WASHINGTON, D.C. 20549
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or section 15(d) of the Exchange Act.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
There was no public trading market for the registrant's common stock as of the last business day of its most recently completed second fiscal quarter and, therefore, the registrant cannot calculate the aggregate market value of its common stock held by non-affiliates as of such date.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 about United eSystems, Inc. (the “Company”) and our subsidiaries, United Check Services, L.L.C. (“United”) and Netcom Data Southern Corp. (“NDS”), 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 annual 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, United, and NDS (sometimes referred to herein on a consolidated basis as the Company, we, us, or similar phrasing) undertake 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:
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 Item 1A. of this report. All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update this Annual Report on Form 10-K 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.
In this annual report on Form 10-K we use the terms “Company,” “we,” “us” and “our” to refer to United eSystems, Inc. and its wholly owned subsidiaries, United Check Services, LLC (“United”) and Netcom Data Southern Corp. (“NDS”). We refer to our $.001 par value common stock as our common stock.
Except for historical information, the following description of our business may contain forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those set forth in these forward-looking statements as a result of a number of factors, including those set forth under Item 1A. Risk Factors in this report.
United eSystems, Inc. is an electronic payment services provider which offers automated clearing house (“ACH”) services, credit card merchant processing services, and other services related to electronic payments. We have been in the ACH payment services business since 1998. In 2008 we entered the credit card payment services business through the acquisition and portfolio asset purchase described below. We now provide payment services for approximately 2,000 merchant accounts, with merchants located nationwide but more concentrated in the eastern half of the United States.
As previously described, we have been an ACH provider, engaged in the business of handling automated bank transactions, since 1998. ACH transactions are also known as electronic checks, or electronic check payments, or electronic debits or credits. We provide a variety of ACH payment services which include automatic debits, automated recurring debits, electronic check truncation, web payments, and remote deposit capture. We cater mostly to merchants engaged in businesses that require significant volumes of electronic transactions. Such services include accounts receivable conversion, direct payroll deposit, point-of-sale check clearing, automatic recurring payments, remote deposit capture, electronic collection services and other similar forms of electronic payment services.
In addition to our ACH services, the Company, through its two acquisitions describe below, now offers credit and debit card processing, real-time account verification, and identity verification services. Such services are complimentary to our ACH payment services and allow us to provide a more comprehensive line of services to our existing and prospective business customers.
Our ACH subsidiary was originally formed and began operations in 1998 under the laws of Louisiana. We were originally incorporated under the laws of the state of Nevada in 2001. Our principal executive offices are located at 2150 North Highway 190, Covington, Louisiana 70433, and our telephone number is (228) 832-1597. Our wholly owned subsidiary, United Check Services, LLC, through which we conduct all of our ACH business operations, is a Louisiana limited liability company formed in 1998 and operates from our processing center located at 15431 O’Neal Road, Gulfport, Mississippi. Our wholly owned subsidiary, Netcom Data Southern Corp., a Georgia corporation, is located at 980 Canton Street, Roswell, Georgia 30076, serves as our sales and marketing office and conducts our merchan t processing business, and its telephone number is (770) 649-1225.
Acquisition of Netcom Data Southern Corp.
On August 22, 2008, we entered into a Stock Purchase Agreement with Netcom Data Southern Corp., pursuant to which we acquired all of the common stock of NDS, a credit card merchant processing business. We acquired NDS as a means of diversifying our electronic payments business and creating a dedicated sales staff. Prior to the transaction, the majority of the Company’s revenue was derived from providing ACH payment services for business merchants. For 2009, the Company derived approximately 30% of its gross revenue from its ACH payments business and approximately 64% from its credit card merchant processing services. NDS’ revenue is derived through contracts it has with several sponsor banks in the United States. NDS is able to establish wholesale pricing with th ese banks in exchange for obtaining merchant customers that process credit card transactions through the sponsor bank. NDS receives a portion of the fees charged on the merchant accounts for the life of the accounts. In addition to obtaining merchant customers, NDS provides certain customer service functions in accordance with it contractual relationships with its sponsor banks. NDS also provides a variety of electronic verification services
which include identity and age verification. We believe that the acquisition of NDS provides the opportunity to improve our operating results and the possibility of creating future value by expanding our line of payments services and by providing us with a dedicated sales staff for marketing all of our payment services.
Pursuant to the agreement, we acquired all of the outstanding stock of NDS in exchange for a net cash payment of approximately $272,000, an unsecured promissory note payable of $2,720,000, and 7,800,000 shares of the Company’s restricted common stock which had an estimated fair value at the date of the acquisition of $.05 per share. As a result of the transaction, all of our sales and marketing activities, as well as all of the customer service duties to manage the credit card merchant accounts of NDS will be conducted through NDS, which is now a wholly owned subsidiary of the Company. Accordingly, we have migrated most of the administrative functions of NDS, such as accounting, bill payment and payroll, to our processing center in Gulfport, Mississippi, and to our executive offices in Covington, Loui siana.
Portfolio Asset Purchase
On September 17, 2008, we, through our wholly owned subsidiary NDS, entered into and closed an Asset Purchase Agreement with Netcom Data Corp. of N.Y. (“Netcom NY”) and American Timeshare Associates, Inc. (“ATA”). Under the terms of the agreement, the Company paid $2,275,000 in cash, plus 3,200,000 shares of its restricted common stock, in exchange for the assignment all of the seller’s rights under a Independent Sales Organization Agreement (the “Bank Agreement”) with LaSalle Bank, N.A., a subsidiary of Bank of America (the “Bank”). The terms of the Bank Agreement allow merchant customers of the seller to utilize the credit card merchant processing services provided by the Bank. As a result of the assignment of the Bank Agreement, NDS will pe rform certain services previously provided by the seller under the Bank Agreement and will receive all payments due therefore from the Bank.
Upon this acquisition, we folded the portfolio into an existing portfolio of NDS located at the same sponsor bank which provided for a seamless transition. This reduced deposits, streamlined customer service, and further increased the credit card services portion of our business.
We accounted for this transaction as an asset purchase and the purchase price, which is based upon the total consideration paid, is included on our consolidated balance sheet as Intangible Assets. The purchase price is amortized over a ten year period, commencing September 17, 2008.
Private Placement of Common Stock
On February 28, 2010, we closed a private placement of common stock and issued and sold 5,072,500 shares of common stock to a limited number of accredited and non-accredited investors for gross proceeds of $1,014,500. The shares were sold at a price of $0.20 per share. The offer and sale was conducted on behalf of the Company by a FINRA-licensed broker-dealer who served as placement agent in the offering and received a sales commission equal to 7% of the gross proceeds of the offering, or $71,015, and a financial advisory/management fee equal to 2% of the gross proceeds of the offering, or $20,290. The shares were offered and sold without registration under the Securities Act of 1933 in reliance upon the exemption provided by Section 4(2) of the Securities Act and Rule 506 of Regulation D promulg ated thereunder, and may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements under the Securities Act. An appropriate legend was placed on the shares of common stock issued. We utilized the net proceeds from the offering primarily to pay down our existing debt with Thermo Credit, LLC.
Industry Background
Credit Card Payment Services
Our credit card payment services are provided through our wholly owned subsidiary NDS, which acts as an independent sales organization (ISO) that obtains merchant customers that utilize credit card processing services through several NDS sponsored banks. NDS receives a portion of the fees charged for such services in exchange for acquiring the merchants and maintaining certain customer service functions. NDS receives a portion of the fees generated from credit card merchant processing services which are provided through its contractual agreements with various sponsor banks.
A card transaction begins when a cardholder presents a card for payment to a merchant. In most cases this is a face-to-face transaction and the card is swiped through a point-of-sale (POS) terminal card reader, which may be provided by NDS. Card and transaction information is captured and transmitted through the POS device to one of our sponsor banks for processing. Once the transaction is accepted, the merchant receives an authorization code which provides the merchant with a high level of confidence that the transaction is authentic and does not exceed the consumer’s spending limits. The terminal electronically records sales draft information, such as the credit card identification number, transaction date and value of the goods or services purchased. Debit card payments differ slightly from traditional credit card transactions in that the cardholder is required to have sufficient funds available in a deposit account at the time of the transaction, or the debit card transaction will not be authorized. Stored value card transactions function similarly to debit cards except that the card itself functions similar to the bank account and a sufficient available balance must exist on the card at the time of purchase in order to be authorized. PIN-based or on-line debit transactions are sent through a debit network, while signature-based, off-line debit, or check card transactions are sent through card associations and require a signature at the time of purchase. Also, PIN-based or on-line debit transactions typically deduct the purchase amount from the cardholder’s deposit account within a day of the purchase, depending on the time of the purchase. Signature-based, off-line debit or check card transactions typically debit the cardholder’s deposit accoun t two to three days after the purchase, although the funds are “held” with a memo posted to the cardholder’s bank account. A credit card transaction posts to a cardholder’s account, reducing the available credit limit in a similar manner.
In providing our credit card services, we are designated as a Merchant Services Provider (MSP), and as an Independent Sales Organization (ISO), by Mastercard and Visa (Card Association). We obtain these designations through our sponsoring banks which are member clearing banks of the Card Association, and accordingly, we adhere to all standards of the Card Associations that apply to us.
Our credit card services business is based on a combination of sales efforts and ongoing customer service. Our sales efforts are focused on obtaining new merchants, completing applications, and assisting the merchant in satisfying any additional underwriting requirements of our sponsoring banks. Our customer efforts are focused on assisting new merchants with implementation of POS hardware, providing software upgrades, advising existing merchants of new developments in card association rules or pricing, and providing general support for merchants that may have questions regarding services.
ACH Payment Services
Automated Clearing House (“ACH”) and the Automated Clearing House network (“ACH Network”) is a processing and delivery system that provides distribution and settlement of electronic credits and debits among financial institutions. The ACH Network was developed in response to the growth of payments by check and the many technological advances in the mid-twentieth century and functions as an efficient, electronic alternative to paper checks. Through a nationwide telecommunications network, United, as an ACH operator, is able to communicate with other ACH operators to exchange entries quickly and efficiently, regardless of geographic distances involved. The ACH Network offers an assortment of technical formats that can be used for a variety of payment applications, products and services. The ACH N etwork is governed by operating rules, regulations and guidelines, which are developed by the actual users of the system, and is administered through a series of agreements among financial institutions, customers, trading partners, and other ACH operators. The main benefits of the ACH Network are cost reductions and increased productivity compared to paper check transactions.
Development of the ACH Network began in the early 1970s when a group of California bankers formed the Special Committee on Paperless Entries (“SCOPE”) in direct response to the rapid growth in check volume. SCOPE was chartered to explore the technical, operational, and legal framework necessary for an automated payments system. SCOPE laid the groundwork for the first automated clearing house association (“ACHA”), which began operation in 1972. The establishment of this ACHA led to the formation of similar groups in other parts of the country. Agreements were made between the emerging regional ACHA’s and the regional Federal Reserve Banks to provide facilities, equipment, and staff to operate regional ACH networks.
In 1974, the National Automated Clearing House Association (“NACHA”) was formed to coordinate the ACH movement nationwide. NACHA oversees America’s largest electronic payments network. NACHA’s primary roles are to develop and maintain the NACHA operating rules, to promote growth in automated check clearing volume, and to provide educational services to its members and other ACH participants. Through joint efforts with the Federal Reserve, local ACH operators were electronically linked on a nationwide basis in 1978.
In an effort to improve the payments system, the U.S. Congress enacted the Monetary Control Act in 1980. As a result of the Act, private sector ACH operators were encouraged to compete with the Federal Reserve, which could no longer offer its services free of charge and was required to recover its operating costs. A private sector adjustment is included in Federal Reserve processing charges to make it comparable to operating on a “for profit” basis.
Business Strategy
General Strategy
As a payment services provider, we cater mostly to businesses that require significant volumes of electronic transactions. Our services may include electronic sales collections, accounts receivable conversion, recurring billing, direct payroll deposit, check clearing, automatic direct debit bill payment, electronic credits and other complimentary services, which include account and route number verification, identity, and age verification. Our verification services help merchants avoid originating erroneous transactions, as well as assist certain types of merchants, such as internet businesses, gift retailers, money service businesses, and consumer loan companies, meet regulatory guidelines that apply to their businesses.
With respect to our electronic ACH business we act as the customer’s ACH processor to clear transactions electronically through the Federal Reserve banking system. We are also paid electronically based on our transaction volume for each customer at the time we settle payments to their operations accounts. To date, the majority of our customers use ACH to collect their sales or accounts receivable. Within the payments industry, we are known as a “third party processor” or “third party sender.” This distinguishes us from traditional financial institutions that function within the ACH network and also serve as our competition. We have been engaged in the ACH processing business since 1998.
Generally speaking, third party processors are aggregators that provide pricing and additional services that their clients may not otherwise receive from traditional financial institutions. By servicing a group of clients, third party processors aggregate larger volumes of ACH transactions which allow them to negotiate lower unit prices than any one of their clients could receive alone. This allows the third party processor to offer competitive pricing to individual clients and still generate sufficient operating margins for its own business.
Our strategy is to expand our traditional ACH business by increasing the volume of business we conduct with our current customers as well as expanding our base to new types of customers. As existing customers expand their businesses, we will continue to provide economical solutions for their ACH processing needs. Additionally, we plan to expand our revenue base to both new and existing customers by adding services that compliment ACH processing such as credit card transaction services, real-time account and identity verification services and electronic bill payment services. As we add more products and services, we are able to develop a greater variety of customized payment solutions for clients, as well as provide enhancements for our existing clients. By developing various customized payment solutions that integrate other payment technologies and products with ACH, we can service particular needs in niche markets. We believe that our acquisition of NDS during 2008 will assist in accomplishing our strategy going forward.
Since 2005 we have provided real-time account verification and consumer authentication services to be used in conjunction with the transactions originated by our clients. These services are designed to reduce the incidence of erroneous or fraudulent transactions they receive. In the case of non-face-to-face transactions, such as transactions generated through internet or telephone based businesses, these services assist our customers in meeting the standards prescribed by NACHA for origination on the ACH Network. Although these verification services are mostly used in the customer-not-present environment today, we believe real-time verification and identification services will continue to grow and over the long-term will develop into a more significant source of revenue for us.
With the acquisition of NDS, we added several new electronic verification services to our product line, which include identity verification and age verification services. These services are provided in real-time through contracts we have with reputable multi-national providers of real-time database services. We are able to negotiate lower rates in exchange for delivering significant volumes of transactions. This allows us to deliver cost effective solutions to our merchants and still maintain acceptable margins.
In addition to verification services, we also offer several types of automated teller machines and stored value debit card products through established vendors. These products may be used in conjunction with ACH services to provide a more comprehensive payment solution for our customers. They allow merchants to offer their customers and/or employees a more convenient way to send or receive payments. In other applications merchants may expand their customer base to the “unbanked” consumer, while also streamlining their internal cash management functions. Stored value cards provide a viable complement to ACH processing when real-time cash delivery systems are necessary. A portion of our commission revenue is derived from these sources.
We also provide credit card merchant processing services through NDS as previously described. Going forward, we plan to expand our sales force of independent payment services agents through various programs designed to provide flexibility in our business relationships with sales agents. We have a variety of agent compensation programs designed to handle referrals, entry level agents, established agents, and national sales agents. We also have a bank partner program designed for small banks and credit unions. Although we cater mostly to small and medium business, we have the pricing ability to compete with other larger payment service providers.
Our strategy includes accelerating growth by broadening our product and service offerings as described above, and then identifying quality independent sales organizations experienced in the payments industry that are able to recognize the value of consolidating particular products and services into customized solutions. By offering incentive based compensation to these sales organizations, we believe we can accelerate our growth and broaden our customer base while minimizing the risk capital needed to execute our expansion goals.
Acquisition Strategy
Our acquisition strategy is to complement our growth through selective acquisitions of either payment asset portfolios or companies with growth potential that have a solid customer base, have established products and services, and operate with strong management teams and dedicated employees. During 2008, we completed the acquisition of NDS as part of this strategy together with the asset acquisition of Netcom NY. We continue to seek companies that bring minimum integration risk, but that add to our overall scale. We seek acquisitions that either fill a product gap; enhance our existing product line; add businesses with adoption growth models; provide enhanced economies of scale; expand our customer base for cross-sell opportunities; or a combination of these factors. We currently have no understanding, arrangement or agreement for any such pending acquisitions at this time.
Marketing and Sales
Our goal is to expand our presence within the payments industry by developing a marketing team that can effectively communicate our quality of service and the operational efficiencies that our payment services can provide to potential customers, both stand alone and in conjunction with complementary products and services that we offer. Currently we utilize leads generated from our website, word-of-mouth referrals, lead generation services, and by utilizing independent sales agents and sales organizations to obtain our current level of business operations.
We will continue to increase our volume of business with both new and existing clients through quality customer service and by making continual improvements to our processing methods and systems in order to improve product efficiencies. This is often accomplished through routine feedback that our personnel and sales agents obtain from our clients as well as from their customers. Where possible, this feedback is translated into future enhancements designed to improve service and efficiency.
In addition to expanding the volume of business, our strategy includes broadening the customer base, thereby reducing our concentration within one particular industry. We plan to accomplish this through our continued use of experienced independent sales organizations with niches in particular segments of the payments industry. In addition to word-of-mouth referrals, existing web-site inquiries, and independent sales organizations, we also attend various trade shows and information seminars as a method of obtaining new business and learning about new products and processing methods.
At the present time, ACH has begun to be widely accepted within the business community. As a result, we continue to see downward movement in transaction pricing within the marketplace. As a result, we have begun to focus our growth strategy going forward on the complimentary services to ACH, such as credit card transaction services, identity, and age verification services, as previously mentioned. We plan to continue to service small and medium
businesses, and to utilize independent sales organizations to penetrate certain industries that are susceptible to using electronic payment services.
Operations
Our corporate headquarters is located in approximately 800 square feet of office space in Covington, Louisiana and our ACH processing center is located in approximately 2,400 square feet of office space in Gulfport, Mississippi. Our sales and marketing office is in Roswell, Georgia where we maintain approximately 1,500 square feet of office space. We maintain completely mobile office servers and workstations at our processing center in Gulfport, with our main transaction processing computer servers located in a state-of-the art co-location facility in Atlanta, Georgia. We utilize multiple redundancy, and communicate through encrypted connection with VPN firewall protection. We also maintain electrical backup power for all servers and workstations.
Our current operational setup prevents interruption of business due to normal temporary power outages or fluctuations. It also facilitates our ability to quickly mobilize our operations from our Gulfport, Mississippi processing center to either the NDS sales location in Roswell, Georgia or to any other location within the United States that provides high speed internet connectivity. From any such location, we are able to quickly re-establish communication between our office workstations and our remote transaction servers and resume processing transactions for our merchant customers.
