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EX-32.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - United eSystems, Inc.exh32-2_0909.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - United eSystems, Inc.exh31-2_0909.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - United eSystems, Inc.exh31-1_0909.htm
EX-32.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - United eSystems, Inc.exh32-1_0909.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark one)
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-49745

UNITED ESYSTEMS, INC.
(Exact name of registrant as specified in its charter)

 
Nevada
 
91-2150635
(State or other jurisdiction
 
(IRS Employer Identification No.)
of incorporation or organization)
   

2150 North Hwy 190
Covington, LA 70433
228-832-1597
(Address and telephone number of principal executive offices)

15431 O’Neal Road
Gulfport, MS  39503
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Yes x  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer
¨
   
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Yes ¨  No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:  As of November 16, 2009, 34,272,629 shares of the registrant’s common stock, $0.001 par value, were issued and outstanding.
 



 
 

 

UNITED ESYSTEMS, INC.
FORM 10-Q
September 30, 2009

INDEX


Page
     
   
4
     
   
 
4
     
   
 
5
     
 
6
     
   
 
7
     
   
 
8 – 14
     
   
15
     
   
21
     
21
     
   
 
     
   
22
     
22
     
   
22
     
   
22
     
   
22
     
   
22
     
   
22
     
   
 
23


 
-2-

 

INTRODUCTORY NOTE

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 about United eSystems, Inc. (the “Company”) and our subsidiaries, United Check Services, L.L.C. (“United”) and Netcom Data Southern Corp. (“NDS”), that are subject to risks and uncertainties.  Forward-looking statements include information concerning future financial performance, business strategy, projected plans and objectives.  Statements preceded by, followed by or that otherwise include the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “may increase,” “may fluctuate” and similar expressions of future or conditional verbs such as “will,” “should,” “would,” and “could” are generally forward-looking in nature and not historical facts.  Actual results may differ materially from those projected, implied, anticipated or expected in the forward-looking statements.  Readers of this quarterly report should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this report. The statements are representative only as of the date they are made.  The Company, United, and NDS (sometimes referred to herein on a consolidated basis as the Company, we, us, or similar phrasing) undertake no obligation to update any forward-looking statement.

These forward-looking statements, implicitly and explicitly, include the assumptions underlying the statements and other information with respect to the Company's beliefs, plans, objectives, goals, expectations, anticipations, estimates, financial condition, results of operations, future performance and business, including management's expectations and estimates with respect to revenues, expenses, return on equity, return on assets, efficiency ratio, asset quality and other financial data and capital and performance ratios.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, these statements involve risks and uncertainties that are subject to change based on various important factors, some of which are beyond the control of the Company. The following factors, among others, could cause the Company's results or financial performance to differ materially from its goals, plans, objectives, intentions, expectations and other forward-looking statements:

 
·
general economic and industry conditions;

 
·
our capital requirements and dependence on the sale of our equity securities;

 
·
the liquidity of the Company’s common stock will be affected by the lack of a trading market;

 
·
intense industry competition;

 
·
fluctuations in the prevailing industry prices of check processing services;

 
·
shortages in availability of qualified personnel;

 
·
legal and financial implications of unexpected catastrophic events;

 
·
regulatory or legislative changes effecting check processing operations; and

 
·
reliance on, and the ability to attract, key personnel.

For a discussion of these and other risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in Item 1A of the Company’s 2008 Annual Report filed on Form 10-K with the SEC, which is available on the SEC’s website at www.sec.gov.  All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update this Quarterly Report on Form 10-Q to reflect events or circumstances after the date hereof.  New factors emerge from time to time, and it is not possible for us to predict which factors, if any, will arise.  In addition, the Company cannot assess the impact of each factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 
-3-

 

PART I.        FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

UNITED ESYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS

   
September 30,
2009
(Unaudited)
   
December 31,
2008
(Audited)
 
                                                                                             
       
 
 
ASSETS
           
CURRENT ASSETS
           
Cash and Cash Equivalents
  $ 256,695     $ 366,844  
Restricted Cash
    96,309       353,702  
Trade Receivables, net
    88,742       84,581  
Prepaid Interest
    70,000       96,000  
Prepaid Expenses
    27,079       19,619  
                 
Total Current Assets
    538,825       920,746  
                 
PROPERTY AND EQUIPMENT, NET
    52,963       57,882  
                 
OTHER ASSETS
               
Intangible Assets
    5,196,394       5,661,916  
Prepaid Interest, Non-current
    60,000       110,000  
Deferred Tax Asset
    163,026       50,307  
Other
    85,250       63,315  
                 
Total Assets
  $ 6,096,458     $ 6,864,166  
                                                                                                                    
               
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES
               
ACH Settlements Payable
  $ 82,004     $ 336,597  
Current Portion Long-Term Debt
    2,452,070       357,709  
Accounts Payable and Accrued Liabilities
    18,676       68,231  
Customers’ Deposits
    14,305       17,105  
                 
Total Current Liabilities
    2,567,055       779,642  
                 
LONG TERM LIABILITIES
               
Notes Payable
    2,610,705       4,977,949  
                 
Total Liabilities
    5,177,760       5,757,591  
                 
STOCKHOLDERS' EQUITY
               
Common Stock - $.001 Par Value; 75,000,000 Shares Authorized, 34,359,167 and 34,316,667 Issued and Outstanding at
  September 30, 2009 and December 31, 2008
    34,359       34,317  
Additional Paid-In Capital
    851,579       850,346  
Retained Earnings
    32,760       221,912  
                 
   Total Stockholders' Equity
    918,698       1,106,575  
                 
Total Liabilities and Stockholders' Equity
  $ 6,096,458     $ 6,864,166  
The accompanying notes are an integral part of these consolidated financial statements.

 
-4-

 

UNITED ESYSTEMS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

     
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
 
     
2009
     
2008
     
2009
     
2008
 
   Revenues                                                                    
                               
      ACH Services
 
$
212,234
   
$
211,057
   
$
640,538
   
$
750,232
 
      Verification Services
   
29,839
     
59,440
     
157,212
     
95,764
 
      Credit Card Services
   
410,046
     
227,694
     
1,366,789
     
227,694
 
        Total Revenues
   
652,118
     
498,191
     
2,164,539
     
1,073,690
 
                                 
Cost of Revenues
   
207,310
     
175,390
     
627,328
     
478,540
 
                                 
     Gross Profit
   
444,808
     
322,801
     
1,537,211
     
595,150
 
                                 
Expenses:
                               
