SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2008
Commission file number: 000-49724
ACIES CORPORATION
NEVADA | 91-2079553 |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
incorporation or organization) |
14 Wall Street, Suite 1620, New York, NY 10005
(Address of principal executive offices) (Zip Code)
(800) 361-5540
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class
-------------------
Common Stock, $.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. £ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. £ Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. x Yes £ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer”, “accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Act. (Check one):
Large accelerated filer £ | Accelerated filer £ |
Non-accelerated filer £ | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). £ Yes x No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $927,564 as of September 30, 2007.
As of July 31, 2008, the registrant had 73,984,095 shares of common stock, $0.001 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2008
INDEX
Page | ||
PART I | ||
Item 1. | Description of Business | 3 |
Item 1A. | Risk Factors | 7 |
Item 1B. | Unresolved Staff Comments | 12 |
Item 2. | Description of Property | 13 |
Item 3. | Legal Proceedings | 13 |
Item 4. | Submission of Matters to a Vote of Security Holders | 13 |
PART II | ||
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 14 |
Item 6 | Selected Financial Data | 15 |
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 15 |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | |
Item 8. | Financial Statements | 20 |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 21 |
Item 9A(T). | Controls and Procedures | 21 |
Item 9B. | Other Information | 22 |
PART III | ||
Item 10. | Directors, Executive Officers, and Corporate Governance | 23 |
Item 11. | Executive Compensation | 25 |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 28 |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 29 |
Item 14. | Principal Accountant Fees and Services | 30 |
PART IV | ||
Item 15 | Exhibits | |
SIGNATURES | 30 |
FORWARD LOOKING STATEMENTS
Some of the statements contained in this Form 10-K that are not historical facts are "forward-looking statements" which can be identified by the use of terminology such as "estimates," "projects," "plans," "believes," "expects," "anticipates," "intends," or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of such forward-looking statements, in that such statements reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause our actual results, performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include without limitation:
1. | Our ability to attract and retain management and to integrate and maintain technical information and management information systems; |
2. | Our ability to generate customer demand for our services; |
3. | The intensity of competition; and |
4. | General economic conditions affecting our industry. |
The foregoing is not intended to be an exhaustive list of all factors that could cause actual results to differ materially from those expressed in forward-looking statements made by Acies Corporation. Investors are encouraged to review the risk factors set forth below in Item 1A.
All written and oral forward-looking statements made in connection with this Form 10-K that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.
COMPANY HISTORY
Our principal subsidiary, Acies, Inc., was incorporated in the State of Nevada on April 22, 2004 as GM Merchant Solutions, Inc. We changed our name to Acies, Inc. on June 23, 2004. On June 28, 2004, we purchased substantially all of the assets of GM Merchant Solution, Inc. ("GM-NY") and GMS Worldwide, LLC ("GMS-NY"). Mr. Oleg Firer, Mr. Yakov Shimon and Mr. Miron Guilliadov had been engaged in the payment processing business through GM Merchant Solution, Inc. and/or GMS Worldwide, LLC since August 2002. Mr. Firer is currently our Chairman, President and Chief Executive Officer, and Mr. Shimon is currently our Vice President of Technology and Data Management. Mr. Guilliadov was our Vice President of Sales until his resignation on May 26, 2006.
On July 2, 2004, Atlantic Synergy, Inc. ("Atlantic") acquired approximately 99.2% of the issued and outstanding common stock of Acies, Inc. in exchange for approximately 26,150,000 newly issued shares of Atlantic's common stock (the "Exchange"). In connection with, and subsequent to, the Exchange, Atlantic transferred all of its assets held immediately prior to the Exchange, subject to all of Atlantic's then existing liabilities, to Terence Channon, Atlantic's former President and Chief Executive Officer, in consideration for Mr. Channon's cancellation of 4,285,000 shares of Atlantic's common stock and the cancellation of 200,000 shares of Atlantic's common stock held by a third party. The transaction was accounted for as a reverse merger.
In November 2004, Atlantic changed its name to Acies Corporation (“Acies” or the “Company”).
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DESCRIPTION OF PRINCIPAL PRODUCTS AND SERVICES
Acies, through its wholly owned subsidiary Acies, Inc., is engaged in the business of providing payment processing solutions to small and medium size merchants across the United States. Through contractual relationships with third parties to whom we outsource the providing of certain services, Acies is able to offer complete solutions for payment processing, whereby we consult with merchants to best determine their hardware and software needs; provide transaction authorization, settlement and clearing services; perform merchant acceptance and underwriting functions; program, deploy and install traditional and next-generation point-of-sale (POS) terminals; assist in the detection of fraudulent transactions; and provide customer and technical support and service on an on-going basis. We are a registered member service provider of JP Morgan Chase Bank and a Strategic Partner of Chase Paymentech Solutions, LLC. Chase Paymentech Solutions, LLC is a joint venture between JPMorgan Chase & Co. and First Data Corp., and is the surviving parent entity of a business combination between Chase Merchant Services, LLC and Paymentech, LP. On May 27, 2008, JPMorgan Chase and First Data Corp. announced that they have agreed to end their joint venture, Chase Paymentech Solutions, LLC, by the end of 2008. In the interim, the two companies will continue to operate their joint venture and continue to provide services to their customers. After the transition, First Data Corp. will assume management of the full-service ISO and Bank unit of the joint venture’s assets and continue to provide services to joint ventures customers. Acies is currently negotiating new processing agreements with JPMorgan Chase and First Data Corp.
Acies' payment processing services enable merchants to process Credit, Debit, Electronic Benefit Transfer (EBT), Check Conversion, and Gift & Loyalty transactions. Our card processing services enable merchants to accept traditional card-present transactions, including "swipe" and contactless transactions, as well as card-not-present transactions made by Internet or by mail, fax or telephone.
We outsource certain services to third parties, including the receipt and settlement of funds. In addition, we outsource for a fee certain underwriting and acceptance functions, effectively insuring against risk for entire processed transaction amounts relating to merchant fraud (while retaining the risk related to the fees representing our revenue stream and associated costs). By doing so, we intend to maintain an efficient operating structure which allows us to expand our operations without having to significantly increase fixed costs or retain certain risks associated with acceptance and underwriting of merchant accounts.
We derive the majority of our revenues from fee income related to transaction processing, which is primarily comprised of a percentage of the dollar amount of each transaction processed, as well as a flat fee per transaction. In the event that we have outsourced any of the services provided in the transaction, we remit a portion of the fee income to the third parties that have provided such outsourced services.
We market and sell our services primarily through an indirect sales channel, i.e., through independent sales agents and organizations. In addition, we market services through our direct channel, which is comprised of a limited in-house sales team.
Our cost of revenues is comprised principally of interchange and association fees which are paid to the card-issuing bank and card association, and fees paid to third parties that have provided outsourced services. The fees paid are based upon fixed pricing schedules (certain detailed costs are fixed on a per transaction and/or event basis, while others are fixed as a percentage of the dollar volume of the transaction), which are subject to periodic revision, and are without regard to the pricing charged to the merchant. Fee structures with third parties providing outsourced services are reviewed, renegotiated and/or revised on a periodic basis, and are based on mutually agreed-to expectations relating to, for instance, minimum new business volume placed within specified periods which, if not met, would result in additional charges to be paid by Acies.
Although Acies initiates and maintains the primary relationships with the merchants whose transaction processing results in our revenues, including generally having control over pricing and retaining risk as it relates to the fees comprising our revenue stream, merchants do not have written contracts with Acies, and instead have contractual agreements with the third-party processor (e.g., Chase Paymentech) to whom Acies outsources, and relies on to perform, certain services on our behalf.
Our fiscal year ends on March 31. References to a fiscal year refer to the calendar year in which such fiscal year ends.
MARKET OVERVIEW
The payment processing industry is an integral part of today's worldwide financial structure. The industry is continually evolving, driven in large part by technological advances. The benefits of card-based payments allow merchants to access a broader universe of consumers, enjoy faster settlement times and reduce transaction errors. By using credit or debit cards, consumers are able to make purchases more conveniently, whether in person, over the Internet, or by mail, fax or telephone, while gaining the benefit of loyalty programs, such as frequent flyer miles or cash back, which are increasingly being offered by credit or debit card issuers.
Consumers are also beginning to use card-based and other electronic payment methods for purchases at an earlier age in life, and increasingly for small dollar amount purchases. Given these advantages of card-based payment systems to both merchants and consumers, favorable demographic trends, and the resulting proliferation of credit and debit card usage, we believe businesses will increasingly seek to accept card-based payment systems in order to remain competitive.
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According to CardTrak.com, total debit and credit card spending in the U.S exceeded $2.2 trillion for 2007. This is the second consecutive year that credit card activity for Visa, MasterCard, American Express and Discover cards has topped the $2 trillion milestone. Ten years ago U.S. consumers ran about $885 billion through their general purpose cards. Since 1985, the amount of credit card spending has increased twelve fold, according to CardWeb.com’s “CardData” service. Meanwhile, spending on VISA and MasterCard debit cards, on a growth percentage basis, continues to outpace credit cards. The growth in all payment card spending has been driven by the expansion into new markets such as fast food, rent payments, taxis, vending and online purchases. The Nilson Report forecasts that credit cards will comprise 47.7% of all transactions by 2009, up from 38.8% in 2007.
Our management believes that cash transactions are becoming progressively obsolete. The proliferation of bank cards has made the acceptance of bank card payments a virtual necessity for many businesses, regardless of size, in order to remain competitive. In addition, the advent and growth of e-commerce have marked a significant new trend in the way business is being conducted. E-commerce is dependent upon credit and debit cards, as well as other cashless payment processing methods.
The payment processing industry continues to evolve rapidly, based on the application of new technology and changing customer needs. We intend to continue to evolve with the market to provide the necessary technological advances to meet the ever-changing needs of our market place. Traditional players in the industry must quickly adapt to the changing environment or be left behind in the competitive landscape.
COMPETITIVE BUSINESS CONDITIONS
We are committed not only to servicing clients' current processing needs, but also to being amongst the first to make available new technologies that may improve our merchants’ respective competitive positions. We are committed to gaining the expertise and relationships to adopt and implement new technologies that we believe may differentiate our service offerings.
The credit, charge and debit card transaction processing services business is highly competitive. Many of our current and prospective competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, more developed infrastructures, greater name recognition and/or more established relationships in the industry than we have. Because of this our competitors may be able to adopt more aggressive pricing policies than we can, develop and expand their service offerings more rapidly, adapt to new or emerging technologies and changes in customer requirements more quickly, take advantage of acquisitions and other opportunities more readily, achieve greater economies of scale, and devote greater resources to the marketing and sale of their services. Because of the high levels of competition in the industry and the fact that other companies may have greater resources, it may be impossible for us to compete successfully. However, we seek to differentiate Acies through our consultative approach, recommending and implementing the best possible overall payment processing solutions, tailored to merchants’ specific needs.
We provide services principally to small- to medium-size merchants in retail, restaurant, supermarket, petroleum and hospitality sectors located across the United States. The small merchants we serve typically process on average in excess of $20,000 a month in credit card transactions and have an average transaction value of approximately $50.00 per transaction. These merchants have traditionally been underserved by larger payment processors. As a result, these merchants have historically paid higher transaction fees than larger merchants and have not been provided with tailored solutions and on-going services that larger merchants typically receive from larger processors.
We believe that we have developed significant expertise in industries that we believe present relatively low risk as customers are generally present and the products or services are generally delivered at the time the transaction is processed. These industries include “brick and mortar” retailers, hospitality, automotive repair shops, food stores, petroleum distributors and professional service providers. As of March 31, 2008, approximately 18% of our merchants were professional service providers, 18% were hospitality merchants, 11% were food stores, 9% were gas stations and petroleum distributors, 8% were automotive sales and repair shops, 6% were apparel stores, 22% were other “brick and mortar” retailers and 8% were other industries.
DISTRIBUTION METHODS
We have adopted what we believe to be an uncomplicated sales strategy enabling us to establish additions to our sales force in a quick, inexpensive manner. We market and sell our services primarily through relationships with independent sales agents and organizations. These agents and organizations act as a non-employee, external sales force in communities throughout the United States.
Our independent sales agents and organizations are principally compensated by receiving on-going monthly residual payments based on a percentage of transaction-based revenues less expenses relating to merchant accounts they have brought to Acies. This stream of residual payments is paid to them indefinitely, assuming that the merchant is still processing through Acies, and that the agent continues to serve the merchant’s needs.
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RELATIONSHIPS WITH SPONSORS AND PROCESSORS
Sponsor Bank
In order to provide processing services for Visa and MasterCard transactions, we must be sponsored by a financial institution that is a principal member of the Visa and MasterCard associations. The sponsor bank must register us with Visa as an Independent Sales Organization and with MasterCard as a Member Service Provider.
We currently have an agreement with Chase Merchant Services, LLC (“Chase”) and JPMorgan Chase Bank (“JPMorgan”) to sponsor us for membership in the Visa and MasterCard associations. Under this agreement, JPMorgan settles bank card transactions for our merchants. We entered into a five-year agreement with JPMorgan in December 2002, which expired in December 2007. In addition, we have a similar agreement with Paymentech, LP, whereby merchant transactions also settle through JPMorgan, which expires in October 2009. As the result of a merger in 2006, Chase Merchant Services, LLC is now known as Chase Paymentech Solutions, LLC, which is also the parent of Paymentech, LP. The Company still maintains separate operating and financial relationships with Chase Paymentech Solutions, LLC and Paymentech, LP. On May 27, 2008, JPMorgan Chase and First Data Corp. announced that they have agreed to end their joint venture, Chase Paymentech Solutions, LLC, by the end of 2008. In the interim, the two companies will continue to operate their joint venture and continue to provide services to their customers. After the transition, First Data Corp. will assume management of the full-service ISO and Bank unit of the joint venture’s assets and continue to provide services to joint ventures customers. Acies is currently negotiating new processing agreements with JPMorgan Chase and First Data Corp.
Third-Party Processors
It is only through contractual arrangements with third-party processors that we have the capabilities to provide critical payment processing services to our merchants.
We have agreements with several third-party processors to provide to us on a non-exclusive basis payment processing and transmittal, transaction authorization and data capture services, and access to various reporting tools. These third-party processors include First Data Corporation and Chase Paymentech Solutions, LLC. Our agreements with third-party processors require us to submit a minimum monthly number of transactions or volume for processing. If we submit a number of transactions or volume that is lower than the minimum, we are required to pay them fees that they would have received if we had submitted the required minimum volume of transactions. Our agreement with First Data Corporation is part of an agreement with Chase Merchant Services, LLC, which expired in December 2007. Our agreement with Paymentech, LP expires in October 2009. On May 27, 2008, JPMorgan Chase and First Data Corp. announced that they have agreed to end their joint venture, Chase Paymentech Solutions, LLC, by the end of 2008. In the interim, the two companies will continue to operate their joint venture and continue to provide services to their customers. After the transition, First Data Corp. will assume management of the full-service ISO and Bank unit of the joint venture’s assets and continue to provide services to joint ventures customers. Acies is currently negotiating new processing agreements with JPMorgan Chase and First Data Corp.