Prior to any business being transacted, either for ACH or credit card processing, prospective clients are reviewed and approved by us and the sponsor bank that will be associated with the account. At this time we utilize processing relationships with three banks for our ACH business and two banks for our credit card services. Once approvals are issued, the proper merchant agreements are executed and accounts are set up. If applicable, appropriate deposits are placed on hand by the client. The entire process typically takes several business days to one week.
Currently, we utilize two software systems in conjunction with processing ACH transactions on behalf of our clients under separate licensing agreements with each vendor. Both are internet based systems that utilize 128 bit sure socket encryption which meets the NACHA guidelines for security standards. There is a “front end” and “back end” component of this software. We use the back end portion to interface with both our client and our clearing bank in order to process and deliver ACH files. The client uses the front end portion for data entry, account inquiries, and reporting.
Once we complete underwriting and a new client is approved, their account is set up and online training is provided by our staff in the use of the front end component of the software. This allows the client to access their account via our website and begin entering transactions to be processed. Our systems allow clients the option of either manually entering transactions or uploading daily batch files for processing. We have numerous methods of accepting transaction data from clients, including comma separated files, XLM interface for real-time submissions, virtual terminal entry, and Excel file conversions. Each batch that a client enters via web access is followed by a transmittal form which creates a crosscheck of the batch total in order to avoid processing erroneous batch files an d to provide additional security measures between us and the client.
Upon receipt of client information, our staff reviews the batches and compares them to the clients’ transmittals. One of our systems requires us to create an ACH file and upload it to the bank over a secure website connection. The other system handles file creation and transmittal through a completely automated process, so we are only required to report exceptions and may discontinue the automated process for that particular file if necessary.
The bank provides confirmation after they have transmitted the file successfully to the Federal Reserve. This provides confirmation for us that the file was processed. Client payments are made by us based on ACH files, not by individual transactions. Any transactions within a file that are not properly formatted are rejected and must be resubmitted following correction of the error. The client settlements created in our system are based on the batch totals, less returned transactions, which equals the net amount due the client. In one of our systems, the client’s account is debited at the time of settlement to pay us for the fees associated with the transactions we have performed on their behalf. Within our other system, client fees are charged daily based u pon the transactions processed for that day whether or not there is a settlement due the client for that given day.
In addition to ACH, we also provide real-time account verification services. These include real-time verification of bank route numbers, account numbers, as well as information regarding the status of bank accounts that may be
frozen or restricted due to non-sufficient funds, magnetic ink character recognition problems, trust account restrictions, or other conditions which would typically preclude the account from accepting an ACH debit transaction. To date we have utilized independent vendors and we act as an intermediary for customer service. In most cases these services are delivered with internet based systems through automated interfaces that we have developed, known as web services, so there is little customer service involved once the accounts and interfaces are set-up. Similar to ACH, as we increase the aggregated volume of these type transactions our costs per unit decrease.
Through NDS we also offer identity and age verification services which assist merchants in authenticating their customers in real time at the point of sale. These services also assist certain types of merchants in meeting regulatory guidelines applicable to their businesses, as previously mentioned.
Our credit card payment services are provided through our wholly owned subsidiary NDS, which acts an independent sales organization (ISO) that obtains merchant customers that utilize credit card processing services through several NDS sponsored banks. NDS receives a portion of the fees charged for such services in exchange for acquiring the merchants and maintaining certain customer service functions. NDS receives a portion of the fees generated from credit card merchant processing services which are provided through its contractual agreements with various sponsor banks.
In providing our credit card services, we are designated as a Merchant Services Provider (MSP), and as an Independent Sales Organization (ISO), by Mastercard and Visa (Card Association). We obtain these designations through our sponsoring banks which are member clearing banks of the Card Association, and accordingly, we adhere to all standards of the Card Associations that apply to us.
With respect to our credit card services, these transactions are processed by the sponsor banks with which we maintain contractual agreements for the placement of merchants. Although we provide many of the customer service functions for these merchants, we do not capture or maintain sensitive credit card information within our systems and therefore are not subject to the typical security standards required of companies actually engaged in the processing and storage of sensitive information associated with such transactions. We do adhere to any VISA/Mastercard Association standards that are applicable to any of our activities, and provide ongoing training and updates to our staff and our independent sales agents in order to keep them abreast of current guidelines and sponsor bank policies.
Our credit card services business is based on a combination of sales efforts and ongoing customer service. Our sales efforts are focused on obtaining new merchants, completing applications, and assisting the merchant in satisfying any additional underwriting requirements of our sponsoring banks. Our customer efforts are focused on assisting new merchants with implementation of POS hardware, providing software upgrades, advising existing merchants of new developments in card association rules or pricing, and providing general support for merchants that may have questions regarding services.
We establish pricing for credit card services with our sponsoring banks, which is partially based upon a percentage of the transaction amount, plus a fee per transaction. We are able to negotiate lower pricing than any of our merchant customers could obtain because we handle certain customer service functions thereby relieving our sponsor banks of these duties, and we aggregate the business volume of many merchants and deliver substantially more card transactions to each of our sponsor banks than the business volume of any one of our merchants. This allows us to offer competitive pricing to individual merchants while still maintaining a profit margin between the merchant’s price and the costs we maintain with our sponsor banks.
Products and Services
We market a variety of related payment services and products in order to provide turn-key business solutions for clients, including ACH services, credit card services, account verification services, identity and age verification services, pin-based transaction services, and other related services.
ACH Processing Services
Our ACH services are typically priced based on transaction fees per each ACH debit, credit, or returned transaction. As stated previously, ACH transactions are processed in batches, rather than in single transactions. This contributes to cost efficiencies compared to other types of electronic payments such as bank wires or credit card transactions.
For this reason, ACH is one of the least expensive electronic payment methods in the marketplace today. In addition to the ACH transaction fees, we also charge a monthly account maintenance fee for each active ACH account. We typically do not charge extra fees for customer support and training. Because ACH fees are typically based on a fixed fee per each transaction, ACH provides the most cost effective method of processing for merchants that have significant volumes of transactions. These larger merchants are usually able to obtain lower unit fees than smaller merchants.
Verification Services
Our account verification services are intended to assist clients in reducing their incidence of returned or erroneous transactions by providing real-time verification of the validity of particular customer bank accounts. We typically set up automated interfaces between our server and the client to provide a real-time connection that allows our customer’s system to query the service and obtain verifications of bank routing number, account number, account status, as well as identify the incidence of dishonored checks presented on the account. With higher levels of service, we can crosscheck databases to determine whether a particular account has recently returned electronic ACH transactions based on proper authorization not being available. Our service can also identify accounts that will not accept ACH transactions, such as trust accounts or accounts set up with other payment restrictions. In the case of merchants that conduct non-face-to-face transactions, such as internet or telephone based businesses, these services are an integral part of maintaining certain standards prescribed by NACHA for allowing these types of transactions to be originated on the ACH network.
Our identity and age verification services are intended to assist merchant clients in authenticating their customer by cross-matching information such as name, address, and social security number against databases provided contractually to us from large multi-national vendors. These services may also be utilized to verify age information provided to the merchant by the customer. Such services allow the merchant to avoid erroneous or fraudulent transactions, as well as to assist merchants in meeting certain regulatory guidelines applicable to their businesses.
Credit Card Services
Through our acquisition of NDS, we substantially increased our volume of business with respect to credit card services. As previously described, we maintain contracts with sponsoring banks that process credit card payments, which establish our wholesale pricing for these services. We market these services to prospective merchants in a wide variety of industries. Although most of our credit card services businesses relates to face-to-face transactions, we do maintain customers engaged in non face-to-face transactions such as telephone or internet orders.
We act as a placement agent by obtaining leads, creating sales proposals, and assisting merchants in completing and submitting applications to one of our selected sponsor banks. Once underwriting is completed, we also assist merchants in implementing their credit card services. This may include providing merchants with our in-house technical support to assist with equipment procurement and programming, depending on the needs of the merchant. Once accounts are established, we provide ongoing customer service by providing supplies, assistance with equipment, and act as a front line for problem resolution between the merchant and sponsor bank.
Other Commission Income
At this time, we offer several services that we obtain from other vendors in exchange for a portion of the transaction fees for the life of the account. These include electronic gateway services, stored value card products, gift cards, and automated teller machine (ATM) services.
Independent Sales Organizations and Independent Sales Agents
We currently utilize approximately twenty-five independent sales agents and/or organizations to assist in marketing our services. Most of our sales agents have pre-existing relationships with businesses in particular market segments. Because our payment services are electronic, our business is not restricted to any portion of the United States. For this reason, we have sales agents located throughout the continental United States, with our strongest geographic presence within the eastern United States.
We believe that we benefit from the business relationships these sales organizations and agents have already established with their clients. Based on these relationships, they can effectively evaluate which products and
services should be offered to the client and illustrate the potential benefits that the client may realize. All of our sales organizations and agents are compensated on a commission basis calculated on a percentage of the fees we receive from the client. Commissions paid to individual agents may vary depending upon the nature of the accounts they represent. Generally, all agents are compensated based upon a percentage of the fees we collect, in excess of a floor price that we retain. In this manner, we receive, at a minimum, the floor price to cover our cost, plus a percentage of the excess fee amount. Conversely, the sales organization or agent receives its percentage of the amount of collected fees in excess of the floor price.
The market for sales organizations and agents is competitive. However, we believe that we will continue to be able to attract and retain qualified agents by offering them the opportunity to:
| | · | Work with us to benefit from building a developing, entrepreneurial company; |
| | · | Participate in an attractive, results-oriented compensation package; and |
| | · | Receive additional incentive compensation by marketing other products and services we offer in conjunction with ACH and credit card processing services. |
Customers
For the year ended December 31, 2009, there were no customers that amounted to more than 10% of our total revenues.
We identify potential customers through website inquiries, personal and business relationships, referrals from sales organizations and agents, and attendance at trade shows and seminars. Any individual or business that has a need for processing of significant numbers of payments is a potential customer and we believe can benefit from our competitive service offerings.
As previously described, our customer is typically a merchant that desires efficient collection or payment of funds. The majority of our clients are businesses that utilize our services to collect their sales or accounts receivable. Other significant segments of our customer base include companies that wish to collect recurring payment installments such as loan companies, property management companies, or associations.
Once a customer has consented to using a service offered by us, we require the customer to complete an application that establishes key information regarding the business entity, its owners, and managers. This application is used in conjunction with an underwriting process in which we and our clearing bank conduct an investigation into the business, its formation, and ownership. This includes obtaining sample copies of relevant documents and authorization forms and scripts that are used by the client to effect transactions that will be settled through ACH processing. Once a client is accepted, a merchant agreement is executed that establishes the terms and conditions upon which we will provide service to the client.
Upon completion of merchant underwriting, we assist with implementation and provide training for the client’s designated person or persons that will operate the system. The setup process can be completed in an hour for manual entry clients. For clients utilizing automated interfaces to submit transactions it usually takes an additional amount of work time, depending on the client’s needs and whether the client has technical support to address issues with its own computer network. Online training typically is utilized and takes less than an hour. Once both the setup and training is complete, the client is able to begin submitting transactions.
Intellectual Property
We rely on a combination of contractual restrictions, internal security practices, and trade secret laws to establish and protect our software, technology and expertise. We believe that legal protection of our proprietary rights, while important, is less significant than the knowledge and experience of our management and personnel and their ability to develop, enhance and market new products and services. We believe the Company possesses all proprietary rights necessary to conduct our business.
Competition
The electronic payments industry in the United States is highly competitive, rapidly evolving, and continues to experience significant growth. There are in excess of 12,000 members of NACHA, most of which are financial institutions. While exact figures are difficult to obtain, management believes less than approximately 3% of the 12,000 members, or 360 members, represent the non-financial institution members that are third party processors of ACH transactions and most financial institution members also provide credit card payment services. Within the overall industry, we represent one of the smaller ACH processors and one of the smaller credit card sales organizations within the United States. Management believes we fall within the bottom 30% of third party processors and credit card s ales organizations at this time.
Based on periodic inquiries with competitors, pricing for ACH services are reviewed at least once annually. We believe that the majority of our competitors charge for services based on a fixed fee per transaction plus a monthly account fee. However, many competitors charge additional setup fees, inquiry fees, and software usage fees. In some cases, competitors charge fees based on a percentage of the sale price, much like the merchant fees charged for credit card transactions, called discount fees.
In contrast, we charge a fixed fee per ACH transaction, and maintain our pricing at approximately the mid-point of the average competitor pricing derived from our periodic reviews of the competition. Our pricing structure is designed to be tied to the productive use of ACH services and we do not charge our customers for costs and software fees not tied to actual transaction activity. Our monthly maintenance fee is designed to cover our costs of these other activities and offer a simplified billing structure.
Competition in the ACH business is based upon pricing and quality of service. We compete with numerous financial institutions and other third party providers that offer essentially the same services as we do. Many of our competitors are substantially larger and have greater financial, technical and marketing resources than us. Our success depends upon our continued ability to deliver our clients personal service and customized solutions.
The major financial institutions have standardized plans and may not always offer all of the services that small to medium-sized businesses in need of electronic solutions demand. However, competition is fierce with other third party providers for this segment of business. Additional pricing pressure may come from the introduction of new technologies. In addition, reductions in prices charged by our competitors may have a material adverse effect on us. Furthermore, consolidations and alliances across industry segments may intensify competition from significantly larger, well-capitalized companies.
We believe that our primary competitors are other independent third party ACH providers. We believe that such competitors will continue to offer small to medium businesses cost effective services by aggregating transaction volumes in a competitive marketplace. Over time, we expect consolidation to occur among third party providers and believe that by positioning ourselves as a public company, we have a competitive advantage in terms of obtaining the expansion capital needed to participate in such consolidation compared to our competitors that are privately held.
Industry Regulations
The ACH process operates from beginning to end through a series of legal agreements. The NACHA operating rules are the primary rules and regulations for the commercial ACH Network.
Federal Government ACH payments are controlled by the provisions of Title 31 Code of Federal Regulations Part 210 (31 C.F.R. Part 210). The Financial Management Service (“FMS”) of the U.S. Department of the Treasury is the agency responsible for establishing Federal Government ACH policy. In 1999, FMS adopted the provisions of the NACHA Operating Rules as the regulations governing the transmission and receipt of Federal Government ACH entries, with certain exemptions to address matters of federal law. FMS also publishes The Green Book, a procedural manual for Federal Government ACH payments. Other laws that have a direct bearing on ACH operations are the Uniform Commercial Code Article 4, which governs check transactions, and Article 4A, and the Electronic Funds Transfer Act as implem ented by Regulation E.
Certain other activities related to ACH payments are affected by The Right to Financial Privacy Act, Regulation D regarding reserve requirements, Regulation CC regarding funds availability, and other regulatory agency directives.
Standards for credit card merchant processing are established by the VISA/Mastercard Association. We are considered a registered MSP/ISO (merchant service provider/independent sales organization) and as such, adhere to all of the Association’s rules and guidelines, as well as any additional guidelines provided by each of our sponsor banks. Because our credit card services are processed directly through our sponsor banks, we do not capture and store sensitive credit card information and therefore it is our sponsor banks that are required to meet the Association’s security requirements for processing credit card transactions.
Employees
We currently have thirteen full-time employees and utilize one technical support team which is outsourced. Two of our employees are located at our corporate headquarters, four of our employees are located at our ACH processing center in Gulfport, Mississippi, with seven employees located at our NDS offices in Roswell, Georgia. Our NDS offices include one technical support professional, and our remote-hosted servers are nearby in Atlanta, Georgia. None of our employees nor the employees or any of our outsourced technical support teams are represented by labor unions. We believe we have good relations with all our employees, sales representatives, and technical support team members.
Mr. Walter Reid Green, Jr. serves as our Chief Executive Officer and Chief Financial Officer. At this time, Mr. Green works full-time from our office in Covington, Louisiana. The staff in Gulfport are responsible for our ACH business and assist with our corporate administrative functions such as accounting, bill payment, and cash management for all of our operating companies.
The majority of our selling activities are conducted through our sales office (NDS) in Roswell, Georgia. The staff at this location provide lead generation, national advertising, customer support for our credit card services business, and sales agent support for all of services.
An investment in our common stock is risky. The risks described below are not the only ones that we face. Additional risks that are not yet known to us or that we currently think are immaterial could also impair our business, operating results or financial condition. Other information set forth in this report, including our financial statements and the related notes detail other risks affecting our business. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected.
We rely on cooperative relationships with, and sponsorship by, banks, the absence of which may prevent us from conducting our business operations.
We rely on several banks for access to the ACH Network for submission of both our ACH and account verification services. Our banking relationships are currently with smaller banks (with assets of less than $500,000,000). Even though smaller banks tend to be more susceptible to mergers or acquisitions and are therefore less stable, these banks find the programs we offer more attractive and we believe we cannot obtain similar relationships with larger banks at this time. A bank could at any time curtail or place restrictions on our processing volume because of its internal business policies or due to other adverse circumstances. If a volume restriction is placed on us, it could materially adversely affect our business operations by restricting our ability to process transactions and rece ive the related revenue. Our relationships with our customers and merchants would also be adversely affected by our inability to process these transactions.
We maintain several banking relationships for ACH processing. While we believe our current bank relationships are sound, we cannot assure that these banks will not restrict our processing volume or that we will always be able to maintain these relationships or establish new banking relationships. Even if new banking relationships are available, they may not be on terms acceptable to us. Ultimately, our failure to maintain these banking relationships and sponsorships may have a material adverse effect on our business and results of operations.
Merchant fraud with respect to ACH transactions could cause us to incur significant losses.
We rely on the processing revenue derived from ACH transactions. If any merchants were to submit or process unauthorized or fraudulent ACH transactions, depending on the dollar amount, we could incur significant losses
which could have a material adverse effect on our business and results of operations. We assume the risk and indemnify our sponsoring banks for bearing the risk of these types of transactions.
We have implemented systems and software for the electronic surveillance and monitoring of fraudulent ACH use. We cannot guarantee that these systems will prevent fraudulent transactions from being submitted and processed or that the funds set aside to address such activity will be adequate to cover all potential situations that might occur. We do not have insurance to protect us from these losses. There is no assurance that our chargeback reserves, which includes our deposits from customers, will be adequate to offset against any unauthorized or fraudulent processing losses that we may incur. Depending on the size of such losses, our results of operations could be immediately and materially adversely affected.
The business in which we compete is highly competitive and there is no assurance that our current products and services will stay competitive or that we will be able to introduce new products and services to compete successfully.
