Attached files
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
(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
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-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:
|
·
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general
economic and industry conditions;
|
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·
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our
capital requirements and dependence on the sale of our equity
securities;
|
|
·
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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;
|
|
·
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shortages
in availability of qualified
personnel;
|
|
·
|
legal
and financial implications of unexpected catastrophic
events;
|
|
·
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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
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59,440
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157,212
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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
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175,390
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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
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97,092
|
||||||||||||
Travel
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15,959
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10,477
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56,919
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24,691
|
||||||||||||
Amortization
expense
|
134,568
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42,018
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403,704
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42,018
|
||||||||||||
Commissions
and fees expense
|
38,863
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11,457
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123,105
|
45,797
|
||||||||||||
Other
|
54,219
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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.
-10-
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
-11-
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.
-12-
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.
-13-
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.
-14-
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
-15-
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.
-16-
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
-17-
$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.
-18-
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.
-19-
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.
-20-
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.
-21-
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.
-22-
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)
|
-23-