UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2008
| ¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 000-49745
UNITED ESYSTEMS, INC.
(Exact name of registrant as specified in its charter)
| Nevada | | 91-2150635 |
| (State or other jurisdiction | | (IRS Employer Identification No.) |
| of incorporation or organization) | | |
15431 O’Neal Road
Gulfport, MS 39503
228-832-1597
(Address and telephone number of principal executive offices and principal place of business)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
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 Exchange Act).
Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date: As of May 14, 2008, 18,291,667 shares of the registrant’s common stock, $0.001 par value, were issued and outstanding.
UNITED ESYSTEMS, INC.
FORM 10-Q
March 31, 2008
INDEX
INTRODUCTORY NOTE
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 about United eSystems, Inc. (the “Company”) and our subsidiary, United Check Services, L.L.C. that are subject to risks and uncertainties. Forward-looking statements include information concerning future financial performance, business strategy, projected plans and objectives. Statements preceded by, followed by or that otherwise include the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “may increase,” “may fluctuate” and similar expressions of future or conditional verbs such as “will,” “should,” “would,” and “could” are generally forward-looking in nature and not historical facts. Actual results may differ materially from those projected, implied, anticipated or expected in the forward-looking statements. Readers of this quarterly report should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this report. The statements are representative only as of the date they are made. The Company and United Check Services, L.L.C. (sometimes referred to herein as on a consolidated basis as the Company, we, us, or similar phrasing) undertakes no obligation to update any forward-looking statement.
These forward-looking statements, implicitly and explicitly, include the assumptions underlying the statements and other information with respect to the Company's beliefs, plans, objectives, goals, expectations, anticipations, estimates, financial condition, results of operations, future performance and business, including management's expectations and estimates with respect to revenues, expenses, return on equity, return on assets, efficiency ratio, asset quality and other financial data and capital and performance ratios.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, these statements involve risks and uncertainties that are subject to change based on various important factors, some of which are beyond the control of the Company. The following factors, among others, could cause the Company's results or financial performance to differ materially from its goals, plans, objectives, intentions, expectations and other forward-looking statements:
| | · | general economic and industry conditions; |
| | · | our capital requirements and dependence on the sale of our equity securities; |
| | · | the liquidity of the Company’s common stock will be affected by the lack of a trading market; |
| | · | intense industry competition; |
| | · | fluctuations in the prevailing industry prices of check processing services; |
| | · | shortages in availability of qualified personnel; |
| | · | legal and financial implications of unexpected catastrophic events; |
| | · | regulatory or legislative changes effecting check processing operations; |
| | · | reliance on, and the ability to attract, key personnel; and |