   Operating
                               
      Personnel costs
   
34,296
     
35,700
     
99,858
     
97,092
 
      Travel
   
15,959
     
10,477
     
56,919
     
24,691
 
      Amortization expense
   
134,568
     
42,018
     
403,704
     
42,018
 
      Commissions and fees expense
   
38,863
     
11,457
     
123,105
     
45,797
 
      Other
   
54,219
     
42,803
     
171,562
     
62,847
 
        Total Operating Expenses
   
277,905
     
 142,455
     
855,148
     
272,445
 
                                 
   Selling, General & Administrative
                               
      Personnel costs
   
127,010
     
69,065
     
330,200
     
104,546
 
      Legal and accounting
   
32,297
     
13,121
     
109,745
     
48,958
 
      Marketing
   
9,684
     
15,554
     
26,933
     
34,694
 
      Consulting
   
--
     
--
     
--
     
32,500
 
      Other
   
3,946
     
8,837
     
 51,719
     
13,069
 
        Total Selling, General & Administrative
   
172,937
     
106,577
     
 518,597
     
 233,767
 
                                 
     Total Expenses
   
450,842
     
249,032
     
1,373,745
     
506,212
 
                                 
(Loss) Income from operations
   
  (6,034
)
   
  73,769
     
 163,466
     
 88,938
 
                                 
Other Income (expense):
                               
      Interest Income
   
517
     
--
     
1,577
     
--
 
      Interest Expense
   
(164,609
)
   
(40,661
)
   
(466,914
)
   
(44,196
)
                                 
Net Income (loss) before income taxes
   
(170,126
)
   
 33,108
     
(301,871
)
   
 44,742
 
                                 
Income tax benefit (expense)
   
73,018
     
(7,284
)
   
 112,719
     
( 9,798
)
                                 
Net (Loss) Income
 
$
  (97,108
)
 
$
  25,824
   
$
 (189,152
)
 
$
 34,944
 
                                 
Net Income per Share
   
NM
     
NM
     
NM
     
 NM
 

NM – Amount not considered meaningful since less than $.01 per share.
The accompanying notes are an integral part of these consolidated financial statements.

 
-5-

 
 
UNITED ESYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Unaudited)

   
Common Stock
   
Additional
Paid-In
   
Retained
   
Stockholders'
 
   
Shares
   
Amount
   
Capital
   
Earnings
   
Equity
 
   
 
   
 
   
 
   
 
   
 
 
                               
Balance at January 1, 2008
    18,291,667     $ 18,292     $ 49,440     $ 341,541     $ 409,273  
                                         
Issuance of Common Stock for Acquisition of Netcom Data Southern, Inc.
    7,800,000       7,800       382,200       -       390,000  
                                         
Issuance of Common Stock for Acquisition of Credit Card Portfolio
    3,200,000       3,200       156,800       -       160,000  
                                         
Issuance of Common Stock in exchange for "Non-interest" bearing loan
    4,800,000       4,800       235,200       -       240,000  
                                         
Net Income
    -       -       -       34,944       34,944  
                                         
Balance at September 30, 2008
    34,091,667     $ 34,092     $ 823,640     $ 376,485     $ 1,234,217  
                                         
Balance at January 1, 2009
    34,316,667     $ 34,317     $ 850,346     $ 221,912     $ 1,106,575  
                                         
Employees’ exercise of stock options
    42,500       42       1,233       --       1,275  
                                         
Net Loss
    -       -       -       (189,152 )     (189,152 )
                                         
Balance at September 30, 2009
    34,359,167     $ 34,359     $ 851,579     $ 32,760     $ 918,698  




The accompanying notes are an integral part of these consolidated financial statements.


 
-6-

 

UNITED ESYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Nine Months Ended
September 30,
 
   
2009
     
2008
 
                                                                                                         
 
                   
 
     
 
                   
 
CASH FLOWS FROM OPERATING ACTIVITIES
             
Net Income (Loss)
$
(189,152
)
 
$
 34,944
 
Adjustments to Reconcile Net Income (Loss) to Net
             
Cash Provided by Operating Activities
             
Depreciation and Amortization
 
428,269
     
64,555
 
(Increase) Decrease in Trade Receivables
 
(4,161
)
   
16,872
 
(Increase) Decrease in Prepaid Expenses
 
(7,460
)
   
6,792
 
Decrease in Prepaid Interest
 
76,000
     
 10,000
 
Decrease in Restricted Cash
 
257,393
     
163,054
 
Increase in Deferred Tax Asset
 
(112,719
)
   
 (695
)
Decrease in ACH Settlements Payable
 
(254,593
)
   
(205,556
)
Decrease in Accounts Payable and Accrued Liabilities
 
(49,555
)
   
(9,981
)
(Decrease) Increase in Customer Deposits
 
(2,800
)
   
42,502
 
Net Cash Provided by Operating Activities
 
141,222
     
122,487
 
               
CASH FLOWS FROM INVESTING ACTIVITIES
             
Acquisition of Property and Equipment
 
(19,646
)
   
(13,053
)
Proceeds from Asset Purchase Escrow
 
61,818
     
--
 
Cash paid in conjunction with acquisition of NDS
 
--
     
(314,741
)
Cash paid in conjunction with acquisition of Portfolio Asset
 
--
     
(2,275,616
)
Increase in Other Assets
 
(21,935
)
   
--
 
Net Cash Provided by (Used in) Investing Activities
 
20,237
     
(2,603,410
)
               
CASH FLOWS FROM FINANCING ACTIVITIES
             
Proceeds from Employees’ exercise of stock options
 
1,275
     
--
 
    Proceeds from notes payable
 
--
     
2,625,000
 
Principal paid on notes payable
 
(272,883
)
   
(70,000
)
Net Cash (Used in) Provided by Financing Activities
 
(271,608
)
   
2,555,000
 
               
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
 
(110,149
)
   
74,077
 
               
CASH AND CASH EQUIVALENTS – BEGINNING OF PERIOD
 
366,844
     
283,988
 
CASH AND CASH EQUIVALENTS – END OF PERIOD
$
256,695
   
$
358,065
 
               
SUPPLEMENTAL DISCLOSURES
             
Cash Paid During the Period for Interest
$
396,633
   
$
15,966
 
Cash Paid During the Period for Taxes
$
5,000
   
$
--
 

The accompanying notes are an integral part of these consolidated financial statements.


 
-7-

 

UNITED ESYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A — PLAN OF REORGANIZATION AND CONTRIBUTION AGREEMENT

On March 30, 2005, Riverbend Telecom, Inc. (“Riverbend”) entered into an Agreement and Plan of Reorganization (the “Spin-Off Agreement”) between Riverbend and Riverbend Holdings, Inc. (“Holdings”), its wholly owned subsidiary, pursuant to which Riverbend transferred all of its assets, liabilities and other obligations to Holdings in consideration for Holdings common stock.  In addition, Riverbend distributed all of Holdings common stock to the then-existing four Riverbend stockholders (the “Spin-Off”), on a pro rata basis, one share of Holdings common stock for each Riverbend share held by the stockholders.  Holdings was formed for the purpose of effecting the reorganization of Riverbend and the subsequent distribution of all of the Holdings common stock to Riverbend’s current stockholders.  Holdings had previously filed a Form 10-SB with the Securities and Exchange Commission registering its common stock under Section 12(g) of the Securities Exchange Act of 1934.