We are in the business of processing payment transactions and designing and implementing integrated systems for our customers. This business is highly competitive and is characterized by rapid technological change, rapid rates of product obsolescence, and rapid rates of new products introduction. Our market share is relatively small as compared to most of our competitors and most of these competitors have substantially more financial and marketing resources. Our competitors’ greater resources enable them to investigate and embrace new and emerging technologies quickly to respond to changes in customers needs, and to devote more resources to product and services development and marketing. We may face increased competition in the future and there is no assurance that current or new competition will allow us to keep our customers. If we lose customers, our business operations may be materially adversely affected, which could cause us to cease our business or curtail our business to a point where we are no longer able to generate sufficient revenues to fund operations. There is no assurance that our current products and services will stay competitive with those of our competitors or that we will be able to introduce new products and services to compete successfully in the future.
Security breaches could impact our continued operations and cause us to lose customers.
We process confidential financial information and maintain several levels of security to protect this data. Security includes hand and card-based identification systems at our data center location that restricts access to the facility, various employee monitoring and access restriction policies, and various firewall and network management methodologies that restrict unauthorized access through the Internet. While these systems have worked effectively in the past, there can be no assurance that we will continue to operate without a security breach in the future. Depending upon the nature of the breach, the consequences of security breaches could be significant and dramatic to our continued operations.
The industry in which we operate involves rapidly changing technology and our failure to improve our products and services or to offer new products and services could cause us to lose customers.
Our industry involves rapidly changing technology. Recently, we have observed rapid changes in technology as evidenced by the Internet and Internet-related services and applications, new and better software, and faster computers and modems. As technology changes, our customers desire and expect better products and services. Our success depends on our ability to improve our existing products and services and to develop and market new products and services. The costs and expenses associated with such an effort could be significant. There is no assurance that we will be able to find the funds necessary to keep up with new technology or that if such funds are available that we can successfully improve our existing products and services or successfully develop new products and services. 0; Our failure to provide improved products and services to our customers or any delay in providing such products and services could cause us to lose customers to our competitors. Loss of customers could have a material adverse effect on us.
Our inability to protect or defend our trade secrets could hurt our business.
We have expended a considerable amount of time and money to develop our own trade secrets. We rely on confidentiality agreements with employees, customers, partners and others and have not otherwise taken steps to obtain additional protection on these information systems. In addition, our third-party confidentiality agreements may be breached and, if they are, there may not be an adequate remedy available. If our trade secrets become
known, we may lose our competitive position, including the loss of our merchant and bank customers. Such a loss could severely impact our results of operations and financial condition.
Failure to obtain additional funds may impact our operations and future growth.
We use funds generated from operations, as well as funds obtained through other sources, to finance operations. In light of our recent financing efforts, existing cash reserves, and as a result of the cash flow generated from operations, we believe we have sufficient cash to support our business activities, including technology and marketing costs. However, future growth may depend on our ability to continue to raise additional funds, either through operations, bank borrowings, or equity or debt financings. There is no assurance that we will be able to continue to raise the funds necessary to finance growth or continue to generate the funds necessary to finance operations, and even if such funds are available, that the terms will be acceptable to us. The inability to generate the necessary funds from operations or from third parties in the future may require us to scale back our product offerings and growth opportunities, which could harm our overall operations.
While we maintain insurance protection against claims related to our services, there is no assurance that such protection will be adequate to cover potential claims and our inability to otherwise pay such claims could harm our business.
We maintain employee dishonesty insurance as well as professional liability insurance for the services we provide. While we believe the limits on our insurance policies are adequate and consistent with the standard industry practices, if claims are brought by our customers or other third parties, we could be required to pay the required claim or make significant expenditures to defend against such claims in amounts that exceed our current insurance coverage. There is no assurance that we will have the money to pay potential plaintiffs for such claims if they arise beyond the amounts insured. Making these payments could have a material adverse effect on our business.
Increases in the costs of technical compliance could harm our business.
The services which we offer require significant technical compliance. This includes compliance with NACHA guidelines and regulations with regard to the Federal Reserve System’s Automated Clearing House and check related issues, and various banking requirements and regulations. We have personnel dedicated to monitoring our compliance to the specific industries we serve and, when possible, we are moving the technical compliance responsibility to other parties. As the compliance issues become more defined in each industry, the costs associated with that compliance may present a risk to us. These costs could be in the form of additional hardware, software or technical expertise that we must acquire and/or maintain. While we currently have these costs under control, we have no control over those entities that set the compliance requirements so no assurance can be given that we will always be able to underwrite the costs of compliance in each industry wherein we compete.
We have limited marketing experience and our marketing efforts may not result in significant increases in ACH processing business.
Since inception, we have only engaged in limited marketing activities and currently have limited marketing experience with no formal marketing department. Accordingly, our marketing efforts may not result in significant initial or continued increases in our ACH processing business. Furthermore, our marketing plans are subject to change as a result of a number of factors, including changes in market conditions, the addition of marketing professionals to our management team, or changes in the needs and preferences of existing and potential customers.
We have a concentrated customer base and any significant adversities affecting our customers could have a material adverse effect on our operations.
To date most of our business has been concentrated with customers engaged in various internet based businesses. As a result, any significant adverse events or conditions affecting these businesses or industries would have a material adverse effect on our business. We also conduct a significant portion of our business with a limited number of significant customers. The loss of any one of our significant customers could have a material adverse effect on our business. See also Management’s Discussion and Analysis section of this report for more information regarding our significant customers.
Our success depends on the continued service of our key management personnel and the loss of services from one or more of these individuals could negatively impact our business.
Our success depends on our ability to attract, motivate and retain highly-skilled managerial personnel. Competition for such personnel in our business is intense. The success that we may achieve will only enhance the reputation of and alternatives available to our key personnel. We may not be able to retain our key employees or attract, motivate and retain additional key employees in the future. Our failure to retain these key employees or failure to attract new personnel as our needs arise would entail significant additional employment costs and may result in management strategy shifts which may diminish our ability to remain profitable.
If we are unable to manage rapid growth effectively, our operating results could be adversely affected.
Our business strategy anticipates rapid growth for the foreseeable future. This growth will place significant strain on our administrative, operational and financial resources and increase demands on our systems and controls. To manage our future growth, we will need to attract, hire and retain highly skilled and motivated officers and employees and improve existing systems and/or implement new systems for information processing, operational and financial management and training, integrating and managing our growing employee base. If we are unable to manage growth effectively, our operating results could be adversely affected.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, investors could lose confidence in our financial reporting, which would harm our business and the trading price of our securities.
Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our brand and operating results could be harmed. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could negatively affect the trading price of our stock.
Compliance with the requirements imposed by Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our operating results.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), beginning with our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007, we were required to furnish a report by our management on our internal control over financial reporting. Beginning with our Annual Report on Form 10-K for the fiscal year ending December 31, 2010, our independent auditor will also be required to furnish a report on our internal controls over financial reporting. We can provide no assurance as to our or our independent auditors’ conclusions with respect to the effectiveness of our internal control over financial reporting under Section 404 of Sarbanes-Oxley. There is a risk that our independent auditors will not be able to conclude that our internal controls over financial r eporting are effective as required by Section 404 of Sarbanes-Oxley. Moreover, the costs to comply with Section 404 of Sarbanes-Oxley, as currently in effect, could have a material adverse effect on our operating results.
Our operating results may fluctuate, which makes our results difficult to predict and could cause our results to fall short of expectations.
Our operating results may fluctuate as a result of a number of factors, many of which are outside of our control. For these reasons, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our quarterly and annual expenses as a percentage of our revenues may be significantly different from our historical or projected rates. Our operating results in future quarters may fall below expectations. Any of these events could cause our stock price to fall. Each of the risk factors listed in this “Risk Factors” section, as well as others including general economic conditions, political events such as war, threat of war and terrorist actions, and natural disasters, may adversely affect our operating results and th e prices of our securities.
If the national and world-wide financial crisis continues or intensifies it could adversely impact demand for our technology and products.
Continued market disruptions could cause broader economic downturns, which may lead to lower demand for our products, increased incidence of customers’ inability to pay their accounts, or insolvency of our customers, any of which could adversely affect our results of operations, liquidity, cash flows, and financial condition.
We have not paid cash dividends on our common stock and do not anticipate paying any dividends on our common stock in the foreseeable future.
We anticipate that we will retain all future earnings and other cash resources for the future operation and development of our business. Accordingly, we do not intend to declare or pay any cash dividends on our common stock in the foreseeable future. Payment of any future dividends will be at the discretion of our board of directors after taking into account many factors, including our operating results, financial conditions, current and anticipated cash needs and plans for expansion.
The price of our common stock is expected to be volatile and an investment in our common stock could decline in value.
There is currently no trading market in our common stock. If a trading market ever develops in the future, the market price of our common stock is expected to be highly volatile. The following factors, in addition to other risk factors described in this annual report, and the potentially low volume of trades in our common stock, may have a significant impact on the market price of our common stock, some of which are beyond our control: announcements by us or our competitors; new products or services that we or our competitors offer; actual or anticipated variations in operating results; the initiation, conduct and/or outcome of intellectual property and/or litigation matters; changes in financial estimates by securities analysts; conditions or trends in the ACH industry; regulatory developments in the United States an d other countries; changes in the economic performance and/or market valuations of other companies; our announcement of significant acquisitions, strategic partnerships, joint ventures or capital commitments; additions or departures of key personnel; global unrest, terrorist activities, and economic and other factors.
It is not anticipated that there will be an active public market for our common stock in the near term and you may have to hold your shares of common stock for an indefinite period of time. You may be unable to resell a large number of your shares of common stock within a short time frame.
There is no active public or other trading market for the common stock, and there can be no assurance that any market will develop or be sustained. Because our common stock is expected to be thinly traded, if traded at all, an investor cannot expect to be able to liquidate its investment in case of an emergency or if it otherwise desires to do so. Large transactions in common stock may be difficult to conduct in a short period of time. In addition, since our common stock is only expected to be eligible for trading on the OTC Bulletin Board, our stockholders may find it difficult to obtain accurate quotations of our common stock and may experience a lack of buyers to purchase such stock or a lack of market makers to support the stock price.
Our common stock may be considered a “penny stock” and may be difficult to sell.
The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market or exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is expected to be below $5.00 per share and therefore will likely be designated as a “penny stock” according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of our stockholders to sell their shares.
Shares eligible for future sale may adversely affect the market.
From time to time, certain of the Company’s stockholders may be eligible to sell all or some of their shares of common stock in the open market pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations. In general, pursuant to Rule 144, a stockholder who has satisfied a six-month holding period may, under
certain circumstances, sell their shares of common stock without registration. Any substantial sale of the Company’s Common Stock pursuant to Rule 144 or pursuant to any resale registration statement may have a material adverse effect on the market price of the common stock should a trading market ever develop in the future.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Our principal executive office is located at 2150 North Highway 190, Covington, Louisiana 70433. We lease approximately 800 square feet of office space pursuant to a twenty-four month lease that expires July 14, 2012. Lease payments are approximately $975 per month.
Our ACH operations offices are located in Gulfport, Mississippi at 15431 O’Neal Road, Gulfport, Mississippi, 59503. We lease approximately 2,400 square feet of office space pursuant to a three year lease that expires November 1, 2011. Lease payments are approximately $2,200 per month.
Our sales offices are located in Roswell, Georgia at 980 Canton Street, Suite D, Roswell, Georgia, 30075. We lease approximately 1,500 square feet of office space pursuant to a three year lease that expires August 22, 2011. Lease payments are approximately $4,000 per month.
We believe these facilities are adequate for our current and future needs.
ITEM 3. LEGAL PROCEEDINGS
We are not engaged in any material legal proceedings to which we or our wholly-owned subsidiaries are a party.
ITEM 5. MARKET FOR COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is not publicly traded.
Holders
As of April 12, 2010, we had approximately 55 beneficial owners of record of our common stock.
Dividends
We have never paid dividends on our common stock. We anticipate that all of our future earnings will be retained for the development of our business and do not expect to pay any cash dividends in the foreseeable future. Any actual payment of future dividends will be at the discretion of our Board of Directors and will be based on our future earnings, financial condition, capital requirements and other relevant factors.
Recent Sales of Unregistered Securities
During the year ended December 31, 2009, we did not have any sales of securities in transactions that were not registered under the Securities Act of 1933, as amended, that have not been previously reported in a Form 8-K or Form 10-Q.
As disclosed in our current report on Form 8-K filed on March 4, 2010, on February 28, 2010, we closed a private placement of our common stock and issued and sold 5,072,500 shares of common stock to a limited number of accredited and non-accredited investors for gross proceeds of $1,014,500. The shares were sold at a price of $0.20 per share. The offer and sale was conducted on behalf of the Company by a FINRA-licensed broker-dealer who served as placement agent in the offering and received a sales commission equal to 7% of the gross proceeds of the offering, or $71,015, and a financial advisory/management fee equal to 2% of the gross proceeds of the offering, or $20,290. The shares were offered and sold without registration under the Securities Act of 1933 in reliance upon the exemptio n provided by Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder, and may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements under the Securities Act. An appropriate legend was placed on the shares of common stock issued.
Issuer Purchases of Equity Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company, the Company is not required to provide the information required by this Item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion regarding our financial condition and results of operations should be read in conjunction with the financial statements and notes thereto beginning on page F-1.
Executive Summary
The Company is an electronic payments service provider headquartered in Covington, Louisiana 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 Automated Clearing House (“ACH”) 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 transactio n 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. The ACH business is divided between traditional banks, large “in-house” processors, and independent processors. We currently operate as an independent processor servicing customers that utilize electronic commerce but find that outsourcing is 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, through its acquisition of NDS, now offers additional services including credit and debit card services, 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 over the past two fiscal years. This section should be read in conjunction with the financial statements and related notes included in this Form 10-K.
Year ended December 31, 2009 compared to year ended December 31, 2008
Revenues
Our revenue is mostly generated by providing payment services which include ACH processing services as well as earning residual revenue from credit card merchant services for business customers. We also provide real-time electronic account verification services, as well as identity and age 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, payments to non-employee contractors, and inter-company transfers. We recognize our ACH revenue upon completion of the service being provided and residual credit card services revenue upon receipt from our sponsori ng banks which is consistent with industry practices within the United States of America.
Our revenue for the year ended December 31, 2009, was $2,730,068 compared to $1,789,208 for the year ended December 31, 2008. The increase of $940,860, or 52.6%, is mainly attributable to the acquisition of NDS on August 22, 2008, and purchase of a credit card portfolio from Netcom NY completed on September 17, 2008. As a result of these two transactions we substantially changed the composition of our revenue as provided in the following:
| Revenue: | | 2009 Dollars | | % | | | 2008 Dollars | | % | | | Variance Dollars | |
| | | | | | | | | | | | | | | | | |
| ACH Processing | | $ | 813,461 | | 29.8 | % | | $ | 941,492 | | 52.6 | % | | $ | (128,031 | ) |
| Verification Services | | $ | 180,440 | | 6.6 | % | | $ | 165,946 | | 9.3 | % | | $ | 14,494 | |
| Credit Card Services | | $ | 1,736,167 | | 63.6 | % | | $ | 681,770 | | 38.1 | % | | $ | 1,054,397 | |
| Total Revenue | | $ | 2,730,068 | | 100.0 | % | | $ | 1,789,208 | | 100.0 | % | | $ | 940,860 | |
This increase is mostly related to the increase in credit card services of $1,054,397, together with the increase in verification services of $14,494, partially offset by the decrease in ACH Services of $128,031. The increase in credit card services relates to the revenue derived from the acquisitions of NDS and the Netcom NY portfolio asset purchase during 2008. The increase in verification services revenue represents additional business we obtained during the second half of 2008 and maintained throughout 2009. The decrease of $128,031 related to our ACH payments business represents changes we made during the prior year with respect to a portion of our ACH business. During 2008 we migrated some of our ACH accounts in conjunction with a policy decision made by one of our processing ban ks to discontinue processing transactions for certain industries. Although we were able to establish alternate services for these merchants, we only recognize net ACH fees associated with these accounts.
Cost of Revenue and Gross Profit
Cost of revenues includes the costs incurred in conjunction with the items processed as well as costs associated with the residual credit card revenue we now receive through NDS, our wholly owned subsidiary. These costs include the direct transactional costs incurred with respect to ACH processing and software as well as direct costs associated with the revenue generated from credit card merchant processing services.
Our cost of revenue for the year ended December 31, 2009 was $886,694, or 32.5% of revenues, compared to $707,444, or 39.5% of revenues, for the year ended December 31, 2008, representing an increase of $179,250 for 2009 compared to 2008. The following table presents the composition of cost of revenue in 2009 and 2008:
| Cost of Revenue: | | 2009 | | % | | | 2008 | | % | | | Variance Dollars | |
| | | | | | | | | | | | | | | | | |
| ACH Services | | $ | 207,792 | | 23.4 | % | | $ | 265,964 | | 37.6 | % | | $ | (58,172 | ) |
| Verification Services | | | 126,251 | | 14.2 | % | | | 106,049 | | 15.0 | % | | | 20,202 | |
| Credit Card Services | | | 552,651 | | 62.4 | % | | | 335,431 | | 47.4 | % | | | 217,220 | |
| Total Cost of Revenue | | $ | 886,694 | | 100.0 | % | | $ | 707,444 | | 100.0 | % | | $ | 179,250 | |
The overall increase in our cost of revenue of $179,250 relates mostly to the increase of $217,220 related to our credit card services business acquired during 2008. This increase, together with the $20,202 increase in verification services, was partially offset by decreases of $58,172 in cost of revenue associated with our ACH services business.
As previously described, we migrated some of our ACH accounts during 2008 in conjunction with a policy decision made by one of our processing banks to discontinue processing transactions for certain industries. Although we were able to establish alternate services and maintain these merchants, we only recognize net ACH fees associated with these accounts, which has resulted in a reduction to our ACH cost of revenues for 2009 compared to 2008. In addition, our ACH cost of revenues has been reduced as a result of our acquisition of NDS. We now only pay residual commissions to the independent agents of NDS and not for any accounts that were originated by NDS. For 2009 there were no commissions paid to NDS, compared to 2008, in which our ACH cost of revenues included $44,932 of commissions paid to NDS.
Our verification fees include the direct transactional costs we pay vendors for account, identity, and age verification services that we provide to merchants. For 2009, verification fees increased by $20,202 compared to the prior year, and represented 14.2% of our cost of revenue. This increase is related to the increase in the number of transactions we provided compared to the prior year, as reflected by the increases in verification services revenue previously described.
