Attached files
file | filename |
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EX-31 - ACIES CORP | ex31.htm |
EX-32 - ACIES CORP | ex32.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 December 31,
2009
|
[
]
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
|
For the
transition period from ____________ to ______________
Commission
file number: 000-49724
ACIES
CORPORATION
(Name of
registrant in its charter)
Nevada
|
7389
|
91-2079553
|
(State
or jurisdiction
|
(Primary
Standard
|
(IRS
Employer Identification
|
of
incorporation or
|
Industrial
Classification
|
No.)
|
organization)
|
Code
Number)
|
3363
N.E. 163rd
Street
Suite
705
North Miami Beach, Florida
33160
(Address
of principal executive offices)
(786)
923-0523
(Registrant's
telephone number)
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 (§232.405 of this
chapter) 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, and
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated
filer,” “accelerated filer”
and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.
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
As of
February 11, 2009, the registrant had 121,616,795 shares of common stock, $0.001
par value per share, outstanding, which includes an aggregate of 47,632,700
shares of common stock which the registrant has agreed to issue (as described
below under “Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds”), but which
have not been physically issued as of the date of this filing.
PART
I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
ACIES
CORPORATION
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
December 31, 2009
|
March
31, 2009
|
||||||
ASSETS
|
|||||||
Current
Assets
|
|||||||
Cash
|
$ | 507 | $ | 44,255 | |||
Accounts
receivable
|
450,135 | 439,891 | |||||
Total
current assets
|
450,642 | 484,146 | |||||
Fixed
assets, net of accumulated depreciation of $46,693 and $42,193,
respectively
|
7,715 | 12,215 | |||||
Total
Assets
|
$ | 458,357 | $ | 496,361 | |||
LIABILITIES
AND SHAREHOLDERS' DEFICIT
|
|||||||
Current
Liabilities
|
|||||||
Notes
payable - current portion
|
$ | 36,547 | $ | 134,688 | |||
Accounts
payable and accrued expenses
|
889,698 | 833,295 | |||||
Accounts
payable to related party
|
26,492 | 92,668 | |||||
Deferred
revenue
|
92,398 | 92,398 | |||||
Merchant
equipment deposits
|
18,810 | 18,810 | |||||
Loans
from related parties
|
- | 363,300 | |||||
Total
current liabilities
|
1,063,945 | 1,535,159 | |||||
Long-term
portion of notes payable
|
10,450 | 41,360 | |||||
Total
Liabilities
|
1,074,395 | 1,576,519 | |||||
Commitment
and contingencies
|
|||||||
Shareholders'
Deficit
|
|||||||
Preferred
stock, Series A, $0.001 par value, 1,000 shares authorized, 1,000 and 0
shares issued and outstanding, respectively
|
1 | - | |||||
Common
stock, $0.001 par value, 200,000,000 shares authorized, 121,616,795 and
73,984,095
shares
issued and outstanding, respectively
|
121,617 | 73,984 | |||||
Additional
paid-in capital
|
6,441,706 | 5,350,181 | |||||
Accumulated
deficit
|
(7,179,362 | ) | (6,504,323 | ) | |||
Total
Shareholders' Deficit
|
(616,038 | ) | (1,080,158 | ) | |||
Total
Liabilities and Shareholders' Deficit
|
$ | 458,357 | $ | 496,361 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-1
ACIES
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
Three
Months and Nine Months Ended December 31, 2009 and 2008
(Unaudited)
Three Months Ended December 31,
|
Nine Months Ended December 31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
||||||||||||||||
Revenues
|
$ | 1,279,884 | $ | 1,640,085 | $ | 3,884,574 | $ | 7,289,631 | ||||||||
Cost
of revenues
|
1,050,588 | 1,486,286 | 3,118,561 | 6,508,261 | ||||||||||||
Gross
margin
|
229,296 | 153,799 | 766,013 | 781,370 | ||||||||||||
General,
administrative and selling expenses
|
243,527 | 97,778 | 1,174,352 | 1,090,521 | ||||||||||||
Operating
income (loss)
|
(14,231 | ) | 56,021 | (408,339 | ) | (309,151 | ) | |||||||||
Interest
expense
|
(228,897 | ) | (21,739 | ) | (266,700 | ) | (96,473 | ) | ||||||||
Net
income (loss)
|
$ | (243,128 | ) | $ | 34,282 | $ | (675,039 | ) | $ | (405,624 | ) | |||||
Income
(loss) per share – Basic and diluted
|
$ | (0.00 | ) | $ | 0.00 | $ | (0.01 | ) | $ | (0.01 | ) | |||||
Weighted
average shares outstanding – Basic and diluted
|
85,267,824 | 73,984,095 | 81,533,935 | 65,223,713 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-2
ACIES
CORPORATION
CONSOLIDATED
STATEMENT OF SHAREHOLDERS’ DEFICIT
For the
Nine Months Ended December 31, 2009
(Unaudited)
Preferred
Stock
|
Common
Stock
|
|
||||||||||||||||||||||||||
Additional Paid-in |
Accumulated
|
|||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||||||||
Balance,
March 31, 2009
|
- | $ | - | 73,984,095 | $ | 73,984 | $ | 5,350,181 | $ | (6,504,323 | ) | $ | (1,080,158 | ) | ||||||||||||||
Preferred
stock issued for services
|
1,000 | 1 | - | - | 377,318 | - | 377,319 | |||||||||||||||||||||
Common
stock issued for services
|
- | - | 4,000,000 | 4,000 | 89,333 | - | 93,333 | |||||||||||||||||||||
Common
stock issued for notes converted
|
- | - | 43,632,700 | 43,633 | 610,858 | - | 654,491 | |||||||||||||||||||||
Amortization
of stock option compensation
|
- | - | - | - | 14,016 | - | 14,016 | |||||||||||||||||||||
Net
loss
|
- | - | - | - | - | (675,039 | ) | (675,039 | ) | |||||||||||||||||||
Balance,
September 30, 2009
|
1,000 | $ | 1 | 121,616,795 | $ | 121,617 | $ | 6,441,706 | $ | (7,179,362 | ) | $ | (616,038 | ) |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Nine
Months Ended December 31, 2009 and 2008
(Unaudited)
|
Nine Months Ended December 31,
|
|||||||
|
2009
|
2008
|
||||||
|
|
|
||||||
CASH
FROM OPERATING ACTIVITIES
|
||||||||
Net
income (loss)
|
$ | (675,039 | ) | $ | (405,624 | ) | ||
Adjustments
to reconcile net loss to cash used in operating activities:
|
||||||||
Share-based
compensation
|
484,668 | 30,667 | ||||||
Debt
conversion expense
|
218,164 | - | ||||||
Depreciation
expense
|
4,500 | 48,821 | ||||||
Changes
in assets and liabilities:
|
||||||||
Accounts
receivable
|
(10,244 | ) | 468,438 | |||||
Other
current assets
|
- | 16,295 | ||||||
Other
assets and deposits
|
- | 35,640 | ||||||
Accounts
payable and accrued expenses
|
63,254 | (213,745 | ) | |||||
Deferred
revenue
|
- | (3,835 | ) | |||||
Deferred
rent
|
- | (70,694 | ) | |||||
CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
85,303 | (94,037 | ) | |||||
|
||||||||
CASH
FROM FINANCING ACTIVITIES
|
||||||||
Proceeds
from notes payable
|
- | 733,653 | ||||||
Repayment
of notes payable
|
(129,051 | ) | (681,014 | ) | ||||
CASH
PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
(129,051 | ) | 52,639 | |||||
|
||||||||
NET
CHANGE IN CASH
|
(43,748 | ) | (41,398 | ) | ||||
Cash,
beginning of period
|
44,255 | 41,398 | ||||||
Cash,
end of period
|
$ | 507 | $ | - | ||||
|
||||||||
Supplemental
disclosures:
|
||||||||
Cash
paid for interest and debt-related fees
|
$ | 7,628 | $ | 96,473 | ||||
Cash
paid for income taxes
|
- | - |
Non-cash
investing and financing activities:
|
||||||||
Note
payable to officer issued for accounts payable and accrued
expenses
|
$ | - | $ | 185,000 | ||||
Conversion
of debt and accrued interest to common stock
|
436,327 | 450,300 |
F-4
ACIES
CORPORATION
(Unaudited)
NOTE
1 - BASIS OF PRESENTATION
The
accompanying unaudited interim financial statements of Acies Corporation ("Acies" or the “Company”) have been
prepared in accordance with accounting principles generally accepted in the
United States of America and the rules of the Securities and Exchange Commission
("SEC"), and
should be read in conjunction with the audited financial statements and notes
thereto contained in Acies' Annual Report filed with the SEC on Form 10-K for
the year ended March 31, 2009. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of financial position and the results of operations for the interim
periods presented have been reflected herein. The results of
operations for the interim periods are not necessarily indicative of the results
to be expected for the full year. Notes to the financial statements
which would substantially duplicate the disclosures contained in the audited
financial statements for the year ended March 31, 2009 as reported in the 10-K
have been omitted. Our fiscal year ends on March
31. References to a fiscal year refer to the calendar year in which
such fiscal year ends.
Summary
of Significant Accounting Policies
The
accounting policies of Acies are contained in the March 31, 2009 Form
10-K. The following are the more significant policies.
Revenue
recognition. Revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the sales price is fixed or
determinable, and collectibility is reasonably assured. Substantially
all of Acies’ revenue is derived from providing credit and debit card processing
services, and it is recognized when the services are
rendered. Revenue is deferred and recorded over the required service
period if all revenue criteria have not been met when the fee is
received. When a merchant has a business transaction for processing
(e.g., purchases of goods or services for which payments are accepted using
credit or debit cards), the amount that is discounted from the transaction
amount prior to the merchant receiving net proceeds is the amount that Acies
recognizes as revenue. Revenue is recognized on a gross basis (i.e.,
prior to deducting expenses paid to third parties for outsourced processing and
settlement services), with such determination based on Acies’ review and
interpretation of current accounting promulgations, including but not limited to
Emerging Issues Task Force Memorandum 99-19 “Reporting Revenue Gross as
Principal versus Net as an Agent” (“EITF 99-19” or ASC
605-45). The indicators of gross revenue reporting which led to our
determination included, but were not limited to, the extent to which Acies has
latitude in establishing price, our credit risk and our discretion in supplier
selection. Any revenue relating to services to be performed in the
future is deferred and recognized on a straight-line basis over the period
during which the services will be performed.
Use of
estimates. In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent 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.
Recent
Accounting Developments
In
June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
(“SFAS 168” or
ASC 105-10). SFAS 168 (ASC 105-10) establishes the Codification as the sole
source of authoritative accounting principles recognized by the FASB to be
applied by all nongovernmental entities in the preparation of financial
statements in conformity with GAAP. SFAS 168 (ASC 105-10) was prospectively
effective for financial statements issued for fiscal years ending on or after
September 15, 2009, and interim periods within those fiscal years. The
adoption of SFAS 168 (ASC 105-10) on July 1, 2009 did not impact the
Company’s results of operations or financial condition. The
Codification did not change GAAP; however, it did change the way GAAP is
organized and presented. As a result, these changes impact how companies
reference GAAP in their financial statements and in their significant accounting
policies. The Company implemented the Codification in this Report by providing
references to the Codification topics alongside references to the corresponding
standards.
F-5
In May
2009, the FASB issued SFAS No. 165 (ASC 855-10) entitled “Subsequent Events”.
Companies are now required to disclose the date through which subsequent events
have been evaluated by management. Public entities (as defined) must
conduct the evaluation as of the date the financial statements are issued, and
provide disclosure that such date was used for this evaluation. SFAS
No. 165 (ASC 855-10) provides that financial statements are considered
“issued” when
they are widely distributed for general use and reliance in a form and format
that complies with GAAP. SFAS No. 165 (ASC 855-10) is effective for
interim or annual periods ending after June 15, 2009, and must be applied
prospectively. The adoption of SFAS No. 165 (ASC 855-10) during the
quarter ended December 31, 2009 did not have a significant effect on the
Company’s financial statements as of that date or for the quarter or
year-to-date period then ended. In connection with preparing the
accompanying unaudited financial statements as of December 31, 2009 and for the
quarter and nine-month period ended December 31, 2009, management evaluated
subsequent events through the date that the financial statements were issued
(filed with the SEC).
With the
exception of the pronouncements noted above, no other accounting standards or
interpretations issued or recently adopted are expected to a have a material
impact on the Company’s consolidated financial position, operations or cash
flows.
NOTE 2 – GOING CONCERN
Acies has
limited capital resources and has incurred significant historical losses and
negative cash flows from operations. Acies believes that funds on
hand combined with funds that will be available from its operations and existing
financing will not be adequate to finance its operating requirements and its
financial obligations under its notes payable for the next twelve
months. Acies believes that it can secure additional capital through
debt and/or equity financing. We do not, however, have any
commitments or identified sources of additional capital from third parties or
from our officers, directors or majority shareholders. There is no
assurance that additional financing will be available on favorable terms, if at
all. Failure of our operations to generate sufficient future cash
flow and failure to raise additional financing could have a material adverse
effect on Acies' ability to continue as a going concern and to achieve its
business objectives. These conditions raise substantial doubt about
Acies’ ability to continue as a going concern. The accompanying
financial statements do not include any adjustments relating to the
recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result should Acies be unable to continue as a going
concern.
NOTE
3 - NOTES PAYABLE
On
October 31, 2006, Acies entered into a Loan and Security Agreement with RBL
Capital Group, LLC (“RBL”). The
Loan and Security Agreement provides a term loan facility with a maximum
borrowing of $2,000,000. Each borrowing under this facility is to be
repaid in 18 equal monthly installments from the date of the borrowing, each of
which includes amortization of the principal amount of the borrowing as
calculated using the interest method. A tri-party agreement between
Acies, RBL and Chase Alliance Partners, LLC (“Chase”, to whom Acies
outsources certain processing services for the majority of its merchant
accounts) arranges for monthly installments to be paid such that Chase forwards
to RBL the entire monthly amounts due to Acies and, after deducting the monthly
installment, the balance is remitted to Acies within 24 hours. The
Loan and Security Agreement requires that accelerated payments of 150% of the
monthly installment are required to be paid if certain cash flow ratios are not
maintained. Borrowings generally bear interest at a fixed rate per
annum of the prime rate at the time of the borrowing plus 8.90%. Each
borrowing under the facility has been at an interest rate of 17.15%, except for
September and December 2007, and February, March and April 2008 drawdowns, which
bear interest at 16.65%, 16.15%, 14.90%, 14.18% and 15.01%,
respectively. Borrowings may not be drawn more than once every 30
days, and there is a limit on aggregate borrowings based on monthly
residuals.