Upon consummation of the Spin-Off, Riverbend completed the contribution transaction with United Check Services, L.L.C. (“United”), a Louisiana limited liability company, according to the terms of a Contribution Agreement entered into on July 14, 2004, as amended by a Letter Agreement dated August 5, 2004 (collectively, the “Contribution Agreement”).  Pursuant to the Contribution Agreement, the equity owners of United contributed all of their limited liability membership interests in United to Riverbend in exchange for 15,315,000 shares of Riverbend’s common stock.  As a result of this transaction, United became a wholly-owned subsidiary of Riverbend, and the members of United became the majority stockholders of Riverbend, and the transaction was accounted for as a reverse acquisition.  As a result of the Spin-Off, the current telecommunications business of Riverbend is now carried on by Holdings, and the automated clearing house services business of United is now carried on by Riverbend, through its 100% ownership interest of United.

On June 13, 2005, Riverbend effected a name change from Riverbend Telecom, Inc. to United eSystems, Inc. (“eSystems” or the “Company”) to better reflect the change in business operations as a result of the consummation of the Plan of Reorganization and the Contribution.

NOTE B — NATURE OF RECENT ACQUISITON AND PORTFOLIO ASSET PURCHASE

Acquisition of Netcom Data Southern Corp.

On August 22, 2008, United eSystems, Inc. entered into a Stock Purchase Agreement (“Agreement”) with Netcom Data Southern Corp. (“NDS”), in which eSystems acquired all of the common stock of NDS.  The transaction was reported on Form 8-K on August 28, 2008, and the details of the transaction together with agreement between eSystems and NDS are included therein.

The Company entered into the transaction as means to diversify its electronic payments business.  Prior to the transaction, the majority of the Company’s revenue was derived from providing ACH payment services for business merchants.  Upon completion of the transaction, the Company’s gross revenues are now approximately 40% from its ACH payments business and 60% from credit card merchant processing services which are provided through contracts that NDS has with several sponsor banks in the United States.  The Board of Directors and management believe that the acquisition of NDS provides the opportunity to improve operating results and the possibility of creating future value.

Pursuant to the Agreement, the Company acquired all of the outstanding stock of NDS in exchange for approximately $272,000 of cash at closing, an unsecured promissory note payable of $2,720,000, and 7,800,000 shares of the Company’s restricted common stock which had an estimated fair value at the date of the acquisition of $.05 per share.  As a result of the transaction, all of the Company’s sales and marketing activities, as well as all of the customer service duties to manage the credit card merchant accounts of NDS will be conducted through NDS, which is now a wholly owned subsidiary of the Company.
 
 
-8-

 
A summary of the purchase price of NDS is as follows:
     
Cash paid to stockholders of NDS, net of cash acquired from NDS
  $ 272,099  
Direct acquisition costs paid by the Company
    35,329  
Promissory note issued to stockholders of NDS
    2,720,000  
Fair value of 7,800,000 shares of stock issued
    390,000  
                                                                                                      
       
Total purchase price
  $ 3,417,428  

The allocation of the NDS purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed are based on eSystems’ estimate of fair values and remaining economic lives as of the acquisition date and are summarized below:

Tangible assets acquired and liabilities assumed
     
Property and Equipment
  $ 14,503  
                                                                                                      
       
Net tangible assets acquired
    14,503  
         
Identifiable intangibles
       
Customer relationships and contracts
    3,402,925  
         
Total purchase price
  $ 3,417,428  

The value allocated to customer relationships and contracts created as a result of the acquisition of NDS will be amortized over its estimated useful life of ten years.  Amortization expense related to NDS for the three months and for the nine months ended September 30, 2009, was $78,360 and $235,080, respectively.

Portfolio Asset Purchase

On September 17, 2008, the Company, through its wholly owned subsidiary NDS, entered into and closed an Asset Purchase Agreement (the “Agreement”) with Netcom Data Corp. of N.Y. and American Timeshare Associates, Inc. (collectively the “Sellers”).  Under the terms of the Agreement, the Company paid $2,275,000 in cash, plus 3,200,000 shares of its restricted common stock, in exchange for the assignment of all of the Seller’s rights under a certain Independent Sales Organization Agreement (the “Bank Agreement”) with LaSalle Bank, N.A., a subsidiary of Bank of America (the “Bank”).  The terms of the Bank Agreement allow merchant customers of the Seller to utilize the credit card merchant processing services provided by the Bank.  As a result of the assignment of the Bank Agreement, NDS will perform certain services previously provided by the Sellers under the Bank Agreement and will receive all payments due therefore from the Bank.  Pursuant to the Agreement, 10% of the cash and stock paid at closing was escrowed, subject to an attrition formula applicable during the twelve months following the transaction date, whereby the Company may be reimbursed up to the amounts escrowed if the portfolio’s performance does not meet certain benchmarks during the applicable period.  For the nine months ended September 30, 2009, the Company received $61,818 as escrow reimbursement.

The Company accounted for this transaction, the Netcom NY Asset Portfolio, as an asset purchase and the purchase price, which is based upon the total consideration paid, is included on its consolidated balance sheet as Intangible Assets.  The purchase price is amortized over a ten year period, commencing September 17, 2008.  Amortization expense related the Netcom NY Asset Portfolio for the three months and nine months ended September 30, 2009, was $56,208, and $168,624, respectively.

 
-9-

 

NOTE C — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

As described in Notes A and B, UNITED ESYSTEMS, INC. serves as the holding company for United Check Services, L.L.C. and Netcom Data Southern Corp.  United provides automated clearing house (ACH) services to businesses throughout the United States.  NDS is an independent sales organization that obtains merchant customers that utilize credit card processing services through several NDS sponsored banks.  NDS receives a portion of the fees charged for such services in exchange for acquiring the merchants and maintaining certain customer service functions.  The Company’s headquarters are located in Covington, Louisiana, the ACH operations center is located in Gulfport, Mississippi, and the operations of NDS are conducted at its offices in Roswell, Georgia.

Basis of Presentation and Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, United and NDS.  All significant intercompany balances and transactions have been eliminated in consolidation.

The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of financial information for the interim periods presented.  These adjustments are of a normal recurring nature and include appropriate estimated provisions.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Revenue Recognition

United charges customers a per transaction fee for its ACH services.  For these transactions, United recognizes only the fees generated as revenue.  United recognizes these fees as revenue when United has provided the service to its customers.  Fees for ACH services are based on contractually determined rates with each individual customer.  Settlements paid to customers for ACH transactions are submitted to the customer net of fees due to United.

NDS receives a portion of the fees generated from credit card merchant processing services which are provided through its contractual agreements with various sponsor banks.  Under these agreements, the merchants’ transaction activity is reported and NDS’ portion of the fees are paid during the month following the month in which the transactions occurred.  Accordingly, NDS recognizes its revenue in the month in which such transactions are reported and payable, which is consistent with industry practices within the United States of America.

Basis of Accounting

The books and records of the Company are kept on the accrual basis of accounting, whereby revenues are recognized when earned and expenses are recognized when incurred.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation.  Depreciation is computed using primarily straight-line methods over the estimated useful lives of the related assets, which ranges from three to seven years.

