U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE |
| | SECURITIES EXCHANGE ACT OF 1934 |
| | For the fiscal year ended: DECEMBER 31, 2008 |
| | |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| | SECURITIES EXCHANGE ACT OF 1934 |
| | For transition period from _____ to _____ |
Commission File Number: 000-33053
FASTFUNDS FINANCIAL CORPORATION
(Name of Registrant in its charter)
| NEVADA | 87-0425514 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification Number) |
319 CLEMATIS STREET, SUITE 703, WEST PALM BEACH, FLORIDA 33401
(Address of principal executive offices)(Zip Code)
Issuer’s telephone number: (561) 514-9042
Securities registered under Section 12 (b) of the Exchange Act:
NONE
Securities registered under Section 12 (g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: ¨Yes xNo
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 (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 Days: xYes ¨No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer:
Large Accelerated Filer ¨ | Accelerated Filer ¨ |
Non-Accelerated Filer ¨ | Smaller Reporting Company x |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): ¨Yes xNo
The aggregate market value of the voting stock held by non-affiliates of the Registrant was $715,000 based on the last sale price of the Registrant's common stock as of the last business day of the Registrants’ most recently completed second fiscal quarter, ($0.16 per share as of June 30, 2008) as reported on the Over-the-Counter Bulletin Board.
The Registrant had 8,174,432 shares of common stock outstanding as of April 10, 2009.
Documents incorporated by reference: None
FASTFUNDS FINANCIAL CORPORATION
FORM 10-K
THIS REPORT MAY CONTAIN CERTAIN “FORWARD-LOOKING” STATEMENTS AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 OR BY THE SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH REPRESENT THE REGISTRANT’S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED TO, STATEMENTS CONCERNING THE REGISTRANT’S OPERATIONS, ECONOMIC PERFORMANCE, FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE OPERATIONAL PLANS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS “MAY”, “WILL”, “EXPECT”, “BELIEVE”, “ANTICIPATE”, “INTENT”, “COULD”, “ESTIMATE”, “MIGHT”, OR “CONTINUE” OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE REGISTRANT’S CONTROL, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY RELATED TO ACQUISITIONS, GOVERNMENTAL REGULATION, MANAGING AND MAINTAINING GROWTH, THE OPERATIONS OF THE COMPANY AND ITS SUBSIDIARIES, VOLATILITY OF STOCK PRICE AND ANY OTHER FACTORS DISCUSSED IN THIS AND OTHER REGISTRANT FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
| (a) | General development of business. |
FastFunds Financial Corporation (“FastFunds”, “FFFC” or the “Company”) is a holding company, organized in Nevada in 1985, formerly operating through its wholly owned subsidiary Chex Services, Inc. (“Chex”). Chex is a Minnesota corporation formed in 1992, and prior to the Asset Sale described and defined in the paragraph below, provided financial services, primarily check cashing, automated teller machine (ATM) access and credit and debit card advances, to customers predominantly at Native American owned casinos and gaming establishments. FastFunds previously existed under the name “Seven Ventures, Inc.” On June 7, 2004, a wholly owned subsidiary of Seven Ventures, Inc. merged with and into Chex (the "Merger”). In the Merger, Hydrogen Power, Inc. (“HPI”), exchanged its 100% ownership of Chex for 7,700,000 shares of the Company’s common stock; representing approximately 93% of the Company’s outstanding common stock immediately following the Merger. On June 29, 2004, the Company changed its name to FastFunds Financial Corporation.
On December 22, 2005, FastFunds and Chex entered into an Asset Purchase Agreement with Game Financial Corporation, pursuant to which FastFunds and Chex agreed to sell substantially all the assets of Chex (the “Asset Sale”). Such assets also represent substantially all of the operating assets of FastFunds on a consolidated basis. On January 31, 2006, FastFunds and Chex completed the Asset Sale for $14 million. Additionally, FastFunds and Chex entered into a Transition Services Agreement with Game Financial pursuant to which FastFunds and Chex agreed to provide certain services to Game Financial to ensure a smooth transition of the sale of the cash access financial services business. HPI agreed to serve as a guarantor of FastFunds and Chex’s performance obligations under the Transition Service Agreement.
On February 28, 2006, HPI (then known as Equitex, Inc.), held a special meeting of shareholders at which two proposals were approved authorizing the acquisition of Hydrogen Power, Inc. (“Old HPI”), through a newly formed wholly-owned Equitex subsidiary as well as certain related common stock issuances. Per the terms of the transaction, as amended, Equitex was obligated to deliver $5 million to Old HPI as a condition to close. On March 14, 2006, FastFunds loaned Equitex the $5 million (the “$5 Million Loan”) for one year at 10% per annum interest. As security for the $5 Million Loan, Equitex pledged to FastFunds all of the common stock of Old HPI. In addition, FastFunds is to receive a profit interest from the operations of Old HPI equal to 10% of the net profit of Old HPI, as defined in the relevant loan documents.
On January 2, 2007, pursuant to the terms of a Redemption, Stock Sale and Release Agreement (the “Redemption Agreement”) by and between HPI and the Company, we (i) redeemed 8,917,344 shares of our common stock held by HPI, (ii) acquired from HPI an aggregate of 5,000,000 shares of common stock of Denaris Corporation, a Delaware corporation (“Denaris”), (iii) acquired from HPI an aggregate of 1,000 shares of common stock of Key Financial Systems, Inc., a Delaware corporation (“Key Financial”), and (iv) acquired from HPI an aggregate of 1,000 shares of common stock of Nova Financial Systems, Inc., a Delaware corporation (“Nova Financial”). Denaris is now a majority owned subsidiary, and Key Financial and Nova Financial are wholly owned subsidiaries of FFFC. Denaris and Key Financial are inactive entities with no operating or intellectual property assets. Nova has limited activity as well as limited assets. The shares of common stock of each entity transferred to us pursuant to the Redemption Agreement constituted all of HPI holdings in each entity. In consideration of the redemption and acquisition of the shares of Denaris, Key Financial and Nova Financial, we released HPI from all outstanding payment obligations, including obligations under the $5 Million Note dated March 14, 2006. The outstanding balance on the $5 Million Note, including principal and interest accrued, as of the date of the Redemption Agreement was $5,402,398. The Company received a fairness opinion from an unaffiliated third party with respect to this transaction.
After the closing of the Redemption Agreement, HPI held 3,500,000 shares of FFFC common stock, constituting approximately 42.8% of FFFC’ s outstanding common stock at December 31, 2008. These shares have been pledged as collateral on certain notes of HPI. During 2008, as a result of the assumption of this debt by HPI Partners, LLC., (“HPIP”) and the subsequent foreclosure by the debt holders upon HPIP. HPIP owns the 3.5 million shares. The principal managers of HPIP are Messrs. Fong and Olson. As of December 31, 2008, we held 1,541,858 shares of HPI common stock, constituting approximately 5.2% of HPI common stock. Pursuant to the Redemption Agreement, the Company and HPI each provided the other certain registration rights relating to the common stock of such party held by the other party.
On January 18, 2008, the Company filed a complaint in the Superior Court of Washington in King County (the “Superior Court”). The complaint was filed by FastFunds Financial Corporation, Daniel Bishop, Barbara M. Schaper, HP Services LLC, VP Development Corporation, and Gulfstream Financial Partners, LLC (collectively, the “Plaintiffs”) against Dilbagh Singh Gujral, Ricky Gurdish Gujral, Virendra Chaudhary, Hydrofuels Technology, Inc. (“GHTI”) and Hydrogen Power, Inc. (collectively, the “Defendants”).
Messrs. Chaudhary and Dilawari are directors of HPI. GHTI is the majority shareholder of HPI. Ricky Gurdish Gujral is the former chief executive officer of HPI. The complaint alleges fraud, misappropriation of corporate opportunity and breach of fiduciary duty by the Defendants relating to the merger of Equitex, Inc. and Hydrogen Power, Inc., the Sublicense Agreement with GHTI, and payments to Ricky Gurdish Gujral. The complaint seeks the appointment of a receiver to take possession of the property and assets of the Company and to manage and operate the Company pending completion of the action. The complaint also seeks damages in the excess of $3,000,000, exemplary damages, attorney’s fees plus interest and costs and any other relief the court finds just and proper. On January 25, 2008, the Superior Court appointed a receiver of HPI with respect to HPI’s assets. Some assets have been recovered by the Receiver. One of the defendants has filed a counterclaim asserting that the action is frivolous; the Plaintiffs have denied the counterclaim in its entirety. GHTI has sought arbitration regarding ownership of certain patent applications and other intellectual property. GHTI was granted a stay of this case until the arbitration is complete.
In May 2008, FFFC signed an Agreement and Plan of Merger and Reorganization (the “ISI Merger”) and a related Addendum to acquire Industrial Systems, Inc. ("ISI"). ISI, founded in 1991 and based in Delta, Colorado, provides turn-key engineering procurement and construction services to the mining, energy and natural resources industries throughout the United States. The letter of intent calls for FFFC to acquire 100% of the outstanding securities of ISI in an all stock tax-free exchange. The terms of the definitive agreement call for the existing stockholders of ISI to own approximately 80% of the Company's common stock at closing of the transaction. Completion of the transaction is subject to FFFC having no liabilities on its balance sheet unless mutually agreed upon, as well as further due diligence by each party, and other customary pre-closing conditions, and was anticipated to occur in 2008. During 2008, the Company did not meet the conditions to close and could give no assurances that it will meet such conditions, accordingly the ISI Merger was not completed. The Company’s continue to talk and are hopeful of still completing a merger. If consummated, this transaction would likely be accounted for as public shell merger or a reverse acquisition with the Company being treated for accounting purposes as the accounting acquiree.
From time to time we evaluate opportunities for strategic investments or acquisitions that would complement our current services and products, enhance our technical capabilities or otherwise offer growth opportunities. As a result, acquisition discussions and, in some cases, negotiations may take place and future investments or acquisitions involving cash, debt or equity securities or a combination thereof may result. FastFunds Financial Corporation maintains its principal office at 319 Clematis Street, Suite 703, West Palm Beach, Florida. You can reach us by telephone at (514) 514-9042.
| (b) | Financial information about segments. |
Through January 31, 2006, we operated in one industry segment, cash disbursement services. We currently have limited operations.
| (c) | Narrative description of business. |
Prior to the Asset Sale, Chex operated at casinos, gaming and other retail establishments throughout the United States. At each of these locations Chex provided any one or a combination of: check cashing; credit/debit card cash advance systems; and ATM terminals. Chex either staffed the locations with its personnel or provided its products and services to the locations based upon the contract with the location.
Chex’s services were provided pursuant to the terms of financial services agreements entered into with each respective establishment. These agreements specified which cash access services were to be provided by Chex, the transaction fees to be charged by Chex to patrons for each type of cash access transaction, and the amount of compensation to be paid by Chex to the location. Pursuant to all of these agreements, Chex maintained the exclusive rights (with rare exception) to provide its services for the term of the contract.
Nova was formed to design, market and service credit card products aimed at the sub-prime market consisting mainly of consumers who may not qualify for traditional credit card products. Nova processes payments on a single remaining portfolio which provides the company with limited operations. Nova continues to receive residual payments on approximately 496 cards still active in the Merrick Bank portfolio at December 31, 2008.The Merrick Bank portfolio should continue to see a decline in active accounts in 2008.
Subsequent to the Asset Sale, the Company has not conducted limited operations and is the process of locating a business to acquire. The Company currently has no full-time employees.
ITEM 1A. RISK FACTORS
The purchase of shares of the Company’s common stock is very speculative and involves a very high degree of risk. An investment in the Company is suitable only for the persons who can afford the loss of their entire investment. Accordingly, investors should carefully consider the following risk factors, as well as other information set forth herein, in making an investment decision with respect to securities of the Company.
RISKS ASSOCIATED WITH OUR COMPANY AND HISTORY:
We have a limited operating business and therefore limited revenues. We have also posted significant losses in each of the past two fiscal years.
In January 2006, we sold substantially all of our operating business, owned by Chex, to Game Financial Corporation. The Company currently has a limited operating business and therefore limited revenues. In addition, we have posted significant losses in each of our past two fiscal years including $1,362,076 for the year ended December 31, 2008 and $3,912,298 for the year ended December 31, 2007. As a result, any investment in the Company must be considered purely speculative.
The Company’s balance sheet contains certain notes payable, which are currently in default/were due February 28, 2008.
Chex previously relied on promissory notes (the “Notes”) issued to private investors to provide operating capital for its business. As of December 31, 2008, the balance of the Notes was $2,090,719. These Notes were due in February 2007 and at that time the Company renewed $283,000 of the Promissory Notes on the same terms and conditions as previously existed. The Company has failed to pay interest and the principal amount of these notes. The Company received complaints filed from several of these note holders. The Company has not responded to these complaints and accordingly the plaintiffs were awarded default judgments. In April 2007 the Company, through a financial advisor,
restructured $1,825,000 of the Notes (the “Restructured Notes”). The Restructured Notes carry a stated interest rate of 15% and matured on February 28, 2008. The Company has not paid the interest on the Notes since June 30, 2007 and did not repay the Notes on their maturity date and does not currently have sufficient capital to repay the Notes. In January 2008, the Company received a complaint from the financial advisor (acting as agent to the holders of the Restructured Notes) and the holders of the Restructured Notes. The claim is seeking $1,946,250 plus per diem interest beginning January 22, 2008 at the rate of twenty percent (20%) per annum, plus $37,000 due the financial advisor for unpaid fees. The claim is currently in litigation and some of the plaintiffs have filed a motion for summary judgment and a motion for sanctions for failure of certain witnesses to appear for depositions.
Chex is a guarantor of certain debt of HPI, and the Company’s entire investment in Chex (i.e., its ownership of all outstanding Chex stock) is subject to a security interest securing such obligation. Furthermore, all of the assets of Chex are subject to a security interest for the same debt.
In March 2004, HPI closed on $5 million of debt financing and issued convertible promissory notes in that principal amount to two financial institutions (the “Lenders”). The proceeds from the promissory notes were immediately thereafter loaned to Chex. The promissory notes are collateralized, among other things, by all of the assets of Chex, and by the 3,500,000 million shares of Company common stock owned by HPI. In conjunction with the Asset Sale, the holders of the promissory notes consented to the sale of certain assets that secured their notes. In contemplation of the Redemption Agreement described above, on December 29, 2006, HPI and the Company obtained the consent of the Lenders to complete the transactions contemplated by the Redemption Agreement. Contemporaneously with receipt of the consent, HPI and the Company entered into a Note and Security Amendment Agreement dated December 29, 2006 with the Lenders, pursuant to which it was agreed to amend certain terms of the Convertible Promissory Note dated March 8, 2004 in favor of Lenders in the principal amount of $5,000,000 to increase the interest rate applicable to the Convertible Promissory Notes from 7% per annum to 10% per annum and the default interest rate from 10% to 13%. Accordingly, if HPI defaults on the obligations specified under the promissory notes, and if Chex cannot cure such defaults, the Company’s remaining assets could be lost.
We require additional financing to complete our proposed merger with ISI, but we are uncertain whether such financing will be available to us.
We will require additional capital to continue or to expand our business plans. We have identified a potential candidate business with which to merge, however, we cannot be certain that business will have revenues from operations that will generate cash flow sufficient to finance our operations and growth thereafter. In addition, we require additional financing to complete the potential merger to eliminate our current debt, or for working capital purposes to operate our business both now, and in the future, including any operations following a successful acquisition, if any.
Additional financing could be sought from a number of sources, including but not limited to additional sales of equity or debt securities, or loans from banks, other financial institutions or affiliates of the Company. If additional funds are raised by the issuance of our equity, then the ownership interest of our existing stockholders will be diluted. If additional funds are raised by the issuance of debt or other equity instruments, we may become subject to certain operational limitations (i.e., negative operating covenants), and such securities may have rights senior to those of the holders of our existing common stock. It is also possible that financing will not be available to us on terms acceptable to us, if at all. If adequate funds are not available on acceptable terms, we may be unable to fund our business including the potential acquisition of an operating company.
There are currently outstanding securities convertible into or exchangeable for an aggregate of 4,079,280 shares of our common stock which, if converted or exchanged, will substantially dilute our existing stockholders.
The Company currently has outstanding notes and securities convertible into or exchangeable for an aggregate of 4,079,280 shares of common stock under certain conditions. In addition, the effective conversion and exercise prices of such securities significantly lower than the current market value of our common stock. If these securities are converted into or exchanged for common stock, their issuance would have a substantial dilutive effect on the percentage ownership of our current stockholders. These securities consist of: (i) outstanding warrants to purchase an aggregate of 189,000 shares of our common stock at a purchase price of $0.10 per share, which were originally issued to HPI in connection with the Merger; (ii) options to purchase 330,000 shares of our common stock at an average purchase price of $1.03 per share; and (iii) warrants to purchase an aggregate of 3,560,280 shares of our common stock at a weighted average purchase price of $0.95 per share.
Our common stock trades only in an illiquid trading market, which generally results in lower prices for our common stock.
Trading of our common stock is conducted on the Over-The-Counter Bulletin Board. This has an adverse effect on the liquidity of our common stock, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and the lack of security analysts’ and the media’s coverage of our Company and its common stock. This may result in lower prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid and asked prices for our common stock.
We have not paid dividends to date, and have no intention of paying dividends to our stockholders.
To date, we have not paid any cash dividends and do not anticipate the payment of cash dividends in the foreseeable future. Accordingly, the only return on an investment in our common stock, if any, may occur upon a subsequent sale of the shares of common stock.
FastFunds leases approximately 1,300 square feet for its executive office in West Palm Beach, Florida, which is adequate for its current needs. The current minimum lease payment is approximately $2,900 per month through January 31, 2010, when it expires. Pursuant to the terms of the lease, FastFunds is also responsible for its pro-rata share of taxes, operating expenses and improvement costs.
