located in the United States, an investor may (i) effect service of process within the United States on the Company; and (ii) enforce judgments obtained in U.S. courts against the Company based upon the civil liability provisions of the U.S. federal securities laws.  An investor may have difficulty (i) bringing an original action in an appropriate foreign court to enforce liabilities against the Company based upon the U.S. federal securities laws and (ii) enforcing, outside the United States, judgments obtained in U.S. courts against the Company, including actions based upon the civil liability provisions of U.S. federal or state securities laws.
 
Any final and conclusive monetary judgment obtained against the Company in US courts, for a definite sum, may be treated by the courts of the British Virgin Islands as a cause of action in itself so that no retrial of the issues would be necessary provided that in respect of the US judgment:
 
1.           the US court issuing the judgment had jurisdiction in the matter and the Company either submitted to such jurisdiction or was resident or carrying on business within such jurisdiction and was duly served with process;
 
2.           the judgment given by the US court was not in respect of penalties, taxes, fines or similar fiscal or revenue obligations of the Company;
 
3.           in obtaining judgment there was no fraud on the part of the person in whose favour judgment was given or on the part of the court;
 
4.           recognition or enforcement of the judgment in the British Virgin Islands would not be contrary to public policy; and
 
5.           the proceedings pursuant to which judgment was obtained were not contrary to natural justice.
 
CERTAIN TERMS
  
Unless otherwise stated in this prospectus,
 
 
·
references to “DJSP,” “we,” “us” or “our company” refer to DJSP Enterprises, Inc.(f/k/a Chardan 2008 China Acquisition Corp.),  including  its subsidiaries; DJS Processing, LLC, Professional Title and Abstract Company of Florida, LLC, and Default Servicing, LLC;
 
 
·
references to “Transaction” refers to the acquisition by the Company of a controlling interest in DAL, which transaction was consummated on January 15, 2010;
 
 
·
references to “Chardan 2008” refers to  Chardan 2008 China Acquisition Corp., the blank check company prior to the consummation of the Transaction;
 
 
·
references to “DAL” refers to DAL Group LLC, a subsidiary of the Company and the entity through which the operating businesses are held, and its subsidiaries, including DJS Processing, LLC, Professional Title and Abstract Company of Florida, LLC, and Default Servicing, LLC;
 
 
·
references to “operating subsidiaries” refers to DJS Processing, LLC, Professional Title and Abstract Company of Florida, LLC, and Default Servicing, LLC;
 
 
·
references to “founding shareholders” refer collectively to Kerry Propper, Xiaosong Zhong, Li Zhang, Li Gong, Dr. Jianjun Shi, Steve Urbach, Jiangnan Huang, Royale Holdings, Dr. Richard Propper, Paula Beharry and Daniel Beharry,  each of whom purchased  shares and warrants of Chardan 2008  prior to our initial public offering; and
 
 
·
references to “public shareholders” refer to the holders of shares purchased in Chardan 2008’s initial public offering.
 
 
·
references to “Stern Contributors” refers to, collectively, David J. Stern, the Law Offices of David J. Stern, Professional Title and abstract Company of Florida, Inc. and Default Servicing, Inc.
 
THE OFFERING
 
This prospectus relates to the resale by the Selling Shareholders identified in this prospectus of up to 23,733,009 ordinary shares of the Company which consists of the following: (i) 2,291,666 ordinary shares held by certain founding shareholders of the Company, (ii) 2,291,666 warrants and 2,291,666 ordinary shares underlying such warrants held by the founding shareholders of the Company (iii) 8,266,667 ordinary shares issuable to certain members of DAL Group LLC (“DAL”) upon conversion of the common units of DAL into ordinary shares of the Company, (iv) 1,500,000 ordinary shares issued in a private placement to certain accredited investors, (v) 2,000,000 warrants and the ordinary shares underlying such warrants issued to the founding shareholders (“Private Placement Warrants”), (vi) 233,010 ordinary shares which may be issued to certain holders of the Private Placement Warrants in connection with their agreement to exercise or sell those warrants, (vii) 6,875,000 ordinary shares underlying the warrants issued as part of the initial public offering (“IPO”) of the Company and (viii) 137,500 ordinary shares and 137,500 warrants which may be issued upon exercise of the unit purchase option issued to the underwriters in connection with the IPO and the 137,500 ordinary shares underlying such warrants.
 