CUSTOMER SERVICE
We are the primary point of contact for our merchants’ payment processing needs, and customer service is therefore a central part of our business plan. From our consultative, total solution approach to handling both routine and complex on-going service issues, we believe that a commitment to superior customer service maximizes the value of our services. In addition, the competitive nature of our business calls for special attention to merchant retention. Through the level of service we provide we endeavor to minimize merchant attrition. This focus on understanding and servicing the varying needs of our different customers is the cornerstone of our business.
We are not dependent on any one or a few customers. No one existing merchant account represents more than 4% of our revenue. Our customer base consists of small to medium-size businesses spread throughout various industries and across the United States.
PATENTS, TRADEMARKS & LICENSES
On June 7, 2005, the United States Trademark Office published a notice of publication for “Acies” in the Official Gazette for opposition purposes. The public had until July 7, 2005 to file oppositions or requests for extensions against our proposed trademark. As neither type of document was filed with the United States Trademark Office, the Commissioner of Patents and Trademarks issued a Notice of Allowance on August 30, 2005, indicating that our proposed trademark is entitled to register. A Statement of Use was filed on February 7, 2007 and a Certificate of Registration was issued on February 12, 2008, registration number 3382339.
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GOVERNMENTAL REGULATIONS
Due to the increasing public concern over consumer privacy rights, governmental bodies in the United States and abroad have adopted, and are considering adopting additional laws and regulations restricting the purchase, sale and sharing of personal information about customers. The laws governing privacy generally remain unsettled and it is difficult to determine whether and how existing and proposed privacy laws will apply to our business. Several states have proposed legislation that would limit the uses of personal information gathered using the Internet. Congress has also considered privacy legislation that could regulate use of consumer information obtained over the Internet or in other ways. While we believe that our business model minimizes our accessing, transmitting and storing customer information, if legislation is passed by the individual states or Congress it would likely raise our cost of revenues, which would decrease our net profit and could lead to a decrease in the value of our securities.
EMPLOYEES
As of June 18, 2008, we have 9 full time employees and engage consultants from time to time. We have no collective bargaining agreements with our employees and believe our relations with our employees are good.
ITEM 1A. RISK FACTORS
In addition to other information contained in this Form 10-K, the following Risk Factors should be considered when evaluating the forward-looking statements contained in this Form 10-K.
RISKS RELATED TO OUR FINANCIAL CONDITION AND BUSINESS
WE HAVE HAD LOSSES SINCE WE HAVE BECOME A PUBLIC REPORTING COMPANY.
We have incurred losses and experienced negative operating cash flow each year since we have become a public reporting company in April 2002. For our fiscal years ended March 31, 2008 and March 31, 2007, we had a net loss of $668,597 and $1,130,717, respectively, and we have had negative operating cash flow of $453,081 and $474,181, respectively.
There is no assurance that we will be profitable. Continued losses may require us to seek additional debt or equity financing. If debt financing is available and obtained, our interest expense may increase and we may be subject to the risk of default, depending on the terms of such financing. If equity financing is available and obtained it may result in our shareholders experiencing significant dilution. If such financing is unavailable we may be required to restrict growth by decreasing future marketing expenditures and/or investment in our infrastructure.
DEPENDENCY ON ADDITIONAL FINANCING.
As mentioned above, we have experienced negative operating cash flow and there is no assurance that we will have positive operating cash flow in the future. We have relied upon borrowings under the Loan and Security Agreement described in detail in the section “Management’s Discussion and Analysis” and in Note 5 to the Consolidated Financial Statements in order to satisfy our liquidity needs. The borrowing capacity afforded us under this agreement has been fully utilized based on the eighteen months term of the Loan and Security Agreement. On June 5, 2008 the Company received additional financing (See Note 12- Subsequent Events), but needs to obtain additional financing to maintain liquidity over the next twelve months.
OUR FINANCIAL STATEMENTS INCLUDE A GOING CONCERN OPINION FROM OUR INDEPENDENT AUDITORS.
The Company received a going concern opinion from its auditors on its financial statements for fiscal 2008. Our auditors have stated that due to our lack of profitability and our negative working capital, there is "substantial doubt" about our ability to continue as a going concern. The going concern opinion from our auditors may limit our ability to access certain types of financing, or may prevent us from obtaining financing on acceptable terms.
MAJORITY VOTING CONTROL OVER THE COMPANY IS IN THE HANDS OF ONLY TWO SHAREHOLDERS.
Voting together, Pinnacle Three Corporation, which holds 22,515,000 or 30% of our outstanding shares of common stock and our CEO, Oleg Firer, who can vote 27,530,009 shares of common stock representing 37.2% of the outstanding shares of common stock have voting control over the Company. Mr. Firer holds proxies for six (6) different stockholders of the Company, holding an aggregate of 17,895,723 shares of the Company’s common stock. The stockholders that entered into Proxy Agreement with Mr. Firer include Rite Holdings, Inc (7,190,331 shares), Yakov Shimon (8,932,510 shares), Leonid Shimon (266,907 shares), Arkady Khavulya (1,423,175 shares), Stanislav Pavlenko (7,800 shares), and G.R. Woitzik (75,000 shares). Mr. Firer also personally holds voting rights to 8,949,910 shares of common stock which he personally beneficially owns. Pinnacle Three Corporation holds 22,515,000 shares of our common stock. As a result, Pinnacle Three Corporation and Mr. Firer will exercise control in determining the outcome of all corporate transactions or other matters, including the election of directors, mergers, consolidations, the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. The interests of Pinnacle Three Corporation and Mr. Firer, who are unrelated and have not agreed to vote together on any shareholder matters, may differ from the interests of the other stockholders and thus result in corporate decisions that are adverse to other shareholders.
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WE DEPEND ON VISA AND MASTERCARD REGISTRATION AND FINANCIAL INSTITUTION SPONSORS AND WE MUST COMPLY WITH THEIR STANDARDS TO MAINTAIN REGISTRATION. THE TERMINATION OF OUR REGISTRATION COULD REQUIRE US TO STOP PROVIDING PROCESSING SERVICES ALTOGETHER.
Our designation with Visa and MasterCard as a member service provider is dependent upon the sponsorship of member clearing banks, including JP Morgan Chase, and our continuing adherence to the standards of the Visa and MasterCard credit card associations. In the event we fail to comply with these standards, Visa or MasterCard could suspend or terminate our designation as a member service provider. If these sponsorships are terminated and we are unable to secure another bank sponsor, we will not be able to process bankcard transactions. Because of the fact that the vast majority of the transactions we process involve Visa or MasterCard, the termination of our registration or any changes in the Visa or MasterCard rules that would impair our registration could require us to stop providing processing services altogether. This would severely impact our revenues, and with that the value of our Company and any securities held in the Company.
WE DEPEND ON SALES AGENTS THAT DO NOT SERVE US EXCLUSIVELY AND HAVE THE RIGHT TO REFER MERCHANTS TO OUR COMPETITORS.
We rely primarily on the efforts of independent sales agents ("Sales Agents") to market our services to merchants seeking to establish an account with a payment processor in order to accept Credit, Debit, Electronic Benefit Transfer (EBT), Check Conversion and Gift & Loyalty transactions. Sales Agents are classified as either individuals or companies that seek to introduce both newly established and existing small, medium and large businesses including retailers, restaurants, supermarkets, petroleum stations and e-commerce retailers. Most of the Sales Agents that refer merchants to us are non-exclusive to us and therefore most of them have the right to refer merchants to other service providers. Our failure to maintain our relationships with our existing and future Sales Agents, and to recruit and establish new relationships with other Sales Agents, could adversely affect our revenues and growth, and increase our merchant attrition. This would lead to an increase in cost of revenues for us which would adversely impact net income.
INCREASES IN INTERCHANGE RATES MAY ADVERSELY AFFECT OUR PROFITABILITY.
Visa and MasterCard routinely increase their respective interchange rates each year. Interchange rates are also known as discount rates that are charged for transactions processed through Visa and MasterCard. Although we historically have reflected these increases in our pricing to merchants, there can be no assurance that merchants will continue to assume the entire impact of future increases or that transaction processing volumes will not decrease and merchant attrition increase as a result of these increases. If interchange rates increase to a point where it becomes unprofitable for us to enable merchants to accept Visa and MasterCard it would cause an increase in our cost of revenues and potentially make it unprofitable for us to continue without a change in our business plan.
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INCREASES IN PROCESSING COSTS MAY ADVERSELY AFFECT OUR PROFITABILITY.
We are subject to certain contractual volume obligations that if not met, will cause our processing costs to increase and may therefore adversely affect our ability to attain and retain new and existing merchants. More information about our contractual obligations is located in the section of “Management’s Discussion and Analysis” entitled "Liquidity and Capital Resources".
HIGH LEVELS OF COMPETITION MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The credit, charge and debit card transaction processing services business is highly competitive. Many of our current and prospective competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, more developed infrastructures, greater name recognition and/or more established relationships in the industry than we have. Because of this our competitors may be able to adopt more aggressive pricing policies than we can, develop and expand their service offerings more rapidly, adapt to new or emerging technologies and changes in customer requirements more quickly, take advantage of acquisitions and other opportunities more readily, achieve greater economies of scale, and devote greater resources to the marketing and sale of their services. Because of the high levels of competition in the industry and the fact that other companies may have greater resources, it may be impossible for us to compete successfully.
MAINTAINING CURRENT REVENUE LEVELS IS DEPENDENT UPON FACTORS IMPACTING THE PETROLEUM INDUSTRY.
Over 40% of the Company’s revenue is derived from merchants in the petroleum industry. The Company therefore has a risk of revenue being adversely impacted by significant decreases in gasoline prices, increases in merchant strategies to have more consumers pay in cash, or other negative factors which adversely affect the petroleum industry.
INCREASED MERCHANT ATTRITION MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We experience attrition in our merchant base in the ordinary course of business resulting from several factors, including business closures and losses to competitors. Despite our retention efforts, increased merchant attrition may have a material adverse effect on our financial condition and results of operations. If we are unable to gain merchants to replace the ones we lose, we may be forced to change, curtail or abandon our business plan.
OUR OPERATING RESULTS ARE SUBJECT TO SEASONAL FLUCTUATIONS IN CONSUMER SPENDING PATTERNS.
We have experienced in the past, and expect to continue to experience, seasonal fluctuations in our revenues as a result of consumer spending patterns. Historically, revenues have been weaker during the first two quarters of the calendar year and stronger during the third and fourth quarters. If, for any reason, our revenues are below seasonal norms during the third or fourth quarter, our net income could be lower than expected. This could lead to a decrease in the value of our common stock.
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WE MAY BECOME SUBJECT TO CERTAIN STATE TAXES FOR CERTAIN PORTIONS OF OUR FEES CHARGED TO MERCHANTS.
We, like other transaction processing companies, may be subject to state taxation of certain portions of our fees charged to merchants for our services. Application of this tax is an emerging issue in the transaction processing industry and the states have not yet adopted uniform guidelines. If in the future we are required to pay such taxes and are not able to pass this expense on to our merchant customers, our financial results could be adversely affected.
WE MAY BE SUBJECT TO LIABILITY DUE TO SECURITY RISKS BOTH TO USERS OF OUR MERCHANT SERVICES AND TO THE UNINTERRUPTED OPERATION OF OUR SYSTEMS.
Security and privacy concerns of users of electronic commerce such as our merchant services may inhibit the growth of the Internet and other online services as a means of conducting commercial transactions. We rely on secure socket layer technology, public key cryptography and digital certificate technology to provide the security and authentication necessary for secure transmission of confidential information. However, various regulatory and export restrictions may prohibit us from using the strongest and most secure cryptographic protection available and thereby expose us to a risk of data interception. While we believe that our business model minimizes our accessing, transmitting and storing consumer information, because some of our activities may involve the storage and transmission of confidential personal or proprietary information, such as credit card numbers, security breaches and fraud schemes could damage our reputation and expose us to a risk of loss and possible liability. In addition, our payment transaction services may be susceptible to credit card and other payment fraud schemes perpetrated by hackers or other criminals. If such fraudulent schemes become widespread or otherwise cause merchants to lose confidence in our services, or in Internet payment systems generally, our revenues could suffer.
WE RELY ON THE INTERNET INFRASTRUCTURE, AND ITS CONTINUED COMMERCIAL VIABILITY, OVER WHICH WE HAVE NO CONTROL. ITS FAILURE COULD SUBSTANTIALLY UNDERMINE OUR BUSINESS STRATEGY.
Our success depends, in large part, on other companies maintaining the Internet system infrastructure, including maintaining a reliable network backbone that provides adequate speed, data capacity and security and to develop products that enable reliable Internet access and services. If the Internet continues to experience significant growth in the number of users, frequency of use and amount of data transmitted, the infrastructure of the Internet may be unable to support the demands placed on it, and as a result the Internet's performance or reliability may suffer. Because we rely heavily on the Internet, this would make our business less profitable.
WE MAY BE SUBJECT TO POTENTIAL LIABILITY FOR INFORMATION POSTED ON OUR CORPORATE WEBSITE.
The legal obligations and potential liability of companies which provide information by means of the Internet are not well defined and are evolving. Any liability of our company resulting from information posted on, or disseminated through, our corporate website could have a material adverse effect on our business, operating results and financial condition.
NEW AND POTENTIAL GOVERNMENTAL REGULATIONS DESIGNED TO PROTECT OR LIMIT ACCESS TO CONSUMER INFORMATION COULD ADVERSELY AFFECT OUR ABILITY TO PROVIDE THE SERVICES WE PROVIDE OUR MERCHANTS.
Due to the increasing public concern over consumer privacy rights, governmental bodies in the United States and abroad have adopted, and are considering adopting additional laws and regulations restricting the purchase, sale and sharing of personal information about customers. The laws governing privacy generally remain unsettled and it is difficult to determine whether and how existing and proposed privacy laws will apply to our business. Several states have proposed legislation that would limit the uses of personal information gathered using the Internet. Congress has also considered privacy legislation that could further regulate use of consumer information obtained over the Internet or in other ways. If legislation is passed by the individual states or Congress it would likely raise our cost of revenues, which would decrease our net profit.
OUR SYSTEMS AND OPERATIONS ARE VULNERABLE TO DAMAGE OR INTERRUPTION FROM FIRE, FLOOD, POWER LOSS, TELECOMMUNICATIONS FAILURE, BREAK-INS, EARTHQUAKE AND SIMILAR EVENTS OUTSIDE OF OUR CONTROL.
Our success depends, in part, on the performance, reliability and availability of our services. If our systems were to fail or become unavailable, such failure would harm our reputation, result in a loss of current and potential customers and could cause us to breach existing agreements. Our systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, Internet breakdown, break-in, earthquake and similar events, and we would face significant damage as a result. In addition, our systems use sophisticated software which may in the future contain viruses that could interrupt service. For these reasons, we may be unable to develop or successfully manage the infrastructure necessary to meet current or future demands for reliability and scalability of our systems. If this happens, it is likely that we would lose customers and revenues would decrease.
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Our success depends upon the personal efforts and abilities of Oleg Firer, our President and Chief Executive Officer. Our ability to operate and implement our business plan is heavily dependent on the continued service of Mr. Firer, as well as our ability to attract, retain and motivate other qualified personnel, particularly in the areas of sales, marketing and management for our company. We face aggressive and continued competition for such personnel. We cannot be certain that we will be able to attract, retain and motivate such personnel in the future.