During 2009, with our acquisition of NDS we now incur costs directly related to our credit card services business. Credit card services costs represented 62.4% of cost of revenues for 2009, compared to 47.4% for 2008, and are associated with our credit card business which was acquired during the second half of 2008.
Our gross profit for the year ended December 31, 2009 was $1,843,374, or 67.5% of revenues, as compared to $1,081,764, or 60.5% of revenues, for the year ended December 31, 2008. The increase in gross profits of $761,610 is mostly attributable to the increase in verification fee revenue and the addition of credit card services revenue following the acquisition of NDS and the portfolio purchase during the second half of 2008 as previously described.
We expect that going forward our revenues will increase while gross profit margins will tend to either remain constant or decrease slightly. Over the past several years we have seen a continued reduction in prevailing unit prices for ACH services, as ACH becomes more widely accepted and the industry gains maturity. At this time, we believe that most of the reduction in ACH unit pricing has occurred and that unit prices are beginning to stabilize. With respect to our credit card services business, as we expand our sales efforts we plan to continue to utilize independent sales agents and we believe this will tend to keep margins consistent in relation to revenues.
Operating Expenses
Operating expenses include costs of personnel, computer maintenance and expenses, supplies, internet services, delivery charges, telecommunications expenses, travel, and other costs associated with our payment services operations.
For 2009, operating expenses were $1,124,980, compared to $604,736 for 2008, representing an increase of $520,244 or approximately 86.0%. The increases in operating costs related mostly to increases in amortization of $361,686, commissions and fees expenses of $100,201, travel of $10,871, and other operating expenses of $47,949. Amortization expense relates to the intangible assets associated with our acquisition of NDS and our purchase of the Netcom NY portfolio asset. The increase in commissions and fees expenses relates mostly to fees paid in conjunction with our Thermo Credit, LLC loan facility, together with certain contracted customer service costs. The increase in travel relates mostly to the addition of NDS’ operations, and the increase in personnel costs relates to incre ases in operating personnel associated with our ACH business compared to the same period in the prior year.
The increase in other operating expenses of $47,949 is mostly related to increases in computer maintenance and expenses of $8,860, lease expense of $38,950, office expenses and utilities of $12,830, and telephone expenses of $24,349, partially offset by decreases in other expenses of $21,383, insurance expenses of $7,502, training and seminar expenses of $2,654, and depreciation expenses of $1,950. All of the increases relate to the cost of operations associated with NDS with the exception of telephone expenses which, in addition to the effect of NDS operations, includes increased service costs in conjunction with upgrades to some of our telephone systems. The decreases relate to the elimination of various duplicate costs following our acquisition of NDS, and the utilization of internal rather than external training programs compared to the prior year.
General and Administrative
Our selling, general and administrative expenses for the year ended December 31, 2009, was $695,520 compared to $449,206 for the year ended December 31, 2008. The increase of $246,314, or 54.8%, is mostly attributable to increases in personnel costs of $244,555, legal and accounting expenses of $31,509, marketing expenses of $1,532, and other expenses of $1,218, partially offset by decreases in consulting expenses of $32,500.
The increase in personnel costs relate mostly to the expenses associated with the business activity of NDS, which was not present during the entire prior year. The increases in legal and accounting represent increased costs during the first quarter of 2009 associated with our annual meeting, annual audit, together with other legal services associated with our efforts to obtain working capital and refinance portions of our notes payable. Our marketing fees were slightly higher due to the activity of NDS, partially offset by the elimination of some duplicate costs following the acquisition of NDS and to reductions in certain internet marketing costs related to our ACH services business. Our consulting fees were lower compared to the same period in the prior year, as we incurred fees withprofessional consultants that were discontinued during 2008. Our other costs reflect a greater amount of activity during the prior year associated with our acquisition of NDS and the asset portfolio purchase.
Other selling, general, and administrative expenses increased by $1,218 compared to the prior year, as previously mentioned, and were mostly attributable to increases in business gifts of $1,245, meals and entertainment of $7,921, postage of $1,681, partially offset by reductions in SEC filing fees of $1,820, and sales office expenses of $7,558. These increases relate to the increased business activity of NDS following the acquisition during 2008, including the reduction in SEC filing fees which related mostly to increased costs associated with our SEC reporting requirements associated with the two acquisitions completed during the prior year 2008.
Other Income and Expense
For 2009, interest income was $2,429 compared to $421 for 2008. During 2009 we held temporarily idle funds in money market accounts which earned more interest income than during the prior year.
Interest expense was $647,999 for 2009, compared to $188,381 for 2008, representing an increase of $459,618, or approximately 244.0%. The substantial increase in interest expense represents the interest cost under the notes payable with the selling shareholders in our NDS acquisition, notes payable associated with Thermo Credit, LLC which funded the cash portion of our portfolio asset purchase, and notes payable with two of our shareholders.
Provision for income taxes
For 2009, we reported income tax benefit of $221,709, compared to $40,509 for 2008. The increase in tax benefit is related to the reduction in gross revenue from ACH services for 2009 compared to 2008, together with the increased amortization costs associated with our two acquisitions during 2008. Currently we report and pay our income taxes as a corporation. Our wholly owned subsidiary, United, is a limited liability company, and because it is owned solely by the Company, it is considered a single member limited liability company, and under Internal Revenue Service regulations, is disregarded as a separate entity for income tax purposes. NDS is an S Corporation and as a result all of its business activity is also reported with the federal tax return of United eSystems, Inc. the parent company of both United and NDS.
Liquidity and Capital Resources
As reflected in our Consolidated Statement of Cash Flows, net cash provided by operating activities for the year ended December 31, 2009, was $23,233, compared to $131,319 for the year ended December 31, 2008, representing a decrease of $108,086. This decrease is mostly due to the effect of the two acquisitions completed during 2008, together with the decrease in ACH services, as previously described. Our net loss increased from $119,629 in 2008 to $400,987 for 2009, representing an increase of $281,358, together with various adjustments to reconcile net loss to net cash provided by operations for each respective period reported.
For 2009, adjustments decreasing our net loss of $400,987 included depreciation and amortization of $568,318, prepaid interest of $102,000, and the increase in accounts payable and accrued liabilities of $45,098, partially offset by adjustments that increased our net loss, such as the increase in trade receivables of $8,215, prepaid expenses of $10,965, the increase in deferred tax asset of $272,016, the decrease in ACH settlements payable of $78,578, and the decrease in customer deposits of $3,500.
For the year ended December 31, 2008, adjustments decreasing our net loss of $119,629 included depreciation and amortization expenses of $208,058, compensation expense related to employee stock grants of $6,250, compensation expense related to employee stock options granted of $17,681, the decrease in prepaid interest of $34,000, the decrease in restricted cash of $177,641, the increase in accounts payable and accrued liabilities of $24,397, and the increase in customers’ deposits of $731. These decreases were partially offset by adjustments that increased our net loss including the increase in trade receivables of $3,091, the increase in deferred tax assets of $40,509, the decrease in ACH settlements payable of $178,372, and the decrease in accounts payable and accrued liabilities of $16,112.
Net cash provided by investing activities was $140,094 for the year ended December 31, 2009, compared to cash used in investing activities of $2,597,120 for the year ended December 31, 2008. For 2009, our acquisition of property plant and equipment related mostly to improvements in our telecommunications systems in order to create efficiencies between our Gulfport, Mississippi and Roswell, Georgia offices. During 2008 we obtained hardware and software of $5,240 and other assets of $12,168 in conjunction with improvements to our ACH processing systems. During 2009, we received $186,818 as part of our escrow reimbursement associated with our Netcom NY
asset portfolio purchase. We also utilized $21,935 in conjunction with increases in deposits and other capitalized items. Cash used in investing activities for the year ended December 31, 2008, consisted primarily of cash used in the acquisition of property and equipment of $14,117, cash paid in conjunction with the acquisition of NDS of $307,428, and cash paid in conjunction with acquisition of the portfolio asset of $2,275,575.
For the year ended December 31, 2009, net cash used in financing activities was $301,958 compared to cash provided by financing activities of $2,548,657 for the year ended December 31, 2008. Several of our employees exercised stock options during 2009 resulting in proceeds of $1,275. Additionally, we made principal payments of $303,233 in conjunction with our credit facility with Thermo Credit, LLC, and our outstanding Sorrentino Note balance. For 2008, we received cash proceeds from notes payable issued in conjunction with our acquisitions of NDS and portfolio asset purchase during 2008. We also received proceeds from the exercise by employees of stock options of $3,000. These increases in cash provided by financing activities were partially offset by principal of $70,000 w e paid to fully extinguish two notes payable held by our principal shareholders.
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 for the total amount of $256,000 were established. The notes requir ed monthly interest-only payments at an annual percentage rate of 10% and were due on demand. On August 20, 2008, the remaining principal balance on these notes totaling $70,000 was repaid.
On September 4, 2008, and September 8, 2008, the Company entered into two new notes payable with two existing shareholders of the Company for a total principal amount of $70,000. The notes provide for interest only payments at a rate of 10% per annum payable monthly thereafter, with the entire principal balances due and payable two years from inception of the notes.
As described in Note B of our financial statements included with this report, the Company entered into two significant transactions, the acquisition of NDS and the asset purchase of a portfolio of credit card services accounts, which were completed on August 22, 2008, and September 17, 2008, respectively. The cash portion of these transactions was partially financed with a $500,000 credit facility the Company established with one of its existing shareholders, together with a credit facility of $2,128,500 established with Thermo Credit LLC. As of December 31, 2009, the outstanding balance of these credit facilities was $357,425, and $1,930,000 respectively.
As disclosed in our current report on Form 8-K filed on March 4, 2010, on February 28, 2010, we closed a private placement of our common stock and issued and sold 5,072,500 shares of common stock to a limited number of accredited and non-accredited investors for gross proceeds of $1,014,500. The shares were sold at a price of $0.20 per share. The offer and sale was conducted on behalf of the Company by a FINRA-licensed broker-dealer who served as placement agent in the offering and received a sales commission equal to 7% of the gross proceeds of the offering, or $71,015, and a financial advisory/management fee equal to 2% of the gross proceeds of the offering, or $20,290. The shares were offered and sold without registration under the Securities Act of 1933 in reliance upon the exemptio n provided by Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder, and may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements under the Securities Act. An appropriate legend was placed on the shares of common stock issued. On March 15, 2010, we utilized the net proceeds from this offering to reduce our outstanding principal balance with Thermo Credit, LLC by $920,000.
As disclosed in Note G of our financial statements, on March 31, 2010, we executed an amendment to our loan agreement with Thermo Credit, LLC which extended the due date of our loan agreement until June 30, 2010.
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 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. Accordingly, we believe we can continue to expand these sales activities from our internally generated cash flow.
Second, we believe we will also expand future operations through acquisitions which are accretive to our current earnings at the time of acquisition. During 2008, we completed two such acquisitions, NDS and the portfolio asset purchase, as means of increasing our volume of business while at the same time expanding our payment services to include credit card services. Going forward, management expects our public company status to enhance our ability to attract qualified personnel, obtain additional working capital, and facilitate acquisitions more effectively than could be accomplished by remaining a private, closely-held entity. At this time, we have no understanding, arrangement or agreement to make any acquisitions, but continue to actively seek such opportunities as a means to accelerate reven ue and earnings growth.
As disclosed in Note K of our audited financial statements included in this report, for the year ended December 31, 2009, we had no customers that accounted for 10% or more of our total revenues.
Also disclosed in Note K of our audited financial statements included in this report for the year ended December 31, 2008, one customer, Insight Marketing LLC, accounted for approximately 25.2% of our total revenues.
We plan to continue to reduce our concentrations with significant customers through our marketing efforts as previously described.
Recent General Economic Conditions
In light of the recent slowdown in the economy and challenges within the financial sector and credit markets it has become more difficult for many companies to evaluate their future operations. Although we were able to complete our recent financing transactions which facilitated the acquisition of NDS on August 22, 2008, and the purchase of the portfolio asset on September 17, 2008, we believe that access to future financing may become more difficult until such time as general economic conditions improve. At this time we have not experienced any material negative impact from recent economic conditions, but we believe it is reasonable to expect that our payment processing business, both for ACH and for credit card transactions could be negatively impacted by these conditions. Accordingly, we belie ve that the following factors should be taken into consideration:
| | · | We may experience reductions in the amount of payments we process for merchants as a result of a downturn in consumer activity and consumer confidence. |
| | · | We may be negatively impacted in our credit card processing business if consumers are unable to maintain existing credit card limits or have credit card services terminated. |
| | · | We may experience difficulties in maintaining or re-financing our existing credit facilities at either equivalent or more favorable rates. |
| | · | New sources of borrowed capital may become more expensive or unavailable which may inhibit our ability to grow. |
| | · | Competition may become more intense and we may be required to reduce pricing to maintain the business we have and/or to obtain new business through our existing sales force. |
Inflation
Inflation has not had a material effect on the operations of the Company in the past. At the present time we have not experienced significant adverse effects as a result of inflation, and we believe such conditions will not adversely affect the Company for the foreseeable future.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions, and estimates that affect the amounts reported in our financial statements and accompanying notes. Note C to the financial statements describes the significant accounting policies and methods used in preparing the financial statements. We consider the accounting policies described below to be our most critical accounting policies and include the policies that are impacted by estimates we make. We base our estimates on historical experience and/or various assumptions that are believed to be reasonable under the circumstances. The results are used by management to make judgments about the carry ing value of assets, liabilities, revenues and expenses. Actual results may materially differ from these estimates.
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, United and NDS. 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 per transaction fee 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.
NDS receives a portion of the fees generated from credit card merchant processing services which are provided through its contractual agreements with various sponsor banks. Under these agreements the merchants’ transaction activity is reported and NDS’ portion of the fees are paid during the month following the month in which the transactions occurred. Accordingly, NDS recognizes its revenue in the month in which such transactions are reported and payable, which is consistent with industry practices within the United States of America.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, the Company is not required to provide the information required by this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required pursuant to this Item are set forth immediately following Item 15 and the signature page of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None.
ITEM 9A(T). CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported 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, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives.
With the participation of management, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures at the conclusion of the period ended December 31, 2009. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in ensuring that material information required to be disclosed is included in the reports that we file with the Securities and Exchange Commission.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of Company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized ac quisition, use or disposition of Company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of the inherent limitations of internal control over financial reporting, misstatements may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on this assessment, management, with the participation of the Chief Executive Officer and Chief Financial Officer, believes that, as of December 31, 2009, our internal control over financial reporting is effective based on those criteria.
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 Securities and Exchange Commission that permit the Company to provide only the management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2009 that materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our executive officers, directors and key employees, and certain information about them, including their ages as of April 12, 2010, are as follows:
| Name | | Age | | Position | | Director Since |
| | | | | | | |
| Walter Reid Green, Jr. | | 51 | | Chief Executive Officer, President, Chief Financial Officer, Treasurer, Corporate Secretary and a Director | | 2005 |
| William R. Plummer | | 65 | | Sales Development Manager and a Director | | 2008 |
| Monica B. Haab | | 43 | | Director | | 2005 |
The following is a brief description of the principal occupation and recent experience of each of our executive officers, directors and key employees:
Walter Reid Green, Jr., age 51, has over twenty years of experience within accounting, management, and finance. Mr. Green’s experience from 1983 through 1993 includes approximately five years in public accounting, four years in federal and state tax auditing, and five years in private industry as a tax specialist for The Louisiana Land and Exploration Company, a multi-national Fortune 500 company subsequently acquired by Burlington Industries. In January 1993, Mr. Green became Treasurer and Chief Financial Officer and a director of Pacesetter Ostrich Farm, Inc., a publicly traded company listed on NASDAQ. In 1998, Pacesetter completed a name change to PrimeLink Systems, Inc. and became a telecommunications service provider, specializin g in the installation of underground fiber optic systems. In July 2002, Mr. Green became the Comptroller for Longue Vue House and Gardens Corporation, an accredited museum with approximately 40 employees located in New Orleans, Louisiana. In March 2003, Mr. Green began his association with United, focusing initially on United’s search for a public company vehicle and ultimately on the completion of its merger with Riverbend Telecom, Inc., and subsequent name change to United eSystems, Inc., to become a publicly traded company. Mr. Green received a Bachelor of Science degree in Accounting, and a minor in Management and Finance, from Southeastern Louisiana University. He successfully completed the uniform Certified Public Accountant examination in August 1986. Mr. Green’s experience and understanding of our business gained through his role as our Chief Executive Officer and Chief Financial Officer, as well as his prior experience as an executiv e officer of a public company, qualifies him to serve as a member of our Board of Directors.
William R. Plummer, age 65, is the former majority owner and President of Netcom Data Southern Corp., the Company’s sales and marketing subsidiary, acquired August 22, 2008, and brings to the Company in excess of thirty years of sales and marketing management experience. Mr. Plummer is considered a key employee of the Company but is not an executive officer. Mr. Plummer was formerly a national sales manager for GAF Corporation and Jason Empire during the 1970’s, and then managed sales and marketing for a catalog showroom merchandiser from 1977 through 1984. He became self-employed as an independent sales organization (ISO) under the name Bill Plummer and Associates until 1987 when he developed Netcom Data Southern Corp. as an ISO specializing in merchant payment services, focusing on a combination of medium-sized merchants and national accounts. Since 1987 and through the acquisition on August 22, 2008, Mr. Plummer has devoted the majority of his business time to the affairs of Netcom Data Southern Corp., and currently serves as Director of Sales of Marketing for the Company, overseeing the management of all the various payment services offered by the Company, including ACH payment services, merchant processing services, and certain other electronic verification services offered by the Company. Mr. Plummer is also currently involved in the development of new products and sales markets for the Company. Mr. Plummer’s experience in sales and marketing management and knowledge of the industry in which we operate, including ACH payment services, merchant processing services and other electronic verification services, qualifies him to serve as a member of our Board of Directors.
Monica B. Haab, age 43, has served as a director since May 25, 2005. Since 1991, Mrs. Haab has worked as an attorney with the law firm of Nowalsky, Bronston & Gothard, APLLC, who provides legal services for the telecommunications industry. She specializes in legal services for long distance and local exchange telecommunications service providers, related to state regulatory agencies as well as the Federal Communications Commission. She obtained a Bachelor of Science degree in Marketing from Nichols State University in Thibodaux, Louisiana and a Juris Doctorate from Loyola University. Ms. Haab’s independence and experience, including her
experience working as an attorney with public companies and regulatory agencies, qualifies her to serve as a member of our Board of Directors.
There are no family relationships among any of our directors or executive officers.
Directors are elected by the stockholders at the annual meeting of stockholders and serve until their successors are duly elected and qualified. Currently, there are three directors. Officers are appointed by and serve at the discretion of the Board of Directors.