The prices at which the Selling Shareholders may sell their shares will be determined by the prevailing market price for the shares or pursuant to privately negotiated transactions. Information regarding the Selling Shareholders and the times and manner in which they may offer and sell the shares under this prospectus is provided under “Selling Shareholders” in this prospectus.
 
The Company is authorized to issue 60,000,000 ordinary shares, par value $0.0001, and 5,000,000 preferred shares, par value $0.0001. As of the date of this registration statement, 10,663,866 ordinary shares are outstanding, held by 18 holders of record. No preferred shares are currently outstanding.  The Company will not receive any proceeds from any sale of ordinary shares by the Selling Shareholders, although if the warrants are converted into ordinary shares, the Company will receive (i) $10,000,000 upon the exercise of all of the warrants held by certain former officers and directors, and their affiliates prior to the Company’s initial public offering whose shares are being registered hereunder, subject to the warrants being exercised on a cashless basis, (ii) $11,458,330 upon the exercise of all of the warrants held by shareholders of the Company prior to the Company’s initial public offering underlying 2,291,666 insider units purchased by such shareholders and (iii) $34,375,000 upon the exercise of the 6,875,000 public warrants issued in our initial public offering pursuant to a prospectus dated August 11, 2008.  Any amounts we receive from such exercises will be used for general working capital purposes.

 
12

 
 
PER SHARE MARKET INFORMATION

Our ordinary shares, warrants and units are quoted on the NASDAQ Capital Markets under the symbols DJSP, DJSPW, and DJSPU, respectively. The units have been quoted since August 12, 2008 and the ordinary shares and warrants since August 25, 2008. Our securities did not trade on any market or exchange prior to August 12, 2008. On March 31, 2010, the closing sale price of the ordinary shares, warrants and units was $11.62, $6.42 and $17.84 respectively.
 
The table below sets forth, for the calendar quarters indicated, the high and low bid closing prices for Chardan 2008’s units for the period from August 12, 2008 through March 31, 2010 and for the ordinary shares and warrants from August 25, 2008 through March 31, 2010.
 
   
Ordinary Shares
   
Warrants
   
Units
 
   
High
   
Low
   
High
   
Low
   
High
   
Low
 
Annual Market Prices
                                   
Year 2008 (from August 12, for units; August 25, for shares and warrants)
 
$
7.28
   
$
6.11
   
$
1.54
   
$
1.05
   
$
8.90
   
$
6.35
 
Year 2009
 
$
9.50
   
$
6.60
   
$
3.80
   
$
0.06
   
$
12.54
   
$
6.79
 
Year 2010 (through March 31, 2010)
 
$
 12.34
   
$
 8.14
   
$
 7.05
   
$
 3.14
   
$
 19.34
   
$
 11.38
 
                                                 
Quarterly Market Prices
                                               
Third Quarter 2008 (from August 25, 2008)
 