Income Taxes

Since United is a single-member limited liability company, it is treated as a disregarded entity for federal income tax reporting purposes.  As such, the Company includes the revenues and expenses of United in its Federal income tax return.

 
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Since NDS is a wholly-owned corporation of the Company, it reports its income taxes as a wholly owned subsidiary of the Company under a consolidated Federal tax return.

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method.  Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to change in tax rates and laws.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained.  The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.  Tax positions taken are not offset or aggregated with other positions.  Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority.  The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above would be reflected as a liability for unrecognized tax benefits in the consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.  Interest and penalties associated with unrecognized tax benefits would be classified as additional income taxes in the statement of operations

Advertising

Advertising costs are charged to operations when incurred.

Statement of Cash Flow Information

For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

NOTE D — RESTRICTED CASH

Restricted cash consists primarily of funds maintained in United’s primary bank account to facilitate ACH transactions.  The Company has restricted this cash from operations in order to ensure that sufficient funds are maintained to process and settle customer’s ACH transactions.

NOTE E — NOTES PAYABLE

In September of 2004, the two existing members of United agreed to take a distribution for the amount of undistributed earnings accumulated by United through June 30, 2004, which amounted to $156,000.  In order to ease the cash flow requirements on United, the members agreed to accept a note for the amount of the distribution.  The amount of the distribution was combined with the amount of advances due to United’s members of $100,000, and notes payable due to United’s members for the total amount of $256,000 were established.  On August 20, 2008, the outstanding principal balance of these notes of $70,000 was paid in full.  On September 4, 2008, and September 8, 2008, the Company entered into two new notes payable with two existing shareholders of the Company for a total principal amount of $70,000.  The notes provide for interest only payments at a rate of 10% per annum payable monthly thereafter, with the entire principal balances due and payable two years from inception of the notes.

On August 22, 2008, as part of the acquisition of NDS, the Company issued an unsecured note (the “Share Purchase Note”) payable to the shareholders of NDS.  The Share Purchase Note bears interest at 5.5% for the first twelve months and 9.5% for the following twenty-four months, when the Share Purchase Note is due in full.  Pursuant to the terms of the Share Purchase Note, the Company will make interest-only payments each month and will make three principal payments of $180,000 on each anniversary date of the note with one final balloon payment representing the then outstanding principal and accrued interest on the third anniversary of the issue date of the Share Purchase Note. During August 2009, the Company executed an amendment to the Share Purchase Note whereby the scheduled principal payment of $180,000 due on August 22, 2009, was amended to require a $30,000 principal payment which

 
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was paid by the Company.  Mr. William Plummer, a current employee, shareholder, and director of the Company, was formerly the majority shareholder of NDS and will receive a majority of the payments on the Share Purchase Note.  As of September 30, 2009, the outstanding principal balance of the Share Purchase Note was $2,690,000.

On August 22, 2008, in order to facilitate the cash payment due at the closing of the acquisition of NDS, the Company issued a non-interest bearing secured promissory note (the “Sorrentino Note”) and entered into and closed a security agreement (the “Security Agreement”) with Robert J. Sorrentino.  The terms of the Sorrentino Note provide that the Company may draw up to $500,000 from Sorrentino with advanced written notice to and subject to the approval of Sorrentino for a period of up to seven months.  The Company drew $280,000 immediately upon issuance of the Sorrentino Note.  Commencing on the seven-month anniversary of the issue date of the Sorrentino Note, the Company will make twenty-four equal monthly installments in an amount sufficient to repay the entire outstanding principal balance during such twenty-four month period.  The Sorrentino Note is secured by the Security Agreement, which grants Sorrentino a security interest in all of the assets existing, owned, or hereafter acquired by the Company.  In lieu of payment of interest, the Company granted Sorrentino 4,800,000 shares of its common stock with an estimated fair value of $0.05 per share.  The Company has recognized the value of the shares issued ($240,000) as prepaid interest, and is amortizing this amount over the total life of the note of 30 months.  On May 27, 2009, the Company executed an Amendment to the Loan Agreement with Sorrentino (“Sorrentino Amendment”) which reduced the amount of monthly principal payments as provided for in the original Sorrentino Note.   Under the Sorrentino Amendment, the Company made an initial payment of $15,350 in principal and began making monthly principal payments of $7,675 thereafter, continuing through February 28, 2011, at which time all remaining principal becomes due and payable.  Under the original terms, monthly principal payments would have been approximately $17,770.  During the nine months ended September 30, 2009, the Company’s principal payments totaled $23,025 thereby reducing the outstanding principal balance of these notes to $372,775 as of September 30, 2009.

On September 17, 2008, in order to facilitate the cash payment due at the closing of the purchase of the portfolio of credit card merchant services accounts from Netcom Data Corp. of N.Y. and American Timeshare Associates, Inc., the Company, NDS, and United (collectively the “Debtors”) borrowed $2,128,500 from Thermo Credit, LLC, a Colorado limited liability company (the “Lender”) pursuant to a Loan, Pledge, and Security Agreement (the “Loan Agreement”) and a Promissory Note (the “Note”) which provide for interest at the greater of 15% per annum or 8% in excess of the prime rate, plus other fees.  Accrued and unpaid interest on the outstanding principal balance of the Note is due and payable monthly commencing on October 31, 2008 and the Note matures and becomes due in full on March 17, 2009, with the Company having the right to extend the maturity to September 17, 2009 with Lender’s approval (not to be unreasonably withheld or delayed).  In the event of such extension, the Note is payable as follows:  (a) one payment of accrued and unpaid interest on March 31, 2009;  (b) five monthly payments of principal plus accrued and unpaid interest thereon in an amount necessary to amortize the outstanding principal balance of the Note as of March 17, 2009 over a period of 24 months commencing on April 30, 2009 and continuing on the same day of each calendar month thereafter (or if no such corresponding date, on the last date of such calendar month); and (c) a final payment of all principal plus accrued and unpaid interest on September 17, 2009.  The Loan Agreement grants the Lender a security interest in all of the assets, now owned, or hereafter acquired by the Debtors, and pledges all of the outstanding common stock of NDS and all of the outstanding membership interests of UCS to the Lender.  Two of the Company’s minority shareholders serve on the board of directors for Thermo Credit, LLC.
 
On March 17, 2009, the Company executed an Amendment to its Loan Agreement with Thermo Credit LLC under which the due date of the loan was extended until March 31, 2010, and the interest rate was increased by 3% APR.  In conjunction with the Amendment, the Company paid $69,158 in principal on March 17, 2009, and $20,000 per month thereafter, reducing the outstanding principal balance to $1,930,000 as of September 30, 2009.

NOTE F — STOCK OPTIONS

On March 30, 2005, the Company entered into a non-qualified stock option agreement, whereby the Company granted 312,000 options to its CFO.  On February 15, 2006, the Company entered into non-qualified stock option agreements with four key employees, granting a total of 90,000 options, which included 32,500 options to its CFO.  All of the options have an exercise price of $.03 per share, and were fully vested as of the date of the grant.  The option agreements terminate five years from the date they were granted.  During 2008, a total of 100,000 shares of non-qualified stock options were exercised by the Company’s CFO.  None of these options were issued during the three months ended September 30, 2009, and a total of 42,500 shares of these options were exercised by two employees of the Company during the nine months ended September 30, 2009.