For a discussion of these and other risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in the Company’s 2007 Annual Report filed on Form 10-KSB with the SEC, which is available on the SEC’s website at www.sec.gov. All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update this Quarterly Report on Form 10-Q to reflect events or circumstances after the date hereof. New factors emerge from time to time, and it is not possible for us to predict which factors, if any, will arise. In addition, the Company cannot assess the impact of each factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
PART I. — FINANCIAL INFORMATION
United eSystems, Inc. and Subsidiary
Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007
| | | | |
| | | March 31, 2008, (Unaudited) | | | December 31, 2007 (Audited) | |
| | | | | | | |
| ASSETS | | | | | | |
| CURRENT ASSETS | | | | | | |
Cash and Cash Equivalents | | $ | 258,723 | | | $ | 283,988 | |
Restricted Cash | | | 782,693 | | | | 531,343 | |
Trade Receivables, net | | | 98,666 | | | | 81,490 | |
Prepaid Expenses | | | 16,687 | | | | 24,476 | |
| | | | | | | | | |
Total Current Assets | | | 1,156,769 | | | | 921,297 | |
| | | | | | | | | |
| PROPERTY AND EQUIPMENT, NET | | | 58,607 | | | | 60,735 | |
| | | | | | | | | |
| OTHER ASSETS | | | 74,788 | | | | 62,620 | |
| | | | | | | | | |
Total Assets | | $ | 1,290,164 | | | $ | 1,044,652 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | |
ACH Settlements Payable | | $ | 746,290 | | | $ | 514,969 | |
Notes Payable | | | 70,000 | | | | 70,000 | |
Accounts Payable and Accrued Liabilities | | | 23,448 | | | | 34,036 | |
Customers’ Deposits | | | 36,404 | | | | 16,374 | |
| | | | | | | | | |
Total Current Liabilities | | | 876,142 | | | | 635,379 | |
| | | | | | | | | |
Total Liabilities | | | 876,142 | | | | 635,379 | |
| | | | | | | | | |
| STOCKHOLDERS' EQUITY | | | | | | | | |
Common Stock - $.001 Par Value; 75,000,000 Shares Authorized, 18,291,667 Shares Issued and Outstanding in 2008 and 2007 | | | 18,292 | | | | 18,292 | |
Additional Paid-In Capital | | | 49,440 | | | | 49,440 | |
Retained Earnings | | | 346,290 | | | | 341,541 | |
| | | | | | | | | |
Total Stockholders' Equity | | | 414,022 | | | | 409,273 | |
| | | | | | | | | |
Total Liabilities and Stockholders' Equity | | $ | 1,290,164 | | | $ | 1,044,652 | |
The Accompanying Notes Are An Integral Part Of These Consolidated Financial Statements.
United eSystems, Inc. and Subsidiary
Consolidated Statements Of Income for the Three Months Ended March 31, 2008 and 2007
| | | Three Months Ended March 31, | |
| | | 2008 | | | | 2007 | |
| | | | | | | | |
| | | | | | | | |
| REVENUES | $ | 260,502 | | | $ | 304,107 | |
| | | | | | | | |
| COST OF REVENUES | | 118,744 | | | | 181,935 | |
Gross Profit | | 141,758 | | | | 122,172 | |
| | | | | | | | |
| EXPENSES | | | | | | | |
Operating Expenses | | | | | | | |
Personnel Costs | | 28,287 | | | | 25,055 | |
Travel | | 11,921 | | | | 6,812 | |
Other | | 28,059 | | | | 28,746 | |
Total Operating Expenses | | 68,267 | | | | 60,613 | |
| | | | | | | | |
Selling, General and Administrative Expenses | | | | | | | |
Personnel Costs | | 16,731 | | | | 28,789 | |
Legal and Accounting | | 9,710 | | | | 11,820 | |
Marketing | | 11,700 | | | | 13,550 | |
Consulting Fees | | 26,000 | | | | - | |
Other | | 1,271 | | | | 782 | |
Total Selling, General and Administrative Expenses | | 65,412 | | | | 54,941 | |
| | | | | | | | |
Total Expenses | | 133,679 | | | | 115,554 | |
| | | | | | | | |
| INCOME FROM OPERATIONS | | 8,079 | | | | 6,618 | |
| | | | | | | | |
| OTHER INCOME (EXPENSE) | | | | | | | |
Interest Expense | | (1,750 | ) | | | (2,633 | ) |
| | | | | | | | |
| NET INCOME BEFORE INCOME TAXES | | 6,329 | | | | 3,985 | |
| INCOME TAX EXPENSE | | 1,580 | | | | 1,015 | |
| NET INCOME | $ | 4,749 | | | $ | 2,970 | |
| EARNINGS PER SHARE – BASIC | $ | 0.00 | | | $ | 0.00 | |
| EARNINGS PER SHARE – DILUTED | $ | 0.00 | | | $ | 0.00 | |
The Accompanying Notes Are An Integral Part Of These Consolidated Financial Statements.