$
7.28
   
$
6.60
   
$
1.54
   
$
1.05
   
$
8.90
   
$
8.00
 
Fourth Quarter 2008
 
$
7.04
   
$
6.11
   
$
1.05
   
$
0.09
   
$
7.80
   
$
6.35
 
First Quarter 2009
 
$
7.15
   
$
6.60
   
$
0.35
   
$
0.06
   
$
7.15
   
$
6.79
 
Second Quarter 2009
 
$
7.45
   
$
6.90
   
$
0.90
   
$
0.24
   
$
8.10
   
$
7.11
 
Third Quarter 2009
 
$
7.79
   
$
7.36
   
$
0.97
   
$
0.34
   
$
8.54
   
$
7.50
 
Fourth Quarter 2009
 
$
9.50
   
$
7.60
   
$
3.80
   
$
1.00
   
$
12.54
   
$
8.00
 
First Quarter 2010
 
$
12.34
   
$
 8.14
   
$
 7.05
   
$
3.14
   
$
 19.34
   
$
 11.38
 
                                                 
Monthly Market Prices
                                               
October 2009
 
$
7.85
   
$
7.58
   
$
1.56
   
$
0.92
   
$
10.50
   
$
8.16
 
November 2009
 
$
7.87
   
$
7.72
   
$
1.45
   
$
1.00
   
$
8.51
   
$
8.00
 
December 2009
 
$
9.50
   
$
7.75
   
$
4.25
   
$
1.00
   
$
13.41
   
$
8.27
 
January 2010
 
$
9.75
   
$
8.27
   
$
4.63
   
$
3.31
   
$
13.93
   
$
12.00
 
February 2010
 
$
9.44
   
$
8.14
   
$
4.43
   
$
3.14
   
$
14.00
   
$
11.38
 
March 2010   
 
$
12.34
   
$
9.50
   
$
7.05
   
$
4.60
   
$
 19.34
   
$
 14.00
 
April 2010
  $
13.50
    $
11.23
    $
8.45
    $
6.15
    $
21.80
    $
17.30
 
 
 
13

 
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
The statements contained in this prospectus that are not purely historical are forward-looking statements. Our forward-looking statements include, but are not limited to, statements regarding our or our management’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predicts,” “project,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.
 
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.
 
The forward-looking statements contained in this prospectus are based on our current expectations and beliefs concerning future developments and their potential effects on us. 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.” 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 undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws and/or if and when management knows or has a reasonable basis on which to conclude that previously disclosed projections are no longer reasonably attainable.

 
14

 
 
USE OF PROCEEDS
 
The Company will not receive any proceeds from any sale of ordinary shares by the Selling Shareholders, although if the warrants are converted into ordinary shares, the Company will receive (i) $10,000,0000 upon the exercise of all of the warrants held by certain former officers and directors, and their affiliates prior to the IPO whose shares are being registered hereunder, subject to the warrants being exercised on a cashless basis, (ii) $11,458,330 upon the exercise of all of the warrants held by shareholders of the Company prior to the IPO underlying 2,291,666 insider units purchased by such shareholders and (iii) $34,375,000 upon the exercise of the 6,875,000 public warrants issued in our IPO pursuant to a prospectus dated August 11, 2008.  Any amounts we receive from such exercises will be used for general working capital purposes.
 
EXPENSES RELATED TO THIS OFFERING
 
Set forth below is an itemization of the total expenses that we expect to incur in connection with this distribution.

SEC registration fee
  $ 9,785  
Legal fees and expenses
  $ 150,000  
Accounting fees and expenses
  $ 20,000  
Miscellaneous
  $ 5,000  
Total
  $ 184,785  

 
15

 

CAPITALIZATION OF DJSP ENTERPRISES, INC.
(FORMERLY CHARDAN 2008 CHINA ACQUISITION CORP.)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS, AND U.S. GAAP, UNLESS OTHERWISE NOTED)
 
The following table sets forth the capitalization as of December 31, 2009 as described below of the Company on an actual basis prior to the Transaction and on an as adjusted basis after giving effect to the Transaction.
 
You should read this capitalization table together with "Management's Discussion and Analysis of Financial Condition and Results of Operation", the financial statements and related notes, and the unaudited pro forma condensed combined financial statements and related notes, all appearing elsewhere in this document.

   
As of Dec. 31, 2009
(in thousands)
 
   
Actual
   
As
Adjusted
 
             
Debt
  $       103,320  
                 
Ordinary shares subject to possible redemption     18,985        
                 
Shareholders' equity:
               
Preferred shares, $0.0001 par value; 5,000,000 shares authorized,  5,566,667 issued
          1  
Ordinary shares, $0.0001 par value, authorized — 60,000,000 shares; issued and outstanding —9,166,666 shares, inclusive of shares and 10,666,666 shares, as adjusted
    1       1  
Additional paid-in capital
    34,253       61,948  
Retained earning (deficit accumulated during the development stage)
    (507 )     (145,502)  
Noncontrolling interest
    -       3,881  
Total Shareholder's equity
    33,747       (79,67 1 )  
                 
Total capitalization
  $ 55,689     $ 23,64 9    

 
16

 

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.
  