Involvement in Certain Legal Proceedings
In May 2002, Mr. Green filed for protection under Chapter 7 of the federal bankruptcy code in connection with Primelink Systems’, a telecommunications service provider of which he was the Chief Financial Officer, default on substantial financial commitments owed him. The bankruptcy was discharged on November 18, 2002.
Corporate Governance
Code of Ethics
The Board has adopted a Code of Ethics to provide guidance on maintaining the Company’s commitment to being honest and ethical in its business endeavors. The code covers a wide range of business practices, procedures and basic principles regarding corporate and personal conduct and applies to all directors, executives, officers and employees. A copy of the code may be obtained by written request submitted to the Company’s Corporate Secretary, United eSystems, Inc., 2150 North Highway 190, Covington, Louisiana 70433.
Independence of Directors
The Board has determined that Ms. Monica Haab is an independent director as that term is defined under Nasdaq Marketplace Rule 4200(a)(15).
Meetings of the Board of Directors
During the fiscal year ended December 31, 2009, the Company’s Board held three meetings.
Directors of the Company are encouraged to attend annual meetings of stockholders either in person or via conference call. With respect to our annual meeting held on January 15, 2009, all of our directors at that time, except Mr. Swank, a former director, were in attendance.
Communications with the Board of Directors
Stockholders may communicate with the Board of Directors, non-management directors as a group, and individual directors by submitting their communications in writing to the Company’s Corporate Secretary at United eSystems, Inc., 2150 North Highway 190, Covington, Louisiana 70433. Any communications received that are directed to the Board will be processed by the Corporate Secretary and distributed promptly to the Board or individual directors, as appropriate. If it is unclear from the communication received whether it was intended or appropriate for the Board, the Corporate Secretary will (subject to any applicable regulatory requirements) use his or her business judgment to determine whether such communication should be conveyed to the Board.
Board Committees
Because the Board of Directors consists of only three members and the Company’s operations remain amendable to oversight by a limited number of directors, the Board has not delegated any of its functions to committees and does not have an audit committee, a compensation committee or a nominating committee. The functions customarily attributable to these committees currently are performed by the Board of Directors as a whole.
Director Nominations
The entire Board of Directors acts as the Company’s nominating committee and the Board has not adopted a nominating committee charter. The Board believes that, considering the size of the Company and the Board of Directors, decisions relating to nominations for election to the Board can be made on a case-by-case basis and without the formality of a nominating committee by all members of the Board. The Board of Directors does not have an express policy with regard to the consideration of any director candidates recommended by stockholders since the Board believes that it can adequately evaluate any such nominees on a case-by-case basis. The Board will consider stockholder recommendations for director nominees that are properly received in accordance with the Company’s bylaws and the applicable rules and regulations of the Securities and Exchange Commission. The Board will evaluate stockholder-recommended candidates under the same criteria as internally generated candidates. Although the Board does not currently have formal minimum criteria for nominees, the Company believes that its directors should have the highest professional and personal ethics and values. They should be committed to enhancing stockholder value and should have sufficient time to carry out their duties and to provide insight and practical wisdom based on experience. Their service on other boards of public companies should be limited to a number that permits them, given their individual circumstances, to perform responsibly all director duties. Each director must represent the interest of all stockholders. Although the Company does not have a formal written diversity policy for the Board, the Board determines the most appropriate mix of characteristics, skills and experiences for the Board as a whole to possess at any given time, with the ob jective of having a Board with adequately diverse backgrounds and experiences in light of the circumstances existing at that time. When considering potential director candidates, the Board considers the candidate’s character, judgment, diversity, age, skills, including financial literacy and experience in the context of the Company’s needs and the needs of the Board of Directors. Substantial relevant business and industry experience would generally be considered important qualifying criteria, as would the ability to attend and prepare for director and stockholder meetings. Any candidate must state in advance his or her willingness and interest in serving on the Board.
Audit Committee Functions
The entire Board of Directors acts as the Company’s audit committee and the Board has not adopted an audit committee charter. The Board views its duties as an audit committee as follows: (i) review recommendations of independent registered accountants concerning the Company’s accounting principles, internal controls and accounting procedures and practices; (ii) review the scope of the annual audit; (iii) approve or disapprove each professional service or type of service other than standard auditing services to be provided by the registered public accountants; and (iv) review and discuss with the independent registered public accountants the audited financial statements. The Board has determined that it does not currently have a director that qualifies as an audit committee financial expert as defined w ithin Section 229.407(d)(5) of the Securities Exchange Act of 1934.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors and persons who own more than 10% of our common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission, and to furnish us with copies of all such reports. Based solely on the review of the Forms 3, 4 and 5 furnished to us and certain representations made to us, we believe that during the year ended December 31, 2009, all filings under Section 16(a) were made on a timely basis, except that Walter Reid Green, Jr. filed a late Form 4 to report the grant of stock options; Monica B. Haab filed a late Form 4 to report the acquisition of common stock; and Robert J. Sorrentino filed a late Form 4 to report the acquisition of common stock.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Philosophy
The Company does not currently have a compensation committee and the Board has not adopted a compensation committee charter. Compensation decisions regarding executive officers and directors are made by the entire Board of Directors. The Board believes that it is appropriate not to have a compensation committee considering the current size of the Company and the Board and the Board’s current composition of directors. The Board places high value on attracting and retaining executives since it is their talent and performance that is responsible for the Company’s success. The Company’s general compensation philosophy is to create a performance-based culture that attracts and retains superior individuals. The Company does not have any employment agreements with any of its executive officers.
Summary Compensation Table
The following table summarizes the compensation that was earned by, or paid or awarded to, the named executive officers. The “named executive officers” are our Chief Executive Officer and the two other most highly compensated executive officers serving as such as of December 31, 2009, determined based on the individual’s total compensation for the year ended December 31, 2009, as reported in the table below. During 2009, the individual set forth in the table below was our only executive officer. The table does not include certain fringe benefits made available on a nondiscriminatory basis to all of our employees, such as group health insurance, dental insurance, professional memberships and dues, vacation and sick leave. In addition, we make available benefits to our e xecutive officers with a view to acquiring and retaining qualified personnel and facilitating job performance. The aggregate value of such benefits in the case of each executive officer listed in the table below, which cannot be precisely ascertained but which is less than $10,000 for each such executive officer, is not included.
| Salary Compensation |
Name and Principal Position(1) | | Fiscal Year | | Salary ($) | | Bonus ($) | | Stock Awards | | Options Awards ($)(2) | | Non-Equity Incentive Plan Compensation ($) | | Nonqualified Deferred Compensation Earnings ($) | | All Other Compensation Compensation ($)(3) | | Total ($) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Walter Reid Green, Jr. Chief Executive Officer, President, Chief Financial Officer and Corporate Secretary | | 2009 2008 | | $ $ | 100,000 75,000 | | $ $ | 1,500 3,000 | | $ $ | — — | | $ $ | — 17,681 | | $ $ | — — | | $ $ | — — | | $ $ | — — | | $ $ | 101,500 95,681 | |
____________________
| (1) | | During the fiscal year ended December 31, 2009, we only had one executive officer, Mr. Green. |
| (2) | | Amounts shown do not reflect compensation actually received, but represent the grant date fair value as determined pursuant to ASC Topic 718. The assumptions underlying the calculation under ASC Topic 718 are discussed under Note I to our Consolidated Financial Statements included with this report. |
| (3) | | Includes all other compensation not reported in the preceding columns, including (i) perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is less than $10,000; (ii) any “gross-ups” or other amounts reimbursed during the fiscal year for the payment of taxes; (iii) discounts from market price with respect to securities purchased from the company except to the extent available generally to all security holders or to all salaried employees; (iv) any amounts paid or accrued in connection with any termination (including without limitation through retirement, resignation, severance or constructive termination, including change of responsibilities) or change in control; (v) contributions to vested and unvested defined contribution plans; (vi) any insurance premiums paid by, or on behalf of, the company relating to life insurance for the benefit of the named executive officer; and (vii) any dividends or other earnings paid on stock or option awards that are not factored into the grant date fair value required to be reported in a preceding column. |
Outstanding Equity Awards At Fiscal Year-End
The following table presents the outstanding equity awards held by each of the named executive officers as of the fiscal year ended December 31, 2009.
| Option Awards | | | Stock Awards | |
| Name | | | Number of Securities Underlying Unexercised Options(#) Exercisable | | | Number of Securities Underlying Unexercised Options(#) Unexercisable | | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | | | Option Exercise Price ($) | | Option Expiration Date | | | Number of Shares or Units of Stock That Have Not Vested (#) | | | Market Value of Shares or Units of Stock That Have Not Vested | | | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested | | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested | |
| Walter Reid Green, Jr | | | 897,500 | | | — | | | — | | $ | .05 | | 08/20/2018 | | | — | | | — | | | — | | | — | |
| | | | 112,000 | | - | — | | | — | | $ | .03 | | 03/30/2010 | | | — | | | — | | | — | | | — | |
| | | | 32,500 | | | — | | | — | | $ | .03 | | 02/15/2011 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Employment Agreements
We do not have any employment agreements with any of our named executive officers.
Non-Employee Director Compensation
Non-employee directors do not currently receive any compensation for attending meetings of the Board. Directors are reimbursed for out-of pocket travel and other expenses incurred in attending Board meetings. In addition, non-employee directors may be engaged by the Company to perform consulting services from time to time and receive compensation for such services as negotiated with the Company.
The table below provides information with respect to compensation paid to the Company’s non-employee directors during fiscal 2009:
| Name(1) | | Fee Earned or Paid in Cash ($) | | Stock Awards ($) | | Option Awards ($) | | Other Compensation ($) | | Total ($) |
| Monica B. Haab(2) | | — | | — | | — | | — | | — |
| | | | | | | | | | | |
| Former Director: | | | | | | | | | | |
| Jeffery C. Swank(3) | | — | | — | | — | | — | | — |
| | | | | | | | | | | |
____________________
| (1) | | Walter Reid Green, Jr., our Chief Executive Officer, President, Chief Financial Officer, Treasurer and Corporate Secretary, is not included in this table as he is an employee and thus received no compensation for services as a director. The compensation received by Mr. Green as an employee is shown in the summary compensation table included elsewhere in this report. |
| (2) | | Ms. Haab is our only non-employee director. As of December 31, 2009, Ms. Haab had no options or stock awards outstanding. As disclosed in the beneficial ownership table elsewhere in this annual report, Ms. Haab is the beneficial owner of 239,198 shares of our common stock. |
| (3) | | Mr. Swank, our former Chief Executive Officer and President, served as a non-employee director from October 15, 2008 to January 15, 2009, when his term as a director ended at our annual meeting of stockholders held on January 15, 2009. At such meeting, Mr. William Plummer, our Sales Development Manager and a current employee, was elected as a director. |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table, together with the accompanying footnotes, sets forth information regarding the beneficial ownership of the common stock of the Company as of April 12, 2010, for (i) each person known by the Company to own beneficially more than 5% of the Company’s common stock, (ii) each officer named in the summary compensation table in this report, (iii) each of the Company’s directors, and (iv) all directors and executive officers as a group. Applicable percentage ownership in the following table is based on 39,345,129 shares of common stock outstanding as of April 12, 2010.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and investment power with respect to the securities. Subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. In addition, shares of common stock issuable upon exercise of options, warrants and other convertible securities beneficially owned that are exercisable within sixty days of April 12, 2010, are deemed outstanding for the purpose of computing the percentage ownership of the person holding those securities, and the group as a whole, but are not deemed outstanding for computing the percentage ownership of any other person.
| Name and Address | | Shares Beneficially Owned | | | Percentage of Class | |
| | | | | | | | | |
| Beneficial Owners of More than 5%: | | | | | | | | |
American Timeshare Associates, Inc. 82 Roslyn Avenue Sea Cliff, New York 11579 | | | 2,802,116 | (1) | | | 7.1 | % |
| | | | | | | | | |
Ron Katz 82 Roslyn Avenue Sea Cliff, New York 11579 | | | 2,963,462 | (2) | | | 7.5 | % |
| | | | | | | | | |
Leon Nowalsky 826 Barracks Street New Orleans, Louisiana 70116 | | | 3,991,500 | (3) | | | 10.1 | % |
| | | | | | | | | |
Paul J. Shovlain P.O. Box 15855 Tallahassee, Florida 32317 | | | 6,891,750 | | | | 17.5 | % |
| | | | | | | | | |
Robert J. Sorrentino 3811 Hollow Crossing Drive Orlando, Florida 32817 | | | 8,935,058 | | | | 22.7 | % |
| | | | | | | | | |
| Directors and Named Executive Officers: | | | | | | | | |
Walter Reid Green, Jr. 15431 O’Neal Gulfport, Mississippi 39503 | | | 1,242,000 | (4) | | | 3.1 | % |
| | | | | | | | | |
Monica B. Haab 15431 O’Neal Gulfport, Mississippi 39503 | | | 239,198 | | | | 0.6 | % |
| | | | | | | | | |
| Name and Address | | Shares Beneficially Owned | | | Percentage of Class | |
| | | | | | | | | |
William R. Plummer 15431 O’Neal Gulfport, Mississippi 39503 | | | 6,396,000 | (5) | | | 16.3 | % |
| | | | | | | | | |
| All officers and directors as a group (3 persons) | | | 7,877,198 | | | | 19.5 | % |
_____________________
| | | |
| (1) | | Ron Katz is the president and sole shareholder of American Timeshare Associates, Inc. and has sole voting and dispositive power over the shares held by American Timeshare Associates, Inc. |
| (2) | | Includes the 2,802,116 shares held by American Timeshare Associates, Inc. as set forth in this table and 161,346 shares held by Net Com Data Corp. of N.Y. Mr. Katz is the president and sole shareholder of both entities and may be deemed to be the beneficial owner of all shares owned by those entities. |
| (3) | | Mr. Nowalsky is the direct owner of 3,791,500 shares of common stock and exercises the sole power to direct the voting or disposition of these shares. In addition, he is the indirect owner of 125,000 shares of common stock, owned by his wife and 75,000 shares of common stock owned by Riverbend Holdings, Inc., of which he serves as an officer, director and significant shareholder. |
| (4) | | Includes 244,500 shares which Mr. Green has the right to acquire pursuant to the exercise of options with an exercise price of $.03 per share and 897,500 shares which Mr. Green has the right to acquire pursuant to the exercise options with an exercise price of $.05 per share. |
| (5) | | Includes 3,198,000 shares owned by Mr. Plummer’s spouse, Beverly Plummer. |
Changes in Control
There are no understandings or agreements known by management at this time that would result in a change in control.
Securities Authorized for Issuance under Equity Compensation Plans
The following table gives information about our common stock that may be issued upon exercise of options, warrants and rights under all of our existing equity compensation plans as of December 31, 2009.
| Equity Compensation Plan Information |
| | | | |
| | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| | (a) | (b) | (c) |
Equity compensation plans approved by security holders (1) | 1,157,000 | $.05 | 718,000 |
| | | | |
Equity compensation plans not approved by security holders (2) | 259,500 | $.03 | - |
| | | | |
| Total | 1,416,500 | $.046 | 718,000 |
____________________
| (1) | | Includes our 2008 Incentive Stock Plan which was approved by stockholders at our annual meeting on January 15, 2009. |
| (2) | | Includes options to purchase 244,500 shares of our common stock at $.03 per share granted to Walter Reid Green, Jr., our Chief Executive Officer and options to purchase 57,500 shares of our common stock at $.03 per share granted to three other employees. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Party Transactions
The following is a description of transactions during 2009 and through the date of this annual report, in which the amount involved in the transaction exceeds $120,000 and in which any of our directors, executive officers or holders of more than 5% of our common stock had or will have a direct or indirect material interest, other than compensation which is described under “Executive Compensation.” We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.
NDS Acquisition – Share Purchase Note
On August 22, 2008, as part of the acquisition of NDS, the Company issued an unsecured note (the “Share Purchase Note”) payable to the stockholders of NDS. The Share Purchase Note bears interest at 5.5% for the first twelve months and 9.5% for the following twenty-four months, when the Share Purchase Note is due in full. Pursuant to the terms of the Share Purchase Note, the Company will make interest only payments each month and will make three principal payments during the term of the Share Purchase Note. The Company shall pay $180,000 towards principal on the first and the second anniversary of the issue date of the Share Purchase Note and one final balloon payment representing the then outstanding principal and accrued interest on the third anniversary of the issue date of the Shar e Purchase Note. Mr. William Plummer, a current employee, stockholder and director of the Company, was formerly the majority stockholder of NDS and will receive a majority of the payments on the Share Purchase Note. On August 23, 2009, we executed an amendment agreement amending certain terms of the Share Purchase Note. As described above, pursuant to the terms of the original note, we were required to make a $180,000 principal payment on August 22, 2009. In accordance with the terms of the amendment, this required payment was modified as follows: (i) we made a one-time principal payment of $30,000 upon execution of the amendment; (ii) commencing September 23, 2009, we will make monthly interest payments on the outstanding balance of the note at an interest rate of 9.5%; and (iii) the remaining principal payment of $150,000 that was originally due on August 22, 2009 will not be due until Mr. Plummer notifies us upon thirty days advance writ ten notice. Additionally, we have agreed that repayment of the note will now be secured by all of our assets. As of December 31, 2009, the outstanding principal balance on the Share Purchase Note was $2,675,000.
NDS Acquisition – Sorrentino Note
On August 22, 2008, in order to facilitate the cash payment due at the closing of the acquisition of NDS, the Company issued a secured promissory note (the “Sorrentino Note”) with no stated interest rate and entered into and closed a security agreement (the “Security Agreement”) with Robert J. Sorrentino. The terms of the Sorrentino Note provide that the Company may draw up to $500,000 from Sorrentino with advanced written notice to and subject to the approval of Sorrentino for a period of up to seven months. Commencing on the seven-month anniversary of the issue date of the Sorrentino Note, the Company will make twenty-four equal monthly installments in an amount sufficient to repay the entire outstanding principal balance during such twenty-four month period. The Sorrent ino Note is secured by the Security Agreement, which grants Sorrentino a security interest in all of the assets of the Company. In lieu of payment of interest, the Company granted Sorrentino 4,800,000 shares of its common stock with an estimated fair value of $0.05 per share. The Company has recognized the value of the shares issued ($240,000) as prepaid interest, and is amortizing this amount over the total life of the note of 30 months. On May 27, 2009, we executed an amendment agreement with Robert J. Sorrentino, amending certain terms of the loan agreement with Mr. Sorrentino. Pursuant to the terms of the amendment, the payment schedule with respect to the loan was modified as follows: (1) we made a one-time principal payment of $15,350 upon execution of the amendment; and (2) commencing May 31, 2009, we are required to make monthly principal payments of $7,675 (reduced from $17,770 contemplated under the original loan agreement) through Fe bruary 28, 2011, at which time the remaining outstanding balance is due and payable. All other terms as set forth in the original loan agreement, and ancillary documents, remain unchanged. As of December 31, 2009, the outstanding principal balance under the loan agreement was $357,425 and the related amount of prepaid interest reflected in the Company’s consolidated balance sheet totaled $104,000, which is classified as current. As of April 12, 2010, Mr. Sorrentino was the beneficial owner of approximately 22.7% of our outstanding common stock.