 
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On August 20, 2008, the Board of Directors adopted the 2008 Incentive Stock Plan and granted at total of 1,157,000 options to employees of United.  All of the options have an exercise price of $.05 per share and were fully vested as of the date of the grant.  The options terminate five years from the date granted.  None of these options have been exercised.

NOTE G — SIGNIFICANT CONCENTRATIONS

Cash

At September 30, 2009, and December 31, 2008, the Company maintained balances with financial institutions in excess of FDIC insured limits.  The Company has not experienced any losses and does not believe that significant credit risk exists as a result of this practice.

Major Customers

During the nine months ended September 30, 2009, the Company had no customers that amounted to more than 10% of the Company’s business.

NOTE H — COMMITMENTS

Operating Leases

Effective August 22, 2008, in conjunction with the acquisition of NDS, the Company entered into a thirty-six month lease with the existing Lessor of the NDS office facilities in Roswell, Georgia, at a rate of $4,000 per month.  The lease is automatically renewable for additional one year periods beyond the initial thirty-six month term unless the Company as Lessee elects not to extend by providing written notice to the Lessor at least five days prior to the expiration of the initial term.

On October 28, 2008, United exercised an option effective November 1, 2008, to extend its leased office facilities at its present location in Gulfport, Mississippi, for an additional three year term beginning at $2,200 per month on the effective date, and increasing by $150 per month after twelve months, and an additional $150 per month after twenty four months.

Employment Contracts

In connection with the Company’s acquisition of NDS, the Company entered into employment contracts with two key employees of NDS, each having a three-year term.  The employment contracts address compensation and termination.

ACH Processing Agreement

On August 4, 2006, United entered into an ACH processing agreement that provided for the utilization of an internet based ACH processing system, inclusive of bank and processing fees.  The term of the agreement is 60 months, and renewable for successive 12 month periods thereafter.  If management elects to terminate this agreement during its initial term without cause, the agreement provides for a liquidation fee equal to the average monthly processing volume at termination multiplied by the number of months remaining in the agreement, subject to a maximum of $66,000.

NOTE I — RELATED PARTY TRANSACTIONS

As disclosed in Note E, the Company has notes payable with minority shareholders and with an entity for which two minority shareholders serve on the board of directors.

 
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NOTE J — EARNINGS PER SHARE

The weighted average common shares outstanding amounted to 34,359,167, and 34,337,194, for the three months and nine months ended September 30, 2009, respectively, and 18,291,667 for the three months and nine months ended September 30, 2008, respectively.  Options to purchase 259,500 shares at $.03 per share, and options to purchase 1,157,000 shares at $.05 per share were outstanding at September 30, 2009, but were not included in the computation of diluted earnings per share because the options’ weighted average exercise price was greater than the estimated market price of the common shares.

NOTE K – FINANCIAL STATEMENT PRESENTATION

Certain amounts in the 2008 financial statements have been reclassified to conform to the 2009 presentation.

NOTE L – ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments are defined as cash and contractual rights and obligations that require settlement, directly or indirectly, in cash.  In cases where quoted market prices are not available, fair values have been estimated using the present value of future cash flows or other valuation techniques.  The results of these techniques are highly sensitive to the assumptions used, such as those concerning appropriate discount rates and estimates of future cash flows, which require considerable judgment.  Accordingly, estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current settlement of the underlying financial instruments.  These disclosures should not be interpreted as representing an aggregate measure of the underlying value of the Company.

   
September 30, 2009
   
December 31, 2008
 
   
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
                                                 
                       
Financial Assets
                       
   Cash and Cash Equivalents
 
$
256,695
   
$
256,695
   
$
366,844
   
$
366,844
 
   Restricted Cash
   
96,309
     
96,309
     
353,702
     
353,702
 
Financial Liabilities
                               
   Notes Payable
 
$
5,062,775
   
$
5,062,775
   
$
5,335,658
   
$
5,335,658
 

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

Cash and Cash Equivalents – The carrying amount of cash and cash equivalents approximates fair values.

Restricted Cash – The carrying amount of restricted cash approximates fair values.

Notes Payable – The carrying amount of notes payable approximates fair values.

NOTE M – SUBSEQUENT EVENTS

During November 2009, in conjunction with the Company’s escrowed earn-out provision with respect to its 2008 Netcom NY asset portfolio purchase, the seller forfeited 86,538 shares and retained 88,462 shares of the escrowed common stock of the Company.  The shares forfeited by the seller and returned to the Company were cancelled and are no longer issued and outstanding.
 
The date to which events occurring after September 30, 2009, the date of the most recent balance sheet, have been evaluated for possible adjustment to the financial statements or disclosure is November 16, 2009, which is the date on which the financial statements were issued.

 
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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Executive Summary

The Company is an electronic payments service provider headquartered in Covington, Louisiana that caters mostly to small and medium size businesses who handle significant volumes of electronic transactions as an integral part of their business.  Since 1998, we have provided electronic Automated Clearing House (“ACH”) payments via our internet-based, encrypted systems, to assist merchants in the collection of their sales and accounts receivables.  Our processing systems may also be used to transmit payments such as loan proceeds, customer refunds, travel expenses, commission payments, and payroll direct deposits. We act as the merchant’s ACH processor and clear transactions electronically through the Federal Reserve Banking System.  We are paid based on a fee per each ACH transaction we process, and typically receive our fees at the time we are settling collected proceeds electronically to each of our merchants.

The ACH Network has been in use for in excess of 30 years, serving a variety of customers, including over 20,000 financial institutions, 3.5 million businesses, and 135 million individuals.  The ACH business is divided between traditional banks, large “in-house” processors, and independent processors.  We currently concentrate on independent processors service customers that utilize electronic commerce but find that outsourcing is a more cost effective solution.  The independent processors find they are able to provide custom tailored solutions and better transaction pricing than the merchants could individually obtain from traditional banks.  We have established ourselves as a quality provider of ACH processing services with proven results utilizing state of-the-art technology.

In addition, the Company, through its acquisition of NDS, now offers additional services including credit and debit card services, real-time account verification, and identity verification services.  Such services are complimentary to our ACH payment services and with their addition it allows us to provide a more comprehensive line of services to our existing and prospective business customers.

Results of Operations

In this section, we provide more detailed information about our operating results and changes in financial position.  This section should be read in conjunction with the financial statements and related notes include in this Form 10-Q, and in conjunction with our Form 10-K previously filed for the year ended December 31, 2008.

