UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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Commission File Number: 000-28457

 

 

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

 

 

 

 

 

 

 

 

 

 

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements in this report contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements.  These factors include, but are not limited to, our ability to implement our business plan and generate revenues, our ability to raise sufficient capital to fund our operations and pay our obligations as they become due, economic, political and market conditions and fluctuations, government and industry regulation, U.S. and global competition, and other factors.  Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Readers should carefully review this quarterly report and our annual report on Form 10-K for the year ended December 31, 2011, including the risks described in Item 1A. - Risk Factors, in their entirety. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events.

 

Unless specifically set forth to the contrary, when used in this report the terms “RedFin", "we"", "our", the "Company" and similar terms refer to RedFin Network, Inc,Inc., a Nevada corporation formerly known as Secured Financial Network, Inc. and our subsidiary. In addition, when used herein and unless specifically set forth to the contrary, “2012” refers to the year ending December 31, 2012 and “2011” refers to the year ended December 31, 2011.  The information which appears on our website at www.redfinnet.com is not part of this report.

 

PART I - FINANCIAL INFORMATION

 

 

 

NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

 

The accompanying unaudited financial statements of RedFin Network, Inc. and our subsidiary (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-K. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Operating results for the three and sixnine months ended JuneSeptember 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Going concern contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time. The Company has incurred losses since inception and has negative cash flows from operations. For the sixnine month periods ended June,September, 2012 and June,September, 2011, the Company had net losses of $336,281$545,624 and $369,602$692,278 respectively and has a stockholders’ deficit of $2,367,869$2,563,213 as of JuneSeptember 30, 2012. As of JuneSeptember 30, 2012 the Company had $0$3,299 in cash. As stated by our auditors in our most recently filed Annual Report on Form 10-K for the year ended December 31, 2011, these conditions raise substantial doubt about the Company’s ability to continue as a going concern. The future of the Company is dependent upon its ability to obtain additional equity and/or debt financing and upon future successful development and marketing of the Company’s products and services. Management is pursuing various sources of equity and debt financing but cannot assure that the Company will be able to secure such financing or obtain financing on terms beneficial to the Company. Failure to secure such financing may result in the Company’s inability to continue as a going concern.

These consolidated financial statements do not include any adjustments relating to the recoverability and classifications of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.

Consolidation

The accompanying consolidated financial statements of the Company include the accounts of the Company named Secured Financial Network, Inc, until April 24, 2011, and it’s wholly owned subsidiary, RedFin Network, Inc. (formerly known as Virtual Payment Solutions, Inc.), Inc, a Florida corporation ("RFN"). The Company created RFN in September of 2007.  All significant inter-company accounts and transactions are eliminated in consolidation.

Accounts Receivable and Revenue Recognition

Accounts Receivable

 

The Company estimates an allowance for doubtful accounts, sales returns and allowances based on historical trends and other criteria.  At JuneSeptember 30, 2012 there was a $7,000 allowances on trade receivables from product sales.  The same allowance was used in December 31, 2011.

The Company recognizes revenues associated with the sale of its products upon shipment. Occasionally the Company receives a deposit on an order prior to shipment. These order deposits are booked as deposits payable until such time as the product actually ships and then it is booked as revenue.

The Company bills for its revenue relating to its data plan and payment gateway services on a monthly basis.

Inventory, which is finished goods, is stated at the lower of cost (first-in, first-out method) or market. A provision for excess or obsolete inventory is recorded at the time the determination is made.

The Company has adopted the Financial Accounting Standards Board (“FASB”) guidelines that require companies to expense the value of employee stock options and similar awards and applies to all outstanding and vested stock-based awards.

 

Business and Credit Concentration

The Company purchases the majority of its products for resale from two suppliers. As of JuneSeptember 30, 2012, the Company’s outstanding balance due these suppliers was $123,982.$127,204. The loss of one or both of these suppliers could have a material adverse effect upon its business for a short-term period of time.

 

Net Loss Per Share

The Company has adopted the FASB guidance regarding standards for the computation, presentation and disclosure of earnings per share. The warrants excluded from the earnings per share calculations total 6,500,000 shares of the Company’s common stock, as the inclusion of such warrants would be anti-dilutive. In addition the Company has convertible debt which may be converted into shares.

Accounting Estimates

Management uses estimates and assumptions in preparing the Company’s consolidated financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used. The reserves on the Company’s related party receivables could change in the near future. There are currently related party receivables consisting solely of cash advances made for travel and business related expenses.