 
17

 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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.

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.

 
18

 
 
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 primarily due to revenues from client-reimbursed costs increasing by $46.8 million to $139.1 million in 2009, as compared to $92.3 million in 2008 and, to a lesser extent and as discussed further below, 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. We anticipate that the programs mentioned above will 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.
 
Revenues from client-reimbursed costs increased due primarily to an increase in foreclosure filing fees which, due to changes in Florida law, over the course of 2009 increased by up to approximately 400%.
 
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 foreclosure files received in 2008 over 2007.  The estimated average processing time for all foreclosure files, except those 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.  This results in the total revenue for any given case file being recognized over a period that averages approximately eight months.  Therefore, revenue for any given year is determined, in part, by the volume of files in the latter months of the previous year.  Because foreclosure case volumes were up in the latter part of 2008 over the same period in 2007, revenues from mortgage foreclosure related services in 2009 increased over 2008 revenues, even though the number of foreclosure file referrals remained constant from 2008 to 2009.  The increase in revenue is also attributable to an increase in the number of REO closings processed during 2009 accounting for a net increase of $2.7 million as well as a net increase in other services provided by the mortgage foreclosure segment such as those related to bankruptcy which increased by $0.8 million.  Fees for these services are recognized on a much more current basis than are those related to mortgage foreclosure services.  These increases were partially offset by a decrease in the 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 a decrease in the fee per mortgage foreclosure file, permitted to be charged to clients and certain clients requiring the use of other title service providers.
 
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;
 
 
19

 
 
 
·
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.
 
The services PTA LLC provides take on average 10 to 14 days to complete while a bill is remitted immediately upon receiving a file.  As a result, an estimated amount of deferred revenue is recorded relating to this category of services.  Historically, the factors used to determine the deferred revenue estimate, such as the volume of files related to these services, has remained fairly constant and since the deferred revenue amount is also immaterial, the amount recorded as an estimate of deferred revenue has remained unchanged.  This was true for calendar years 2007 and 2008, during which time the amount remained unchanged at $263,900.  In late 2009, volumes decreased sufficiently to warrant a change in the amount of deferred revenue from $263,900 to $225,063.
 
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.

 
20

 

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.
 
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
     
 
 
 
21

 
  
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.

 
22

 
  
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.
 
On April 16, 2010, we signed a definitive agreement to acquire all of the outstanding shares of capital stock of Timios, Inc. (“Timios”), a national title insurance and settlement services company.  The closing of the acquisition is subject to customary due diligence, closing conditions and regulatory approvals.  Should the transaction be consummated, Timios would become a wholly-owned subsidiary of DAL.  The terms of the definitive agreement provide that we will acquire Timios for $1.5 million in cash, 200,000 of our ordinary shares, and up to another 100,000 of our ordinary shares to be earned upon achievement of defined performance metrics.  Timios had revenue of $5.05 million for the last 12 months.
 
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.
 
23

  
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.
 
 
24

 
 
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.
 
 
25

 
 
 
·
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.
 
 
26

 
  
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.
 
 
27

 
 
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.
 
 
28

 
 
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.
 
 
29

 
 
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL 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.
 
 
30

 
 
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)
   
            (118,455)
 
                                     
Total DJSP Enterprises, Inc.'s equity
   
                     33,747
     
          13,020
     
 
     
23,166
(6)
   
(56,505)
 
Noncontrolling interest
   
                             -
     
                  -
     
23,166
(6)
   
 
   
(23,166)
 
Total Equity
   
                     33,747
     
          13,020
                     
              (79,671)
 
