Attached files
file | filename |
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EX-21.1 - EXHIBIT 21.1 - nFinanSe Inc. | exhibit_21-1.htm |
EX-32.2 - EXHIBIT 32.2 - nFinanSe Inc. | exhibit_32-2.htm |
EX-31.2 - EXHIBIT 31.2 - nFinanSe Inc. | exhibit_31-2.htm |
EX-31.1 - EXHIBIT 31.1 - nFinanSe Inc. | exhibit_31-1.htm |
EX-32.1 - EXHIBIT 32.1 - nFinanSe Inc. | exhibit_32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
one)
ý ANNUAL REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended January 2,
2010
¨ TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from _________ to ____________
Commission
File No. 000-33389
nFinanSe
Inc.
(Exact
name of registrant as specified in its charter)
Nevada
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65-1071956
|
||
(State
or other jurisdiction of
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(I.R.S.
Employer
|
||
incorporation
or organization)
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Identification
Number)
|
||
3923
Coconut Palm Drive, Suite 107,
|
|||
Tampa, Florida
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33619
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||
(Address
of principal executive offices)
|
(Zip
Code)
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Registrant’s
telephone number, including area code: (813)
367-4400
Securities
registered pursuant to Section 12 (b) of the Act: none
Securities
registered pursuant to Section 12 (g) of the Act: 200,000,000 common
shares par value $0.001 per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No ý
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No ý
Indicate
by check mark whether the registrant (l) 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 ý 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). Not
applicable.
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
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 (Do not check if a smaller reporting company) £
|
Smaller
reporting company T
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No ý
The
aggregate market value of our voting stock held by non-affiliates computed by
reference to the last reported sale price of such stock as of June 30, 2009, was
$3,447,618.
The
number of shares of the issuer’s Common Stock outstanding as of March 12, 2010
is 9,542,887.
Documents Incorporated By
Reference: As stated in Part III of this annual report, portions of the
registrant’s definitive proxy statement to be filed within 120 days after the
end of the fiscal year covered by this annual report are incorporated herein by
reference.
TABLE
OF CONTENTS
Page | |||
1
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PART
I………………………………………………………………………………………………………………………………………………….………......................................………………………………………………….……….............
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2
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Item
1.
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Business………………………………………………………………………………………………………………….………......................................………………………………………………….……….............
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2
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Item
1A.
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Risk
Factors……………………………………………………………………..……………………………………….………......................................………………………………………………….……….............
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6
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Item
2.
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Properties…………….…………………………………………………….…………………………………………….………......................................………………………………………………….……….............
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12
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Item
3.
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Legal
Proceedings………………………………………………………….…………………………………………….………......................................………………………………………………….………............
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12
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Item
4.
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(Removed
and
Reserved)……………………………………….………......................................………………………………………………….……….............……………………………………….………...........
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12
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PART
II……………………………………………………………………………………………...……………………………………….………......................................………………………………………………….……….............................
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13
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Item
5.
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Market
for Our Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity
Securities………………………………………………….………………………….……….............................
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13
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Item
7.
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Management’s
Discussion and Analysis of Financial Conditions and Results of
Operations……………………………………………………………………..………………………….………......................
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14
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Item
8.
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Financial
Statements and Supplementary Data
………..……………………….………………………….……….............................………………………….……….............................…………………………....
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24
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Item
9.
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Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure……………………………………………………………………….………………………….………..................
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24
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Item
9A.
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Controls
and
Procedures………………………………………………………...………………………….……….............................………………………….……….............................………………………….…..
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24
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Item
9B.
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Other
Information……………………………………………………………….………………………….……….............................………………………….……….............................………………………….…….
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25
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PART
III…………………………………………………………………………………………….………………………….……….............................………………………….……….............................………………………….………...............
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26
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Item
10.
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Directors,
Executive Officers and Corporate
Governance…….…..……………………………………….……….............................………………………….……….............................………………………….…
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26
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Item
11.
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Executive
Compensation………………………………………………………..………………………….……….............................………………………….……….............................………………………….…..
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26
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder
Matters…………………………………………………….………………………….……….............................
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26
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence….………………………….……….............................………………………….……….............................……………….............
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26
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Item
14.
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Principal
Accountant Fees and
Services………………………………………...………………………….……….............................………………………….……….............................…………………………....
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26
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PART
IV…………………………………………………………………………………………….………………………….……….............................………………………….………...............................................................................................
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27
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Item
15.
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Exhibits……………………………………………………………………….....……………….……….............................………………………….………...............................................................................................
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27
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Signatures………………………………………………………………………..……………….……….............................………………………….………...............................................................................................
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32
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-i-
FORWARD-LOOKING
STATEMENTS
In this
annual report, we make a number of statements, referred to as “forward-looking statements,”
which are intended to convey our expectations or predictions regarding the
occurrence of possible future events or the existence of trends and factors that
may impact our future plans and operating results. These forward-looking
statements are derived, in part, from various assumptions and analyses we have
made in the context of our current business plan and information currently
available to us and in light of our experience and perceptions of historical
trends, current conditions and expected future developments and other factors we
believe to be appropriate in the circumstances. You can generally identify
forward-looking statements through words and phrases such as “seek,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “budget,” “project,” “may be,” “may continue,” “may likely result,” and other similar
expressions and include statements regarding:
·
|
the
extent to which we continue to experience losses;
|
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·
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our
real property leases and expenses related thereto;
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·
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our
ability to fund our future cash needs through public or private equity
offerings and debt financings;
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·
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whether
our business strategy, expansion plans and hiring needs will significantly
escalate our cash needs;
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·
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our
need to raise additional capital and, if so, whether our success will
depend on raising such capital;
|
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·
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our
reliance on our sponsoring bank’s federal charter permitting us to offer
stored value cards in various states;
|
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·
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our
expectation of continued and increasing governmental regulation of the
stored value card industry;
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·
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the
completion of our Payment Card Industry Security and Compliance audit and
certification of our network;
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·
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our
anticipation of future earnings volatility;
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·
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our
entrance into additional financings, which result in a recognition of
derivative instrument liabilities; and
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·
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the
hiring of a substantial number of additional employees in sales,
operations and customer service.
|
When
reading any forward-looking statement you should remain mindful that all such
statements are inherently uncertain as they are based on current expectations
and assumptions concerning future events or future performance of our Company,
and that actual results or developments may vary substantially from those
expected as expressed in or implied by that statement for a number of reasons or
factors, including those relating to:
·
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our
ability to design and market our products;
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·
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the
estimated timing of our product roll-outs;
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·
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our
ability to protect our intellectual property rights and operate our
business without infringing upon the intellectual property rights of
others;
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·
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the
changing regulatory environment related to our
products;
|
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·
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whether
or not markets for our products develop and, if they do develop, the pace
at which they develop;
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·
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our
ability to attract the qualified personnel to implement our growth
strategies;
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·
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our
ability to develop sales and distribution capabilities;
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·
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our
ability to work with our distribution partners;
|
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·
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the
accuracy of our estimates and projections;
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·
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our
ability to fund our short-term and long-term financing
needs;
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·
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changes
in our business plan and corporate strategies; and
|
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·
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other
risks and uncertainties discussed in greater detail in this annual report,
including those factors under the heading “Risk Factors” and those risks
discussed under the heading “Management’s Discussion and Analysis of
Financial Condition and Results of
Operations.”
|
Each
forward-looking statement should be read in context with, and with an
understanding of, the various other disclosures concerning our Company, as well
as other public reports filed with the United States Securities and Exchange
Commission. You should not place undue reliance on any forward-looking statement
as a prediction of actual results or developments. We are not obligated to
update or revise any forward-looking statement contained in this annual report
to reflect new events or circumstances unless and to the extent required by
applicable law.
As used
in this annual report, the terms “we,” “us,” “our,” “nFinanSe,” and “the Company” mean nFinanSe
Inc. unless otherwise indicated. All dollar amounts in this annual report are in
U.S. dollars unless otherwise stated.
-1-
PART
I
Item 1. Business.
BUSINESS
OVERVIEW
nFinanSe
Inc. is a provider of stored value cards (“SVCs”), for a wide variety of
markets, including grocery stores, convenience stores and general merchandise
stores. Our products and services are aimed at capitalizing on the growing
demand for stored value and reloadable ATM/prepaid card financial products. We
believe SVCs are a fast-growing product segment in the financial services
industry.
BACKGROUND
We were
founded on July 10, 2000 and began developing a technology platform focused on
selling debit cards to individuals without bank accounts or who maintain limited
funds in their bank accounts. Those individuals are referred to by us
as the “unbanked” and “underbanked”. Typically, the unbanked and underbanked
market is composed of credit “challenged” and cash-based consumers. We
ascertained that a major barrier to the acceptance and use of debit cards was
the ability to load additional funds on the SVCs. To address this issue,
we shifted focus in 2003 toward enhancing our network, known as the nFinanSe
Network™, to enable customers to load funds directly onto our SVCs or those of
other issuers with which we have agreements.
In August
2004, we completed a reverse merger and recapitalization with a publicly traded
company, Pan American Energy Corp., (“Pan American”). From a legal
perspective, Pan American remained as the surviving entity, however, for
financial statement purposes, the transaction was treated as a reverse merger
and a recapitalization whereby we were deemed to be the acquirer and no goodwill
or other intangible assets were recorded. Pan American changed its
name to Morgan Beaumont, Inc., and adopted our business plans and strategies. In
2006, we changed our name from Morgan Beaumont, Inc. to nFinanSe
Inc.
In 2005, we began selling wholesale
telecommunications services and we launched prepaid phone cards in an effort to
develop brand recognition in the credit challenged or cash-based consumer
market. However, the phone card operation struggled with unacceptable operating
losses which were draining resources from our core SVC
business. Additionally, we had re-directed our strategy on the retail
sale of SVCs by focusing on established pre-paid card distributors who provide
direct channels into large numbers of retail outlets for sale and loading of our
SVCs. Accordingly, we made the decision to abandon this line of
business in the fourth quarter of fiscal 2006. We accounted for this
discontinued operation using the component-business approach in accordance with
a certain accounting standard as defined in the Accounting Standards
Codification (“ASC”). As such, the
results of MBI Services Group, LLC have been eliminated from ongoing operations
for all periods presented and shown as a single line item on the statements of
operations entitled “Loss from discontinued operations” for each period
presented.
During
fiscal 2006, we added Western Union® and MoneyGram® to our fund loading network
and signed an agreement with DFS Services LLC (“DFS”) to issue Discover®
Network-branded SVCs. In June 2007, we extended this agreement with
DFS, executed a Program Sponsor Agreement, whereby we sell bank-issued Discover®
Network branded SVCs, and executed an Incentive Agreement with DFS that provides
us with marketing funds for the sale of Discover® Network-branded
SVCs.
In
October 2007, we executed a Prepaid Card Distribution, Activation and Services
Agreement with Interactive Communications International, Inc.
(“InComm”) which permits us to currently offer our SVCs in over 12,000 retail
agent locations that use InComm to sell and activate prepaid products including
SVCs. InComm distributes prepaid products to more than 135,000 retail
locations. We expect to sign Agency Agreements with additional InComm retail
locations this year. In July 2009, we executed a Card Distribution and Agency
Agreement with Coinstar E-Payment Services Inc. who distributes nFinanSe SVCs to
more than 6,000 retail locations. Additionally, we have distribution
agreements with several other smaller prepaid card distributors who offer our
SVCs through their retail partners.
-2-
During
fiscal 2009, we made the decision to expand our card offerings and executed an
agreement with American Express® to offer American Express-branded gift cards
and an agreement with Visa U.S.A. Inc. (“Visa®”) and Palm Desert National Bank
that permits us to offer Visa-branded general purpose reloadable SVCs.
Therefore, along with our Discover Network ® branded SVCs, we now offer a suite
of prepaid card products that includes Discover Network®, American Express® and
Visa®.
PRODUCTS
AND SERVICES
nFinanSe
sells Discover branded, bank-issued reloadable general spend and gift
SVCs. We also sell Visa® branded, bank-issued reloadable general
spend cards and American Express branded gift SVCs. These SVCs are
sold directly to consumers through our distribution partners’ network of retail
locations. We also sell payroll SVCs directly to
companies. Currently we have approximately 18,000 retail agent
locations where our cards are currently sold.
Card
Product
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Description
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Uses
|
Benefits
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|||
Reloadable
General Spend SVC
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A
prepaid SVC primarily for the unbanked cash-based consumer that is
reloadable at nFinanSe Network locations nationwide and is sold at
selected retail locations through our prepaid card
distributors.
|
Underbanked/unbanked/cash-based
consumers can use the SVC at ATMs and to make purchases wherever Discover®
and VISA® Cards are accepted. Also can be used to load Automated Clearing
House payroll deposits.
|
Security,
convenience, lower cost than check cashing and money
orders.
|
|||
Gift
SVC
|
A
Discover® Network-branded SVC and an American Express-branded SVC that is
denominated for set values
|
Typically,
a retail product sold at retail locations.
|
Can
be used to make purchases wherever Discover and American
Express Cards are accepted.
|
|||
Payroll
SVC
|
A
prepaid SVC for the loading of an employee’s payroll. The SVC is
reloadable through the web or from the client’s payroll department via
direct deposit.
|
Payroll
distribution targeting companies with a large number of employees that
receive payroll and commission checks.
|
Eliminates
costly check preparation and distribution and reduces the loss of employee
productivity and associated costs in cashing payroll
checks.
|
We are a
program sponsor of both Discover® Network and Visa®–branded SVCs. We believe
that Discover® Network SVCs and VISA® branded SVCS offer significant advantages
over other branded SVCs sold in the United States. These SVCs also offer the
advantages of immediate issuance (no waiting for the card to arrive by mail),
balance reporting and real-time authorization.
Additionally,
we believe that there is a tremendous growth opportunity in offering Discover®
Network and VISA® branded payroll SVCs. However, our experience to- date tells
us that although we can demonstrate major savings for employers, the amount of
time and effort expended by employers to internally “sell” payroll SVCs has
hampered aggressive roll-out result initiatives. We still believe our
SVCs can eliminate costly check production and distribution for employers and
offer security, 24 hours a day and seven days a week “free of course” customer
service, and eliminate costly payroll cashing fees for employees. We believe
that over time, these services will make our program attractive not only to
companies but to their employees.
nFinanSe
Network™
We have
developed our nFinanSe Network™, which connects the Company with our load
locations. As of January 2, 2010, we had approximately 84,000 nFinanSe Network™
locations consisting primarily of Western Union® and MoneyGram® locations and
over 14,000 retail agent locations where our cards are currently
sold.
-3-
We
believe that the nFinanSe Network™ is one of the largest universal load
platforms in the United States. We are able to add locations to our nFinanSe
Network™ by integrating with large retailers, either directly or through their
designated provider and by selecting distributors who are connected to their
participating retailers. We believe the nFinanSe Network™ is
compliant with federal and state legal requirements (including the PATRIOT Act).
Currently, the nFinanSe Network™ enables us to issue and service our own
reloadable general spend SVCs while directly controlling all aspects of the
cardholder experience such as customer service and web portal
access. We believe this should enable SVC holders to reload their
card at many sites, which we further believe will increase customer
satisfaction, reduce churn and increase card usage. This makes our network one
of our key strategic assets.
IMPORTANT
BUSINESS RELATIONSHIPS
Our
current and planned operations involve working with the following business
partners, among others, to sell SVCs and related services. Each of these
relationships plays a different role in our operations.
● Card
networks. Our agreement with DFS Financial Services LLC, Visa
U.S.A. Inc. and American Express Inc. permits us to offer SVCs with branded
holograms to prospective cardholders through various approved channels. These
agreements typically run for up to three years and renew annually thereafter. We
pay our issuing banks for certain Discover and Visa program, authorization and
settlement fees and Discover and Visa pays to the issuing bank the
interchange revenue earned on sales transactions from SVCs that we sponsor.
American Express prints and issues their cards directly and charges us for the
face amount and their wholesale fee when the card is sold and activated at
retail.
● Issuing
Banks. Our business plan
involves using federally-chartered banks to issue Discover
Network® and Visa® branded SVCs. These agreements typically run for three
years and have renewal terms of one to three year terms. The agreements vary;
however, most include charges for transactions and revenue sharing arrangements
in interchange revenues, as well as the interest earned on cardholder
balances.
● Processor. Discover®
Network, Visa® and the issuing banks require that we engage an approved
processor so that all of the consumer transactions are tracked and all debits
and credits to the consumer SVC accounts are properly adjusted. We chose
Metavante Corporation (“Metavante”), to act
as the processor. Metavante has all necessary regulatory and banking approvals
to conduct transactions from point-of-sale (“POS”) terminals, and from banks to
apply credits and debits to the consumer cards. Metavante has a schedule of fees
for services provided to us and to the SVC holder. Those fees associated with
SVC holder activity are typically passed on to the consumer, usually through a
service-related price mark-up.
● Distribution
Partners. Our retail strategy is to use prepaid card distributors who
wish to add additional products to their line. We ship SVCs to distributors on a
consignment basis. The distributor then moves the SVCs to their contracted
retail locations. When the SVC is sold at retail, the retailer activates the SVC
by “swiping” it through a POS terminal that is connected to us through their
distributor. We load value on cards concurrently with the collection
of funds by the retailer. The retailer remits all but the retailer's
fee to the distributor. The distributor then subsequently reimburses
the Company for the load value on the card and pays our portion of the wholesale
fees, if any, based on contractual terms through an ACH transaction.