Fair Value of Financial Instruments

The Company has adopted the FASB guidelines regarding the estimate of the fair value of all financial instruments included on its balance sheet as of JuneSeptember 30, 2012. The Company considers the carrying value of accounts receivable, accounts payable and accrued expenses in the consolidated financial statements to approximate their face value. The Company has not made an evaluation of the fair value of the recorded notes payable, derivative and liquidating liabilities on the secured convertible notes, largely as a result of the undercapitalization of the Company.

Derivative Financial Instruments

Our derivative financial instruments consist of embedded and free-standing derivatives related primarily to the convertibles notes. The embedded derivatives include the conversion features, and liquidated damages clauses in the registration rights agreement. In addition, under the accounting provisions, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock," the Company is required to classify certain other non-employee stock options and warrants (free-standing derivatives) as liabilities. The accounting treatment of derivative financial instruments requires that the Company record the derivatives and related warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. The recorded value of all derivatives at JuneSeptember 30, 2012 and December 31, 2011 totaled $349,757$398,926 and $349,863, respectively. Any change in fair value of these instruments will be recorded as non-operating, non-cash income or expense at each reporting date. If the fair value of the derivatives is higher at the subsequent balance sheet date, the Company will record a non-operating, non-cash charge. If the fair value of the derivatives is lower at the subsequent balance sheet date, the Company will record non-operating, non-cash income. At JuneSeptember 30, 2012 and December 31, 2011 derivatives were valued primarily using the Black-Scholes Option Pricing Model.

 

 

The accounting guidance establishes a fair value hierarchy based on whether the market participant assumptions used in determining fair value are obtained from independent sources (observable inputs) or reflect the Company's own assumptions of market participant valuation (unobservable inputs). A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The accounting guidance establishes three levels of inputs that may be used to measure fair value:

•           Level 1—Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

•           Level 2—Quoted prices for identical assets and liabilities in markets that are inactive; quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; or

 

•           Level 3—Prices or valuations that require inputs that are both unobservable and significant to the fair value measurement.

The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and views an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate the Company's or the counterparty's non-performance risk is considered in determining the fair values of liabilities and assets, respectively.

The fair value of our financial instruments at JuneSeptember 30, 2012 and December 31, 2011 follows:

 

Recent Accounting Pronouncements

 

Reclassifications

Certain reclassifications to the numbers have been made to the prior periods for presentation purposes.

NOTE 2 - ACCRUED LIABILITIES

The accrued liabilities consisted of the following:

 

NOTE 3 – DEPOSITS AND NOTES PAYABLE

         

The total amount of Deposits Payable as of JuneSeptember 30, 2012 was $39,401$63,311 and consisted of.

 

The total amount of Notes Payable as of JuneSeptember 30, 2012 was $381,101$450,384 (inclusive of long-term debt) and consisted of $381,101 in Promissory Notes as follows:

The total amount of Convertible Notes Payable as of JuneSeptember 30, 2012 was $150,500$178,000 and consisted of:

On December 6, 2011 the Company entered into a Convertible Promissory Note (Note #8) with Asher Enterprises, Inc. with a principal amount of $50,000. Terms of the note are repayment of 150% of the principal amount after 270 days. The note is due and payable on September 8, 2012. The holder has the option to convert the principal and accrued interest into shares of our Company stock at a conversion price equal to 60% of the “trading price” as described in the Note. These proceeds from this loan were used for both the purchase of inventory as well as fund Company operations. As of the date of this filing this note was in default.

On January 17, 2012 the Company entered into a Convertible Promissory Note (Note #9) with Asher Enterprises, Inc. with a principal amount of $47,500. Terms of the note are repayment of 150% of the principal amount after 270 days. The note is due and payable on October 19, 2012. The holder has the option to convert the principal and accrued interest into shares of our Company stock at a conversion price equal to 60% of the “trading price” as described in the Note. These proceeds from this loan were used for both the purchase of inventory as well as fund Company operations. As of the date of this filing this note was in default.

On May 10, 2012 the Company entered into a Convertible Promissory Note (Note #10) with Asher Enterprises, Inc. with a principal amount of $53,000. Terms of the note are repayment of 150% of the principal amount after 270 days. The note is due and payable on February 14, 2013. The holder has the option to convert the principal and accrued interest into shares of our Company stock at a conversion price equal to 60% of the “trading price” as described in the Note. These proceeds from this loan were used for both the purchase of inventory as well as fund Company operations.

Lines of Credit

The total amount due under our Lines of Credit as of JuneSeptember 30, 2012 is $1,295,000$1,387,500 and consisted of:

Commercial Holding:Holding AG:

During June 2010, the Company entered into line of credit with HEB, LLC with an initial credit limit of $400,000. Interest on outstanding balances will accrue at the rate of 14% per annum. This line of credit is due and payable on December 31, 2012. As of JuneSeptember 30, 2012 the outstanding balance due on this credit line was $243,000.