Total liabilities and stockholders' equity
 
 $
                     55,689
   
 $
          38,616
                   
$
                42,576
 
 
31

  
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)
This amount represents the net assets attributable to the combined noncontrolling ownership interests of DAL. The noncontrolling interests of DAL exist following the Transaction due to the ownership by the Stern Contributors and Existing Members of DAL.  Each owns a combination of either DAL common units, DAL Series A preferred units, and/or DAL Series B preferred units.  This ownership represents a combined 29.05% of DAL.  Refer also to footnote 12 of the pro forma balance sheet for additional details of this ownership and the units related to the noncontrolling ownership interests.  The ownership percentages and equity allocations for the members of DAL, on a pro forma basis, as of the closing date of the Transaction, are summarized below:
 
Member
 
Ownership Interest
   
Equity Allocation
 
DJSP Enterprises
    70.95 %   $ 56,579  
Stern Contributors
    19.07 %   $ 15,207  
Existing Members
    9.98 %   $ 7,958  
    Total
    100.00 %   $ 79,744  
 
 
(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
 
 
32

  
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 the cash consideration purchase price, which represents an acquisition by DAL of the Stern Contributors’ interest in the operating subsidiaries DJS LLC, PTA LLC, and DSI LLC:
 
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
 
 
The cash consideration paid in excess of the carrying value of the equity interest sold of $132,949 represents a special distribution to the Stern Contributors.
 
 
(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)
Upon this Transaction, David J. Stern, the Law Offices of David J. Stern (“DJS”), Professional Title and abstract Company of Florida, Inc. (“PTA”) and Default Servicing, Inc. (“DSI”) transferred all of their non-legal business and assets to DJS LLC, PTA LLC and DSI LLC, respectively. Mr. Stern, DJS, PTA and DSI (the “Stern Contributors”) then transferred all of their ownership interests in DJS LLC, PTA LLC and DSI LLC to DAL. In consideration for their contribution of their ownership interests in DJS LLC, PTA LLC and DSI LLC to DAL, the Stern Contributors received from DAL the following: (i) $58,500,080 in cash; (ii) $52,469,000 in a promissory note issued by DAL to DJS (the “Stern Deferral Note”); (iii) 1,200,000 DAL Common Units; (iv) 1,666,667 DAL Series A Preferred Units; (v) 3,133,333 DAL Series B Preferred Units; and (vi) the right to receive $35 million in post-closing cash. As a result of the Transaction, DAL acquired membership interests in the three limited liability companies (DJS LLC, PTA LLC and DSI LLC) that together constitute a provider of non-legal residential mortgage foreclosure processing and other services, principally in the state of Florida. DAL did not acquire any portion of such companies that involves the provision of legal services. Following the Transaction, the existing members of DAL, FlatWorld DAL LLC (“FlatWorld”) and Fortuna Capital Partners LP (“Fortuna”), held (i) an aggregate of 1,500,000 Common Units of DAL and (ii) an aggregate of 766,667 Series B Preferred Units in DAL. Immediately following the closing of the Transaction, Fortuna transferred its membership interest in DAL to FlatWorld; FlatWorld then immediately transferred its resulting membership interest, 60% to Nagina Partners LLC (“Nagina”) and 40% to Jeffrey A. Valenty (“Valenty”).

The issuance of Series B units by DAL to the Stern Contributors and Existing Members 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 are automatically exchanged for common units of DAL and will subsequently be convertible into DJSP Enterprises 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. The Series B-1 preferred units converted into common units on March 23, 2010. The Series B-2 Preferred Units converted into Common Units on May 3, 2010.

The Transaction was accounted for as a reverse recapitalization, 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. Because the owner of DJS, PTA and DSI is considered to be in control of the Company and DAL, the assets were contributed to DAL in exchange for the units described above at the net assets’ cost due to the entities involved in the Transaction being under common control.  Refer to footnote 6 of the pro forma balance sheet for the equity interest components of DAL. The calculation of the noncontrolling interest assumes Series A and B units of DAL are outstanding.  Since the Series A and B units are convertible on a 1:1 basis to common units, the noncontrolling interest was computed by providing equal weighting to the Series A and B units as compared to the common units resulting in a noncontrolling interest of 29.05% of DAL.
 
 
33

 

CHARDAN 2008 ACQUISITION CORP. AND DJS PROCESSING DIVISION
AND COMBINED AFFILIATES
  
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