F-6
In
addition, the Loan and Security Agreement contains customary affirmative and
negative covenants for credit facilities of this type, including covenants with
respect to liquidity, disposition of assets, liens, other indebtedness,
investments, shareholder distributions, transactions with affiliates, officers’
compensation, and the transfer or sale of our merchant base, and that there are
no significant changes in our business. In addition, should Acies
sell more than 25% of its merchant accounts for which certain processing
services are outsourced to Chase, that event would require that borrowings under
the facility be repaid in full. Also, should Acies transfer the
outsourcing of certain processing services for merchant accounts for which Chase
currently provides such services to a different third-party, that event would
require either an agreement between Acies, RBL and the third-party similar to
the agreement currently in place between Acies, RBL and Chase, or that
borrowings under the facility be repaid in full.
The Loan
and Security Agreement additionally provides for customary events of default
with corresponding grace periods, including the failure to pay any principal or
interest when due, failure to comply with covenants, material
misrepresentations, certain bankruptcy, insolvency or receivership events,
imposition of certain judgments and the liquidation or merger of
Acies. Acies’ obligations under the Loan and Security Agreement are
secured by substantially all of Acies’ assets, including future remittances
relating to its portfolio of merchant accounts. Proceeds from loans
under this facility have been used to fund general working capital needs, and to
repay loans from officers of Acies.
With the
April 2008 drawdown on this facility, the Company has fully utilized this
capacity and has no remaining availability on this facility. Acies’
borrowings under this agreement were $0 and $100,000 during the nine months
ended December 31, 2009 and 2008, respectively. At December 31, 2009,
our aggregate remaining principal outstanding from these borrowings was
$46,997. The principal repayment schedule for notes payable as of
December 31, 2009 was as follows:
Twelve
Months Ending December 31:
|
||||
2010
|
$
|
36,547
|
||
2011
|
10,450
|
|||
Total
|
$
|
46,997
|
On
November 19, 2009, Pinnacle Three Corporation (“Pinnacle”) converted
the amount of $213,045 owed under the Amended Pinnacle Notes into 21,304,500
shares of the Company’s restricted common stock, which amount included principal
of $178,300 and accrued and unpaid interest of $34,745 (See Note
5).
On
November 19, 2009, Oleg Firer, the Company’s Chief Executive Officer and
Director, converted the amount of $223,282 owed under the Amended Firer Note
into 22,328,200 shares of the Company’s restricted common stock, which amount
included principal of $185,000 and accrued and unpaid interest of $38,282 (see
Note 5).
NOTE
4 - STOCK OPTIONS AND WARRANTS
During
the nine months ended December 31, 2009 and 2008, Acies recognized share-based
compensation expense related to options in the amount of $14,016 and $27,000,
respectively.
On
November 12, 2009, the Board of Directors of the Company agreed to grant
non-qualified options pursuant to the Company’s 2009 Stock Incentive Plan (the
“Plan”) to
purchase 1,000,000 shares of the Company’s common stock, to each of the three
members of the Board of Directors, Oleg Firer, Theodore Ferrara and Steven
Wolberg (the “Options”) in
consideration for services rendered to the Company and to be rendered to the
Company as Directors of the Company. The Options have an exercise
price of $0.01 per share; and are exercisable for five (5)
years. Options held by each Director to purchase 333,334 shares vest
immediately upon the date of the grant (the “Grant Date”); Options
to purchase 333,333 shares vest on the first anniversary of the Grant Date; and
Options to purchase 333,333 shares vest on the second anniversary of the Grant
Date, subject to such Directors’ continued service to the Board of
Directors. The vesting and expiration of the Options are also subject
to the terms and conditions of the Plan and the Option Agreements which evidence
such grants. The fair value of the options was determined to be
$29,857 using the Black-Scholes option-pricing model. Variables used in the
Black-Scholes pricing model for the options include: (1) discount rate of 2.3%,
(2) expected term of 5 years, (3) expected volatility of 251% and (4) zero
expected dividends. One third of the value was expensed immediately
and remaining $19,905 is being amortized over two years. At December
31, 2009, the remaining unamortized amount was $15,841.
F-7
Options
outstanding and exercisable as of December 31, 2009:
Exercise
Price
|
Number
of
Shares
|
Remaining
life
|
Exercisable
Number
of
Shares
|
|||||||
$0.25
|
1,000,000
|
1.5
years
|
1,000,000
|
|||||||
$0.01
|
3,000,000
|
4.9
years
|
999,999
|
Options
outstanding as of December 31, 2009 have a $0 intrinsic value.
Warrants
outstanding and exercisable as of December 31, 2009:
Exercise
Price
|
Number
of
Shares
|
Remaining
life
|
Exercisable
Number
of
Shares
|
|||||||
$0.25
|
7,440,000
|
0.09
year
|
7,440,000
|
All
warrants expired unexercised on February 3, 2010.
There
were no warrants granted during the nine months ended December 31, 2009 or 2008.
NOTE
5 – EQUITY
Common
Stock
In
September 2007, Acies issued a total of 300,000 shares of restricted common
stock to its three independent directors, which vested on June 30,
2008. The market value on the date of issuance was $12,000, which was
expensed ratably over the vesting period. During the nine months
ended December 31, 2009 and 2008, Acies recognized a total of $0 and $3,667,
respectively, in share-based compensation expense in connection with the vested
portion of restricted stock awards issued in the aforementioned
grant.
On July
17, 2008, Acies issued 22,515,000 shares of common stock to Pinnacle in exchange
for the $450,000 promissory note and accrued interest of $300.
In
November 2009, the Company ratified the terms and conditions of a three-month
consulting agreement between the Company and Steven Wolberg, a former consultant
and current Director of the Company (the “Consulting
Agreement”). Pursuant to the terms of the Consulting
Agreement, Mr. Wolberg agreed to perform legal, consulting and other services
for the Company for a period of three months (from July 1, 2009 to September 30,
2009), in consideration for 4,000,000 restricted shares of the Company’s common
stock. Consulting expense was recognized in full over the service period and
valued based on the market price per share on the last day of the respective
month. Total consulting expense recognized was $93,333.
On
November 19, 2009, Pinnacle and the Company entered into 2nd
Amended and Restated Promissory Notes, to amend and restate Pinnacle’s
outstanding promissory notes in the aggregate principal amount of $213,045,
which amount included principal of $178,300 and accrued and unpaid interest of
$34,745 (the “Amended
Pinnacle Notes”). Pursuant to the Amended Pinnacle Notes, the
Company agreed to reduce the conversion price of the notes from $0.02 per share
to $0.01 per share in consideration for Pinnacle agreeing to immediately convert
such Amended Pinnacle Notes and accrued and unpaid interest thereon in the
aggregate amount of $213,045 into 21,304,500 shares of the Company’s restricted
common stock. Immediately following the Company’s entry into the
Amended Pinnacle Notes, Pinnacle converted the entire principal and accrued
interest outstanding under the notes into 21,304,500 shares of the Company’s
restricted common stock. In connection with this induced conversion,
the Company recorded $106,523 of additional interest expense.
F-8
On
November 19, 2009, Oleg Firer, the Company’s Chief Executive Officer and
Director, and the Company entered into a 2nd
Amended and Restated Promissory Note, to amend and restate Mr. Firer’s
outstanding promissory note in the principal amount of $223,282, which amount
included principal of $185,000 and accrued and unpaid interest of $38,282 (the
“Amended Firer
Note”). Pursuant to the Amended Firer Note, the Company agreed
to reduce the conversion price of the note from $0.02 per share to $0.01 per
share in consideration for Mr. Firer agreeing to immediately convert such
Amended Firer Note and accrued and unpaid interest thereon in the aggregate
amount of $223,282 into 22,328,200 shares of the Company’s restricted common
stock. Immediately following the Company’s entry into the Amended
Firer Note, Mr. Firer converted the entire principal and accrued interest
outstanding under the note into 22,328,200 shares of the Company’s restricted
common stock. In connection with this induced conversion, the Company
recorded $111,641 of additional interest expense.
Preferred
Stock
On
December 15, 2008, Acies filed with the Nevada Secretary of State, a Certificate
of Designations of Acies Corporation Establishing the Designations, Preferences,
Limitations and Relative Rights of the Preferred Stock (the “Designation”). The
Designation provides for the designation of a series of 44,340 shares of Series
A Preferred Stock, par value $0.001 per share. The holders of the
Preferred Stock are not to be entitled to any liquidation
preference. The Designation provides conversion rights whereby upon
the effective date of a reverse stock split each share of preferred stock will
be automatically converted into shares of Acies’ post-reverse stock split common
stock at a rate of 1,000 post-reverse stock split shares of Acies’ restricted
common shares for each 1 share of preferred stock, without any required action
by the holder thereof.
The
preferred stock is to have the same voting rights as those accruing to the
common stock and vote that number of shares as are issuable upon conversion of
such preferred stock that any holder as of the record date of any such vote
based on the conversion rate divided by the reverse stock split (to
retroactively take into account the reverse stock split). The voting
rights of the preferred stock are to be applicable regardless of whether Acies
has a sufficient number of authorized but unissued shares of common stock then
available to effect an automatic conversion. The holders of the
preferred stock are not entitled to receive dividends paid on Acies’ common
stock and the preferred stock is not to accrue any
dividends. Further, the shares of the Series A Preferred Stock do not
have and are not subject to redemption rights.
On August
13, 2009, the Board of Directors approved an amendment to and the restatement of
Acies’ previously designated Series A Preferred Stock, which became effective
with the Secretary of State of Nevada on August 14, 2009. The Series
A Preferred Stock, as amended, allows the Board of Directors in its sole
discretion to issue up to 1,000 shares of Series A Preferred Stock, which Series
A Preferred Stock has the right to vote in aggregate, on all shareholder matters
equal to 51% of the total vote. The Series A Preferred Stock will be
entitled to this 51% voting right no matter how many shares of common stock or
other voting stock of Acies are issued or outstanding in the future (the “Super Majority Voting
Rights”). Additionally, Acies shall not adopt any amendments
to Acies’ Bylaws, Articles of Incorporation, as amended, make any changes to the
Certificate of Designations establishing the Series A Preferred Stock, or effect
any reclassification of the Series A Preferred Stock, without the affirmative
vote of at least 66-2/3% of the outstanding shares of Series A Preferred Stock.
However, Acies may, by any means authorized by law and without any vote of the
holders of shares of Series A Preferred Stock, make technical, corrective,
administrative or similar changes to such Certificate of Designations that do
not, individually or in the aggregate, adversely affect the rights or
preferences of the holders of shares of Series A Preferred Stock.
In
connection with the employment agreement discussed in Note 7, on August 13,
2009, Acies issued 1,000 shares of Series A Preferred Stock to Mr. Firer. The
fair value on the date of issuance was $377,319 and was recognized as
share-based compensation in general and administrative expense.
F-9
NOTE
6 - LOSS PER SHARE
Stock
options and warrants in the amount of 11,440,000 and 11,296,981 for the nine
months ended December 31, 2009 and 2008, respectively, were not included in the
computation of diluted loss per share, as they are anti-dilutive as a result of
Acies having a net loss for the nine months ended December 31, 2009 and 2008 and
three months ended December 31, 2009 and the options and warrants being out of
the money for the three months ended December 31, 2008.
NOTE
7 – EMPLOYMENT AGREEMENT
On May 5,
2009, we entered into a new employment agreement with Mr. Firer. The
terms of Mr. Firer’s employment agreement supersede the terms of the employment
agreement dated May 5, 2006.
Mr.
Firer’s 2009 employment agreement has a three-year term and provides for an
annual base salary of $215,000 on an annualized basis, subject to periodic
adjustments. Under this agreement, he is entitled to earn periodic
incentive bonuses, based upon the achievement of milestones and objectives
established by our Board of Directors or Compensation Committee. For
each fiscal year covered by the agreement, Mr. Firer has been and will be
eligible to earn (1) quarterly incentive bonus payments in the aggregate annual
maximum amount of up to 70% of his base salary based upon the achievement of
milestones and objectives established by our Board of Directors relating to
revenue growth, net income, and cash flow from operations, (2) an annual
discretionary bonus of up to 30% of Mr. Firer’s base salary, (3) reimbursement
to Mr. Firer for health insurance premiums of up to $1,350 per month, (4)
automobile allowance in an amount not to exceed $1,500 per month and (5)
$1,000,000 of whole life insurance policy with the beneficiary designated by Mr.
Firer.
In
connection with this employment agreement, on August 13, 2009, Acies issued
1,000 shares of Series A Preferred Stock to Mr. Firer. The fair value on the
date of issuance was $377,319 and was recognized as share-based compensation in
general and administrative expense.
NOTE
8 – RELATED PARTY TRANSACTIONS
In June
2008, Acies borrowed $450,000 through the execution of a convertible promissory
note with Pinnacle Three Corporation (“Pinnacle”), bearing
interest at a rate of 8% per annum, with principal and all accrued interest
payable in November 2010. On June 6, 2008, Acies received a
conversion letter from Pinnacle requesting conversion of the principal and
accrued interest into 22,515,000 shares of Acies common stock at a price of
$0.02 per share, per the terms of the Note agreement. The principal
and interest total of $450,300 is included on the balance sheet as stock payable
at June 30, 2008. On July 17, 2008, Acies issued 22,515,000 shares to
Pinnacle in exchange for the Settlement Agreement and Mutual Release between
Pinnacle and Acies.