United eSystems, Inc. and Subsidiary
Consolidated Statements Of Cash Flows for the Three Months Ended March 31, 2008 and 2007
| | | Three Months Ended March 31, | |
| | | 2008 | | | | 2007 | |
| | | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | |
Net Income | $ | 4,749 | | | $ | 2,970 | |
Adjustments to Reconcile Net Income to Net Cash | | | | | | | |
Used In Operating Activities: | | | | | | | |
Depreciation Expense | | 7,368 | | | | 6,496 | |
(Increase) Decrease in Trade Receivables | | (17,176 | ) | | | 7,059 | |
Increase (Decrease) in ACH Settlements Payable | | 231,321 | | | | (26,231 | ) |
(Increase) Decrease in Restricted Cash | | (251,350 | ) | | | 25,231 | |
Decrease in Accounts Payable and Accrued Liabilities | | (10,588 | ) | | | (20,552 | ) |
Decrease (Increase) in Prepaid Expenses | | 7,789 | | | | (8,881 | ) |
Increase in Customers' Deposits | | 20,030 | | | | 1,000 | |
| | | | | | | | |
Net Cash Used In Operating Activities | | (7,857 | ) | | | (12,908 | ) |
| | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | |
Purchase of Property and Equipment | | (5,240 | ) | | | (5,400 | ) |
Increase in Other Assets | | (12,168 | ) | | | (50,000 | ) |
| | | | | | | | |
Net Cash Used in Investing Activities | | (17,408 | ) | | | (55,400 | ) |
| | | | | | | | |
| CASH FLOWS FOR FINANCING ACTIVITIES | | | | | | | |
Principal payments on Notes Payable | $ | - | | | $ | (16,000 | ) |
| | | | | | | | |
Net Cash Used in Financing Activities | | - | | | | (16,000 | ) |
| | | | | | | | |
| NET DECREASE IN CASH AND CASH EQUIVALENTS | | (25,265 | ) | | | (84,308 | ) |
| | | | | | | | |
| CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR | | 283,988 | | | | 384,830 | |
| | | | | | | | |
| CASH AND CASH EQUIVALENTS - END OF YEAR | $ | 258,723 | | | $ | 300,522 | |
| | | | | | | | |
| SUPPLEMENTAL DISCLSOURE OF CASH FLOW INFORMATION | | | | | | | |
Payments for Taxes | $ | - | | | $ | 19,000 | |
| | | | | | | | |
Payments for Interest | $ | 1,750 | | | $ | 2,633 | |
The Accompanying Notes Are An Integral Part Of These Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A — PLAN OF REORGANIZATION AND CONTRIBUTION AGREEMENT
On March 30, 2005, Riverbend Telecom, Inc. (Riverbend) entered into an Agreement and Plan of Reorganization (the “Spin-Off Agreement”) between Riverbend and Riverbend Holdings, Inc. (Holdings), its wholly owned subsidiary, pursuant to which Riverbend transferred all of its assets, liabilities and other obligations to Holdings in consideration for Holdings common stock. In addition, Riverbend distributed all of Holdings common stock to the then-existing four Riverbend stockholders (the “Spin-Off”), on a pro rata basis, one share of Holdings common stock for each Riverbend share held by the stockholders. Holdings was formed for the purpose of effecting the reorganization of Riverbend and the subsequent distribution of all of the Holdings common stock to Riverbend’s current stockholders. Holdings had previously filed a Form 10-SB with the Securities and Exchange Commission regarding its common stock under Section 12(g) of the Securities Exchange Act of 1934.
Upon consummation of the Spin-Off, Riverbend completed the contribution transaction with United Check Services, L.L.C. (United), a Louisiana limited liability company, according to the terms of a Contribution Agreement entered into on July 14, 2004, as amended by a Letter Agreement dated August 5, 2004 (collectively, the “Contribution Agreement”). Pursuant to the Contribution Agreement, the equity owners of United contributed all of their limited liability membership interests in United to Riverbend in exchange for 15,315,000 shares of Riverbend’s common stock. As a result of this transaction, United became a wholly-owned subsidiary of Riverbend, and the members of United became the majority stockholders of Riverbend, and the transaction was accounted for as a reverse acquisition. As a result of the Spin-Off, the current telecommunications business of Riverbend is now carried on by Holdings, and the automated clearing house services business of United is now carried on by Riverbend, through its 100% ownership interest of United.
On June 13, 2005, Riverbend effected a name change from Riverbend Telecom, Inc. to United eSystems, Inc. to better reflect the change in business operations as a result of the consummation of the Plan of Reorganization and the Contribution.
NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
As described in Note A, UNITED ESYSTEMS, INC. (Company) serves as the holding company for United Check Services, L.L.C. (United). United provides automated clearing house (ACH) services to businesses throughout the United States. The Company’s operations center is located in Gulfport, Mississippi.
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, United Check Services, L.L.C. All significant intercompany balances and transactions have been eliminated in consolidation.
The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of financial information for the interim periods presented. These adjustments are of a normal recurring nature and include appropriate estimated provisions.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of 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
United charges customers a fee on a transaction by transaction basis for its ACH services. For these transactions, United recognizes only the fees generated as revenue. United recognizes these fees as revenue when United has provided the service to its customers.
Fees for ACH services are based on contractually determined rates with each individual customer. Settlements paid to customers for ACH transactions are submitted to the customer net of fees due to United.
Basis of Accounting
The books and records of the Company are kept on the accrual basis of accounting, whereby revenues are recognized when earned and expenses are recognized when incurred.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using primarily straight-line methods over the estimated useful lives of the related assets, which ranges from three to seven years.
Income Taxes
Since United is a single-member limited liability company, it is treated as a disregarded entity for federal income tax reporting purposes. As such, the Company includes the revenues and expenses of United in its Federal income tax return.
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to change in tax rates and laws.
Advertising
Advertising costs are charged to operations when incurred.
Statement of Cash Flow Information
For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
NOTE C — RESTRICTED CASH
Restricted cash consists primarily of funds maintained in United’s primary bank account to facilitate ACH transactions. The Company has restricted this cash from operations in order to ensure that sufficient funds are maintained to process and settle customer’s ACH transactions.
NOTE D — NOTES PAYABLE
In September of 2004, the two existing members of United agreed to take a distribution for the amount of undistributed earnings accumulated by United through June 30, 2004, which amounted to $156,000. In order to ease the cash flow requirements on United, the members agreed to accept a note for the amount of the distribution. The amount of the distribution was combined with the amount of advances due to United’s members of $100,000, and notes payable due to United’s members for the total amount of $256,000 were established. The notes are unsecured, due on demand and require interest-only payments, at an annual percentage rate of 10%. As of March 31, 2008, and December 31, 2007, the outstanding principal balance of these notes was $70,000.
NOTE E — STOCK OPTIONS
On March 30, 2005, the Company entered into a non-qualified stock option agreement, whereby the Company granted 312,000 options to its CFO. On February 15, 2006, the Company entered into non-qualified stock option agreements with four key employees, granting a total of 90,000 options, which included 32,500 options to its CFO. All of the options have an exercise price of $.03 per share, and were fully vested as of the date of the grant. The option agreements terminate five years from the date they were granted. No options were exercised in 2008 or in 2007.
NOTE F — SIGNIFICANT CONCENTRATIONS
Restricted Cash
At March 31, 2008 and December 31, 2007, the Company maintained a balance with a financial institution in excess of FDIC insured limits.
Major Customers
During the three months ended March 31, 2008, United had transactions with one customer that amounted to approximately 48.5% of the United’s ACH processing revenue. None of these customers were affiliated with the Company through common ownership.
NOTE G — COMMITMENTS
Operating Leases
On April 1, 2008, United extended its prior three year agreement to lease office facilities at its present location for an additional twelve months at $2,400 per month, with an option to further extend its lease for an additional two years.
NOTE H — RELATED PARTY TRANSACTIONS
As disclosed in Note D, the Company has notes payable totaling $70,000 at March 31, 2008 and December 31, 2007, due to majority stockholders of the Company for funds advanced to United in prior years and for the amount of the distributions due to the former members of United.