NOTE 4 – NOTES RECEIVABLE

On February 29, 2012, the Company entered into a promissory note with Ellamate, Inc. of Courtland, NY by lending Ellamate, Inc. the sum of $50,000. Terms of the note are 12% interest and the note matures on August 28, 2012. In addition to the 12% interest, Ellamate has also agreed to remit 3% of their “residual” income as additional consideration. This note was repaid to the Company in full on July 9, 2012.

NOTE 5 - DERIVATIVE AND LIQUIDATING LIABILITIES

Asher Enterprises Convertible Notes

On December 6, 2011, the Company issued a $50,000 convertible note (Note #8), convertible into shares of common stock at 60% of the then market price of the common stock.

The fair value of the total derivative liabilities of $116,198$112,058 relating to the Asher Enterprises, Inc. note as of JuneSeptember 30, 2012 is attributed to the Convertible Note conversion factor of 60% of market. The estimated derivative liability recorded is computed utilizing the Black Scholes model, with the following assumptions for the Convertible Note agreement executed as follows:

On January 17, 2012 the Company issued a $47,500 convertible note (Note #9), convertible into shares of common stock at 60% of the then market price of the common stock.

The fair value of the total derivative liabilities of $110,388$106,455 relating to the Asher Enterprises, Inc. note as of JuneSeptember 30, 2012 is attributed to the Convertible Note conversion factor of 60% of market. The estimated derivative liability recorded is computed utilizing the Black Scholes model, with the following assumptions for the Convertible Note agreement executed as follows:

On May 15, 2012 the Company issued a $53,000 convertible note (Note #10), convertible into shares of common stock at 60% of the then market price of the common stock.

The fair value of the total derivative liabilities of $123,170$118,781 relating to the Asher Enterprises, Inc. note as of JuneSeptember 30, 2012 is attributed to the Convertible Note conversion factor of 60% of market. The estimated derivative liability recorded is computed utilizing the Black Scholes model, with the following assumptions for the Convertible Note agreement executed as follows:

 

NOTE 6 - EQUITY TRANSACTIONS

Common Stock

On March 28, 2012, the Company issued to Asher Enterprises, Inc. 486,111 shares of the Company’s common stock upon the conversion of $17,500 principal amount on a $63,000 convertible note (Note #6) that the Company had with Asher Enterprises, Inc. dated September 15, 2011 at a price of $.036 per share.

On April 2, 2012, the Company issued to Asher Enterprises, Inc. 611,111 shares of the Company’s common stock upon the conversion of $22,000 principal amount on a $63,000 convertible note (Note #6) that the Company had with Asher Enterprises, Inc. dated September 15, 2011 at a price of $.036 per share.

On May 17, 2012, the Company issued to Asher Enterprises, Inc. 600,000 shares of the Company’s common stock upon the conversion of $15,000 principal amount on a $42,500 convertible note (Note #7) that the Company had with Asher Enterprises, Inc. dated October 31, 2011 at a price of $.025 per share.

On May 30, 2012, the Company issued to Asher Enterprises, Inc. 822,967 shares of the Company’s common stock upon the conversion of $15,500 principal amount and $1,700 in accrued interest on a $42,500 convertible note (Note #7) that the Company had with Asher Enterprises, Inc. dated October 31, 2011 at a price of $.021 per share.

On June 25, 2012, the Company issued to David Rappa, 171,429 shares of the Company’s common stock relating to his 2012 employment agreement with the Company. These shares were valued at the sum of $6,000.

 

A summary of the activity of warrants issued as of JuneSeptember 30, 2012 as follows:

 

The following table summarizes information about stock warrants outstanding and exercisable at JuneSeptember 30, 2012:

 

NOTE 7 - SUBSEQUENT EVENTS

 

The Company has evaluated all subsequent events from the balance sheet date through the date of this filing and with the exception of the items below there are no events to disclose:

 

 

 

 

Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this quarterly report on Form 10-Q constitute “forward-looking statements.” Forward-looking statements are statements that are not historical, including statements regarding management’s intentions, beliefs, expectations, representations, plans or predictions of the future and are typically identified by words such as “believe,” “expect,” “anticipate” “intend,” “estimate,” “may,” “will,” “should,” and “could.”  These forward-looking statements involve numerous risks and uncertainties that could cause our actual results to be materially different from those set forth in the forward-looking statements including, without limitation, our ability to implement our business plan and generate revenues, our ability to raise sufficient capital to fund our operations and pay our obligations as they become due, economic, political and market conditions and fluctuations, government and industry regulation, U.S. and global competition and the other additional risks and uncertainties that are set forth in the Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission. The risk factors described in our Form 10-K are not the only risks we face.  Additional risks and uncertainties not currently known to us or that we deem immaterial also may materially adversely affect our business, financial condition and/or operating results.   We assume no obligation to update any forward-looking statements as a result of new information or future events or developments, except as required by law. The following discussion should also be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this report.