In
November 2009, the Company ratified the terms and conditions of a three-month
consulting agreement between the Company and Steven Wolberg, a former consultant
and current Director of the Company. Consideration of 4,000,000
restricted shares of the Company’s common stock. Consulting expense was
recognized in full over the service period and valued based on the market price
per share on the last day of the respective month. Total consulting expense
recognized was $93,333 (see NOTE 5).
On
November 19, 2009, Pinnacle converted the principal amount of $213,045 into
21,304,500 shares of the Company’s restricted common stock, which amount
included principal of $178,300 and accrued and unpaid interest of $34,745 (See
Note 5).
On
November 19, 2009, Oleg Firer, the Company’s Chief Executive Officer and
Director, converted the principal $223,282 into 22,328,200 shares of the
Company’s restricted common stock, which amount included principal of $185,000
and accrued and unpaid interest of $38,282 (see Note 5).
Merchant
Processing Services Corp (“MPS”) provides day-to-day support functions, office
and servicing for Acies for a monthly payment of $20,000 to $25,000. MPS is a
wholly-owned subsidiary of Merchant Capital Holding Corp, partly owned by Star
Capital Holdings Corp. (“Star”). Oleg Firer, Acies’ CEO, serves as a Co-Chairman
of Star. No compensation has been paid to Mr. Firer by Star
as consideration for being a Co-Chairman. Leon Goldstein, President of
Pinnacle Three Corp. is a founder of Star and also serves as a Co-Chairman. For
the nine months ended December 31, 2009, Acies incurred expenses to MPS in the
amount of $195,000. As of December 31, 2009, $11,500 was payable.
F-10
CERTAIN
STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q (THIS "FORM 10-Q"),
CONSTITUTE "FORWARD
LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1934, AS AMENDED, AND THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 (COLLECTIVELY, THE "REFORM ACT").
CERTAIN, BUT NOT NECESSARILY ALL, OF SUCH FORWARD-LOOKING STATEMENTS CAN BE
IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES", "EXPECTS", "MAY", "SHOULD", OR "ANTICIPATES", OR THE
NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR BY
DISCUSSIONS OF STRATEGY THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF
ACIES CORPORATION AND ITS PRINCIPAL SUBSIDIARY, ACIES, INC. (COLLECTIVELY,
"THE COMPANY",
"WE", “ACIES,” "US" OR "OUR") TO BE
MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM
10-Q, UNLESS ANOTHER DATE IS STATED, ARE TO DECEMBER 31, 2009.
The
Company was originally incorporated in the State of Nevada on October 11,
2000. On October 1, 2003, the Company changed its name to Atlantic
Synergy, Inc. (“Atlantic”). Our
principal subsidiary, Acies, Inc., was incorporated in the State of Nevada on
April 22, 2004 as GM Merchant Solutions, Inc., and changed its name to Acies,
Inc. on June 23, 2004. On June 28, 2004, Acies, Inc. purchased
substantially all of the assets of GM Merchant Solutions, Inc., a New York
corporation ("GM-NY") and GMS
Worldwide, LLC, a New York limited liability company ("GMS-NY"), including
cash, accounts receivable, office equipment, furniture, computer hardware and
software, and goodwill and other intangible property (including customer lists,
leases, and material contracts) in exchange for Acies, Inc. common stock (the
“Acies, Inc.
Stock”). Mr. Oleg Firer, our current Chief Executive Officer
and Director, Mr. Yakov Shimon, our former Vice President of Technology and Data
Management, and Mr. Miron Guilliadov, our former Vice President of Sales, had
been engaged in the payment processing business through GM-NY and
GMS-NY.
On July
2, 2004, Atlantic acquired approximately 99.2% of the issued and outstanding
common stock of Acies, Inc. in exchange for approximately 26,150,000 newly
issued shares of Atlantic's common stock (the "Exchange"). In
connection with, and subsequent to the Exchange, Atlantic transferred all of its
assets held immediately prior to the Exchange, subject to all of Atlantic's then
existing liabilities, to Terence Channon, Atlantic's former President and Chief
Executive Officer, in consideration for Mr. Channon's cancellation of 4,285,000
shares of Atlantic's common stock and the cancellation of 200,000 shares of
Atlantic's common stock held by a third party. The transaction was accounted for
as a reverse merger. In connection with this transaction, the Acies,
Inc. stock was exchanged for common stock of Atlantic.
In
November 2004, Atlantic changed its name to Acies Corporation (“Acies” or the “Company”).
DESCRIPTION
OF PRINCIPAL PRODUCTS AND SERVICES
The
Company, through its wholly-owned subsidiary Acies, Inc., is engaged in the
business of providing payment processing solutions to small and medium size
merchants across the United States. Through contractual relationships with third
parties to whom we outsource the providing of certain services, Acies is able to
offer complete solutions for payment processing, whereby we consult with
merchants to best determine their hardware and software needs; provide
transaction authorization, settlement and clearing services; perform merchant
acceptance and underwriting functions; program, deploy and install traditional
and next-generation point-of-sale (POS) terminals; assist in the detection of
fraudulent transactions; and provide customer and technical support and service
on an on-going basis. We are a registered member service provider of Wells
Fargo Bank, N.A. Historically we were sponsored by JPMorgan Chase
Bank through a joint venture between JPMorgan Chase and First Data
Corp. On May 27, 2008, JPMorgan Chase and First Data Corp announced
that they had agreed to end their joint venture. On November 3, 2008,
JPMorgan Chase and First Data Corp completed an ownership transition and ended
their joint venture. As part of this transaction, First Data Corp
assumed services to the joint venture’s customers and changed bank sponsorship
to Wells Fargo Bank, N.A. The Company continues to do business under
its legacy agreement, while negotiating new processing agreements with First
Data Corp.
-2-
The
Company’s payment processing services enable merchants to process Credit, Debit,
Electronic Benefit Transfer (EBT), Check Conversion, and Gift & Loyalty
transactions. Our card processing services enable merchants to accept
traditional card-present transactions, including "swipe" and
contactless transactions, as well as card-not-present transactions made by
Internet or by mail, fax or telephone.
We
outsource certain services to third parties, including the receipt and
settlement of funds. In addition, we outsource for a fee certain underwriting
and acceptance functions, effectively insuring against risk for entire processed
transaction amounts relating to merchant fraud (while retaining the risk related
to the fees representing our revenue stream and associated costs). By doing so,
we intend to maintain an efficient operating structure which allows us to expand
our operations without having to significantly increase fixed costs or retain
certain risks associated with acceptance and underwriting of merchant
accounts.
We derive
the majority of our revenues from fee income related to transaction processing,
which is primarily comprised of a percentage of the dollar amount of each
transaction processed, as well as a flat fee per transaction. In the event that
we have outsourced any of the services provided in the transaction, we remit a
portion of the fee income to the third parties that have provided such
outsourced services.
We market
and sell our services primarily through an indirect sales channel, i.e., through
independent sales agents and organizations. In addition, we market services
through our direct channel, which is comprised of a limited in-house sales
team.
Our cost
of revenues is comprised principally of interchange and association fees which
are paid to the card-issuing bank and card association, and fees paid to third
parties that have provided outsourced services. The fees paid are based upon
fixed pricing schedules (certain detailed costs are fixed on a per transaction
and/or event basis, while others are fixed as a percentage of the dollar volume
of the transaction), which are subject to periodic revision, and are without
regard to the pricing charged to the merchant. Fee structures with third parties
providing outsourced services are reviewed, renegotiated and/or revised on a
periodic basis, and are based on mutually agreed-to expectations relating to,
for instance, minimum new business volume placed within specified periods which,
if not met, would result in additional charges to be paid by the
Company.
Although
the Company initiates and maintains the primary relationships with the merchants
whose transaction processing results in our revenues, including generally having
control over pricing and retaining risk as it relates to the fees comprising our
revenue stream, merchants do not have written contracts with the Company, and
instead have contractual agreements with third-party processors to whom we
outsource, and rely on to perform, certain services on our behalf.
Our
fiscal year ends on March 31. References to a fiscal year refer to the calendar
year in which such fiscal year ends.
MARKET
OVERVIEW
The
payment processing industry is an integral part of today's worldwide financial
structure. The industry is continually evolving, driven in large part by
technological advances. The benefits of card-based payments allow merchants to
access a broader universe of consumers, enjoy faster settlement times and reduce
transaction errors. By using credit or debit cards, consumers are able to make
purchases more conveniently, whether in person, over the Internet, or by mail,
fax or telephone, while gaining the benefit of loyalty programs, such as
frequent flyer miles or cash back, which are increasingly being offered by
credit or debit card issuers.
-3-
Consumers
are also beginning to use card-based and other electronic payment methods for
purchases at an earlier age in life, and increasingly for small dollar amount
purchases. Given these advantages of card-based payment systems to both
merchants and consumers, favorable demographic trends, and the resulting
proliferation of credit and debit card usage, we believe businesses will
increasingly seek to accept card-based payment systems in order to remain
competitive.
Our
management believes that cash transactions are becoming progressively obsolete.
The proliferation of bank cards has made the acceptance of bank card payments a
virtual necessity for many businesses, regardless of size, in order to remain
competitive. In addition, the advent and growth of e-commerce have marked a
significant new trend in the way business is being conducted. E-commerce is
dependent upon credit and debit cards, as well as other cashless payment
processing methods.
The
payment processing industry continues to evolve rapidly, based on the
application of new technology and changing customer needs. We intend to continue
to evolve with the market to provide the necessary technological advances to
meet the ever-changing needs of our market place. Traditional players in the
industry must quickly adapt to the changing environment or be left behind in the
competitive landscape.
COMPETITIVE
BUSINESS CONDITIONS
We are
committed not only to servicing clients' current processing needs, but also to
being amongst the first to make available new technologies that may improve our
merchants’ respective competitive positions. We are committed to gaining the
expertise and relationships to adopt and implement new technologies that we
believe may differentiate our service offerings.
The
credit, charge and debit card transaction processing services business is highly
competitive. Many of our current and prospective competitors have substantially
greater financial, technical and marketing resources, larger customer bases,
longer operating histories, more developed infrastructures, greater name
recognition and/or more established relationships in the industry than we have.
Because of this our competitors may be able to adopt more aggressive pricing
policies than we can, develop and expand their service offerings more rapidly,
adapt to new or emerging technologies and changes in customer requirements more
quickly, take advantage of acquisitions and other opportunities more readily,
achieve greater economies of scale, and devote greater resources to the
marketing and sale of their services. Because of the high levels of competition
in the industry and the fact that other companies may have greater resources, it
may be impossible for us to compete successfully. However, we seek to
differentiate the Company through our consultative approach, recommending and
implementing the best possible overall payment processing solutions, tailored to
merchants’ specific needs.
We
provide services principally to small and medium-size merchants in retail,
restaurant, supermarket, petroleum and hospitality sectors located across the
United States. The small merchants we serve typically process on average in
excess of $20,000 a month in credit card transactions and have an average
transaction value of approximately $50.00 per transaction. These merchants have
traditionally been underserved by larger payment processors. As a result, these
merchants have historically paid higher transaction fees than larger merchants
and have not been provided with tailored solutions and on-going services that
larger merchants typically receive from larger processors.
We
believe that we have developed significant expertise in industries that we
believe present relatively low risk as customers are generally present and the
products and/or services are generally delivered at the time the transaction is
processed. These industries include “brick and mortar”
retailers, hospitality, automotive repair shops, food stores, petroleum
distributors and professional service providers. As of March 31, 2009, the end
of our last fiscal year, approximately 19% of our merchants were professional
service providers, 18% were hospitality merchants, 10% were food stores, 9% were
gas stations and petroleum distributors, 8% were automotive sales and repair
shops, 6% were apparel stores, 22% were other “brick and mortar”
retailers and 8% were other industries.
-4-
DISTRIBUTION
METHODS
We have
adopted what we believe to be an uncomplicated sales strategy enabling us to
establish additions to our sales force in a quick, inexpensive manner. We market
and sell our services primarily through relationships with independent sales
agents and organizations. These agents and organizations act as a non-employee,
external sales force in communities throughout the United States.
Our
independent sales agents and organizations are principally compensated by
receiving on-going monthly residual payments based on a percentage of
transaction-based revenues less expenses relating to merchant accounts they have
brought to the Company. This stream of residual payments is paid to them
indefinitely, assuming that the merchant is still processing through Acies, and
that the agent continues to serve the merchant’s needs.
MATERIAL
TRANSACTIONS:
On or
around August 13, 2009, the Board of Directors approved an amendment to and the
restatement of the Company’s previously designated Series A Preferred Stock,
which became effective with the Secretary of State of Nevada on August 14,
2009. The Series A Preferred Stock, as amended, allows the Board of
Directors in its sole discretion to issue up to 1,000 shares of Series A
Preferred Stock, which Series A Preferred Stock has the right to vote in
aggregate, on all shareholder matters equal to 51% of the total
vote. The Series A Preferred Stock will be entitled to this 51%
voting right no matter how many shares of common stock or other voting stock of
the Company are issued or outstanding in the future (the “Super Majority Voting
Rights”). Additionally, the Company shall not adopt any
amendments to the Company's Bylaws, Articles of Incorporation, as amended, make
any changes to the Certificate of Designations establishing the Series A
Preferred Stock, or effect any reclassification of the Series A Preferred Stock,
without the affirmative vote of at least 66-2/3% of the outstanding shares of
Series A Preferred Stock. However, the Company may, by any means authorized by
law and without any vote of the holders of shares of Series A Preferred Stock,
make technical, corrective, administrative or similar changes to such
Certificate of Designations that do not, individually or in the aggregate,
adversely affect the rights or preferences of the holders of shares of Series A
Preferred Stock.
On or
around August 13, 2009, the Company and Mr. Firer agreed to the entry into a
three year employment agreement effective as of May 5, 2009 and continuing until
May 4, 2012 (unless terminated previously as provided in the agreement and
described below). Pursuant to the agreement, Mr. Firer agreed to
serve as our Chief Executive Officer and as the Chief Executive Officer of
Acies, Inc., our wholly-owned Nevada subsidiary. We agreed to pay Mr.