ITEM 3. LEGAL PROCEEDINGS.
We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters may have a material adverse impact either individually or in the aggregate on our consolidated results of operations, financial position or cash flows.
In January 2008 the Company and three guarantors received a complaint filed by Grace Capital, LLC (as agent) and individual noteholders in the Fourth Judicial District in the County of Hennepin, in the State of Minnesota. The complaint seeks payment of principal and interest of $1,946,250 as of January 22, 2008, plus default per diem interest at the rate of twenty percent (20%) per annum and $37,000 for unpaid fees to Grace Capital, LLC.
Pursuant to the terms of the Asset Sale, the Company owed Game Financial Corporation (“Game”) approximately $300,000. The parties agreed to settle the balance due for $275,000. The Company didn’t make any payments as stipulated in the settlement, and subsequently, Game filed a complaint against the Company. The Company has agreed to a judgment of $275,000 plus interest and attorney fees for a total of $329,146.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is not listed on any exchange; however, market quotes for the Company’s common stock (under the symbol FFFC) may be obtained from the Over-the-Counter Bulletin Board Service. The bulletin board service is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter securities. The table below states the quarterly high and low bid prices for the common stock as reported by the bulletin board service. However, such Over-the-Counter market quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and may not represent actual transactions.
| | | | |
| Quarter Ended | High | | Low |
| 2008 | | | |
| March 31, 2008 | $0.51 | | $0.11 |
| June 30, 2008 | $0.23 | | $0.11 |
| September 30, 2008 | $0.11 | | $0.05 |
| December 31, 2008 | $0.07 | | $0.006 |
| | | | |
| Quarter Ended | High | | Low |
| 2007 | | | |
| March 31, 2007 | $0.97 | | $0.46 |
| June 30, 2007 | $0.80 | | $0.40 |
| September 30, 2007 | $0.57 | | $0.26 |
| December 31, 2007 | $0.57 | | $0.13 |
The number of record holders of our common stock as of April 10, 2009, was 145 according to our transfer agent. This figure excludes an indeterminate number of shareholders whose shares are held in “street” or “nominee” name.
FastFunds has not declared nor paid cash dividends on our common stock during the previous two fiscal years, nor do we anticipate paying any cash dividends in the foreseeable future. We currently intend to retain any future earnings to fund our limited operations.
| (d) | Securities Authorized for Issuance Under Equity Compensation Plans. |
We have the following securities authorized for issuance under our equity compensation plans as of December 31, 2008, including options outstanding or available for future issuance under our 2004 Stock Option Plan.
| Equity Compensation Plan Information |
| | | | | | | |
| Plan category | | 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 plan |
| | | (a) | | (b) | | (c) |
| | | | | | | |
| Equity compensation plans not approved by security holders | | 330,000 | | $ 1.03 | | 1,345,000 |
| | | | | | | |
| Total | | 330,000 | | $ 1.03 | | 1,345,000 |
| | Recent Sales of Unregistered Securities |
None.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto for the years ended December 31, 2008, 2007 and 2006. The financial statements presented for the year ended December 31, 2008, 2007 and 2006 include FastFunds, Chex, Collection Solutions and FastFunds International Limited. Key, Nova and Denaris are included beginning January 2, 2007.
In light of the foregoing, and the Company’s sale of substantially all of its assets in January 2006, the historical data presented below is not indicative of, and therefore, not useful for purposes of predicting future results. You should read this information in conjunction with the audited consolidated financial statements of the Company, including the notes to those statements (Item 8), and the following “Management’s Discussion and Analysis of Financial Conditions and Results of Operations”.
The Company’s financial statements for the year ended December 31, 2008 have been prepared on a going concern basis, which contemplates the realization of its remaining assets and the settlement of liabilities and commitments in the normal course of business. The Company has incurred significant losses since its inception and has a working capital deficit of $5,075,249, and an accumulated deficit of $17,427,588 as of December 31, 2008. Moreover, it presently has no ongoing business operations or sources of revenue, and little available resources with which to obtain or develop new operations.
These factors raise substantial doubt about the Company’s ability to continue as a going concern. There can be no assurance that the Company will have adequate resources to fund future operations or that funds will be available to the Company when needed, or if available, will be available on favorable terms or in amounts required by the Company. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
In May 2008, FFFC signed an Agreement and Plan of Merger and Reorganization (the “ISI Merger”) and a related Addendum to acquire Industrial Systems, Inc. ("ISI"). ISI, founded in 1991 and based in Delta, Colorado, provides turn-key engineering procurement and construction services to the mining, energy and natural resources industries throughout the United States. The letter of intent calls for FFFC to acquire 100% of the outstanding securities of ISI in an all stock tax-free exchange. The terms of the definitive agreement call for the existing stockholders of ISI to own approximately 80% of the Company's common stock at closing of the transaction. Completion of the transaction is subject to FFFC having no liabilities on its balance sheet unless mutually agreed upon, as well as further due diligence by each party, and other customary pre-closing conditions, and was anticipated to occur in 2008. During 2008, the Company did not meet the conditions to close and could give no assurances that it will meet such conditions, accordingly the ISI Merger was not completed. The Company’s continue to talk and are hopeful of still completing a merger. If consummated, this transaction would likely be accounted for as public shell merger or a reverse acquisition with the Company being treated for accounting purposes as the accounting acquiree.
| (a) | Liquidity and Capital Resources |
For the year ended December 31, 2008, net cash used in operating activities was $291,520 compared to $521,898 for the year ended December 31, 2007. Net loss for the year ended December 31, 2008 was $1,362,076 compared to a net loss of $3,912,298 for the year ended December 31, 2007. The significant activity in the net loss in 2008 includes selling general and administrative expenses of $872,068 and interest expense of $528,827. The 2007 loss includes the permanent impairment of the HPI common stock of $1,206,000, stock based compensation expense of $912,551, interest expense of $495,486 and $245,571 and $240,630 of debt restructuring charges and depreciation and amortization, respectively. Non-cash adjustments to the net loss for the year ended December 31, 2008 were approximately $262,000 and consisted primarily of depreciation and amortization of $138,000, stock-based compensation of $119,000 and non cash interest expense of $5,000. Non-cash adjustments to the net loss for the year ended December 31, 2007 was $2,299,761 and included $1,206,000 for the permanent impairment of the HPI common stock, $912,551 for stock based compensation expense, $240,630 of depreciation and amortization, deferred income taxes of $75,000 and $64,711 of other non-cash expenses.
Cash provided by investing activities for the year ended December 31, 2008 was $100,000 compared to $207,363 for the year ended December 31, 2007. Net cash provided in 2008 was the result of $100,000 received in payments on notes receivable. The 2007 activity was the result of $255,000 received in payments on notes and interest receivable, offset by $50,000 in notes issued.
Cash provided by financing activities for the year ended December 31, 2008 was $191,577 compared to $261,914 for the year ended December 31, 2007. The 2008 activity includes the Company receiving $196,850 upon the issuance of notes payable, and the Company repaying $2,281 of notes payable. The 2007 activity includes the Company receiving $323,172 upon the issuance of notes payable. The Company also repaid $19,000 of convertible notes and notes payable and incurred deferred loan costs of $45,250.
For the year ended December 31, 2008, net cash increased $47 compared to a net cash decrease of $52,711 for the year ended December 31, 2007. Ending cash at December 31, 2008, was $536 compared to $479 at December 31, 2007.
Other sources available to us that we may utilize include the sale of equity securities as well as the exercise of stock options and/or warrants, all of which may cause dilution to our stockholders. We may also be able to borrow funds from related and/or third parties.
| (b) | Results of operations. |
Critical Accounting Policies and Estimates
Preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheets and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Moreover, except as described below, we do not employ any critical accounting policies that are selected from among available alternatives or require the exercise of significant management judgment to apply.
We believe that the following are some of the more critical accounting policies that currently affect our financial condition and results of operations:
| 1) | stock based compensation; and, |
| 2) | income taxes, deferred taxes |
Stock Based Compensation
Share-based compensation expense is based on the estimated fair value at the grant date of the portion of share-based payment awards that are ultimately expected to vest during the period. The grant date fair value of stock-based awards to employees and directors is calculated using the Black-Scholes option pricing model. The assumptions used in the Black-Scholes option pricing model, particularly the Company’s estimates of expected term and volatility, are based in some respects on management’s judgments and historical trends. Compensation expense for the share-based payment awards granted subsequent to December 31, 2005, are based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).
Income Taxes, Deferred Taxes
The operations of the Company for periods subsequent to the acquisition of the Company by HPI (then known as Equitex) and through August 2004, at which time HPI’s ownership interest fell below 80% are included in consolidated federal income tax returns filed by HPI. Subsequent to August 2004 and through January 29, 2006, the Company will file a separate return. As of January 30, 2006, HPI’s ownership interest again exceeded 80% and the operations of the Company will be included in a consolidated federal income tax return from that date through October 29, 2006 when the ownership fell below 80%. As of October 30, 2006, the Company will be filing separate income tax returns. For financial reporting purposes, the Company’s provision for income taxes has been computed, and current and deferred taxes have been allocated on a basis as if the Company has filed a separate income tax return for each year presented. Management assesses the realization of its deferred tax assets to determine if it is more likely than not that the Company's deferred tax assets will be realizable. The Company adjusts the valuation allowance based on this assessment.
In prior years the Company recorded a valuation allowance to reduce its deferred tax assets to the amount, if any, then deemed more likely than not to be realized. The Company considers future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. During 2006, the Company removed its deferred tax valuation allowance and utilized the remainder of its deferred tax assets related to net operating losses to offset the taxable gain resulting from the Asset Sale. In addition, during 2006 the Company utilized a portion of HPI’s net operating losses to offset the remainder of 2006 taxable income resulting in a payable due to HPI. See RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS below for a discussion of the likely future effect of adopting Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes: an interpretation on FASB Statement No. 109.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. This statement, as it relates to financial assets and liabilities, is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. On February 12, 2008, the FASB issued FSP No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which delayed the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis, until January 1, 2009 for calendar year-end entities. Upon adoption, the provisions of SFAS No. 157 are to be applied prospectively with limited exceptions. The adoption of SFAS No. 157 is not expected to have a material impact on our Consolidated Financial Statements.
The Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes” - an Interpretation of FASB Statement No. 109 (“FIN 48”) on January 1, 2007. There were no unrecognized tax benefits and there was no effect on the Company’s financial condition or results of operations as a result of implementing FIN 48. The Company files income tax returns in the U.S. federal jurisdiction and various state and jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before 1995, and state tax examinations for years before 1995. Management does not believe there will be any material changes in our unrecognized tax positions over the next 12 months. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, there was no accrued interest or penalties associated with any unrecognized tax benefits, nor were any interest expense recognized during the quarter.
As of January 1, 2007, the Company also adopted SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” The adoption of SFAS No. 155 did not have a material impact on our Consolidated Financial Statements.
In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Financial Liabilities”, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company did not adopt SFAS No. 159 on any individual instrument as of January 1, 2008.
In May 2007, the FASB issued FSP FIN No. 46R-7, "Application of FASB Interpretation No. 46(R) to Investment Companies." FSP FIN No. 46R-7 amends the scope of the exception to FIN No. 46R to state that investments accounted for at fair value in accordance with the specialized accounting guidance in the American Institute of Certified Public Accountants Audit and Accounting Guide, Investment Companies, are not subject to consolidation under FIN No. 46R. This interpretation is effective for fiscal years beginning on or after December 15, 2007. The Company does not expect the adoption of FSP FIN No. 46R-7 to have a material impact on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R is a revision to SFAS No. 141 and includes substantial changes to the acquisition method used to account for business combinations (formerly the “purchase accounting” method), including broadening the definition of a business, as well as revisions to accounting methods for contingent consideration and other contingencies related to the acquired business, accounting for transaction costs, and accounting for adjustments to provisional amounts recorded in connection with acquisitions. SFAS No.141R retains the fundamental requirement of SFAS No. 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141R is effective for periods beginning on or after December 15, 2008, and will apply to all business combinations occurring after the effective date. The Company is currently evaluating the requirements of SFAS No. 141R.
The FASB also issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – an amendment of Accounting Research Bulletin No. 51, Consolidated Financial Statements” in December 2007. This Statement amends ARB No. 51 to establish new standards that will govern the (1) accounting for and reporting of non-controlling interests in partially owned consolidated subsidiaries and (2) the loss of control of subsidiaries. Non-controlling interest will be reported as part of equity in the consolidated financial statements. Losses will be allocated to the non-controlling interest, and, if control is maintained, changes in ownership interests will be treated as equity transactions. Upon a loss of control, any gain or loss on the interest sold will be recognized in earnings. SFAS No. 160 is effective for periods beginning after December 15, 2008. The Company is currently evaluating the requirements of SFAS No. 160.
The FASB also issued SFAS No. 161 “Disclosures about Derivatives Instruments and Hedging Activities” in March 2008. This statement requires enhanced disclosure about an entities derivative and hedging activities and thereby improves the transparency of financial reporting. This statement is effective for financial statements for fiscal years and interim periods beginning after November 15, 2008, with earlier application encouraged. The Company is currently evaluating the requirements of SFAS No. 161.
Results of operations
Results of continuing operations for the year ended December 31, 2008 vs. December 31, 2007
REVENUES
Total revenues for 2008 were $78,693 compared to $91,587 for 2007. Revenues for the year ended December 31, 2008 and 2007 consist of credit card income on Nova’s remaining credit card portfolio.
OPERATING EXPENSES
Operating expenses were $39,874 for the year ended December 31, 2008 compared to $58,173 for 2007. The operating expenses for the year ended December 31, 2008 and 2007 primarily consisted of expenses related to third party servicing fees of Nova’s remaining credit card portfolio.
CORPORATE OPERATING (INCOME) EXPENSES
Corporate operating expenses for 2008 were $854,124 and $2,055,420 for 2007. The expenses were comprised of the following:
| | | 2008 | | | 2007 | |
| | | | | | | |
| Salaries and benefits | | | $51,546 | | | | $52,069 | |
| Stock-based compensation | | | 119,200 | | | | 912,551 | |
| Accounting, legal and consulting | | | 629,453 | | | | 552,154 | |
| Travel and entertainment | | | 3,591 | | | | 11,773 | |
| Advertising | | | 645 | | | | - | |
| Depreciation and amortization | | | 2,743 | | | | 11,304 | |
| Derivative liability expense (income) | | | - | | | | 368,499 | |
| Other | | | 64,890 | | | | 147,070 | |
| | | | | | | | | |
| | | | $872,068 | | | | $2,055,420 | |
Salaries and related costs remained consistent for our one employee for 2008 compared to the year ended December 31, 2007. This employee was terminated in March 2009.
Accounting, legal and consulting expenses increased for the year ended December 31, 2008. The increase for the year ended December 31, 2008 was primarily as a result of increases in legal fees associated with certain law suits the Company is defending.
Other costs included in corporate operating expenses decreased for the year ended December 31, 2008 compared to the year ended December 31, 2007.
Stock based compensation expense for 2008 consisted of amortization of costs related to the Restructured Notes. Stock based compensation expense of $912,551 for the year ended December 31, 2007 consisted of the amortization of warrants issued related to guaranty fees and other costs related to the Restructured Notes and $39,151 related to options issued to directors and officers.
OTHER INCOME (EXPENSE)
Other expense, net for the year ended December 31, 2008 was $528,827 compared to expenses of $1,889,692 for the year ended December 31, 2007. Included in this for the year ended December 31, 2007 was loss on debt extinguishment costs of $245,571. Due to the permanent impairment of the HPI common stock, the Company also expensed $1,206,000 for the year ended December 31, 2007. Interest expense for the year ended December, 2008 and 2007 is summarized as:
| | | 2008 | | | 2007 | |
| | | | | | | |
| Beneficial conversion features | | | - | | | | $168,236 | |
| Notes payable to individual investors | | | $528,827 | | | | 327,250 | |
| | | | | | | | | |
| | | | $528,827 | | | | $495,486 | |
There was no Interest income for the year ended December 31, 2008 compared to $57,365 for the year ended December 31, 2007.
INCOME TAX EXPENSE
There was no income tax expense recorded for the year ended December 31, 2008 and 2007.
Results of operations
Results of continuing operations for the year ended December 31, 2007 vs. December 31, 2006
REVENUES
Total revenues for 2007 were $91,587 compared to $2,192,382 for 2006. Revenues for the year ended December 31, 2007 consist of credit card income on Nova’s remaining credit card portfolio. Effective January 31, 2006, the Company sold substantially all of its assets and accordingly, the prior year’s results reflect one-month of fees from providing financial services of $1,714,882, as well as $477,500 of fees received under the TSA from the buyer of the assets.
OPERATING EXPENSES
Operating expenses were $58,173 for the year ended December 31, 2007 compared to $1,200,185 for 2006. The operating expenses for the year ended December 31, 2007 primarily consisted of expenses related to third party servicing fees of Nova’s remaining credit card portfolio. Chex location expenses were $1,200,185 for 2006. The expense is for one-month of activity as a result of the sale of substantially all of the assets that were generating revenues and their associated costs at January 31, 2006.
CORPORATE OPERATING (INCOME) EXPENSES
Corporate operating expenses for 2007 were $2,055,420 and $3,680,045 for 2006. The expenses were comprised of the following:
| | | 2007 | | | 2006 | |
| | | | | | | |
| Salaries and benefits | | | $52,069 | | | | $465,125 | |
| Stock-based compensation | | | 912,551 | | | | 355,000 | |
| Accounting, legal and consulting | | | 552,154 | | | | 1,102,345 | |
| Travel and entertainment | | | 11,773 | | | | 66,967 | |
| Advertising | | | - | | | | 3,446 | |
| Depreciation and amortization | | | 11,304 | | | | 351,710 | |
| Provision for valuation allowances and bad debt expense | | | - | | | | 478,184 | |
| Derivative liability expense (income) | | | 368,499 | | | | (9,099 | ) |
| Other | | | 147,070 | | | | 866,367 | |
| | | | | | | | | |
| | | | $2,055,420 | | | | $3,680,045 | |
Corporate operating expenses for 2006 include Chex’s Minneapolis administrative office which through January 31, 2006, supported the operating locations and was closed on May 31, 2006.