Three Months and Nine Months Ended September 30, 2009, compared to the Three Months and Nine Months  Ended September 30, 2008

Revenues

Our revenue is mostly generated by providing payment services which include ACH processing services as well as earning residual revenue from credit card merchant services for business customers.  We also provide real-time electronic account verification services, as well as identity and age verification services.  The majority of our customers utilize our services to collect their gross receipts or accounts receivable electronically.  However, ACH processing services may also be utilized for other purposes, including direct deposit of employee payroll, employee travel advances, payments to non-employee contractors, and inter-company transfers.  We recognize our ACH revenue upon completion of the service being provided and residual credit card services revenue upon receipt from our sponsoring banks which is consistent with industry practices within the United States of America.

For the three months ended September 30, 2009, revenues were $652,118, compared to $498,191 for the three months ended September 30, 2008, representing an increase of $153,927, or approximately 30.8%.  This increase is mostly related to the increase in credit card services of $182,352, together with increases in ACH services of $1,177, partially offset by decreases in verification services of $29,601.  The increase in credit card services relates to the revenue derived from the acquisitions of NDS and the Netcom NY portfolio asset purchase during 2008.  The increase in ACH services is relatively immaterial and represents normal fluctuations in business activity, while the decrease in verification services revenue represents a greater utilization of these services during the quarter ended September 30, 2008 compared to the quarter ended September 30, 2009. We often experience fluctuations in our

 
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quarterly verification revenue as some of our customers utilize these services periodically rather than on a daily basis.
 
For the nine months ended September 30, 2009, revenues were $2,164,539, compared to $1,073,690 for the nine months ended September 30, 2008, representing an increase of $1,090,849, or approximately 101.6%.  This increase is mostly related to the increase in credit card services of $1,139,095, together with the increase in verification services of $61,448, partially offset by the decrease in ACH Services of $109,694.  The increase in credit card services relates to the revenue derived from the acquisitions of NDS and the Netcom NY portfolio asset purchase during 2008.  The increase in verification services revenue of $61,448 for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, represents additional business we obtained during the second half of 2008.  We often experience fluctuations in our quarterly verification revenue as some of our customers utilize these services periodically rather than on a daily basis.  The decrease of $109,694 related to our ACH payments business represents changes we made during the prior year with respect to a portion of our ACH business.  During 2008 we migrated some of our ACH accounts in conjunction with a policy decision made by one of our processing banks to discontinue processing transactions for certain industries.  Although we were able to establish alternate services for these merchants, we only recognize net ACH fees associated with these accounts.

Cost of Revenue and Gross Profit

Cost of revenues includes the costs incurred in conjunction with the items processed as well as costs associated with the residual credit card revenue we now receive through NDS, our wholly owned subsidiary.  These costs include the direct transactional costs incurred with respect to ACH processing and software as well as direct costs associated with the revenue generated from credit card merchant processing services.

The following table presents the composition of cost of revenue for the three months ended September 30, 2009 and 2008:

Cost of Revenue:
 
Three Months
Ended
September 30,
2009
 
Percentage
   
Three Months
Ended
September 30,
2008
 
Percentage
   
Variance
Dollars
 
                                    
   
 
                
   
                
 
   
 
                
   
                
 
   
 
                
 
  ACH Services
 
$
51,672
 
24.7
%
 
$
80,054
 
45.6
%
 
$
(28,382
)
  
                               
  Verification Services
   
8,141
 
3.9
%
   
21,402
 
12.2
%
   
 (13,261
)
  
                               
  Credit Card Services
   
147,497
 
71.4
%
   
73,934
 
42.2
%
   
73,563
 
                                 
Total Cost of Revenue
 
$
207,310
 
100.0
%
 
$
175,390
 
100.0
%
 
$
31,920
 

For the three months ended September 30, 2009, cost of revenues was $207,310, compared to $175,390 for the three months ended September 30, 2008, representing an increase of $31,920, or approximately 18.2%.  This increase is mostly attributable to the increase of $73,563 in our credit card services business resulting from the acquisition of NDS and the purchase of the Netcom NY portfolio asset during 2008.  This increase was partially offset by the decreases in ACH Services of $28,382 and in verification fees of $13,261.  As previously described, we migrated some of our ACH accounts during 2008 in conjunction with a policy decision made by one of our processing banks to discontinue processing transactions for certain industries.  Although we were able to establish alternate services and maintain these merchants, we only recognize net ACH fees associated with these accounts, which has resulted in a reduction to our ACH cost of revenues for the three months ended September 30, 2009, compared to the three months ended September 30, 2008.  In addition, our ACH cost of revenues has been reduced as a result of our acquisition of NDS.  We now only pay residual commissions to the independent agents of NDS and not for any accounts that were originated by NDS.  For the three months ended September 30, 2009, our verification services costs also decreased in conjunction with the reduction in verification service revenue generated compared to the three months ended September 30, 2008.

 
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The following table presents the composition of cost of revenue for the nine months ended September 30, 2009 and 2008:

Cost of Revenue:
 
Nine Months
Ended
September 30,
2009
 
Percentage
   
Nine Months
Ended
September 30,
2008
 
Percentage
   
Variance
Dollars
 
                                    
   
 
                
   
                
 
   
 
                
   
                
 
   
 
                
 
  ACH Services
 
$
151,349
 
24.1
%
 
$
211,278
 
44.2
%
 
$
(59,929
)
  
                               
  Verification Services
   
76,184
 
12.1
%
   
52,493
 
11.0
%
   
 23,691
 
  
                               
  Credit Card Services
   
399,795
 
63.8
%
   
214,769
 
44.8
     
185,026
 
                                 
Total Cost of Revenue
 
$
627,328
 
100.0
%
 
$
478,540
 
100.0
%
 
$
148,788
 

For the nine months ended September 30, 2009, cost of revenues was $627,328, compared to $478,540 for the nine months ended September 30, 2008, representing an increase of $148,788, or approximately 31.1%.  This increase is mostly attributable to the increase of $185,026 related to our credit card services business resulting from the acquisition of NDS and the purchase of the Netcom NY portfolio asset during 2008.  This increase, together with the $23,691 increase in verification services, was partially offset by decreases of $59,929 in cost of revenue associated with our ACH services business.  Our verification services costs increase in conjunction with the level of services we provided.  As previously described, we migrated some of our ACH accounts during 2008 in conjunction with a policy decision made by one of our processing banks to discontinue processing transactions for certain industries.  Although we were able to establish alternate services and maintain these merchants, we only recognize net ACH fees associated with these accounts, which has resulted in a reduction to our ACH cost of revenues for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008.  In addition, our ACH cost of revenues has been reduced as a result of our acquisition of NDS.  We now only pay residual commissions to the independent agents of NDS and not for any accounts that were originated by NDS.  For the nine months ended September 30, 2009, there were no commissions paid to NDS, compared to the nine months ended September 30, 2008, in which our ACH cost of revenues of $478,540 included $44,932 of commissions paid to NDS.

For the three months ended September 30, 2009, our gross profit was $444,808, compared to $322,801 for the three months ended September 30, 2008, representing an increase of $122,007, or approximately 37.8%.  Our gross profit stated as a percentage of revenues was 68.2% for the three months ended September 30, 2009, compared to 64.8% for the three months ended September 30, 2008.  The increase in our gross profit as a percentage of revenue reflects the effect of the two acquisitions, as previously described, which have also resulted in a substantial increase in our volume of business associated with credit card services.