Firer compensation of $215,000 per year, and that Mr. Firer would have the
right, at the sole discretion of our Board of Directors, to receive an annual
incentive bonus of up to a maximum of 70% of Mr. Firer’s annual base salary and
an annual discretionary bonus of up to 30% of Mr. Firer’s base
salary. We also agreed to issue Mr. Firer the 1,000 shares of the
Company’s Series A Preferred Stock which were previously designated by the Board
of Directors (as described above, which designation was amended and
restated). Finally, the employment agreement provided that we would
reimburse Mr. Firer for health insurance premiums of up to $1,350 per month and
provide Mr. Firer a car allowance of up to $1,500 per month.
The
employment agreement can be terminated by Mr. Firer for “cause” (as defined
therein), by the Company for “good reason” as
defined therein, by the mutual consent of the parties, or by any party at any
time for any reason. The employment agreement is also terminated by
Mr. Firer’s death or his disability (as described therein). In the event
the agreement is terminated for “cause” by the
Company, without “good
reason” by Mr. Firer, or by mutual agreement, Mr. Firer is to be paid any
earned but unpaid salary, benefits or bonuses, and reimbursement for any
business expenses paid by Mr. Firer (the “Accrued
Obligations”). In the event that Mr. Firer’s employment is
terminated due to death or disability, he (or his heirs) are to receive the
Accrued Obligations and up to 12 months of COBRA health coverage reimbursement
(the “COBRA
Coverage”). In the event the employment agreement is terminated
without “cause”
by the Company or for “good reason” by Mr.
Firer, he is to receive the Accrued Obligations, the COBRA Coverage, and the
greater of 12 months of salary or the remaining salary due to him under the term
of the agreement.
-5-
On
September 23, 2008, we entered into an 18% Convertible Promissory Note (the
"Pinnacle
Note") in favor of Pinnacle Three Corporation ("Pinnacle") to
evidence $172,653 of loans advanced to the Company by Pinnacle during the months
of August and September 2008. In July 2009, the Company entered
into an additional 18% Convertible Promissory Note with Pinnacle to evidence an
additional $5,647 loaned by Pinnacle to the Company (the “Second Pinnacle Note”
and collectively with the Pinnacle Note, the “Pinnacle Notes”). The
Pinnacle Notes were convertible into shares of the Company’s common stock
at an exercise price of $0.02 per share at any time prior to the maturity
date. The Pinnacle Notes bear interest at a rate of 18%
per annum, and were due and payable on September 23, 2009.
On
September 23, 2008, the Company entered into an 18% Convertible
Promissory Note in favor of Mr. Firer, the Company’s Chief Executive Officer, to
evidence the amount of $185,000 owed by the Company to Mr. Firer in
connection with various expenses paid by Mr. Firer on the
Company's behalf and reimbursements he is owed dating back to April 2006
(the “Firer
Note”). The Firer Note was convertible into shares of the
Company's common stock at an exercise price of $0.02 per share at any time
prior to the maturity date. Under the terms and conditions of the Firer
Note, the Company promised to pay to Mr. Firer a principal sum in the
amount of $185,000, together with accrued and unpaid interest at the rate of 18%
per annum, on September 23, 2009.
On or
around September 23, 2009, the Company entered into 1st Amendments and
Restatements to the Pinnacle Notes and Firer Note with Pinnacle and Mr. Firer,
respectively, which extended the due date of such notes to November 30, 2009,
without changing any of the other terms and conditions of the
notes.
In
November 2009, the Company ratified the terms and conditions of a three-month
consulting agreement between the Company and Steven Wolberg, a former consultant
and current Director and officer (as described below) of the Company (the “Consulting
Agreement”). Pursuant to the terms of the Consulting
Agreement, Mr. Wolberg agreed to perform legal, consulting and other services
for the Company for a period of three months (from July 1, 2009 to September 30,
2009), in consideration for 4,000,000 restricted shares of the Company’s common
stock.
On
November 12, 2009, the Board of Directors of the Company agreed to grant
non-qualified options pursuant to the Company’s 2009 Stock Incentive Plan (the
“Plan”) to
purchase 1,000,000 shares of the Company’s common stock, to each of the three
members of the Board of Directors, Oleg Firer, Theodore Ferrara and Steven
Wolberg (the “Options”) in
consideration for services rendered to the Company and to be rendered to the
Company as Directors of the Company. The Options have an exercise
price of $0.01 per share; and are exercisable for five (5)
years. Options held by each Director to purchase 333,334 shares vest
immediately upon the date of the grant (the “Grant Date”); Options
to purchase 333,333 shares vest on the first anniversary of the Grant Date; and
Options to purchase 333,333 shares vest on the second anniversary of the Grant
Date, subject to such Directors’ continued service to the Board of
Directors. The vesting and expiration of the Options are also subject
to the terms and conditions of the Plan and the Option Agreements which evidence
such grants.
On or
around November 19, 2009, Pinnacle and the Company entered into 2nd
Amended and Restated Promissory Notes, to amend and restate Pinnacle’s
outstanding promissory notes in the aggregate principal amount of $213,045,
which amount included principal of $178,300 and accrued and unpaid interest of
$34,745 (the “Amended
Pinnacle Notes”). Pursuant to the Amended Pinnacle Notes, the
Company agreed to reduce the conversion price of the notes from $0.02 per share
to $0.01 per share in consideration for Pinnacle agreeing to immediately convert
such Amended Pinnacle Notes and accrued and unpaid interest thereon in the
aggregate amount of $213,045 into 21,304,500 shares of the Company’s restricted
common stock. Immediately following the Company’s entry into the
Amended Pinnacle Notes, Pinnacle converted the entire principal and accrued
interest outstanding under the notes into 21,304,500 shares of the Company’s
restricted common stock.
On or
around November 19, 2009, Oleg Firer, the Company’s Chief Executive Officer and
Director, and the Company entered into a 2nd
Amended and Restated Promissory Note, to amend and restate Mr. Firer’s
outstanding promissory note in the principal amount of $223,282, which amount
included principal of $185,000 and accrued and unpaid interest of $38,282 (the
“Amended Firer
Note”). Pursuant to the Amended Firer Note, the Company agreed
to reduce the conversion price of the note from $0.02 per share to $0.01 per
share in consideration for Mr. Firer agreeing to immediately convert such
Amended Firer Note and accrued and unpaid interest thereon in the aggregate
amount of $223,282 into 22,328,200 shares of the Company’s restricted common
stock. Immediately following the Company’s entry into the Amended
Firer Note, Mr. Firer converted the entire principal and accrued interest
outstanding under the note into 22,328,200 shares of the Company’s restricted
common stock.
-6-
COMPARISON
OF OPERATING RESULTS
FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009, COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 2008
Revenues
decreased $360,201 or 22.0% to $1,279,884 for the three months ended December
31, 2009, as compared to revenues of $1,640,085 for the three months ended
December 31, 2008. The decrease in revenues was principally due to the decrease
in processing volumes (i.e., card-based sales in dollars) and the decrease in
the number of transactions. The decrease reflects the decrease in
merchant processing revenues resulting from the loss of merchant accounts and
loss of sales agents, and greater pricing pressure in certain industries to
which we market our services.
Cost of
revenues decreased $435,698 or 29.3% to $1,050,558 for the three months ended
December 31, 2009, as compared to cost of revenues of $1,486,286 for the three
months ended December 31, 2008. The decrease in cost of revenues was principally
attributable to the decrease in merchant processing costs that resulted from a
decrease in merchant processing revenues.
Gross
margin increased $75,497 or 49.1% to $229,296 for the three months ended
December 31, 2009, as compared to gross margin of $153,799 for the three months
ended December 31, 2008 due to the Company negotiating a reduced fee structure
with First Data Corp.
Cost of
revenues as a percentage of revenues were 82.1% for the three months ended
December 31, 2009, compared to 90.6% for the three months ended December 31,
2008, a decrease in cost of revenues as a percentage of revenues of 8.5% from
the prior period. The main reason for the decrease in cost of
revenues as a percentage of revenues was due to the Company negotiating a
reduced fee structure with First Data Corp.
General,
administrative and selling ("G&A") expense
increased $145,749 or 149.1% to $243,527 for the three months ended December 31,
2009, as compared to G&A expense of $97,778 for the three months ended
December 31, 2008. The increase in G&A expense was principally attributable
to approximately $75,000 increase third party operational fees and an
approximately $70,000 increase in marketing expenses.
We had an
operating loss of $14,231 for the three months ended December 31, 2009, compared
to operating income of $56,021 for the three months ended December 31, 2008, a
decrease in operating income of $70,252 from the prior period, which
decrease was largely attributable to the increase in G&A expense and the
decrease in revenues.
During
the three months ended December 31, 2009, we incurred interest expense of
$228,897 related to our notes payable compared to $21,739 for the three month
period of the prior year, an increase of $207,158 from the prior
period. The increase in interest expense was due to a non-cash
expense of $218,164 for the induced conversion of notes payable, partially
offset by a reduction in interest expense resulting from the reduced outstanding
balance of loans and notes payable for the three months ended December 31, 2009,
compared to the three months ended December 31, 2008.
We had a
net loss of $243,128 for the three months ended December 31, 2009, as compared
to net income of $34,282 for the three months ended December 31, 2008, an
increase in net loss of $208,846 from the prior period. The increase
in net loss was due to the $360,201 decrease in revenues, the $145,749 increase
in G&A expenses and the $207,158 increase in interest expense, partially
offset by the $435,698 decrease in costs of revenues for the three months ended
December 31, 2009, compared to the three months ended December 31,
2008.
-7-
FOR
THE NINE MONTHS ENDED DECEMBER 31, 2009, COMPARED TO THE NINE MONTHS ENDED
DECEMBER 31, 2008
Revenues
decreased $3,405,057 or 46.7% to $3,884,574 for the nine months ended December
31, 2009, as compared to revenues of $7,289,631 for the nine months ended
December 31, 2008. The decrease in revenues was principally due to the decrease
in processing volumes (i.e., card-based sales in dollars) and the decrease in
the number of transactions. The decrease reflects the decrease in
merchant processing revenues resulting from the loss of merchant accounts and
loss of sales agents, and greater pricing pressure in certain industries to
which we market our services.
Cost of
revenues decreased $3,389,700 or 52.1% to $3,118,561 for the nine months ended
December 31, 2009, as compared to cost of revenues of $6,508,261 for the nine
months ended December 31, 2008. The decrease in cost of revenues was principally
attributable to the decrease in merchant processing costs that resulted from a
decrease in merchant processing revenues.
Gross
margin decreased $15,357 or 2.0% to $766,013 for the nine months ended December
31, 2009, as compared to gross margin of $781,370 for the nine months ended
December 31, 2008 due to the decrease in revenues.
Cost of
revenues as a percentage of revenues was 80.3% for the nine months ended
December 31, 2009, compared to 89.3% for the nine months ended December 31,
2008, a decrease in cost of revenues as a percentage of revenues of 9% from the
prior period. The main reason for the decrease in cost of revenues as
a percentage of revenues was due to the Company negotiating a reduced fee
structure with First Data Corp.
General,
administrative and selling ("G&A") expense
increased $83,831 or 7.7% to $1,174,352 for the nine months ended December 31,
2009, as compared to G&A expense of $1,090,521 for the nine months ended
December 31, 2008. The increase in G&A expense was principally
attributable to $484,668 in share-based compensation, partially offset by
decreased personnel costs and operational costs associated with a scale down in
our operation which was due mainly to the recent economic downturn.
We had an
operating loss of $408,339 for the nine months ended December 31, 2009, compared
to an operating loss of $309,151 for the nine months ended December 31, 2008, an
increase in operating loss of $99,188 or 32.1% from the prior
period.
During
the nine months ended December 31, 2009, we incurred interest expense of
$266,700 related to our notes payable compared to $96,473 for the nine month
period of the prior year, an increase of $170,227 from the prior
period. The increase in interest expense was mainly due to a non-cash
expense of $218,164 for the induced conversion of notes payable, partially
offset by a reduction in interest expense resulting from the reduced outstanding
balance of loans and notes payable for the nine months ended December 31, 2009,
compared to the nine months ended December 31, 2008.
We had a
net loss of $675,039 for the nine months ended December 31, 2009, as compared to
a net loss of $405,624 for the nine months ended December 31, 2008, an increase
in net loss of $269,415 from the prior period. The increase in net
loss was due to the $3,405,057 decrease in revenues, the $83,831 increase in
G&A expenses and the $170,227 increase in interest expense, partially offset
by the $3,389,700 decrease in cost of revenues for the nine months ended
December 31, 2009, compared to the nine months ended December 31,
2008.
-8-
LIQUIDITY
AND CAPITAL RESOURCES
As of
December 31, 2009, we had total current assets of $450,642, consisting solely of
accounts receivable of $450,135 and $507 of cash. We had total assets
of $458,357, consisting of total current assets of $450,642 and $7,715 of fixed
assets, net of accumulated depreciation.
We had
total current liabilities of $1,063,945 as of December 31, 2009, which consisted
of notes payable – RBL, current portion of $36,547, accounts payable and accrued
expenses of $889,698, accounts payable to related parties of $26,492, deferred
revenue of $92,398 and merchant equipment deposits of $18,810. We had
total liabilities of $1,074,395, which included total current liabilities of
$1,063,945 and long-term portion of notes payable of $10,450.
As of
December 31, 2009, we had negative working capital of $613,303 and an
accumulated deficit of $7,179,362. The Company believes that the
existing financing and expected earnings will not meet its current working
capital and debt service requirements for the next twelve months. These issues
raise substantial doubt about our ability to continue as a going concern. The
accompanying financial statements do not include any adjustments relating to the
recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result should the Company be unable to continue as a
going concern.
To
alleviate the effects of our previously reported working capital deficits and
negative cash flows from operations, the Company succeeded in securing financing
on October 31, 2006, when we entered into a Loan and Security Agreement (the
“Loan
Agreement”) with RBL Capital Group, LLC (“RBL”). The Loan
Agreement provided a term loan facility with a maximum borrowing of $2,000,000.
The Company has fully utilized this capacity and has no remaining availability
on this facility.
As of
December 31, 2009, the aggregate amount outstanding from our RBL facility
borrowings was $36,547. The amounts borrowed from RBL bear interest
at 15.01% per annum.