We do not maintain key-man insurance on the life of Mr. Firer. If Mr. Firer were to resign or die, the loss could result in loss of sales, delays in new product and service development and diversion of management resources, and we could face high costs and substantial difficulty in hiring qualified successors and could experience a loss in productivity while any such successor obtains the necessary training and experience. The loss of Mr. Firer, and our inability to hire, retain and motivate qualified sales, marketing and management personnel for our company would have a material adverse effect on our business and operations.
THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE BECAUSE THERE ARE A SUBSTANTIAL NUMBER OF OPTIONS AND WARRANTS OUTSTANDING AND THE SALE OF THE UNDERLYING SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
The market price of our common stock may decline because there are a large number of options and warrants that are available for exercise, and the sale of shares underlying these options and warrants may depress the market price of our common stock. As of July 31, 2008, we had 73,984,095 shares of common stock issued and outstanding, and 4,530,181 outstanding and exercisable options and warrants to purchase up to 8,310,000 shares of common stock. Although the holders may not exercise or convert our outstanding warrants if such conversion or exercise would cause them to own more than 9.99% of our outstanding common stock, this restriction does not prevent the holders from converting and/or exercising some of their holdings. Exercise of these options and warrants would dilute the proportionate equity interest and voting power of holders of our common stock.
OUR HISTORIC STOCK PRICE HAS BEEN VOLATILE AND THE FUTURE MARKET PRICE FOR OUR COMMON STOCK IS LIKELY TO CONTINUE TO BE VOLATILE DUE IN PART TO THE LIMITED MARKET FOR OUR SHARES, WHICH MAY MAKE IT DIFFICULT FOR YOU TO SELL OUR COMMON STOCK FOR A POSITIVE RETURN ON YOUR INVESTMENT.
The public market for our common stock has historically been very volatile. Any future market price for our shares is likely to continue to be very volatile. This price volatility may make it more difficult for you to sell shares when you want at prices you find attractive. We do not know of any one particular factor that has caused volatility in our stock price. However, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies. Broad market factors, general economic and political conditions, and the investing public's negative perception of our business may reduce our stock price, regardless of our operating performance. Further, the market for our common stock is limited and we cannot assure you that a larger market will ever be developed or maintained.
IF WE ARE LATE IN FILING OUR QUARTERLY OR ANNUAL REPORTS WITH THE SEC, WE MAY BE DE-LISTED FROM THE OVER-THE-COUNTER BULLETIN BOARD.
Pursuant to Over-The-Counter Bulletin Board ("OTCBB") rules relating to the timely filing of periodic reports with the SEC, any OTCBB issuer which fails to file a periodic report (Form 10-Q's or 10-K's) by the due date of such report (not withstanding any extension granted to the issuer by the filing of a Form 12b-25), three (3) times during any twenty-four (24) month period is automatically de-listed from the OTCBB. Such removed issuer would not be re-eligible to be listed on the OTCBB for a period of one-year, during which time any subsequent late filing would reset the one-year period of de-listing. Furthermore, any issuer delisted from the OTCBB more than one (1) time in any twenty-four (24) month period for failure to file a periodic report would be ineligible to be re-listed for a period of one-year year, during which time any subsequent late filing would reset the one-year period of de-listing. As we are currently late in filing our 10-KSB for the period ended March 31, 2008, if we are late in our filings two more times in the current twenty-four (24) month period, or three times in any subsequent twenty-four (24) month period and are de-listed from the OTCBB, or if our securities are de-listed from the OTCBB two times in any twenty-four (24) month period for failure to file a periodic report, our securities may become worthless and we may be forced to curtail or abandon our business plan.
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WE MAY INCUR SIGNIFICANT EXPENSES AS A RESULT OF BEING QUOTED ON THE OVER THE COUNTER BULLETIN BOARD, WHICH MAY NEGATIVELY IMPACT OUR FINANCIAL PERFORMANCE.
We incur significant legal, accounting and other expenses as a result of being listed on the Over the Counter Bulletin Board. The Sarbanes-Oxley Act of 2002, as well as related rules implemented by the Commission has required changes in corporate governance practices of public companies. We expect that compliance with these laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 as discussed in the following risk factor, may substantially increase our expenses, including our legal and accounting costs, and make some activities more time-consuming and costly. As a result, there may be a substantial increase in legal, accounting and certain other expenses in the future, which would negatively impact our financial performance and could have a material adverse effect on our results of operations and financial condition.
OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING ARE NOT CONSIDERED EFFECTIVE, WHICH COULD RESULT IN A LOSS OF INVESTOR CONFIDENCE IN OUR FINANCIAL REPORTS AND IN TURN HAVE AN ADVERSE EFFECT ON OUR STOCK PRICE.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with this annual report for the year ended March 31, 2008, we are required to furnish a report by our management on our internal controls over financial reporting. Such report is required to contain, among other matters, an assessment of the effectiveness of our internal controls over financial reporting as of the end of the year, including a statement as to whether or not our internal controls over financial reporting are effective. This assessment must include disclosure of any material weaknesses in our internal controls over financial reporting identified by management. Beginning with the year ended March 31, 2010, this report will also contain a statement that our independent registered public accounting firm has issued an attestation report on management's assessment of internal controls. As we were unable to assert that our internal controls are effective as of March 31, 2008, and if in future years our independent registered public accounting firm is unable to attest that our management's report is fairly stated or they are unable to express an opinion on our management's evaluation or on the effectiveness of our internal controls, investors could lose confidence in the accuracy and completeness of our financial reports, which in turn could cause our stock price to decline.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
· | that a broker or dealer approve a person's account for transactions in penny stocks; and |
· | the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. |
In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
· | obtain financial information and investment experience objectives of the person; and |
· | make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. |
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:
· | sets forth the basis on which the broker or dealer made the suitability determination; and |
· | that the broker or dealer received a signed, written agreement from the investor prior to the transaction. |
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. DESCRIPTION OF PROPERTY
We currently lease office space at 14 Wall Street, Suite 1620, New York, New York 10005. The term of the lease for this office space is seven (7) years and ends in October 2011. We currently pay $14,859 per month for this office space which is approximately 5,545 square feet.
We also lease office space at 1934 Hollywood Boulevard, Suite 200, Hollywood, Florida, 33020. The term of the lease for this office space is three (3) years and ends in February 2011. We currently pay $3,053 per month for this office space which is 2,000 square feet.
We believe that our facilities are adequate to meet our current needs. However, as we continue to reduce overhead to improve cash flow, we may need to relocate our headquarters office space.
We have contracted with a commercial real estate broker to identify potential sub-lessees for our New York headquarters office space. It is anticipated that at such time we have sublet this space, the Company’s headquarters office will relocate to our Hollywood, Florida space, and a small office will be maintained in the New York area for several employees who are not relocating.
The Company is not subject to any legal proceedings other than the following: On December 4, 2006, Acies received a complaint filed in the Supreme Court of the State of New York, County of New York, by a merchant, which named as co-defendants several of our strategic partners, Acies and a third-party bank. The dispute relates to bank accounts used by the merchant to process credit and debit card transactions. Acies believes that the probability of any material loss is remote, especially when considering that we are contractually indemnified by a partner for the type of loss which would result from such a claim.
There were no matters submitted to a vote of security holders during the fourth quarter of fiscal year ended March 31, 2008.
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PART II
Our common stock has been traded on the Over-The-Counter Bulletin Board under the symbol "ACIE". The table below sets forth, for the periods indicated, the high and low sale prices per share of the common stock as reported on the Over-The-Counter Bulletin Board. These quotations reflect prices between dealers do not include retail mark-ups, markdowns, and commissions and may not necessarily represent actual transactions.
High | Low | |||||||
2009 Fiscal: | ||||||||
First Quarter | $ | 0.05 | $ | 0.01 | ||||
2008 Fiscal: | ||||||||
First Quarter | 0.05 | 0.03 | ||||||
Second Quarter | 0.05 | 0.03 | ||||||
Third Quarter | 0.05 | 0.01 | ||||||
Fourth Quarter | 0.07 | 0.03 | ||||||
2007 Fiscal | ||||||||
First Quarter | 0.11 | 0.08 | ||||||
Second Quarter | 0.09 | 0.07 | ||||||
Third Quarter | 0.08 | 0.03 | ||||||
Fourth Quarter | 0.06 | 0.04 |
As of June 18, 2008, there were 73,984,095 shares of common stock outstanding.
As of June 18, 2008, there were approximately 50 stockholders of record of our common stock. This does not reflect those shares held beneficially or those shares held in "street" name.
Dividends
We have not paid cash dividends in the past, nor do we expect to pay cash dividends for the foreseeable future. We anticipate that earnings, if any, will be retained for the development of our business.
EQUITY COMPENSATION PLAN INFORMATION
We currently do not have an equity compensation plan in place. However, through March 31, 2008 we have issued options, which have not been approved by our shareholders, to our management team and directors as follows:
NUMBER OF SECURITIES TO BE ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS AND WARRANTS (a) | WEIGHTED AVERAGE EXERCISE PRICE OF OUTSTANDING OPTIONS AND WARRANTS (b) | NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE UNDER COMPENSATION PLANS (EXCLUDING SECURITIES REFLECTED IN COLUMN (a)) (c) | ||||
Equity compensation plans approved by shareholders: | N/A | N/A | N/A | |||
Equity compensation plans not approved by shareholders: | 5,130,181 | $ | 0.74 | N/A |
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In June 2008, the Company borrowed $450,000 through the execution of a Convertible Promissory Note (the “Note”) with Pinnacle Three Corporation, bearing interest at a rate of 8% per annum, with principal and all accrued interest payable in November 2010. On June 6, 2008, the Company received a conversion letter from Pinnacle Three Corporation requesting conversion of the principal and accrued interest into 22,515,000 shares of Acies common stock at a price of $0.02 per share, per the terms of the Note agreement. On July 17, 2008, the Company issued 22,515,000 shares to Pinnacle Three Corporation in exchange for the Settlement Agreement and Mutual Release between Pinnacle Three Corporation and the Company.
ITEM 6. SELECTED FINANICAL DATA
Item omitted as not required for smaller reporting companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Acies Corporation ("Acies" or the “Company”), through its wholly owned subsidiary Acies, Inc., is engaged in the business of providing payment processing solutions to small and medium size merchants across the United States. Through contractual relationships with third parties to whom we outsource the providing of certain services, Acies is able to offer complete solutions for payment processing, whereby we consult with merchants to best determine their hardware and software needs; provide transaction authorization, settlement and clearing services; perform merchant acceptance and underwriting functions; program, deploy and install traditional and next-generation point-of-sale (POS) terminals; assist in the detection of fraudulent transactions; and provide customer and technical support and service on an on-going basis. We are a registered member service provider of JP Morgan Chase Bank and a Strategic Partner of Chase Paymentech Solutions, LLC. On May 27, 2008, JPMorgan Chase and First Data Corp. announced that they have agreed to end their joint venture, Chase Paymentech Solutions, LLC, by the end of 2008. In the interim, the two companies will continue to operate their joint venture and continue to provide services to their customers. After the transition, First Data Corp. will assume management of the full-service ISO and Bank unit of the joint venture’s assets and continue to provide services to joint ventures customers. Acies is currently negotiating new processing agreements with JPMorgan Chase and First Data Corp.
Acies' payment processing services enable merchants to process Credit, Debit, Electronic Benefit Transfer (EBT), Check Conversion, and Gift & Loyalty transactions. Our card processing services enable merchants to accept traditional card-present transactions, including "swipe" and contactless transactions, as well as card-not-present transactions made by Internet or by mail, fax or telephone.
We outsource certain services to third parties, including the receipt and settlement of funds. In addition, we outsource for a fee certain underwriting and acceptance functions, effectively insuring against risk for entire processed transaction amounts relating to merchant fraud (while retaining the risk related to the fees representing our revenue stream and associated costs). By doing so, we intend to maintain an efficient operating structure which allows us to expand our operations without having to significantly increase fixed costs or retain certain risks associated with acceptance and underwriting of merchant accounts.
We derive the majority of our revenues from fee income related to transaction processing, which is primarily comprised of a percentage of the dollar amount of each transaction processed, as well as a flat fee per transaction. In the event that we have outsourced any of the services provided in the transaction, we remit a portion of the fee income to the third parties that have provided such outsourced services.
We market and sell our services primarily through an indirect sales channel, i.e., through independent sales agents and organizations. In addition, we market services through our direct channel, which is comprised of a limited in-house sales team.
Our cost of revenues is comprised principally of interchange and association fees which are paid to the card-issuing bank and card association, and fees paid to third parties that have provided outsourced services. The fees paid are based upon fixed pricing schedules (certain detailed costs are fixed on a per transaction and/or event basis, while others are fixed as a percentage of the dollar volume of the transaction), which are subject to periodic revision, and are without regard to the pricing charged to the merchant. Fee structures with third parties providing outsourced services are reviewed, renegotiated and/or revised on a periodic basis, and are based on mutually agreed-to expectations relating to, for instance, minimum new business volume placed within specified periods which, if not met, would result in additional charges to be paid by Acies.
Although Acies initiates and maintains the primary relationships with the merchants whose transaction processing results in our revenues, including generally having control over pricing and retaining risk as it relates to the fees comprising our revenue stream, merchants do not have written contracts with Acies, and instead have contractual agreements with the third-party processor (e.g., Chase Paymentech) to whom Acies out sources, and relies on to perform, certain services on our behalf.
We have incurred losses and experienced negative operating cash flow each year since we have become a public reporting company. For our fiscal years ended March 31, 2008 and March 31, 2007, we had a net loss of $668,597 and $1,130,717, respectively, and we have had negative operating cash flow of $453,081 and $474,181, respectively.
Our auditors have stated that due to our lack of profitability and our negative working capital, there is "substantial doubt" about our ability to continue as a going concern. This substantial doubt may limit our ability to access certain types of financing, or may prevent us from obtaining financing on acceptable terms.
Our fiscal year ends on March 31. References to a fiscal year refer to the calendar year in which such fiscal year ends.
Our principal executive offices are located at 14 Wall Street, Suite 1620, New York, NY 10005 and our telephone number is (800) 361-5540. We are incorporated in the State of Nevada.
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REVENUES
Revenues increased $1,271,871 (or 11%) to $13,095,197 for the fiscal year ended March 31, 2008, as compared to revenues of $11,823,326 for the fiscal year ended March 31, 2007. The increase in revenues was principally due to an increase in processing volumes (i.e., card-based sales in dollars) and an increase in number of transactions. The increase reflects an increase in merchant processing revenues resulting from the addition of new merchant accounts, which was partially offset by merchant account attrition in the normal course of business at a level expected for our portfolio, and greater pricing pressure in certain industries to which we market our services.
Cost of revenues increased $913,134 (or 9%) to $11,567,450 for the fiscal year ended March 31, 2008, as compared to cost of revenues of $10,654,316 for the fiscal year ended March 31, 2007. The increase in cost of revenues was principally attributable to the increase in merchant processing costs that resulted from increasing merchant processing revenues, increase in Visa/MasterCard interchange costs and the increased costs associated with a higher proportion of business sourced through our indirect sales channel (i.e., independent sales agents and organizations).
Gross margin increased $358,737 (or 31%) to $1,527,747 for the fiscal year ended March 31, 2008, as compared to gross margin of $1,169,010 for the fiscal year ended March 31, 2007. Gross margin as a percentage of revenues was 12% for fiscal 2008, as compared to 10% in the prior year. Gross margin percentage increased principally as a result of the aforementioned increase in the average ticket and the pricing increase, the effects of which combined to be greater than the increase in cost of revenue.