Salaries and related costs decreased significantly for 2007 compared to the year ended December 31, 2006 period primarily as a result of the elimination of the Minneapolis administrative staff during the second quarter of 2006. The Company had one fulltime employee for 2007. As of May 31, 2006, the Company vacated that office and will not be incurring any future staffing costs related to the Chex operations.
Accounting, legal and consulting expenses decreased for the year ended December 31, 2007. The decrease for the year ended December 31, 2007 was primarily as a result of decreases in consulting fees of approximately $743,000, of which approximately $725,000 were for costs associated with the refinancing of investor notes. The 2006 consulting costs related to the refinancing were primarily comprised of $134,972 of cash, $224,215 of HPI common stock and the issuance of 436,206 FastFunds warrants to purchase common stock at $1.00 per share, valued at $355,000 under the Black-Scholes option pricing method. In addition, FFFC has entered into consulting agreements with a financial advisor and individuals who provide various consulting services to the Company. These continuing agreements require the Company to pay approximately $15,000 per month. There were also decreases of approximately $145,000 and $47,000, respectively for professional fees and director fees for the year ended December 31, 2007 compared to the year ended December 31, 2006.
In 2006, the Company decreased the valuation allowance on a customer receivable that previously had been fully provided for as the Company negotiated a settlement with the customer for $275,000. The Company received $135,000 in July 2006 and $140,000 was paid in January 2007. The valuation allowance on a related party receivable (including interest of $63,392) and a note receivable was increased by $268,392 and $50,000, respectively during the second quarter of 2006. Additionally, approximately $300,000 of bad debt expense related to the settlement of receiving $1.2 million shares of HPI common stock for amounts owed, and the write-off of a stock subscription receivable of $135,000 as part of a settlement.
Other costs included in corporate operating expenses decreased for the year ended December 31, 2007 compared to the year ended December 31, 2006.
Stock based compensation expense of $912,551 for the year ended December 31, 2007 consisted of the amortization of warrants issued related to guaranty fees and other costs related to the Restructured Notes and $39,151 related to options issued to directors and officers. The expense for the year ended December 31, 2006 of $355,000 resulted from the issuance of 436,206 warrants to purchase shares of the Company’s common stock at $1.00 per share, valued at $355,000 under the Black-Scholes option pricing model.
OTHER INCOME (EXPENSE)
Other expense, net for the year ended December 31, 2007 was $1,889,692 compared to expenses of $2,010,754 for the year ended December 31, 2006. Included in this for the year ended December 31, 2007 was loss on debt extinguishment costs of $245,571 compared to $1,236,949 for the year ended December 31, 2006. Included in other expenses for the year ended December 31, 2006, was $670,000 of costs related to the extinguishment of convertible notes payable due from third parties in exchange for the issuance of 180,000 shares of parent company common stock. In addition, the Company recorded $493,067 of expense related to the settlement of $200,000 of convertible debt. The settlement terms stipulate a registration rights penalty clause and a price protection clause whereby HPI must reimburse the former debt holders if the market price of the HPI common stock issued to them in the settlement is below $4.00 per share at the time they sell the stock. As a result, the Company has recorded a liability of $493,067, of which $450,000 at December 31, 2006 represented the difference between the market value of the shares issued as of December 31, 2006 and the $4.00 stated in the settlement agreement, and costs incurred due to late registration of the 180,000 shares of common stock. Due to the permanent impairment of the HPI common stock, the Company also expensed $1,206,000 for the year ended December 31, 2007. Interest expense for the year ended December, 2007 and 2006 is summarized as:
| | | 2007 | | | 2006 | |
| | | | | | | |
| Beneficial conversion features | | | $168,236 | | | | $586,521 | |
| HPI $5 million note payable | | | - | | | | 17,533 | |
| Notes payable to individual investors | | | 327,250 | | | | 491,169 | |
| Amortization of note discounts | | | - | | | | 242,377 | |
| Other | | | - | | | | 501 | |
| | | | | | | | | |
| | | | $495,486 | | | | $1,338,101 | |
Interest income decreased to $57,365 for the year ended December 31, 2007 compared to $564,296 for the year ended December 31, 2006. The decrease for the year ended December 31, 2007 was due primarily to the interest income in 2006 of approximately $400,000 recorded on the $5.0 million HPI Note issued in March 2006 and interest income of $164,463 on cash balances during 2006.
INCOME TAX EXPENSE
There was no income tax expense recorded for the years ended December 31, 2008 and 2007. Income tax expense for the year ended December 31, 2006 was $856,913. The 2006 amount is primarily related to $851,000 the Company recorded as deferred income tax expense as a result of the Asset Sale in January 2006. This expense represents the use of HPI’s net operating losses, as the Company does not have sufficient loss carryforwards available to offset the total taxable gain on the Asset Sale.
OFF BALANCE SHEET ARRANGEMENTS
None
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and a decline in the stock market. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. The Company has limited exposure to market risks related to changes in interest rates. The Company does not currently invest in equity instruments of public or private companies for business or strategic purposes.
The principal risks of loss arising from adverse changes in market rates and prices to which the Company and its subsidiaries are exposed relate to interest rates on debt. The Company has only fixed rate debt. The Company has $2,589,366 of debt outstanding as of December 31, 2008, of which $2,090,719 has been borrowed at fixed rates ranging from 10% to 15%. This fixed rate debt is subject to renewal quarterly or annually and was due February 28, 2008.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements are listed under Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Effective March 10, 2009, we appointed the registered independent public accounting firm of Hawkins Accounting as our independent accountants for the fiscal year ending December 31, 2008.
Sherb & Company (“Sherb”) was dismissed effective March 10, 2009, and notified of their dismissal on that date. The decision to dismiss Sherb was made by our board of directors.
The only year for which Sherb was our auditor, and the interim periods subsequent to December 31, 2007, there have been no disagreements with Sherb on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure or any reportable events.
Sherb’s report on our consolidated financial statements for the year ended December 31, 2007, the only year for which Sherb audited our financial statements, contained an uncertainty paragraph explaining we had sold substantially all of the assets of a wholly-owned subsidiary that previously conducted most of our business operations and that event as well as our history of significant recurring losses raised substantial doubt about our ability to continue as a going concern. With the exception of the foregoing, Sherb’s audit reports on our consolidated financial statements for the fiscal year ended December 31, 2007, did not include an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During the two most recent fiscal years through March 10, 2009, we did not consult with Hawkins Accounting regarding either (i) the application of accounting principles to a specific transaction, either contemplated or proposed; or the type of audit opinion that might be rendered on our financial statements and neither a written report was provided to us nor oral advice was provided to us that Hawkins Accounting concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K, or a reportable event, as that term is defined in Item 304 (a)(1)(v) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
A review and evaluation was performed by the Company's management, including the Company's Acting Chief Executive Officer (the "CEO") who is also the Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that review and evaluation, the CEO /CFO has concluded that as of December 31, 2008 disclosure controls and procedures, were effective at ensuring that the material information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported as required in the application of SEC rules and forms.
Management’s Report on Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a set of processes designed by, or under the supervision of, a company’s principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
| • | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; |
| • | Provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| • | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statement. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our CEO/CFO has not evaluated the effectiveness of our internal control over financial reporting as described in Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report based upon criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) due to the fact that the we do not have the personnel resources or technological infrastructure in place to perform the evaluation. Based upon our management’s discussions with our auditors and other advisors, our CEO/CFO believe that, during the period covered by this report, such internal controls and procedures were not effective as described below.
Due to the small size and limited financial resources, the Company’s administrative assistant and the acting chief executive officer are the only individuals involved in the accounting and financial reporting. As a result, there is no segregation of duties in the accounting function, leaving all aspects of financial reporting and physical control of cash in the hands of the same individual, our acting chief executive officer. This lack of segregation of duties represents a material weakness. We will continue periodically review our disclosure controls and procedures and internal control over financial reporting and make modifications from time to time considered necessary or desirable.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
| | ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
| (a)(b)(c) | Identification of directors, executive officers and certain significant persons |
| Name | | Age | | Offices Held | | Length of service |
| | | | | | | |
| Henry Fong | | 72 | | Chairman | | Since June 2004 |
| | | | | | | |
| Thomas B. Olson | | 43 | | Secretary | | Since June 2004 |
| | | | | | | |
| Barry Hollander | | 51 | | Acting Chief Executive Officer | | Since January 2007 |
Our directors hold office until the next annual meeting of the stockholders and until their respective successors have been elected and qualified. Officers are appointed by our Board of Directors and hold office until their successors are duly elected and qualified.
No arrangement exists between any of the above officers and directors pursuant to which any one of those persons was elected or appointed to such office or position.
Not applicable.
HENRY FONG
Mr. Fong became the Company’s chairman and chief executive officer upon the effectiveness of the Merger. In July 2004, Mr. Graham Newall was hired as the chief executive officer. Mr. Fong has served in a variety of roles for other public corporations. Mr. Fong has been the president, treasurer and a director of Equitex from its inception in January 1983 to January 2007. Mr. Fong has been president and a director of Equitex 2000, Inc. since its inception in 2001. Mr. Fong has been President and a Director of China Nuvo Solar Energy, Inc. since March 2002. China Nuvo Solar Energy, Inc. is an alternative energy company., that is publicly traded. Mr. Fong has been president and a director of Inhibiton Therapeutics, Inc. since its inception in May 2004. Inhibiton Therapeutics, Inc. is a publicly traded company performing research and development on new cancer therapies. From December 2000 to January 2002, Mr. Fong was a director of Popmail.com, Inc., a publicly traded Internet marketing company. From 1959 to 1982 Mr. Fong served in various accounting, finance and budgeting positions with the Department of the Air Force. During the period from 1972 to 1981 he was assigned to senior supervisory positions at the Department of the Air Force headquarters in the Pentagon. In 1978, he was selected to participate in the Federal Executive Development Program and in 1981, he was appointed to the Senior Executive Service. In 1970 and 1971, he attended the Woodrow Wilson School, Princeton University and was a Princeton Fellow in Public Affairs. Mr. Fong received the Air Force Meritorious Civilian Service Award in 1982. Mr. Fong has passed the uniform certified public accountant exam. In March 1994, Mr. Fong was one of twelve CEOs selected as Silver Award winners in FINANCIAL WORLD magazine’s corporate American “Dream Team.”
THOMAS B. OLSON
Mr. Olson became the Company’s secretary upon the effectiveness of the Merger. Mr. Olson also served as secretary of Equitex from January 1988 to April 2007, and has been a director of Chex since May 2002. Since March 2002, Mr. Olson has been the secretary of China Nuvo Solar Energy, Inc., a publicly traded alternative energy company. Mr. Olson has been Secretary of Equitex 2000, Inc. since its inception in 2001. Mr. Olson has been secretary of Inhibiton Therapeutics, Inc. since its inception in May 2004. Inhibiton Therapeutics, Inc. is a publicly traded company performing research and development on new cancer therapies. Mr. Olson has attended Arizona State University and the University of Colorado at Denver.
BARRY HOLLANDER
Mr. Hollander has been our Acting Chief Executive Officer since January 2007. Mr. Hollander has been the chief financial officer of China Nuvo Solar Energy, Inc. since May 2002. Mr. Hollander has been the chief financial officer of VP Sports since March 1999. From 1994 to 1999, Mr. Hollander was the chief financial officer of California Pro Sports, Inc., an in-line skate importer, marketer and distributor. In 1999 California Pro merged with Imaginon, Inc. Mr. Hollander has been in the sporting goods industry since 1980 in various accounting, senior management and executive positions. Mr. Hollander has a BS degree from Fairleigh Dickinson University and passed the uniform certified public accountant exam.
| (f) | Involvement in certain legal proceedings. |
Not applicable.
| (g) | Promoters and control persons. |
Not applicable.
(h) Audit committee financial expert.
See (i) below.
(i) Identification of the audit committee
The Company does not currently have an audit committee of the board of directors, as none is required, and the board believes it can effectively serve in that function and, therefore, currently does. Management believes that certain individuals on the board of directors may have the necessary attributes to serve as a financial expert on an audit committee, if required.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires executive officers and directors and persons who beneficially own more than 10% of our common stock to file initial reports of ownership and reports of changes in ownership with the SEC. Executive officers, directors and greater-than-10% beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file. We believe that during 2007, based solely on a review of the copies of such forms furnished to us during 2007 and written representations from the executive officers, directors and greater-than-10% beneficial owners of our common stock, have complied with all Section 16 filing requirements.
CODE OF ETHICS
We have adopted a Code of Ethics for our senior financial management, which includes our chief executive officer and chief financial officer as principal executive and accounting officers, that has been filed as an exhibit to this report.
ITEM 11. EXECUTIVE COMPENSATION.
Compensation Discussion and Analysis
Mr. Barry Hollander became Acting Chief Executive Officer in January 2007, filling a vacancy. Prior to that appointment, Mr. Hollander was providing functions related to accounting, finance and general operations of the Company as a consultant. Pursuant to the Board of Directors resolution, Mr. Hollander receives a management fee of $12,000 per month.
We had no cash incentive bonus program in effect for 2008.
Severance and Change-in-Control Benefits
We had no provisions for mandatory severance benefits in the event of a termination of change of control of the Company.
We have no plan or arrangement with respect to any officer’s of the Company that will result from a change in control of the Company or a change in the individual’s responsibilities following a change in control. For descriptions of applicable employment agreements and arrangements, please refer to the above paragraph (a) of this Item.
Through the Asset Sale on January 31, 2006, our executives were eligible to participate in all of our employee benefit plans, such as medical, dental, vision, group life and disability insurance on the same basis as our other employees.
We currently have no benefit plan.
Summary Compensation Table
The following table sets forth information regarding compensation paid to our officers during the years ended December 31, 2008 and 2007:
| Name and Principal Position | Year | Salary ($) | Bonus ($) | All Other Compensation ($) | Total ($) |
| (a) | (b) | (c) | (d) | (i) | (j) |
Barry Hollander (1) Acting Chief Executive Officer | 2008 2007 | $0 $0 | $0 $0 | $124,250 $152,250 | $124,250 $152,250 |
| (1) | Mr. Hollander became the acting chief executive officer on January 2, 2007 to fill a vacancy and received management fees of $124,250 and $152,250 for 2008 and 2007, respectively. |
Grant of Plan-Based Awards
None.
Outstanding Equity Awards at Fiscal Year-End Table
None.
| | Option Awards | Stock Awards |
| Name | Number of Securities Under-lying Unexer-cised Options (#) Exer-cisable | Number of Securities Under-lying Unexer-cised Options (#) Unexer-cisable | Equity Incentive Plan Awards: Number of Securities Under-lying Unexer-cised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Securities That Have Not Vested (#) | Market Value of Securities That Have Not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Securities or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Securities or Other Rights That Have Not Vested ($) |
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) |
| Henry Fong | 90,000 | 0 | 0 | $0.75 | 2/29/2017 | 0 | $0 | 0 | $0 |
Option Exercises and Stock Vested Table
None.
Non-Qualified Deferred Compensation Plans
We have no non-qualified deferred compensation plans currently in effect.
Director Compensation
The following table shows the compensation earned by each of our non-officer directors for the year ended December 31, 2008.
| Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Option Awards ($) (2) | Non-Equity Incentive Plan Compensation ($) | Change in Pension Value and Non-Qualified Deferred Compensation Earnings | All Other Compensation | Total ($) |
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) |
| Henry Fong | $25,000 | | | | | | $25,000 |
| Aaron Grunfeld (1) | $22,917 | | | | | | $22,917 |
| (1) | Mr. Grunfeld resigned in November 2008. |
| (2) | Amount reflects the dollar amount recognized for financial statement reporting purposes for the fiscal year ended December 31, 2008 in accordance with SFAS 123(R) of stock option awards, and may include amounts from awards granted in and prior to fiscal year 2008. Assumptions used in the calculation of this amount for employees are identified in Note 2 to our annual financial statements for the year ended December 31, 2008 included elsewhere in this Annual Report. |
The 2008 amounts were not paid and are included in accrued expenses on the 2008 balance sheet. In September 2005 the Board of Directors of the Company authorized a new compensation plan to all Directors of the Company, which includes the grant of 30,000 options to each director on an annual basis, as well as annual compensation of $25,000 to each director, to be paid in monthly installments. In February 2007, the Board of Directors authorized the issuance of options to purchase 30,000 shares of common stock at $0.75 per share to each Messrs. Fong and Grunfeld. Beginning with the monthly fee due September 1, 2006, the Board of Directors temporarily suspended the monthly payment and accordingly, at December 31, 2008, $129,159 is included in accrued liabilities representing the total amount that remains unpaid in the aggregate. Additionally, members of the board of directors receive reimbursement for expenses incurred in attending board meetings or for other services related to their responsibilities as board members.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
(a) Security Ownership of Certain Beneficial Owners and Security Ownership of Management.