For the nine months ended September 30, 2009, our gross profit was $1,537,211, compared to $595,150 for the nine months ended September 30, 2008, representing an increase of $942,061, or approximately 158.3%.  Our gross profit stated as a percentage of revenues was 71.0% for the nine months ended September 30, 2009, compared to 55.4% for the nine months ended September 30, 2008.  The increase in our gross profit as a percentage of revenue reflects the effect of the two acquisitions, as previously described, which have also resulted in a substantial increase in our volume of business associated with credit card services.

Operating Expenses

Operating expenses include costs of personnel, computer maintenance and expenses, supplies, internet services, delivery charges, telecommunications expenses, travel, and other costs associated with our payment services operations.

For the three months ended September 30, 2009, operating expenses were $277,905, compared to $142,455 for the three months ended September 30, 2008, representing an increase of $135,450 or approximately 95.1%.  The increases in operating costs related mostly to increases in amortization of $92,550, commissions and fees expenses of

 
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$27,406, travel of $5,482, and other operating expenses of $11,416.  Amortization expense relates to the intangible assets associated with our acquisition of NDS and our purchase of the Netcom NY portfolio asset.  The increase in commissions and fees expenses relates mostly to fees paid in conjunction with our Thermo Credit, LLC loan facility, together with certain contracted customer service costs.  The increase in travel relates mostly to the addition of NDS’ operations.

The increase in other operating expenses of $11,416 is mostly related to increases in freight and shipping expenses of $1,511, lease expense of $9,350, office expenses of $454, telephone expenses of $3,596, partially offset by decreases in training expenses of $2,395, and computer maintenance expenses of $1,126.  All of these increases relate to the cost of operations associated with NDS with the exception of telephone expenses which, in addition to the effect of NDS operations, includes increased service costs in conjunction with upgrades to some of our telephone systems.  The decreases in training expenses relate to certain courses attended by employees in the prior year that were not necessary in the current year.  The decrease in computer maintenance expenses were related to a reduction in maintenance associated with our upgraded computer systems.

For the nine months ended September 30, 2009, operating expenses were $855,148, compared to $272,445 for the nine months ended September 30, 2008, representing an increase of $582,703 or approximately 213.9%.  The increases in operating costs related mostly to increases in amortization of $361,686, commissions and fees expenses of $77,308, travel of $32,228, personnel costs of $2,766, and other operating expenses of $108,715.  Amortization expense relates to the intangible assets associated with our acquisition of NDS and our purchase of the Netcom NY portfolio asset.  The increase in commissions and fees expenses relates mostly to fees paid in conjunction with our Thermo Credit, LLC loan facility, together with certain contracted customer service costs.  The increase in travel relates mostly to the addition of NDS’ operations, and the increase in personnel costs relates to increases in operating personnel associated with our ACH business compared to the same period in the prior year.

The increase in other operating expenses of $108,715 is mostly related to increases in computer maintenance and expenses of 8,686, lease expense of $36,800, office expenses and utilities of $25,608, and telephone expenses of $21,733.  All of these increases relate to the cost of operations associated with NDS with the exception of telephone expenses which, in addition to the effect of NDS operations, includes increased service costs in conjunction with upgrades to some of our telephone systems.

Selling, General, and Administrative Expenses

For the three months ended September 30, 2009, our selling, general, and administrative expenses were $172,937, compared to $106,577 for the three months ended September 30, 2008, representing an increase of $66,360, or approximately 62.3%.  This increase is mostly due to increases in personnel costs of $57,945, and legal and accounting of $19,176, partially offset by decreases in marketing of $5,870, and other expenses of $4,891.  The increase in personnel costs relate mostly to the expenses associated with the business activity of NDS.  The increases in legal and accounting are associated with our efforts to obtain working capital and to re-finance portions of our existing notes payable.  The decreases in marketing and other expenses represent reductions in costs compared to the same period in the prior year related to certain internet marketing programs utilized in conjunction with our ACH services business and certain other duplicative administrative costs that were eliminated following the acquisition of NDS.

For the nine months ended September 30, 2009, our selling, general, and administrative expenses were $518,597, compared to $233,767 for the nine months ended September 30, 2008, representing an increase of $284,830, or approximately 121.8%.  This increase is mostly due to increases in personnel costs of $225,654, legal and accounting of $60,787, and other expenses of $38,650, partially offset by decreases in marketing of $7,761, and consulting fees of $32,500.  The increase in personnel costs relate mostly to the expenses associated with the business activity of NDS, which was not present during the same period in the prior year.  The increases in legal and accounting represent increased costs during the first quarter of 2009 associated with our annual meeting, annual audit, together with other legal services associated with our efforts to obtain working capital and refinance portions of our notes payable.  Our marketing fees were slightly lower due to the elimination of some duplicate costs following the acquisition of NDS and to reductions in certain internet marketing costs related to our ACH services business.  Our consulting fees were lower compared to the same period in the prior year, as we incurred fees with professional consultants that were discontinued during 2008.  Our other costs reflect a greater amount of activity during the prior year associated with our acquisition of NDS and the asset portfolio purchase.

 
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Results of Operations

We reported a net loss for the three months and nine months ended September 30, 2009, of $97,108 and $189,152, respectively, compared to net income of $25,824 and $34,944, respectively, for the three months and nine months ended September 30, 2008. This represented a decrease in net income of $122,934 and $224,096 for the three months and nine months ended September 30, 2009 compared to the same periods in the prior year.  These decreases are mostly attributable to the effect of the acquisition of NDS and the purchase of the Netcom NY portfolio asset.  We now recognize significant amortization expenses related to the intangible assets acquired, together with interest expense associated with our credit facility with Thermo Credit, and our seller financing with the former shareholders of Netcom, as well as non-cash interest expense related to the Sorrentino Note, all of which facilitated the financing for the acquisitions.  As a result we have substantially increased our volume of business, and although we reported net losses for the three months and nine months ended September 30, 2009, we produced net positive cash flow from our operations.

Liquidity and Capital Resources

Per our Consolidated Statements of Cash Flows, net cash provided by operating activities for the nine months ended September 30, 2009, was $141,222, compared to net cash provided by operating activities of $122,487 for the nine months ended September 30, 2008, or an increase of $18,735.  The increase in cash provided by operating activities is due primarily to the various adjustments necessary to reconcile net income (loss) to net cash provided by operations for each of the respective periods presented.

For the nine months ended September 30, 2009, adjustments decreasing our net loss of $189,152 included depreciation and amortization of $428,269, and the decrease in prepaid interest of $76,000, partially offset by adjustments that increased our net loss, such as the increase in trade receivables of $4,161, the increase in prepaid expenses of $7,460, the increase in deferred tax asset of $112,719, the decrease in accounts payable and accrued liabilities of $49,555, and the decrease in customer deposits of $2,800.