In June
2008, the Company borrowed $450,000 through the execution of a Convertible
Promissory Note (the “Note”), with Pinnacle
Three Corporation, bearing interest at a rate of 8% per annum, with principal
and all accrued interest payable in November 2010. On June 6, 2008,
the Company received a conversion letter from Pinnacle Three Corporation
requesting conversion of the principal and accrued interest, into 22,515,000
shares of Acies common stock at a price of $0.02 per share, per the terms of the
Note agreement. On July 17, 2008, the Company issued 22,515,000
shares to Pinnacle Three Corporation in exchange for the Settlement Agreement
and Mutual Release between Pinnacle Three Corporation and the
Company.
On
September 23, 2008, the Company entered into an 18% Convertible Promissory Note
in favor of Pinnacle for $172,653 to evidence loans advanced to the Company by
Pinnacle during the months of August and September 2008. In July 2009, the
Company entered into an additional 18% Convertible Promissory Note with Pinnacle
to evidence an additional $5,647 loaned by Pinnacle to the Company. Together
with principal and all accrued interest, the notes were due and payable on
September 23, 2009. The notes are convertible into shares of the Company's
common stock at an exercise price of $0.02 per share at any time prior to the
maturity date.
-9-
On
September 23, 2008, the Company entered into an 18% Convertible Promissory Note
in favor of Mr. Oleg Firer, the Company's Chief Executive Officer and Director
of the Company, to evidence the amount of $185,000 owed by the Company to Mr.
Firer in connection with various expenses paid by Mr. Firer on the Company's
behalf and reimbursements he is owed dating back to April 2006. The note was due
and payable together with accrued and unpaid interest on September 23, 2009, and
is convertible into shares of the Company's common stock at an exercise price of
$0.02 per share at any time prior to the maturity date.
On or
around September 23, 2009, the Company entered into 1st Amendments and
Restatements to the Pinnacle Notes and Firer Note with Pinnacle and Mr. Firer,
respectively, which extended the due date of such notes to November 30, 2009,
without changing any of the other terms and conditions of the
notes.
On or
around November 19, 2009, Pinnacle and the Company entered into 2nd
Amended and Restated Promissory Notes, to amend and restate Pinnacle’s
outstanding promissory notes in the aggregate principal amount of $213,045,
which amount included principal of $178,300 and accrued and unpaid interest of
$34,745 (the “Amended
Pinnacle Notes”). Pursuant to the Amended Pinnacle Notes, the
Company agreed to reduce the conversion price of the notes from $0.02 per share
to $0.01 per share in consideration for Pinnacle agreeing to immediately convert
such Amended Pinnacle Notes and accrued and unpaid interest thereon in the
aggregate amount of $213,045 into 21,304,500 shares of the Company’s restricted
common stock. Immediately following the Company’s entry into the
Amended Pinnacle Notes, Pinnacle converted the entire principal and accrued
interest outstanding under the notes into 21,304,500 shares of the Company’s
restricted common stock.
On or
around November 19, 2009, Oleg Firer, the Company’s Chief Executive Officer and
Director, and the Company entered into a 2nd
Amended and Restated Promissory Note, to amend and restate Mr. Firer’s
outstanding promissory note in the principal amount of $223,282, which amount
included principal of $185,000 and accrued and unpaid interest of $38,282 (the
“Amended Firer
Note”). Pursuant to the Amended Firer Note, the Company agreed
to reduce the conversion price of the note from $0.02 per share to $0.01 per
share in consideration for Mr. Firer agreeing to immediately convert such
Amended Firer Note and accrued and unpaid interest thereon in the aggregate
amount of $223,282 into 22,328,200 shares of the Company’s restricted common
stock. Immediately following the Company’s entry into the Amended
Firer Note, Mr. Firer converted the entire principal and accrued interest
outstanding under the note into 22,328,200 shares of the Company’s restricted
common stock.
Acies
believes that it can secure additional capital through debt and/or equity
financing. We do not, however, have any commitments or identified
sources of additional capital from third parties or from our officers, directors
or significant shareholders. There is no assurance that additional financing
will be available on favorable terms, if at all. If we are unable to raise such
additional financing, it would have a materially adverse effect upon our
operations and our ability to fully implement our business plan, which would
limit our ability to continue as an on-going business.
Cash
Requirements
Our
business is such that our revenues are generally recurring. Once we add a new
account, which generally entails up-front expenditures, whether it be salaries
for direct (i.e., Acies-employed) salespersons, or an investment in merchant
terminal equipment, we typically receive revenue relating to that account for as
long as the merchant is our customer. If we employ a strategy of utilizing
independent sales agents and organizations who are not salaried and are paid on
a performance-based basis, the up-front costs are even less; however;
commissions payable to these independent sales agents are higher.
Our
strategy is flexible, whereby we attempt to employ funds that are available to
us to profitably grow the business as rapidly as possible, albeit in a
controlled fashion, with an eye toward maintaining customer service levels and
minimizing risk in order to retain merchants and have a long-term revenue
stream. Funding may be necessary to grow the business significantly, especially
through direct sales channels which would require the addition of salaried
employees. In the absence of such funding, we believe that we can continue to
grow at modest levels, relying more heavily on the indirect (i.e., independent
sales agent) channel.
-10-
Most of
our expenses are variable and are a function of our revenue stream, while other
expenses are of a more fixed nature, but are still controllable. Moreover, our
fixed expenses which reflect the on-going cost of our infrastructure would not
need to be increased significantly as our revenue base increases. We estimate
that over the next twelve months, to maintain a minimal rate of growth, we would
have corporate operating expenses on a cash basis, excluding our cost of
revenues which is variable, of approximately $1,000,000. This would include our
personnel costs, rent, professional fees, insurance, utilities and other office
expenses. At our current revenue growth rate, assuming no improvement over
historical margins, we believe that operating cash flow would not be sufficient
to cover our expenditures, unless we are able to obtain additional
financing.
We have
no current commitment from our officers and Directors or any of our shareholders
to supplement our operations or provide us with financing in the future. If we
are unable to raise additional capital from conventional sources and/or
additional sales of stock in the future, we may be forced to curtail or cease
our operations. The failure to obtain financing could have a substantial adverse
effect on our business and financial results.
In the
future, we may be required to seek additional capital by selling debt or equity
securities, selling assets, or otherwise be required to bring cash flows in
balance when we approach a condition of cash insufficiency. The sale of
additional equity or debt securities will result in dilution to our then
shareholders. We provide no assurance that financing will be available in
amounts or on terms acceptable to us, or at all.
Cash
Flows
The
Company had $85,303 of cash provided by operating activities for the nine months
ended December 31, 2009, which mainly consisted of $675,039 of net loss and
$10,244 of accounts receivable primarily offset by $484,668 of share-based
compensation, $218,164 of debt conversion expense and $63,254 of accounts
payable and accrued expenses.
The
Company had $129,051 of cash used in financing activities for the nine months
ended December 31, 2009, which was due solely to repayment of notes
payable.
OFF
BALANCE SHEET ARRANGEMENTS
We do not
have any off balance sheet arrangements.
CRITICAL
ACCOUNTING POLICIES
Our
discussion and analysis of our financial condition and results of operations is
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of any contingent assets and liabilities. On an on-going
basis, we evaluate our estimates. We base our estimates on various assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
We
believe the following critical accounting policy affects our more significant
estimates and judgments used in the preparation of our financial
statements:
-11-
Revenue
recognition. Revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable, and
collectability is reasonably assured. Substantially all of Acies’ revenue is
derived from providing credit and debit card processing services, and it is
recognized when the services are rendered. When a merchant has a business
transaction for processing (e.g., purchases of goods or services for which
payments are accepted using credit or debit cards), the amount of the processing
fees due from the merchant that is discounted from the transaction amount prior
to the merchant receiving net proceeds is the amount that Acies recognizes as
revenue.
Revenue
is recognized on a gross basis (i.e., prior to deducting expenses paid to third
parties for outsourced processing and settlement services), with such
determination based on Acies’ review and interpretation of current accounting
promulgations, including but not limited to Emerging Issues Task Force Consensus
99-19, “Reporting
Revenue Gross as Principal versus Net as an Agent” (“EITF 99-19”). We
believe that most of the indicators of gross revenue reporting discussed in EITF
99-19 support our revenue recognition policy. Factors which were critical in our
determination included, but were not limited to, the extent to which Acies has
latitude in establishing price, credit risk and discretion in supplier
selection.
Acies has
very broad latitude in negotiating and setting the pricing paid by the merchants
for electronic transactions, including all fees relating to merchants’
acceptance of credit and debit card payments. Pricing generally is unique to
each merchant, and is principally based upon the merchant’s tailored needs,
competitive pricing issues and a satisfactory profit margin for Acies. Although
pricing varies by merchant, Acies’ costs relating to these transactions, paid to
third-party processors and others to whom Acies outsources certain functions,
are generally fixed and are based upon predetermined cost schedules which apply
regardless of the pricing agreed to by the merchant. Acies control of pricing is
critical to the determination of profitability as it relates to any given
merchant.
Acies has
credit risk relating to the revenue it recognizes. Should there be a problem
with any given transaction, or with fraudulent conduct by any given merchant,
Acies is not generally liable for the underlying value of a transaction (i.e.,
the amount paid by a consumer of a product or service paid for by credit or
debit card). We are, however, generally liable for the transaction costs (as
described above), even if we do not receive the revenue relating to the
transaction.
Although
Acies is generally not a formal party to a merchant agreement, we do have a
choice of third-party processors and servicers to whom we may outsource certain
on-going functions relating to any given merchant account and its related
transactions. In most cases, we have the contractual authority with our
third-party processors to switch a merchant account from one third-party
processor to another, assuming that the merchant agrees to do so.
The above
factors, along with Acies being the primary point of contact in the acquiring
and on-going servicing of its merchants, as well as the full spectrum of
services that Acies provides to its merchants, have led Acies to the judgment
that gross revenue reporting is the most appropriate accounting treatment. In
addition, we believe that based on our business model, our investors and other
readers of our financial statements benefit greatly from this presentation as it
exhibits the impact on profitability of the Company’s pricing
policies.
Share-based
Compensation. We account for share-based payments under SFAS 123R (ASC 718),
which requires that share-based payments be reflected as an expense based upon
the grant-date fair value of those awards. The expense is recognized over the
remaining vesting periods of the awards. The Company estimates the fair value of
these awards, including stock options and warrants, using the Black-Scholes
model. This model requires management to make certain estimates in the
assumptions used in this model, including the expected term the award will be
held, volatility of the underlying common stock, discount rate and forfeiture
rate. We develop our assumptions based on our past historical trends as well as
consider changes for future expectations.
-12-
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant
to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to
provide the information required by this Item as it is a “smaller reporting
company,” as defined by Rule 229.10(f)(1).
ITEM 4T. CONTROLS AND
PROCEDURES
Disclosure
Controls and Procedures
Management
of the Company, with the participation of the Chief Executive Officer and acting
Chief Financial Officer, Oleg Firer, evaluated the effectiveness of the design
and operation of the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Securities and Exchange Act of 1934, as amended) as of
December 31, 2009. Based upon this evaluation, the Chief Executive
Officer, who is also the acting Chief Financial Officer has concluded that
the Company’s disclosure controls and procedures were not effective as of
December 31, 2009, because of the material weakness in internal control over
financial reporting described below.
The
matters involving internal controls and procedures that the Company's
management considered to be material weaknesses under the standards of the
Public Company Accounting Oversight Board were: (1) inadequate segregation of
duties consistent with control objectives; (2) insufficient written policies and
procedures for accounting and financial reporting with respect to the
requirements and application of GAAP and SEC disclosure requirements; and (3)
ineffective controls over period end financial disclosure and reporting
processes.
Management
believes that the material weaknesses set forth above did not have an effect on
the Company's financial results reported herein.
We are
committed to improving our financial organization. As part of
this commitment, we will increase our personnel resources
and technical accounting expertise within the accounting function when
funds are available to the Company. In addition, at that time,
the Company will prepare and implement sufficient written policies and
checklists which will set forth procedures for accounting and financial
reporting with respect to the requirements and application of GAAP and
SEC disclosure requirements.
Management
believes that preparing and implementing sufficient written policies and
checklists will remedy the following material weaknesses (i)
insufficient written policies and procedures for accounting and
financial reporting with respect to the requirements
and application of GAAP and SEC disclosure requirements; and (ii)
ineffective controls over period end financial close and reporting
processes. Further, management believes that the hiring of additional
personnel who have the technical expertise and knowledge will result in
proper segregation of duties and provide more checks and balances
within the financial reporting department. Additional personnel will
also provide the cross training needed to support the Company if
personnel turnover issues within the financial reporting department
occur.
We will
continue to monitor and evaluate the effectiveness of our internal controls
and procedures and our internal controls over financial reporting on an
ongoing basis and are committed to taking further action and
implementing additional enhancements or improvements, as necessary and
as funds allow.
Changes
in Internal Control Over Financial Reporting
There have been no changes in our
internal control over financial reporting identified in connection with the
evaluation required by paragraph (d) of Rules13a-15 or 15d-15 under the Exchange
Act that occurred during the last fiscal quarter that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
-13-
PART II - OTHER
INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
On
December 4, 2006, the Company received a complaint filed in the Supreme Court of
the State of New York, County of New York, by a merchant, which named as
co-defendants Acies, several of our strategic partners, and a third-party
bank. The dispute relates to bank accounts used by the merchant to
process credit and debit card transactions. The Company believes that
the probability of any material loss is remote, especially when considering that
we are contractually indemnified by a partner for the type of loss which would
result from such a claim.
Other
than the above mentioned dispute, we are not currently involved in legal
proceedings that could reasonably be expected to have a material adverse effect
on our business, prospects, financial condition or results of operations. We may
become involved in material legal proceedings in the future.
ITEM 1A. RISK
FACTORS
An
investment in our common stock is highly speculative, and should only be made by
persons who can afford to lose their entire investment in us. You should
carefully consider the following risk factors and other information in this
quarterly report before deciding to become a holder of our common stock. If any
of the following risks actually occur, our business and financial results could
be negatively affected to a significant extent.