The following table contains information at March 31, 2009, as to the beneficial ownership of shares of our common stock by each person who, to our knowledge at that date, was the beneficial owner of five percent or more of the outstanding shares of the class, each person who is a director or a named executive officer of the Company under the summary compensation table and all persons as a group who are current executive officers and directors, and as to the percentage of outstanding shares so held by them at March 31, 2009. The number of shares beneficially held is determined under rules promulgated by the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Including the number of shares below does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial owner of the shares.
| | | | | | | | | | | |
| Name and Address of Beneficial Owner | | Shares of Common Stock Owned (1) | | Shares of Common Stock Underlying Options (1) | | Shares of Common Stock Underlying Warrants (1) | | Total | | Percentage of Common Stock Owned (2) |
| | | | | | | | | | | |
HPI Partners, LLC. 7315 E. Peakview Ave. Englewood, Co. 80111 | | 3,500,000 | | 0 | | 0 | | 3,500,000 | | 42.8% |
| | | | | | | | | | | |
Henry Fong 7315 E Peakview Ave Englewood CO 80111 | | 148,725 | | 90,000 | | 800,000 | | 1,038,725 | | 11.5% |
| | | | | | | | | | | |
Barry Hollander 319 Clematis St #703 West Palm Beach FL 33401 | | 28,546 | | 0 | | 0 | | 28,546 | | 0.3% |
| | | | | | | | | | | |
| All officers and directors as a group (three persons) | | 206,212 | | 120,000 | | 800,000 | | 1,126,212 | | 13.7% |
(1) The beneficial owners exercise sole voting and investment power.
(2) As of March 31, 2009, 8,175,432 shares of our common stock were outstanding.
If we conclude the transaction with ISI the acquisition would result in a change of control of the Company.
ISI is an engineering procurement and construction services company to the mining, energy and natural resources industries.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
WARRANT ISSUED TO EQUITEX IN CONNECTION WITH MERGER
In connection with the Merger, the Company issued a five-year warrant to Equitex for the purchase of an aggregate of 800,000 shares of Company common stock at a purchase price of $0.10 per share. Equitex has subsequently distributed all of these warrants to purchase common stock.
(a) Transactions with Related Persons.
None.
Transactions with Directors
DIRECTOR INDEPENDENCE
Our board of directors has one director and has no standing sub-committees at this time due to the associated expenses and the small size of our board. We are not currently listed on a national securities exchange that has requirements that a majority of the board of directors be independent, however, the board has determined that Aaron A. Grunfeld, until his resignation on November 8, 2008, was an “independent” under the definition set forth in the listing standards of the NASDAQ Stock Market, Inc., which is the definition that our board has chosen to use for the purposes of the determining independence.
In performing the functions of the audit committee, our board oversees our accounting and financial reporting process. In this function, our board performs several functions. Our board, among other duties, evaluates and assesses the qualifications of the Company’s independent auditors; determines whether to retain or terminate the existing independent auditors; meets with the independent auditors and financial management of the Company to review the scope of the proposed audit and audit procedures on an annual basis; reviews and approves the retention of independent auditors for any non-audit services; reviews the independence of the independent auditors; reviews with the independent auditors and with the Company’s financial accounting personnel the adequacy and effectiveness of accounting and financial controls and considers recommendations for improvement of such controls; reviews the financial statements to be included in our annual and quarterly reports filed with the Securities and Exchange Commission; and discusses with the Company’s management and the independent auditors the results of the annual audit and the results of our quarterly financial statements. While we do not currently have a standing compensation committee, our non-employee director considers executive officer compensation, and our entire board participates in the consideration of director compensation. Our non-employee board members oversee our compensation policies, plans and programs. Our non-employee board members further review and approve corporate performance goals and objectives relevant to the compensation of our executive officers; review the compensation and other terms of employment of our Chief Executive Officer and our other executive officers; and administer our equity incentive and stock option plans. Each of our directors participates in the consideration of director nominees. In addition to nominees recommended by directors, our board will consider nominees recommended by shareholders if submitted in writing to our secretary. Our board believes that any candidate for director, whether recommended by shareholders or by the board, should be considered on the basis of all factors relevant to our needs and the credentials of the candidate at the time the candidate is proposed. Such factors include relevant business and industry experience and demonstrated character and judgment.
Indebtedness of management.
Mr. James Welbourn, one of the Company’s former directors (resigned January 2, 2007) has a note payable to the Company at December 31, 2008 in the amount of $253,366, which is presented as a reduction of stockholders’ equity in the Company’s balance sheet as of December 31, 2008. In conjunction with the Asset Sale, the Company agreed to compensate the director $100,800 annually in consideration of a five year non-compete agreement and a release, whereby the director waived his right to future commissions that he was previously entitled to. Such compensation is being applied to reduce the note payable.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Hawkins Accounting served as our independent registered public accounting firm for December 31, 2008
Sherb & Co. served as our independent registered public accounting firm for 2007 and through September 30, 2008
GHP Horwath, P.C. served as our independent registered public accounting firm for 2006.
Audit Fees
Fees billed and expected to be billed by Hawkins Accounting for audit services related to the year ended December 31, 2008 were approximately $7,000, which includes out-of-pocket costs incurred in connection with these services.
Fees billed and expected to be billed by Sherb & Co. for interim financial statement review services related to the nine months ended September 30, 2008 and for the audit year ended December 31, 2007 were approximately $13,500 and $41,000, respectively, which includes out-of-pocket costs incurred in connection with these services.
Fees billed and expected to be billed by GHP Horwath, P.C. for audit and interim financial statement review services related to the years ended December 31, 2007 and 2006 were approximately $25,000 and $95,000, respectively, which includes out-of-pocket costs incurred in connection with these services.
Audit-Related Fees
Fees billed by Hawkins Accounting for audit-related services related to the years ended December 31, 2008 were approximately $0.
Fees billed by Sherb & Co. for audit-related services related to the years ended December 31, 2007 were approximately $0.
Tax Fees
Fees billed and expected to be billed by Hawkins Accounting for tax return preparation services related to the year ended December 31, 2008 were approximately $0.
Fees billed and expected to be billed by Sherb & Co. for tax return preparation services related to the year ended December 31, 2007 were approximately $0.
All Other Fees
The Company incurred no other fees to Hawkins Accounting for 2008.
The Company incurred no other fees to Sherb & Co. for 2007.
Preapproval Policy
Pursuant to our Audit Committee Charter, before the accountant is engaged by us to render audit or non-audit services, our audit committee approves the engagement. In absence of a standing audit committee, such approval is made by our entire board of directors.
PART IV
| | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. |
| (a) | The following documents are filed as a part of this report immediately following the signature page. |
| 1. | Financial Statements and Supplementary Data |
| | Page |
| Report of Independent Registered Public Accounting Firm | F-1 |
| Report of Independent Registered Public Accounting Firm | F-2 |
| Consolidated financial statements: | |
| Consolidated balance sheets - December 31, 2008 and 2007 | F-3 |
Consolidated statements of operations - years ended December 31, 2008, 2007 and 2006 | F-4 |
Consolidated statements of stockholders’ equity (equity deficiency) Years ended December 31, 2008, 2007 and 2006 | F-5 – F-7 |
Consolidated statements of cash flows - years ended December 31, 2008, 2007 and 2006 | F-8 – F-9 |
| Notes to consolidated financial statements | F-10 – F-32 |
| 2. | Financial Statements Schedules. |
Financial statements and exhibits – Schedule 11, Valuation and Qualifying Accounts, are omitted because the information is included in the consolidated financial statements and notes.
| 2.1 | Asset Purchase Agreement among Game Financial Corporation, Chex Services, Inc. and FastFunds Financial Corporation, dated as of December 22, 2005 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report filed on December 27, 2005). |
| | |
| 3.1 | Articles of Incorporation of FastFunds Financial Corporation (incorporated by reference to Exhibit 3.(I) of the registrant's Registration Statement on Form 10-SB filed on August 7, 2001). |
| | |
| 3.2 | Bylaws of FastFunds Financial Corporation (incorporated by reference to Exhibit 3 of the registrant's Registration Statement on Form 10-SB filed on August 7, 2001). |
| | |
| 9.1 | Voting Agreement between Game Financial Corporation, FastFunds Financial Corporation and Equitex, Inc., dated December 22, 2005 (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report filed on December 27, 2005). |
| | |
| 10.7 | Transition Service Agreement between Game Financial Corporation, Chex Services, Inc. and FastFunds Financial Corporation, dated as of January 31, 2006 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report filed on February 6, 2006). |
| | |
| 10.8 | $5 million Secured Promissory Note of Equitex, Inc. in favor of FastFunds Financial Corporation, dated as of March 14, 2006 (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report filed on March 20, 2006). |
| | |
| 10.9 | Stock Pledge Agreement between Equitex, Inc. and FastFunds Financial Corporation, dated as of March 14, 2006 (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report filed on March 20, 2006). |
| | |
| 10.10 | Agreement (for profit participation) between Equitex, Inc. and FastFunds Financial Corporation, dated as of March 14, 2006 (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report filed on March 20, 2006). |
| | |
| 14.1 | Code of Ethics (Filed herewith). |
| | |
| 21.1 | List of Subsidiaries (Filed herewith). |
| | |
| 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith). |
| | |
| 32.1 | Certifications under Section 906 of Sarbanes-Oxley Act of 2002 (filed herewith). |
SIGNATURES
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.
| Date: April 15, 2009 | FASTFUNDS FINANCIAL CORPORATION (Registrant) |
| | By /S/ BARRY HOLLANDER |
| | Acting Chief Executive Officer Principal Executive Officer and Principal Financial 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.
| Date: April 15, 2009 | /S/ BARRY HOLLANDER |
| | Barry Hollander, Acting Chief Executive Officer |
| | |
| Date: April 15, 2009 | /S/ HENRY FONG |
| | Henry Fong, Director |
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 2008, 2007 and 2006
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | Page |
| Reports of Independent Registered Public Accounting Firm | F-1 – F-2 |
| | |
| Consolidated financial statements: | |
| | |
Consolidated balance sheets | F-3 |
| | |
Consolidated statements of operations | F-4 |
| | |
Consolidated statements of stockholders’ equity (equity deficiency) | F-5 – F-7 |
| | |
Consolidated statements of cash flows | F-8 – F-9 |
| | |
Notes to consolidated financial statements | F-10 – F-32 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
FastFunds Financial Corporation and Subsidiaries
West Palm Beach, FL
We have audited the accompanying consolidated balance sheets of FastFunds Financial Corporation and Subsidiaries as of December 31, 2008, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the year ended December 31, 2008. FastFunds Financial Corporation and Subsidiaries’ management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of FastFunds Financial Corporation and Subsidiaries as of December 31, 2008, and the consolidated results of its operations and its cash flows for the year ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred net losses since inception, which raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustment that might result from the outcome of this uncertainty.
/s/Hawkins Accounting
April 14, 2009
Los Angeles, CA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
FastFunds Financial Corporation
We have audited the accompanying consolidated balance sheet of FastFunds Financial Corporation and subsidiaries (the “Company”) as of December 31, 2007, and the related consolidated statements of operations, stockholders’ equity deficiency and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FastFunds Financial Corporation and subsidiaries as of December 31, 2007, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, on January 31, 2006, the Company sold substantially all of the assets of a wholly-owned subsidiary that previously conducted most of the Company’s business operations. That event, and the Company’s history of significant recurring losses, its working capital deficiency and stockholders’ equity deficiency, raise substantial doubt about its ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 1. The consolidated financial statements do not include adjustments that might result from the outcome of this uncertainty.
/s/ SHERB & CO., LLP
Certified Public Accountant
Boca Raton, Florida
| FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES |
| | | | | | | |
| CONSOLIDATED BALANCE SHEETS |
| | | | | | | |
| DECEMBER 31, 2008 AND 2007 |
| | | | | | | |
| | 2008 | | | 2007 | |
| | | | | | | |
| | | | | | | |
| ASSETS | | | | | | |
| | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | | $536 | | | | $479 | |
| Accounts receivable, net of allowance of $12,615 (2008) and $53,378 (2007) | | | 92,934 | | | | 216,591 | |
| Current portion of notes and advances receivable (Note 3) | | | 139,575 | | | | 170,000 | |
| Other current assets | | | 4,213 | | | | 4,213 | |
| | | | | | | | | |
| Total current assets | | | 237,258 | | | | 391,283 | |
| | | | | | | | | |
| | | | | | | | | |
| Accounts receivable | | | 105,000 | | | | | |
| Notes receivable (Note 3) | | | - | | | | 69,575 | |
| Property and equipment, net of accumulated depreciation of $82,542 (2008) and $79,799 (2007) | | | - | | | | 2,743 | |
| Deferred loan costs, net of accumulated amortization of $877,811 (2008) and $877,811 (2007) | | | - | | | | 153,286 | |
| Intangible and other assets | | | 200 | | | | 200 | |
| | | | | | | | | |
| | | | 105,200 | | | | 225,804 | |
| | | | | | | | | |
| | | | $342,458 | | | | $617,087 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY DEFICIENCY | | | | | | | | |
| | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Checks issued in excess of cash in bank | | | $- | | | | $2,992 | |
| Accounts payable | | | 733,499 | | | | 564,987 | |
| Due to HPI (Note 6) | | | 75,000 | | | | 75,000 | |
| Accrued expenses, including related parties $22,148 (2008) and $4,702 (2007) (Note 4) | | | 1,371,642 | | | | 835,274 | |
| Promissory notes and current portion of long-term debt (Note 5), including related | | | | | | | | |
| parties of $392,922 (2008) and $196,072 (2007) | | | 2,589,366 | | | | 2,324,672 | |
| Convertible debentures, net of discount of $5,223 (2007) (Note 5) | | | - | | | | 132,277 | |
| Derivative liabilities (Note 7) | | | 648,000 | | | | 1,052,535 | |
| | | | | | | | | |
| Total current liabilities | | | 5,417,507 | | | | 4,987,737 | |
| | | | | | | | | |
| | | | | | | | | |
| Commitments and contingencies (Notes 4, 5, 6 and 7) | | | | | | | | |
| | | | | | | | | |
| Stockholders' equity deficiency (Note 9): | | | | | | | | |
| Preferred stock, $.001 par value; 5,000,000 shares authorized; no shares issued and | | | | | |
| outstanding | | | | | | | | |
| Common stock, $.001 par value; 250,000,000 shares authorized; 17,091,686 shares (2008) | |
| and 16,248,851 shares (2007) issued and 8,174,432 shares (2008) | | | | | |
| and 7,331,597 shares (2007) outstanding | | | 17,092 | | | | 16,249 | |
| Additional paid-in capital | | | 17,136,658 | | | | 16,580,624 | |
| Investment in HPI common stock | | | - | | | | - | |
| Notes, advances and interest receivable, related parties | | | (253,366 | ) | | | (354,166 | ) |
| Common treasury stock at cost; 8,917,344 shares | | | (4,547,845 | ) | | | (4,547,845 | ) |
| Accumulated deficit | | | (17,427,588 | ) | | | (16,065,512 | ) |
| | | | | | | | | |
| Total stockholders' equity deficiency | | | (5,075,049 | ) | | | (4,370,650 | ) |
| | | | | | | | | |
| | | | $342,458 | | | | $617,087 | |
See notes to consolidated financial statements.| FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES |
| | | | | | | | | | |
| CONSOLIDATED STATEMENTS OF OPERATIONS |
| | | | | | | | | | |
| YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 |
| | | | | | | | | | |
| | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Fee revenue, net | | | $78,693 | | | | $91,587 | | | | $1,714,882 | |
| Other income | | | - | | | | - | | | | 477,500 | |
| | | | | | | | | | | | | |
| Total revenue | | | 78,693 | | | | 91,587 | | | | 2,192,382 | |
| | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | |
| Fees to casinos | | | - | | | | - | | | | 546,196 | |
| Salaries and benefits | | | - | | | | - | | | | 303,489 | |
| Selling, general and administrative | | | - | | | | - | | | | 141,880 | |
| Processing fees | | | 38,236 | | | | 69,997 | | | | 230,889 | |
| Returned checks (collected) | | | (11,222 | ) | | | (26,565 | ) | | | (22,269 | ) |
| Other | | | 12,860 | | | | 15,341 | | | | - | |
| | | | | | | | | | | | | |
| Total operating expenses | | | 39,874 | | | | 58,773 | | | | 1,200,185 | |
| | | | | | | | | | | | | |
| Gross margin | | | 38,819 | | | | 32,814 | | | | 992,197 | |
| | | | | | | | | | | | | |
| Selling, general and administrative | | | 872,068 | | | | 1,686,922 | | | | 2,902,049 | |
| Fair value adjustment of derivative liabilities | | | | | | | 368,498 | | | | (9,099 | ) |
| Amortization of intangible and other assets | | | - | | | | - | | | | 308,911 | |
| Provision for (recovery of) losses and bad debt expense on related party | | | | | | | | | | | | |
| notes and interest receivable | | | - | | | | - | | | | 568,184 | |
| (Recovery of) provision for losses and bad debt expense on note | | | | | | | | | |
| receivable, other | | | - | | | | - | | | | (90,000 | ) |
| Gain on sale of assets (Note 1) | | | - | | | | - | | | | (4,145,835 | ) |
| | | | | | | | | | | | | |
| (Loss) income from operations | | | (833,249 | ) | | | (2,022,606 | ) | | | 1,457,987 | |
| | | | | | | | | | | | | |
| Other income (expense): | | | | | | | | | | | | |