NOTE I — EARNINGS PER SHARE
For earnings per share calculations, the weighted average common shares outstanding amounted to 18,291,667 for the three months ended March 31, 2008 and 2007. Options to purchase 402,000 shares at $.03 per share were outstanding during the three months ended March 31, 2008, and 2007, but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the estimated market price of the common shares.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Summary
The Company is an electronic payments service provider headquartered in Gulfport, Mississippi, that caters mostly to small and medium size businesses who handle significant volumes of electronic transactions as an integral part of their business. Since 1998, we have provided electronic ACH (Automated Clearing House) payments via our internet-based, encrypted systems, to assist merchants in the collection of their sales and accounts receivables. Our processing systems may also be used to transmit payments such as loan proceeds, customer refunds, travel expenses, commission payments, and payroll direct deposits. We act as the merchant’s ACH processor and clear transactions electronically through the Federal Reserve Banking System. We are paid based on a fee per each ACH transaction we process, and typically receive our fees at the time we are settling collected proceeds electronically to each of our merchants.
The ACH Network has been in use for in excess of 30 years, serving a variety of customers, including over 20,000 financial institutions, 3.5 million businesses, and 135 million individuals. According to the National ACH Association (NACHA), in 2006, there were nearly 16 billion ACH payments made, an increase of approximately 15.4% over the prior year, and valued at approximately $30.3 trillion. It also estimated that for 2006 in excess of 7.5 billion consumer bills were collected via the ACH Network which included 3.3 billion pre-authorized debits, 1.8 billion internet payments, and 2.8 billion checks converted into ACH payments, representing increases of 6.1%, 35%, and 32% respectively, compared to 2005. Overall, ACH payment volume continues to double every five years as merchants and financial service providers recognize the value and efficiencies that ACH payments provide.
The ACH business is divided between traditional banks, large “in-house” processors, and independent processors. We currently concentrate on independent processors service customers that utilize electronic commerce but find that outsourcing to be a more cost effective solution. The independent processors find they are able to provide custom tailored solutions and better transaction pricing than the merchants could individually obtain from traditional banks. We have established ourselves as a quality provider of ACH processing services with proven results utilizing state of-the-art technology.
In addition, the Company has recently begun offering to our customers additional services including credit and debit card processing, real-time account verification, and identity verification services. Such services are complimentary to our ACH payment services and with their addition it allows us to provide a more comprehensive line of services to our existing and prospective business customers.
Results of Operations
In this section, we provide more detailed information about our operating results and changes in financial position. This section should be read in conjunction with the financial statements and related notes include in this Form 10-Q, and in conjunction with our Form 10-KSB previously filed for the year ended December 31, 2007.
Three Months Ended March 31, 2008 compared to the Three Months Ended March 31, 2007.
Our revenue is mostly generated by providing Automated Clearing House (ACH) processing services for business customers. We also provide electronic account verification services. The majority of our customers utilize our services to collect their gross receipts or accounts receivable electronically. However, ACH processing services may also be utilized for other purposes, including direct deposit of employee payroll, employee travel advances, and intercompany transfers. We recognize revenue upon completion of the service being provided.
For the three months ended March 31, 2008, revenues were $260,502, compared to $304,107 for the three months ended March 31, 2007, representing a decrease of $43,605, or approximately 14%. Such decreases are related to a discontinuance of processing for several accounts at the end of 2007 that were marginally profitable which was only partially offset by new accounts added during the current quarter.
Cost of revenues include the costs incurred in conjunction with the items processed. These costs include the direct transactional costs incurred for ACH processing and account verification services, plus the direct costs associated with client activation and the utilization of our ACH processing software.
For the three months ended March 31, 2008, cost of revenues was $118,744, compared to $181,935 for the three months ended March 31, 2007, representing a decrease of $63,191, or approximately 35%. The decrease in cost of revenues in the current quarter reflects the positive effect of the elimination of several marginally profitable accounts described above. During the current quarter we continued to increase our volume of business while at the same time eliminating certain accounts which were not contributing significantly to our gross margins. We continued to utilize independent sales organizations (ISO’s) during the current quarter, together with our website marketing to obtain most of our business.
For the three months ended March 31, 2008, our gross profit was $141,758, compared to $122,172 for the three months ended March 31, 2007, representing an increase of $19,586, or approximately 16%. The increase in gross profit is mostly attributable to the discontinuance of several marginally profitable accounts as previously described.