RISKS
RELATED TO OUR FINANCIAL CONDITION AND BUSINESS
WE
HAVE HAD LOSSES SINCE WE HAVE BECOME A PUBLIC REPORTING COMPANY.
We have
incurred losses and experienced negative operating cash flow each year since we
have become a public reporting company in April 2002. For our fiscal years ended
March 31, 2009 and March 31, 2008, we had a net loss of $388,691 and $668,597,
respectively, and we had a positive operating cash flow of $95,842 for
the fiscal year ended March 31, 2009 as compared to negative operating cash
flow of $453,081 for the fiscal year ended March 31, 2008. We
had a net loss of $243,128 for the three months ended December 31, 2009 and a
net loss of $675,039 for the nine months ended December 31, 2009 which net loss
was largely the result of share-based compensation of $484,668 for the nine
months ended December 31, 2009. As of December 31, 2009, we had
negative working capital of $613,303 and an accumulated deficit of
$7,179,362.
Continued
losses may require us to seek additional debt or equity financing. If debt
financing is available and obtained, our interest expense may increase and we
may be subject to the risk of default, depending on the terms of such financing.
If equity financing is available and obtained it may result in our shareholders
experiencing significant dilution. If such financing is unavailable we may be
required to restrict growth by decreasing future marketing expenditures and/or
investment in our infrastructure.
DEPENDENCY
ON ADDITIONAL FINANCING.
As
mentioned above, we have experienced negative operating cash flow and there is
no assurance that we will have positive operating cash flow in the future. We
have relied upon borrowings under the Loan and Security Agreement described in
detail in the section “Management’s Discussion and
Analysis” and in Note 1 to the Unaudited Consolidated Financial
Statements in order to satisfy our liquidity needs. The borrowing capacity
afforded us under this agreement has been fully utilized based on the eighteen
month term of the Loan and Security Agreement. The Company needs to
obtain additional financing to maintain liquidity and continue its business
operations over the next twelve months.
-14-
OUR AUDITED FINANCIAL STATEMENTS FOR
FISCAL YEAR 2009 INCLUDE AN OPINION FROM OUR INDEPENDENT AUDITORS INDICATING
THAT THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING
CONCERN.
Our
auditors have stated that due to our lack of profitability and our negative
working capital, there is "substantial doubt"
about our ability to continue as a going concern. This substantial doubt may
limit our ability to access certain types of financing, or may prevent us from
obtaining financing on acceptable terms.
MAJORITY
VOTING CONTROL OVER THE COMPANY IS IN THE HANDS OF OUR CHIEF EXECUTIVE OFFICER
AND DIRECTOR, OLEG FIRER.
Including
the issuance of shares upon conversion of the Amended Firer Note, which shares
have not physically been issued to date, but have been included in the number of
issued and outstanding shares used throughout this report, our Chief Executive
Officer, Oleg Firer, can vote 31,962,486 shares of common stock representing
26.4% of the outstanding shares of common stock and all of our outstanding
shares of Series A Preferred Stock, which can vote in aggregate 51% of the
voting shares on any shareholder vote, and therefore vote 126,112,378 shares as
of the date of this filing. As a result, Mr. Firer can vote an
aggregate of 158,074,864 voting shares or 63.9% of the aggregate of 247,279,173
voting shares currently outstanding on any shareholder vote and therefore has
majority voting control over the Company. As a result, Mr. Firer will
exercise majority control in determining the outcome of all corporate
transactions or other matters, including the election of directors, mergers,
consolidations, the sale of all or substantially all of our assets, and also the
power to prevent or cause a change in control. The interests of Mr. Firer may
differ from the interests of the other stockholders and thus result in corporate
decisions that are adverse to other shareholders.
THE
INTERESTS OF MR. FIRER, OUR CHIEF EXECUTIVE OFFICER AND DIRECTOR AND MR.
WOLBERG, OUR DIRECTOR, MAY DIFFER FROM THE INTERESTS OF OUR OTHER SHAREHOLDERS,
AND THEY MAY ALSO COMPETE WITH THE COMPANY AND/OR ENTER INTO TRANSACTIONS
SEPARATE FROM THE COMPANY.
Mr.
Firer, our Chief Executive Officer and Director and Mr. Wolberg, our Director,
are involved in business interests separate from their involvement with the
Company, including but not limited to Merchant Capital Holdings, and its
affiliates, Prime Portfolios, LLC, and its affiliates, separate joint ventures
between other individuals, including Mr. Firer and Mr. Wolberg, and other
businesses and companies which also operate in the payment processing industry
similar to and/or in competition with the Company. Neither Mr. Firer nor Mr.
Wolberg are under any obligation to include the Company in any transactions,
businesses, operations, joint ventures or agreements which they undertake. As a
result, we may not benefit from connections they make and/or agreements,
ventures or understandings they enter into while employed by and/or while
serving as officers or Directors of us, and they, or entities or affiliates they
are associated with, including, but not limited to those disclosed above, may
profit from transactions which they undertake while we do not. As a
result, Mr. Firer and/or Mr. Wolberg may find it more lucrative or beneficial to
cease serving as an officer or Director of the Company in the future and may
resign from the Company at that time. Furthermore, while employed by us and/or
while serving as officers or Directors of us, shareholders should keep in mind
that they are not under any obligation to share their contacts or relationships
and/or to enter into favorable contracts, agreements, ventures or understandings
they may come across with the Company, and as a result may choose to enter into
such contracts, agreements, ventures or understandings through entities which
they own, operate or are affiliated with, which are not affiliated with us,
which may in fact complete with us, and from which we will receive no
benefit.
THE
COMPANY PAYS A MONTHLY FEE TO A PARTY AFFILIATED WITH THE COMPANY’S MAJORITY
SHAREHOLDER AND PRESIDENT, OLEG FIRER FOR DAY-TO-DAY SUPPORT OF THE COMPANY’S
OPERATIONS.
Merchant
Processing Services Corp (“MPS”) provides day-to-day support functions, office
and servicing for the Company for a monthly payment of between $20,000 to
$25,000 per month. MPS is a wholly-owned subsidiary of Merchant Capital Holding
Corp, partly owned by Star Capital Holdings Corp. (“Star”). Oleg Firer, the
Company’s Chief Executive Officer, serves as a Co-Chairman of Star. No
compensation has been paid to Mr. Firer by Star as consideration for being
a Co-Chairman. Leon Goldstein, President of Pinnacle Three Corp., a significant
shareholder of the Company, is a founder of Star and also serves as a
Co-Chairman. For the nine months ended December 31, 2009, the Company incurred
expenses to MPS in the amount of $195,000. As of December 31, 2009, $11,500 was
payable. Potential conflicts of interest and/or perceived conflicts of interest
exist between Mr. Firer’s relationship with MPS and the Company, which could
cause the value of the Company’s securities to decline in
value.
-15-
WE
DEPEND ON VISA AND MASTERCARD REGISTRATION AND FINANCIAL INSTITUTION SPONSORS
AND WE MUST COMPLY WITH THEIR STANDARDS TO MAINTAIN REGISTRATION. THE
TERMINATION OF OUR REGISTRATION COULD REQUIRE US TO STOP PROVIDING PROCESSING
SERVICES ALTOGETHER.
Our
designation with Visa and MasterCard as a member service provider is dependent
upon the sponsorship of member clearing banks, including Wells Fargo Bank,
N.A., and our
continuing adherence to the standards of the Visa and MasterCard credit card
associations. In the event we fail to comply with these standards, Visa or
MasterCard could suspend or terminate our designation as a member service
provider. If these sponsorships are terminated and we are unable to secure
another bank sponsor, we will not be able to process bankcard transactions.
Because of the fact that the vast majority of the transactions we process
involve Visa or MasterCard, the termination of our registration or any changes
in the Visa or MasterCard rules that would impair our registration could require
us to stop providing processing services altogether. This would severely impact
our revenues, and with that the value of our Company.
WE
DEPEND ON SALES AGENTS THAT DO NOT SERVE US EXCLUSIVELY AND HAVE THE RIGHT TO
REFER MERCHANTS TO OUR COMPETITORS.
We rely
primarily on the efforts of independent sales agents ("Sales Agents") to
market our services to merchants seeking to establish an account with a payment
processor in order to accept Credit, Debit, Electronic Benefit Transfer (EBT),
Check Conversion and Gift & Loyalty transactions. Sales Agents are
classified as either individuals or companies that seek to introduce both newly
established and existing small, medium and large businesses including retailers,
restaurants, supermarkets, petroleum stations and e-commerce retailers. Most of
the Sales Agents that refer merchants to us are non-exclusive to us and
therefore most of them have the right to refer merchants to other service
providers. Our failure to maintain our relationships with our existing and
future Sales Agents, and to recruit and establish new relationships with other
Sales Agents, could adversely affect our revenues and growth, and increase our
merchant attrition. This would lead to an increase in cost of revenues for us
which would adversely impact net income.
INCREASES
IN INTERCHANGE RATES MAY ADVERSELY AFFECT OUR PROFITABILITY.
Visa and
MasterCard routinely increase their respective interchange rates each year.
Interchange rates are also known as discount rates that are charged for
transactions processed through Visa and MasterCard. Although we historically
have reflected these increases in our pricing to merchants, there can be no
assurance that merchants will continue to assume the entire impact of future
increases or that transaction processing volumes will not decrease and merchant
attrition increase as a result of these increases. If interchange rates increase
to a point where it becomes unprofitable for us to enable merchants to accept
Visa and MasterCard it would cause an increase in our cost of revenues and
potentially make it unprofitable for us to continue without a change in our
business plan.
INCREASES
IN PROCESSING COSTS MAY ADVERSELY AFFECT OUR PROFITABILITY.
We are
subject to certain contractual volume obligations that if not met, will cause
our processing costs to increase and may therefore adversely affect our ability
to attain and retain new and existing merchants. More information about our
contractual obligations is located in the section of “Management’s Discussion and
Analysis” entitled "Liquidity and Capital
Resources."
HIGH
LEVELS OF COMPETITION MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The
credit, charge and debit card transaction processing services business is highly
competitive. Many of our current and prospective competitors have substantially
greater financial, technical and marketing resources, larger customer bases,
longer operating histories, more developed infrastructures, greater name
recognition and/or more established relationships in the industry than we have.
Because of this our competitors may be able to adopt more aggressive pricing
policies than we can, develop and expand their service offerings more rapidly,
adapt to new or emerging technologies and changes in customer requirements more
quickly, take advantage of acquisitions and other opportunities more readily,
achieve greater economies of scale, and devote greater resources to the
marketing and sale of their services. Because of the high levels of competition
in the industry and the fact that other companies may have greater resources, it
may be impossible for us to compete successfully.
-16-
MAINTAINING
CURRENT REVENUE LEVELS IS DEPENDENT UPON FACTORS IMPACTING THE PETROLEUM
INDUSTRY.
Over 27%
of the Company’s revenue is derived from merchants in the petroleum
industry. The Company therefore has a risk of revenue being adversely
impacted by significant decreases in gasoline prices, increases in merchant
strategies to have more consumers pay in cash, or other negative factors which
adversely affect the petroleum industry.
INCREASED
MERCHANT ATTRITION MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
We
experience attrition in our merchant base in the ordinary course of business
resulting from several factors, including business closures and losses to
competitors. Despite our retention efforts, increased merchant attrition may
have a material adverse effect on our financial condition and results of
operations. If we are unable to gain merchants to replace the ones we lose, we
may be forced to change, curtail or abandon our business plan.
OUR
OPERATING RESULTS ARE SUBJECT TO SEASONAL FLUCTUATIONS IN CONSUMER SPENDING
PATTERNS.
We have
experienced in the past, and expect to continue to experience, seasonal
fluctuations in our revenues as a result of consumer spending patterns.
Historically, revenues have been weaker during the first two quarters of the
calendar year and stronger during the third and fourth quarters. If, for any
reason, our revenues are below seasonal norms during the third or fourth
quarter, our net income could be lower than expected. This could lead to a
decrease in the value of our common stock.
WE
MAY BECOME SUBJECT TO CERTAIN STATE TAXES FOR CERTAIN PORTIONS OF OUR FEES
CHARGED TO MERCHANTS.
We, like
other transaction processing companies, may be subject to state taxation of
certain portions of our fees charged to merchants for our services. Application
of this tax is an emerging issue in the transaction processing industry and the
states have not yet adopted uniform guidelines. If in the future we are required
to pay such taxes and are not able to pass this expense on to our merchant
customers, our financial results could be adversely affected.
WE
MAY BE SUBJECT TO LIABILITY DUE TO SECURITY RISKS BOTH TO USERS OF OUR MERCHANT
SERVICES AND TO THE UNINTERRUPTED OPERATION OF OUR SYSTEMS.
Security
and privacy concerns of users of electronic commerce such as our merchant
services may inhibit the growth of the Internet and other online services as a
means of conducting commercial transactions. We rely on secure socket layer
technology, public key cryptography and digital certificate technology to
provide the security and authentication necessary for secure transmission of
confidential information. However, various regulatory and export restrictions
may prohibit us from using the strongest and most secure cryptographic
protection available and thereby expose us to a risk of data interception. While
we believe that our business model minimizes our accessing, transmitting and
storing consumer information, because some of our activities may involve the
storage and transmission of confidential personal or proprietary information,
such as credit card numbers, security breaches and fraud schemes could damage
our reputation and expose us to a risk of loss and possible liability. In
addition, our payment transaction services may be susceptible to credit card and
other payment fraud schemes perpetrated by hackers or other criminals. If such
fraudulent schemes become widespread or otherwise cause merchants to lose
confidence in our services, or in Internet payment systems generally, our
revenues could suffer.
-17-
WE
RELY ON THE INTERNET INFRASTRUCTURE, AND ITS CONTINUED COMMERCIAL VIABILITY,
OVER WHICH WE HAVE NO CONTROL. ITS FAILURE COULD SUBSTANTIALLY UNDERMINE OUR
BUSINESS STRATEGY.