| Interest expense including related party interest of $17,446 (2008), | | | | | | | | | |
| $4,702 (2007) and $693,905 (2006) | | | (528,827 | ) | | | (495,486 | ) | | | (1,338,101 | ) |
| Loss on debt extinguishment and restructuring | | | | | | | (245,571 | ) | | | (1,236,949 | ) |
| Permanent impairment of HPI common stock | | | | | | | (1,206,000 | ) | | | - | |
| Interest income including related party interest of | | | | | | | | | | | | |
| $2,790 (2007) and $399,658 (2006) | | | | | | | 57,365 | | | | 564,296 | |
| | | | | | | | | | | | | |
| Total other expense | | | (528,827 | ) | | | (1,889,692 | ) | | | (2,010,754 | ) |
| | | | | | | | | | | | | |
| Loss before income taxes | | | (1,362,076 | ) | | | (3,912,298 | ) | | | (552,767 | ) |
| Income tax expense (Note 8) | | | - | | | | - | | | | (856,913 | ) |
| | | | | | | | | | | | | |
| Net loss | | | $(1,362,076 | ) | | | $(3,912,298 | ) | | | $(1,409,680 | ) |
| | | | | | | | | | | | | |
| Net loss per share | | | $(0.17 | ) | | | $(0.54 | ) | | | $(0.09 | ) |
| | | | | | | | | | | | | |
| Weighted average number of common shares outstanding | | | 8,071,805 | | | | 7,199,438 | | | | 15,049,758 | |
See notes to consolidated financial statements.| | FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (EQUITY DEFICIENCY) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Notes, | | | | | Total |
| | | | | | | | | | | | | | | | | | | advances and | | | | stockholders' |
| | | | | | | | | | Additional | | Stock | | | | | and interest | | | | | |
| | | | | Common stock | | paid-in | | subscription | Investment in | receivable, | | Accumulated | | (equity |
| | | | | Shares | | Amount | | capital | | receivable | | HPI | | related parties | deficit | | deficiency) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balances, January 1, 2006 | | 10,513,672 | | $ | 10,514 | | $ | 14,812,356 | | $ | (135,000) | | $ | (14,905) | | $ | (6,990,700) | | $ | (10,743,534) | | $ | (3,061,269) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of common stock upon cashless | | | | | | | | | | | | | | | | | | | | | |
| | exercise of warrants (Note 9) | | 149,943 | | | 150 | | | (150) | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Increase in notes and advances receivable due | | | | | | | | | | | | | | | | | | | | | |
| | from related parties, net | | | | | | | | | | | | | | | | | (593,355) | | | | | | (593,355) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Warrants issued for services (Note 7) | | | | | | 355,000 | | | | | | | | | | | | | | | 355,000 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Conversion of HPI note and interest | | | | | | | | | | | | | | | | | | | | | | |
| | payable to common stock | | 4,717,344 | | | 4,717 | | | 4,335,238 | | | | | | | | | | | | | | | 4,339,955 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of 200,000 shares of common stock | | | | | | | | | | | | | | | | | | | | | |
| | in settlement of debt | | 200,000 | | | 200 | | | (200) | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Receipt of HPI common stock in | | | | | | | | | | | | | | | | | | | | | | | |
| | satisfaction of notes, advances and interest | | | | | | | | | | | | | | | | | | | | | |
| | receivable (Note 9) | | | | | | | | | | | | | | (6,144,000) | | | 6,443,794 | | | | | | 299,794 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of note to HPI | | | | | | | | | | | | | | | | | | | | | | | |
| | (Notes 1 and 9) | | | | | | | | | | | | | | | | | (5,000,000) | | | | | | (5,000,000) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amount due from HPI pursuant to | | | | | | | | | | | | | | | | | | | | | | | |
| | share price guarantee agreement (Note 9) | | | | | | 126,582 | | | | | | | | | (126,582) | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Write off of stock subscription receivable | | | | | | | | | | | | | | | | | | | | | |
| | (Note 9) | | | | | | | | | | | 135,000 | | | | | | | | | | | | 135,000 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Receipt of HPI common stock in | | | | | | | | | | | | | | | | | | | | | | | |
| | exchange for amounts due to HPI | | | | | | | | | | | | | | | | | | | | | | |
| | (Note 9) | | | | | | | | | | | | | | (450,000) | | | | | | | | | (450,000) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Repricing of warrants and extension of | | | | | | | | | | | | | | | | | | | | | |
| | expiration | | | | | | | | 26,400 | | | | | | | | | | | | | | | 26,400 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Purchase of HPI common stock | | | | | | | | | | | | | | | | | | | | | | | |
| | (Note 9) | | | | | | | | | | | | | | (192,299) | | | | | | | | | (192,299) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | | | | | | | | | (1,409,680) | | | (1,409,680) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balances, December 31, 2006 | | 15,580,959 | | $ | 15,581 | | $ | 19,655,226 | | $ | | | $ | (6,801,204) | | $ | (6,266,843) | | $ | (12,153,214) | | $ | (5,550,454) |
(Continued)| FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (EQUITY DEFICIENCY) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 (CONTINUED) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Notes, | | | | | | | | Total |
| | | | | | | | | | | | | | | | advances and | | | | | | | stockholders' |
| | | | | | | | | | Additional | | | | | and interest | | | | | | | | equity |
| | | | | Common stock | | | paid-in | | Investment in | receivable, | | Common stock | Accumulated | | (equity |
| | | | | Shares | | Amount | | capital | | HPI | | related parties | treasury | | deficit | | deficiency) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balances, January 1, 2007 | | 15,580,959 | | $ | 15,581 | | $ | 19,655,226 | | $ | (6,801,204) | | $ | (6,266,843) | | $ | - | | $ | (12,153,214) | | $ | (5,550,454) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Return of Company common stock in satisfaction of notes, | | | | | | | | | | | | | | | | | | | | | |
| | advances and interest receivable (Notes 1 and 7) | | | | | | 1,227,019 | | | | | | 5,814,617 | | | (4,547,845) | | | | | | 2,493,791 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of common stock upon cashless exercise of | | | | | | | | | | | | | | | | | | | | | |
| | warrants | | 181,686 | | | 182 | | | (182) | | | | | | | | | | | | | | | - |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Decrease in notes and advances receivable due from related | | | | | | | | | | | | | | | | | | | | | |
| | parties, net (Note 7) | | | | | | | | | | | | | | 98,060 | | | | | | | | | 98,060 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Warrants and options issued for services (Note 6) | | | | | | | 1,031,751 | | | | | | | | | | | | | | | 1,031,751 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Conversion of accounts payable to common stock | 250,000 | | | 250 | | | 124,750 | | | | | | | | | | | | | | | 125,000 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of common stock for services (Note 6) | 150,000 | | | 150 | | | 112,350 | | | | | | | | | | | | | | | 112,500 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of common stock in conjunction with note issuances | 86,206 | | | 86 | | | 24,914 | | | | | | | | | | | | | | | 25,000 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reclassification of HPI common stock at fair value (Note 2) | | | | | | (5,595,204) | | | 6,801,204 | | | | | | | | | | | | 1,206,000 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net loss | | | | | | | | | | | | | | | | | | | | (3,912,298) | | | (3,912,298) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balances, December 31, 2007 | | 16,248,851 | | $ | 16,249 | | $ | 16,580,624 | | $ | - | | $ | (354,166) | | $ | (4,547,845) | | $ | (16,065,512) | | $ | (4,370,650) |
(Continued)| FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (EQUITY DEFICIENCY) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 (CONTINUED) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Notes, | | | | | | | | Total |
| | | | | | | | | | | | | | | | advances and | | | | | | stockholders' |
| | | | | | | | | | Additional | | | | | and interest | | | | | | | | |
| | | | | Common stock | | paid-in | | Investment in | receivable, | | Common stock | Accumulated | (equity |
| | | | | Shares | | Amount | | capital | | HPI | | related parties | treasury | | deficit | | deficiency) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balances, January 1, 2008 | | 16,248,851 | | $ | 16,249 | | $ | 16,580,624 | | $ | - | | $ | (354,166) | | $ | (4,547,845) | | $ | (16,065,512) | | $ | (4,370,650) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Decrease in notes and advances receivable due from related | | | | | | | | | | | | | | | | | | |
| | parties, net (Note 7) | | | | | | | | | | | | | | 100,800 | | | | | | | | | 100,800 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of common stock in satisfaction of convertible | | | | | | | | | | | | | | | | | | | | | | |
| | debentures, derivative laibility and accrued interest | 842,835 | | | 843 | | | 556,034 | | | | | | | | | | | | | | | 556,877 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net loss | | | | | | | | | | | | | | | | | | | | (1,362,076) | | | (1,362,076) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balances, December 31, 2008 | | 17,091,686 | | $ | 17,092 | | $ | 17,136,658 | | $ | - | | $ | (253,366) | | $ | (4,547,845) | | $ | (17,427,588) | | $ | (5,075,049) |
See notes to consolidated financial statements.| FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES |
| | | | | | | | | | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | | | | | | | | |
| YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 |
| | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
| Cash flows from operating activities: | | | | | | | | | |
| Net loss | | | $(1,362,076 | ) | | | $(3,912,298 | ) | | | $(1,409,680 | ) |
| Adjustments to reconcile net loss to net cash (used in) provided | | | | | | | | | |
| by operating activities: | | | | | | | | | | | | |
| Permanent impairment of HPI common stock | | | | | | | 1,206,000 | | | | - | |
| Depreciation and amortization | | | 137,629 | | | | 240,630 | | | | 601,899 | |
| Non-cash interest expense | | | 5,223 | | | | 39,711 | | | | 764,927 | |
| Stock-based compensation | | | 119,200 | | | | 912,551 | | | | 355,000 | |
| Provision for losses, including bad debt | | | - | | | | - | | | | 478,184 | |
| Loss on debt extinguishment | | | | | | | 245,571 | | | | 1,236,949 | |
| Amortization of discount on convertible promissory notes | | | | | | | | | | | | |
| payable related to beneficial conversion features | | | - | | | | - | | | | - | |
| Discount on debentures | | | | | | | (24,515 | ) | | | (20,620 | ) |
| Gain on sale of net operating assets of subsidiary (Note 1) | | | - | | | | - | | | | (4,145,835 | ) |
| Deferred income tax expense | | | | | | | 75,000 | | | | 851,000 | |
| Decrease (increase) in assets, net of Asset Sale (Note 1): | | | | | | | | | | | | |
| Accounts receivable | | | 18,657 | | | | 13,841 | | | | 163,044 | |
| Interest and other receivables | | | | | | | (2,740 | ) | | | (399,658 | ) |
| Prepaid and other current assets | | | | | | | 3,865 | | | | 28,228 | |
| Increase (decrease) in liabilities: | | | | | | | | | | | | |
| Accounts payable | | | 168,530 | | | | 105,453 | | | | 98,096 | |
| Accrued expenses | | | 621,317 | | | | (16,071 | ) | | | (2,048,127 | ) |
| Derivative liabilities | | | | | | | 591,014 | | | | 461,521 | |
| Due to HPI | | | - | | | | - | | | | (1,160,192 | ) |
| | | | | | | | | | | | | |
| Net cash (used in) provided by operating activities | | | (291,520 | ) | | | (521,988 | ) | | | (4,145,264 | ) |
| | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Cash acquired in redemption agreement transaction (Note 1) | | | | | | | 2,363 | | | | - | |
| Issuance of notes receivable | | | | | | | (50,000 | ) | | | - | |
| Proceeds received from Asset Sale, net of costs (Note 1) | | | - | | | | - | | | | 12,642,784 | |
| Purchases of property and equipment | | | - | | | | - | | | | - | |
| Repayments on notes and interest receivable | | | 100,000 | | | | 255,000 | | | | 160,461 | |
| Advances on notes receivable | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | |
| Net cash provided by (used in) investing activities | | | 100,000 | | | | 207,363 | | | | 12,803,245 | |
| | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Increase (decrease in) in checks issued in excess of cash in bank | | | (2,992 | ) | | | 2,992 | | | | (1,105,379 | ) |
| Repayments on convertible promissory notes | | | | | | | (15,000 | ) | | | (1,012,500 | ) |
| Borrowings on notes and loans payable | | | 196,850 | | | | 323,172 | | | | 450,000 | |
| Repayments on notes and loans payable | | | (2,281 | ) | | | (4,000 | ) | | | (9,593,497 | ) |
| Borrowings on long-term debt, HPI | | | - | | | | - | | | | - | |
| Repayments of long-term debt | | | - | | | | - | | | | - | |
| Purchase of HPI common stock | | | - | | | | - | | | | (192,299 | ) |
| Proceeds from sale of HPI common stock | | | - | | | | - | | | | - | |
| Repurchase of warrants | | | - | | | | - | | | | - | |
| Payments of deferred loan costs | | | | | | | (45,250 | ) | | | - | |
| Notes and advances to HPI | | | - | | | | - | | | | (5,424,769 | ) |
| Repayments on notes and advances to HPI | | | - | | | | - | | | | 400 | |
| | | | | | | | | | | | | |
| Net cash provided by (used in) financing activities | | | 191,577 | | | | 261,914 | | | | (16,878,044 | ) |
(Continued)| FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES |
| | | | | | | | | | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) |
| | | | | | | | | | |
| YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 |
| | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
| Decrease in cash and cash equivalents | | | 57 | | | | (52,711 | ) | | | (8,220,063 | ) |
| Cash and cash equivalents, beginning | | | 479 | | | | 53,190 | | | | 8,273,253 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents, ending | | | $536 | | | | $479 | | | | $53,190 | |
| | | | | | | | | | | | | |
| Supplemental disclosure of cash flow information: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Cash paid for interest | | | | | | | $322,804 | | | | $1,246,763 | |
| | | | | | | | | | | | | |
| Cash paid for income taxes | | | $- | | | | $- | | | | $5,913 | |
| | | | | | | | | | | | | |
| Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | | |
| | | | | | | | | | | | | |
| Conversion of accounts payable to common stock | | | | | | | $125,000 | | | | | |
| | | | | | | | | | | | | |
| Cashless exercise of warrants | | | | | | | $182 | | | | $150 | |
| | | | | | | | | | | | | |
| Return of common stock for note receivable, advances, and interest receivable | | | | | | | $2,493,791 | | | | | |
| | | | | | | | | | | | | |
| Conversion of accounts payable and accrued expenses to note payable | | | $70,125 | | | | | | | | | |
| | | | | | | | | | | | | |
| Reclassification from current portion of accounts receivable to non-current | | | $105,000 | | | | | | | | | |
| | | | | | | | | | | | | |
| Conversion of parent company note payable and accrued interest to common stock | | | | | | | 3,905,960 | |
| | | | | | | | | | | | | |
| Receipt of parent company common stock in satisfaction of notes advances and interest | | | | | |
| receivable | | | | | | | | | | | 6,144,000 | |
| | | | | | | | | | | | | |
| Receipt of parent company common stock in exchange for amounts due parent company | | | | | | | 450,000 | |
| | | | | | | | | | | | | |
| Issuance of common stock by parent to a third party for settlement of an obligation in | | | | | | | | | | |
| exchange for reduction in receivable | | | | | | | | | | | $150,000 | |
See notes to consolidated financial statements.
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 1. | Business and organization, asset sale, and going concern and management’s plans: |
Business and organization:
FastFunds Financial Corporation (the “Company” or “FFFC”) is a holding company, and through January 31, 2006, operated primarily through its wholly-owned subsidiary Chex Services, Inc. (“Chex”). FFFC was previously organized as Seven Ventures, Inc. (“SVI”). Effective June 7, 2004, Chex merged with SVI (the “Merger”), a Nevada corporation formed in 1985. At the date of the Merger, SVI was a public shell with no significant operations. The acquisition of Chex by SVI was recorded as a reverse acquisition based on factors demonstrating that Chex represents the accounting acquirer. The historical stockholders’ equity of Chex prior to the exchange was retroactively restated (a recapitalization) for the equivalent number of shares received in the exchange after giving effect to any differences in the par value of the SVI and Chex common stock, with an offset to additional paid-in capital. The restated consolidated accumulated deficit of the accounting acquirer (Chex) has been carried forward after the exchange. On June 29, 2004, SVI changed its name to FFFC.
The Company is an equity investee of Hydrogen Power, Inc. (“HPI”), a public company, formerly known as Equitex, Inc. As of December 31, 2008, HPI owns approximately 43% of the Company’s outstanding common stock.
FFFC’s wholly-owned subsidiaries (collectively referred to as the “Company”) include the following:
Chex, a Minnesota corporation, provided financial services prior to the sale of substantially all of Chex’s assets (the “Asset Sale”), see below, which primarily consisted of check cashing, automated teller machine (ATM) access, and credit card advances to customers primarily at Native American owned casinos and gaming establishments.
Collection Solutions, Inc. (“Collection Solutions”), a Minnesota corporation, formed for the purpose of providing collection services for the Company, customers of the Company, and other entities both within and outside the gaming industry. Collection Solutions is licensed as a collection agency in Minnesota.
FastFunds International, Inc. (“FFI”), a Delaware corporation based in London. FFI was formed to build a presence in Europe for the Company’s stored value card program.
FFC FastFunds (Cyprus) Limited (“FFC”), formed in September 2004, under the Laws of Cyprus. FFC was formed to have a presence in Cyprus to work with a financial institution regarding the issuance of stored value cards throughout Europe.
FastFunds International Limited (“FFIL”), formed in October 2004 with the Registrar of Companies for England and Wales. FFIL was formed in order to have a local presence in the European community.
Key Financial Services, Inc. (“Key”) and Nova Financial Services, Inc. (“Nova”) were formed to design, market and service credit card products aimed at the sub-prime market; both companies are wholly-owned by the Company. Nova processes payments on a remaining portfolio, which provides the Company with limited operations. Key ceased "run-off" operations in the fourth quarter of 2003.
Denaris Corporation ("Denaris"), was formed to develop and market a prepaid re-loadable stored value card program, which was designed to offer customers, particularly immigrants, a convenient alternative to traditional bank accounts; 77%-owned by the Company; Denaris generated no revenues through December 31, 2008.
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 1. | Business and organization, asset sale, and going concern and management’s plans (continued): |
Business and organization (continued):
Collection Solutions, FFI, FFC and FFIL generated no revenues and had no significant operations for the years ended December 31, 2008, 2007 and 2006. All significant intercompany accounts and transactions have been eliminated in consolidation.