For the nine months ended September 30, 2008, adjustments that increased our net income of $34,944 included depreciation and amortization expense of $64,555, together with decreases in trade receivables of $16,872, prepaid expenses of $6,792, prepaid interest of $10,000 and  increases in customer deposits of $42,502.  These increases to net income were offset by adjustments that reduced net income such as the decrease in accounts payable and accrued liabilities of $9,981.  The adjustments for depreciation and amortization included $42,018 of amortization expense related the acquisition of NDS and purchase of the portfolio asset previously described.  The decrease in trade receivables related to improvements made in our ACH business related to marginal accounts.  The decrease in prepaid expenses related mostly to prepaid insurance.  The decrease in prepaid interest related to recognition of certain interest costs that are amortized over the term of one of the credit facilities we obtained and utilized to finance the acquisition of NDS and the portfolio asset purchase.  The reduction in accounts payable and accrued liabilities was related to a change in the way we paid some of our vendors which reduced turnaround time with these payments.

Net cash provided by investing activities was $20,237 for the nine months ended September 30, 2009, compared to cash used in investing activities of $2,603,410 for the nine months ended September 30, 2008.  During the nine months ended September 30, 2009, we made improvements to our telecommunications systems in order to create efficiencies between our Gulfport, Mississippi and Roswell, Georgia offices.  For the same period in the prior year we obtained hardware and software of $5,240 and other assets of $12,168 in conjunction with improvements to our ACH processing systems.  During the nine months ended September 30, 2009, we received $61,818 as part of our escrow reimbursement associated with our Netcom NY asset portfolio purchase.  We also utilized $21,935 in conjunction with increases in deposits and other capitalized items.

Net cash used in financing activities was $271,608 for the nine months ended September 30, 2009, compared to cash provided by financing activities of $2,555,000 for the nine months ended September 30, 2008.  Several of our employees exercised stock options during the current period resulting in proceeds of $1,275.  Additionally, we made principal payments of $272,883 in conjunction with our credit facility with Thermo Credit, LLC, and our outstanding Sorrentino Note balance.

 
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To date we have financed our capital expenditure needs from cash flows generated from our operations, with the exception of our acquisition financing.  Our acquisition financing was mostly funded from three sources, Thermo Credit LLC, Sorrentino, and the former Netcom shareholders.  Currently Mr. Sorrentino and the former Netcom shareholders represent a significant but not controlling interest in the Company.  We are currently seeking permanent equity and/or debt financing to extinguish or replace our interim financing with Thermo Credit LLC.  We then plan to reduce or extinguish the Sorrentino note and the seller financed notes with the former Netcom shareholders.  We believe we have strong relationships with these two creditors, as we completed amendments to our credit agreements with both Thermo Credit LLC and Sorrentino during the nine months ended September 30, 2009, which supports our efforts to obtain permanent financing, to continue our operations, and to fund our cash needs for the next twelve months.

Our future expansion is planned from two sources.  First, we plan to continue to expand our use of independent sales organizations (ISO’s) to assist in the growth of our ACH and verification service business.  While there are costs associated with this increase, the majority of additional sales costs will be funded through the additional sales produced from these selling activities.  We have and plan to continue to structure our sales compensation plans based on commissions only, and employ the use of independent sales representatives already engaged in selling financial products and/or services that are complementary to ACH services.  Accordingly, we believe we can continue to expand these sales activities from our internally generated cash flow.

Second, we believe we will also expand future operations through acquisitions which are accretive to our current earnings at the time of acquisition.  During 2008, we completed two such acquisitions, NDS and the portfolio asset purchase, as means of increasing our volume of business while at the same time expanding our payment services to include credit card services.  Going forward, management expects our public company status to enhance our ability to attract qualified personnel, obtain additional working capital, and facilitate acquisitions more effectively than could be accomplished by remaining a private, closely-held entity.  At this time, we have no understanding, arrangement or agreement to make any acquisitions, but continue to actively seek such opportunities as a means to accelerate revenue and earnings growth.

Recent General Economic Conditions

In light of the recent slowdown in the economy and challenges within the financial sector and credit markets it has become more difficult for many companies to evaluate their future operations.  Although we were able to complete our recent financing transactions which facilitated the acquisition of NDS on August 22, 2008, and the purchase of the portfolio asset on September 17, 2008, we believe that access to future financing may become more difficult until such time as general economic conditions improve.  At this time we have not experienced any material negative impact from recent economic conditions, but we believe it is reasonable to expect that our payment processing business, both for ACH and for credit card transactions could be negatively impacted by these conditions.  Accordingly, we believe that the following factors should be taken into consideration:

 
·
We may experience reductions in the amount of payments we process for merchants as a result of a downturn in consumer activity and consumer confidence.
 
·
We may be negatively impacted in our credit card processing business if consumers are unable to maintain existing credit card limits or have credit card services terminated.
 
·
We may experience difficulties in maintaining or re-financing our existing credit facilities at either equivalent or more favorable rates.
 
·
New sources of borrowed capital may become more expensive or unavailable which may inhibit our ability to grow.
 
·
Competition may become more intense and we may be required to reduce pricing to maintain the business we have and/or to obtain new business through our existing sales force.

Inflation

Inflation has not had a material effect on the operations of the Company in the past.  At the present time we have not experienced significant adverse effects as a result of inflation, and we believe such conditions will not adversely affect the Company for the foreseeable future.


 
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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As a smaller reporting company, the Company is not required to provide the information required by this Item.

ITEM 4(T). CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

Management is responsible for maintaining effective disclosure controls and procedures.  As of the end of the period covered by this Quarterly Report on Form 10-Q, management evaluated the effectiveness and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)).  Based on that evaluation, both the Company’s Principal Executive Officer and Principal Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in reports that are filed or submitted under the Exchange Act are recorded, processed, summarized and reported to management within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in internal controls over financial reporting during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 
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PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

We are not engaged in any material legal proceedings which involve us, any of our subsidiaries or any of our properties.

ITEM 1A.  RISK FACTORS.

As a smaller reporting company, the Company is not required to provide the information required by this Item.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

During the quarter ended September 30, 2009, we did not have any sales of securities in transactions that were not registered under the Securities Act of 1933, as amended, that have not been previously reported in a Form 8-K.

ITEM 3.  DEFAULT UPON SENIOR SECURITIES.

None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

ITEM 5.  OTHER INFORMATION.

None.

ITEM 6.  EXHIBITS.

               
   
10.1
 
Amendment Agreement dated August 23, 2009, to Unsecured Promissory Note between the Company and William R. Plummer (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on August 24, 2009).
31.1
 
Certification of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2
 
Certification of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1
 
Certification of Principal Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2
 
Certification of Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.*
_______________
* Filed herewith.



 
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
UNITED ESYSTEMS, INC.
                                                                  
      
Date:   November 16, 2009      
By: /s/ Walter Reid Green, Jr.
 
      Walter Reid Green, Jr.
 
      Chief Executive Officer, President and
      Chief Financial Officer
 
      (Principal Executive Officer and Principal Financial Officer)
 
 

 
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