Our
success depends, in large part, on other companies maintaining the Internet
system infrastructure, including maintaining a reliable network backbone that
provides adequate speed, data capacity and security and to develop products that
enable reliable Internet access and services. If the Internet continues to
experience significant growth in the number of users, frequency of use and
amount of data transmitted, the infrastructure of the Internet may be unable to
support the demands placed on it, and as a result the Internet's performance or
reliability may suffer. Because we rely heavily on the Internet, this would make
our business less profitable.
WE
MAY BE SUBJECT TO POTENTIAL LIABILITY FOR INFORMATION POSTED ON OUR CORPORATE
WEBSITE.
The legal
obligations and potential liability of companies which provide information by
means of the Internet are not well defined and are evolving. Any liability of
our company resulting from information posted on, or disseminated through, our
corporate website could have a material adverse effect on our business,
operating results and financial condition.
NEW
AND POTENTIAL GOVERNMENTAL REGULATIONS DESIGNED TO PROTECT OR LIMIT ACCESS TO
CONSUMER INFORMATION COULD ADVERSELY AFFECT OUR ABILITY TO PROVIDE THE SERVICES
WE PROVIDE OUR MERCHANTS.
Due to
the increasing public concern over consumer privacy rights, governmental bodies
in the United States and abroad have adopted, and are considering adopting
additional laws and regulations restricting the purchase, sale and sharing of
personal information about customers. The laws governing privacy generally
remain unsettled and it is difficult to determine whether and how existing and
proposed privacy laws will apply to our business. Several states have proposed
legislation that would limit the uses of personal information gathered using the
Internet. Congress has also considered privacy legislation that could further
regulate use of consumer information obtained over the Internet or in other
ways. If legislation is passed by the individual states or Congress it would
likely raise our cost of revenues, which would decrease our net
profit.
OUR
SYSTEMS AND OPERATIONS ARE VULNERABLE TO DAMAGE OR INTERRUPTION FROM FIRE,
FLOOD, POWER LOSS, TELECOMMUNICATIONS FAILURE, BREAK-INS, EARTHQUAKE AND SIMILAR
EVENTS OUTSIDE OF OUR CONTROL.
Our
success depends, in part, on the performance, reliability and availability of
our services. If our systems were to fail or become unavailable, such failure
would harm our reputation, result in a loss of current and potential customers
and could cause us to breach existing agreements. Our systems and operations
could be damaged or interrupted by fire, flood, power loss, telecommunications
failure, Internet breakdown, break-in, earthquake and similar events, and we
would face significant damage as a result. In addition, our systems use
sophisticated software which may in the future contain viruses that could
interrupt service. For these reasons, we may be unable to develop or
successfully manage the infrastructure necessary to meet current or future
demands for reliability and scalability of our systems. If this happens, it is
likely that we would lose customers and revenues would decrease.
-18-
WE
RELY ON KEY MANAGEMENT.
Our
success depends upon the personal efforts and abilities of Oleg Firer, our
President and Chief Executive Officer. Our ability to operate and implement our
business plan is heavily dependent on the continued service of Mr. Firer, as
well as our ability to attract, retain and motivate other qualified personnel,
particularly in the areas of sales, marketing and management for our company. We
face aggressive and continued competition for such personnel. We cannot be
certain that we will be able to attract, retain and motivate such personnel in
the future.
We have a
three year employment agreement in place with Mr. Firer; however, we do not
maintain key-man insurance on the life of Mr. Firer. If Mr. Firer were to resign
or die, the loss could result in loss of sales, delays in new product and
service development and diversion of management resources, and we could face
high costs and substantial difficulty in hiring qualified successors and could
experience a loss in productivity while any such successor obtains the necessary
training and experience. The loss of Mr. Firer, and our inability to hire,
retain and motivate qualified sales, marketing and management personnel for our
company would have a material adverse effect on our business and
operations.
OUR
REVENUES ARE HIGHLY SENSITIVE TO OVERALL CHANGES IN THE ECONOMY AND CONSUMER
SPENDING PATTERNS IN GENERAL.
As we
receive a greater number of payment processing fees the more consumers spent at
the locations of the merchants who are our clients, we are highly susceptible to
downturns in the overall economy and changes in consumer
spending. Due to the downturns in the credit markets, bankruptcies of
several large employers, as well as overall layoffs in the global economy and
general malaise in the global consumer economy, we expect our revenues for the
near future to be highly volatile and most likely lower than for the same
periods of fiscal 2009. As a result, our results of operations and
the value of our securities could decline in value and/or become
worthless.
-19-
SHAREHOLDERS
MAY BE DILUTED SIGNIFICANTLY THROUGH OUR EFFORTS TO OBTAIN FINANCING AND SATISFY
OBLIGATIONS THROUGH THE ISSUANCE OF ADDITIONAL SHARES OF OUR COMMON
STOCK.
Wherever
possible, our Board of Directors attempts to use non-cash consideration to
satisfy obligations. This non-cash consideration may consist of
restricted shares of our common stock. Our Board of Directors has authority,
without action or vote of the shareholders, to issue all or part of the
authorized but unissued shares of common stock. In addition, we may attempt to
raise capital by selling shares of our common stock, possibly at a discount to
market. These actions will result in dilution of the ownership interests of
existing shareholders, may further dilute common stock book value, and that
dilution may be material. Such issuances may also serve to enhance existing
management’s ability to maintain control of the Company because the shares may
be issued to parties or entities committed to supporting existing
management.
OUR
HISTORIC STOCK PRICE HAS BEEN VOLATILE AND THE FUTURE MARKET PRICE FOR OUR
COMMON STOCK IS LIKELY TO CONTINUE TO BE VOLATILE DUE IN PART TO THE LIMITED
MARKET FOR OUR SHARES, WHICH MAY MAKE IT DIFFICULT FOR YOU TO SELL OUR COMMON
STOCK FOR A POSITIVE RETURN ON YOUR INVESTMENT.
The
public market for our common stock has historically been very volatile. Any
future market price for our shares is likely to continue to be very volatile.
This price volatility may make it more difficult for you to sell shares when you
want at prices you find attractive. We do not know of any one particular factor
that has caused volatility in our stock price. However, the stock market in
general has experienced extreme price and volume fluctuations that have often
been unrelated or disproportionate to the operating performance of companies.
Broad market factors, general economic and political conditions, and the
investing public's negative perception of our business may reduce our stock
price, regardless of our operating performance. Further, the market for our
common stock is limited and we cannot assure you that a larger market will ever
be developed or maintained.
IF
WE ARE LATE IN FILING OUR QUARTERLY OR ANNUAL REPORTS WITH THE SEC, WE MAY BE
DE-LISTED FROM THE OVER-THE-COUNTER BULLETIN BOARD.
Pursuant
to Over-The-Counter Bulletin Board ("OTCBB") rules
relating to the timely filing of periodic reports with the SEC, any OTCBB issuer
which fails to file a periodic report (Form 10-Q's or 10-K's) by the due date of
such report (not withstanding any extension granted to the issuer by the filing
of a Form 12b-25), three (3) times during any twenty-four (24) month period is
automatically de-listed from the OTCBB. Such removed issuer would not be
re-eligible to be listed on the OTCBB for a period of one-year, during which
time any subsequent late filing would reset the one-year period of de-listing.
Furthermore, any issuer delisted from the OTCBB more than one (1) time in any
twenty-four (24) month period for failure to file a periodic report would be
ineligible to be re-listed for a period of one-year year, during which time any
subsequent late filing would reset the one-year period of
de-listing. If we are late in our filings three times in any
twenty-four (24) month period and are de-listed from the OTCBB, or if our
securities are de-listed from the OTCBB two times in any twenty-four (24) month
period for failure to file a periodic report, our securities may become
worthless and we may be forced to curtail or abandon our business
plan.
WE
MAY INCUR SIGNIFICANT EXPENSES AS A RESULT OF BEING QUOTED ON THE OVER THE
COUNTER BULLETIN BOARD, WHICH MAY NEGATIVELY IMPACT OUR FINANCIAL
PERFORMANCE.
We incur
significant legal, accounting and other expenses as a result of being listed on
the Over the Counter Bulletin Board. The Sarbanes-Oxley Act of 2002, as well as
related rules implemented by the Commission has required changes in corporate
governance practices of public companies. We expect that compliance with these
laws, rules and regulations, including compliance with Section 404 of the
Sarbanes-Oxley Act of 2002 as discussed in the following risk factor, may
substantially increase our expenses, including our legal and accounting costs,
and make some activities more time-consuming and costly. As a result, there may
be a substantial increase in legal, accounting and certain other expenses in the
future, which would negatively impact our financial performance and could have a
material adverse effect on our results of operations and financial
condition.
-20-
OUR
INTERNAL CONTROLS OVER FINANCIAL REPORTING ARE NOT CONSIDERED EFFECTIVE, WHICH
COULD RESULT IN A LOSS OF INVESTOR CONFIDENCE IN OUR FINANCIAL REPORTS AND IN
TURN HAVE AN ADVERSE EFFECT ON OUR STOCK PRICE.
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our annual
report for the year ended March 31, 2008, we were required to furnish a report
by our management on our internal controls over financial reporting. Such report
is required to contain, among other matters, an assessment of the effectiveness
of our internal controls over financial reporting as of the end of the year,
including a statement as to whether or not our internal controls over financial
reporting are effective. This assessment must include disclosure of any material
weaknesses in our internal controls over financial reporting identified by
management. Beginning with the year ended March 31, 2011; this report will also
contain a statement that our independent registered public accounting firm has
issued an attestation report on management's assessment of internal controls. As
we were unable to assert that our internal controls were effective as of March
31, 2009, and if in future years our independent registered public accounting
firm is unable to attest that our management's report is fairly stated or they
are unable to express an opinion on our management's evaluation or on the
effectiveness of our internal controls, investors could lose confidence in the
accuracy and completeness of our financial reports, which in turn could cause
our stock price to decline.
OUR COMMON STOCK IS
SUBJECT TO THE "PENNY
STOCK" RULES OF THE SEC AND THE TRADING MARKET IN OUR SECURITIES IS
LIMITED, WHICH MAKES TRANSACTIONS IN OUR STOCK CUMBERSOME AND MAY REDUCE THE
VALUE OF AN INVESTMENT IN OUR STOCK.
The
Securities and Exchange Commission has adopted Rule 15g-9 which establishes the
definition of a "penny
stock," for the purposes relevant to us, as any equity security that has
a market price of less than $5.00 per share or with an exercise price of less
than $5.00 per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, the rules require:
·
|
that
a broker or dealer approve a person's account for transactions in penny
stocks; and
|
·
|
the
broker or dealer receives from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased.
|
In order
to approve a person's account for transactions in penny stocks, the broker or
dealer must:
·
|
obtain
financial information and investment experience objectives of the person;
and
|
·
|
make
a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
|
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the Commission relating to the penny stock
market, which, in highlight form:
·
|
sets
forth the basis on which the broker or dealer made the suitability
determination; and
|
·
|
that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
|
-21-
Generally,
brokers may be less willing to execute transactions in securities subject to the
"penny stock"
rules. This may make it more difficult for investors to dispose of our common
stock and cause a decline in the market value of our stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
WE
CURRENTLY HAVE A SPORADIC, ILLIQUID, VOLATILE MARKET FOR OUR COMMON STOCK, AND
THE MARKET FOR OUR COMMON STOCK MAY REMAIN SPORADIC, ILLIQUID, AND VOLATILE IN
THE FUTURE.
We
currently have a highly sporadic, illiquid and volatile market for our common
stock, which market is anticipated to remain sporadic, illiquid and volatile in
the future and will likely be subject to wide fluctuations in response to
several factors, including, but not limited to:
(1)
|
actual
or anticipated variations in our results of operations;
|
|
(2)
|
our
ability or inability to generate new revenues;
|
|
(3)
|
the
number of shares in our public float;
|
|
(4)
|
increased
competition; and
|
|
(5)
|
conditions
and trends in the economy for consumer goods and credit card
services.
|
Furthermore,
because our common stock is traded on the over the counter bulletin board, our
stock price may be impacted by factors that are unrelated or disproportionate to
our operating performance. These market fluctuations, as well as general
economic, political and market conditions, such as recessions, interest rates or
international currency fluctuations may adversely affect the market price of our
common stock. Additionally, at present, we have a limited number of shares in
our public float, and as a result, there could be extreme fluctuations in the
price of our common stock. Additionally, at present, we have a limited number of
shares in our public float, and as a result, there could be extreme fluctuations
in the price of our common stock. Further, due to the limited volume of our
shares which trade and our limited public float, we believe that our stock
prices (bid, asked and closing prices) may not reflect the actual value of our
common stock. Shareholders and potential investors in our common stock should
exercise caution before making an investment in the Company.
ITEM 2. UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS
On
November 12, 2009, the Board of Directors of the Company agreed to grant
non-qualified options pursuant to the Company’s 2009 Stock Incentive Plan (the
“Plan”) to
purchase 1,000,000 shares of the Company’s common stock, to each of the three
members of the Board of Directors, Oleg Firer, Theodore Ferrara and Steven
Wolberg (the “Options”) in
consideration for services rendered to the Company and to be rendered to the
Company as Directors of the Company. The Options have an exercise
price of $0.01 per share; and are exercisable for five (5)
years. Options held by each Director to purchase 333,334 shares vest
immediately upon the date of the grant (the “Grant Date”); Options
to purchase 333,333 shares vest on the first anniversary of the Grant Date; and
Options to purchase 333,333 shares vest on the second anniversary of the Grant
Date. The vesting and expiration of the Options are further subject
to the terms and conditions of the Plan and the Option Agreements which evidence
such grants. The Company claims an exemption from registration
afforded by Section 4(2) of the Securities Act of 1933, as amended, since the
foregoing grants did not involve a public offering, the recipients took the
options for investment and not resale and we took appropriate measures to
restrict transfer.
-22-
In
November 2009, the Company ratified the terms and conditions of a three-month
consulting agreement between the Company and Steven Wolberg, a former consultant
and current Director of the Company (the “Consulting
Agreement”). Pursuant to the terms of the Consulting
Agreement, Mr. Wolberg agreed to perform legal, consulting and other services
for the Company for a period of three months (from July 1, 2009 to September 30,
2009), in consideration for 4,000,000 restricted shares of the Company’s common
stock. The Company claims an exemption from registration afforded by
Section 4(2) of the Securities Act of 1933, as amended, since the foregoing
issuance did not involve a public offering, the recipient took the shares for
investment and not resale and we took appropriate measures to restrict transfer.