PERSONNEL EXPENSE
Personnel expense decreased $193,815 (or 14%) to $1,212,332 for the fiscal year ended March 31, 2008, as compared to personnel expense of $1,406,147 for the fiscal year ended March 31, 2007. The decrease was due primarily to a decrease in stock-based compensation and decrease in personnel from 19 full time employees as of March 31, 2007, to 9 full time employees as of March 31, 2008.
PROFESSIONAL FEES
Professional fees decreased $38,645 (or 13%) to $256,627 for the fiscal year ended March 31, 2008, as compared to $295,272 for the fiscal year ended March 31, 2007. The decrease was due to a net of higher legal fees and lower consulting fees for the year ended March 31, 2008, compared to the year ended March 31, 2007.
GENERAL, ADMINISTRATIVE AND SELLING EXPENSES
General, administrative and selling ("G&A") expenses remained approximately the same for the fiscal year ended March 31, 2008, where G&A was $400,752 as compared to G&A expense for the fiscal year ended March 31, 2007 of $400,239.
RENT
Rent expense decreased by $2,669 or 1.6% to $168,326 for the year ended March 31, 2008, compared to $170,995 for the year ended March 31, 2007.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense increased $130,862 to $158,455 for the fiscal year ended March 31, 2008, as compared to interest expense of $27,593 for the fiscal year ended March 31, 2007, reflecting increased borrowings under the Loan and Security Agreement dated October 31, 2006. The Company also incurred additional drawdowns on this credit facility during fiscal 2008, which led to increased interest expense for the year ended March 31, 2008, compared to the year ended March 31, 2007.
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NET LOSS
We had a net loss of $668,597 for the fiscal year ended March 31, 2008, as compared to a net loss of $1,130,717 for the fiscal year ended March 31, 2007. The decrease in net loss is primarily attributable to an increase in gross margin and a decrease in corporate expenses, partially offset by the increase in interest expense for the year ended March 31, 2008, compared to the year ended March 31, 2007.
As of March 31, 2008, we had total current assets of $1,141,398, and total current liabilities of $2,276,000 resulting in negative working capital of $1,134,602. The ratio of current assets to current liabilities was 51% as of March 31, 2008. The Company believes that the existing financing and expected earnings will not meet its current working capital and debt service requirements for the next twelve months. These issues raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability of the carrying amount of recorded assets or the amount of liabilities that might result should the Company be unable to continue as a going concern.
To alleviate the effects of our previously reported working capital deficits and negative cash flows from operations, the Company succeeded in securing financing on October 31, 2006, when we entered into a Loan and Security Agreement (the “Loan Agreement”) with RBL Capital Group, LLC (“RBL”). The Loan Agreement provided a term loan facility with a maximum borrowing of $2,000,000. With the April 2008 drawdown on this facility, the Company has fully utilized this capacity and has no remaining availability on this facility.
At March 31, 2008, Acies had drawn down an aggregate total of $1,770,000 on the RBL facility and our aggregate remaining principal outstanding from these borrowings was $902,687 at March 31, 2008. In April 2008, Acies had additional borrowings under its Loan and Security Agreement aggregating $100,000, bringing the principal and interest to be repaid as of April 30, 2008 to $927,946. As of August 13, 2008, the principal amount to be repaid under the facility is approximately $576,358.
In June 2008, the Company borrowed $450,000 through the execution of a Convertible Promissory Note (the “Note”), with Pinnacle Three Corporation, bearing interest at a rate of 8% per annum, with principal and all accrued interest payable in November 2010. On June 6, 2008, the Company received a conversion letter from Pinnacle Three Corporation requesting conversion of the principal and accrued interest, into 22,515,000 shares of Acies common stock at a price of $0.02 per share, per the terms of the Note agreement. On July 17, 2008, the Company issued 22,515,000 shares to Pinnacle Three Corporation in exchange for the Settlement Agreement and Mutual Release between Pinnacle Three Corporation and the Company.
This borrowing will only alleviate our short-term capital needs. Acies believes that it can secure additional capital through debt and/or equity financing, and has received proposals from potential lenders, which are currently in negotiation. We do not, however, have any commitments or identified sources of additional capital from third parties or from our officers, directors or significant shareholders. There is no assurance that additional financing will be available on favorable terms, if at all. If we are unable to raise such additional financing, it would have a materially adverse effect upon our operations and our ability to fully implement our business plan, which would limit our ability to continue as an on-going business.
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Cash Flows
The Company had $453,081 of cash used in operating activities for the year ended March 31, 2008, which mainly consisted of $668,597 of net loss offset by $83,447 of stock-based compensation, $91,107 of depreciation expense and $117,677 of accounts payable and accrued expenses.
The Company had $6,839 of cash used in investing activities for the year ended March 31, 2008, which was solely due to purchases of fixed assets.
The Company had $499,491 of cash provided by financing activities for the year ended March 31, 2008, which included $1,310,000 of proceeds from our Loan Agreement and the Note, offset by $770,467 of payments on the Loan Agreement and $40,042 of repayment of loan by an officer of the Company.
Cash Requirements
Our business is such that our revenues are generally recurring. Once we add a new account, which generally entails up-front expenditures, whether it be salaries for direct (i.e., Acies-employed) salespersons, or an investment in merchant terminal equipment, we typically receive revenue relating to that account for as long as the merchant is our customer. If we employ a strategy of utilizing Independent Sales Agents and organizations, who are not salaried and are paid on a performance-based basis, the up-front costs are even less, however; commissions payable to these Independent Sales Agents are higher.
Our strategy is flexible, whereby we attempt to employ funds that are available to us to profitably grow the business as rapidly as possible, albeit in a controlled fashion, with an eye toward maintaining customer service levels and minimizing risk in order to retain merchants and have a long-term revenue stream. Funding may be necessary to grow the business significantly, especially through direct sales channels which would require the addition of salaried employees. In the absence of such funding, we believe that we can continue to grow at modest levels, relying more heavily on the indirect (i.e., independent sales agent) channel.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of any contingent assets and liabilities. On an on-going basis, we evaluate our estimates. We base our estimates on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policy affects our more significant estimates and judgments used in the preparation of our financial statements:
Revenue recognition. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Substantially all of Acies’ revenue is derived from providing credit and debit card processing services, and it is recognized when the services are rendered. When a merchant has a business transaction for processing (e.g., purchases of goods or services for which payments are accepted using credit or debit cards), the amount of the processing fees due from the merchant that is discounted from the transaction amount prior to the merchant receiving net proceeds is the amount that Acies recognizes as revenue.
Revenue is recognized on a gross basis (i.e., prior to deducting expenses paid to third parties for outsourced processing and settlement services), with such determination based on Acies’ review and interpretation of current accounting promulgations, including but not limited to Emerging Issues Task Force Consensus 99-19, “Reporting Revenue Gross as Principal versus Net as an Agent” (“EITF 99-19”). We believe that most of the indicators of gross revenue reporting discussed in EITF 99-19 support our revenue recognition policy. Factors which were critical in our determination included, but were not limited to, the extent to which Acies has latitude in establishing price, credit risk and discretion in supplier selection.
Acies has very broad latitude in negotiating and setting the pricing paid by the merchants for electronic transactions, including all fees relating to merchants’ acceptance of credit and debit card payments. Pricing generally is unique to each merchant, and is principally based upon the merchant’s tailored needs, competitive pricing issues and a satisfactory profit margin for Acies. Although pricing varies by merchant, Acies’ costs relating to these transactions, paid to third-party processors and others to whom Acies outsources certain functions, are generally fixed and are based upon predetermined cost schedules which apply regardless of the pricing agreed to by the merchant. Acies control of pricing is critical to the determination of profitability as it relates to any given merchant.
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Acies has credit risk relating to the revenue it recognizes. Should there be a problem with any given transaction, or with fraudulent conduct by any given merchant, Acies is not generally liable for the underlying value of a transaction (i.e., the amount paid by a consumer of a product or service paid for by credit or debit card). We are, however, generally liable for the transaction costs (as described above), even if we do not receive the revenue relating to the transaction.
Although Acies is generally not a formal party to a merchant agreement, we do have a choice of third-party processors and servicers to whom we may outsource certain on-going functions relating to any given merchant account and its related transactions. In most cases, we have the contractual authority with our third-party processors to switch a merchant account from one third-party processor to another, assuming that the merchant agrees to do so.
The above factors, along with Acies being the primary point of contact in the acquiring and on-going servicing of its merchants, as well as the full spectrum of services that Acies provides to its merchants, have led Acies to the judgment that gross revenue reporting is the most appropriate accounting treatment. In addition, we believe that based on our business model, our investors and other readers of our financial statements benefit greatly from this presentation as it exhibits the impact on profitability of the Company’s pricing policies.
Stock based Compensation. We account for share-based payments under SFAS 123R, which requires that share-based payments be reflected as an expense based upon the grant-date fair value of those awards. The expense is recognized over the remaining vesting periods of the awards. The Company estimates the fair value of these awards, including stock options and warrants, using the Black-Scholes model. This model requires management to make certain estimates in the assumptions used in this model, including the expected term the award will be held, volatility of the underlying common stock, discount rate and forfeiture rate. We develop our assumptions based on our past historical trends as well as consider changes for future expectations.
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective April 1, 2007, the Company adopted Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109,” (“FIN 48”). This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than fifty percent likely of being realized upon ultimate settlement. The interpretation also provides guidance on derecognition, classification, interest and penalties, and other matters. The adoption did not have an effect on the consolidated financial statements. There continues to be no liability related to unrecognized tax benefits at March 31, 2008, and no effect on the effective rate.
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 for financial assets and liabilities and is effective for fiscal years beginning after November 15, 2008 for non-financial assets and liabilities. The adoption of SFAS 157 is not expected to have a material effect on our financial position or results of operations.
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” ("SFAS 159.") SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The provisions of SFAS 159 are effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 is not expected to have a material effect on our financial position or results of operations.
-19-
ITEM 8. FINANCIAL STATEMENTS.
FINANCIAL STATEMENT INDEX
ACIES CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
PAGE | |
Reports of Registered Independent Public Accounting Firms | F-1 – F-2 |
Consolidated Balance Sheets | F-3 |
Consolidated Statements of Operations | F-4 |
Consolidated Statements of Shareholders’ Deficit | F-5 |
Consolidated Statements of Cash Flows | F-6 |
Notes to Consolidated Financial Statements | F-7 |
-20-
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Acies Corporation
New York, New York
We have audited the accompanying consolidated balance sheet of Acies Corporation as of March 31, 2008, and the related consolidated statements of operations, shareholders’ deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2008 and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and negative cash flows from operations, all of which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ GBH CPAs, PC
GBH CPAs, PC
www.gbhcpas.com
Houston, Texas
August 13, 2008
F-1
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheet of Acies Corporation as of March 31, 2007, and the related consolidated statements of operations, shareholders’ deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2007 and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
/s/ AMPER, POLITZINER & MATTIA, P.C.
June 22, 2007
New York, New York
F-2
CONSOLIDATED BALANCE SHEETS |
As of March 31, 2008 and 2007 |
ASSETS | ||||||||
Current Assets | 2008 | 2007 | ||||||
Cash | $ | 41,398 | $ | 1,827 | ||||
Accounts receivable | 1,083,705 | 1,027,740 | ||||||
Other current assets | 16,295 | - | ||||||
Total current assets | 1,141,398 | 1,029,567 | ||||||
Other assets and deposits | 67,921 | 52,275 | ||||||
Fixed assets, net of accumulated depreciation of $35,892 and $23,934, respectively | 18,516 | 23,635 | ||||||
Merchant terminal equipment, net of accumulated depreciation of $187,317 and 108,168 respectively | 48,435 | 127,584 | ||||||
Total Assets | $ | 1,276,270 | $ | 1,233,061 | ||||
LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
Current Liabilities | ||||||||
Notes payable - current portion | $ | 800,677 | $ | 311,421 | ||||
Accounts payable and accrued expenses | 1,360,280 | 1,242,603 | ||||||
Deferred revenue | 96,233 | 95,627 | ||||||
Merchant equipment deposits | 18,810 | 18,810 | ||||||
Loan from Officer | - | 40,042 | ||||||
Total current liabilities | 2,276,000 | 1,708,503 | ||||||
Long-term portion of notes payable | 102,010 | 51,733 | ||||||
Deferred rent and other obligations | 70,694 | 60,109 | ||||||
Total Liabilities | 2,448,704 | 1,820,345 | ||||||
Commitment and contingencies | ||||||||
Shareholders’ Deficit | ||||||||
Common stock, $0.001 par value, 200,000,000 shares | ||||||||
authorized, 51,469,095 and 51,169,095 shares issued and outstanding at March 31, 2008 and 2007, respectively | 51,469 | 51,169 | ||||||
Additional paid in capital | 4,891,729 | 4,808,582 | ||||||
Accumulated deficit | (6,115,632 | ) | (5,447,035 | ) | ||||
Total Shareholders’ Deficit | (1,172,434 | ) | (587,284 | ) | ||||
Total Liabilities and Shareholders’ Deficit | $ | 1,276,270 | $ | 1,233,061 |
The accompanying notes are an integral part of these consolidated financial statements.