We also collect monthly maintenance fees from the cardholder directly and, in
some cases, we share some portion of these fees with the
distributor. We have executed agreements with prepaid card
distributors including InComm, Coinstar E-Payment Systems, QComm/Emida, WL
Petrey and Now Prepay. These distributors represent more than 100,000 retail
locations that could potentially offer our SVCs. During December 2009, over
14,000 retail locations were offering our SVCs. We expect over the
next 12 months that our distributors will market our cards in more than 28,000
retail locations.
· Large Retailers.
Certain larger retailers have indicated that they would prefer to integrate
directly to our network or designate a specialized third party provider to
integrate to our network. When the SVC is sold, the retailer activates the SVC
by “swiping” it through a POS terminal which communicates directly to the
retailer host computer which then communicates directly to us or through their
designated communications provider. We load value on cards
concurrently with the collection of funds by the retailer. The
retailer remits the load value on the card and pays our wholesale fees based on
the terms of our agreement. We have not executed any direct
agreements as of January 2, 2010 although we are in discussions with several
large retailers that may wish to proceed in this manner.
-4-
● Third-Party Load
Locations. We have important relationships with Western Union® and
MoneyGram® that allow these two companies to load value on our reloadable SVCs
using the nFinanSe Network. These relationships greatly expand our load network.
Not only can we load our Discover® Network and Visa®–branded SVCs at these
locations, but our network has the functionality to load preauthorized
third-party-issued cards as well. At this time, we do not have any
third-party-issued card arrangements.
LICENSING
REQUIREMENTS
We have
obtained a United States Treasury Federal Money Services business license, which
is required by some states to conduct our operations. In addition, 43
states and the District of Columbia, have established laws or regulations
requiring entities that load money on cards or process such transactions, to be
licensed by the state unless that entity has a federal or state banking
charter. Although we offer our cards in conjunction with national banking
institutions that have federal banking charters, on October 2, 2007, we created
our wholly-owned subsidiary, nFinanSe Payments Inc., for the express purpose of
acquiring the required state licenses. We now have the requisite license from 41
states and the District of Columbia. We do not plan to offer cards in the
remaining two states (Vermont and Hawaii) that require licenses and have not
applied for a license in either state.
COMPETITION
The
markets for financial products and services, including SVCs and services related
thereto, are intensely competitive. We compete with a variety of companies in
our markets and our competitors vary in size, scope and breadth of products and
services offered. Certain segments of the financial services industry tend
to be highly fragmented, with numerous companies competing for market share.
Highly fragmented segments currently include financial account processing,
customer relationship management solutions, electronic funds transfer and SVC
solutions. In addition to competition from other companies, we face competition
from existing and potential clients who already have or may develop their own
product offerings.
We
believe our competitive advantages are:
●
|
the
attributes of both our Visa® and Discover Network® cards,
including:
● instant
issuance;
● preauthorized
transactions;
● acceptance
by over 4 million merchants;
|
●
|
the
price and features of our SVCs and
services;
|
●
|
the
industry experience of our sales force;
and
|
●
|
the
size and breadth of our load
network.
|
PROPRIETARY
RIGHTS
We have
not patented or trademarked any of our products or technology through the U.S.
Patent and Trademark Office, nor have we copyrighted any of our products or
technology through the U.S. Copyright Office. We have filed trademark
applications for the name nFinanSe Inc. and our logo, A3 =
Anytime, anywhere, anytime and logo and the nFinanSe Network™ name and logo.
Third parties may infringe or misappropriate our intellectual property rights or
we may not be able to detect unauthorized use and take appropriate steps to
enforce our rights. In addition, other parties may assert infringement claims
against us. Such claims, regardless of merit, could result in the expenditure of
significant financial and managerial resources. Further, an increasing number of
patents are being issued to third parties regarding money and debit card
processes. Future patents may limit our ability to use processes covered by such
patents or expose us to claims of patent infringement or otherwise require us to
seek to obtain related licenses. Such licenses may not be available to us on
acceptable terms. The failure to obtain such licenses on acceptable terms could
have a negative effect on our business.
-5-
Our
management believes that our products, trademarks and other proprietary rights
do not infringe on the proprietary rights of third parties and that we have
licensed from third parties the proprietary rights required to conduct our
business from third parties.
Our
proprietary intellectual property consists of:
●
|
customer
relationship management software, for use in customer service applications
that require tightly integrated and customizable interaction;
and
|
●
|
application
server and web server software to provide the business logistics necessary
for proper data transmission of all
transactions.
|
We
believe that the majority of our proprietary software is protected by common law
copyright.
EMPLOYEES
As of January 2, 2010, we had 53
full-time employees, of which eight are officers and executives, five are
engaged in sales, two are engaged in marketing, seven are engaged in technology
research and development, twenty are engaged in customer service, five are
engaged in operations, three are engaged in finance and three are engaged in
general administration. None of our current employees are covered by
any collective bargaining agreement and we have never experienced a work
stoppage. We consider our employee relations to be good.
Item
1A. Risk Factors
In
addition to the other information included in this annual report, the following
factors should be carefully considered in evaluating our business, financial
position and future prospects. Any of the following risks, either alone or taken
together, could materially and adversely affect our business, financial position
or future prospects. If one or more of these or other risks or uncertainties
materialize, or if our underlying assumptions prove to be incorrect, our actual
results may vary materially from what we have projected.
We
have incurred losses since inception and anticipate that we will continue to
incur losses through the first three quarters of fiscal 2010.
We have
operated continuously at a loss since inception and may be unable to continue as
a going concern. We expect to experience continuing financial losses. Losses for
the fiscal year ended January 2, 2010, and losses since inception were
approximately $13.9 million and $64.2 million, respectively. The
extent to which we continue to experience losses will depend on a number of
factors, including:
●
|
implementation
of our sales and marketing
strategies;
|
●
|
competitive
developments in our market;
|
●
|
customer
acceptance of and demand for our SVCs and
services;
|
●
|
our
ability to attract, retain and motivate qualified personnel, particularly
sales associates; and
|
●
|
the
continued adoption by consumers of
SVCs.
|
Our products may never achieve
commercial acceptance among our target SVC customers. In addition, we may never
obtain or sustain positive operating cash flow, generate net income or
ultimately achieve cash flow levels sufficient to support our
operations.
-6-
We
need to raise additional capital.
To fund
the full scale implementation of our business plan and the planned rollout and
distribution of cards in both the retail and payroll card segments of our
business, we will need to raise approximately $3 million of additional capital
to fund operations for the second half of fiscal 2010. Additionally,
although we completed a revolving accounts receivable credit facility which we
use to fund the face amount of gift cards and the load amounts on general spend
cards on a daily basis, we anticipate that we will need this type of facility
for 12 to 18 months longer than the current commitment due to the extended
amount of time it has taken us to begin our business
implementation. Actual capital requirements will depend on many
factors, including the success of our products, the amounts needed to fund
anticipated gift card sales and general spend loads until we receive
reimbursement from our distributors, the costs and bonding collateral required
for state licenses and the market acceptance of new product
offerings. Additional funds may not be available when needed, or, if
available, such funds may not be obtainable on terms acceptable to us. If
adequate funds are unavailable, we may not be able to continue as a going
concern.
Additional
equity or debt financing may be dilutive to existing stockholders or impose
terms that are unfavorable to us or our existing stockholders.
If we
raise additional funds by issuing equity securities, our stockholders will
experience dilution. Debt financing, if available, may involve arrangements that
include covenants limiting or restricting our ability to take specific actions,
such as incurring additional debt, making capital expenditures or declaring
dividends. Any debt financing or additional equity that we raise may contain
terms, such as liquidation and other preferences, which are not favorable to us
or our current stockholders. If we raise additional funds through collaboration
and licensing arrangements with third parties, it may be necessary to relinquish
valuable rights to our technologies and products or grant unfavorable license
terms.
Future
sales of our common stock, or the perception that such sales may occur, could
continue to depress our stock price.
Sales of
substantial amounts of our common stock in the public market, or the perception
that such sales may occur, could harm the market price of our common stock and
could materially impair our ability to raise capital in the future through
offerings of our common stock or securities convertible into our common
stock.
Most
states require us to undergo a difficult and costly process of obtaining
licenses to sell and load SVCs.
Forty-three states along with the District of Columbia have established laws or
regulations requiring entities that load money on cards or process such
transactions, to be licensed by the state unless that entity has a federal or
state banking charter. We currently hold a license in 41 states and
the District of Columbia. We do not plan to conduct operations in the remaining
two states which require such licenses (Vermont and
Hawaii). Licensing with various states requires that we
post performance bonds concurrent with submitting the license application or
renewal. The current amounts of the various state bonds now total
more than $10 million. As we add retail agent locations the states
require that we increase the face amount of the applicable bond. With our
limited operations, the surety is requiring up to 10% of the face amount of the
bonds in collateral. We funded $500,000 of collateral in February
2009 in the form of a letter of credit arranged and collateralized by Jeffrey
Porter, one of our major stockholders. We expect the surety bond company may
request an increase in the amount of this letter of credit as operations become
more established in various states. On February 1, 2009, we entered
into a Guaranty and Indemnification Agreement with Mr. Porter which indemnifies
him from loss and compensates him at the rate of 2% per quarter on the amount of
the letter of credit. On February 1, 2010, both the letter of credit and the
Guarantee and Indemnification Agreement were renewed for another twelve
months.
-7-
States
may adopt even more stringent licensing rules and regulations, compliance with
which could be expensive and time consuming.
There
have been, and we expect that there will continue to be, a number of legislative
and regulatory proposals aimed at changing the SVC industry. We expect
regulation of this industry to increase and become more complicated. Regulatory
and tax-intensive states may adopt complex and heavily regulated schemes.
Although we cannot predict the legislative or regulatory proposals that will be
adopted or the effect those proposals may have on our business, including any
future licensing requirements, the pendency or approval of such proposals could
materially adversely affect our business by limiting our ability to generate
projected revenues, to raise capital or to obtain strategic partnerships or
licenses. An increase in bonding or fee requirements in particular
states could curtail our activities in those jurisdictions.
Our
point-of-purchase operators may subject us to liability if they fail to follow
applicable laws.
As part
of our license requirements, we are required to have agency agreements with each
retailer that offers our cards to customers. Among other things, the agreements
require our agents to comply with the Patriot Act and anti-money-laundering
laws. Although we do not intend to be responsible for their
actions, we could be subject to state or federal actions if our agents violate
or are accused of violating the law. Such actions could compromise our
credibility with our customers, issuing banks and state regulators and generally
have a materially adverse effect on our business. Any such claims or litigation,
with or without merit, could be costly and a diversion of management’s
attention, which could have a material adverse effect on our business, operating
results and financial condition. Adverse determinations in such claims or
litigation could harm our business, operating results and financial
condition.
There
is only a limited market for our common stock as a “penny stock.”
A limited
public market currently exists for our common stock on the OTC Bulletin Board.
In the future, a more active public market for our common stock may never
develop or be sustained.
Our
common stock is also subject to the penny stock rules. The term “penny stock”
generally refers to low-priced, speculative securities of very small companies.
Before a broker-dealer can sell a penny stock, SEC rules require the
broker-dealer to first approve the customer for the transaction and receive from
the customer a written agreement for the transaction. The broker-dealer must
furnish the customer with a document describing the risks of investing in penny
stocks. The broker-dealer must tell the customer the current market quotation,
if any, for the penny stock and the compensation the broker-dealer and its
broker will receive for the trade. Finally, the broker-dealer must send monthly
account statements showing the market value of each penny stock held in the
customer’s account. These requirements make penny stocks more difficult to
trade. Because our common stock is subject to the penny stock rules, the market
liquidity of our common stock is limited and is likely to remain
so.
We
depend on key personnel and could be harmed by the loss of their services
because of the limited number of qualified people in our industry.
Because
of our small size, we require the continued service and performance of our
management team, sales and technology employees, all of whom we consider to be
key employees. Competition for highly qualified employees in the financial
services industry is intense. Our success will depend to a significant degree
upon our ability to attract, train, and retain highly skilled directors,
officers, management, business, financial, legal, marketing, sales, and
technical personnel and upon the continued contributions of such people. In
addition, we may not be able to retain our current key employees. The loss of
the services of one or more of our key personnel and our failure to attract
additional highly qualified personnel could impair our ability to expand our
operations and provide service to our customers.
-8-
Security
and privacy breaches of our electronic transactions may damage customer
relations and inhibit our growth.
Any
failures in our security and privacy measures could have a material adverse
effect on our business, financial condition and results of operations. We
electronically store personal information about consumers, including birth
dates, addresses, bank account numbers, credit card information, social security
numbers and merchant account numbers. If we are unable to protect this
information, or if consumers perceive that we are unable to protect this
information, our business and the growth of the electronic commerce market in
general could be materially adversely affected. A security or privacy breach
may:
●
|
cause
our customers to lose confidence in our services;
|
|
●
|
deter
consumers from using our services;
|
|
●
|
harm
our reputation;
|
|
●
|
require
that we expend significant additional resources related to our information
security systems and could result in a disruption of our
operations;
|
|
●
|
expose
us to liability;
|
|
●
|
increase
expenses related to remediation costs; and
|
|
●
|
decrease
market acceptance of electronic commerce transactions and SVC
use.
|
Although
management believes that we have utilized proven applications designed for
premium data security and integrity in electronic transactions, our use of these
applications may be insufficient to address changing market conditions and the
security and privacy concerns of existing and potential customers.
A Payment Card Industry Security and
Compliance audit was completed by BT INS, Inc., an international PCI audit firm,
on May 21, 2009 and we maintained our Level One Payment Service Provider
certification for our nFinanSe Network™, which we originally received on May 6,
2007. This is the highest certification attainable. We
anticipate maintaining this certification going forward.
The
market for electronic commerce services is evolving and may not continue to
develop or grow rapidly enough for us to become profitable.
If the
number of electronic commerce transactions does not continue to grow or if
consumers or businesses do not continue as projected to adopt our products and
services, it could have a material adverse effect on our business, financial
condition and results of operations. Management believes future growth in the
electronic commerce market will be driven by the cost, ease of use and
quality of products and services offered to consumers and businesses. In order
to reach and thereafter maintain our profitability, consumers and businesses
must continue to adopt our products and services.
The
debit card and SVC industry is a fairly new industry that is developing and
building standards, processes and relationships.
We are a
developmental company building our networks and relationships. In the course of
this development of our network, relationships, load locations and related
systems, there exists the possibility that the associated companies may delay
roll-out of our products and services. These delays could have an
adverse effect on cash flow, sales and inventory levels.
If
we do not respond to rapid technological change or changes in industry
standards, our products and services could become obsolete and we could lose our
customers.
If
competitors introduce new products and services, or if new industry standards
and practices emerge, our existing product and service offerings, technology and
systems may become obsolete. Further, if we fail to adopt or develop new
technologies or to adapt our products and services to emerging industry
standards, we may lose current and future customers, which could have a material
adverse effect on our business, financial condition and results of operations.
The electronic commerce industry is changing rapidly. To remain competitive, we
must continue to enhance and improve the functionality and features of our
products, services and technologies.
-9-
Changes
in network and banking regulations could hurt our ability to carry out our
business plan.
We have
designed our systems and card programs to comply and work in association with
the card networks and applicable banking rules and regulations. A
significant change of those rules and regulations could require us to
dramatically alter our software programs, the hardware upon which we operate and
our implementation and operation of SVCs. Such changes could be costly or
impractical and we may not be able to modify our operations and technology to
comply with any major changes in banking regulations.
Changes
in the Bank Secrecy Act and/or the USA PATRIOT Act could impede our ability
to circulate cards that can be easily loaded or issued.
Our
current compliance program and screening process for the distribution and/or
sale of SVCs is designed to comply with the Bank Secrecy Act (“BSA”) and
the Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act (the “USA PATRIOT Act”). These
regulations require financial institutions to obtain and confirm information
related to their respective cardholders. If the BSA and/or the USA PATRIOT Act
or subsequent legislation increases the level of scrutiny that we must apply to
our cardholders and customers, it may be costly or impractical for us to
continue to profitably issue and load cards for our customers.
We
may eventually face significant competition from major banks.
Although
several other small and private companies offer products and services similar to
those offered by us, most banks have not targeted the “credit challenged
consumer” and “cash-based consumer” markets. It is possible that those banks may
begin to enter the market for, and expend increasing resources to develop,
financial services targeted at the credit challenged and cash-based markets,
including the sale and servicing of SVCs and similar services. These banks have
significantly greater market presence, brand-name recognition, and financial,
technical, and personnel resources than us. Although few banks have focused on
our intended target market, they may do so in the future either directly or
through acquisition. Accordingly, we may experience increased competition from
traditional and emerging banks and other financial institutions. We cannot
predict whether we will be able to compete successfully against current or
future competitors or that competitive pressures will not materially adversely
affect our business, financial condition, or prospects. Any increase in
competition may reduce our gross margins, require increased spending on sales
and marketing, and otherwise materially adversely affect our business, financial
condition and prospects.