Asset sale:
On December 22, 2005, FFFC and Chex entered into an Asset Purchase Agreement (the “APA”) with Game Financial Corporation (“Game”), pursuant to which FFFC and Chex agreed to sell all of its cash access contracts and certain related assets, which represented substantially all the assets of Chex. Such assets also represented substantially all of the operating assets of the Company on a consolidated basis. On January 31, 2006, FFFC and Chex completed the sale (the “Asset Sale”) for $14 million pursuant to the APA and received net cash proceeds of $12,642,784, after certain transaction related costs and realized a pre-tax book gain of $4,145,835. As a result of the Asset Sale, the Company has no substantial continuing operations. Therefore, the Company is not reporting and accounting for the sale of Chex’s assets as discussed in discontinued operations.
On March 14, 2006, FFFC loaned HPI $5 million of the total proceeds from the Asset Sale for one year at 10% per annum interest (Note 9). Based on management’s evaluation of repayment intentions, and in consideration of Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) Topic 4-E regarding receivables from affiliates, the total face value amount is presented as a reduction of stockholders’ equity at December 31, 2006.
Additionally, FFFC and Chex entered into a Transition Services Agreement (the “TSA”) with Game pursuant to which FFFC and Chex agreed to provide certain services to Game to ensure a smooth transition of the sale of the cash-access financial services business. Pursuant to the TSA, FFFC and Chex provided the necessary services for approximately three months and Game paid FFFC $150,000 per month. The TSA terminated May 19, 2006, and as a result FFFC recorded $477,500 of other income pursuant to the agreement for the year ended December 31, 2006.
Pursuant to the APA and the TSA, FFFC and Chex owed Game approximately $300,000. Game, FFFC and Chex agreed to settle the balance due for $275,000 (included in accounts payable on the balance sheet presented herein) with payment terms. FFFC and Chex have not made any of the payments stipulated in the settlement and subsequently Game filed a complaint against Chex, FFFC and HPI seeking approximately $318,000. The Company has agreed to a judgment of $275,000, plus interest and attorney fees, for a total of $329,146. FFFC and Chex have agreed to indemnify HPI.
Going concern and management’s plans:
The Company’s financial statements for the year ended December 31, 2008 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company has incurred significant losses since its inception and has a working capital deficit of approximately $5,075,000, and an accumulated deficit of approximately $17,428,000 as of December 31, 2008. Moreover, it presently has no ongoing business operations or sources of revenue and little resources with which to obtain or develop new operations.
These factors raise substantial doubt about the Company’s ability to continue as a going concern. There can be no assurance that the Company will have adequate resources to fund future operations, if any, or that funds will be available to the Company when needed, or if available, will be available on favorable
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 1. | Business and organization, asset sale, and going concern and management’s plans (continued): |
Going concern and management’s plans (continued):
terms or in amounts required by the Company. Currently, the Company does not have a revolving loan agreement with any financial institutions, nor can the Company provide any assurance it will be able to enter into any such agreement in the future. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Currently, the Company does not have a revolving loan agreement with any financial institution, nor can the Company provide any assurance it will be able to enter into any such agreement in the future, or be able to raise funds through further issuance of debt or equity in the Company.
In May 2008, FFFC signed an Agreement and Plan of Merger and Reorganization and a related Addendum to acquire Industrial Systems, Inc. ("ISI"). ISI, founded in 1991 and based in Delta, Colorado, provides turn-key engineering procurement and construction services to the mining, energy and natural resources industries throughout the United States. The letter of intent calls for FFFC to acquire 100% of the outstanding securities of ISI in an all stock tax-free exchange. The terms of the definitive agreement call for the existing stockholders of ISI to own approximately 80% of the Company's common stock at closing of the transaction. Completion of the transaction is subject to FFFC having no liabilities on its balance sheet unless mutually agreed upon, as well as further due diligence by each party, and other customary pre-closing conditions. The Company has not been able to meet the conditions to close the transaction and the letter of intent has expired. However, ISI and the Company have recently begun new discussions regarding a potential merger.
The Company evaluates, on an ongoing basis, potential business acquisition/restructuring opportunities that become available from time to time, which management considers in relation to its corporate plans and strategies.
Return of Company Common Stock from HPI:
On January 2, 2007, pursuant to the terms of a Redemption, Stock, Sale and Release Agreement (the “Redemption Agreement”) by and between HPI and the Company, the Company (i) redeemed 8,917,344 shares of FFFC’s common stock held by HPI, (ii) acquired from HPI an aggregate of 5,000 shares of common stock of Denaris Corporation, a Delaware corporation (“Denaris”), (iii) acquired from HPI an aggregate of 1,000 shares of common stock of Key Financial Systems, Inc., a Delaware corporation (“Key Financial”), and (iv) acquired from HPI an aggregate of 1,000 shares of common stock of Nova Financial Systems, Inc., a Delaware corporation (“Nova Financial”). Denaris was a majority owned subsidiary of HPI, and Key Financial and Nova Financial were wholly owned subsidiaries of HPI. Denaris, Key Financial and Nova Financial do not have significant operations. The shares of common stock of each entity transferred by HPI pursuant to the Redemption Agreement constituted all of HPI’s holdings in each entity. In consideration of the redemption and acquisition of the shares of Denaris, Key Financial and Nova Financial, FFFC released HPI from all outstanding payment obligations of HPI to the Company which totaled $5,814,617, including obligations under a Secured Promissory Note dated March 14, 2006 in favor of the Company in the principal face amount of $5,000,000 (the “FastFunds Note”). The outstanding balance on the FastFunds Note, including principal and interest accrued, as of the date of the Redemption Agreement was $5,402,398. HPI released the Company from all payment obligations of the Company to HPI, which totaled $2,151,572. The Company allocated the difference between the value of the assets received and the consideration exchanged as an increase to additional paid-in capital.
After the closing of the Redemption Agreement, HPI held 3,500,000 shares of FFFC common stock, constituting approximately 42.8% of FFFC’s outstanding common stock at December 31, 2008. These
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 1. | Business and organization, asset sale, and going concern and management’s plans (continued): |
Return of Company Common Stock from HPI (continued):
shares have been pledged as collateral on certain notes of HPI. During 2008 as a result of the assumption of this debt by HPI Partners, LLC., (“HPIP”) and the subsequent foreclosure by the debt holders upon HPIP. HPIP owns the 3.5 million shares. The principal managers of HPIP are Messrs. Fong and Olson. Mr. Fong is the Chairman and CEO of FFFC and Mr. Olson is the secretary of FFFC. As of December 31, 2008, the Company holds 1,546,036 shares of common stock of HPI. Pursuant to the Redemption Agreement, the Company and HPI each provided the other certain registration rights relating to the common stock of such party held by the other party.
On January 18, 2008, the Company filed a complaint in the Superior Court of Washington in King County (the “Superior Court”). The complaint was filed by FastFunds Financial Corporation, Daniel Bishop, Barbara M. Schaper, HP Services LLC, VP Development Corporation, and Gulfstream Financial Partners, LLC (collectively, the “Plaintiffs”) against Dilbagh Singh Gujral, Ricky Gurdish Gujral, Virendra Chaudhary, Gurinder Dilawari, Global Hydrofuels Technology, Inc. (“GHTI”) and Hydrogen Power, Inc. (collectively, the “Defendants”).
Messrs. Chaudhary and Dilawari are directors of HPI. GHTI is the majority shareholder of HPI. Ricky Gurdish Gujral is the former chief executive officer of HPI. The complaint alleges fraud, misappropriation of corporate opportunity and breach of fiduciary duty by the Defendants relating to the merger of Equitex, Inc. and Hydrogen Power, Inc., the Sublicense Agreement with GHTI, and payments to Ricky Gurdish Gujral. The complaint seeks the appointment of a receiver to take possession of the property and assets of the Company and to manage and operate the Company pending completion of the action. The complaint also seeks damages in the excess of $3,000,000, exemplary damages, attorney’s fees plus interest and costs and any other relief the court finds just and proper. On January 25, 2008, the Superior Court appointed a receiver of HPI with respect to HPI’s assets. Some assets have been recovered by the Receiver. One of the defendants has filed a counterclaim asserting that the action is frivolous; the Plaintiffs have denied the counterclaim in its entirety. GHTI has sought arbitration regarding ownership of certain patent applications and other intellectual property. GHTI was granted a stay of this case until the arbitration is complete.
| 2. | Summary of significant accounting policies: |
Cash and cash equivalents:
For the purpose of the financial statements, the Company considers all highly-liquid investments with an original maturity three-months or less to be cash equivalents.
Accounts (credit card) receivables and revenue recognition:
Accounts (credit card) receivables are stated at cost plus refundable and earned fees (the balance reported to customers), reduced by allowances for refundable fees and losses. Management believes that part of this receivable will not be collected in the next twelve months and accordingly has reclassified a portion of the receivable as non-current on the accompanying balance sheet.
Fees (revenues) are accrued monthly on active credit card accounts and included in credit card receivables, net of estimated uncollectible amounts. Accrual of income is discontinued on credit card accounts that have been closed or charged off. Accrued fees on credit card loans are charged off with the card balance, generally when the account becomes 90 days past due.
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 2. | Summary of significant accounting policies: |
Cash and cash equivalents (continued):
The allowance for losses is established through a provision for losses charged to expenses. Credit card receivables are charged against the allowance for losses when management believes that collectability of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated losses on existing receivables, based on evaluation of the collectability of the accounts and prior loss experience. This evaluation also takes into consideration such factors as changes in the volume of the loan portfolio, overall portfolio quality and current economic conditions that may affect the borrowers’ ability to pay. While management uses the best information available to make its evaluations, this estimate is susceptible to significant change in the near term.
The accompanying consolidated financial statements are prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“USGAAP”). The consolidated financial statements of the Company include the Company and its subsidiaries. All material inter-company balances and transactions have been eliminated.
Notes and advances receivable:
The Company has made notes and advances to various officers, affiliates and employees of the Company under various loan agreements (Notes 3 and 9). The notes and advances made to officers were made prior to the acquisition of Chex by HPI in December 2001. The Company’s allowance for doubtful notes receivable is adjusted based on the Company’s assessment of the collectability of each individual note and advance receivable, as well as the aging of the notes and advances receivable. After all attempts to collect a note receivable have failed, the note receivable is written-off against the allowance. Based on management’s evaluation of repayment intentions, and in consideration of SAB topic 4-E regarding receivables due from a former director, $253,366, $354,166 and $454,966 of the total face value amount is presented as a reduction of stockholders’ equity at December 31, 2008, 2007 and 2006, respectively.
Property, equipment and leaseholds:
Property, equipment and leaseholds are stated at cost, and depreciation is provided by use of accelerated and straight-line methods over the estimated useful lives of the assets. The cost of leasehold improvements is depreciated over the estimated useful life of the assets or the length of the respective leases, whichever period is shorter. The estimated useful lives of property, equipment and leaseholds are as follows:
| Office equipment, furniture and vehicles | 3 to 7 years |
| Computer hardware and software | 3 to 5 years |
| Leasehold improvements | 7 years |
Impairment of HPI common stock:
At December 31, 2008 and December 31, 2007, the Company owned 1,546,036 shares of common stock of HPI. At December 31, 2006, the Company presented its investment in HPI common stock as a component of stockholders’ equity deficiency at cost in a manner similar to treasury stock. This presentation was based upon the Company’s consideration of the provisions of Emerging Issues Task Force (“EITF”) Issue No. 98-2, Accounting by a Subsidiary or Joint Venture for an Investment in the Stock of its Parent Company or Joint Venture Partner (“EITF 98-2”). This EITF discusses that in the separate financial statements of a subsidiary; an investment in the common stock of a parent whose only significant
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 2. | Summary of significant accounting policies (continued): |
Impairment of HPI common stock (continued):
asset is its investment in the subsidiary is essentially the same as stock of the subsidiary and should be classified as a reduction to stockholders’ equity. In April 2007, the Company transferred all of its securities classified as a component of stockholders’ equity deficiency to an available-for-sale security. The cost of the securities at the date of the transfer was $6,801,000. The fair value of the securities at the date of transfer was $1,206,000. The difference at the date of the transfer between cost and fair value of the securities was recorded as a reduction to additional paid-in capital. The transfer of securities resulted from the Company no longer being a subsidiary of HPI in 2007; therefore, the provisions of EITF 98-2 are no longer applicable.
Impairment of HPI common stock (continued):
Unrealized gains and losses are computed on the basis of specific identification and are reported as a separate component on comprehensive income (loss), included as a separate item in shareholders’ equity deficiency. The unrealized loss reported through September 30, 2007 was $588,000 resulting in a balance of $618,000, reported as available-for-sale securities at September 30, 2007. Realized gains, realized losses, and declines in value, judged to be other-than-temporary, are included in other income (expense). Due to the status of HPI and the then current market price of HPI common stock of $0.05 per share as of March 17, 2008, management believed that the decline in value is other than temporary and accordingly, reduced the available-for-sale security to zero as of December 31, 2007 and has included $1,206,000 in other expense for the year ended December 31, 2007.
The Company does not accrue for estimated future legal and related defense costs, if any, to be incurred in connection with outstanding or threatened litigation and other disputed matters but rather, records such as period costs when the services are rendered.
Loss per share of common stock is computed based on the weighted average number of common shares outstanding during the period. Stock options, warrants, and common stock underlying convertible promissory notes are not considered in the calculations for the periods ended December 31, 2008, 2007 and 2006, as the impact of the potential common shares, which total 4,079,280 (2008), 4,204,280 (2007), and 2,335,280 (2006), would be antidilutive and decrease loss per share. Therefore, there is no diluted loss per share presented in 2008, 2007 and 2006.
Preparation of the consolidated financial statements in accordance 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 and disclosure of contingent assets and liabilities at the dates of the balance sheets and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 2. | Summary of significant accounting policies (continued): |
Fair value of financial instruments:
The estimated fair value of financial instruments has been determined by the Company using available market information and appropriate methodologies; however, considerable judgment is required in interpreting information necessary to develop these estimates. Accordingly, the Company’s estimates of fair values are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
The fair values of cash and cash equivalents, current non-related party accounts receivable, and accounts payable approximate their carrying amounts because of the short maturities of these instruments.
The fair values of notes and advances receivable from non-related parties approximate their net carrying values because of the allowances recorded as well as the short maturities of these instruments. The fair values of receivables from related parties are not practicable to estimate, based upon the related party nature of the underlying transactions.
The fair values of notes and loans payable to non-related parties approximate their carrying values because of the short maturities of these instruments. The fair value of long-term debt to non-related parties approximates carrying values, net of discounts applied, based on market rates currently available to the Company. The fair value of the notes payable to related parties (presented as a reduction in stockholders’ equity deficiency) are not practicable to estimate, based on the related party nature of the underlying transactions.
Accounting for obligations and instruments potentially settled in the Company’s common stock:
The Company accounts for obligations and instruments potentially to be settled in the Company's stock in accordance with EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company’s Own Stock. This issue addresses the initial balance sheet classification and measurement of contracts that are indexed to, and potentially settled in, the Company's stock.
Under EITF 00-19, contracts are initially classified as equity or as either assets or liabilities, depending on the situation. All contracts are initially measured at fair value and subsequently accounted for based on the then current classification. Contracts initially classified as equity do not recognize subsequent changes in fair value as long as the contracts continue to be classified as equity. For contracts classified as assets or liabilities, the Company reports changes in fair value in earnings and discloses these changes in the financial statements as long as the contracts remain classified as assets or liabilities. If contracts classified as assets or liabilities are ultimately settled in shares, any previously reported gains or losses on those contracts continue to be included in earnings. The classification of a contract is reassessed at each balance sheet date.
Stock-based compensation:
The Company has one stock option plan approved by FFFC’s Board of Directors in 2004, and also grants options and warrants to consultants outside of its stock option plan pursuant to individual agreements.
On January 1, 2006, the Company adopted the provisions of, and accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards (SFAS) No. 123 – revised 2004 (“SFAS 123R”) Share-Based Payment which replaced SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”) and supersedes Opinion No. 25 of the Accounting Principles Board, Accounting for
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 2. | Summary of significant accounting policies (continued): |
Stock-based compensation (continued):
Stock Issued to Employees (APB 25). The Company elected the modified-prospective method, under which prior periods are not revised for comparative purposes.
Previously, the Company accounted for stock-based employee and director compensation using the intrinsic method under APB 25. There were no options granted during the year ended December 31, 2008. During the year ended December 31, 2007, the Company granted to officers and directors 70,000 options to purchase shares of common stock at $0.75 per share (the market value of the common stock on the date of the grant). The options were valued at $39,151 based upon the Black-Scholes option pricing model (approximately a $0.56 grant date fair value per option). These options were fully-vested at the date of the grant. There were no options granted during the year ended December 31, 2006, and all options granted prior to the adoption of SFAS 123R were fully-vested. As a result, no stock option expense was required to be recorded in 2006. Therefore, there was no effect of the change on 2006 operations.
The fair value of options and warrants granted to purchase FFFC and HPI common stock were estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions for 2007.
| | 2007 |
| | |
| Expected dividend yield | 0 |
| Expected stock price volatility | 119% - 132% |
| Risk fee interest rate | 4.48% - 4.79% |
| Expected life of options | 3 years |
The Company’s stock option plan is more fully described in Note 9.
Certain minor reclassifications to amounts reported in the 2007 consolidated financial statements have been made to conform to the 2008 presentation.
Recently issued accounting pronouncements:
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. This statement, as it relates to financial assets and liabilities, is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. On
February 12, 2008, the FASB issued FSP No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which delayed the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis, until January 1, 2009 for calendar year-end entities. Upon adoption, the provisions of SFAS No. 157 are to be applied prospectively with limited exceptions. The adoption of SFAS No. 157 is not expected to have a material impact on our consolidated financial statements.
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 2. | Summary of significant accounting policies (continued): |
Recently issued accounting pronouncements (continued):
In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Financial Liabilities”, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company did not adopt SFAS No. 159 on any individual instrument as of January 1, 2008.