F-3
ACIES CORPORATION |
CONSOLIDATED STATEMENTS OF OPERATIONS |
Years Ended March 31, 2008 and 2007 |
2008 | 2007 | |||||||
Revenues | $ | 13,095,197 | $ | 11,823,326 | ||||
Cost of revenues | 11,567,450 | 10,654,316 | ||||||
Gross margin | 1,527,747 | 1,169,010 | ||||||
Corporate expenses: | ||||||||
Personnel expense (includes non-cash stock-based compensation) | 1,212,332 | 1,406,147 | ||||||
Professional fees | 256,627 | 295,272 | ||||||
General, administrative and selling | 400,752 | 400,239 | ||||||
Rent | 168,326 | 170,995 | ||||||
Total corporate expenses | 2,037,997 | 2,272,653 | ||||||
Operating loss | (510,250 | ) | (1,103,643 | ) | ||||
Other income (expense): | ||||||||
Interest expense | (158,455 | ) | (27,593 | ) | ||||
Interest income | 108 | 519 | ||||||
Total other income (expense) | (158,347 | ) | (27,074 | ) | ||||
Net loss | $ | (668,597 | ) | $ | (1,130,717 | ) | ||
Net loss per share - Basic and Diluted | $ | (0.01 | ) | $ | (0.02 | ) | ||
Weighted average shares outstanding - Basic and Diluted | 51,342,865 | 51,062,986 |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT |
Years ended March 31, 2008 and 2007 |
Common Stock | Additional Paid-in | Accumulated | ||||||||||||||||||
Stock | Par | Capital | Deficit | Total | ||||||||||||||||
Balance, March 31, 2006 | 50,563,751 | $ | 50,564 | $ | 4,434,914 | $ | (4,316,318 | ) | $ | 169,160 | ||||||||||
Stock-based compensation – restricted stock | 300,000 | 300 | 104,700 | - | 105,000 | |||||||||||||||
Stock-based compensation - options | - | - | 242,273 | - | 242,273 | |||||||||||||||
Stock issued for services | 305,344 | 305 | 26,695 | - | 27,000 | |||||||||||||||
Net loss | - | - | - | (1,130,717 | ) | (1,130,717 | ) | |||||||||||||
Balance, March 31, 2007 | 51,169,095 | 51,169 | 4,808,582 | (5,447,035 | ) | (587,284 | ) | |||||||||||||
Stock-based compensation –restricted stock | 300,000 | 300 | 12,534 | - | 12,834 | |||||||||||||||
Stock-based compensation - options | - | - | 70,613 | - | 70,613 | |||||||||||||||
Net loss | - | - | - | (668,597 | ) | (668,597 | ) | |||||||||||||
Balance, March 31, 2008 | 51,469,095 | $ | 51,469 | $ | 4,891,729 | $ | (6,115,632 | ) | $ | (1,172,434 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
ACIES CORPORATION |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
Years Ended March 31, 2008 and 2007 |
Year Ended March 31 | ||||||||
2008 | 2007 | |||||||
CASH FROM OPERATING ACTIVITIES | ||||||||
Net loss | $ | (668,597 | ) | $ | (1,130,717 | ) | ||
Adjustments to reconcile net loss to cash used in operating activities: | ||||||||
Stock-based compensation | 83,447 | 347,273 | ||||||
Stock issued for services | - | 27,000 | ||||||
Depreciation expense - fixed assets and merchant equipment | 91,107 | 89,959 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (55,965 | ) | (101,093 | ) | ||||
Other current assets | (16,295 | ) | - | |||||
Deferred revenue | 606 | 95,627 | ||||||
Other assets | (15,646 | ) | (11,233 | ) | ||||
Accounts payable and accrued expenses | 117,677 | 337,841 | ||||||
Other assets and deposits | - | 4,851 | ||||||
Deferred rent and other current liabilities | 10,585 | (133,689 | ) | |||||
CASH USED IN OPERATING ACTIVITIES | (453,081 | ) | (474,181 | ) | ||||
: | ||||||||
CASH USED IN INVESTING ACTIVITIES | ||||||||
Purchases of merchant terminal equipment | - | (46,569 | ) | |||||
Purchases of fixed assets | (6,839 | ) | (5,382 | ) | ||||
CASH USED IN INVESTING ACTIVITIES | (6,839 | ) | (51,951 | ) | ||||
CASH FROM FINANCING ACTIVITIES | ||||||||
Proceeds from notes payable | 1,310,000 | 460,000 | ||||||
Repayment of notes payable | (770,467 | ) | (96,845 | ) | ||||
Proceeds from loan from officer | - | 130,000 | ||||||
Repayment of loan from officer | (40,042 | ) | (90,000 | ) | ||||
CASH PROVIDED BY FINANCING ACTIVITIES | 499,491 | 403,155 | ||||||
NET CHANGE IN CASH | 39,571 | (122,977 | ) | |||||
Cash, beginning of the year | 1,827 | 124,804 | ||||||
Cash, end of the year | $ | 41,398 | $ | 1,827 | ||||
Supplemental disclosures: | ||||||||
Cash paid for interest and debt-related fees | $ | 158,455 | $ | 27,593 | ||||
Cash paid for income taxes | - | - |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
ACIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – GOING CONCERN
The Company has limited capital resources and has incurred significant historical losses and negative cash flows from operations. The Company believes that funds on hand combined with funds that will be available from its operations and existing financing will not be adequate to finance its operation requirements and its financial obligations under its notes payable for the next twelve months. While the Company has obtained additional financing of $450,000 in June 2008 through the execution of a Convertible Promissory Note, the Company believes this will only alleviate our short-term capital needs. Acies believes that it can secure additional capital through debt and/or equity financing, and has received proposals from potential lenders, which are currently in negotiation. We do not, however, have any commitments or identified sources of additional capital from third parties or from our officers, directors or majority shareholders. There is no assurance that additional financing will be available on favorable terms, if at all. If we are unable to raise such additional financing, it would have a materially adverse effect upon our operations and our ability to fully implement our business plan, which would limit our ability to continue as an on-going business. Failure of our operations to generate sufficient future cash flow and failure to raise additional financing could have a material adverse effect on the Company's ability to continue as a going concern and to achieve its business objectives. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability of the carrying amount of recorded assets or the amount of liabilities that might result should the Company be unable to continue as a going concern.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business. Acies Corporation (“Acies” or the “Company”), through its wholly owned subsidiary Acies, Inc., provides payment processing services to merchants across the United States. Acies' payment processing services enable merchants to process Credit, Debit, Electronic Benefit Transfer (EBT), Check Conversion, and Gift & Loyalty transactions. Acies also offers traditional and next-generation point-of-sale (POS) terminals, which enable merchants to utilize Acies' payment processing services. Acies outsources certain processing services to various third parties, including Chase Paymentech, LLC.
Cash and Cash Equivalents. Acies considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Principles of Consolidation. The accompanying consolidated financial statements include the accounts of Acies and Acies, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates. In preparing financial statements in conformity with generally accepted accounting principles, management makes 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.
Revenue Recognition. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. Substantially all of Acies’ revenue is derived from providing credit and debit card processing services, and it is recognized when the services are rendered. Revenue is deferred and recorded over the required service period if all revenue criteria have not been met when the fee is received. When a merchant has a business transaction for processing (e.g., purchases of goods or services for which payments are accepted using credit or debit cards), the amount that is discounted from the transaction amount prior to the merchant receiving net proceeds is the amount that Acies recognizes as revenue. Revenue is recognized on a gross basis (i.e., prior to deducting expenses paid to third parties for outsourced processing and settlement services), with such determination based on Acies’ review and interpretation of current accounting promulgations, including but not limited to Emerging Issues Task Force Memorandum 99-19 “Reporting Revenue Gross as Principal versus Net as an Agent” (“EITF 99-19”). The indicators of gross revenue reporting which led to our determination included, but were not limited to, the extent to which Acies has latitude in establishing price, our credit risk and our discretion in supplier selection.
Any revenue relating to services to be performed in the future is deferred and recognized on a straight-line basis over the period during which the services will be performed.
Allowance for Doubtful Accounts. Bad debt expense is recognized based on management’s estimate of likely losses per year, based on past experience and an estimate of current year uncollectible amounts. As of March 31, 2008 and 2007, no allowance for doubtful accounts was deemed necessary.
F-7
Long-lived Assets. At each balance sheet date or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, management of the Company evaluates recoverability of such assets. An impairment loss is recognized if the amount of undiscounted cash flows is less than the carrying amount of the asset, in which case the asset is written down to fair value. The fair value of the asset is measured by either quoted market prices or the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved.
Stock Based Compensation. We account for share-based payments under SFAS No. 123R, which requires that share−based payments be reflected as an expense based upon the grant−date fair value of those awards. The expense is recognized over the remaining vesting period of the awards. The Company estimates the fair value of these awards, including stock options and warrants, using the Black−Scholes model. This model requires management to make certain estimates in the assumptions used in this model, including the expected term the award will be held, volatility of the underlying common stock, discount rate and forfeiture rate. We develop our assumptions based on our past historical trends as well as consider changes for future expectations. For restricted stock awards, the Company values the stock based on the closing price of our common stock on the date of the award, and recognizes the expense over the vesting period of the restricted stock on a straight-line basis.
Income Taxes. Acies recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. Acies provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.
Effective April 1, 2007, the Company adopted Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109,” (“FIN 48”). This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than fifty percent likely of being realized upon ultimate settlement. The interpretation also provides guidance on derecognition, classification, interest and penalties, and other matters. The adoption did not have an effect on the consolidated financial statements. There continues to be no liability related to unrecognized tax benefits at March 31, 2008, and no effect on the effective rate.
Net Loss per Share. Acies calculates basic net loss per share in accordance with Financial Accounting Standards Statement 128, which is based on the weighted average number of common shares outstanding during the year. Diluted loss per share is calculated based on the weighted-average number of outstanding common shares plus the effect of dilutive potential common shares, using the if-converted method. Acies’ calculation of diluted net loss per share excludes potential common shares as of March 31, 2008 and 2007 as the effect would be anti-dilutive.
Risks from Concentrations. The majority of our merchants’ transactions are processed by two third-party processors, which merged in 2006. The Company therefore has a risk of our processors significantly increasing our costs of outsourcing the services provided. The Company, however, believes that there are alternative processing relationships available should this occur.
In addition, over 40% of the Company’s revenue is derived from merchants in the petroleum industry. The Company therefore has a risk of revenues being adversely impacted by significant decreases in gasoline prices or other negative factors which adversely affect the petroleum industry.
Fair Value of Financial Instruments. The carrying value of the accounts receivable, accounts payable and accrued expenses and notes payable approximate their respective fair values due to the their short maturities.
Recently Issued Accounting Pronouncements.
F-8
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” ("SFAS 159.") SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The provisions of SFAS 159 are effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 is not expected to have a material effect on our financial position or results of operations.
NOTE 3 - FIXED ASSETS
Property and office equipment consisted of the following at March 31, 2008 and 2007:
Description | Life | 2008 | 2007 | ||||||
Computer Equipment | 3 years | $ | 23,811 | $ | 23,811 | ||||
Office Furniture | 7 years | 15,614 | 15,614 | ||||||
Equipment | 5 years | 14,983 | 8,144 | ||||||
54,408 | 47,569 | ||||||||
Less: accumulated depreciation | (35,892 | ) | (23,934 | ) | |||||
$ | 18,516 | $ | 23,635 |
Depreciation expense on fixed assets totaled $11,958 and $12,262 in fiscal 2008 and 2007, respectively. These amounts were determined using the straight-line depreciation method over the estimated useful life of the assets as noted above, as measured from the dates of acquisition.
NOTE 4- MERCHANT TERMINAL EQUIPMENT
As a sales promotion campaign, Acies at times places point of sale equipment at merchant locations as an inducement to generate revenue from processing services. When this occurs, Acies owns the equipment and often receives a deposit thereon from the merchant. Should the merchant cease to be a customer, the equipment is returned to Acies for redeployment to a different merchant location, and the deposit is returned to the merchant. This equipment consisted of the following at March 31, 2008 and 2007:
Description | Life | 2008 | 2007 | ||||||
Merchant terminal equipment | 3 years | $ | 235,752 | $ | 235,752 | ||||
Less: accumulated depreciation | (187,317 | ) | (108,168 | ) | |||||
$ | 48,435 | $ | 127,584 |
Depreciation expense on terminal equipment totaled $79,149 and $77,697 in fiscal 2008 and 2007, respectively. These amounts were determined using the straight-line depreciation method over the estimated useful life of the assets as noted above, as measured from the dates of acquisition.
NOTE 5 - NOTE PAYABLE
On October 31, 2006, Acies entered into a Loan and Security Agreement with RBL Capital Group, LLC (“RBL”). The Loan and Security Agreement provides a term loan facility with a maximum borrowing of $2,000,000. Each borrowing under this facility is to be repaid in 18 equal monthly installments, each of which includes amortization of the principal amount of the borrowing as calculated using the interest method. A tri-party agreement between Acies, RBL and Chase Alliance Partners, L.P. (“Chase”, to whom Acies outsources certain processing services for the majority of its merchant accounts) arranges for monthly installments to be paid such that Chase forwards to RBL the entire monthly amounts due to Acies and, after deducting the monthly installment, the balance is remitted to Acies within 24 hours. The Loan and Security Agreement requires that accelerated payments of 150% of the monthly installment are required to be paid if certain cash flow ratios are not maintained. Borrowings generally bear interest at a fixed rate per annum of prime plus 8.90%. Borrowings under the facility have been at interest rates ranging between 14.18% and 17.15%. Borrowings may not be drawn more than once every 30 days, and there is a limit on aggregate borrowings based on monthly residuals.
In addition, the Loan and Security Agreement contains customary affirmative and negative covenants for credit facilities of this type, including covenants with respect to liquidity, disposition of assets, liens, other indebtedness, investments, shareholder distributions, transactions with affiliates, officers’ compensation, and the transfer or sale of our merchant base, and that there are no significant changes in our business. In addition, should Acies sell more than 25% of its merchant accounts for which certain processing services are outsourced to Chase, that event would require that borrowings under the facility be repaid in full. Also, should Acies transfer the outsourcing of certain processing services for merchant accounts for which Chase currently provides such services to a different third-party, that event would require either an agreement between Acies, RBL and the third-party similar to the agreement currently in place between Acies, RBL and Chase, or that borrowings under the facility be repaid in full.
The Loan and Security Agreement additionally provides for customary events of default with corresponding grace periods, including the failure to pay any principal or interest when due, failure to comply with covenants, material misrepresentations, certain bankruptcy, insolvency or receivership events, imposition of certain judgments and the liquidation or merger of Acies. Acies’ obligations under the Loan and Security Agreement are collateralized by substantially all of Acies’ assets, including future remittances relating to its portfolio of merchant accounts. Proceeds from loans under this facility will be used to fund general working capital needs, and to repay loans from officers of the Company.
Acies’ borrowings under this agreement were $460,000 and $1,310,000 during the fiscal years ended March 31, 2007 and 2008, respectively. At March 31, 2008, our aggregate remaining principal outstanding from these borrowings was $902,687. Subsequent to March 31, 2008, the Company has made additional borrowings under the facility of $100,000 (see Note 12 - Subsequent Events). As of April 2008, the Company did not have any further remaining availability under this facility.
The principal repayment schedule for notes payable as of March 31, 2008 is as follows:
Year Ending March 31: | ||||
2009 | $ | 800,677 | ||
2010 | 102,010 |
NOTE 6 - STOCK OPTIONS AND WARRANTS
Acies does not currently have an equity compensation plan in place. We have, however, issued options which have not been approved by our shareholders.
Acies accounts for stock-based compensation under SFAS 123R “Share-Based Payments,” which requires all share-based payments to employees, including grants of employee stock options and restricted stock, to be recognized in the financial statements at their fair values. The expense is being recognized on a straight-line basis over the vesting period of the amounts.
During the years ended March 31, 2008 and 2007, Acies recognized stock-based compensation expense (related both to options and to restricted stock awards) in the amount of $83,447 and $347,273, respectively. Unrecognized compensation expense on the non-vested portion of the options at March 31, 2008 was approximately $50,000, which is expected to be expensed over a weighted average period of 1.00 year.
F-10
No options were granted during the twelve months ended March 31, 2008. During the year ended March 31, 2007, Acies granted to employees 1,925,000 options which vest every quarter over a period of three years with an exercise price of $0.25. The fair value of each stock option award was determined as of the date of grant using the Black-Scholes option-pricing model with the following assumptions as of March 31, 2007:
2007 | ||||
Expected volatility | 217 | % | ||
Expected term (years) | 5 | |||
Risk-free interest rate | 4.99% - 5.01 | % | ||
Expected dividend yield | 0 | % | ||
Forfeiture rate | 0 | % | ||
Resulting weighted average grant date fair value | $ | 0.08 |
Expected volatility is based solely on historical volatility of our common stock over the period commensurate with the expected term of the stock options. The expected term calculation is based upon the expected term the option is to be held, which in most cases is the full term of the option. The risk-free interest rate is based upon the U.S. Treasury yield in effect at the time of grant for an instrument with a maturity that is commensurate with the expected term of the stock options. The expected forfeiture rate of 0% is based on the small population of option holders. The dividend yield of zero is based on the fact that we have never paid cash dividends on our common stock and we have no present intention to pay cash dividends.