Internal
processing errors could result in our failing to appropriately reflect
transactions in customer accounts.
In the
event of a system failure that goes undetected for a substantial period of time,
we could allow transactions on blocked accounts, confirm false authorizations,
fail to deduct charges from accounts or fail to detect systematic fraud or
abuse. Errors or failures of this nature could adversely impact our operations,
our credibility and our financial standing.
Information
system processing interruptions could result in an adverse impact on us, our
credibility and our financial standing.
In the
event of an information systems processing interruption due to hardware failure,
software failure or environmental force majeure, cardholders may lose access to
fund loading, balance review, transaction ability or customer
service. Such an event could also allow transactions on blocked
accounts, false authorizations, failure to deduct charges from accounts or
failure to detect systematic fraud or abuse. Errors or failures of this nature
could immediately adversely impact our operations, our credibility and our
financial standing.
Requirements
to maintain higher reserve accounts could impair our growth and
profitability.
We are
currently required to maintain reserve deposit accounts with both of our card
issuing banks. If we are required to deposit higher than normal reserves with
either or both, it could have a material impact on our cash available for
operations and impede our business expansion.
-10-
Certain
delays could cause loss of business opportunities and inhibit our
growth.
Delays in
the development of our programs or business plans could cause loss of
opportunities. These delays could be in areas such as:
●
|
integration
and deployment with our retail distributors;
|
|
●
|
SVC
sales and activation; and
|
|
●
|
SVC
integration and usage.
|
The
delays may impact our cash flow and profitability. Delays in
distribution and/or adoption of our technology or products could delay the sale,
activation and use of SVCs.
Providing
credit to the wrong distributors could harm our business and inhibit our
growth.
If
distributors are unable to fulfill their credit obligations to us, it could have
a material adverse effect on our financial condition and results of operations.
We immediately transfer funds into the cardholder pooled account at the issuing
bank even though the money will not be remitted to us for several days by the
distributor. We continually monitor our distributors’ financial condition and in
many cases we have arrangements whereby we are authorized to electronically
debit their accounts each day for amounts due to us. We usually require that
some level of minimum cash balance be maintained with us to cover the associated
risk. However, if at the time the ACH electronic debit is initiated, the
distributor does not pay us as agreed and the amount is in excess of the
maintained cash balance, it could seriously harm our financial
condition.
Difficult
conditions in the economy generally may materially adversely affect our business
and results of operations, and we do not expect these conditions to improve in
the near future.
Our
results of operations are materially affected by conditions in the economy
generally. The capital and credit markets have been experiencing extreme
volatility and disruption for more than eighteen months at unprecedented levels.
Recently, concerns over inflation, energy costs, geopolitical issues, the
availability and cost of credit, the U.S. mortgage market and a declining U.S.
real estate market have contributed to increased volatility and diminished
expectations for the economy and consumer spending. These factors, combined with
volatile oil prices, declining business and consumer confidence and increased
unemployment, have precipitated an economic slowdown and national recession.
These events and the continuing market upheavals may have an adverse effect on
us because we are dependent upon customer and consumer behavior. Our revenues
are likely to decline in such circumstances. In addition, in the event of
extreme and prolonged market events, such as the global credit crisis, we could
incur significant losses.
Factors
such as consumer spending, business investment, the volatility and strength of
the capital markets, and inflation all affect the business and economic
environment and, ultimately, the amount and profitability of our business. In an
economic downturn characterized by higher unemployment, lower family income,
lower corporate earnings, lower business investment and lower consumer spending,
the demand for our SVC products and services could be adversely affected.
Adverse changes in the economy could affect our results negatively and could
have a material adverse effect on our business and financial condition. The
current mortgage crisis and economic slowdown has also raised the possibility of
future legislative and regulatory actions that could further impact our
business. We cannot predict whether or when such actions may occur, or what
impact, if any, such actions could have on our business, results of operations
and financial condition.
There
can be no assurance that actions of the U.S. government, Federal Reserve and
other governmental and regulatory bodies for the purpose of stabilizing the
financial markets will achieve the intended effect.
In
response to the financial crises affecting the banking system and financial
markets and going concern threats to banks and other financial institutions, the
federal government, Federal Reserve and other governmental and regulatory bodies
have taken or are considering taking numerous actions to address these financial
crises. There can be no assurance as to the actual impact of these government
actions on the financial markets or on us. The failure of these programs to help
stabilize the financial markets and a continuation or worsening of current
financial market conditions could materially and adversely affect our business,
financial condition, results of operations, access to credit or the trading
price of our common stock.
-11-
The
soundness of other institutions and companies could adversely affect
us.
Our
ability to engage in loading and purchasing transactions could be adversely
affected by the actions and failure of other institutions and companies,
including Metavante, our card-issuing banks and the retailers and distributors
that carry our SVCs. As such, we have exposure to many different
industries and counterparties. As a result, defaults by, or even questions or
rumors about, one or more of these institutions or companies could lead to
losses or defaults by us or other institutions. Losses related to these defaults
or failures could materially and adversely affect our results of
operations.
The
financial stability of our card- issuing banks and increased federal legislation
could adversely affect us.
Our
card-issuing banks are subject to capital standards established by the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation and the Office of the Comptroller of the Currency. These
governmental bodies have recently adopted regulations pursuant to Section 38 of
the Federal Deposit Insurance Act and Section 131 of the Federal Deposit
Insurance Corporation Improvement Act of 1991. These regulations
establish five capital categories and procedures for classification of financial
institutions within these capital categories. These regulations
further impose certain restrictions upon financial institutions which are
designed to prevent financial institutions from being classified with any one of
the three “undercapitalized” categories. Institutions that are
classified into one of the three “undercapitalized” categories are subject to
certain supervisory actions. For example, any financial institution
which is classified as “critically undercapitalized” must be placed in
conservatorship or receivership within 90 days of such determination unless it
is also determined that some other course of action would better serve the
purposes of the regulations. Should one of our card-issuing banks
fall into one of the undercapitalized categories, we may be required to move our
card-issuing programs to other banks. This could cause disruption of
our operations and may adversely affect our the results of said
operations. The effects of legislation currently being considered by
Congress cannot be estimated or measured at this time.
A
prolonged economic downturn could reduce our customer base and demand for our
products.
We are in
uncertain economic times, including uncertainty with respect to financial
markets that have been volatile as a result of sub-prime mortgage related and
other matters. Our success significantly depends upon the growth of demand of
our products from a growing customer base. If the communities in which we
operate do not grow, or if prevailing economic conditions locally, nationally or
internationally are unfavorable, our business may not succeed. A prolonged
economic downturn would likely contribute to the deterioration of the demand for
SVC’s and our products and services, which in turn would hurt our business. A
prolonged economic downturn could, therefore, result in losses that could
materially and adversely affect our business.
Item
2. Properties.
Our
offices are located at 3923 Coconut Palm Drive, Suite 107, Tampa, Florida
33619. The lease, which commenced in October 2007, calls for
aggregate future minimum rentals of approximately $563,000 (exclusive of sales
tax and common area maintenance charges that we are also required to pay) to be
paid over a five year period. We also have an operating lease
agreement with a term of less than one year for a sales office in Atlanta,
Georgia. This sales office lease call for future minimum rentals of
approximately $15,100.
We
maintain technology equipment, primarily network servers, telecommunications and
security equipment, to run the nFinanSe Network at two third party
locations. Our primary location is in Sarasota, Florida and our
backup location, with functionally identical equipment, is in Tampa,
Florida. All of our other tangible personal property is located at
our Tampa office. All of our equipment is in good operating condition and repair
(subject to normal wear and tear and despite being utilized beyond original
estimated life).
Item
3. Legal Proceedings.
We may
become involved in litigation from time to time in the ordinary course of
business. However, as of January 2, 2010, to the best of our knowledge, no such
litigation exists or is threatened.
Item
4. (Removed and Reserved).
-12-
PART
II
Item
5. Market for Our Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Market
Information
Shares of
our common stock are quoted on the OTC Bulletin Board under the symbol
“NFSE.” The following quotations reflect the high and low bids for
the shares of the common stock based on inter-dealer prices without retail
mark-up, mark-down or commission, and may not represent actual transactions. The
high and low bid prices for the shares of the common stock during each full
financial quarter for the two most recent fiscal years were as
follows:
Quarter
Ended
|
High
|
Low
|
||
January
2, 2010
|
$ 0.30
|
$ 0.07
|
||
October
3, 2009
|
$ 0.44
|
$
0.25
|
||
July
4, 2009
|
$ 1.02
|
$
0.35
|
||
April
4, 2009
|
$ 1.02
|
$
0.57
|
||
January
3, 2009
|
$ 0.90
|
$
0.80
|
||
September
27, 2008
|
$ 2.30
|
$
2.10
|
||
June
28, 2008
|
$ 2.40
|
$
2.20
|
||
March
29, 2008
|
$ 2.80
|
$
2.60
|
Holders
of Record of Common Stock
As of
March 12, 2010, there were approximately 92 holders of record of our common
stock.
Dividends
Our
Series A Preferred Stock accrues dividends of 5% per annum are paid semiannually
and can be satisfied in cash or through the issuance of Common
Stock. Unless and until these dividends are declared and paid in
full, the Company is prohibited from declaring any dividends on its Common
Stock. Pursuant to the Company’s Amended and Restated Loan and
Security Agreement, dated November 26, 2008 (see Note C – Credit Facility and
Term Notes), the Company is limited to paying $500,000 in any fiscal year for
cash dividends or other cash distributions to the holders of shares of Series A
Preferred Stock. There are no dividend requirements on our Series B
Convertible Preferred Stock, on our Series C Convertible Preferred Stock or on
our Series D Convertible Preferred Stock.
Dividends
owed but not declared on our Series A Preferred Stock were $192,136 as of
January 3, 2009 which were subsequently satisfied through the issuance of Common
Stock. On August 11, 2009, the Company’s Board of Directors declared
$179,772 in dividends due through June 30, 2009 to be paid through the issuance
of 391,565 shares of our Common Stock, which remain unpaid as of January 2,
2010. Dividends owed but not declared on our Series A Preferred Stock
were $204,609 as of January 2, 2010. During fiscal 2008, dividends
were also paid on the voluntary conversion of 320,000 shares of Series A
Preferred Stock into 320,000 shares of Common Stock, in the form of 1,301 shares
of Common Stock.
-13-
Equity
Compensation Plan Information
The
following table provides information concerning our equity compensation plans as
of January 2, 2010:
Plan
Category
|
Number
of securities
to
be issued upon exercise of
outstanding options
|
Weighted-average
exercise
price of
outstanding
options
|
Number of securities
remaining
available for future issuance under equity compensation plans (excluding
securities reflected in column (a))
|
|||||||||
(a)
|
(b)
|
(c)
|
||||||||||
Equity compensation plans approved by security holders | 3,012,638 | $ | 3.09 | 997,212 | ||||||||
Equity
compensation plans not approved by security holders
|
-- | -- | -- | |||||||||
Total
|
3,012,638 | $ | 3.09 | 997,212 |
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
Business.
See Item
1 – “Business” in this annual report for a description and discussion of our
business.
Fiscal Year End.
Because
our distributor arrangements generally operate on a weekly cycle, our fiscal
year ends on the Saturday closest to December 31 of each year.
Discontinued
Operations.
In
September 2006, we discontinued the operations of our wholesale long distance
and prepaid phone card business. All financial information pertaining
to this discontinued business has been eliminated from ongoing operations for
all periods presented in our financial statements included in this report and is
shown as a single line item entitled “Discontinued Operations.”
Results of
Operations.
Our
principal operations commenced in 2001. However, to date, we have had
limited revenues. Accounting guidelines set forth guidelines for identifying an
enterprise in the development stage and the standards of financial accounting
and reporting applicable to such an enterprise. In the opinion of management,
our activities from our inception through January 2, 2010 fall within the
referenced guidelines. Accordingly, we report our activities in this report in
accordance with these guidelines.
Lack
of Profitability of Business Operations since 2001.
During
the years leading up to fiscal 2006, we were primarily focused on selling Visa®
and MasterCard® SVCs and experienced significant difficulties and interruptions
with our third-party card issuers due to administrative errors, defective cards
and poor service. Additionally, it became apparent to management that there was
a flaw in focusing solely on the sale of SVC products that did not include a
convenient load solution for consumers. Consequently, management made the
decision to expand our focus to include the development of a process, which
became known as the nFinanSe Network TM, to
allow the consumer to perform value loads in a retail environment. To enhance
the load center footprint, in fiscal 2006, we entered into agreements with
MoneyGram® and Western Union® whereby our SVCs could be loaded at their
locations.
-14-
Further,
in 2006, and as amended in June 2007, we signed an agreement with DFS Services,
LLC that permits us to provide Discover® Network-branded SVCs directly or
through a card issuing bank. We believe the Discover® Network SVC products have
multiple competitive advantages over the SVCs we were previously selling.
Consequently, we focused on implementing the agreement with DFS Services, LLC in
lieu of pursuing SVC sales through our existing arrangements. Accordingly, our
sales efforts were interrupted while we developed our new Discover® Network SVC
programs and abandoned our then-existing SVC programs by disposing of the
associated SVC inventory. The time and money lost due to the difficulties and
interruptions we experienced hindered our progress and ability to make a
profit.
In late
2006, we developed a new go-to-market strategy centered on marketing bank-issued
Discover® Network-branded SVCs through well-established prepaid card
distributors combined with the load performing ability of the nFinanSe
Network™. In October 2007, we executed a Prepaid Card Distribution,
Activation and Services Agreement with Interactive Communications
International, Inc. (“InComm”) which permits us to currently offer our SVCs in
over 12,000 retail agent locations that use InComm to sell and activate prepaid
products including SVCs. InComm distributes prepaid products to more
than 135,000 retail locations. We expect to sign Agency Agreements with
additional InComm retail locations the coming year. In July 2009, we executed a
Card Distribution and Agency Agreement with Coinstar E-Payment Services Inc. who
distributes nFinanSe SVCs to more than 6,000 retail
locations. Additionally, we have distribution agreements with several
other smaller prepaid card distributors who offer our SVCs through their retail
partners.
During
fiscal 2009, we made the decision to expand our card offerings and executed an
agreement with American Express to offer American Express-branded gift cards and
an agreement with Visa U.S.A. Inc. (“Visa®”) along with Palm Desert National
Bank that permits us to offer Visa-branded general purpose reloadable SVCs.
Therefore, along with our Discover Network ® branded SVCs, we can now offer a
suite of prepaid card products that includes American Express and
Visa®.
At
January 2, 2010, there were over 84,000 locations where our SVCs could be loaded
(mostly Western Union® and MoneyGram® locations) and approximately 14,000 retail
locations currently offering our SVCs for sale and for reload
services.
The
following discussion compares the operations of the business for the fiscal
years ended January 2, 2010 (“fiscal 2009” or
“2009”), a 52
week period, and January 3, 2009 (“fiscal 2008” or
“2008”), a 53
week period.
Revenues. We
produce revenues through four general types of transactions:
•
|
Wholesale
fees, charged to our prepaid card distributors when our SVCs are sold or
reloaded.
|
•
|
Transaction
fees, paid by the applicable networks and passed through by our card
issuing banks when our SVCs are used in a purchase or ATM
transaction.
|
•
|
Maintenance
fees, charged to an SVC with a cash balance for initial activation and
monthly maintenance.
|
•
|
Interest
revenue, on overnight investing of SVC balances by our card issuing
bank.
|
|
These
fees differ by card type, issuing bank and transaction
type.
|
In July
2009, we made the decision to follow common industry practice in connection with
the initial sale of a reloadable SVC. As such, we lowered the retail price of
our reloadable general spend card from $5.95 collected at the point of sale to
$3.00 and we charge a $2.95 maintenance/activation fee to the card balance upon
activation by the card holder. As a result, in accordance with our
existing distribution contracts, the fees previously retained by the
retailer/distributor at the point of sale now exceed the amount that is
collected at point of sale. As such, we now pay to the distributor a “Retailer
Fee” when our SVCs are sold as opposed to collecting a wholesale fee. The
difference is recouped when we charge the initial $2.95 maintenance fee. The net
result is essentially the same, but the manner in which it is collected now
follows common industry practice. We still charge a wholesale fee for reload
transactions.
-15-
Revenues
for the fiscal 2009 and fiscal 2008 were $15,789 and $33,409,
respectively. Revenue was down approximately 53% in the year ended
January 2, 2010 compared to the year ended January 3, 2009. The lower
revenue for 2009 is attributable to the amortization of $120,000 of marketing
funds paid to a national retailer, while only $10,000 was amortized in
2008. We are required under generally accepted accounting principles
to reflect this type of amortization expense as a contra-revenue item in our
financial statements. Gross revenues for 2009 were $135,789, compared with
$43,309 for 2008. Revenues in both 2009 and 2008 were
restricted due to delays in getting cards for sale into retail
locations. These delays stem from our distributors inability to (i)
implement our distribution agreements in a timely manner, (ii) provide a
consistent platform for retailer connections, (iii) timely test retailer
connectivity and (iv) successfully complete pilots. During fiscal
2008, our retail focus was on implementing our distribution agreement with
InComm, getting licensed in over 41 states that require licenses and in which we
intend to do business and executing agency agreements with retailers to sell and
load our SVCs. InComm provides prepaid programs at more than 100,000 retail
locations in the United States and is expected to provide more than a sufficient
base to meet our needs. Additionally, we expect that other prepaid
card distributors servicing retailers across the United States will add to our
overall sales capacity.