Thermo Credit Note
On September 17, 2008, in order to facilitate the cash payment due at the closing of the purchase of the portfolio of credit card merchant services accounts from Netcom Data Corp. of N.Y. and American Timeshare Associates, Inc., the Company, NDS, and United (collectively the “Debtors”) borrowed $2,128,500 from Thermo Credit, LLC, a Colorado limited liability company (the “Lender”) pursuant to a Loan, Pledge, and Security Agreement (the “Loan Agreement”) and a Promissory Note (the “Note”) which provide for interest at the greater of 15% per annum or 8% in excess of the prime rate, plus other fees. Accrued and unpaid interest on the outstanding principal balance of the Note is due and payable monthly commencing on October 31, 2008 and the Note was scheduled to mature on March 17, 2009, with the Company having the right to extend the maturity to September 17, 2009 with Lender’s approval. In the event of such extension, the Note is payable as follows: (a) one payment of accrued and unpaid interest on March 31, 2009; (b) five monthly payments of principal plus accrued and unpaid interest thereon in an amount necessary to amortize the outstanding principal balance of the Note as of March 17, 2009 over a period of 24 months commencing on April 30, 2009 and continuing on the same day of each calendar month thereafter (or if no such corresponding date, on the last date of such calendar month); and (c) a final payment of all principal plus accrued and unpaid interest on September 17, 2009. The Loan Agreement grants the Lender a security interest in all of the assets, now owned, or hereafter acquired by the Debtors, and pledges all of the outstanding Common Stock of NDS and all of the outstanding memb ership interests of UCS to the Lender. On March 17, 2009, the Company executed an Amendment modifying the terms of the credit facility. Pursuant to the Amendment, the credit facility was modified as follows: (1) the maturity date was extended to March 31, 2010; (2) the outstanding principal amount was reduced to $2,050,000; (3) the installment payment schedule was modified consistent with the new outstanding amount and maturity date; and (4) the interest rate on the outstanding amount was increased by 3% to the greater of the prime rate plus 11%, or 18%. In connection with the Amendment, United eSystems was also required to pay a commitment fee of 1% of the outstanding amount, or $20,500. On March 31, 2010 the Company executed an Amendment to the Agreement further extending the due date of the loan until June 30, 2010. Mr. Leon Nowalsky and Mr. Robert J. Sorrentino, who own approximately 10.1% and 22.7%, respectively, of our outstanding common stock as of April 12, 2010, serve on the board of directors of Thermo Credit. As of December 31, 2009, the outstanding principal balance on the Note was $1,930,000.
Other Stockholder Notes
On September 4, 2008 and September 8, 2008, the Company entered into two notes payable with three existing stockholders of the Company, who each own less than 5% of the Company’s outstanding common stock, for an aggregate principal amount of $70,000. The notes provide for interest only payments at a rate of 10% per annum payable monthly, with the entire principal balances due and payable on September 4, 2010 and September 8, 2010, respectively.
Legal Services
During 2009, the Company obtained legal services from a law firm in which two stockholders of the Company, who each own less than 5% of the Company’s outstanding Common Stock, serve as partners. The amount paid to this firm during 2009 totaled $1,416.64. In addition, the Company obtained legal services from a law firm in which Monica Haab, a director, works as an attorney and Leon Nowalsky, a beneficial holder of approximately 10.1% of our outstanding common stock, serves as a partner. The total amount paid to this firm during 2009 totaled $6,610.08.
Director Independence
The Board of Directors has determined that Ms. Haab qualifies as an independent director as that term is defined under Nasdaq Marketplace Rule 4200(a)(15).
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table shows the aggregate fees billed to us for professional services by Laporte, Sehrt, Romig and Hand, for the calendar years 2009 and 2008, respectively:
| | | Fiscal 2009 | | | Fiscal 2008 | |
Audit Fees (1) | | $ | 46,375 | | | $ | 40,375 | |
| Audit-Related fees | | | - | | | | - | |
| Tax Fees | | | - | | | | - | |
| All Other Fees | | | - | | | | - | |
| Total Fees | | $ | 46,375 | | | $ | 40,375 | |
________________________
| (1) | | Includes fees for the Company’s annual audits and reviews of the Company’s quarterly financial statements or services that are normally provided by the accountant in connection with statutory or regulatory filings or engagements. |
Pre-Approval Policies and Procedures
The Company’s Board of Directors, which serves as the audit committee, reviews the scope and extent of all audit and non-audit services to be provided by the independent auditors and reviews and pre-approves all fees to be charged for such services. The Board of Directors may establish additional or other procedures for the approval of audit and non-audit services that the Company’s independent auditors perform. In pre-approving services to be provided by the independent auditors, the Board of Directors considers whether such services are consistent with applicable rules regarding auditor independence. All fees set forth in the table above were approved by the Board of Directors.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents Filed as Part of this Report
| | (1) | Financial Statements. The consolidated financial statements of United eSystems, Inc., which are listed on the Index to Financial Statements appearing on page F-1 of this report. |
| | (2) | Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulations of the SEC are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto. |
| | (3) | Exhibits. The following is a list of exhibits filed as part of this annual report on Form 10-K. |
| | 3.1 | | Articles of Incorporation (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form 10-SB filed April 23, 2002). |
| | 3.2 | | First Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.3 to our Form 10-KSB filed on April 15, 2005). |
| | 3.3 | | Certificate of Amendment to the Articles of Incorporation (incorporated by reference to Exhibit 3.4 to our Form 10-QSB filed on August 12, 2005). |
| | 3.4 | | Bylaws (incorporated by reference to Exhibit 3.2 to our Registration Statement on Form 10-SB filed April 23, 2002). |
| | 3.5 | | First Amended Bylaws of United eSystems, Inc. (incorporated by reference to Exhibit 3.1 to our Form 8-K filed on October 14, 2008). |
| | 10.1 | | Contribution Agreement between Riverbend Telecom, Inc., Riverbend Holdings, Inc., Leon Nowalsky and the equity owners of United Check Services, LLC, dated July 14, 2004 (incorporated by reference to Exhibit 10.5 to our Form 8-K filed on July 21, 2004). |
| | 10.2 | | Letter Agreement dated August 5, 2004 (incorporated by reference to Exhibit 10.6 to our Form 8-K filed on August 30, 2004). |
| | 10.3 | | Agreement and Plan of Reorganization between Riverbend Telecom, Inc. and Riverbend Holdings, Inc. dated March 30, 2005 (incorporated by reference to Exhibit 10.7 to our Form 8-K filed on April 4, 2005). |
| | 10.4 | | Real Estate Lease between Marston Lee and Kathy P. Rogers and United Check Services (incorporated by reference to Exhibit 10.9 to our Form 10-QSB filed on August 12, 2005). |
| | 10.5 | | Real Estate Lease Renewal dated March 17, 2008 (incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on August 13, 2008). |
| | 10.6 | | United eSystems, Inc. 2008 Incentive Stock Plan (incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on November 14, 2008).+ |
| | 10.7 | | NetCom Data Southern Corp. Share Purchase Agreement dated August 22, 2008 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on August 28, 2008). |
| | 10.8 | | Robert J. Sorrentino Secured Promissory Note dated August 22, 2008 (incorporated by reference to Exhibit 10.2 to our Form 8-K filed on August 28, 2008). |
| | 10.9 | | Robert J. Sorrentino Security Agreement dated August 22, 2008 (incorporated by reference to Exhibit 10.3 to our Form 8-K filed on August 22, 2008). |
| | 10.10 | | Purchase Agreement dated September 17, 2008 between Netcom Data Corp. and Net Com Data Corp of N.Y. and American Timeshare Associates, Inc. (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on September 23, 2008). |
| | 10.11 | | Promissory Note dated September 17, 2008 issued to Thermo Credit, LLC. (incorporated by reference to Exhibit 10.2 to our Form 8-K filed on September 23, 2008). |
| | 10.12 | | Loan, Pledge, and Security Agreement dated September 17, 2008 by and among Thermo Credit, LLC and United eSystems, Inc., Netcom Data Southern Corp., Netcom Data Corp. and United Check Services, L.L.C. (incorporated by reference to Exhibit 10.3 to our Form 8-K filed on September 23, 2008). |
| | 10.13 | | Subordination Agreement dated September 17, 2008 by and among Robert Sorrentino, Thermo Credit, LLC and United eSystems, Inc., Netcom Data Southern Corp, Netcom Data Corp. and United Check Services, L.L.C. (incorporated by reference to Exhibit 10.4 to our Form 8-K filed on September 23, 2008). |
| | 10.14 | | Pledge and Control Agreement dated September 17, 2008 by and among Thermo Credit, LLC and Leon Nowalsky and Robert Sorrentino (incorporated by reference to Exhibit 10.5 to our Form 8-K filed on September 23, 2008). |
| | 10.15 | | Service Agreement dated July 13, 2008 between LaSalle Bank, N.A. and Netcom Data Corp. (incorporated by reference to Exhibit 10.6 to our Form 8-K filed on September 23, 2008). |
| | 10.16 | | Amendment to Thermo Credit, LLC Loan, Pledge and Security Agreement and related Promissory Note dated March 17, 2009. (incorporated by reference to Exhibit 10.16 to our Form 10-K filed on March 31, 2009). |
| | 10.17 | | Employment Agreement between Netcom Data Southern Corp. and William R. Plummer dated August 22, 2008 (incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on May 15, 2009).+ |
| | 10.18 | | Non-Competition, Confidentiality, and Non-Solicitation Agreement between the Company, Netcom Data Southern Corp. and William R. Plummer dated August 22, 2008 (incorporated by reference to Exhibit 10.3 to our Form 10-Q filed on May 15, 2009).+ |
| | 10.19 | | Amendment to Security Agreement and Promissory Note between Robert J. Sorrentino and United eSystems, Inc. dated May 27, 2009 (incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on August 14, 2009). |
| | 10.20 | | Amendment Agreement dated August 23, 2009 to Unsecured Promissory Note between the Company and William R. Plummer (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on August 24, 2009). |
| | 14.1 | | Code of Ethics (incorporated by reference to Exhibit 14 to our Form 10-KSB filed on April 14, 2004). |
| | 21.1 | | List of Subsidiaries of United eSystems (incorporated by reference to Exhibit 21.1 to our Form 10-K filed on March 31, 2009). |
| | 31.1 | | Principal Executive Officer Certification under Section 302 of the Sarbanes-Oxley Act of 2002.* |
| | 31.2 | | Principal Financial Officer Certification under Section 302 of the Sarbanes-Oxley Act of 2002.* |
| | 32.1 | | Principal Executive Officer Certification under Section 906 of the Sarbanes-Oxley Act of 2002.* |
| | 32.2 | | Principal Financial Officer Certification under Section 906 of the Sarbanes-Oxley Act of 2002.* |
_____________________
* Filed Herewith
+ Management contracts and compensatory plans.
Pursuant to 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.
| | UNITED ESYSTEMS, INC. |
| | |
| Date: April 15, 2010 | By: /s/ Walter Reid Green, Jr. |
| | Walter Reid Green, Jr. |
| | Chief Executive Officer and Chief Financial Officer |
| | (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
Pursuant to the requirements of the Securities 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 |
| | | | | |
| | | | | |
| /s/ Walter Reid Green, Jr. | | Chief Executive Officer, Chief Financial Officer | | April 15, 2010 |
| Walter Reid Green, Jr. | | and Director | | |
| | | | | |
| | | | | |
| /s/ William R. Plummer | | Director | | April 15, 2010 |
| William R. Plummer | | | | |
| | | | | |
| | | | | |
| /s/ Monica B. Haab | | Director | | April 15, 2010 |
| Monica B. Haab | | | | |
| UNITED ESYSTEMS, INC. AND SUBSIDARY |
| |
| INDEX TO FINANCIAL STATEMENTS |
| | Page No. |
| Independent Auditors’ Report | F-1 |
| Consolidated Balance Sheets | F-2 – F-3 |
| Consolidated Statements of Income | F-4 |
| Consolidated Statements of Changes in Stockholders’ Equity | F-5 |
| Consolidated Statements of Cash Flows | F-6 |
| Notes to Consolidated Financial Statements | F-7 – F-23 |
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of United eSystems, Inc. and its wholly-owned subsidiaries, United Check Services, L.L.C. and Netcom Data Southern Corp., as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years 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 audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United eSystems, Inc. and its wholly-owned subsidiaries, United Check Services, L.L.C. and Netcom Data Southern Corp., as of December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to examine management’s assertion about the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009 included in the accompanying Form 10-K and, accordingly, we do not express an opinion thereon.
A Professional Accounting Corporation
Metairie, Louisiana
April 15, 2010
UNITED ESYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | December 31, | |
| ASSETS | | 2009 | | | | 2008 | |
| | | | | | | | |
| CURRENT ASSETS | | | | | | | |
Cash and Cash Equivalents | $ | 228,213 | | | $ | 366,844 | |
Restricted Cash | | 271,624 | | | | 353,702 | |
Trade Receivables, net | | 93,021 | | | | 84,581 | |
| Deferred Tax Asset, current | | 206,338 | | | | 27,655 | |
Prepaid Interest | | 104,000 | | | | 96,000 | |
Prepaid Expenses | | 30,584 | | | | 19,619 | |
| | | | | | | | |
Total Current Assets | | 933,780 | | | | 948,401 | |
| | | | | | | | |
| PROPERTY AND EQUIPMENT, NET | | 52,400 | | | | 57,882 | |
| | | | | | | | |
| OTHER ASSETS | | | | | | | |
Intangible Assets, net | | 4,932,499 | | | | 5,661,916 | |
Deferred Tax Asset, Non-current | | 65,678 | | | | 12,854 | |
Prepaid Interest, Non-current | | - | | | | 110,000 | |
Other | | 85,250 | | | | 63,315 | |
| | | | | | | | |
Total Assets | $ | 6,069,607 | | | $ | 6,854,368 | |
| | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | |
| | | | | | | | |
| CURRENT LIABILITIES | | | | | | | |
ACH Settlements Payable | $ | 258,019 | | | $ | 336,597 | |
Current Portion Long-Term Debt | | 2,422,100 | | | | 357,709 | |
Accounts Payable and Accrued Liabilities | | 63,022 | | | | 58,433 | |
Customers’ Deposits | | 13,605 | | | | 17,105 | |
| | | | | | | | |
Total Current Liabilities | | 2,756,746 | | | | 769,844 | |
| | | | | | | | |
| LONG TERM LIABILITIES | | | | | | | |
Notes Payable | | 2,610,325 | | | | 4,977,949 | |
| | | | | | | | |
Total Liabilities | | 5,367,071 | | | | 5,747,793 | |
| | | | | | | | |
| STOCKHOLDERS' EQUITY | | | | | | | |
Common Stock - $.001 Par Value; 75,000,000 Shares Authorized, 34,272,629 Shares Issued and Outstanding in 2009 and 34,316,667 in 2008 | | 34,272 | | | | 34,317 | |
Additional Paid-In Capital | | 847,339 | | | | 850,346 | |
Retained Earnings | | (179,075 | ) | | | 221,912 | |
| | | | | | | | |
Total Stockholders' Equity | | 702,536 | | | | 1,106,575 | |
| | | | | | | | |
Total Liabilities and Stockholders' Equity | $ | 6,069,607 | | | $ | 6,854,368 | |
The accompanying notes are an integral part of these consolidated financial statements.
| UNITED ESYSTEMS, INC. AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF OPERATIONS |
| | | For the Years Ended December 31, | |
| | | 2009 | | | | 2008 | |
| | | | | | | | |
| REVENUES | | | | | | | |
ACH Processing | $ | 813,461 | | | $ | 941,492 | |
Verification Services | | 180,440 | | | | 165,946 | |
Credit Card Services | | 1,736,167 | | | | 681,770 | |
Total Revenues | | 2,730,068 | | | | 1,789,208 | |
| | | | | | | | |
| COST OF REVENUES | | 886,694 | | | | 707,444 | |
Gross Profit | | 1,843,374 | | | | 1,081,764 | |
| | | | | | | | |
| EXPENSES | | | | | | | |
Operating Expenses | | | | | | | |
Personnel Costs | | 139,165 | | | | 139,628 | |
Travel | | 72,142 | | | | 61,271 | |
Amortization | | 538,272 | | | | 176,586 | |
Commissions and fees expense | | 151,139 | | | | 50,938 | |
Other | | 224,262 | | | | 176,313 | |
| | | | | | | | |
Total Operating Expenses | | 1,124,980 | | | | 604,736 | |
| | | | | | | | |
Selling, General and Administrative Expenses | | | | | | | |
Personnel Costs | | 512,707 | | | | 268,152 | |
Legal and Accounting | | 123,672 | | | | 92,163 | |
Marketing | | 36,453 | | | | 34,921 | |
Consulting | | - | | | | 32,500 | |
Other | | 22,688 | | | | 21,470 | |
Total Selling, General and Administrative Expenses | | 695,520 | | | | 449,206 | |
| | | | | | | | |
Total Expenses | | 1,820,500 | | | | 1,053,942 | |
| | | | | | | | |
| INCOME FROM OPERATIONS | | 22,874 | | | | 27,822 | |
| | | | | | | | |
| OTHER INCOME (EXPENSE) | | | | | | | |
Interest Income | | 2,429 | | | | 421 | |
Interest Expense | | (647,999 | ) | | | (188,381 | ) |
Other Expense | | - | | | | - | |
| | | | | | | | |
Total Other Expense | | (645,570 | ) | | | (187,960 | ) |
| | | | | | | | |
| NET LOSS BEFORE INCOME TAXES | | (622,696 | ) | | | (160,138 | ) |
| INCOME TAX BENEFIT | | (221,709 | ) | | | (40,509 | ) |
| NET LOSS | $ | (400,987 | ) | | $ | (119,629 | ) |
| LOSS PER SHARE – BASIC | $ | 0.01 | | | $ | 0.00 | |
| LOSS PER SHARE – DILUTED | $ | 0.01 | | | $ | 0.00 | |
The accompanying notes are an integral part of these consolidated financial statements.