The following summarizes the stock option and warrant transactions for the two years ended March 31, 2008:
Options | Weighted Average Exercise Price | Warrants | Weighted Average Exercise Price | |||||||
Outstanding at March 31, 2006 | 3,791,637 | $ | 0.94 | 8,310,000 | $ | 0.27 | ||||
Granted | 1,925,000 | 0.25 | - | - | ||||||
Forfeited | (586,456) | 0.84 | - | - | ||||||
Outstanding at March 31, 2007 | 5,130,181 | 0.74 | 8,310,000 | 0.27 | ||||||
Granted | - | - | - | - | ||||||
Forfeited | - | - | - | - | ||||||
Outstanding at March 31, 2008 | 5,130,181 | $ | 0.74 | 8,310,000 | $ | 0.27 |
Options outstanding and exercisable as of March 31, 2008:
Exercise Price | Number of Shares | Remaining life | Exercisable Number of Shares | ||||||||
$ | 1.00 | 2,307,281 | 1 years | 2,307,281 | |||||||
$ | 1.00 | 1,022,900 | 2 years | 1,022,900 | |||||||
$ | 0.25 | 1,800,000 | 3 years | 1,200,000 | |||||||
5,130,181 | 4,530,181 |
Warrants outstanding and exercisable as of March 31, 2008:
Number of Shares | Remaining life | Exercisable Number of Shares | |||||||||
$ | 0.25 | 7,590,000 | 2 years | 7,590,000 | |||||||
$ | 0.50 | 720,000 | 2 years | 720,000 | |||||||
8,310,000 | 8,310,000 |
There were no warrants issued during the years ended March 31, 2008 or 2007.
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Pursuant to a service agreement with a third party retained to perform investor relations services, from April 2006 to December 2006 Acies issued a total of 305,344 shares of restricted common stock with an aggregate value of $27,000. The related expense is included in general, administrative and selling expenses for the year ended March 31, 2007. Effective December 2006, Acies terminated our relationship with this investor relations services provider.
Effective February 1, 2006, Acies awarded 1,650,000 shares of restricted common stock valued at $165,000, to its then chief financial
officer, Jeffrey A. Tischler. All of the shares are unregistered, 825,000 shares vested as of February 1, 2006, and the remaining
825,000 shares vested as of February 1, 2007.
In May 2006, Acies granted a total of 300,000 shares of restricted common stock to its three independent directors, which vested one year from the grant date. The market value on the date of issuance was $27,000, which was expensed ratably over the vesting period.
In September 2007, Acies granted a total of 300,000 shares of restricted common stock to its three independent directors, which vest on June 30, 2008. The market value on the date of issuance was $12,000, which is being expensed ratably over the vesting period.
During the year ended March 31, 2008 and 2007 Acies recognized a total of $12,834 and $105,000, respectively, in stock-based compensation expense in connection with the vested portion of restricted stock awards issued in the current and previous periods. Unrecognized compensation expense on the non-vested portion of the restricted stock as of March 31, 2008 was approximately $3,667, which is expected to be expensed in the quarter ending June 30, 2008.
NOTE 8 - LOSS PER SHARE
A reconciliation of the numerator and the denominator used in the calculation of loss per share is as follows:
For the year ended March 31, | ||||||||
2008 | 2007 | |||||||
Basic and diluted: | ||||||||
Net loss | $ | (668,597 | ) | $ | (1,130,717 | ) | ||
Weighted average common shares outstanding | 51,342,865 | 51,062,986 | ||||||
Net loss per common share | $ | (0.01 | ) | $ | (0.02 | ) |
Stock options in the amount of 5,130,181 and warrants in the amount of 8,310,000 each period were not included in the computation of diluted loss per share applicable to common stockholders, as they are anti−dilutive as a result of net losses for the years ended March 31, 2008 and 2007, respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Acies’ current headquarters is located in New York, New York. On June 4, 2004 Acies entered into a 7 year lease agreement. The agreement has scheduled rental increases that are expensed on a straight line basis. In March 2008, Acies entered into a 3 year lease agreement for 2,000 square feet of office space in Hollywood, Florida. The agreement has scheduled rental increases that are expensed on a straight line basis.
A deferred rental obligation for both locations in the amount of $70,694 and $60,109 as of March 31, 2008 and 2007, respectively, is recorded in Deferred Rent and Other Obligations. Rent expense was approximately $168,800 and $171,000 for fiscal 2008 and 2007, respectively.
Future minimum lease payments under all leases as of March 31, 2008 are as follows:
Fiscal 2009 | $ | 223,200 | ||
Fiscal 2010 | 229,500 | |||
Fiscal 2011 | 237,200 | |||
Fiscal 2012 | 116,000 | |||
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NOTE 10 - RELATED PARTY TRANSACTIONS
During the year ended March 31, 2008 and 2007, Acies paid approximately $22,500 and $22,900, respectively, for equipment purchased and accrued for in prior periods from ViVOtech Inc. Jeffrey D. Klores, a former Director of Acies, was Vice President of Sales for ViVOtech Inc.
During the year ended March 31, 2008, Acies paid approximately $76,700 in residual commissions to an independent sales organization, a principal of which is also a principal of Rite Holdings, Inc., which is a significant shareholder of Acies.
In October 2006, Acies borrowed a total of $90,000 from an officer pursuant to Promissory Notes under which interest would accrue
at 8% per annum. The principal was repaid in full on November 2, 2006, and interest of less than $1,000 was forgiven. In addition, in
March 2007, Acies borrowed $40,000 from an officer with interest at 9.5% per annum, which was repaid on April 3, 2007 with
accrued interest of less than $100.
During the period of April 2006 through May 2008, Oleg Firer, our President, CEO and Chairman has paid for certain day-to-day expenses of Acies, these expenses accrued to and currently equal approximately $157,000 as of May 31, 2008. In May 2008, Mr. Firer has requested reimbursement of these expenses from Acies which expenses have not been reimbursed as of the date of this filing.
NOTE 11 - INCOME TAXES
Since its inception, Acies has incurred net losses and, therefore, has no significant tax liability. The net deferred tax asset has been fully offset by a valuation allowance due to uncertainty regarding the realization of the assets. The cumulative Federal net operating loss carry-forward is approximately $3,596,000 at March 31, 2008, and will expire in the years 2023 through 2028. The net operating loss carryforwards may not be available to offset future taxable income of Acies due to statutory limitations based on changes of ownership and other statutory restrictions.
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At March 31, 2008 and 2007, deferred tax assets consisted of the following:
2008 | 2007 | |||||||
Deferred rent | $ | 31,800 | $ | 27,000 | ||||
Deferred revenue | 43,300 | 43,000 | ||||||
Stock-based compensation | 144,500 | 119,100 | ||||||
Net operating losses | 1,618,200 | 1,370,900 | ||||||
1,837,800 | $ | 1,560,000 | ||||||
Valuation allowance | (1,837,800 | ) | (1,560,000 | ) | ||||
Net deferred tax asset | $ | - | $ | - |
On April 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 provides recognition criteria and a related measurement model for uncertain tax positions taken or expected to be taken in income tax returns. FIN 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. Tax positions that meet the more likely than not threshold are then measured using a probability weighted approach recognizing the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. Acies had no tax positions relating to open income tax returns that were considered to be uncertain. Accordingly, we have not recorded a liability for unrecognized tax benefits upon adoption of FIN 48. There continues to be no liability related to unrecognized tax benefits at March 31, 2008.
Acies’s 2003 and 2004 tax years remain subject to examination by the IRS. Acies has not yet filed the 2005 and 2006 tax returns (for fiscal 2006 and fiscal 2007). The expiration of the statute of limitations related to various state income taxes varies by state. Acies’s Federal tax returns and any significant state tax returns are not currently under examination.
NOTE 12 - SUBSEQUENT EVENTS
In April 2008, Acies had an additional borrowing under its Loan and Security Agreement aggregating $100,000. This borrowing was the last available borrowing under this Agreement as we have reached the maximum allowed borrowing under this Agreement. The total principal amount to be repaid under the facility was $576,358 at August 13, 2008.
In June 2008, Acies borrowed $450,000 through the execution of a Convertible Promissory Note (the “Note”) with Pinnacle Three Corporation, bearing interest at a rate of 8% per annum, with principal and all accrued interest payable in November 2010. On June 6, 2008, Company received a conversion letter from Pinnacle Three Corporation requesting conversion of the principal and accrued interest into 22,515,000 shares of Acies common stock at a price of $0.02 per share, per the terms of the Note agreement. On July 17, 2008, Acies issued 22,515,000 shares to Pinnacle Three Corporation in exchange for the Settlement Agreement and Mutual Release between Pinnacle Three Corporation and Acies.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
As reported in the Company’s Form 8-K filing dated July 24, 2008, Amper, Politziner and Mattia, P.C. resigned as the Company’s independent registered public accounting firm, and our Board of Directors replaced that firm with our current principal independent accountants, GBH CPAs, PC. There were no disagreements, as defined in Item 304 of Regulation S-K, between the Company and our former independent registered public accountants.
As reported in the Company’s Form 8-K filing dated December 21, 2006, the Audit Committee of our Board of Directors elected to dismiss our former principal independent accountants, Malone and Bailey PC, and replaced that firm with the independent registered public accounting firm, Amper, Politziner and Mattia, P.C. There were no disagreements, as defined in Item 304 of Regulation S-K, between the Company and our former principal independent accountants.
ITEM 9A(T). CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Management of the Company, with the participation of the Chief Executive Officer and acting Chief Financial Officer, Oleg Firer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities and Exchange Act of 1934, as amended) as of March 31, 2008. Based upon this evaluation, the Chief Executive Officer, who is also the acting Chief Financial Officer has concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2008 because of the material weakness in internal control over financial reporting described below.
Management’s Report on Internal Control over Financial Reporting.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15 (f) under the Securities and Exchange Act of 1934, as amended. Management must evaluate its internal controls over financial reporting, as required by Sarbanes-Oxley Act. The Company's internal control over financial reporting is a process designed under the supervision of the Company's management to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external purposes in accordance with U.S. generally accepted accounting principles (“GAAP”).
As of March 31, 2008, management assessed the effectiveness of the Company's internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting such assessments. Based on that evaluation, they concluded that, during the period covered by this report, such internal controls and procedures were not effective to detect the inappropriate application of GAAP rules as more fully described below. This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.
The matters involving internal controls and procedures that the Company's management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) inadequate segregation of duties consistent with control objectives; (2) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosure requirements; and (3) ineffective controls over period end financial disclosure and reporting processes. The aforementioned material weaknesses were identified by the Company's management in connection with the financial statements as of March 31, 2008.
Management believes that the material weaknesses set forth above did not have an effect on the Company's financial results reported herein.
We are committed to improving our financial organization. As part of this commitment, we will increase our personnel resources and technical accounting expertise within the accounting function when funds are available to the Company. In addition, at that time the Company will prepare and implement sufficient written policies and checklists which will set forth procedures for accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosure requirements.
Management believes that preparing and implementing sufficient written policies and checklists will remedy the following material weaknesses (i) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosure requirements; and (ii) ineffective controls over period end financial close and reporting processes. Further, management believes that the hiring of additional personnel who have the technical expertise and knowledge will result in proper segregation of duties and provide more checks and balances within the financial reporting department. Additional personnel will also provide the cross training needed to support the Company if personnel turnover issues within the financial reporting department occur. The CEO will assume the responsibilities of the CFO as a result of Mr. Tischler’s resignation.
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We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
Audit Committee Report:
In addition to the material weakness described above in connection with Management’s Report on Internal Control Over Financial Reporting, the Company’s audit committee found several weaknesses in its review of the Company’s expense reimbursement policy prior to the resignation of the Company’s independent Directors in July 2008. Such weaknesses as described by the audit committee included the recommendation by the audit committee that the Company require its officers and Directors to include more detail in their requests for expense reimbursements and that the Company adopt a formal policy regarding the reimbursement of business expenses by the Company’s officers and Directors sufficient to withstand an IRS audit, which formal reimbursement policy has not been adopted or implemented to date.
Changes in Internal Control Over Financial Reporting
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Directors are elected at each meeting of stockholders and hold office until the next annual meeting of stockholders and the election and qualifications of their successors. Executive officers are elected by and serve at the discretion of the board of directors.
Our executive officers, managers and directors are as follows:
Name | Age | Position | ||
Oleg Firer | 30 | Chairman of the Board of Directors, President and Chief Executive Officer, and Secretary | ||
Jeffrey A. Tischler (1) | 52 | Executive Vice President and Chief Financial Officer, Treasurer, and Director | ||
Yakov Shimon | 37 | Vice President, Technology and Data Management | ||
Jeffrey D. Klores (2) | 48 | Director | ||
William G. Scigliano (2) | 42 | Director | ||
Bonnie K. Wachtel (2) | 52 | Director | ||
Theodore Ferrara (3) | 43 | Director |
(2) Effective July 16, 2008, Mr. Klores, Mr. Scigliano and Ms. Wachtel resigned as independent directors of the Company.
(3) Effective July 17, 2008, Mr. Ferrara was appointed as a Director of the Company.
OLEG FIRER, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER - From May 2005 to the present, Oleg Firer has served as Chairman of the Board of Directors. From July 2004 to the present, Mr. Firer has served as our President, Chief Executive Officer and Secretary and Treasurer until May 4, 2006. Mr. Firer has served as the President of GM Merchant Solution, Inc., since August 2002. Additionally, Mr. Firer has served as the Managing Partner of GMS Worldwide, LLC, since August 2003. From November 2002 to December 2003, Mr. Firer served as the Chief Operating Officer of Digital Wireless Universe, Inc. From December 2001 to November 2002, Mr. Firer served as the Managing Partner of CELLCELLCELL, LLC. From March 1998 to December 2001, Mr. Firer served as Vice President of SpeedUS Corp (NASDAQ: SPDE). Mr. Firer attended business management classes at Phoenix University in 2000. Mr. Firer studied Computer Science at New York Technical College from 1993 to 1995.
JEFFREY A. TISCHLER, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, AND DIRECTOR - - Jeffrey A. Tischler joined Acies as its Chief Financial Officer on May 6, 2005, and was elected Executive Vice President and Chief Financial Officer, Treasurer and Director, in May 2006. Prior to joining Acies, Mr. Tischler was Vice President of Asta Funding, Inc. (NASDAQ:ASFI), a consumer receivables asset management company, where his responsibilities included involvement in operational and financial functions ranging from strategic planning to strengthening the company's infrastructure. From 1993 to 2000, Mr. Tischler was Executive Vice President and Chief Financial Officer of LandAmerica Financial Group, Inc. (NYSE:LFG), including serving as Executive Vice President and Chief Financial and Administrative Officer of LandAmerica's acquired predecessors, Commonwealth Land Title Insurance Company and Transnation Title Insurance Company. From 1980 to 1993, Mr. Tischler was with Reliance Group Holdings, Inc., where he held the position of Vice President of Financial Planning and Analysis. A certified public accountant, Mr. Tischler was a senior accountant with KPMG Peat Marwick from 1978 to 1980. Mr. Tischler received an M.B.A. degree in Finance and Accounting from the University of Rochester's Simon School of Business in 1978, and a B.A. in Economics from the University of Rochester in 1977. Mr. Tischler is also an independent Director, and Chairman of the Audit Committee, of Ivivi Technologies, Inc. (NASDAQ: IVVI), a medical technology company specializing in electroceutical therapeutic technologies.