Operating Expenses.
Operating expenses for 2009 decreased $3,353,962 to $10,664,319 compared
with $14,018,281 for 2008, a 24% decrease. These changes in our operating
expenses are attributable to the following:
Transaction and Operating
Expenses. Transaction and operating expenses reflect charges
for the cost of SVCs sold, charges from our processor, issuing-banks and
networks (Visa®, Discover® Network, ATM networks and EFT networks) for our SVC
programs and card transaction costs and the costs of the nFinanSe customer
service department.
Description
|
Fiscal
2009
|
Fiscal
2008
|
||||||
SVC
card cost, program and transaction expenses
|
$ | 831,532 | $ | 1,131,704 | ||||
Inventory
impairment, disposals and reserves
|
1,721,837 | 371,383 | ||||||
Stock
based compensation
|
3,575 | 399 | ||||||
Customer
service expenses
|
727,348 | 898,508 | ||||||
Transaction
and operating expenses
|
$ | 3,284,292 | $ | 2,401,994 |
Transaction
and operating expenses increased 37% to $3,284,292 in fiscal 2009 from
$2,401,994 in fiscal 2008. This increase of $882,298 was primarily
the result of an increase in inventory impairment, disposals and reserves of
$1,349,954, to $1,721,837 in 2009 from $371,383 in 2008. The
inventory impairment charge of $1,474,209 in 2009 was for certain inventory
items printed in 2007 that are scheduled to be destroyed or that have an
expiration date of less than six months prior to their expiration, $1,249,809
higher than the 2008 inventory impairment charge of $224,400 for gift cards
printed in 2006 that have an expiration date of less than twelve months prior to
their projected dates of deployment. General inventory reserves
increased $100,645 for our increases in inactive SVC inventory.
During
2009, we implemented a process to that resulted in a decrease of approximately
$300,172 in the costs charged by our processor to maintain our increased card
inventory on their system. In addition, we have implemented
scheduling efficiencies for our 24/7 customer service coverage and decreased our
costs by approximately $171,160.
Selling and Marketing
Expenses. Selling and marketing expenses represent the costs
we incur for our sales force and for the advertising, trade show and internal
marketing expenses associated with marketing our SVCs.
Description
|
Fiscal
2009
|
Fiscal
2008
|
||||||
Advertising
and marketing expenses
|
$ | 635,198 | $ | 1,528,808 | ||||
Sales
force expenses
|
1,047,337 | 1,936,372 | ||||||
Stock
based compensation
|
125,410 | 218,165 | ||||||
Selling
and marketing expenses
|
$ | 1,807,945 | $ | 3,683,345 |
-16-
Selling
and marketing expenses decreased 51%, or $1,875,400, to $1,807,945 in fiscal
2009 from $3,683,345 in fiscal 2008. Advertising and marketing
expenses were $893,610 lower due primarily to expenses of a national trade print
advertising campaign in 2008 and none in 2009. Lower sales force expenses of
$889,035 were primarily due to lower employee compensation and benefits, expense
travel and entertainment expense, and rent expense. The decrease in
sales force compensation and travel and entertainment expenses can be attributed
to reductions in the sales force from 2008 to 2009. In addition, rent
expense decreased due to the elimination in the third quarter of 2008 of a
temporary warehouse space used to store point-of-purchase displays for our
distributors.
Stock-based
compensation decreased in 2009 due to forfeiture of options and the termination
of stock based compensation expense associated with the reduction of sales force
employees from 2008.
General and Administrative
Expenses. General and administrative expenses decreased
$2,360,860 to $5,572,082 for fiscal 2009 from $7,932,942 for fiscal
2008. The components of expense are:
Description
|
Fiscal
2009
|
Fiscal
2008
|
||||||
Payroll,
benefits and taxes
|
$ | 2,745,595 | $ | 3,069,113 | ||||
Stock-based
compensation
|
341,352 | 1,701,872 | ||||||
Professional,
legal and licensing expense
|
876,704 | 1,550,374 | ||||||
Office
and occupancy expenses
|
795,160 | 934,990 | ||||||
Impairment
expense
|
375,212 | 149,743 | ||||||
Other
administrative expense
|
438,059 | 526,850 | ||||||
General
and Administrative Expenses
|
$ | 5,572,082 | $ | 7,932,942 |
When
comparing 2009 to 2008, the overall decrease in general and administrative
expenses is primarily attributable to:
·
|
decreased
payroll, benefits and taxes expenses of $323,518, due primarily to
$125,000 in higher bonuses paid in fiscal 2008 than fiscal 2009 and annual
compensation increases offset by lower general and administrative payroll
in 2009 than in 2008;
|
·
|
decreased
stock-based compensation expense of $1,360,520, which is primarily
attributable to our having fully expensed the stock option grants to Mr.
Welch and Mr. Springer under their employment agreements as of the end of
fiscal 2008;
|
·
|
decreased
professional, legal and licensing expense of $673,670 due to $221,378 in
lower recruiting fees incurred in the prior year to increase our sales
force and $448,349 in lower legal fees incurred in connection with the
completion of our state licensing initiative and reduced litigation
activity; and,
|
·
|
impairment
of asset charge of $375,212 in 2009 to write-down the balance
of the expected value of a marketing incentive agreement compared with
impairment of asset charges of $149,743 to write-down the expected value
of a marketing incentive agreement in
2008.
|
Loss Before Other Income
(Expense). As a result of the above, the losses before other
income (expense) for fiscal 2009 and fiscal 2008 were $10,648,530 and
$13,984,872, respectively.
Other
Income (Expense).
Interest expense.
Interest expense was $3,249,515 for fiscal 2009. Non-cash interest
expense for this period was $2,420,942. Of this, $9,925 relates to
the fair value of warrants earned during the period under the Guaranty and
Indemnification Agreement between the Company and Mr. Bruce E. Terker, $295,512
relates primarily to interest accrued for funds advanced under the Amended and
Restated Loan Agreement that was converted into shares of our Series D
Convertible Preferred Stock, and the remaining $2,155,505 relates to the
amortization of the fair value of the warrants issued under the Amended and
Restated Loan Agreement. Cash interest was $828,573. Of
this, $354,814 was paid or payable to the Lenders for funds advanced under the
terms of the Amended and Restated Loan Agreement, and $421,309 represents the
amortization of placement fees and legal fees incurred in connection with the
Amended and Restated Loan Agreement. Cash interest of approximately
$50,000 relates to amounts paid to Mr. Jeffrey Porter for bond collateral
guarantees. Interest expense incurred during fiscal 2008 was
$308,497. In fiscal 2008, the majority of our interest expense
represented amortization of non-cash costs recorded for the value of warrants
issued to lenders participating in certain financing transactions. In
fiscal 2008, our cash interest expense was $82,919 that was incurred for bond
collateral guarantees, advances against our existing line of credit,
amortization of cash deferred financing costs, and insurance premium
financing.
-17-
Loss on Derivative Financial
Instruments. In March and May 2008,
we entered into certain Securities Purchase Agreements which included an
exchange provision, permitting the investors to exchange the securities they
received for the securities sold by us in a subsequent offering, if such an
offering occurred within six months. A portion of the proceeds
received was allocated to recognize a derivative liability related to that
exchange feature. The derivative liability is measured at fair value
and was initially valued at $163,968. On June 12, 2008, the exchange
feature was triggered and the derivative liability was settled as a result of
the exchange. At that time, the fair value of the derivative
liability was estimated to be $560,000. As a result, for the year
ended January 3, 2009, we recorded a loss related to the derivative liability of
$396,032 ($560,000 less the $163,968 initially allocated to the
liability). During fiscal 2009, there were no derivative financial
instrument liabilities outstanding and, accordingly, we had no gains or losses
on such instruments during the year ended January 2, 2010. At January 2, 2010,
the Company did not have any remaining items to be measured at fair value and
does not have any remaining derivative liabilities. At January 3,
2009, the Company did not have any remaining items to be measured at fair value
and does not have any remaining derivative liabilities.
Loss from
Litigation. In 2008, we recorded a total of $105,500 expense
incurred as a result of the settlement of a breach of contract dispute under a
services agreement and a settlement agreement from a securities lawsuit, in
which the Company admitted no wrongdoing in the matter. There was no
loss from litigation in fiscal 2009.
Loss from Continuing
Operations. Loss from continuing operations was $13,898,941 for fiscal
2009, or $872,533 lower than the loss from continuing operations of $14,771,474
for fiscal 2008.
Liquidity
and Capital Resources.
From
inception to January 2, 2010, we have raised net proceeds of approximately $52.5
million from financing activities. We used these proceeds to fund operating and
investing activities. We had a cash balance of approximately $2.0
million as of March 15, 2010.
Net cash
used in operating activities was approximately $8.6 million and $13.6 million
for fiscal 2009 and fiscal 2008, respectively. The decrease in cash
used in operations was primarily the result of lower losses from operations and
increased non-cash expense items.
Net cash
used by investment activities for fiscal 2009 was approximately $22,600 for
purchases of property and equipment, primarily for additional computer
hardware. Net cash provided by investment activities for fiscal 2008
was approximately $569,100, consisting of the redemption of our short-term
investment of $725,000, offset by approximately $156,000 for purchases of
property and equipment, primarily for additional computer hardware and software
for new employees and the nFinanSe NetworkTM.
As
described in Note C to our consolidated financial statements, on June 10, 2008,
we entered into a revolving credit facility with various lenders in the
aggregate principal amount of $15,500,000 (the “Credit
Facility”). Loans under the Credit Facility are to be used
solely to make payments to card issuing banks for credit to SVCs. On
November 26, 2008, the Credit Facility was subsequently amended to establish a
sub-commitment of $3,400,000, pursuant to which each lender in its sole
discretion, may advance funds (each, an “Accommodation Loan”)
that may be used by the Company for working capital expenditures, working
capital needs and other general corporate purposes. Loans and
Accommodation Loans may be repaid and re-borrowed. The maturity date
of the Credit Facility was November 25, 2009, one year after the initial
borrowing and on October 29, 2009, the lenders approved the extension of
maturity for an additional six months upon the satisfaction of certain
conditions set forth in the Amended and Restated Loan Agreement. The
Credit Facility contemplates that, with the lenders’ consent, the maximum
commitment may be increased to up to $20,000,000, and additional lenders may be
added. In addition, commencing on May 7, 2009, the Company sold term
loan notes (the “June
Term Loan Notes”) with a principal amount of $1,000,000. The
June Term Loan Notes accrue interest at 10% annually and were amended to mature
on August 31, 2009. The Company’s obligations under the June Term
Loan Notes are secured by a lien on substantially all of its assets. The
June Term Loan Notes were purchased by each of Ballyshannon Partners, L.P.,
Odyssey Capital Group, L.P., Lancaster Investment Partners, L.P., 5 Star
Partnership, L.P., EDJ Limited and Trellus Partners, L.P. In June
2009, the Company received requisite lender permission under the Amended and
Restated Credit Agreement as well as the consent of the requisite number of
holders of its Series A Preferred Stock to issue up to an additional $1 million
of Term Loans (the “July Term Loans”),
Commencing on July 3, 2009, the Company sold the July Term Loans with a
principal amount of $1,000,000. The July Term Loans accrue interest
at 10% annually and mature on August 31, 2009. The July Term Loans
were purchased by each of Ballyshannon Partners, L.P., Odyssey Capital Group,
L.P. and Lancaster Investment Partners. As of October 3, 2009, we had
drawn $500,000 under the Amended and Restated Loan Agreement. The
amounts drawn under the June Term Loan Notes, the July Term Loans and
Accommodation Loans and accrued interest thereon were exchanged for Series D
Preferred Stock on August 21, 2009 as described in Note D to our consolidated
financial statements.
-18-
Mr.
Terker, a current member of the Board of Directors, has sole voting and
dispositive power over the securities held by Ballyshannon Partners, L.P. and
its affiliates, two of which were holders of the June Term Loan Notes and July
Term Loans. Mr. Terker has a financial interest in such entities,
and, as such, has a financial interest in the June Term Loan Notes and the July
Term Loans.
During
fiscal 2009, our financing activities included net cash of approximately $7.3
million through sales equity and borrowings of $4.7 million under the Credit
Facility ($2.7 million of
Accommodation Loan borrowings, $2.0 million of June and July Term Loan Note
borrowings) offset by approximately $22,500 in stock issuance
costs. During fiscal 2008, our financing activities included net cash
of approximately $10.2 million through sales of certain of our equity and
borrowings of $1.2 the Credit Facility offset by approximately $459,600 in
deferred financing costs incurred in connection with the Credit
Facility.
On
February 1, 2009, we completed a partial funding of collateral amounting to
approximately $500,000 for performance bonds issued in connection with our state
licensing efforts. The collateral, in the form of a letter of credit
arranged by Mr. Jeffrey Porter, was issued by a bank and was placed with the
insurance company that issued the various bonds which at the end of the year
aggregated approximately $9,600,000. Mr. Porter entered into a
Guarantee and Indemnification Agreement with the Company dated February 1, 2009.
Accordingly, we are currently contingently liable for the face amount of the
letter of credit. Mr. Porter was to be compensated in cash at 2% of the average
outstanding amount of the letter of credit per quarter paid in arrears, however,
he chose to take the compensation in the form of Series D Preferred Stock during
the August equity raise. The Guarantee and Indemnification Agreement can be
cancelled by the Company upon receiving a more favorable arrangement from
another party. Upon demand, the Company will be required to increase the
collateral up to 10% of the face amount of bonds issued by the insurance
company. On February 1, 2010, both the letter of credit and the Guarantee and
Indemnification Agreement were renewed for another twelve months.
To fund
the full scale implementation of our business plan and the planned rollout and
distribution of cards in both the retail and paycard segments of our business,
we will need to raise approximately $3 to $5 million of additional capital
during fiscal 2010. We expect to finance this through public or
private equity offerings and have retained investment bankers to
assist. We may decide to raise the capital in more than one
transaction based on market conditions and business
circumstances. Although we are confident of our business plan, we
have experienced unforeseen difficulties with implementing our plans in the past
and there can be no assurance that unforeseen difficulties can be avoided going
forward. This fact alone could hamper our ability to raise the funds
necessary to permit us to continue as a going concern for a reasonable period of
time. If we are able to raise the funds, the terms and conditions may be highly
dilutive to existing stockholders.
Changes
in Number of Employees.
We anticipate that the development of our business will require the
hiring of a substantial number of additional employees in sales,
administration, operations and customer service.
-19-
Off-Balance
Sheet Arrangements
Operating
Leases.
We are
obligated under various operating lease agreements for our
facilities. Future minimum lease payments and anticipated common area
maintenance charges under all of our operating leases are approximately as
follows at January 2, 2010:
Fiscal
year ending
|
Amounts
|
|||
2010
|
$ | 215,800 | ||
2011
|
205,000 | |||
2012
|
156,300 | |||
2013
|
- | |||
2014
|
- | |||
Total
|
$ | 577,100 |
Employment
Agreements.
We are
obligated under employment agreements with our Chief Executive Officer, Jerry R.
Welch, and our Chief Financial Officer, Raymond P. Springer. The
employment agreements had an initial term from September 5, 2006 to December 31,
2008 and were automatically renewed for two years with a new expiration date of
December 31, 2010. The employment agreements provide to Messrs. Welch
and Springer a current annual salary of $275,000 and $200,000, respectively.
Each agreement is to be automatically renewed indefinitely for succeeding terms
of two years unless otherwise terminated in accordance with the
agreement. Both Mr. Welch and Mr. Springer also receive
performance-based bonuses and certain medical and other benefits. If
we terminate Mr. Welch or Mr. Springer without cause, we will be required to pay
severance to them in the amount of compensation and benefits they would have
otherwise earned in the remaining term of their employment agreements or twelve
months, whichever period is shorter.
On
February 23, 2009, the Compensation Committee recommended to the Board and the
Board granted to our Chief Executive Officer, Jerry R. Welch, 250,000 stock
options at an exercise price of $1.00 per share, which, using the Black-Scholes
option pricing model, were valued at an aggregate of
$143,840. Options to purchase 50,000 shares will become fully vested
on the anniversary date of the grant and 50,000 options will vest ratably over
the 12 months beginning March 31, 2010. Of the final 150,000 options, 75,000
will vest on the first anniversary date of the grant and 75,000 will vest
ratably over the 12 months beginning March, 2010, provided the Company has
positive EBITDA in any month prior to September 30, 2009. The Company failed to
achieve positive EBITDA and the 150,000 stock options were subsequently
forfeited by Mr. Welch.
On
February 23, 2009, the Compensation Committee recommended to the Board and the
Board granted to our Chief Financial Officer, Raymond P. Springer, 50,000 stock
options at an exercise price of $1.00 per share, which, using the Black-Scholes
option pricing model, were valued at an aggregate of $28,768. The
options will become fully vested in two years, with one half vesting on the
anniversary date of the grant and 1/12 of the remaining grant vesting monthly
thereafter.