The issuance of the shares have been approved by the Board of Directors of the
Company, and as such, the shares have been included in the number of issued and
outstanding shares disclosed throughout this report even though they have not
been physically issued to date.
On or
around November 19, 2009, Pinnacle and the Company entered into 2nd
Amended and Restated Promissory Notes, to amend and restate Pinnacle’s
outstanding promissory notes in the aggregate principal amount of $213,045,
which amount included principal of $178,300 and accrued and unpaid interest of
$34,745 (the “Amended
Pinnacle Notes”). Pursuant to the Amended Pinnacle Notes, the
Company agreed to reduce the conversion price of the notes from $0.02 per share
to $0.01 per share in consideration for Pinnacle agreeing to immediately convert
such Amended Pinnacle Notes and accrued and unpaid interest thereon in the
aggregate amount of $213,045 into 21,304,500 shares of the Company’s restricted
common stock. Immediately following the Company’s entry into the
Amended Pinnacle Notes, Pinnacle converted the entire principal and accrued
interest outstanding under the notes into 21,304,500 shares of the Company’s
restricted common stock. The Company claims an exemption from
registration afforded by Section 4(2) of the Securities Act of 1933, as amended,
since the foregoing issuance did not involve a public offering, the recipient
took the shares for investment and not resale and we took appropriate measures
to restrict transfer. The issuance of the shares have been approved by the Board
of Directors of the Company, and as such, the shares have been included in the
number of issued and outstanding shares disclosed throughout this report even
though they have not been physically issued to date.
On or
around November 19, 2009, Oleg Firer, the Company’s Chief Executive Officer and
Director, and the Company entered into a 2nd
Amended and Restated Promissory Note, to amend and restate Mr. Firer’s
outstanding promissory note in the principal amount of $223,282, which amount
included principal of $185,000 and accrued and unpaid interest of $38,282 (the
“Amended Firer
Note”). Pursuant to the Amended Firer Note, the Company agreed
to reduce the conversion price of the note from $0.02 per share to $0.01 per
share in consideration for Mr. Firer agreeing to immediately convert such
Amended Firer Note and accrued and unpaid interest thereon in the aggregate
amount of $223,282 into 22,328,200 shares of the Company’s restricted common
stock. Immediately following the Company’s entry into the Amended
Firer Note, Mr. Firer converted the entire principal and accrued interest
outstanding under the note into 22,328,200 shares of the Company’s restricted
common stock. The Company claims an exemption from registration
afforded by Section 4(2) of the Securities Act of 1933, as amended, since the
foregoing issuance did not involve a public offering, the recipient took the
shares for investment and not resale and we took appropriate measures to
restrict transfer. The issuance of the shares have been approved by the Board of
Directors of the Company, and as such, the shares have been included in the
number of issued and outstanding shares disclosed throughout this report even
though they have not been physically issued to date.
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES.
None.
-23-
ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
On
October 30, 2009, the Company held an Annual Meeting of Stockholders (the “Meeting”). Present
at the Meeting was Oleg Firer, the Company’s Chief Executive Officer and
Director, who owns (and did own as of September 17, 2009 (the “Record Date”)) all
one thousand (1,000) outstanding shares of our Series A Preferred Stock, giving
him the right to vote fifty-one percent (51%) of our voting shares eligible to
vote at the annual meeting, totaling 77,003,854 shares. Additionally, Mr. Firer
beneficially owned 9,634,286 shares of our outstanding common stock,
representing 13.0% of our outstanding common stock as of the Record
Date. Pinnacle Three Corporation, which is beneficially owned by Leon
Goldstein, its President (“Pinnacle”), owned
22,515,000 shares of common stock as of the Record Date, representing 30.4% of
our outstanding common stock and Theodore Ferrara, our Director, owned 7,190,331
shares of common stock, as a result of his beneficial ownership of Rite
Holdings, Inc., representing 9.7% of our outstanding common stock as of the
Record Date. Mr. Firer received proxies prior to the Meeting to vote
the shares of common stock held by Pinnacle and Mr. Ferrara. As a
result, Mr. Firer voted an aggregate of 116,343,471 voting shares at the
Meeting, representing a quorum of the outstanding shares of the Company as of
the Record Date, and representing 77.1% of our voting stock as of the Record
Date (150,987,949 shares) to approve the following proposals (the “Proposals”):
1.
|
The
election of Oleg Firer, Theodore Ferrara and Steven Wolberg as Directors
of the Company to serve until the next annual meeting of the Company, or
until their successor(s) are duly
appointed;
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2.
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The
authorization of the Board of Directors to amend our Certificate of
Incorporation to effect a reverse split of our outstanding common stock in
a ratio between 1:10 and 1:500, without further approval of our
stockholders, upon a determination by our Board of Directors that such a
reverse stock split is in the best interests of our Company and our
stockholders;
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3.
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The
ratification of the Company’s 2009 Stock Incentive Plan;
and
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4.
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The
ratification of the appointment of GBH CPAs, PC, as the Company’s
independent auditors for the fiscal years ending March 31, 2009 and
2010.
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The
Proposals are described in greater detail in the Company’s Definitive Schedule
14C filing, filed with the Securities and Exchange Commission on September 24,
2009. Mr. Wolberg’s biographical information was previously filed in the
Company’s Report on Form 8-K, filed with the Securities and Exchange Commission
on September 25, 2009.
ITEM 5. OTHER
INFORMATION
None.
-24-
ITEM 6.
EXHIBITS
Exhibit
Number Description of
Exhibit
3.1
|
Articles
of Incorporation of TerenceNet, Inc. dated October 11, 2000. (Incorporated
by reference to Exhibit 3 to TerenceNet, Inc.'s Form 10-SB, as amended,
filed with the Securities and Exchange Commission on April 5,
2002).
|
3.2
|
Bylaws
of TerenceNet, Inc. (Incorporated by reference to Exhibit 4 to TerenceNet,
Inc.'s Form 10-SB, as amended, filed with the Securities and Exchange
Commission on April 5, 2002).
|
3.3
|
Certificate
of Amendment of Articles of Incorporation (Incorporated by reference to
Exhibit 3 to Atlantic Synergy, Inc.'s Form 8-K filed with the Securities
and Exchange Commission on July 9,
2004).
|
3.4
|
Certificate
of Designations of Acies Corporation Establishing the Designations,
Preferences, Limitations and Relative Rights of Its Series A Preferred
Stock (Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K
filed with the Securities and Exchange Commission on February 13,
2009).
|
3.5
|
Amended
and Restated Certificate of Designation of the Company’s Series A
Preferred Stock (Incorporated by reference to the Company’s Form 10-Q
filed with the Securities and Exchange Commission on August 19,
2009).
|
4.1
|
Form
of Series A Common Stock Purchase Warrant issued to investors pursuant to
the February 3, 2005 private placement (Incorporated by reference to
Exhibit 4.2 to the Company's Form 8-K filed with the Securities and
Exchange Commission on February 8,
2005).
|
10.1
|
Exchange
Agreement by and between Acies, Inc. and Atlantic Synergy, Inc. dated as
of July 2, 2004 (Incorporated by reference to Exhibit 2 to Atlantic
Synergy, Inc.'s Form 8-K/A filed with the Securities and Exchange
Commission on July 12, 2004).
|
10.2
|
Year
2004 Stock Award Plan of Atlantic Synergy, Inc. (Incorporated by reference
to Exhibit 4 to Atlantic Synergy, Inc.'s Form S-8 filed with the
Securities and Exchange Commission on August 31,
2004).
|
10.3
|
Year
2004 Officer/Director/Employee Stock Award Plan of Atlantic Synergy, Inc.
(Incorporated by reference to Exhibit 4 to Atlantic Synergy, Inc.'s Form
S-8 filed with the Securities and Exchange Commission on September 13,
2004).
|
10.4
|
Form
of Subscription Agreement by and between Atlantic Synergy, Inc. and the
purchasers identified on the signature pages thereto dated as of September
2, 2004 (Incorporated by reference to the Company’s Registration Statement
on Form SB-2 filed with the Securities and Exchange Commission on March 4,
2005).
|
10.5
|
Investor
Relations Agreement by and between Acies, Inc. and Investor Relations
Network dated as of December 3, 2004 (Incorporated by reference to the
Company’s Registration Statement on Form SB-2 filed with the Securities
and Exchange Commission on March 4,
2005).
|
10.6
|
Securities
Purchase Agreement by and between the Company and the purchasers
identified on the signature pages thereto dated as of February 3, 2005
(Incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed
with the Securities and Exchange Commission on February 8,
2005).
|
-25-
10.7
|
Registration
Rights Agreement by and between the Company and the purchasers identified
on the signature pages thereto dated as of February 3, 2005 (Incorporated
by reference to Exhibit 4.3 to the Company's Form 8-K filed with the
Securities and Exchange Commission on February 8,
2005).
|
10.8
|
Employment
Agreement by and between the Company and Oleg Firer dated as of May 5,
2006 (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K
filed with the Securities and Exchange Commission on May 12,
2006).
|
10.9
|
Employment
Agreement by and between the Company and Yakov Shimon dated as of July 1,
2004 (Incorporated by reference to the Company’s Registration Statement on
Form SB-2 filed with the Securities and Exchange Commission on March 4,
2005).
|
10.10
|
Employment
Agreement by and between the Company and Miron Guilliadov dated as of July
1, 2004 (Incorporated by reference to the Company’s Registration Statement
on Form SB-2 filed with the Securities and Exchange Commission on March 4,
2005).
|
10.11
|
Form
of Subscription Agreement by and between GM Merchant Solutions, Inc. and
the purchasers identified on the signature pages thereto dated as of June
2, 2004 (Incorporated by reference to the Company’s Registration Statement
on Form SB-2 filed with the Securities and Exchange Commission on March 4,
2005).
|
10.12
|
Employment
Agreement by and between the Company and Jeffrey A. Tischler dated as of
May 5, 2006 (Incorporated by reference to Exhibit 10.2 to the Company’s
Form 8-K filed with the Securities and Exchange Commission on May 12,
2006).
|
10.13
|
Loan
and Security Agreement by and between the Company and RBL Capital Group,
LLC, dated October 31, 2006, providing a Term Loan Facility with a maximum
borrowing of $2,000,000.00 (Incorporated by reference to the Company’s
Form 8-K filed with the Securities and Exchange Commission on November 6,
2006).
|
10.14
|
Convertible
Promissory Note with Pinnacle Three Corporation (Incorporated by reference
to the Company’s Form 8-K filed with the Securities and Exchange
Commission on July 21, 2008).
|
10.15
|
Settlement
Agreement and Mutual Release Between Pinnacle Three Corporation and the
Company (Incorporated by reference to the Company’s Form 8-K filed with
the Securities and Exchange Commission on July 21,
2008).
|
10.16
|
Convertible
Promissory Note with Pinnacle Three Corporation (Incorporated by reference
to the Company’s Form 8-K filed with the Securities and Exchange
Commission on September 29, 2008).
|
10.17
|
Convertible
Promissory Note with Oleg Firer (Incorporated by reference to the
Company’s Form 8-K filed with the Securities and Exchange Commission on
September 29, 2008).
|
10.18
|
Lease
Termination Agreement between CRP/Capstone 14 W Property Owner, L.L.C. and
the Company (Incorporated by reference to the Company’s Form 10-Q filed
with the Securities and Exchange Commission on November 17,
2008).
|
10.19
|
Convertible
Promissory Note with Pinnacle Three Corporation. (Incorporated by
reference to the Company’s Form 10-K filed with the Securities and
Exchange Commission on July 14,
2009).
|
10.20
|
Employment
Agreement with Oleg Firer (Incorporated by reference to the Company’s Form
10-Q filed with the Securities and Exchange Commission on August 19,
2009).
|
-26-
10.21
|
(First)
1st
Amended and Restated Convertible Promissory Note with Pinnacle Three
Corporation (Incorporated by reference to the Company’s Form 8-K filed
with the Securities and Exchange Commission on September 25,
2009).
|
10.22
|
(Second)
1st
Amended and Restated Convertible Promissory Note with Pinnacle Three
Corporation (Incorporated by reference to the Company’s Form 8-K filed
with the Securities and Exchange Commission on September 25,
2009).
|
10.23
|
1st
Amended and Restated Convertible Promissory Note with Oleg Firer
(Incorporated by reference to the Company’s Form 8-K filed with the
Securities and Exchange Commission on September 25,
2009).
|
10.24
|
(First)
2nd Amended and Restated Convertible Promissory Note with Pinnacle Three
Corporation (Incorporated by reference to the Company’s Form 10-Q filed
with the Securities and Exchange Commission on November 20,
2009).
|
10.25
|
(Second)
2nd
Amended and Restated Convertible Promissory Note with Pinnacle Three
Corporation (Incorporated by reference to the Company’s Form 10-Q filed
with the Securities and Exchange Commission on November 20,
2009).
|
10.26
|
2nd
Amended and Restated Convertible Promissory Note with Oleg Firer
(Incorporated by reference to the Company’s Form 10-Q filed with the
Securities and Exchange Commission on November 20,
2009).
|
16.1
|
Letter
from Amper, Politziner & Mattia, P.C. (Incorporated by reference to
the Company’s Form 8-K filed with the Securities and Exchange Commission
on July 30, 2008).
|
31
|
Certification
by Chief Executive Officer and acting Chief Financial Officer pursuant to
Sarbanes-Oxley Section 302 (filed
herewith).
|
32
|
Certification
by Chief Executive Officer and acting Chief Financial Officer pursuant to
18 U.S.C. Section 1350 (filed
herewith).
|
-27-
SIGNATURES
In
accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ACIES CORPORATION
|
|
Date: February 16,
2010
|
/s/ Oleg Firer
|
Oleg
Firer
|
|
Chief
Executive Officer and Chief Financial
Officer
|
-28-