Operating expenses include costs of personnel, computers, supplies, internet services, delivery charges, telecommunications expenses, travel, and other costs associated with our ACH processing operations. For the three months ended March 31, 2008, operating expenses were $68,267, compared to $60,613 for the three months ended March 31, 2007, representing an increase of $7,654, or approximately 13%. The increases in operating costs related mostly to an increase in personnel costs of $3,232 and an increase in travel costs of $5,109. The increase in personnel costs represents the addition of an ACH processing employee during the current quarter. The increase in travel costs is associated with enhancements related to our payment processing hardware and software assets at out-of-state locations where we maintain redundant systems as well as reimbursable travel costs incurred by consultants providing professional services to the Company.
For the three months ended March 31, 2008, our selling, general, and administrative expenses were $65,412, compared to $54,941 for the three months ended March 31, 2007, representing an increase of $8,684, or approximately 16%. This increase is mostly due to an increase in consulting fees of $26,000, partially offset by decreases in personnel costs of $12,058, legal and accounting costs of $2,110, and marketing costs of $1,850. The increases in consulting fees represented costs associated with our efforts to obtain suitable acquisitions of payment processing account portfolios as a means of accelerating our growth. The decrease in personnel costs reflect the absence of salaries paid during the first quarter of 2007 for a marketing employee that was terminated by the second quarter of 2007. Legal and accounting costs were reduced in connection with the resolution during 2007 of our litigation against Community Loans of America. We also reduced certain marketing costs in the current quarter by utilizing more cost effective joint advertising programs with one of our most preferred ISO’s compared to the same period in the prior year.
We produced a net profit for the three months ended March 31, 2008 of $4,749 compared to a net profit of $2,970 for the three months ended March 31, 2007, representing an increase of $1,779, or 60%. The increase in net income is mostly attributable to the improvements we made by eliminating marginally profitable accounts and partially replacing them with new business at more acceptable gross profit margins. However, during the current quarter we expended $26,000 for consulting fees included in our selling, general and administrative expenses related to our efforts to obtain suitable payment processing account portfolios. These costs were not critical to our ongoing operations, and accordingly, after adjusting for these non-recurring items, our net profit for the current quarter ended March 31, 2008, would increase by $19,500 net of tax, resulting in a net profit of $24,249.
Liquidity and Capital Resources
Per our Consolidated Statements of Cash Flows, net cash used in operating activities for the three months ended March 31, 2008, was $7,857, compared to $12,908 for the three months ended March 31, 2007, or a decrease of $5,051. This reduction of cash used in operating activities is due to the increase in net income of $1,779, together with various adjustments necessary to reconcile net income to net cash used in operations for each of the respective periods reported.
For the three months ended March 31, 2008, adjustments increasing our net income of $4,749 included the decrease in prepaid expenses of $7,789 and the increase in customers’ deposits of $20,030, offset by adjustments that decreased our net income, such as the increase in trade receivables of $17,176 and the decrease in accounts payable and accrued liabilities of $10,588. The increase in net income was mostly attributable to improvement we made by replacing marginally profitable accounts with more profitable new business compared to the same period in the prior
year, as previously described. The decrease in prepaid expenses relate mostly to prepaid insurance. The reductions in accounts payable and accrued liabilities relate mostly to trade accounts payable.
For the three months ended March 31, 2007, adjustments increasing our net income of $2,970 included the decrease in trade receivables of $7,059, offset by adjustments that decreased our net income, such as the increase in prepaid expenses of $8,881 and the decrease in accounts payable and accrued liabilities of $20,552. The increase in net income was mostly attributable to increases in the volume of business we conducted compared to the same period in the prior year, as previously described. The increase in prepaid expenses relate mostly to prepaid insurance. The reductions in accounts payable and accrued liabilities relate mostly to payments for income taxes.
Net cash used in investing activities was $17,408 for the three months ended March 31, 2008, and $55,400 the three months ended March 31, 2007. This represents cash utilized for purchases of ACH processing hardware and software of $5,240 and other assets of $12,168 during the current quarter, compared to similar purchases of ACH processing hardware and other assets of $5,400 and $50,000 respectively in the same period in the prior year.