On
December 15, 2008, the Company issued a total of 42,750 stock options (750 stock
options to each employee (including seven officers) except our CEO) at an
exercise price of $0.75 per share. The options vest one third at the
one-year anniversary of the grants and then ratably for the following 24
months. The options were valued using the Black-Scholes option
pricing model at an aggregate fair value of approximately $30,000, which is
being recognized as stock-based compensation expense over the vesting period of
the options.
On
January 24, 2008, Messrs. Welch and Springer were awarded 95,000 and 45,000
stock options, respectively, at an exercise price of $4.00 per share, which were
valued using the Black-Scholes option pricing model at aggregate fair values of
approximately $234,000 and $111,000, respectively. These amounts were
recognized as stock-based compensation expense as the options
vested. The options were divided into 28 equal installments,
with the first seventeen installments vesting on January 28, 2008 and additional
installments vesting on the final day of each month through December 31,
2008. At January 3, 2009, all options have vested and all
compensation expense related to these options has been recognized.
-20-
Service
and Purchase Agreements.
We have
entered into renewable contracts with DFS Services LLC and VISA® U.S.A. Inc.,
our card networks, Palm Desert National Bank (“PDNB”), and First
Bank & Trust (“FB&T”), our
card-issuing banks, Metavante Corporation (“Metavante”), our
processor, and American Express® Travel Related Services Company, Inc., a gift
card program, that have initial expiration dates from June 30, 2010 through
December 26, 2014. Because the majority of the fees to be
paid are contingent primarily on card volume, it is not possible to calculate
the amount of the future commitment on these contracts. The Metavante and
FB&T agreements also require a minimum payment of $5,000 and $7,500 per
month, respectively. During the fiscal 2009 and fiscal 2008, we made
aggregate payments of approximately $753,400 and $594,200, respectively to
Metavante, $13,700 and $2,100, respectively to PDNB and $147,400 and $111,500,
respectively, to FB&T under these agreements.
Bond
Collateral.
On
February 1, 2009, we completed a partial funding of collateral amounting to
approximately $500,000 for performance bonds issued in connection with our state
licensing efforts. The collateral, in the form of a letter of credit
arranged by Mr. Jeffrey Porter, was issued by a bank and was placed with the
insurance company that issued the various bonds which at the end of the year
aggregated approximately $9,600,000. Mr. Porter entered into a
Guarantee and Indemnification Agreement with the Company dated February 1, 2009.
Accordingly, we are currently contingently liable for the face amount of the
letter of credit. Mr. Porter was to be compensated in cash at 2% of the average
outstanding amount of the letter of credit per quarter paid in arrears, however,
he chose to take the compensation in the form of Series D Preferred Stock during
the August equity raise. The Guarantee and Indemnification Agreement can be
cancelled by the Company upon receiving a more favorable arrangement from
another party. Upon demand, the Company will be required to increase the
collateral up to 10% of the face amount of bonds issued by the insurance
company. On February 1, 2010, both the letter of credit and the Guarantee and
Indemnification Agreement were renewed for another twelve months.
On
February 19, 2008, the Company completed the funding of collateral amounting to
approximately $1.8 million required for the performance bonds issued in
connection with our state licensing efforts. The collateral, in the form of a
one-year letter of credit issued by a bank, was placed with the insurance
company that issued the various bonds aggregating to a face amount of
approximately $7.2 million. The issuing bank required that the letter of credit
be guaranteed by Mr. Porter, one of our major stockholders, and Bruce E. Terker,
a member of our Board and a current major stockholder. Of the total
collateral amount, Mr. Porter arranged for approximately $1 million, and the
remainder was provided by Mr. Terker. In connection with this accommodation, the
Company and Messrs. Porter and Terker entered into respective Guaranty and
Indemnification Agreements. Accordingly, we were contingently liable for the
face amount of the letter of credit of approximately $1.8 million, which expired
February 2009. Mr. Porter was compensated in cash at 2% of the $1 million in
collateral per quarter paid in arrears. Mr. Terker agreed to be compensated in
the form of warrants to purchase 33,912 shares of our common stock at a purchase
price of $3.35 per share, which was earned ratably over the course of the year.
The Guarantee and Indemnification Agreements were cancelled in February
2009.
Critical
Accounting Policies
Revenue
Recognition.
We
generate the following types of revenues:
•
|
Wholesale
fees, charged to our prepaid card distributors when our SVCs are sold or
reloaded.
|
•
|
Transaction
fees, paid by the applicable networks and passed through by our card
issuing banks when our SVCs are used in a purchase or ATM
transaction.
|
•
|
Maintenance
fees, charged to an SVC with a cash balance for initial activation and
monthly maintenance.
|
•
|
Interest
revenue, on overnight investing of SVC balances by our card issuing
bank.
|
-21-
In July
2009, we made the decision to follow common industry practice in connection with
the initial sale of a reloadable SVC. As such, we lowered the retail price of
our reloadable general spend card from $5.95 collected at the point of sale to
$3.00 and we charge a $2.95 maintenance/activation fee to the card balance upon
activation by the card holder. As a result, in accordance with our
existing distribution contracts, the fees previously retained by the
retailer/distributor at the point of sale now exceed the amount that is
collected at point of sale. As such, we now pay to the distributor a “Retailer
Fee” when our SVCs are sold as opposed to collecting a wholesale fee. The
difference is recouped when we charge the initial $2.95 maintenance fee. The net
result is essentially the same, but the manner in which it is collected now
follows common industry practice. We still charge a wholesale fee for reload
transactions.
Our
revenue recognition policy is consistent with the criteria set forth in SEC
guidance for determining when revenue is realized or realizable and earned. In
accordance with the requirements of this guidance, we recognize revenue when (1)
persuasive evidence of an arrangement existing, (2) delivery has occurred, (3)
our price to the buyer is fixed or determinable and (4) collectability of the
receivables is reasonably assured. We recognize the costs of these revenues,
including the cost of printing the cards, packaging and collateral material, at
the time revenue is recognized. Certain periodic card costs are
recognized as incurred.
Use
of Estimates.
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements. The reported amounts of
revenues and expenses during the reporting period may be affected by the
estimates and assumptions we are required to make. Estimates that are critical
to the accompanying consolidated financial statements arise from our belief that
(1) we will be able to raise and generate sufficient cash to continue as a going
concern (2) all long-lived assets are recoverable, and (3) our inventory is
properly valued and deemed recoverable. In addition, stock-based
compensation expense represents a significant estimate. The markets
for our products are characterized by intense competition, rapid technological
development, evolving standards and regulations and short product life cycles,
all of which could impact the future realization of our assets. Estimates and
assumptions are reviewed periodically and the effects of revisions are reflected
in the period that they are determined to be necessary. It is at least
reasonably possible that our estimates could change in the near term with
respect to these matters.
Stock-Based
Compensation.
We
account for stock-based compensation utilizing the fair value recognition
pursuant to an applicable Accounting Standard Codification (“ASC”). This statement
requires us to recognize compensation expense in an amount equal to the
grant-date fair value of shared-based payments such as stock options granted to
employees. These options generally vest over a period of time and the
related compensation cost is recognized over that vesting period.
With
respect to non-employee stock options that vest at various times and have no
significant disincentives for non-performance and/or specific performance
commitments, we follow relevant accounting guidance. Pursuant to this
guidance, the value of these options is estimated at each reporting date and
finally measured at the respective vesting date(s) of the options (or the date
on which the consultants’ performance is complete). The expense for
each group of options is recognized ratably over the vesting period for each
group, and the estimated value of any unvested options is updated each period.
As a result, under these arrangements, our initial and periodic recording of
stock-based compensation expense represents an estimate for which changes are
reflected in the period that they are determined to be necessary.
Long-Lived
Assets.
In
accordance with applicable ASC guidance, we evaluate the recoverability of
long-lived assets and the related estimated remaining lives when events or
circumstances lead us to believe that the carrying value of an asset may not be
recoverable. As of January 2, 2010, our estimates indicate that the
remaining long-lived assets are recoverable.
-22-
Convertible
Debt and Equity Securities Issued with Registration Rights
Agreements.
In
connection with the sale of debt or equity securities, we may enter into
registration rights agreements that generally require us to file registration
statements with the SEC to register common stock shares that may be issued on
conversion of debt or preferred stock to permit resale of common stock shares
previously sold under an exemption from registration or to register common stock
shares that may be issued on exercise of outstanding options or warrants. The
agreements typically require us to pay damages, in the form of contractually
stipulated penalties, for any delay in filing the required registration
statements or in the registration statements becoming effective, maintaining
effectiveness or, in some instances, maintaining a listing of our common stock.
These damages are usually expressed as a fixed percentage, per month, of the
original proceeds we received on issuance of the debt, preferred stock, common
stock shares, options or warrants. We account for any such penalties as
contingent liabilities, applying the applicable accounting guidance.
Accordingly, we recognize any damages when it becomes probable that they will be
incurred and when amounts are reasonably estimable.
Impact
of Recently Issued Accounting Pronouncements.
In April
2009, an accounting standard regarding accounting for assets acquired and
liabilities assumed in a business combination that arise from contingencies was
released. It addresses the initial recognition, measurement and
subsequent accounting for assets and liabilities arising from contingencies in a
business combination, and requires that such assets acquired or liabilities
assumed be initially recognized at fair value at the acquisition date if fair
value can be determined during the measurement period. If the acquisition-date
fair value cannot be determined, the asset acquired or liability assumed arising
from a contingency is recognized only if certain criteria are
met. The standard also requires that a systematic and rational basis
for subsequently measuring and accounting for the assets or liabilities be
developed depending on their nature. The standard is effective for
assets or liabilities arising from contingencies in business combinations for
which the acquisition date is during or after 2010. The Company does not
anticipate that the adoption of this statement will have a material impact on
its consolidated financial statements, absent any material business
combinations.
In April
2009, the Financial Accounting Standards Board (the “FASB”) issued the
following three standards intended to provide additional application guidance
and enhance disclosures regarding fair value measurements and impairments of
securities:
One such
standard provides additional guidance for estimating fair value when the volume
and level of activity for the asset or liability have decreased
significantly. The standard also provides guidance on identifying
circumstances that indicate a transaction is not orderly. Its
adoption did not affect the Company’s consolidated financial
statements.
The
second standard requires disclosures about fair value of financial instruments
in interim reporting periods of publicly traded companies that were previously
only required to be disclosed in annual financial statements. As this
standard amends only the disclosure requirements about fair value of financial
instruments in interim periods, its adoption did not affect the Company’s
consolidated financial statements.
The third
standard amends current other-than-temporary impairment guidance in GAAP for
debt securities to make the guidance more operational and to improve the
presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements. This standard does not
amend existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities. The adoption of
this standard did not affect the Company’s consolidated financial
statements.
In
June 2009, the FASB issued a standard regarding accounting for transfers of
financial assets. The provisions of this standard amend previous
guidance by removing the concept of a qualifying special-purpose entity and
removing an exception regarding variable interest entities that were previously
considered qualifying special-purpose entities. The provisions of the standard
will become effective for us on January 3, 2010. The adoption of this
standard is not expected to affect the Company’s consolidated financial
statements.
-23-
Item
8. Financial Statements and Supplementary Data.
The
audited financial statements of the Company for the fiscal year (52 week period)
ended January 2, 2010 and the fiscal year (53 week period) ended January 3,
2009, and the reports thereon of Baumann, Raymondo & Co. PA, our independent
accountants and Kingery & Crouse, P.A., our former independent accountants,
are included in this annual report following the Exhibit Index to this annual
report.
Item
9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
Item
9A. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
As
required by Rule 13a-15 under the Exchange Act, we carried out an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures as of January 2, 2010. This evaluation was carried out
under the supervision and with the participation of our Chief Executive Officer
and our Chief Financial Officer. In assessing the effectiveness of
our internal control over financial reporting we utilized the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission as
published in "Internal Control
over Financial Reporting – Guidance for Smaller Public
Companies." Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures as of the end of the period covered by this report were
effective.
Our
management performed additional analyses, reconciliations and other procedures
and has concluded that the Company’s consolidated financial statements for the
periods covered by and included in this annual report are fairly stated in all
material respects in accordance with generally accepted accounting principles in
the U.S. for each of the periods presented herein.
Inherent
Limitations Over Internal Controls
The
Company's internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. The Company's internal control over
financial reporting includes those policies and procedures that:
(i)
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the Company's
assets;
|
(ii)
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that the Company's receipts and expenditures
are being made only in accordance with authorizations of the Company's
management and directors; and
|
|
(iii)
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company's assets that
could have a material effect on the financial
statements.
|
Management,
including the Company's Chief Executive Officer and Chief Financial Officer,
does not expect that the Company's internal controls will prevent or detect all
errors and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of internal controls
can provide absolute assurance that all control issues and instances of fraud,
if any, have been detected. Also, any evaluation of the effectiveness of
controls in future periods is subject to the risk that those internal controls
may become inadequate because of changes in business conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
-24-
Management's
Report on Internal Control over Financial Reporting.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the (i)
effectiveness and efficiency of operations, (ii) reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles, and (iii) compliance
with applicable laws and regulations. Our internal controls framework is based
on the criteria set forth in the Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
As stated
above, management assessed the effectiveness of our internal control over
financial reporting as of January 2, 2010, utilizing the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission as
published in "Internal Control
over Financial Reporting – Guidance for Smaller Public
Companies." Based on the assessment by management, we
determined that our internal control over financial reporting was effective as
of January 2, 2010.
Changes
in Internal Control over Financial Reporting.
During
the fiscal quarter ended January 2, 2010, there were no changes in our internal
control over financial reporting that have materially affected, or are
reasonably likely to affect, our internal control over financial
reporting.
Item
9B. Other Information.
None.
-25-
PART
III
Item
10. Directors, Executive Officers and Corporate
Governance.
|
The
information called for by Item 10 of Form 10-K will be set forth under the
caption “Directors, Executive Officers and Corporate Governance” in our
definitive proxy statement, to be filed within 120 days after the end of the
fiscal year covered by this annual report, and is incorporated herein by
reference.
Item
11. Executive Compensation.
The
information called for by Item 11 of Form 10-K will be set forth under the
caption “Executive Compensation” in our definitive proxy statement, to be filed
within 120 days after the end of the fiscal year covered by this annual report,
and is incorporated herein by reference.
Item
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder
Matters.
|
The
information called for by Item 12 of Form 10-K will be set forth under the
caption “Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters” in our definitive proxy statement, to be filed
within 120 days after the end of the fiscal year covered by this annual report,
and is incorporated herein by reference.
Item
13. Certain Relationships and Related Transactions, and
Director Independence.
The
information called for by Item 13 of Form 10-K will be set forth under the
caption “Certain Relationships and Related Transactions, and Director
Independence” in our definitive proxy statement, to be filed within 120 days
after the end of the fiscal year covered by this annual report, and is
incorporated herein by reference.
Item
14. Principal Accountant Fees and Services.
The
information called for by Item 14 of Form 10-K will be set forth under the
caption “Principal Accountant Fees and Services” in our definitive proxy
statement, to be filed within 120 days after the end of the fiscal year covered
by this annual report, and is incorporated herein by reference.