In May 2007, the FASB issued FSP FIN No. 46R-7, "Application of FASB Interpretation No. 46(R) to Investment Companies." FSP FIN No. 46R-7 amends the scope of the exception to FIN No. 46R to state that investments accounted for at fair value in accordance with the specialized accounting guidance in the American Institute of Certified Public Accountants Audit and Accounting Guide, Investment Companies, are not subject to consolidation under FIN No. 46R. This interpretation is effective for fiscal years beginning on or after December 15, 2007. The Company does not expect the adoption of FSP FIN No. 46R-7 to have a material impact on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R is a revision to SFAS No. 141 and includes substantial changes to the acquisition method used to account for business combinations (formerly the “purchase accounting” method), including broadening the definition of a business, as well as revisions to accounting methods for contingent consideration and other contingencies related to the acquired business, accounting for transaction costs, and accounting for adjustments to provisional amounts recorded in connection with acquisitions. SFAS No.141R retains the fundamental requirement of SFAS No. 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141R is effective for periods beginning on or after December 15, 2008, and will apply to all business combinations occurring after the effective date. The Company is currently evaluating the requirements of SFAS No. 141R.
The FASB also issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – an amendment of Accounting Research Bulletin No. 51, Consolidated Financial Statements” in December 2007. This statement amends ARB No. 51 to establish new standards that will govern the (1) accounting for and reporting of non-controlling interests in partially owned consolidated subsidiaries and (2) the loss of control of subsidiaries. Non-controlling interest will be reported as part of equity in the consolidated financial statements. Losses will be allocated to the non-controlling interest, and, if control is maintained, changes in ownership interests will be treated as equity transactions. Upon a loss of control, any gain or loss on the interest sold will be recognized in earnings. SFAS No. 160 is effective for periods beginning after December 15, 2008. The Company is currently evaluating the requirements of SFAS No. 160.
The FASB also issued SFAS No. 161 “Disclosures About Derivatives Instruments and Hedging Activities” in March 2008. This statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This statement is effective for financial statements for fiscal years and interim periods beginning after November 15, 2008, with earlier application encouraged. The Company is currently evaluating the requirements of SFAS No. 161.
The Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes” - an Interpretation of FASB Statement No. 109 (“FIN 48”) on January 1, 2007. There were no unrecognized tax benefits and there was no effect on the Company’s financial condition or results of operations as a result of implementing FIN 48. The Company files income tax returns in the U.S. federal jurisdiction and various state and jurisdictions. The Company is
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 2. | Summary of significant accounting policies (continued): |
Recently issued accounting pronouncements (continued):
no longer subject to U.S. federal tax examinations for years before 1995, and state tax examinations for years before 1995. Management does not believe there will be any material changes in our unrecognized tax positions over the next 12 months. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, there was no accrued interest or penalties associated with any unrecognized tax benefits, nor were any interest expense recognized during the quarter.
| 3. | Notes and interest receivable: |
Notes and interest receivable at December 31, 2008 and 2007, consist of the following:
| | | 2008 | | | 2007 | |
| Note receivable, ISI; interest at 6%; matured April 2007; currently in default | | | $50,000 | | | | $50,000 | |
| | | | | | | | | |
Note receivable (Denaris) from Paymaster Jamaica (see Redemption Agreement) (Note 1); interest at 10%, collateralized by a pledge of Paymaster Jamaica common shares by Paymaster Jamaica's president; note matured in August 15, 2008; currently in default; payments of interest only due semi-annually beginning August 15, 2003 through maturity (received payments of $100,000 through December 31, 2008); a valuation allowance of $250,000 has been recorded against this receivable at December 31, 2008 and 2007 [A] | | | 339,575 | | | | 439,575 | |
| | | | | | | | | |
Note receivable from Coast ATM, LLC; interest at 10%; maturity November 2005; a valuation allowance of $50,000 has been recorded against this receivable at December 31, 2008 and 2007, respectively; in default and non-performing [A] | | | 50,000 | | | | 50,000 | |
| | | | 439,575 | | | | 539,575 | |
| Less current maturities | | | (139,575 | ) | | | (170,000 | ) |
| | | | | | | | | |
| Notes and interest receivable, net of current portion, before valuation allowance | | | 300,000 | | | | 369,575 | |
| Less valuation allowance | | | (300,000 | ) | | | (300,000 | ) |
| | | | | | | | | |
| Notes and interest receivable, long-term | | | $0 | | | | $69,575 | |
| | [A] | The Company is no longer accruing interest on these non-performing loans due to uncertainty as to substantial collection. |
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 3. | Notes and interest receivable (continued): |
Changes in the allowance for notes and interest receivable for the years ended December 31, 2008, 2007 and 2006 are as follows:
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
| Balances, beginning of year | | | $300,000 | | | | $316,500 | | | | $336,500 | |
| Additions charged to costs and expenses | | | | | | | | | | | | |
| (deducted from notes receivable) | | | - | | | | 250,000 | | | | 255,000 | |
| Deductions credited to costs and expenses | | | | | | | | | | | | |
| (added to notes receivable) | | | - | | | | (205,000 | ) | | | (275,000 | ) |
| Deductions to the allowance for final | | | | | | | | | | | | |
| settlements | | | - | | | | (61,500 | ) | | | - | |
| | | | | | | | | | | | | |
| Balances, end of year | | | $300,000 | | | | $300,000 | | | | $316,500 | |
Accrued liabilities at December 31, 2008 and 2007 were $1,420,611, and $835,274, respectively, and were comprised of:
| | | 2008 | | | 2007 | |
| | | | | | | |
| Legal fees | | | $297,797 | | | | $263,849 | |
| Interest | | | 670,678 | | | | 188,639 | |
| Accounting fees | | | 17,758 | | | | 83,883 | |
| Consultants and advisors | | | 101,800 | | | | 52,000 | |
| Director’s fees | | | 129,159 | | | | 81,239 | |
Registration rights | | | 98,013 | | | | 98,013 | |
| Other | | | 56,437 | | | | 67,651 | |
| | | | | | | | | |
| | | | $1,371,642 | | | | $835,274 | |
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 5. | Promissory notes, including related parties and current portions of long-term debt: |
Promissory notes, including related parties and current portions of long-term debt at December 31, 2008 and 2007, consist of the following:
| | | 2008 | | | 2007 | |
| | | | | | | |
| Promissory notes payable: | | | | | | |
| | | | | | | |
| Various, including related parties of $392,922 (2008) and $196,072 (2007); interest rate ranging from 8% to 10% [A] | | | $498,647 | | | | $196,072 | |
| | | | | | | | | |
Notes payable; interest rates ranging from 9% to 15%; interest payable quarterly; the notes are unsecured, matured on February 28, 2008; currently in default and past due [B] | | | 2,090,719 | | | | 2,128,600 | |
| | | | | | | | | |
| | | | $2,589,366 | | | | $2,324,672 | |
| | | | | | | | | |
| Long-term debt: | | | | | | | | |
| | | | | | | | | |
Convertible debentures, net of discount of $5,223 (2007) [C] | | | $- | | | | $132,277 | |
| | | | | | | | | |
| Less current portion | | | - | | | | (132,277 | ) |
| | | | | | | | | |
| Long-term debt, net of current portion | | | $- | | | | $0 | |
The weighted average interest rate on short-term borrowings was 20.1%, 14.4% and 10.3% in 2008, 2007 and 2006, respectively.
| [A] | Includes a note for professional services rendered of $70,125 to GHP Horwath, P.C. (“GHP”) the Company’s auditors through 2006. The note matured on July 9, 2008 and is in default. GHP filed a complaint for the unpaid amount plus interest and attorney fees pursuant to the note described herein. The Company has answered the complaint with affirmative defenses. Initial discussions of settlement have begun, but no settlement has been made. |
| | [B] | These notes payable (the “Promissory Notes”) originally became due on February 28, 2007. At that time, the Company renewed $283,000 of the Promissory Notes on the same terms and conditions as previously existed. The Company has failed to pay interest and the principal amount of these notes. The Company received complaints filed from several of these note holders. The Company has not responded to these complaints and accordingly the plaintiffs were awarded default judgments. In April 2007 the Company, through a financial advisor, restructured $1,825,000 of the Promissory Notes (the “Restructured Notes”). The Company has accrued an expense of $36,500 to compensate the financial advisor 2% of the Restructured Notes as well as having issued 150,000 shares of common stock to the financial advisor (Note 7). The Restructured Notes carry a stated interest rate of 15% (a default rate of 20%) and matured on February 28, 2008. The Company has not paid the interest due since September 30, 2007 and no principal payments on the Promissory Notes have been made in 2008 and accordingly, they are in default. |
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 5. | Promissory notes, including related parties and current portions of long-term debt (continued): |
The chairman of the board of the Company has personally guaranteed up to $1 million of the Restructured Notes and two other non-related individuals each guaranteed $500,000 of the Restructured Notes. In consideration of their guarantees the Company granted warrants to purchase a total of 1,600,000 shares of common stock of the Company at an exercise price of $0.50 per share, expiring in March 2010. The warrants were valued at $715,200 using the Black-Scholes option pricing model and are being amortized over the one-year term of the Restructured Notes.
In January 2008, the Company and the three guarantors received a complaint filed by the financial advisor (acting as agent for the holders of the Restructured Notes) and the holders of the Restructured Notes. The claim is seeking $1,946,250 plus per diem interest beginning January 22, 2008 at the rate of twenty percent (20%) per annum plus $37,000 due the financial advisor for unpaid fees. Some of the plaintiffs have filed a motion for summary judgment and a motion for sanctions for failure of certain witnesses to appear for depositions.
| | [C] | In December 2006, the Company entered into a purchase agreement with two accredited investors for the issuance and sale of $50,000 of 10% unsecured convertible debentures in private transactions (the “2006 Debentures”). The Company received $45,000 from these transactions net of $5,000 of debt issuance costs, which will be amortized over the three-year term of the Debentures. |
The Debentures are convertible at 75% of the average closing bid price per share of the Company’s common stock for the twenty days immediately preceding the date of conversion. The Debentures cannot be converted until nine months after the issuance date of each Debenture.
The Company has determined that the conversion feature represents an embedded derivative. Since the Debentures are convertible into a variable number of shares upon conversion, the conversion feature is not considered to be conventional and therefore must be bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value if these derivative instruments have been recorded as a liability in the consolidated balance sheet with the corresponding amount recorded as a discount to the Debentures. The change in the fair value of the derivative liability will be remeasured at each balance sheet reporting date with any difference recorded as other income (expense) in the consolidated statement of operations.
For the period from the issuance date to December 31, 2006, the Company reduced the previously recorded liability by $9,099 resulting in a recorded derivative liability of $11,521 at December 31, 2006.
During the year ended December 31, 2007, the Company entered into purchase agreements with accredited investors for the issuance and sale of $87,500 of 10% unsecured convertible debentures in private transactions (the “2007 Debentures”). In 2007 the Company received $78,750 from these transactions net of $8,750 of debt issuance costs, which will be amortized over the three-year term of the Debentures. The Debentures are convertible at 75% of the average closing bid price per share of
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 5. | Promissory notes, including related parties and current portions of long-term debt (continued): |
the Company’s common stock for the twenty days immediately preceding the date of conversion. The Debentures cannot be converted until nine months after the issuance date of each Debenture. The Company has determined that the conversion feature represents an embedded derivative. Since the Debentures are convertible into a variable number of shares upon conversion, the conversion feature is not considered to be conventional and therefore must be bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of these derivative instruments of $24,515 has been recorded as a liability in the consolidated balance sheet with the corresponding amount recorded as a discount to the Debentures. The change in the fair value of the derivative liability will be remeasured at each balance sheet reporting date with any difference recorded as other income (expense) in the consolidated statement of operations.
At December 31, 2007, the Company revalued all derivative liabilities. Therefore, for the period from December 31, 2006 to December 31, 2007 the Company recorded an expense and increased the previously recorded liabilities by $364,312 resulting in a derivative liability balance of $375,833 at December 31, 2007. In February 2008, the Company issued 842,835 shares of our common stock upon the conversion of $137,500 of convertible debentures and unpaid interest of $14,842. The shares were issued at approximately $0.18 per share pursuant to the debenture agreement. Additionally, $404,535 that was previously expensed and recorded as a derivative liability on the balance sheet at December 31, 2007 was eliminated with the offset to additional paid-in-capital.
The Company has amounts due to HPI as of December 31, 2008 and 2007 of $75,000 and $2,151,572 as of December 31, 2006. The 2006 amount was comprised of $1,844,000 related to its utilization of a portion of HPI’s net operating loss carryforwards (Note 8). In addition, during 2006 the Company recorded a liability to HPI in the amount of $450,000 related to its acquisition of 300,000 shares of HPI common stock (Note 9) valued at $1.50 per share, its trading price on the date of the transaction. In December 2006, the Company repaid HPI $142,428 of this obligation. In January 2007, in conjunction with the return of Company common stock from HPI (Note 1), the Company released HPI from the $2,151,572 then due.
| 7. | Commitments and contingencies: |
Litigation:
The Company is involved in various claims and legal actions ( as described in footnotes 1 and 5) arising in the ordinary course of business. Although unable to estimate minimum costs, if any, in the opinion of management, the ultimate disposition of these matters may have a material adverse impact either individually or in the aggregate on future consolidated results of operations, financial position or cash flows of the Company.
Beginning February 2007, the Company began leasing office space in West Palm Beach, Florida, its corporate headquarters for approximately $2,900 per month. This lease expires February 2010 and increases by approximately 5% from February 1, 2008 and 2009. Pursuant to this lease, the Company is also required to pay its pro-rata share of taxes, operating expenses and improvement costs.
Future approximate minimum lease payments due under this lease as of December 31, 2008, are as follows:
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 7. | Commitments and contingencies (continued): |
Operating lease (continued):
| Year ending December 31, | | Amount |
| | | |
| 2009 | | $ 37,000 |
| 2010 | | 3,200 |
| | | |
| | | $ 40,200 |
Rent expense for the years ending December 31, 2008, 2007 and 2006 was approximately $38,350, $32,000 and $54,000, respectively.
Consulting agreements:
In February 2006, the Company entered into a consulting agreement with a financial advisor (a former officer of the Company is a partner) to provide assistance to the Company in the placement of debt or equity financing with prospective investors. The term of the agreement is for three years, but can be terminated at any time by either party with 60 days notice. The advisor is to be compensated if the advisor is successful in completing a debt or equity financing for or on behalf of the Company. During 2006, the financial advisor assisted the Company in restructuring and or obtaining approximately $4,500,000 of investor notes. Pursuant to the agreement, the advisor was paid $134,972 and received 75,000 shares of common stock of HPI. The shares were valued at $224,215 and are included in general and administrative expenses for the year ended December 31, 2006.
In addition, the advisor received warrants to purchase up to 436,206 shares of the Company’s common stock at an exercise price of $1.00 per share. The warrants were valued at $355,000 based upon the Black-Scholes option-pricing model which was included in selling, general and administrative expenses for the year ended December 31, 2006.
In 2007, pursuant to the Restructured Notes (Note 5), the Company issued 150,000 shares of its common stock to the financial advisor. The shares were valued at $112,500 (based on the market price of $0.75 of the common stock on the date of the agreement). Additionally, the Company agreed to pay $36,500 (included in accrued liabilities at December 31, 2007). Since the terms of the Restructured Notes included extending the notes to February 28, 2008, the Company is amortizing the total cost of $149,000 over the one-year renewal of the notes and $124,166 is included in interest expense for the year ending December 31, 2007.
In conjunction with the Asset Sale, an officer signed a five-year non-compete agreement with the buyer and also signed a release, waiving his right to any future commissions that he was previously entitled to. The Company agreed to compensate the officer $100,800 annually, over the five-year term of the non-compete agreement. Such compensation is to be applied to reduce the loan and interest receivable from the officer. If the officer breaches his non-compete agreement, the officer is no longer entitled to compensation and will be liable for any amount remaining on the loan. Accordingly, during 2008 and 2007, the Company recorded consulting expenses of $100,800 each year, and the interest and note receivable from the officer has been reduced by $100,800 for 2008 and 2007 (Note 9).
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 7. | Commitments and contingencies (continued): |
In March 2004, HPI closed on $5 million of debt financing and issued convertible promissory notes to two financial institutions (the “Lenders”). The proceeds from the promissory notes were immediately thereafter loaned to Chex. The promissory notes are collateralized, among other things, by all of the assets of Chex and HPI, including the 3.5 million shares of FFFC common stock owned by HPI. In conjunction with the Asset Sale, the Lenders consented to the sale of assets that secured their notes. In contemplation of the Redemption Agreement described above, on December 29, 2006, HPI and the Company obtained the consent of the Lenders to complete the transactions contemplated by the Redemption Agreement. Contemporaneously with receipt of the consent, FFFC (as successor in interest to Chex) reconfirmed its obligations under the guaranty and security agreements previously provided by Chex. The guaranty and security agreements do not expire until the notes are paid in full. On August 6, 2007, HPI received a notice of default from the Lenders. On August 16, 2007, the Lenders and HPI entered into a Forbearance Agreement in consideration of HPI paying $300,000 (paid on August 14, 2007) and making a final payment (the “Final Payment”) of $646,981 by October 15, 2007. During the fourth quarter of 2007 $100,000 of the Final Payment was paid, and there remained an unpaid balance of principal and interest of approximately $561,000. On March 11, 2008, the Lenders notified the court appointed receiver of HPI that that they were foreclosing on the assets of HPI that were collateralizing the loan. During 2008 HPIP assumed the remaining unpaid balance. HPIP paid the balance in 2008. Hpip is a related party to FFFC thru common management.