UNITED ESYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2009 and 2008
| | | Common Stock | | | Additional Paid-In | | | Retained | | | Total Stockholders' | |
| | | Shares | | | Amount | | | Capital | | | Earnings | | | Equity | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Balance at January 1, 2008 | | | 18,291,667 | | | $ | 18,292 | | | $ | 49,440 | | | $ | 341,541 | | | $ | 409,273 | |
| | | | | | | | | | | | | | | | | | | | | |
Exercise of Employee Stock Options | | | 100,000 | | | | 100 | | | | 2,900 | | | | - | | | | 3,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| Issuance of Stock Options | | | - | | | | - | | | | 17,681 | | | | | | | | 17,681 | |
| | | | | | | | | | | | | | | | | | | | | |
| Issuance of restricted common stock granted Employees under 2008 ISO Plan | | | 125,000 | | | | 125 | | | | 6,125 | | | | - | | | | 6,250 | |
| | | | | | | | | | | | | | | | | | | | | |
| Issuance of Common Stock for Acquisition of Netcom Data Southern, Inc. | | | 7,800,000 | | | | 7,800 | | | | 382,200 | | | | - | | | | 390,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| Issuance of Common Stock for Acquisition of Credit Card Portfolio | | | 3,200,000 | | | | 3,200 | | | | 156,800 | | | | - | | | | 160,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| Issuance of Common Stock in exchange for "Non-interest" bearing loan | | | 4,800,000 | | | | 4,800 | | | | 235,200 | | | | - | | | | 240,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net Loss | | | - | | | | - | | | | - | | | | (119,629 | ) | | | (119,629 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2008 | | | 34,316,667 | | | | 34,317 | | | | 850,346 | | | | 221,912 | | | | 1,106,575 | |
| | | | | | | | | | | | | | | | | | | | | |
| Exercise of Employee stock options | | | 42,500 | | | | 42 | | | | 1,233 | | | | - | | | | 1,275 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net Loss | | | - | | | | - | | | | - | | | | (400,987 | ) | | | (400,987 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Attrition Reimbursement under terms of Acquired Credit Card Portfolio | | | (86,538 | ) | | | (87 | ) | | | (4,240 | ) | | | - | | | | (4,327 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2009 | | | 34,272,629 | | | $ | 34,272 | | | $ | 847,339 | | | $ | (179,075 | ) | | $ | 702,536 | |
The accompanying notes are an integral part of these consolidated financial statements.
UNITED ESYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | For The Years Ended December 31, | |
| | | 2009 | | | | 2008 | |
| | | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | |
Net Loss | $ | (400,987 | ) | | $ | (119,629 | ) |
Adjustments to Reconcile Net Loss to Net | | | | | | | |
Cash Provided by Operating Activities | | | | | | | |
Depreciation and Amortization | | 568,318 | | | | 208,058 | |
Compensation expense related to employee stock grant | | - | | | | 6,250 | |
Compensation expense related to employee stock options granted | | - | | | | 17,681 | |
Increase in Trade Receivables | | (8,215 | ) | | | (3,091 | ) |
(Increase) Decrease in Prepaid Expenses | | (10,965 | ) | | | 4,857 | |
Decrease in Prepaid Interest | | 102,000 | | | | 34,000 | |
Decrease in Restricted Cash | | 82,078 | | | | 177,641 | |
Increase in Deferred Tax Assets | | (272,016 | ) | | | (40,509 | ) |
Increase in Other Assets | | - | | | | (695 | ) |
Decrease in ACH Settlements Payable | | (78,578 | ) | | | (178,372 | ) |
Increase in Accounts Payable and Accrued Liabilities | | 45,098 | | | | 24,397 | |
(Decrease) Increase in Customer Deposits | | (3,500 | ) | | | 731 | |
Net Cash Provided by Operating Activities | | 23,233 | | | | 131,319 | |
| | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | |
Acquisition of Property and Equipment | | (24,789 | ) | | | (14,117 | ) |
Cash paid in conjunction with acquisition of NDS | | - | | | | (307,428 | ) |
Cash paid in conjunction with acquisition of Portfolio Asset | | - | | | | (2,275,575 | ) |
Proceeds from Asset Purchase Escrow | | 186,818 | | | | - | |
Increase in Other Assets | | (21,935 | ) | | | - | |
Net Cash Provided by (Used in) Investing Activities | | 140,094 | | | | (2,597,120 | ) |
| | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | |
Proceeds from notes payable | | - | | | | 2,615,657 | |
Proceeds from employee stock options exercised | | 1,275 | | | | 3,000 | |
Principal paid on notes payable | | (303,233 | ) | | | (70,000 | ) |
Net Cash (Used in) Provided by Financing Activities | | (301,958 | ) | | | 2,548,657 | |
| | | | | | | | |
| NET(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | (138,631 | ) | | | 82,856 | |
| | | | | | | | |
| CASH AND CASH EQUIVALENTS – BEGINNING OF YEAR | | 366,844 | | | | 283,988 | |
| CASH AND CASH EQUIVALENTS – END OF YEAR | $ | 228,213 | | | $ | 366,844 | |
| | | | | | | | |
| SUPPLEMENTAL DISCLOSURES | | | | | | | |
Cash Paid During the Period for Interest | $ | 543,999 | | | $ | 123,101 | |
Cash Paid During the Period for Taxes | | 5,000 | | | | - | |
The accompanying notes are an integral part of these financial statements.
UNITED ESYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Audited)
| | | For The Years Ended December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITES | | | | | | |
| | | | | | | |
| Acquisition of Netcom Data Southern, Inc. (NDS) Identifiable Intangible Assets Acquired | $ | - | | $ | 3,402,925 | |
| Net Tangible Assets Acquired: | | | | | | |
Property and Equipment | | - | | | 14,503 | |
| | | | | | | |
Net Tangible Assets Acquired | | - | | | 14,503 | |
| | | | | | | |
Total Assets Acquired | | - | | | 3,417,428 | |
| | | | | | | |
| Less: | | | | | | |
Fair Value of stock issued | | - | | | (390,000 | ) |
Promissory Note Issued to Stockholder of NDS | | - | | | (2,720,000 | ) |
| | | | | | | |
Net Cash Paid for Acquisition of NDS | $ | | | $ | 307,428 | |
| | | | | | | |
| Purchase of Credit Card Portfolio | | | | | | |
Value of Credit Card Portfolio Acquired | $ | - | | $ | 2,435,575 | |
Less Value of Stock Issued for Purchase | | - | | | (160,000 | ) |
| | | | | | | |
Net Cash Paid for Purchase of Credit Card Portfolio | $ | - | | $ | 2,275,575 | |
| | | | | | | |
| Stock Issued in Exchange for “Interest-Free” Loan; Recognized as Prepaid Interest on Consolidated Balance Sheet | $ | - | | $ | 240,000 | |
The accompanying notes are an integral part of these financial statements.
UNITED ESYSTEMS, INC. AND SUBSIDIARIES
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 stockh olders. 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 — NATURE OF RECENT ACQUISITON AND PORTFOLIO ASSET PURCHASE
Acquisition of Netcom Data Southern Corp.
On August 22, 2008, United eSystems, Inc. (“eSystems”, “Company”) entered into a Stock Purchase Agreement (“Agreement”) with Netcom Data Southern Corp. (“NDS”), in which eSystems acquired all of the common stock of NDS. The transaction was reported on Form 8-K on August 28, 2008, and the details of the transaction together with agreement between eSystems and NDS are included therein.
The Company entered into the transaction as means to diversify its electronic payments business. Prior to the transaction, the majority of the Company’s revenue was derived from providing ACH payment services for business merchants. For 2009, the Company’s gross revenues are now approximately 30% from its ACH payments business and 64% from credit card merchant processing services which are provided through contracts that NDS has with several sponsor banks in the United States. The Board of Directors and management believe that the acquisition of NDS provides the opportunity to improve operating results and the possibility of creating future value.
Pursuant to the Agreement, the Company acquired all of the outstanding stock of NDS in exchange for approximately $272,000 of cash at closing, an unsecured promissory note payable of $2,720,000, and 7,800,000 shares of the Company’s restricted common stock which had an estimated fair value at the date of the acquisition of $.05 per share. As a result of the transaction, all of the Company’s sales and marketing activities, as well as all of the customer service duties to manage the credit card merchant accounts of NDS will be conducted through NDS, which is now a wholly owned subsidiary of the Company.
UNITED ESYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B — NATURE OF RECENT ACQUISITON AND PORTFOLIO ASSET PURCHASE (Continued)
| A summary of the purchase price of NDS is as follows: | | | |
| Cash paid to stockholders of NDS, net of cash acquired from NDS | | $ | 272,099 | |
| Direct acquisition costs paid by the Company | | | 35,329 | |
| Promissory note issued to stockholders of NDS | | | 2,720,000 | |
| Fair value of 7,800,000 shares of stock issued | | | 390,000 | |
| | | | | |
| Total purchase price | | $ | 3,417,428 | |
The allocation of the NDS purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed are based on eSystems’ estimate of fair values and remaining economic lives as of the acquisition date and are summarized below:
| Tangible assets acquired and liabilities assumed | | | |
Property and Equipment | | $ | 14,503 | |
| | | | | |
Net tangible assets acquired | | | 14,503 | |
| | | | | |
| Identifiable intangibles | | | | |
Customer relationships and contracts | | | 3,402,925 | |
| | | | | |
| Total purchase price | | $ | 3,417,428 | |
The value allocated to customer relationships and contracts created as a result of the acquisition of NDS will be amortized over its estimated useful life of ten years. Amortization expense related to NDS for the year ended December 31, 2009, was $313,440, and $111,010 for 2008.
Portfolio Asset Purchase
On September 17, 2008, the Company, through its wholly owned subsidiary NDS, entered into and closed an Asset Purchase Agreement (the “Agreement”) with Netcom Data Corp. of N.Y. and American Timeshare Associates, Inc. (collectively the “Sellers”). Under the terms of the Agreement the Company paid $2,275,000 in cash, plus 3,200,000 shares of its restricted common stock, in exchange for the assignment all of the Seller’s rights under a certain Independent Sales Organization Agreement (the “Bank Agreement”) with LaSalle Bank, N.A., a subsidiary of Bank of America (the “Bank”). The terms of the Bank Agreement allow merchant customers of the Seller to utilize the credit card merchant processing services provided by the Bank. As a result of the assi gnment of the Bank Agreement, NDS will perform certain services previously provided by the Sellers under the Bank Agreement and will receive all payments due therefore from the Bank. Pursuant to the Agreement, 10% of the cash and stock paid at closing was escrowed, subject to an attrition formula applicable during the twelve months following the transaction date, whereby the Company may be reimbursed up to the amounts escrowed if the portfolio’s performance does not meet certain benchmarks during the applicable period.
The Company accounted for this transaction as an asset purchase and the purchase price, which is based upon the total consideration paid, is included on its consolidated balance sheet as Intangible Assets. The purchase price is amortized over a ten year period, commencing September 17, 2008. Amortization expense related to the Portfolio Asset Purchase for the year ended December 31, 2009, was $224,832 and $65,576 for 2008.
UNITED ESYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
As described in Notes A and B, UNITED ESYSTEMS, INC. (Company) serves as the holding company for United Check Services, L.L.C. (United) and Netcom Data Southern Corp (NDS). United provides automated clearing house (ACH) services to businesses throughout the United States. NDS is an independent sales organization that obtains merchant customers that utilize credit card processing services through several NDS sponsored banks. NDS receives a portion of the fees charged for such services in exchange for acquiring the merchants and maintaining certain customer service functions. The Company’s headquarters and ACH operations center are located in Gulfport, Mississippi, and the operations of NDS are conducted at its offices in Roswell, Georgia.
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, United and NDS. All significant intercompany balances and transactions have been eliminated in consolidation.
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 per transaction fee 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.
NDS receives a portion of the fees generated from credit card merchant processing services which are provided through its contractual agreements with various sponsor banks. Under these agreements the merchants’ transaction activity is reported and NDS’ portion of the fees are paid during the month following the month in which the transactions occurred. Accordingly, NDS recognizes its revenue in the month in which such transactions are reported and payable, which is consistent with industry practices within the United States of America.
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.
Reclassifications
Certain prior period amounts have been reclassified to conform to the December 31, 2009 financial presentation.
UNITED ESYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company reports its income taxes under a consolidated Federal tax return which includes the business activity of the Company, as well as the business activity of its wholly owned subsidiaries, United and NDS.
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.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above would be reflected as a liability for unrecognized tax benefits in the consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits would be classified as additional income taxes in the statement of operations
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.
Recent Accounting Pronouncements
In June 2009, the FASB replaced The Hierarchy of Generally Accepted Accounting Principles, with the FASB Accounting Standards CodificationTM (The Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification was effective for financial statements issued for periods ending after September 15, 2009.
In December 2007, the FASB issued guidance that establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. The guidance is effective for fiscal years beginning on or after December 15, 2008. There was no impact from adoption of this guidance, as the Company did not have an acquisition during 2009.
UNITED ESYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
On January 1, 2009, the Company adopted new guidance that related to accounting for non-controlling interests in consolidated financial statements. The new accounting guidance states for entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners separately within the consolidated statement of financial condition within equity, but separate from the parent’s equity and separately on the face of the consolidated statement of operations. Further, the new guidance states that changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary should be accounted for consistently and when a subsidiary is deconsolidated, any retained non-controlling equity investment i n the former subsidiary should be initially measured at fair value. The adoption of this guidance had no impact on the Company.
In March 2008, the FASB issued guidance that amended and expanded the disclosure requirements for derivative instruments and hedging activities. The guidance requires qualitative disclosure about objectives and strategies for using derivative and hedging instruments, quantitative disclosures about fair value amounts of the instruments and gains and losses on such instruments, as well as disclosures about credit-risk features in derivative agreements. The guidance was effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this guidance had no impact on the Company.
In June 2008, the FASB issued guidance which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, included in the earnings allocation in computing earnings per common share (EPS) under the two-class method. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This guidance was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented were to be adjusted retrospectively (including interim financial statements, summaries of earnings, a nd selected financial data) to conform to the provisions of this guidance. Since the Company's unvested restricted stock awards do not contain non-forfeitable rights to dividends, they are not included under the scope of this pronouncement, and therefore, the adoption of this guidance had no impact on the Company.
In May 2009, FASB issued new guidance relating to subsequent events and established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The new guidance sets forth:
| | · | the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; |
| | · | the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and |
| | · | the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. |
The Company has adopted the new guidance that was effective for financial statements issued for interim and annual periods ending after June 15, 2009.
UNITED ESYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In April 2009, the FASB amended existing guidance for determining whether impairment is other-than-temporary for debt securities. The guidance requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria are met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment (OTTI) related to other factors, which is recognized in other comprehensive income and 2) OTTI related to credit loss, which must be recogniz ed in the income statement. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. Additionally, disclosures about other-than-temporary impairments for debt and equity securities were expanded. This guidance was effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance had no impact on the Company.
In August 2009, the FASB issues Accounting Standards Update (“ASU”) 2009-05, Fair Value Measurements and Disclosures, which updates ASC 820, Fair Value Measurements and Disclosures. The updated guidance affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. It also requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. Thi s guidance was effective October 1, 2009. The adoption of the new guidance had no impact on the Company.
In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140 (“SFAS 166”). This statement is not yet included in the codification, but will impact ASC 860, Transfers and Servicing. This statement prescribes the information that a reporting entity must provide in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferor’s continuing involvement in transferred financial assets. Specifically, among other aspects, SFAS 166 amends Stateme nt of Financial Standard No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, or SFAS 140, by removing the concept of a qualifying special-purpose entity from SFAS 140 and removes the exception from applying FIN 46(R) to variable interest entities that are qualifying special-purpose entities. It also modifies the financial-components approach used in SFAS 140. SFAS 166 is effective for fiscal years beginning after November 15, 2009. This pronouncement is not expected to have an impact on our consolidated financial position and results of operations.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”). This statement is not yet included in the codification, but will impact ASC 810, Consolidation. This statement amends FASB Interpretation No. 46, Consolidation of Variable Interest Entities (revised December 2003) — an interpretation of ARB No. 51, or FIN 46(R), to require an enterprise to determine whether its variable interest or interests give it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is the enterprise that has both (1) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. SFAS 167 also amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS 167 is effective for fiscal years beginning after November 15, 2009. This pronouncement is not expected to have an impact on our consolidated financial position and results of operations.
NOTE D – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2009 and 2008:
| | | 2009 | | | | 2008 | |
| Computers and Office Equipment | $ | 83,452 | | | $ | 70,803 | |
| Furniture and Fixtures | | 8,626 | | | | 5,831 | |
| Software | | 87,027 | | | | 85,623 | |
| Leasehold Improvements | | 14,846 | | | | 6,907 | |
| Less: Accumulated Depreciation | | (141,551 | ) | | | (111,282 | ) |
| | | | | | | | |
| Property and Equipment, Net | $ | 52,400 | | | $ | 57,882 | |
Depreciation expense charged to operations totaled $30,271 and $31,472 for the years ended December 31, 2009 and 2008, respectively. Average estimated useful lives for computers, software, and leasehold improvements are three years. Furniture, fixtures, and office equipment have average estimated useful lives of five years.
UNITED ESYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E – INTANGIBLE ASSETS
Following is a summary of non-goodwill intangibles at December 31, 2009 and 2008:
| | | December 31, 2009 | | | December 31, 2008 | |
| | | Gross | | | Accumulated | | | Gross | | | Accumulated | |
| | | Amount | | | Amortization | | | Amount | | | Amortization | |
| | | | | | | | | | | | | |
| Customer Contracts - NDS | | $ | 3,402,925 | | | $ | 424,450 | | | $ | 3,402,925 | | | $ | 111,010 | |
| Customer Contracts - Portfolio Purchase | | | 2,431,248 | | | | 477,224 | | | | 2,435,575 | | | | 65,574 | |
| | | | | | | | | | | | | | | | | |
| Totals | | $ | 5,834,173 | | | $ | 901,674 | | | $ | 5,838,500 | | | $ | 176,584 | |
Amortization expense for 2009 and 2008 was $538,272 and $176,586, respectively. Estimated amortization expense for each of the ensuing years through December 31, 2013 is $538,272 per year.
Intangible assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. During the years ended December 31, 2009 and 2008, management determined that there was no impairment to intangible assets.