-26-
PART
IV
Item
15. Exhibits.
Exhibit
No.
|
Description
of Exhibit
|
|
3.1
|
Amended
and Restated Articles of Incorporation of the Company (filed as Exhibit
3.1 to the Company’s Annual Report on Form 10-KSB filed on December 29,
2006 and incorporated by reference herein)
|
|
3.2
|
Certificate
of Amendment to Amended and Restated Articles of Incorporation of the
Company (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K
filed on December 27, 2006 and incorporated by reference
herein)
|
|
3.3
|
By-Laws,
as amended, of the Company (filed as Exhibit 3 to the Company’s
Registration Statement on Form SB-2/A filed on November 28, 2001 and
incorporated by reference herein)
|
|
3.4
|
Certificate
of Designations, Rights and Preferences of Series A Convertible Preferred
Stock, as filed with the Secretary of State of the State of Nevada on
December 27, 2006 (filed as Exhibit 99.3 to the Company’s Current Report
on Form 8-K filed on January 4, 2007 and incorporated by reference
herein).
|
|
3.5
|
Certificate
of Designations, Rights and Preferences of Series B Convertible Preferred
Stock, as filed with the Secretary of State of the State of Nevada on June
29, 2007 (filed as Exhibit 99.3 to the Company’s Current Report on Form
8-K filed on July 5, 2007 and incorporated by reference
herein)
|
|
3.6
|
Certificate
of Amendment to Certificate of Designation For Nevada Profit Corporation,
Series A Preferred Stock, as filed with the Secretary of State of the
State of Nevada on June 12, 2008 (filed as Exhibit 99.4 to the Company’s
Current Report on Form 8-K filed on June 16, 2008 and incorporated by
reference herein)
|
|
3.7
|
Certificate
of Amendment to Certificate of Designation For Nevada Profit Corporation,
Series B Preferred Stock, as filed with the Secretary of State of the
State of Nevada on June 12, 2008 (filed as Exhibit 99.5 to the Company’s
Current Report on Form 8-K filed on June 16, 2008 and incorporated by
reference herein)
|
|
3.8
|
Certificate
of Designations, Rights and Preferences of Series C Convertible Preferred
Stock, as filed with the Secretary of State of the State of Nevada on June
12, 2008 (filed as Exhibit 99.6 to the Company’s Current Report on Form
8-K filed on June 16, 2008 and incorporated by reference
herein)
|
|
3.9
|
Certificate
of Amendment to Certificate of Designation For Nevada Profit Corporation
for Series A Preferred Stock, as filed with the Secretary of State of the
State of Nevada on August 25, 2009 (filed as Exhibit 99.3 to the Company’s
Current Report on Form 8-K filed on August 26, 2009 and incorporated by
reference herein)
|
|
3.10
|
Certificate
of Amendment to Certificate of Designation For Nevada Profit Corporation
for Series B Preferred Stock, as filed with the Secretary of State of the
State of Nevada on August 25, 2009 (filed as Exhibit 99.4 to the Company’s
Current Report on Form 8-K filed on August 26, 2009 and incorporated by
reference herein)
|
|
3.11
|
Certificate
of Amendment to Certificate of Designation For Nevada Profit Corporation
for Series C Preferred Stock, as filed with the Secretary of State of the
State of Nevada on August 25, 2009 (filed as Exhibit 99.5 to the Company’s
Current Report on Form 8-K filed on August 26, 2009 and incorporated by
reference herein)
|
-27-
3.12
|
Certificate
of Designations, Rights and Preferences of the Series D Convertible
Preferred Stock, as filed with the Secretary of State of the State of
Nevada on August 21, 2009 (filed as Exhibit 99.6 to the Company’s Current
Report on Form 8-K filed on August 26, 2009 and incorporated by reference
herein)
|
|
4.1
|
Form
of Senior Secured Convertible Promissory Note, as executed by the Company
and the holders thereof on September 29, 2006 and November 8, 2006 (filed
as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on
October 5, 2006 and incorporated by reference herein)
|
|
4.2
|
Form
of Securities Exchange Agreement, as executed by the Company and holders
of the Company’s Senior Secured Convertible Promissory Notes on September
29, 2006 (filed as Exhibit 99.1 to the Company’s Current Report on Form
8-K filed on October 5, 2006 and incorporated by reference
herein)
|
|
4.3
|
Form
of Joinder, as executed on November 8, 2006, by the Company and those
holders of Senior Secured Convertible Promissory Notes, all dated as of
November 8, 2006, who were not originally parties to the Securities
Exchange Agreements, dated as of September 29, 2006 (filed as Exhibit 99.3
to the Company’s Current Report on Form 8-K filed on November 13, 2006 and
incorporated by reference herein)
|
|
4.4
|
Form
of Securities Exchange Agreement, as executed by the Company and the
investors signatory thereto on December 28, 2006 (filed as Exhibit 99.1 to
the Company’s Current Report on Form 8-K filed on January 4, 2007 and
incorporated by reference herein)
|
|
4.5
|
Form
of Stock Purchase Agreements, as executed by the Company and the
purchasers signatory thereto on December 28, 2006 (filed as Exhibit 99.2
to the Company’s Current Report on Form 8-K filed on January 4, 2007 and
incorporated by reference herein)
|
|
4.6
|
Form
of Securities Purchase Agreement, as executed by the Company and the
investors signatory thereto on June 29, 2007 (filed as Exhibit 99.1 to the
Company’s Current Report on Form 8-K filed on July 5, 2007 and
incorporated by reference herein)
|
|
4.7
|
Form
of Warrant, as issued by the Company to certain investors on June 29, 2007
(filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed
on July 5, 2007 and incorporated by reference herein)
|
|
4.8
|
Warrant
to Purchase Common Stock, dated February 19, 2008, issued by the Company
to Bruce E. Terker (filed as Exhibit 99.4 to the Company’s Current Report
on Form 8-K filed on February 22, 2008 and incorporated by reference
herein)
|
|
4.9
|
Form
of Securities Purchase Agreement, as executed by the Company and Bruce E.
Terker on March 21, 2008 (filed as Exhibit 99.1 to the Company’s Current
Report on Form 8-K filed on March 28, 2008 and incorporated by reference
herein)
|
|
4.10
|
Form
of Warrant, as issued by the Company to Bruce E. Terker on March 21, 2008
(filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed
on March 28, 2008 and incorporated by reference herein)
|
|
4.11
|
Form
of Securities Purchase Agreement, as executed by the Company and the
purchasers signatory thereto on March 28, 2008 and March 31, 2008 (filed
as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on March
31, 2008 and incorporated by reference herein)
|
|
4.12
|
Form
of Warrant, as issued by the Company to certain investors on March 28,
2008 and March 31, 2008 (filed as Exhibit 99.2 to the Company’s Current
Report on Form 8-K filed on March 31, 2008 and incorporated by reference
herein)
|
-28-
4.13
|
Form
of Securities Purchase Agreement, as executed by the Company and Bruce E.
Terker on May 16, 2008 (filed as Exhibit 99.1 to the Company’s Current
Report on Form 8-K filed on May 22, 2008 and incorporated by reference
herein)
|
|
4.14
|
Form
of Warrant, as issued by the Company to Bruce E. Terker on May 16, 2008
(filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed
on May 22, 2008 and incorporated by reference herein)
|
|
4.15
|
Form
of Securities Purchase Agreement, as executed by the Company and the
purchasers signatory thereto on June 12, 2008 (filed as Exhibit 99.1 to
the Company’s Current Report on Form 8-K filed on June 16, 2008 and
incorporated by reference herein)
|
|
4.16
|
Form
of Warrant, as issued by the Company to certain investors on June 12, 2008
(filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed
on June 16, 2008 and incorporated by reference herein)
|
|
4.17
|
Form
of Securities Exchange Agreement, as executed by the Company and the
investors signatory thereto on June 12, 2008 (filed as Exhibit 99.3 to the
Company’s Current Report on Form 8-K filed on June 16, 2008 and
incorporated by reference herein)
|
|
4.18
|
Form
of Amendment No. 1 to Warrant, as issued by the Company to certain lenders
on November 26, 2008 (filed as Exhibit 99.2 to the Company’s Current
Report on Form 8-K filed on December 3, 2008 and incorporated by reference
herein)
|
|
4.19
|
Form
of Warrant, as issued by the Company to certain lenders on November 26,
2008 (filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K
filed on December 3, 2008 and incorporated by reference
herein)
|
|
4.20
|
Form
of Common Stock Warrant as issued by the Company to certain investors on
February 3, 2009 (filed as Exhibit 99.2 to the Company’s Current
Report on Form 8-K filed on February 9, 2009 and incorporated by reference
herein)
|
|
4.21
|
Form
of Amendment No. 1 to Warrants issued to certain Lenders on February 3,
2009 (filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K
filed on February 9, 2009 and incorporated by reference
herein)
|
|
4.22
|
Form
of Note, as issued by the Company to certain lenders in connection with
the note offering which commenced on May 7, 2009 (the “Term Loan Notes”)
(filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended July 4, 2009 and incorporated by reference
herein)
|
|
4.23
|
Form
of Common Stock Warrant as issued by the Company in tandem with the Term
Loan Notes (filed as Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended July 4, 2009 and incorporated by reference
herein)
|
|
4.24
|
Form
of Securities Purchase Agreement, as executed by the Company and certain
investors on August 21, 2009 (filed as Exhibit 99.1 to that certain Form
8-K filed on August 26, 2009 and incorporated by reference
herein)
|
|
4.25
|
Form
of Warrant, as issued by the Company to certain investors on August 21,
2009 (filed as Exhibit 99.2 to that certain Form 8-K filed on August 26,
2009 and incorporated by reference herein)
|
|
10.1
|
Swift
Pay Service Agreement, dated as of March 18, 2005, by and between Western
Union and the Company (filed as Exhibit 8.1.1 to the Company’s Current
Report on Form 8-K filed on June 24, 2005 and incorporated by reference
herein)
|
-29-
10.2
|
ExpressPayment
(TM) Service Agreement, dated as of October 31, 2006, by and between
MoneyGram Payment Systems, Inc. and the Company (filed as Exhibit 8.1.1 to
the Company’s Current Report on Form 8-K filed on November 18, 2005 and
incorporated by reference herein)
|
|
10.3
|
Stored
Value Card Issuer Agreement, dated as of May 10, 2006, by and between
Discover Financial Services LLC and the Company (filed as Exhibit 8.1.1 to
the Company’s Current Report on Form 8-K filed on May 11, 2006 and
incorporated by reference herein)
|
|
10.4
|
Stored
Value Prepaid Card Sponsorship Agreement, dated as of October 20, 2006,
and Addendum to Stored Value Prepaid Card Sponsorship Agreement, dated as
of November 10, 2006, by and between Palm Desert National Bank and the
Company (filed as Exhibit 10.4 to the Company’s Annual Report on Form
10-KSB filed on December 29, 2006 and incorporated by reference
herein)
|
|
10.5
|
Stored
Value Card Processing Agreement, dated as of June 14, 2006, by and between
Metavante Corporation and the Company (filed as Exhibit 10.5 to the
Company’s Annual Report on Form 10-KSB filed on December 29, 2006 and
incorporated by reference herein)
|
|
10.6**
|
Employment
Agreement, dated as of September 5, 2006, by and between Jerry R. Welch
and the Company (filed as Exhibit 99.1 to the Company’s Current Report on
Form 8-K filed on September 15, 2006 and incorporated by reference
herein)
|
|
10.7**
|
Nonqualified
Stock Option Agreement, dated as of September 5, 2006, by and between
Jerry R. Welch and the Company (filed as Exhibit 99.2 to the Company’s
Current Report on Form 8-K filed on September 15, 2006 and incorporated by
reference herein)
|
|
10.8**
|
Employment
Agreement, dated as of September 5, 2006, by and between Raymond P.
Springer and the Company (filed as Exhibit 99.3 to the Company’s Current
Report on Form 8-K filed on September 15, 2006 and incorporated by
reference herein)
|
|
10.9**
|
Nonqualified
Stock Option Agreement, dated as of September 5, 2006, by and between
Raymond P. Springer and the Company (filed as Exhibit 99.4 to the
Company’s Current Report on Form 8-K filed on September 15, 2006 and
incorporated by reference herein)
|
|
10.10**
|
Employment
Agreement, dated as of October 1, 2005, by and between Mr. Clifford Wildes
and the Company (filed as Exhibit
10.10 to the Company’s Annual Report on Form 10-KSB filed on December 29,
2006 and incorporated by reference herein)
|
|
10.11
|
Commercial
Lease Agreement, dated as of January 10, 2005, by and between The 6015,
LLC and the Company (filed as Exhibit 10.11 to the Company’s Annual Report
on Form 10-KSB filed on December 29, 2006 and incorporated by reference
herein)
|
|
10.12
|
Sublease
Agreement, dated as of August 5, 2005, by and between GEBO Corporation USA
and the Company (filed as Exhibit 5.3 to the Company’s Quarterly Report on
Form 10-QSB filed on August 15, 2005 and incorporated by reference
herein)
|
|
10.13
|
2004
Amended Stock Incentive Plan (filed as Exhibit 10.13 to the Company’s
Annual Report on Form 10-KSB filed on December 29, 2006 and incorporated
by reference herein)
|
|
10.14**
|
Separation
Agreement and Release of Claims, dated as of January 29, 2007, by and
between the Company and Clifford Wildes (filed as Exhibit 99.1 to the
Company’s Current Report on Form 8-K filed on February 2, 2007 and
incorporated by reference herein)
|
-30-
10.15**
|
Offer
of Employment, dated April 24, 2007, by and between the Company and Jerome
Kollar (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K
filed on May 18, 2007 and incorporated by reference
herein)
|
|
10.16**
|
Incentive
Stock Option Grant, dated May 14, 2007, by and between the Company and
Jerome Kollar (filed as Exhibit 99.2 to the Company’s Current Report on
Form 8-K filed on May 18, 2007 and incorporated by reference
herein)
|
|
10.17
|
Commercial
Lease Agreement, dated as of April 16, 2007, by and between FLA Owner LLC
and the Company (filed as Exhibit 10.1 to the Company’s Quarterly Report
on Form 10-QSB filed on November 9, 2007 and incorporated by reference
herein)
|
|
10.18
|
Letter
of Credit Accommodation (together with a sample Irrevocable Letter of
Credit to be issued thereunder), dated February 14, 2008, between the
Company and National Penn Bank (filed as Exhibit 99.1 to the Company’s
Current Report on Form 8-K filed on February 22, 2008 and incorporated by
reference herein)
|
|
10.19
|
Guaranty
and Indemnification Agreement, dated February 15, 2008, by and between the
Company and Jeffrey Porter (filed as Exhibit 99.2 to the Company’s Current
Report on Form 8-K filed on February 22, 2008 and incorporated by
reference herein)
|
|
10.20
|
Guaranty
and Indemnification Agreement, dated February 19, 2008, by and between the
Company and Bruce E. Terker (filed as Exhibit 99.3 to the Company’s
Current Report on Form 8-K filed on February 22, 2008 and incorporated by
reference herein)
|
|
10.21
|
Loan
and Security Agreement, dated as of June 10, 2008, among the Company,
nFinanSe Payments Inc., and the lenders party thereto and Ballyshannon
Partners, L.P., as agent (filed as Exhibit 99.7 to the Company’s Current
Report on Form 8-K filed on June 16, 2008 and incorporated by reference
herein)
|
|
10.22
|
Amended
and Restated Loan and Security Agreement, dated as of November 26, 2008,
among the Company, nFinanSe Payments Inc., and the lenders party thereto
and Ballyshannon Partners, L.P., as agent (filed as Exhibit 99.1 to the
Company’s Current Report on Form 8-K filed on December 3, 2008 and
incorporated by reference herein)
|
|
10.23
|
First
Amendment to Amended and Restated Loan and Security Agreement, as executed
by the Company, and nFinanSe Payments Inc., the lenders party thereto, and
Ballyshannon Partners, L.P., acting as agent, on February 3, 2009 (filed
as Exhibit 99.1 of the Company’s Current Report on Form 8-K filed on
February 9, 2009 and incorporated by reference herein)
|
|
14.1
|
Code
of Ethics (filed as Exhibit 14.1 to the Company’s Annual Report on Form
10-KSB filed on December 29, 2006 and incorporated by reference
herein)
|
|
21.1*
|
List
of the Company’s Subsidiaries
|
|
31.1*
|
Certifications
of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
the Securities Exchange Act of 1934.
|
|
31.2*
|
Certifications
of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
the Securities Exchange Act of 1934.
|
|
32.1*
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section
1350.
|
|
32.2*
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section
1350.
|
* Filed
herewith.
**
Management contract or compensatory plan or arrangement.
-31-
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.
nFinanSe
Inc.
By:
|
/s/ Jerry R. Welch
|
|
Jerry
R. Welch, Chief Executive Officer and Director
|
||
Date:
|
April
1, 2010
|
In accordance with the requirements of
the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:
|
/s/Jerry R. Welch
|
|
Jerry
R. Welch, Chief Executive Officer and Director
|
||
(Principal
Executive Officer)
|
||
Date:
|
April
1, 2010
|
|
By:
|
/s/Raymond P. Springer
|
|
Raymond
P. Springer, Secretary and Chief Financial Officer
|
||
(Principal
Financial Officer)
|
||
Date:
|
April
1, 2010
|
|
By:
|
/s/ Jerome A. Kollar
|
|
Jerome
A. Kollar, Principal Accounting Officer
|
||
Date:
|
April
1, 2010
|
|
By:
|
/s/ Ernest W. Swift
|
|
Ernest
W. Swift, Director
|
||
Date:
|
April
1, 2010
|
|
By:
|
/s/ Donald A. Harris
|
|
Donald
A. Harris, Director
|
||
Date:
|
April
1, 2010
|
|
By:
|
/s/ Joseph D. Hudgins
|
|
Joseph
D. Hudgins, Director
|
||
Date:
|
April
1, 2010
|
|
By:
|
/s/ Bruce E. Terker
|
|
Bruce
E. Terker, Director
|
||
Date:
|
April
1, 2010
|
-32-
nFinanSe
Inc.
(A Development Stage
Enterprise)
Consolidated
Financial Statements
as
of and for the fiscal years ended January 2, 2010 and January 3,
2009
and
for the period July 10, 2000 (inception) to January 2, 2010,
and
Report
of Independent Registered Public Accounting Firm
F-1
nFinanSe
Inc.
(A Development Stage
Enterprise)
TABLE OF
CONTENTS
Page
|
|
Reports
of Independent Registered Public Accounting
Firms………………..………………………….....……….........................................................................................................................................................................................
|
F-3
& F-4
|
Consolidated
Financial Statements:
|
|
Consolidated
Balance Sheets as of January 2, 2010 and January 3,
2009…………………...............................................................................................................................................................................................................................
|
F-5
|
Consolidated
Statements of Operations for the fiscal year ended January 2, 2010, the
fiscal year ended January 3, 2009 and the period July 10, 2000 (inception)
to January 2, 2010………..….…………….…………….....
|
F-6
|
Consolidated
Statements of Stockholders’ Equity (Deficit) for the fiscal year ended
January 2, 2010, the fiscal year ended January 3, 2009 and each fiscal
period from July 10, 2000 (inception) to January 2, 2010
…….
|
F-7
|
Consolidated
Statements of Cash Flows for the fiscal year ended January 2, 2010, the
fiscal year ended January 3, 2009 and the period July 10, 2000 (inception)
to January 2, 2010………..….…………….……………....
|
F-13
|
Notes
to Consolidated Financial
Statements…………….………..……………..…………………………………..............................................................................................................................................................................................
|
F-15
|
F-2
[LETTERHEAD OF Baumann, Raymondo
& Co. PA]
To the
Board of Directors and Stockholders
nFinanSe
Inc.