Net cash used in financing activities was $0 for the three months ended March 31, 2008, compared to $16,000 for the three months ended March 31, 2007, representing the repayment of principal amounts on notes payable to the majority shareholders in the prior year’s first quarter compared to no such principal payments during the current quarter. We elected not to make further reductions in the principal balance of these notes as we began expending funds in our search to obtain suitable processing payment portfolios as a means to accelerate our growth.
As described in Note A of our financial statements included in this report, and in our Form 10-KSB for the year ended December 31, 2006, on July 14, 2004, United executed a Contribution Agreement to effect a reverse acquisition with Riverbend Telecom, Inc., a reporting company under the Securities and Exchange Act of 1934, for the purpose of becoming a public company to enhance the planned expansion of our operations. On this date, the members of United agreed to take a distribution for the amount of undistributed earnings accumulated by us through July 14, 2004, which amounted to $156,000. In order to ease our cash flow requirements, the members agreed to accept a note for the amount of the distribution. The amount of the distribution was combined with the amount of advances due to the members of $100,000, and notes payable due to the members, and now our principal shareholders, for the total amount of $256,000 were established. The notes require monthly interest-only payments at an annual percentage rate of 10% and are due on demand. As of March 31, 2008, and December 31, 2007, the principal balance of these notes was $70,000. Interest paid for the three months ended March 31, 2008, of $1,750, relates to these notes payable.
To date we have financed our capital expenditure needs from cash flows generated from our operations. At this time, we believe we have sufficient operations and existing non-restricted cash to fund our needs for at least the next twelve months.
Our future expansion is planned from two sources. First, we plan to continue to expand our use of independent sales organizations (ISO’s) to assist in the growth of our ACH and verification service business. While there are costs associated with this increase, the majority of additional sales costs will be funded through the additional sales produced from these selling activities. We have and plan to continue to structure our sales compensation plans based on commissions only, and employ the use of independent sales representatives already engaged in selling financial products and/or services that are complementary to ACH services.
Second, we believe we will also expand future operations through acquisitions which are accretive to our current earnings. During the current quarter we began to actively search for suitable acquisitions of payment processing account portfolios and expect our public company status to enhance our ability to obtain additional working capital and facilitate such acquisitions more effectively than could be accomplished by remaining a private, closely-held entity. At this time, however, we have not completed any such acquisitions.
As disclosed in Note F of our financial statements included with this report, we have disclosed certain concentrations with significant customers, indicating that we had one customer accounting for approximately 48.5% of our ACH revenue for the three months ended March 31, 2008. None of these customers were affiliated to us through common ownership. During the quarter ended March 31, 2007, we had transactions with three customers that amounted to approximately 65% of our total revenue. We plan to continue to reduce our concentrations with significant customers through our marketing efforts as previously described.
Inflation
Inflation has not had a material effect on our operations in the past. At the present time there is a substantial doubt that such conditions will adversely affect us for the foreseeable future.
As a smaller reporting company, the Company is not required to provide the information required by this Item.
Disclosure Controls and Procedures
Management is responsible for maintaining effective disclosure controls and procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, management evaluated the effectiveness and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, both the Company’s Principal Executive Officer and Principal Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in reports that are filed or submitted under the Exchange Act are recorded, processed, summarized and reported to Management within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in internal controls over financial reporting during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
Not Applicable
As a smaller reporting company, the Company is not required to provide the information required by this Item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Not Applicable
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable
Not Applicable
(a) Exhibits
31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.*
31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.*
32.1 Certification pursuant to Rule 13a-14(b) of the Securities Exchange Act and 18 U.S.C. §1350.*
_______________
* Filed herewith.
In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | UNITED ESYSTEMS, INC. |
| | |
| Date: May 14, 2008 | By: /s/ Jeffery C. Swank |
| | Jeffery C. Swank |
| | Chief Executive Officer and President |
| | (Principal Executive Officer) |
| | |
| | |
| Date: May 14, 2008 | By: /s/ Walter Reid Green, Jr. |
| | Walter Reid Green, Jr. |
| | Chief Financial Officer |
| | (Principal Financial Officer) |
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