HPI stock price guaranty:
In May 2006, HPI and the Company negotiated a settlement regarding convertible notes with a face value of $200,000 issued by the Company, whereby HPI issued 180,000 shares of its common stock. In connection with the Settlement Agreement, a Stock Sale and Lock-up Agreement, Registration Agreement and an Escrow Agreement were also entered into (the “Agreements”). Terms of the Agreements stipulate a price protection clause whereby the Company under certain circumstances must reimburse the former debt holders if the market price of the HPI common stock issued to them in the settlement is below $4.00 per share at the time they sell the stock. As a result, the Company has recorded a derivative liability due to the debt holders at December 31, 2008 and December 31, 2007 of $648,000, respectively, and an expense of $198,000 (2007), representing the difference between the market value of the common stock as of each date and the $4.00 stated in the settlement agreement. The amounts are included on the balance sheet in derivative liabilities and on the statement of operations in loss on extinguishment of debt.
The operations of the Company for periods subsequent to its acquisition by HPI and through August 2004, at which time HPI’s ownership interest fell below 80% are included in consolidated federal income tax returns filed by HPI. Subsequent to August 2004 and through January 29, 2006 the Company will file a separate income tax return. As of January 30, 2006, HPI’s ownership interest again exceeded 80% and the operations of the Company will be included in a consolidated federal income tax from that date through October 29, 2006 when the ownership fell below 80%. As of October 30, 2006, the Company will be filing separate income tax returns. For financial reporting purposes, the Company’s provision for income taxes has been computed, and current and deferred taxes have been allocated on a basis as if the Company has filed a separate income tax return for each year presented. Management assesses the
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 8. | Income taxes (continued): |
realization of its deferred tax assets to determine if it is more likely than not that the Company's deferred tax assets will be realizable. The Company adjusts the valuation allowance based on this assessment.
Income tax expense for 2006 was $856,913. This amount is primarily related to deferred income tax expense recorded as a result of the Asset Sale in January 2006. This expense primarily represents the use of HPI’s net operating loss carryforwards, as the Company does not have sufficient net operating loss carryforwards available to offset the total taxable gain on the Asset Sale. Accordingly, the Company has recorded a liability to Parent company of $1,844,000 comprised of the 2006 deferred tax expense of $851,000, as well as the 2005 deferred tax expense of $993,000.
Income tax expense for 2008, 2007 and 2006, is as follows:
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
| Current: | | | | | | | | | |
| Federal | | | $- | | | | $- | | | | $- | |
| State | | | - | | | | - | | | | 5,913 | |
| | | | | | | | | | | | | |
| | | | - | | | | - | | | | 5,913 | |
| | | | | | | | | | | | | |
| Deferred: | | | | | | | | | | | | |
| Federal | | | 1,118,421 | | | | 1,107,684 | | | | 365,000 | |
| State | | | 131,579 | | | | 130,316 | | | | 44,000 | |
| Valuation allowance | | | (1,250,000 | ) | | | (1,238,000 | ) | | | 442,000 | |
| | | | | | | | | | | | | |
| | | | - | | | | - | | | | 851,000 | |
| | | | | | | | | | | | | |
| | | | $- | | | | $- | | | | $856,913 | |
The following is a summary of the Company’s deferred tax assets and liabilities at December 31, 2008 and 2007:
| | | 2008 | | | 2007 | |
| | | | | | | |
| Deferred tax assets - current: | | | | | | |
| Allowance for losses on notes receivable | | | $- | | | | $114,000 | |
| Stock-based compensation and other | | | 792,000 | | | | 746,000 | |
| Net operating loss carryforwards | | | 458,000 | | | | 378,000 | |
| | | | 1,250,000 | | | | 1,238,000 | |
| | | | | | | | | |
| Less valuation allowance | | | (1,250,000 | ) | | | (1,238,000 | ) |
| | | | | | | | | |
| | | | | | | | | |
| Net deferred tax assets | | | $- | | | | $- | |
A reconciliation between the expected tax expense (benefit) and the effective tax rate for the years ended December 31, 2008, 2007 and 2006, respectively, are as follows:
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 8. | Income taxes (continued): |
| | | 2008 | | 2007 | | 2006 |
| | | | | | | |
| Statutory federal income tax rate | | (34%) | | (34%) | | (34%) |
| State taxes, net of federal income tax | | (4%) | | (4%) | | (4%) |
| Effect of change in valuation allowance | | - | | 21% | | 80% |
| Non deductible expenses and other | | 38% | | 17% | | 113% |
| | | | | | | |
| | | 0% | | 0% | | 155% |
At December 31, 2006, the Company had utilized all of its net operating loss carryforwards available for federal and state income tax purposes. For the year ended December 31, 2008, the Company had a tax net operating loss carry forward of approximately $1,206,000. Any unused portion of this carry forward expires in 2028. Utilization of this loss may be limited in the event of an ownership change pursuant to IRS Section 382. The Company’s valuation allowance increased $12,000 during the year ended December 31, 2007.
| 9. | Stockholders’ equity deficiency: |
Common stock:
During 2006, the Company issued 149,943 shares of common stock upon the cashless exercise of warrants to purchase 178,000 shares of common stock.
In March 2007, the Company issued 150,000 shares of common stock to a financial advisor (Note 6). The Company also issued 250,000 shares of common stock as payment for $125,000 of unpaid legal services. The shares were valued at $0.50 per share (the market price of the common stock on the date of conversion).
In August 2007, the Company issued 86,206 shares of common stock in the aggregate to three individuals for consideration for their purchase of $150,000 of an outstanding note from a note holder. The shares were valued at $0.29 per share, or $25,000, which is included in interest expense for the year ended December 31, 2007.
During 2007, the Company issued 181,686 shares of common stock upon the cashless exercise of warrants to purchase 226,000 shares of common stock.
In February 2008, the Company issued 842,835 shares of common stock in satisfaction of $137,500 of convertible debentures, derivative liability of $404,535 and accrued interest of $14,842. The shares were valued at approximately $0.18 per share.
Stock options:
The Company has a stock option plan (the “Plan”) which was approved by the Board of Directors in July 2004 and which permits the grant of shares to attract, retain and motivate employees, directors and consultants of up to 1.8 million shares of common stock. Options are generally granted with an exercise price equal to the Company’s market price of its common stock on the date of the grant and vest immediately upon issuance. In 2005, the Company granted to officers and directors 385,000 options under the Plan to purchase shares of common stock at an exercise price of $1.10 per share (the market value of the common stock at the date of the grant).
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 9. | Stockholders’ equity deficiency (continued): |
Stock options (continued):
There were no options granted during the year ended December 31, 2008.
During the year ended December 31, 2007, the Company granted officers and directors 70,000 options to purchase shares of common stock at an exercise price of $0.75 per share (the market value of the common stock on the date of the grant). The options were valued at $39,151 based upon the Black-Scholes option pricing model (approximately a $0.56 grant date fair value per option). The options were fully-vested at the date of the grant and therefore, the Company recorded $39,151 of stock-based compensation expense during the year ended December 31, 2007. All options outstanding at December 31, 2008 are fully vested and exercisable. A summary of outstanding balances at December 31, 2008 is as follows:
| | | | Weighted- | | Weighted- | | Aggregate |
| | | | Average | | Average | | Intrinsic |
| | Options | | exercise price | | Remaining contractual life | | Value |
| | | | | | | | |
| Outstanding at January 1, 2008 | 455,000 | | $1.05 | | 5.97 | | $0 |
| Options expired | (125,000) | | $1.10 | | | | |
| | | | | | | | |
| Outstanding at December 31, 2008 | 330,000 | | $1.03 | | 6.98 | | $0 |
The fair value of options granted to purchase the Company’s common stock were estimated on the date of the grant using the Black Scholes option pricing model with the following assumptions used for the 2007 grants:
| Expected dividend yield | | 0 |
| Expected stock price volatility | | 126.8% |
| Risk fee interest rate | | 4.79% |
| Expected life of options | | 3 years |
The expected term of stock options issued to employees represents the period of time that the stock options granted are expected to be outstanding based on historical exercise trends. The expected life of stock options and warrants issued to third parties is the contractual life. The expected volatility is based on the historical price volatility of FFFC’s common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options. The dividend yield represents FFFC’s anticipated cash dividend over the expected life of the stock options.
In January 2007 the Company issued warrants to purchase 500,000 shares of its common stock to a third party for their guaranty of an obligation that the Company is a guarantor. The warrants have an exercise price of $0.50 per share, expire in January 2010 and were valued at $255,050 based upon the Black-
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 9. | Stockholders’ equity deficiency (continued): |
Warrants (continued):
Scholes option pricing model. As the services have been provided, the $255,050 has been included in selling, general and administrative expense for the year ending December 31, 2007.
In March 2007 the Company issued warrants to purchase 800,000 shares of its common stock to the Chairman of the Board of the Company and additional warrants to purchase an aggregate of 800,000 shares of its common stock was issued to two third parties. The warrants have an exercise price of $0.50, expire in March 2010 and were valued at $715,200 using the Black Scholes option pricing model and are being amortized over a one-year term as the warrants were issued in connection with guarantees given on the Restructured Notes (Note 4). As a result, $596,000 is included in selling, general and administrative expense for the year ending December 31, 2007.
Also in March 2007, the Company granted warrants to purchase 50,000 shares of its common stock to a third party in consideration of a promissory note issued to the third party from ISI. The warrants have an exercise price of $0.50 and expire in March 2010. The Company valued the warrants at $22,350 based upon the Black Scholes option pricing model. As the services have been provided, $22,350 has been included in selling, general and administrative expense for the year ending December 31, 2007.
The weighted average grant date fair value of warrants granted during the years ended December 31, 2007 and 2006 was approximately $0.46 and $0.81, respectively.
A summary of the activity of the Company’s outstanding warrants during 2008 and 2007 is as follows:
| | | Warrants | | Weighted-average exercise price | | Weighted-average grant date fair value | | Aggregate intrinsic value |
| | | | | | | | | |
| Outstanding and exercisable at January 1, 2007 | | 1,950,280 | | $ 1.32 | | $ 0.44 | | $ 186,750 |
| | | | | | | | | |
| Granted | | 2,150,000 | | 0.50 | | 0.46 | | |
| Exercised | | (226,000) | | 0.10 | | 0.90 | | |
| Forfeited | | (125,000) | | 1.81 | | 0.48 | | |
| | | | | | | | | |
| Outstanding and exercisable at December 31, 2007 | | 3,749,280 | | $ 0.91 | | $ 0.42 | | $ 60,480 |
| | | | | | | | | |
| Granted | | | | | | | | |
| Exercised | | | | | | | | |
| Forfeited | | | | | | | | |
| | | | | | | | | |
| Outstanding and exercisable at December 31, 2008 | | 3,749,280 | | $ 0.91 | | $ 0.42 | | $ 0 |
The following table sets forth the exercise price range, number of shares, weighted average exercise price and remaining contractual lives of the warrants by groups as of December 31, 2008.
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 9. | Stockholders’ equity deficiency (continued): |
Warrants (continued):
| Exercise price range | | Number of options outstanding | | Weighted-average exercise price | | Weighted-average remaining life |
| | | | | | | |
| $0.10 | | 189,000 | | $ 0.10 | | .44 |
| $0.50 - $1.00 | | 2,586,206 | | 0.58 | | .96 |
| $1.75 - $2.00 | | 974,074 | | 1.92 | | 1.30 |
| | | | | | | |
| | | 3,749,280 | | $ 0.91 | | 1.17 |
The fair value of warrants granted to purchase the Company’s common stock were estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions used for the grants in the year ended December 31, 2007.
| | 2007 |
| | |
| Expected dividend yield | 0 |
| Expected stock price volatility | 119%-132% |
| Risk fee interest rate | 4.48%-4.68% |
| Expected life of warrants | 3 years |
Investment in HPI:
In 2007 the cost value of the shares were reclassified to available-for-sale securities at the fair value of $1,206,000. The difference at the date of the transfer ($5,595,204) was recorded as a reduction to additional paid-in capital. At December 31, 2007, the Company believed that there was an other than temporary impairment to the value of the HPI and accordingly, the Company has reduced the available-for-sale securities to zero at December 31, 2007 and has included $1,206,000 in other expense for the year ended December 31, 2007.
Notes, advances and interest receivable from related parties:
The Company has notes receivable due from HPI under various loan agreements. In addition, the Company has made advances to HPI to fund its operations. In accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 79, Allocation of Expenses and Related Disclosure in Financial Statements of Subsidiaries, Divisions or Lessor Business Components of Another Entity, certain expenses paid by the Company on behalf of HPI have been charged to the receivables.
The following table summarizes the activity in these accounts for 2008, 2007 and 2006.
| | 2008 | | 2007 | | 2006 |
| | | | | | | | | |
| Beginning principal balances | $ | 354,166 | | $ | 5,867,185 | | $ | 6,070,785 |
| Cash advances | | | | | | | | 424,310 |
| Issuance of HPI common stock to third party for | | | | | | | | |
| Settlement of Chex obligation | | | | | | | | (212,155) |
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 9. | Stockholders’ equity deficiency (continued): |
Notes, advances and interest receivable from related parties (continued):
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
| Chex cash disbursements and accounts payable | | | | | | | | | |
| allocated to HPI and Denaris | | | | | | | | | 459 | |
| Loan to HPI | | | | | | | | | 5,000,000 | |
| Share price guarantee from HPI | | | | | | | | | 126,582 | |
| Issuance of HPI warrants to third party for settlement of | | | | | | | | | | |
| Chex obligation | | | | | | | | | 73,882 | |
| Cash repayments | | | | | | | | | (400 | ) |
| Consulting fees applied to officer’s receivable | | | (100,800 | ) | | | (100,800 | ) | | | (31,334 | ) |
| Receipt of company common stock in return for debt | | | | | | | | | | | | |
forgiveness [A] | | | | | | | (5,412,219 | ) | | | | |
| Receipt of 1,200,000 shares of HPI common stock in | | | | | | | | | | | | |
| payment of principal balance owed as of January 31, | | | | | | | | | | | | |
| 2006 from HPI and Denaris | | | | | | | | | | | (5,584,944 | ) |
| | | | | | | | | | | | | |
Ending principal balances [B] | | | 253,366 | | | | 354,166 | | | | 5,867,185 | |
| | | | | | | | | | | | | |
| Interest receivable, including reclassification of interest | | | | | | | | | | | | |
| due from Parent company (and its subsidiary) of | | | | | | | | | | | | |
| $399,658 (2006) | | | - | | | | - | | | | 399,658 | |
| | | | | | | | | | | | | |
| Ending principal and interest balances | | | $253,366 | | | | $354,166 | | | | $6,266,843 | |
| | [A] | In January 2007, HPI returned 8,917,344 shares of FFFC common stock to the Company, as well as shares of Key, Nova and Denaris that HPI owned in full settlement of amounts due the Company of $5,412,219 in receivables and $402,398 of interest. |
The above balances are presented as a reduction of stockholders’ equity on the accompanying consolidated balance sheets.
| | [B] | The principal balance at December 31, 2008, 2007 and 2006 are as follows: |
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
| HPI | | | $- | | | | $- | | | | $5,412,219 | |
| Denaris | | | - | | | | - | | | | - | |
| Chex officer | | | 253,366 | | | | 354,166 | | | | 454,966 | |
| | | | | | | | | | | | | |
| | | | $253,366 | | | | $354,166 | | | | $5,867,185 | |
In March 2006, HPI issued 1,200,000 shares of its common stock in full settlement of amounts due for HPI and Denaris. The Company applied the market value of the shares of $6,144,000 first to the principal amounts owed ($5,584,944) and the remaining amount of $559,056 to interest as stated above. The Company recorded bad debt expense of $299,794 as a result of the market value, 1,200,000 shares being less than the carrying value of the notes and interest receivable at the date of the transaction.
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2008, 2007 and 2006
| 9. | Stockholders’ equity deficiency (continued): |
Stock subscription receivable:
In August 2004, the Company issued 40,000 shares of FFFC common stock to a convertible note holder in exchange for a stock subscription receivable. In February 2005, 15,000 of the shares were returned to the Company, reducing the stock receivable to $135,000. The $135,000 was written-off during the second quarter of 2006 in conjunction with the Settlement Agreement with the convertible note holders discussed in Note 4.
| 10. | Selected quarterly financial data (unaudited): |
Selected unaudited quarterly financial data for 2008 and 2007 is summarized as follows:
| | | 2008 | |
| | | | | | | | | | | | | |
| | | First | | | Second | | | Third | | | Fourth | |
| | | Quarter | | | quarter | | | Quarter | | | Quarter | |
| | | | | | | | | | | | | |
| Revenues | | | $20,348 | | | | $21,325 | | | | $19,352 | | | | $17,668 | |
| | | | | | | | | | | | | | | | | |
| Gross margin | | | 9,864 | | | | 10,081 | | | | 12,025 | | | | 6,949 | |
| Net loss | | | (491,425 | ) | | | (319,661 | ) | | | (279,672 | ) | | | (271,318 | ) |
| Basic loss per common share | | | (0.06 | ) | | | (0.04 | ) | | | (0.02 | ) | | | (0.03 | ) |
| | | 2007 | |
| | | | | | | | | | | | | |
| | | First | | | Second | | | Third | | | Fourth | |
| | | Quarter | | | quarter | | | Quarter | | | Quarter (a) | |
| | | | | | | | | | | | | |
| Revenues | | | $23,560 | | | | $24,710 | | | | $21,103 | | | | $22,214 | |
| | | | | | | | | | | | | | | | | |
| Gross margin | | | 1,132 | | | | 12,211 | | | | 3,243 | | | | 16,228 | |
| Net loss | | | (745,623 | ) | | | (334,986 | ) | | | (665,945 | ) | | | (2,165,744 | ) |
| Basic loss per common share | | | (0.11 | ) | | | (0.05 | ) | | | (0.09 | ) | | | (0.29 | ) |
| (a) | Includes expense of $1,206,000 for the permanent impairment of HPI common stock. |
F-32