Overview

RFN markets its products and services through the branded name RedFin Network.  These products and services today include:

RedFin PCI Compliant and Visa certified Payment Gateway

RedFin Sidebar QuickBooks interface

RedFin Desktop Terminal

Redfin Retail POS

RedFin Hospitality POS

All of the transaction hardware is integrated with the RedFin Payment Gateway, which connects merchants utilizing IP based terminals and wireless devices using Bluetooth, Ethernet, and GPRS to acquiring processors and banks for approval or denial of credit card, debit card, and ACH charges.

The PCI/DSS Standard was developed by the major credit card associations as a guideline to help organizations that process card payments prevent credit card fraud crackingas well as  “cracking” and various other security vulnerabilities and threats. A company processing, storing, or transmitting payment card data must be PCI compliant or risk losing their ability to process credit card payments and being audited and/or fined. Merchants and payment card service providers must validate their compliance annually.

 

 

The Blue Bamboo Products and RedFin Payment Gateway are marketed through 150 non-exclusive reseller agreements with ISO’S (Independent Sales Organizations) and VAR’s (Value Added Resellers) selling products and merchant services to end customers throughout the U.S.  Revenue is generated through sales of terminal products, by monthly data plans required to operate wireless products, licensing fees for software and per transaction fees charged for each transaction passing through the Payment Gateway to end acquiring processors such as Vital, Global all First Data Networks, Paymentech, Heartland, Valutec and others already integrated with the Payment Gateway.  All Internet merchants, certain brick and mortar merchants using IP based transaction terminals, and mobile wireless transaction devices require a gateway to pass transactions from their customer’s use of a payment form to the acquiring bank/processor.

The RedFin Payment Gateway is re-branded for other large associations requiring their own name recognition by the ISO/Merchant customer base.  Currently we private label the Payment Gateway for our customers CashBack, Blackstone Merchant Services, Prospay, TX Direct, Ellamate, Charge Card systems, and Diversified Check Solutions to name a few.

In late 2009 RedFin became a preferred vendor of Chase Paymentech for deployment of Blue Bamboo products operating on the RedFin Network, through Chases 300 agent internal network in Dallas and Phoenix and banking agents nationwide.  

Through 2011 RedFin delivered over 2000 Blue Bamboo P-25 printer/card readers to Arvato Services, provider of logistic services to Intuit for their Go-Payment mobile transaction platform.  In addition, RFN continues to be the provider of the same printer/card reader for Aircharge, a Pipeline Data Company, providing a mobile platform for processing through all major cell phones.   

The Company will continue its objective to keep a low cost efficient overhead by outsourcing its hosting requirements as well as the customer and technical support functions, while controlling all product deployment internally.  All Level 1 and 2 customer service related questions have also been outsourced to Card Group with a 24/7 resolution of customer trouble tickets in less than 15 minutes.  Level 3 technical support is provided after hours by Power-It-Up.

Results of Operation for the Three Months Ended JuneSeptember 30, 2012 Compared to the Three Months Ended JuneSeptember 30, 2011 and the SixNine Months Ended JuneSeptember 30, 2012 Compared to the SixNine Months Ended JuneSeptember 30, 2011

 

We generate revenues from the sale of the Blue Bamboo wireless terminals, our recurring monthly data plans and sales of our RedFin Gateway transaction platform.  Our revenue decreased approximately 30%24% and approximately 9%14%, respectively, in the three months and sixnine months ended JuneSeptember 30, 2012 compared to the same periods in 2011. The Company believes that the recent reduction in revenue is temporary as sales have begun to recover and that subsequent quarters inthe fourth quarter of 2012 will result in sales levels and sales growth that will be in line with the previous upward trends.

 

Our cost of goods sold includes the payment processing terminals we sell as well as the recurring expenses to maintain the service to the terminals. Our cost of goods also includes our labor expenses to administer the gateway as well as the monthly licensing fees associated with maintaining and operating our payment gateway. Our cost of goods sold as a percentage of revenues was approximately 57%62% for both the three months ended JuneSeptember 30, 2012 and 2011, and approximately 64% for the nine months ended September 30, 2012 as compared to approximately 58% for the comparable period in 2011, and approximately 62% for the six months ended June 30, 2012 as compared to approximately 61% for the comparable period in 2011.  The reduction in cost of goods percentages can be attributed to management’s continuing efforts to reduce product costs and inbout freight charges from China. We expect our gross margins to continue to improve as sales volumes and direct selling to certain end users result in recognition of better gross margins for the Company