YAKOV SHIMON, VICE PRESIDENT- TECHNOLOGY AND DATA MANAGEMENT - From July 2004 to April 2006, Yakov Shimon served as our Vice President of Merchant Operations. In April 2006, Mr. Shimon was named our Vice President - Technology and Data Management. Mr. Shimon has served as Vice President of GM Merchant Solution, Inc., since August 2002. Additionally, Mr. Shimon has served as a Member of GMS Worldwide, LLC., since August 2003. From February 2000 to December 2003 Mr. Shimon served as Vice President of Development of Digital Wireless Universe, Inc. From September 1998 to February 2000, Mr. Shimon served as Senior Developer at SpeedUS Corp (NASDAQ: SPDE). Mr. Shimon graduated from Polytechnic University in New York with a major in Mechanical Engineering in August 1995.
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JEFFREY D. KLORES, DIRECTOR - From 2002 to early 2008, Jeffrey Klores served as Vice President of Sales for the Eastern U.S. and Canada for Santa Clara, California-based ViVOtech, which specializes in electronic payment technology on a worldwide basis where customers can make payments with radio frequency (“RF”) enabled credit cards, access cards and cell phones at existing point-of-sale systems. From 1998 to 2000, Mr. Klores served as Eastern Sales Manager of InfoSpace, where he was involved with business development activities with U.S. banks and financial services organizations. From 1994 to 1996, Mr. Klores was Director of New Business Development of First Data Corporation (NYSE: FDC), where he helped create merchant processing alliances with domestic-based-banks. From 1991 to 1993, he was Senior Account Executive at Electronic Data Systems Corporation (NYSE: EDS) where he was responsible for sales to credit card issuing, acquiring, and debit card processing banks. From 1989 to 1991, Mr. Klores served as Sales Manager of Norwest Card Services, where he led the merchant acquiring, card issuing, debit and correspondent data processing sales efforts across the United States. In 1980 Mr. Klores received a Bachelor’s Degree in Marketing from the University of Arizona and received an M.B.A. in Management from Western International University in 1984.
BONNIE K. WACHTEL, DIRECTOR - Bonnie Wachtel was elected a Director of the Company in May 2006. For the past 23 years, Ms. Wachtel has served as Vice President and General Counsel of Wachtel & Co., Inc., a securities and investment banking firm based in Washington, D.C. She also serves as a director of VSE Corp. (Nasdaq:VSEC), a leading provider of diversified services to the engineering, defense, and homeland security markets and as a director of Information Analysis Incorporated (OTCBB:IAIC), an information technology services company. Ms. Wachtel holds a B.A. and an M.B.A. from the University of Chicago, and a J.D. from the University of Virginia. She is a Certified Financial Analyst.
WILLIAM G. SCIGLIANO, DIRECTOR - William Scigliano was elected a Director of the Company in May 2006. Mr. Scigliano brings Acies broad expertise in the fields of investment banking, mergers and acquisitions and government relations. Mr. Scigliano served as a Co-chairman of the Board of Wherify Wireless, Inc. (OTCBB:WFYW), a leading developer of patented wireless location solutions and services for family safety and communications, Mr. Scigliano resigned as the Wheirfy's Co-chairman of the Board on June 27, 2007 and also served as a Director for AlphaTrade.com (OTCBB:APTD), Mr. Scigliano resigned as the Director of AlphaTrade.com on Augst 11, 2006.. Previously, he was Chairman and CEO of IQ Biometrix, where he led the Company to become a major provider of identification technology for law enforcement and homeland security and directed its merger with Wherify in mid-2005. Prior to that, he was an executive advisor to the Attorney General of British Columbia and also served as an advisor to the National Association of Attorneys General in Washington, D.C.
THEODORE FERRARA, DIRECTOR – Mr. Ferrara has served as a Director of the Company since July 17, 2008. Mr. Ferrara is currently the President of Sicon Contractors Inc., where he has served since October 1991. Sicon Contractors, Inc. is a construction company operating out of Brooklyn, New York that specializes in the excavation, installation and restoration of utilities. Mr. Ferrara has also served as the President of Rite Holdings, Inc., since July 2007. From January 1985 to September 1991 he worked as a backhoe operator for Sical Contractors, Inc. in Brooklyn, New York. The Company does not currently have an employment agreement or other compensation arrangement in place with Mr. Ferrara.
EXECUTIVE OFFICERS OF THE COMPANY
Officers are appointed to serve at the discretion of the Board of Directors. None of our executive officers, managers or directors has a family relationship with any other of our executive officers, managers or directors. All executive officers have agreed to abide by the Company’s Code of Ethics.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit and compensation committees of our board of directors were formed on May 26, 2006, both consisted of our three independent directors, Ms. Wachtel and Messrs. Klores and Scigliano, prior to their resignations in July 2008. Subsequent to their resignations, the Company has not had an audit committee and/or a compensation committee and the functions of such committees have been handled exclusively by the board of directors.
COMPLIANCE WITH SECTION 16(a), BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based on our review of copies of all disclosure reports filed by our directors and executive officers pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, a number of Forms 3 and 4 were not timely filed. They are as follows:
A Form 3 was filed by Rite Holdings, Inc. on July 25, 2007, reporting its purchase of 7,190,331 shares on July 3, 2007.
A Form 4 was filed by Bonnie K Wachtel on September 12, 2007, reporting the grant of 100,000 shares on September 1, 2007.
A Form 4 was filed by William Scigliano on September 19, 2007, reporting the grant of 100,000 shares on September 1, 2007.
A Form 4 was filed by Jeffrey Klores on September 26, 2007, reporting the grant of 100,000 shares on September 1, 2007.
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SUMMARY COMPENSATION TABLE
Name and principal position | Fiscal Year | Salary ($) | Bonus ($) | Stock awards ($) (1) | Option awards ($) (1) | All other compensation ($) (6) | Total ($) | |||||||||||||||
Oleg Firer, President and CEO | 2008 | $ | 215,000 | - | - | $ | 43,494 | (3) | 15,960 | $ | 274,454 | |||||||||||
2007 | $ | 211,433 | - | - | $ | 90,898 | (3) | $ | 15,720 | $ | 318,051 | |||||||||||
Jeffrey A. Tischler, EVP and CFO (7) | 2008 | $ | 180,000 | - | - | $ | 13,846 | (4) | $ | 12,000 | $ | 192,000 | ||||||||||
2007 | $ | 176,942 | - | $68,750 | $ | 73,851 | (4) | $ | 5,000 | $ | 324,543 | |||||||||||
Yakov Shimon, Vice President | 2008 | $ | 130,000 | - | - | $ | 12,258 | (5) | - | $ | 142,258 | |||||||||||
2007 | $ | 118,333 | - | - | $ | 24,109 | $ | 4,850 | $ | 147,292 |
(1) The value for Stock and Option Awards in the table above represents the dollar amount recognized for financial reporting purposes for each respective year in accordance with Statement of Financial Accounting Standards No. 123R, Accounting for Stock-Based Compensation (SFAS 123R). The dollar amount for each named executive officer varies depending on the number of options held, the fair value of such options, and the vesting terms of such options. See Note 6 of Notes to Consolidated Financial Statements for the year ended March 31, 2008 for information on the assumptions used to calculate the grant date fair value of Option Awards and the expense recognized under SFAS 123R
(2) Effective February 1, 2006, Acies awarded 1,650,000 shares of restricted common stock valued at $165,000, to its chief financial officer, Jeffrey A.Tischler. All of the shares are unregistered, 825,000 shares vested as of February 1, 2006, and the remaining 825,000 shares vested as of February 1, 2007.
(3) As of March 31, 2008 Mr. Firer has options to purchase 2,845,825 shares of common stock, of which 2,512,492 options are vested. As part of the total options, 1,000,000 options were granted in May 2006 and are vesting quarterly over a three-year period.
(4) As of March 31, 2008 Mr. Tischler has options to purchase 2,142,900 shares of common stock, of which 1,976,233 options are vested. As part of total options, 500,000 options were granted in May 2006 and are vesting quarterly over a three year period. These options are expected to be forfeited in the next period due to the resignation of Mr. Tischler in May 2008. In addition in February 2006, Mr. Tischler was granted 825,000 shares of restricted stock that was fully vested as of February 2007.
(5) As of March 31, 2008 Mr. Shimon has options to purchase 761,456 shares of common stock, of which 661,456 options are vested. As part of the total options, 300,000 were granted in May 2006 and are vesting quarterly over a three-year period.
(6) Other compensation for all named employees consists of premium payments for life insurance policies pursuant to employment agreements. Such payments for Mr. Shimon ceased in July 2006.
(7) Effective May 31, 2008, Jeffrey A. Tischler resigned from the Company.
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OUTSTANDING EQUITY AWARDS AT MARCH 31, 2008
The following table sets forth information regarding the unexercised options for each of the named executive officers as of March 31, 2008:
Option and Warrant Awards | |||||||||||||
Name | Number of Securities Underlying Unexercised Options and Warrants (#) Exercisable | Number of Securities Underlying Unexercised Options and Warrants (#) Unexercisable | Option or Warrant Exercise Price ($) | Option or Warrant Expiration Date | |||||||||
Oleg Firer | 1,845,825 | (1) | - | $ | 1.00 | 07/01/09 | |||||||
666,667 | (5) | 333,333 | (5) | $ | 0.25 | 05/03/11 | |||||||
Jeffrey A. Tischler (6) | 922,900 | (2) | - | $ | 1.00 | 05/09/10 | |||||||
720,000 | (3) | - | $ | 0.50 | 05/09/10 | ||||||||
333,333 | (5) | 166,667 | (5) | $ | 0.25 | 05/03/11 | |||||||
Yakov Shimon | 461,456 | (1) | - | $ | 1.00 | 07/01/09 | |||||||
200,000 | (5) | 100,000 | (5) | $ | 0.25 | 05/03/11 |
(1) Options granted July 1, 2004, vesting ratably each quarter over a three-year period and are fully vested.
(2) Options granted May 9, 2005, vesting ratably each quarter over a two-year period and are fully vested.
(3) Warrants granted May 9, 2005, vesting ratably each six months over a one-year period and are fully vested.
(4) Options granted May 3, 2006, vesting ratably each quarter over a three-year period ending March 31, 2009.
(5) Effective May 31, 2008, Jeffrey A. Tischler resigned from the Company, accelerating the expiration of his options and warrants to August 29, 2008.
EXECUTIVE EMPLOYMENT AGREEMENTS
On July 1, 2004, we entered into a three-year employment contract with Oleg Firer to serve as our Chief Executive Officer. Under the terms of the contract, Mr. Firer received a base salary of $180,000 per year subject to upward or downward adjustments each year after an annual review. Mr. Firer is also entitled to receive annual performance based bonuses targeted at 30% or greater of his base salary and contingent bonus based on certain performance factors. On May 5, 2006, we entered into a new employment agreement with Mr. Firer. The terms of Mr. Firer’s employment agreement supersede the terms of the employment agreement between dated July 1, 2004. In connection with such previous employment agreement, on July 1, 2004 Mr. Firer was granted stock options to purchase 1,845,825 shares of our common stock at an exercise price of $1.00 per share (the “2004 Option Grant”), which options vest ratably on a quarterly basis over a 3 year period from the date of grant and expire on July 1, 2009.
Mr. Firer’s 2006 employment agreement has a three-year term and provides for an annual base salary of $215,000 on an annualized basis, subject to periodic adjustments. Under this agreement, Mr. Firer is entitled to earn periodic incentive bonuses, based upon the achievement of milestones and objectives established by our Board of Directors or Compensation Committee. For each fiscal year covered by the agreement, Mr. Firer has been and will be eligible to earn quarterly incentive bonus payments in the aggregate annual maximum amount of up to 70% of his base salary based upon the achievement of milestones and objectives established by our Board of Directors relating to revenue growth, net income, and cash flow from operations, automobile allowance in an amount not to exceed $1,500 per month and $1,000,000 whole life insurance policy with the beneficiary designated by Mr. Firer. Under the employment agreement, Mr. Firer also is eligible to earn annual discretionary bonuses. No such bonuses were earned based on fiscal 2008 performance.
On May 5, 2006, we entered into an employment agreement with Mr. Tischler. The terms of Mr. Tischler’s employment agreement supersede the terms of his employment offer letter dated May 4, 2005. In connection with such offer letter, in May 2005 Mr. Tischler was granted stock options to purchase 922,900 shares of our common stock at an exercise price of $1.00 per share, which options vest ratably on a quarterly basis over a 2 year period from the date of grant and expire on July 1, 2009, and warrants to purchase 720,000 shares of our common stock at an exercise price of $0.50 per share, which warrants vest ratably on a semi-annual basis over a 1 year period from the date of grant and expire on May 9, 2010 (the “ 2005 Grant”).
Mr. Tischler’s employment agreement provides for a base salary of $180,000 on an annualized basis, subject to periodic adjustments. Mr. Tischler was eligible to earn periodic incentive bonuses, based upon the achievement of milestones and objectives established by our Board of Directors or Compensation Committee. For the fiscal year ending March 31, 2008, Mr. Tischler was eligible to earn quarterly incentive bonus payments in the aggregate annual maximum amount of up to 50% of his base salary based upon the achievement of milestones and objectives established by our Board of Directors relating to revenue growth, net income, and cash flow from operations. Under the employment agreement, Mr. Tischler also was eligible to earn annual discretionary bonuses. No such bonuses were earned based on fiscal 2008 performance. Mr. Tischler’s employment agreement was renewed for a one-year period effective May 2007, with the same terms as described above. Mr. Tischler resigned from the Company effective May 31, 2008.
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COMPENSATION OF DIRECTORS
Members of our Board of Directors receive cash compensation for their services as Directors, and are reimbursed for reasonable expenses incurred in attending Board or committee meetings. Directors do receive stock compensation for services. In 2006, Mr. Klores received 100,000 options to purchase common stock at $1.00 per share. For serving in fiscal 2008, our independent directors each received 100,000 shares of restricted stock.
The following table sets forth information concerning the compensation of our directors during the last completed fiscal year ended March 31, 2008:
Name | Fees Earned Total | Stock awards ($) (1) | Option awards ($) (1) | Total ($) | |||||||||||
Jeffrey D. Klores* | $ | 1,500 | $ | 4,278 | (2 | ) | $ | 1,017 | $ | 6,795 | |||||
William B.G. Scigliano* | $ | 1,500 | $ | 4,278 | (3 | ) | - | 5,778 | |||||||
Bonnie K. Wachtel* | $ | 1,500 | $ | 4,278 | (4 | ) | - | 5,778 | |||||||
* On July 16, 2008, the Company’s three independent Directors, Jeffrey Klores, Bonnie Wachtel and William Scigliano, tendered their resignations as Directors of the Company effective as of July 16, 2008. On July 17, 2008, the Board of Directors of the Company approved a decrease in the number of Directors of the Company from four (4) to two (2) and appointed Theodore Ferrara as a Director of the Company to fill the one remaining vacancy on the Board. Mr. Ferrara’s biographical information is provided above.