Tampa,
Florida
We have
audited the consolidated balance sheet of nFinanSe Inc. and subsidiaries (the
“Company”) ( a development stage enterprise) as of January 2, 2010,
and the related consolidated statements of operations, stockholders’ equity
(deficit) and cash flows for the fiscal year ended January 2, 2010, and for each
fiscal period from July 10, 2000 (inception) to January 2,
2010. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements for each fiscal period from July 10, 2000
(inception) through January 3, 2009 were audited by other auditors and our
opinion, insofar as it relates to cumulative amounts included for such prior
periods, is based solely on the reports of other auditors.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provided a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of nFinanSe Inc. and
subsidiaries as of January 2, 2010 and the results of their operations and cash
flows for the fiscal year ended January 2, 2010, and for each fiscal period from
July 10, 2000 (inception) to January 2, 2010, in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note B to
the consolidated financial statements, the Company has suffered recurring losses
and negative cash flows from operations since inception and has been dependent
on existing stockholders and new investors to provide the cash resources to
sustain its operations. This raises substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans in regard
to these matters are also described in Note B. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
We were
not engaged to examine management’s assertion about the effectiveness of
nFinanSe Inc. and subsidiaries’ internal control over financial reporting as of
January 2, 2010 included in the accompanying Management’s Annual Report on
Internal Control over Financial Reporting and, accordingly, we do not
express an opinion thereon.
/s/
Baumann, Raymondo & Co. PA
March
29, 2010
Tampa,
FL
F-3
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of nFinanSe Inc. and
Subsidiaries:
In our opinion, the
consolidated balance sheet as of January 3, 2009, and the related
statements of operations, stockholders’ (deficit) equity and of cash flows for
the fiscal year then ended present fairly, in all material respects, the results
of operations and cash flows nFinanSe Inc. and its subsidiaries (the
“Company”), a development stage enterprise, as of and for the fiscal
year ended January 3, 2009 and, cumulatively, for the period from July 10, 2000
(date of inception) to January 3, 2009 (not separately presented herein) in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Notes A and B to the
consolidated financial statements, the Company is in the development stage, has
suffered recurring losses from operations and has ongoing requirements for
additional capital investment. These factors raise substantial doubt
about the Company’s ability to continue as a going concern. Management’s plans
in regard to these matters are also described in Note B. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ KINGERY
& CROUSE, P.A.
Certified Public
Accountants
Tampa,
FL
March 30,
2009
F-4
nFinanSe
Inc.
(A Development Stage
Enterprise)
CONSOLIDATED
BALANCE SHEETS
January
2,
|
January
3,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 3,794,788 | $ | 475,608 | ||||
Restricted
cash
|
343,075 | 472,500 | ||||||
Receivables:
|
||||||||
Accounts
(net of allowance for doubtful accounts of $0 and $0,
respectively)
|
189,015 | 52,078 | ||||||
Other
|
13,519 | 25,776 | ||||||
Prepaid
expenses and other current assets, including prepaid marketing costs
of
approximately $30,800 and $224,600, respectively
|
236,758 | 402,505 | ||||||
Current
portion of deferred financing costs (net of accumulated amortization of
$459,607 and
$38,300, respectively)
|
- | 421,306 | ||||||
Inventories
|
1,416,890 | 2,885,779 | ||||||
Total
current assets
|
5,994,045 | 4,735,552 | ||||||
PROPERTY
AND EQUIPMENT
|
405,615 | 625,746 | ||||||
OTHER
ASSETS
|
||||||||
Deferred
financing costs (net of accumulated amortization of $3,113,841
and $127,532, respectively)
|
- | 1,402,849 | ||||||
Deferred
cost of marketing incentive agreement warrants (net
of accumulated amortization of $10,281 and $4,309,
respectively)
|
- | 381,250 | ||||||
Other
assets
|
54,932 | 272,404 | ||||||
TOTAL
ASSETS
|
$ | 6,454,592 | $ | 7,417,801 | ||||
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 347,936 | $ | 343,020 | ||||
Accrued
personnel costs
|
88,231 | 105,772 | ||||||
Accrued
inventory liability
|
- | 210,159 | ||||||
Accrued
lease and contractual obligations
|
- | 150,241 | ||||||
Credit
facility loans outstanding
|
500,000 | 1,200,000 | ||||||
Deferred
revenues
|
51,667 | 31,250 | ||||||
Other
accrued liabilities
|
44,365 | 522,113 | ||||||
Total
current liabilities
|
1,032,199 | 2,562,555 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
STOCKHOLDERS’
EQUITY:
|
||||||||
Preferred
stock - $.001 par value: 25,000,000 shares authorized;
16,869,822 and 12,537,984 shares issued and outstanding on
January 2, 2010 and January 3, 2009, respectively, as
follows:
|
||||||||
Series
A Convertible Preferred Stock – 9,330,514 shares authorized; 7,500,484
shares issued and outstanding with liquidation values of
$7,705,093 and $7,692,620 (including undeclared accumulated dividends in
arrears of $204,609 and $192,136) as of January 2, 2010 and January 3,
2009, respectively
|
7,500 | 7,500 | ||||||
Series
B Convertible Preferred Stock – 1,000,010 shares authorized; 1,000,000
shares issued and outstanding with a liquidation value of $3,000,000 at
January 2, 2010 and January 3, 2009
|
1,000 | 1,000 | ||||||
Series
C Convertible Preferred Stock – 4,100,000 shares authorized; 4,037,500
shares issued and outstanding with a liquidation value of $8,075,000 at
January 2, 2010 and January 3, 2009
|
4,038 | 4,038 | ||||||
Series
D Convertible Preferred Stock – 4,666,666 shares authorized; 4,331,838
shares issued and outstanding with a liquidation value of $12,995,514 at
January 2, 2010
|
4,332 | - | ||||||
Common
stock - $0.001 par value: 200,000,000 shares authorized; 9,542,887 and
9,344,108 shares issued and outstanding as of January 2, 2010 and January
3, 2009, respectively
|
9,543 | 9,344 | ||||||
Additional
paid-in capital
|
71,421,315 | 56,770,705 | ||||||
Deficit
accumulated during the development stage
|
(66,025,335 | ) | (51,937,341 | ) | ||||
Total
stockholders’ equity
|
5,422,393 | 4,855,246 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 6,454,592 | $ | 7,417,801 | ||||
See notes
to consolidated financial statements.
F-5
nFinanSe
Inc.
(A Development Stage
Enterprise)
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the fiscal
year
ended
January
2, 2010
|
For
the fiscal
year
ended
January
3, 2009
|
For
the period
July
10, 2000
(inception)
to
January
2, 2010
|
||||||||||
REVENUES
|
$ | 15,789 | $ | 33,409 | $ | 1,255,366 | ||||||
OPERATING
EXPENSES
|
||||||||||||
Transaction
and operating expenses
|
3,284,292 | 2,401,994 | 8,050,483 | |||||||||
Selling
and marketing expenses
|
1,807,945 | 3,683,345 | 9,847,922 | |||||||||
General
and administrative expenses
|
5,572,082 | 7,932,942 | 36,075,677 | |||||||||
Total
operating expenses
|
10,664,319 | 14,018,281 | 53,974,082 | |||||||||
Loss
before other income (expense)
|
(10,648,530 | ) | (13,984,872 | ) | (52,718,716 | ) | ||||||
Other
income (expense):
|
||||||||||||
Interest
expense
|
(3,249,515 | ) | (308,497 | ) | (5,246,276 | ) | ||||||
Interest
income
|
- | 24,185 | 1,164,425 | |||||||||
Gain
(loss) on derivative instruments
|
- | (396,032 | ) | 1,449,230 | ||||||||
Loss
from litigation
|
- | (105,500 | ) | (105,500 | ) | |||||||
Loss
on debt extinguishment
|
- | - | (4,685,518 | ) | ||||||||
Registration
rights penalties
|
- | - | (98,649 | ) | ||||||||
Other
expense
|
(896 | ) | (758 | ) | (95,510 | ) | ||||||
Total
other expense
|
(3,250,411 | ) | (786,602 | ) | (7,617,798 | ) | ||||||
Loss
from continuing operations
|
(13,898,941 | ) | (14,771,474 | ) | (60,336,514 | ) | ||||||
Loss
from discontinued operations
|
- | - | (3,861,579 | ) | ||||||||
Net
loss
|
(13,898,941 | ) | (14,771,474 | ) | (64,198,093 | ) | ||||||
Dividends
paid on Series A Convertible
Preferred Stock
|
(189,054 | ) | (190,527 | ) | (1,827,244 | ) | ||||||
Undeclared
and unpaid dividends on Series A Convertible Preferred
Stock
|
(384,380 | ) | (192,136 | ) | (384,380 | ) | ||||||
Net
loss attributable to common stockholders
|
$ | (14,472,375 | ) | $ | (15,154,137 | ) | $ | (66,409,717 | ) | |||
Net
loss per share - basic and diluted:
|
||||||||||||
Continuing
operations
|
$ | (1.52 | ) | $ | (1.74 | ) | ||||||
Discontinued
operations
|
$ | - | $ | - | ||||||||
Total
net loss per share
|
$ | (1.52 | ) | $ | (1.74 | ) | ||||||
Weighted
average number of shares outstanding
|
9,529,745 | 8,715,664 | ||||||||||
See notes
to consolidated financial statements.
F-6
nFinanSe
Inc.
(A Development Stage
Enterprise)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
Convertible
Preferred Stock
|
Common
Stock
|
Additional
Paid-In
|
Common
Stock Subscribed
and
Note Receivable From
|
Deficit
Accumulated During the Development
|
||||||||||||||||||||||||||||||||
Series
A
|
Series
B
|
Series
C
|
Shares
|
Par
Value
|
Capital
|
Stockholder
|
Stage
|
Total
|
||||||||||||||||||||||||||||
Balances,
July 10, 2000 (inception)
|
$ | - | $ | - | $ | - | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||||||||
Common
Stock subscription
|
- | - | - | - | - | - | 100 | - | 100 | |||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Balances,
December 31, 2000
|
- | - | - | - | - | - | 100 | - | 100 | |||||||||||||||||||||||||||
Issuance
of Common Stock for cash:
|
||||||||||||||||||||||||||||||||||||
At
$0.177 per share
|
- | - | - | 2,547 | 3 | 447 | (100 | ) | - | 350 | ||||||||||||||||||||||||||
At
$0.126 per share
|
- | - | - | 39,802 | 39 | 4,961 | - | - | 5,000 | |||||||||||||||||||||||||||
Issuance
of Common Stock for services
|
||||||||||||||||||||||||||||||||||||
At
$1.57 per share
|
- | - | - | 77,853 | 78 | 122,172 | - | - | 122,250 | |||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | (216,982 | ) | (216,982 | ) | |||||||||||||||||||||||||
Balances,
December 31, 2001
|
- | - | - | 120,202 | 120 | 127,580 | - | (216,982 | ) | (89,282 | ) | |||||||||||||||||||||||||
Issuance
of Common Stock for cash:
|
||||||||||||||||||||||||||||||||||||
At
$1.57 per share
|
- | - | - | 1,337 | 1 | 2,099 | - | - | 2,100 | |||||||||||||||||||||||||||
At
$2.62 per share
|
- | - | - | 64,766 | 65 | 169,435 | - | - | 169,500 | |||||||||||||||||||||||||||
At
$3.14 per share
|
- | - | - | 15,921 | 16 | 49,984 | - | - | 50,000 | |||||||||||||||||||||||||||
Issuance
of Common Stock for services:
|
||||||||||||||||||||||||||||||||||||
At
$1.57 per share
|
- | - | - | 46,412 | 46 | 72,834 | - | - | 72,880 | |||||||||||||||||||||||||||
At
$2.62 per share
|
- | - | - | 75,465 | 75 | 197,816 | - | - | 197,891 | |||||||||||||||||||||||||||
At
$3.14 per share
|
- | - | - | 3,375 | 3 | 10,597 | - | - | 10,600 | |||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | (451,646 | ) | (451,646 | ) | |||||||||||||||||||||||||
Balances,
December 31, 2002
|
- | - | - | 327,478 | 326 | 630,345 | - | (668,628 | ) | (37,957 | ) | |||||||||||||||||||||||||
Issuance
of Common Stock for cash:
|
||||||||||||||||||||||||||||||||||||
At
$1.57 per share
|
- | - | - | 14,210 | 14 | 22,299 | - | - | 22,313 | |||||||||||||||||||||||||||
At
$3.14 per share
|
- | - | - | 12,737 | 13 | 39,987 | - | - | 40,000 | |||||||||||||||||||||||||||
Issuance
of Common Stock for services
|
||||||||||||||||||||||||||||||||||||
At
$3.14 per share
|
- | - | - | 189,289 | 189 | 594,276 | - | - | 594,465 | |||||||||||||||||||||||||||
Issuance
of Common Stock for assets of Typhoon Technologies at $3.14 per
share
|
- | - | - | 71,068 | 71 | 223,119 | - | - | 223,190 | |||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | (954,974 | ) | (954,974 | ) | |||||||||||||||||||||||||
Balances,
December 31, 2003
|
- | - | - | 614,782 | 613 | 1,510,026 | - | (1,623,602 | ) | (112,963 | ) | |||||||||||||||||||||||||
Continued
|
F-7
nFinanSe
Inc.
(A Development Stage
Enterprise)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
Convertible
Preferred Stock
|
Common
Stock
|
Additional
Paid-In
|
Common
Stock Subscribed
and
Note Receivable From
|
Deficit
Accumulated During the Development
|
||||||||||||||||||||||||||||||||
Series
A
|
Series
B
|
Series
C
|
Shares
|
Par
Value
|
Capital
|
Stockholder
|
Stage
|
Total
|
||||||||||||||||||||||||||||
Issuance
of Common Stock for cash at $1.57 per share
|
- | - | - | 13,183 | 13 | 20,687 | - | - | 20,700 | |||||||||||||||||||||||||||
Issuance
of Common Stock held in escrow
|
- | - | - | 17,513 | 18 | (18 | ) | - | - | - | ||||||||||||||||||||||||||
Common
Stock issued for services at $3.14 per share
|
- | - | - | 4,521 | 5 | 14,195 | - | - | 14,200 | |||||||||||||||||||||||||||
Issuance
of Common Stock in exchange for net assets in a
recapitalization
|
- | - | - | 1,351,250 | 1,351 | 2,967,649 | (3,000,000 | ) | - | (31,000 | ) | |||||||||||||||||||||||||
Collections
on note receivable from stockholder
|
- | - | - | - | - | - | 1,615,586 | - | 1,615,586 | |||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | (1,031,335 | ) | (1,031,335 | ) | |||||||||||||||||||||||||
Balances,
September 30, 2004
|
- | - | - | 2,001,249 | 2,000 | 4,512,539 | (1,384,414 | ) | (2,654,937 | ) | 475,188 | |||||||||||||||||||||||||
Issuance
of Common Stock and warrants for cash:
|
||||||||||||||||||||||||||||||||||||
At
$4.00 per share
|
- | - | - | 356,250 | 356 | 1,424,644 | - | - | 1,425,000 | |||||||||||||||||||||||||||
At
$8.00 per share (net of stock issuance costs)
|
- | - | - | 618,125 | 618 | 4,882,996 | - | - | 4,883,614 | |||||||||||||||||||||||||||
Allocation
of proceeds from sales of Common Stock to derivative financial instruments
(warrants)
|
- | - | - | - | - | (3,461,500 | ) | - | - | (3,461,500 | ) | |||||||||||||||||||||||||
Allocation
of proceeds from sales of Common Stock to derivative financial instruments
(registration rights)
|
- | - | - | - | - | (545,943 | ) | - | - | (545,943 | ) | |||||||||||||||||||||||||
Value
attributable to consulting and director options
|
- | - | - | - | - | 1,074,700 | - | - | 1,074,700 | |||||||||||||||||||||||||||
Issuance
of Common Stock for certain property and equipment of
MTel
|
- | - | - | 43,183 | 43 | 748,157 | - | - | 748,200 | |||||||||||||||||||||||||||
Collections
on note receivable from stockholder
|
- | - | - | - | - | - | 1,384,414 | - | 1,384,414 | |||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | (7,417,935 | ) | (7,417,935 | ) | |||||||||||||||||||||||||
Balances,
September 30, 2005
|
- | - | - | 3,018,807 | 3,017 | 8,635,593 | - | (10,072,872 | ) | (1,434,262 | ) | |||||||||||||||||||||||||
Continued
|
F-8
nFinanSe
Inc.