NOTE F — 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 G — NOTES PAYABLE
Due to Shareholders
On September 4, 2008, and September 8, 2008, the Company entered into two notes payable with two existing shareholders of the Company for a total principal amount of $70,000. The notes provide for interest only payments at a rate of 10% per annum payable monthly thereafter, with the entire principal balances due and payable two years from inception of the notes. The outstanding balance due to shareholders was $70,000 at both December 31, 2009 and December 31, 2008.
NDS Acquisition – Share Purchase Note
On August 22, 2008, as part of the acquisition of NDS, the Company issued an unsecured note (the “Share Purchase Note”) payable to the shareholders of NDS. The Share Purchase Note bears interest at 5.5% for the first twelve months and 9.5% for the following twenty-four months, when the Share Purchase Note is due in full. Pursuant to the terms of the Share Purchase Note, the Company will make interest-only payments each month and will make three principal payments of $180,000 on each anniversary date of the note with one final balloon payment representing the then outstanding principal and accrued interest on the third anniversary of the issue date of the Share Purchase Note. During August 2009, the Company executed an amendment to the Share Purchase Note whereby the scheduled principal payment o f $180,000 due on August 22, 2009, was amended to require a $30,000
UNITED ESYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G — NOTES PAYABLE (Continued)
principal payment which was paid by the Company. Mr. William Plummer, a current employee, shareholder, and director of the Company, was formerly the majority shareholder of NDS and will receive a majority of the payments on the Share Purchase Note. As of December 31, 2009, the outstanding principal balance of the Share Purchase Note was $2,675,000.
NDS Acquisition – Sorrentino Note
On August 22, 2008, in order to facilitate the cash payment due at the closing of the acquisition of NDS, the Company issued a non-interest bearing secured promissory note (the “Sorrentino Note”) and entered into and closed a security agreement (the “Security Agreement”) with Robert J. Sorrentino. The terms of the Sorrentino Note provide that the Company may draw up to $500,000 from Sorrentino with advanced written notice to and subject to the approval of Sorrentino for a period of up to seven months. The Company drew $280,000 immediately upon issuance of the Sorrentino Note. Commencing on the seven-month anniversary of the issue date of the Sorrentino Note, the Company will make twenty-four equal monthly installments in an amount sufficient to repay the entire outstanding principal balance during such twenty-four month period. The Sorrentino Note is secured by the Security Agreement, which grants Sorrentino a security interest in all of the assets existing, owned, or hereafter acquired by the Company. In lieu of payment of interest, the Company granted Sorrentino 4,800,000 shares of its common stock with an estimated fair value of $0.05 per share. The Company has recognized the value of the shares issued ($240,000) as prepaid interest, and is amortizing this amount over the total life of the note of 30 months. On May 27, 2009, the Company executed an Amendment to the Loan Agreement with Sorrentino (“Sorrentino Amendment”) which reduced the amount of monthly principal payments as provided for in the original Sorrentino Note. Under the Sorrentino Amendment, the Company made an initial payment of $15,350 in principal and began making monthly principal payments of $7,675 thereafter, continuing through Febru ary 28, 2011, at which time all remaining principal becomes due and payable. Under the original terms, monthly principal payments would have been approximately $17,770. During the year ended December 31, 2009, the Company’s principal payments totaled $38,375 thereby reducing the outstanding principal balance of these notes to $357,425 as of December 31, 2009, and the related amount of prepaid interest reflected in the Company’s consolidated balance sheet totaled $104,000, which is classified as current. As of April 12, 2010, Mr. Sorrentino was the beneficial owner of approximately 22.7% of our outstanding common stock.
Thermo Credit Note
On September 17, 2008, in order to facilitate the cash payment due at the closing of the purchase of the portfolio of credit card merchant services accounts from Netcom Data Corp. of N.Y. and American Timeshare Associates, Inc., the Company, NDS, and United (collectively the “Debtors”) borrowed $2,128,500 from Thermo Credit, LLC, a Colorado limited liability company (the “Lender”) pursuant to a Loan, Pledge, and Security Agreement (the “Loan Agreement”) and a Promissory Note (the “Note”) which provide for interest at the greater of 15% per annum or 8% in excess of the prime rate, plus other fees. Accrued and unpaid interest on the outstanding principal balance of the Note is due and payable monthly commencing on October 31, 2008 and the Note matures and becomes due in fu ll on March 17, 2009, with the Company having the right to extend the maturity to September 17, 2009 with Lender’s approval (not to be unreasonably withheld or delayed). In the event of such extension, the Note is payable as follows: (a) one payment of accrued and unpaid interest on March 31, 2009; (b) five monthly payments of principal plus accrued and unpaid interest thereon in an amount necessary to amortize the outstanding principal balance of the Note as of March 17, 2009 over a period of 24 months commencing on April 30, 2009 and continuing on the same day of each calendar month thereafter (or if no such corresponding date, on the last date of such calendar month); and (c) a final payment of all principal plus accrued and unpaid interest on September 17, 2009. The Loan Agreement grants the Lender a security interest in all of the assets, now owned, or hereafter acquired by the Debtors, and pledges all of the outstanding common stock of NDS and all of th e outstanding membership interests of UCS to the Lender. Two of the Company’s minority shareholders serve on the board of directors for Thermo Credit, LLC.
UNITED ESYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G — NOTES PAYABLE (Continued)
On March 17, 2009, the Company executed an Amendment to its Loan Agreement with Thermo Credit LLC under which the due date of the loan was extended until March 31, 2010, and the interest rate was increased by 3% APR. In conjunction with the Amendment, the Company paid $69,158 in principal on March 17, 2009, and $20,000 per month thereafter through September 30, 2009, reducing the outstanding principal balance by December 31, 2009, to $1,930,000. On March 31, 2010 the Company executed an Amendment to the Agreement further extending the due date of the loan until June 30, 2010.
The following notes payable are outstanding at December 31:
| | | December 31 | |
| | | 2009 | | | 2008 | |
| Due to Shareholders | $ | 70,000 | | $ | 70,000 | |
| Share Purchase Note – NDS | | 2,675,000 | | | 2,720,000 | |
| Sorrentino Note | | 357,425 | | | 426,500 | |
| Thermo Credit Note | | 1,930,000 | | | 2,119,158 | |
| | | | | | | |
| | $ | 5,032,425 | | $ | 5,335,658 | |
The following are maturities of long-term debt:
| Year | | Amount | |
| | | | |
| 2010 | | $ | 2,422,100 | |
| 2011 | | | 2,610,325 | |
| Totals | | $ | 5,032,425 | |
UNITED ESYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H — INCOME TAXES
For the year ended December 31, 2008, United eSystems Inc. adopted the provisions of the Accounting for Uncertainty in Income Taxes Topic of the FASB Accounting Standards Codification. The Company recognizes a threshold and measurement process for financial statement recognition of uncertain tax positions taken or expected to be taken in a tax return. The interpretation also provides guidance on recognition, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company files a U.S. federal income tax return and various state income tax returns. The Company’s tax filings are subject to audit by various taxing authorities. The Company’s open audit periods are 2006 through 2009. There are currently no returns under examination. At January 1, 2008, and at December 31, 2008 and 2009, the Company had no uncertain tax positions.
The provision for income taxes for 2009 and 2008, consists of the following:
| | | Years Ended December 31, | |
| | | 2009 | | | | 2008 | |
| | | | | | | | |
| Current Tax Benefit | $ | - | | | $ | - | |
| Deferred Tax Benefit | | (221,709 | ) | | | (40,509 | ) |
| | | | | | | | |
Total Income Tax Benefit | $ | (221,709 | ) | | $ | (40,509 | ) |
The Company’s provision for income tax expense (benefit) is equivalent to approximately 35.6% and 25.3% of the Company’s net income (loss) before taxes for the years ended December 31, 2009 and 2008, respectively. The effective tax rate differs from the statutory rate due to expenses that are recognized for book purposes but that are not deductible for Federal and state income tax purposes.
The Company has available at December 31, 2009, $529,071 in federal and $529,542 in state Net Operating Loss (NOL) carryforwards that may be applied against future taxable income and that expire in 2028 and 2029.
The Company’s deferred tax assets (liabilities) consist of the following components:
| | | December 31, | |
| | | 2009 | | | 2008 | |
| Deferred Tax Assets | | | | | | |
| Net Operating Loss Carryforwards | | $ | 206,338 | | | $ | 27,655 | |
| Amortization of Intangibles | | | 65,678 | | | | 12,854 | |
| | | | | | | | | |
| Total Deferred Tax Assets | | | 272,016 | | | | 40,509 | |
| | | | | | | | | |
| Deferred Tax Liabilities | | | - | | | | - | |
| Valuation Allowance | | | - | | | | - | |
| Net Deferred Tax Asset | | $ | 272,016 | | | $ | 40,509 | |
UNITED ESYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H — INCOME TAXES (CONT’D)
There is no valuation allowance for the deferred tax assets at December 31, 2009 or 2008, as management believes that it is more likely than not that the deferred tax assets will be realized, based on its estimate of income which will be taxable in the future.
The Company had no amount of interest and penalties recognized in the consolidated statements of operations for the years ended December 31, 2009 and 2008, respectively, nor any amount of interest and penalties payable recognized in the consolidated balance sheets as of December 31, 2009 and 2008, respectively.
NOTE I — 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. During 2008 and 2009, a total of 100,000 and 42,500 shares of non-qualified stock options were exercised. The options exercised in 2008 were options previously granted in 2005 to the CFO.
On August 20, 2008, the Board of Directors adopted the 2008 Incentive Stock Plan and granted at total of 1,157,000 options to employees of United. All of the options have an exercise price of $.05 per share and were fully vested as of the date of the grant. The options terminate five years from the date granted. None of these options have been exercised.
There were no options granted during 2009 and there was no compensation expense charged to operations related to stock options during 2009.
The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions used for options granted in 2008:
| Expected Volatility | 29.15% |
| Expected Term | 5.0 Years |
| Expected Dividends | $0.00 |
| Risk Free Rate | 3.79% |
| Weighted-Average Fair Value of Options Granted During 2008 | $.015 |
Compensation expense charged to operations for options granted in 2008 totaled $17,681. During 2009 and 2008, cash received upon exercise under the Company’s stock option plan totaled $1,275 and $3,000 respectively.
UNITED ESYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I — STOCK OPTIONS (Continued)
| Options | | Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| | | | | | | | | |
| Outstanding at January 1, 2009 | | 1,459,000 | | $.046 | | 7.52 | | $.00 |
| Granted | | - | | - | | | | |
| Exercised | | 42,500 | | $.03 | | | | |
| Forfeited or Expired | | - | | - | | | | |
| Outstanding at December 31, 2009 | | 1,416,500 | | $.046 | | 6.52 | | $.00 |
| Exercisable at December 31, 2009 | | 1,416,500 | | $.046 | | 6.52 | | $.00 |
The total intrinsic value for options exercised during 2009 was $638.
| Options | | Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| | | | | | | | | |
| Outstanding at January 1, 2008 | | 402,000 | | $.03 | | | | |
| Granted | | 1,157,000 | | $.05 | | | | |
| Exercised | | 100,000 | | $.03 | | | | |
| Forfeited or Expired | | - | | - | | | | |
| Outstanding at December 31, 2008 | | 1,459,000 | | $.046 | | 7.52 | | $.00 |
| Exercisable at December 31, 2008 | | 1,459,000 | | $.046 | | 7.52 | | $.00 |
The total intrinsic value for options exercised during 2008 was $2,000.
NOTE J – ISSUANCE OF RESTRICTED STOCK
In conjunction with the 2008 Incentive Stock Plan, the Board of Directors granted a total of 125,000 shares of restricted common stock to three of its key employees, none of which were officers or directors of the Company. These shares became fully vested upon the completion of the Company’s acquisition of NDS. Compensation expense charged to operations for issuance of restricted stock granted in 2008 totaled $6,250. There were no grants of common stock during 2009.
UNITED ESYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K — SIGNIFICANT CONCENTRATIONS
Cash
The Company maintains cash in financial institutions in excess of insured limits. The Company has not experienced any losses and does not believe that significant credit risk exists as a result of this practice.
Major Customers
During the year ended December 31, 2009, the Company had no customers that amounted to approximately 10% or more of the Company’s total revenue. During the year ended December 31, 2008, the Company had transactions with one customer that amounted to approximately 25.2% of the Company’s total revenue.
NOTE L — COMMITMENTS
Operating Leases
Effective August 22, 2008, in conjunction with the acquisition of NDS, the Company entered into a thirty-six month lease with the existing Lessor of the NDS office facilities in Roswell, Georgia, at a rate of $4,000 per month. The lease is automatically renewable for additional one year periods beyond the initial thirty-six month terms unless the Company as Lessee elects not to extend by providing written notice to the Lessor at least five days prior to the expiration of the initial term. Future minimum lease payments are as follows:
| Year | | Amount | |
| | | | |
| 2010 | | | 48,000 | |
| 2011 | | | 32,000 | |
| Total | | $ | 80,000 | |
On October 28, 2008, United exercised an option effective November 1, 2008, to extend its leased office facilities at its present location in Gulfport, Mississippi, for an additional three year term beginning at $2,200 per month on the effective date, and increasing by $150 per month after twelve months, and an additional $150 per month after twenty four months. Future minimum lease payments are as follows:
| Year | | Amount | |
| | | | |
| 2010 | | | 28,500 | |
| 2011 | | | 25,000 | |
| Total | | $ | 53,500 | |
Lease expense for the years ended December 31, 2009 and 2008, amounted to $78,850 and $39,900, respectively.
UNITED ESYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L — COMMITMENTS (Continued)
Employment Contracts
In connection with the Company’s acquisition of NDS, the Company entered into employment contracts with two key employees of NDS, each having a three-year term. The employment contracts address compensation and termination. Future payments associated with the employment contracts are as follows:
| Year | | Amount | |
| | | | |
| 2010 | | $ | 150,000 | |
| 2011 | | | 106,452 | |
| | | | | |
| Total | | $ | 256,452 | |
ACH Processing Agreement
On August 4, 2006, United entered into an ACH processing agreement that provided for the utilization of an internet based ACH processing system, inclusive of bank and processing fees. The term of the agreement is 60 months, and renewable for successive 12 month periods thereafter. If management elects to terminate this agreement during its initial term without cause, the agreement provides for a liquidation fee equal to the average monthly processing volume at termination times the number of months remaining in the agreement, subject to a maximum of $66,000. Future minimum payments associated with this agreement are as follows:
| Year | | Amount | |
| | | | |
| 2010 | | | 66,000 | |
| 2011 | | | 44,000 | |
| | | | | |
| | | $ | 110,000 | |
NOTE M — RELATED PARTY TRANSACTIONS
As disclosed in Note G, the Company has as of December 31, 2009 notes payable with minority shareholders and with an entity for which two minority shareholders serve on the board of directors.
During 2009 the Company obtained legal services from a firm for which two minority shareholders of the Company serve as partners. The amount paid to this firm during 2009 and 2008 totaled $1,417 and $2,331, respectively. In addition, the Company obtained legal services from a firm for which a minority shareholder serves as a partner. The total amount paid to this firm during 2009 and 2008 totaled $5,967 and $2,891, respectively.
UNITED ESYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N — EARNINGS PER SHARE
For earnings per share calculations, the weighted average number of common shares outstanding amounted to 34,335,875 and 23,816,940. For the years ended December 31, 2009 and 2008, there were outstanding options to purchase 1,416,500 and 1,459,000 shares, respectively at a weighted average price of $.046 and $.046 per share, respectively. For 2009 and 2008, the effect of dilutive stock options totaled 113,320 and 116,720 shares, respectively.
The following transaction occurred after December 31, 2009, which, had it taken place during fiscal 2009, would have changed the number of shares used in the computations of earnings per share: 5,072,500 common shares were issued in a private placement.
NOTE O – ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure is made in accordance with the requirements of Fair Value Topic of the ASC. Financial instruments are defined as cash and contractual rights and obligations that require settlement, directly or indirectly, in cash. In cases where quoted market prices are not available, fair values have been estimated using the present value of future cash flows or other valuation techniques. The results of these techniques are highly sensitive to the assumptions used, such as those concerning appropriate discount rates and estimates of future cash flows, which require considerable judgment. Accordingly, estimate presented herein are not necessarily indicative of the amounts the Company could realize in a current settlement of the underlying financial instruments. The Fair Value Topic excludes certain financial instruments and all non-financial instruments from its disclosure requirements. These disclosures should not be interpreted as representing an aggregate measure of the underlying value of the Company.
| | | December 31, 2009 | | | December 31, 2008 | |
| | | Carrying Amount | | | Fair Value | | | Carrying Amount | | | Fair Value | |
| | | | | | | | | | | | | |
| Financial Assets | | | | | | | | | | | | |
| Cash and Cash Equivalents | | $ | 228,213 | | | $ | 228,213 | | | $ | 366,844 | | | $ | 366,844 | |
| Restricted Cash | | | 271,624 | | | | 271,624 | | | | 353,702 | | | | 353,702 | |
| Financial Liabilities | | | | | | | | | | | | | | | | |
| Notes Payable | | $ | 5,032,425 | | | $ | 5,032,425 | | | $ | 5,335,658 | | | $ | 5,335,658 | |
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:
Cash and Cash Equivalents – The carrying amount of cash and cash equivalents approximates fair values.
Restricted Cash – The carrying amount of restricted cash approximates fair values.
Notes Payable – The carrying amount of notes payable approximates fair values.
UNITED ESYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P — SUBSEQUENT EVENTS
Management has evaluated subsequent events through the date that the financial statements were available to be issued, April 15, 2010, and determined the following:
As disclosed in its current report on Form 8-K filed on March 4, 2010, on February 28, 2010, the Company completed a private placement of its common stock and issued and sold 5,072,500 shares of common stock to a limited number of accredited and non-accredited investors for gross proceeds of $1,014,500. The shares were sold at a price of $0.20 per share. The offer and sale was conducted on behalf of the Company by a FINRA-licensed broker-dealer who served as placement agent in the offering and received a sales commission equal to 7% of the gross proceeds of the offering, or $71,015, and a financial advisory/management fee equal to 2% of the gross proceeds of the offering, or $20,290. The shares were offered and sold without registration under the Securities Act of 1933 in reliance upon the exemption provided by Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder, and may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements under the Securities Act. An appropriate legend was placed on the shares of common stock issued. On March 15, 2010, the Company utilized the net proceeds from this offering to reduce its outstanding principal balance of notes payable with Thermo Credit, LLC by $920,000.
On March 31, 2010, the Company executed an additional amendment to its loan agreement with Thermo Credit, LLC, which further extended the due date of the loan until June 30, 2010.
No subsequent events occurring after this date have been evaluated for inclusion in these financial statements.
F-23