(1) The value for Stock and Option Awards in the table above represents the dollar amount recognized for financial reporting purposes for each respective year in accordance with Statement of Financial Accounting Standards No. 123R, Accounting for Stock-Based Compensation (SFAS 123R). The dollar amount for each named executive officer varies depending on the number of options held, the fair value of such options, and the vesting terms of such options. See Note 6 of Notes to Consolidated Financial Statements for the year ended March 31, 2008 for information on the assumptions used ot calculate the grant date fair value of Option Awards and the expense recognized under SFAS 123R
(2) As of March 31, 2008, Mr. Klores had 100,000 options to purchase shares of common stock, which were fully vested. Restricted stock of 100,000 shares were granted in May 2006 and vested one year from grant date and 100,000 shares were granted in September 2007 and vest in nine months at June 2008.
(3) As of March 31, 2008, Mr. Scigliano had restricted stock grants of 100,000 shares granted in May 2006 which vested one year from grant date and 100,000 shares granted in September 2007 which vest in nine months at June 2008.
(3) As of March 31, 2008 Ms. Wachtel had restricted stock grants of 100,000 shares granted in May 2006 which vested one year from grant date and 100,000 shares granted in September 2007 which vest in nine months at June 2008.
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The following table identifies as of August 1, 2008 information regarding the current directors and executive officers of the Company (and those who held those positions as of March 31, 2008) and those persons or entities who beneficially own more than 5% of the common stock of the Company, and the number of and percent of the Company's common stock beneficially owned by:
· | all directors and nominees, naming them, |
· | our executive officers, |
· | our directors and executive officers as a group, without naming them, and |
· | persons or groups known by us to own beneficially 5% or more of our common stock. |
The Company believes that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.
A person or other entity is deemed to be the beneficial owner of securities that can be acquired by that owner within 60 days from June 18, 2008 upon the exercise of options, warrants or convertible securities. Each beneficial owner's percentage ownership is determined by assuming that options, warrants or convertible securities that are held by that owner, but not those held by any other owner, and which are exercisable within 60 days of June 18, 2008 have been exercised and converted.
Name of Beneficial Owner | Common Stock Beneficially Owned | Percentage of Common Stock(1) | ||
Oleg Firer 14 Wall St., Suite 1620 New York, NY 10005 | 30,125,834 | (2) | 39.3 | % |
Yakov Shimon 14 Wall St., Suite 1620 New York, NY 10005 | 9,847,087 | (3) | 13.2 | % |
Jeffrey A. Tischler (8) 14 Wall St., Suite 1620 New York, NY 10005 | 3,667,900 | (4) | 4.8 | % |
Bonnie K. Wachtel (7) 14 Wall St., Suite 1620 New York, NY 10005 | 700,000 | * |
Jeffrey D. Klores (7) 14 Wall St., Suite 1620 New York, NY 10005 | 301,000 | * | ||
William B.G. Scigliano (7) 14 Wall St., Suite 1620 New York, NY 10005 | 200,000 | * | ||
All Officers and Directors As a Group (6 persons as of March 31, 2008) | 44,841,821 | 56.6 | % | |
Rite Holdings, Inc./Theodore Ferrara 299 Broadway New York, NY 10007 | 7,190,331 | (5) | 9.2 | % |
Pinnacle Three Corporation 1445 Windjammer Way Hollywood, Fl 33160 | 22,515,000 | (6) | 30.4 | % |
* Less than 1%
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(1) | Based on 73,984,095 shares of common stock outstanding as of June 18, 2008, except that shares of common stock underlying options or warrants exercisable within 60 days of the date hereof are deemed to be outstanding for purposes of calculating the beneficial ownership of securities of the holder of such options or warrants. |
(2) | Includes: (i) 8,212,510 shares of common stock issued on July 2, 2004 pursuant to an Exchange Agreement whereby Acies Corporation exchanged approximately 99.2% of its issued and outstanding common stock for approximately 26,150,000 newly issued shares of common stock of Atlantic Synergy, Inc.; (ii) 228,121 shares of common stock issued on July 2, 2004 which are held indirectly by entities jointly owned by Oleg Firer, Yakov Shimon and Miron Guilliadov; (iii) 720,000 shares of common stock issued on September 13, 2004 pursuant to the 2004 Officer/Director/Employee Stock Award Plan; (iv) 4,000 shares of common stock purchased on the open market on October 5, 2004 at a price of $0.25 per share; (v) 5,200 shares of common stock purchased on the open market on February 25, 2005 at a price of $0.19 per share; (vi) 8,200 shares of common stock purchased on the open market on May 11, 2005 at a price of $0.095 per share; (vii) options issued on July 1, 2004 to purchase 1,845,825 shares of common stock which vested as of June 30, 2007 at a price of $1.00 per share; and (viii) options issued on May 3, 2006 to purchase 750,000 shares of common stock which will have vested as of June 30, 2008 at a price of $0.25 per share. Also includes the result of Mr. Firer’s entry into Proxy Agreements or about June 18, 2008, with six (6) different stockholders of the Company, holding an aggregate of 17,895,723 shares of the Company’s common stock, whereby they appointed Mr. Firer as proxy with full power of substitution to such stockholder’s shares of common stock at any annual or special meeting held within thirteen (13) months of each particular stockholders’ entry into the Proxy Agreements. The stockholders that entered into Proxy Agreements with Mr. Firer include Rite Holdings, Inc. (7,190,331 shares), Yakov Shimon (8,932,510 shares), Leonid Shimon (266,907 shares), Arkady Khavulya (1,423,175 shares), Stanislav Pavlenko (7,800 shares), and G.R. Woitzik (75,000 shares). |
(3) | Includes: (i) 8,212,510 shares of common stock issued on July 2, 2004 pursuant to an Exchange Agreement whereby Acies Corporation exchanged approximately 99.2% of its issued and outstanding common stock for approximately 26,150,000 newly issued shares of common stock of Atlantic Synergy, Inc.; (ii) 228,121 shares of common stock issued on July 2, 2004 which are held indirectly by entities jointly owned by Oleg Firer, Yakov Shimon and Miron Guilliadov; (iii) 720,000 shares of common stock issued on September 13, 2004 pursuant to the 2004 Officer/Director/Employee Stock Award Plan; (iv) options issued on July 1, 2004 to purchase 461,456 shares of common stock which vested as of June 30, 2007 at a price of $1.00 per share, and (v) options issued on May 3, 2006 to purchase 225,000 shares of common stock which will have vested as of June 30, 2008 at a price of $0.25 per share. |
(4) | Includes : (i) 1,650,000 shares of restricted common stock awarded on February 1, 2006, pursuant to a Restricted Stock Agreement; (ii) Warrants issued on May 9, 2005 to purchase 720,000 shares of common stock at $0.50 per share; and (iii) options issued on May 9, 2005 to purchase 922,900 shares of common stock which vested as of June 30, 2007 at a price of $1.00 per share and (v) options issued on May 3, 2006 to purchase 375,000 shares of common stock which will have vested as of June 30, 2008 at a price of $0.25 per share. Effective May 31, 2008, Jeffrey A. Tischler resigned from the Company, accelerating the expiration of his options and warrants to August 29, 2008. |
(5) | Includes 7,190,331 shares of common stock sold to Rite Holdings on March 8, 2008 previously owned by Miron Guilliadov. The beneficial owner of the shares held by Rite Holdings is Theodore Ferrara, who became our Director on July 17, 2008. |
(6) | Includes: 22,515,000 shares of common stock issued upon conversion of the Promissory Note issued to Pinnacle Three Corporation for $450,000 at an exercise price of $0.02 per share including accrued interest of $300. |
(7) | On July 16, 2008, the Company’s three independent Directors, Jeffrey Klores, Bonnie Wachtel and William Scigliano, tendered their resignations as Directors of the Company effective as of July 16, 2008. On July 17, 2008, the Board of Directors of the Company approved a decrease in the number of Directors of the Company from four (4) to two (2) and appointed Theodore Ferrara as a Director of the Company to fill the one remaining vacancy on the Board. |
(8) | On May 1, 2008, Jeffrey A. Tischler tendered his resignation as the Company’s Director, Executive Vice President and Chief Financial Officer, effective May 31, 2008. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
During the year ended March 31, 2008, the Company paid approximately $22,500 for equipment previously purchased from ViVOtech Inc. Jeffrey D. Klores, a Director of the Company, was Vice President of Sales for ViVOtech Inc at the time of the purchase. During the corresponding period ended March 31, 2007, the Company purchased equipment from ViVOtech Inc. aggregating of $22,947. Jeffrey D. Klores, a former Director of the Company, was Vice President of Sales for ViVOtech Inc
During the year ended March 31, 2008, the Company paid approximately $76,700 in residual commissions to an independent sales agent, a principal of which is also a principal of Rite Holdings, Inc., which is a significant shareholder of the Company.
Our former independent directors, Mr. Klores, Mr. Scigliano and Ms. Wachtel, qualified as being independent pursuant to the rules and regulations of NASDAQ. Subsequent to their resignations in July 2008, the Company has not had an audit committee and/or a compensation committee and the functions of such committees have been handled exclusively by the board of directors.
On July 17, 2008, the Board of Directors of the Company approved a decrease in the number of Directors of the Company from four (4) to two (2) and appointed Theodore Ferrara as a Director of the Company to fill the one remaining vacancy on the Board.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a summary of the fees billed to the Company by its independent registered public accounting firm for professional services rendered during fiscal years 2008 and 2007:
FEE CATEGORY | FISCAL 2008 | FISCAL 2007 | ||||||
Audit Fees | $ | 125,747 | $ | 92,550 | ||||
Audit-Related Fees | - | 2,310 | ||||||
Tax Fees | 9,390 | - | ||||||
All Other Fees | - | 3,815 | ||||||
Total Fees | $ | 135,137 | $ | 98,675 |
Audit Fees. Consists of fees billed for professional services rendered by GBH CPAs, PC for the audit of the Company’s consolidated financial statements for the year ended March 31, 2008, Amper, Politziner & Mattia, P.C. for the audit of the Company’s consolidated financial statements for the year ended March 31, 2007 and the review of the interim consolidated financial statements included in the quarterly reports for the year ended March 31, 2008 and the period ended December 31, 2006 as well as for professional serves rendered by Malone and Bailey PC for the review of the quarterly reports for the periods ended September 30, 2006 and June 30, 2006.
Audit-Related Fees. Consists of fees billed for professional services rendered by Malone & Bailey PC in assisting the Company with the transition to new auditors in fiscal 2007.
Tax Fees. Consists of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal and state tax compliance and tax planning.
All Other Fees. Consists of fees billed for professional services rendered in assisting the Company in its response to comments from the Securities and Exchange Commission with regard to the Company’s Form 10-KSB for the fiscal year ended March 31, 2005.
ITEM 15. EXHIBITS
The following exhibits are included as part of this Form 10-K. References to "the Company" in this Exhibit List refer to Acies Corporation, a Nevada corporation.
3.1 | Articles of Incorporation of TerenceNet, Inc. dated October 11, 2000. (Incorporated by reference to Exhibit 3 to TerenceNet, Inc.'s Form 10-SB, as amended, filed with the Securities and Exchange Commission on April 5, 2002). |
3.2 | Bylaws of TerenceNet, Inc. (Incorporated by reference to Exhibit 4 to TerenceNet, Inc.'s Form 10-SB, as amended, filed with the Securities and Exchange Commission on April 5, 2002). |
3.3 | Certificate of Amendment of Articles of Incorporation (Incorporated by reference to Exhibit 3 to Atlantic Synergy, Inc.'s Form 8-K filed with the Securities and Exchange Commission on July 9, 2004). |
4.1 | Form of Series A Common Stock Purchase Warrant issued to investors pursuant to the February 3, 2005 private placement (Incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed with the Securities and Exchange Commission on February 8, 2005). |
10.1 | Exchange Agreement by and between Acies, Inc. and Atlantic Synergy, Inc. dated as of July 2, 2004 (Incorporated by reference to Exhibit 2 to Atlantic Synergy, Inc.'s Form 8-K/A filed with the Securities and Exchange Commission on July 12, 2004). |
10.2 | Year 2004 Stock Award Plan of Atlantic Synergy, Inc. (Incorporated by reference to Exhibit 4 to Atlantic Synergy, Inc.'s Form S-8 filed with the Securities and Exchange Commission on August 31, 2004). |
10.3 | Year 2004 Officer/Director/Employee Stock Award Plan of Atlantic Synergy, Inc. (Incorporated by reference to Exhibit 4 to Atlantic Synergy, Inc.'s Form S-8 filed with the Securities and Exchange Commission on September 13, 2004). |
10.4 | Form of Subscription Agreement by and between Atlantic Synergy, Inc. and the purchasers identified on the signature pages thereto dated as of September 2, 2004 (Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on March 4, 2005). |
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10.5 | Investor Relations Agreement by and between Acies, Inc. and Investor Relations Network dated as of December 3, 2004 (Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on March 4, 2005). |
10.6 | Securities Purchase Agreement by and between the Company and the purchasers identified on the signature pages thereto dated as of February 3, 2005 (Incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed with the Securities and Exchange Commission on February 8, 2005). |
10.7 | Registration Rights Agreement by and between the Company and the purchasers identified on the signature pages thereto dated as of February 3, 2005 (Incorporated by reference to Exhibit 4.3 to the Company's Form 8-K filed with the Securities and Exchange Commission on February 8, 2005). |
10.8 | Employment Agreement by and between the Company and Oleg Firer dated as of May 5, 2006 (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 12, 2006). |
10.9 | Employment Agreement by and between the Company and Yakov Shimon dated as of July 1, 2004 (Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on March 4, 2005). |
10.10 | Employment Agreement by and between the Company and Miron Guilliadov dated as of July 1, 2004 (Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on March 4, 2005). |
10.11 | Form of Subscription Agreement by and between GM Merchant Solutions, Inc. and the purchasers identified on the signature pages thereto dated as of June 2, 2004 (Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on March 4, 2005). |
10.12 | Employment Agreement by and between the Company and Jeffrey A. Tischler dated as of May 5, 2006 (Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 12, 2006). |
10.13 | Loan and Security Agreement by and between the Company and RBL Capital Group, LLC, dated October 31, 2006, providing a Term Loan Facility with a maximum borrowing of $2,000,000.00 (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 6, 2006). |
10.14 | Convertible Promissory Note with Pinnacle Three Corporation (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on July 21, 2008). |
10.15 | Settlement Agreement and Mutual Release Between Pinnacle Three Corporation and the Company (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on July 21, 2008). |
16.1 | Letter from Amper, Politziner & Mattia, P.C. (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on July 30, 2008). |
31 | Certification by Chief Executive Officer and Chief Financial Officer pursuant to Sarbanes-Oxley Section 302 (filed herewith). |
32 | Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (filed herewith). |
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SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ACIES CORPORATION | ||
Date: August 15, 2008 | By: | /s/ Oleg Firer |
Oleg Firer | ||
Chief Executive Officer |
Date: August 15, 2008 | By: | /s/ Oleg Firer |
Oleg Firer | ||
Chief Financial Officer |
In accordance with the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE | TITLE | DATE | ||
By: /s/ Oleg Firer | Chairman of the Board, and Chief Executive Officer | August 15, 2008 | ||
Oleg Firer | ||||
By:/s/ Oleg Firer | ||||
Oleg Firer | Chief Financial Officer | August 15, 2008 | ||
By: /s/ Theodore Ferrara | Director | August 15, 2008 | ||
Theodore Ferrara | ||||
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