(A Development Stage
Enterprise)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
Convertible
Preferred Stock
|
Common
Stock
|
Additional
Paid-In
|
Common
Stock Subscribed
and
Note Receivable From
|
Deficit
Accumulated
During the Development
|
||||||||||||||||||||||||||||||||
Series
A
|
Series
B
|
Series
C
|
Shares
|
Par
Value
|
Capital
|
Stockholder
|
Stage
|
Total
|
||||||||||||||||||||||||||||
Derivative
liability related to warrants exercised for Common Stock
|
- | - | - | - | - | 5,254,468 | - | - | 5,254,468 | |||||||||||||||||||||||||||
Reclassify
derivative portion of registration rights damages
|
- | - | - | - | - | (454,226 | ) | - | - | (454,226 | ) | |||||||||||||||||||||||||
Warrants
exercised for Common Stock at $4.00 per share
|
- | - | - | 618,125 | 618 | 2,471,882 | - | - | 2,472,500 | |||||||||||||||||||||||||||
Exercise
of vested stock options
|
- | - | - | 10,000 | 10 | (10 | ) | - | - | - | ||||||||||||||||||||||||||
Issuance
of additional Common Stock to principal of MTel
|
- | - | - | 7,000 | 7 | (7 | ) | - | - | - | ||||||||||||||||||||||||||
Issuance
of Common Stock to consultant
|
- | - | - | 10,000 | 10 | (10 | ) | - | - | - | ||||||||||||||||||||||||||
Issuance
of Common Stock in connection with registration rights
penalties
|
- | - | - | 101,345 | 102 | 652,523 | - | - | 652,625 | |||||||||||||||||||||||||||
Issuance
of Common Stock for consultant services
|
- | - | - | 58,750 | 59 | 453,175 | - | - | 453,234 | |||||||||||||||||||||||||||
Issuance
of warrants to consultants
|
- | - | - | - | - | 226,732 | - | - | 226,732 | |||||||||||||||||||||||||||
Employee
and director stock based award activity
|
- | - | - | - | - | 1,272,263 | - | - | 1,272,263 | |||||||||||||||||||||||||||
Cancellation
of Common Stock received in litigation settlement with former
employee
|
- | - | - | (2,500 | ) | (2 | ) | 2 | - | - | - | |||||||||||||||||||||||||
Correction
of stock certificate
|
- | - | - | 1 | - | - | - | - | - | |||||||||||||||||||||||||||
Issuance
of Common Stock for shares in PBS
|
- | - | - | 7,500 | 8 | 83,992 | - | - | 84,000 | |||||||||||||||||||||||||||
Reversal
of investment in PBS
|
- | - | - | - | - | (83,992 | ) | - | - | (83,992 | ) | |||||||||||||||||||||||||
Record
gain on warrants
|
- | - | - | - | - | (9,000 | ) | - | - | (9,000 | ) | |||||||||||||||||||||||||
Issuance
of additional investment rights
|
- | - | - | - | - | 600,000 | - | - | 600,000 | |||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | (14,789,641 | ) | (14,789,641 | ) | |||||||||||||||||||||||||
Balances,
September 30, 2006
|
- | - | - | 3,829,028 | 3,829 | 19,103,385 | - | (24,862,513 | ) | (5,755,299 | ) | |||||||||||||||||||||||||
Continued
|
F-9
nFinanSe
Inc.
(A Development Stage
Enterprise)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
Convertible
Preferred Stock
|
Common
Stock
|
Additional
Paid-In
|
Common
Stock Subscribed
and
Note Receivable From
|
Deficit
Accumulated During the Development
|
||||||||||||||||||||||||||||||||
Series
A
|
Series
B
|
Series
C
|
Shares
|
Par
Value
|
Capital
|
Stockholder
|
Stage
|
Total
|
||||||||||||||||||||||||||||
Cancellation
of PBS Common Stock
|
- | - | - | (7,539 | ) | (8 | ) | - | - | - | (8 | ) | ||||||||||||||||||||||||
Employee
and directors stock based award activity
|
- | - | - | - | - | 125,056 | - | - | 125,056 | |||||||||||||||||||||||||||
Amortization
and adjustment of registration rights penalties
|
- | - | - | - | - | 203,689 | - | - | 203,689 | |||||||||||||||||||||||||||
Issuance
of Series A Convertible Preferred Stock
|
9,328 | - | - | - | - | 10,507,985 | - | - | 10,517,313 | |||||||||||||||||||||||||||
Dividends
on Series A Convertible Preferred Stock
|
- | - | - | - | - | 1,000,000 | - | (1,000,000 | ) | - | ||||||||||||||||||||||||||
Accrued
interest satisfied via the issuance of Series A Convertible Preferred
Stock
|
- | - | - | - | - | 68,000 | - | - | 68,000 | |||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | (717,070 | ) | (717,070 | ) | ||||||||||||||||||||||||||
Balances,
December 30, 2006
|
9,328 | - | - | 3,821,489 | 3,821 | 31,008,115 | - | (26,579,583 | ) | 4,441,681 | ||||||||||||||||||||||||||
Employee
and director stock based award activity
|
- | - | - | - | - | 1,996,595 | - | - | 1,996,595 | |||||||||||||||||||||||||||
Issuance
of PBS warrants
|
- | - | - | - | - | 5,600 | - | - | 5,600 | |||||||||||||||||||||||||||
Issuance
of Series B Convertible Preferred Stock
|
- | 1,000 | - | - | - | 2,787,125 | - | - | 2,788,125 | |||||||||||||||||||||||||||
Private
placement of Common Stock
|
- | - | - | 2,023,199 | 2,023 | 5,608,889 | - | - | 5,610,912 | |||||||||||||||||||||||||||
Issuance
of Common Stock in connection with the conversion of Series A Convertible
Preferred Stock to Common Stock
|
(1,508 | ) | - | - | 1,507,450 | 1,508 | - | - | - | - | ||||||||||||||||||||||||||
Issuance
of Common Stock in lieu of cash dividends on Series A Convertible
Preferred Stock that was converted into Common Stock
|
- | - | - | 15,125 | 15 | 52,325 | - | (52,353 | ) | (13 | ) | |||||||||||||||||||||||||
Issuance
of DFS Services LLC warrants
|
- | - | - | - | - | 535,302 | - | - | 535,302 | |||||||||||||||||||||||||||
Exercise
of vested stock options
|
- | - | - | 4,666 | 5 | 8,244 | - | - | 8,249 | |||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | (9,948,094 | ) | (9,948,094 | ) | |||||||||||||||||||||||||
Balances,
December 29, 2007
|
7,820 | 1,000 | - | 7,371,929 | 7,372 | 42,002,195 | - | (36,580,030 | ) | 5,438,357 | ||||||||||||||||||||||||||
Continued
|
F-10
nFinanSe
Inc.
(A Development Stage
Enterprise)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
Convertible
Preferred Stock
|
Common
stock
|
Additional
Paid-In
|
Common
Stock Subscribed
and
Note Receivable From
|
Deficit
Accumulated During the Development
|
||||||||||||||||||||||||||||||||
Series
A
|
Series
B
|
Series
C
|
Shares
|
Par
Value
|
Capital
|
Stockholder
|
Stage
|
Total
|
||||||||||||||||||||||||||||
Employee
and director stock based award activity
|
- | - | - | - | - | 1,920,436 | - | - | 1,920,436 | |||||||||||||||||||||||||||
Issuance
of Series C Convertible Preferred Stock
|
- | - | 4,038 | - | - | 7,565,242 | - | - | 7,569,280 | |||||||||||||||||||||||||||
Private
placement of Common Stock
|
- | - | - | 1,420,000 | 1,420 | 2,660,720 | - | - | 2,662,140 | |||||||||||||||||||||||||||
Issuance
of Common Stock in connection with the conversion of Series A Convertible
Preferred Stock to Common Stock
|
(320 | ) | - | - | 320,000 | 320 | - | - | - | - | ||||||||||||||||||||||||||
Issuance
of Common Stock in lieu of cash dividends on Series A Convertible
Preferred Stock that was converted into Common Stock
|
- | - | - | 182,179 | 182 | 585,504 | - | (585,837 | ) | (151 | ) | |||||||||||||||||||||||||
Shares
issued as settlement without admission of fault for Bedlington Securities
litigation
|
- | - | - | 50,000 | 50 | 50,450 | - | - | 50,500 | |||||||||||||||||||||||||||
Derivative
liability related to exchange feature in the Securities Purchase
arrangement.
|
- | - | - | - | - | 396,032 | - | - | 396,032 | |||||||||||||||||||||||||||
Warrants
issued in connection with Credit Facility Agreements
|
- | - | - | - | - | 1,530,381 | - | - | 1,530,381 | |||||||||||||||||||||||||||
Warrants
issued as compensation for providing collateral on surety
bonds
|
- | - | - | - | - | 59,745 | - | - | 59,745 | |||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | (14,771,474 | ) | (14,771,474 | ) | |||||||||||||||||||||||||
Balances,
January 3, 2009
|
7,500 | 1,000 | 4,038 | 9,344,108 | 9,344 | 56,770,705 | - | (51,937,341 | ) | 4,855,246 | ||||||||||||||||||||||||||
Continued
|
F-11
nFinanSe
Inc.
(A Development Stage
Enterprise)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
Convertible
Preferred Stock
|
Common
stock
|
Additional
Paid-In
|
Common
Stock Subscribed
and
Note Receivable From
|
Deficit
Accumulated During the Development
|
||||||||||||||||||||||||||||||||||||
Series
A
|
Series
B
|
Series
C
|
Series
D
|
Shares
|
Par
Value
|
Capital
|
Stockholder
|
Stage
|
Total
|
|||||||||||||||||||||||||||||||
Employee
and director stock based award activity
|
- | - | - | - | - | - | 471,194 | - | - | 471,194 | ||||||||||||||||||||||||||||||
Issuance
of Series D Convertible Preferred Stock
|
- | - | - | 4,332 | - | - | 12,968,633 | - | - | 12,972,965 | ||||||||||||||||||||||||||||||
Issuance
of Common Stock in lieu of cash dividends on Series A Convertible
Preferred Stock that was converted into Common Stock
|
- | - | - | - | 198,779 | 199 | 188,854 | - | (189,053 | ) | - | |||||||||||||||||||||||||||||
Warrants
issued in connection with Credit Facility Agreements
|
- | - | - | - | - | - | 1,012,004 | - | - | 1,012,004 | ||||||||||||||||||||||||||||||
Warrants
issued as compensation for providing collateral on surety
bonds
|
- | - | - | - | - | - | 9,925 | - | - | 9,925 | ||||||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | - | (13,898,941 | ) | (13,898,941 | ) | ||||||||||||||||||||||||||||
Balances,
January 2, 2010
|
$ | 7,500 | $ | 1,000 | $ | 4,038 | $ | 4,332 | 9,542,887 | $ | 9,543 | $ | 71,421,315 | $ | - | $ | (66,025,335 | ) | $ | 5,422,393 | ||||||||||||||||||||
See notes
to consolidated financial statements
F-12
nFinanSe
Inc.
(A Development Stage
Enterprise)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the
fiscal
year ended
January 2, 2010
|
For
the
fiscal
year ended January 3, 2009
|
For
the period
July
10, 2000
(inception)
to
January
2, 2010
|
||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
Net
loss
|
$ | (13,898,941 | ) | $ | (14,771,474 | ) | $ | (64,198,093 | ) | |||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
Depreciation
and amortization
|
241,129 | 288,571 | 1,491,933 | |||||||||
Provision
for inventory obsolescence
|
247,628 | 146,952 | 913,436 | |||||||||
Provision
for bad debts
|
- | - | 461,972 | |||||||||
Amortization
of intangible assets
|
- | - | 15,485 | |||||||||
Stock
based compensation and consulting
|
471,194 | 1,920,436 | 8,565,996 | |||||||||
Purchased
in process research and development
|
- | - | 153,190 | |||||||||
Loss
(gain) on derivative instruments
|
- | 396,032 | (1,449,230 | ) | ||||||||
Loss
on debt extinguishments
|
- | - | 4,685,518 | |||||||||
Loss on
disposal of assets
|
809 | 394 | 29,572 | |||||||||
Loss
from impairment of assets
|
1,849,421 | 374,180 | 3,319,504 | |||||||||
Debt
forgiveness as a result of litigation settlement
|
- | - | (50,000 | ) | ||||||||
Non-cash
interest expense
|
2,718,676 | 187,277 | 3,621,924 | |||||||||
Value/expense
of third party warrants
|
5,972 | 4,202 | 15,881 | |||||||||
Changes in assets and
liabilities, net:
|
||||||||||||
Restricted
cash
|
129,425 | (472,500 | ) | (343,075 | ) | |||||||
Receivables
|
(124,680 | ) | (45,367 | ) | (502,243 | ) | ||||||
Inventories
|
(252,949 | ) | (1,314,962 | ) | (3,674,321 | ) | ||||||
Prepaid
expenses and other current assets
|
587,053 | 133,765 | 1,554 | |||||||||
Other
assets
|
217,473 | (210,379 | ) | (4,119 | ) | |||||||
Assets
of discontinued operations
|
- | - | (229,060 | ) | ||||||||
Accounts
payable and accrued liabilities
|
(801,490 | ) | (124,823 | ) | 711,624 | |||||||
Accrued
registration rights penalties
|
- | - | 98,649 | |||||||||
Deferred
revenues
|
20,417 | (75,000 | ) | 51,667 | ||||||||
NET
CASH USED IN OPERATING ACTIVITIES
|
(8,588,863 | ) | (13,562,696 | ) | (46,312,236 | ) | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
Purchases
of property and equipment
|
(22,608 | ) | (156,371 | ) | (2,133,313 | ) | ||||||
Early
redemption of short-term investment
|
- | 725,496 | (2,504 | ) | ||||||||
Cash
advanced under note receivable
|
- | - | (202,000 | ) | ||||||||
Other
|
- | - | (30,737 | ) | ||||||||
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES
|
(22,608 | ) | 569,125 | (2,368,554 | ) | |||||||
(Continued)
F-13
nFinanSe
Inc.
(A Development Stage
Enterprise)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Continued)
For
the
fiscal
year ended
January
2, 2010
|
For
the
fiscal
year ended January 3, 2009
|
For
the period
July
10, 2000
(inception)
to
January
2, 2010
|
||||||||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
Proceeds
from issuance of Series A Convertible Preferred Stock
|
- | - | 4,000,000 | |||||||||
Proceeds
from issuance of Series B Convertible Preferred Stock
|
- | - | 3,000,000 | |||||||||
Proceeds
from issuance of Series C Convertible Preferred Stock
|
- | 8,075,000 | 8,075,000 | |||||||||
Proceeds
from issuance of Series D Convertible Preferred Stock
|
7,253,199 | - | 7,253,199 | |||||||||
Proceeds
from borrowings
|
4,700,000 | 1,200,000 | 11,265,162 | |||||||||
Repayments
of notes payable
|
- | - | (147,912 | ) | ||||||||
Collections
on note receivable from stockholder
|
- | - | 3,000,000 | |||||||||
Payment
for deferred financing costs
|
- | (459,606 | ) | (459,606 | ) | |||||||
Payments
for stock issuance costs
|
(22,548 | ) | (683,580 | ) | (1,519,289 | ) | ||||||
Proceeds
from the exercise of vested stock options
|
8,249 | |||||||||||
Proceeds
from the issuance of Common Stock
|
- | 2,840,000 | 18,000,775 | |||||||||
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
11,930,651 | 10,971,814 | 52,475,578 |
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
3,319,180 | (2,021,757 | ) | 3,794,788 | ||||||||
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
475,608 | 2,497,365 | - | |||||||||
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$ | 3,794,788 | $ | 475,608 | $ | 3,794,788 | ||||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||||||
Interest
paid
|
$ | 530,839 | $ | 541,527 | $ | 1,089,362 | ||||||
Income
taxes paid
|
$ | - | $ | - | $ | - | ||||||
SUPPLEMENTAL
DISLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
||||||||||||
Acquisition
of assets by issuance of Common Stock
|
$ | - | $ | - | $ | 818,200 | ||||||
Reclassification
of proceeds from sales of Common Stock to derivative financial instrument
liabilities
|
$ | - | $ | - | $ | 4,007,443 | ||||||
Issuance
of Common Stock for net assets of Pan American Energy Corporation in a
recapitalization - see Note A
|
$ | - | $ | - | $ | 2,969,000 | ||||||
Issuance
of Common Stock in lieu of cash payment of registration
penalties
|
$ | - | $ | - | $ | 652,625 | ||||||
Reclassification
of long-lived assets to assets of discontinued telecom
operations
|
$ | - | $ | - | $ | 100,000 | ||||||
Warrants
Issued to DFS Services, LLC
|
$ | - | $ | - | $ | 535,302 | ||||||
Warrants
Issued to Lenders
|
$ | 1,530,381 | $ | 1,530,381 | $ | 1,530,381 | ||||||
Conversion
of Series A Preferred Stock to Common Stock
|
$ | - | $ | 320 | $ | 1,828 | ||||||
Dividends
on Series A Convertible Stock Preferred Stock
|
$ | 189,054 | $ | 585,837 | $ | 1,827,244 | ||||||
Declared
and unpaid dividends on Series A Convertible Preferred
Stock
|
$ | 179,771 | $ | - | $ | 179,771 | ||||||
Conversion
of Senior Secured Convertible Promissory Notes and accrued interest to
Series A Convertible Preferred Stock
|
$ | - | $ | - | $ | 5,327,934 | ||||||
Exchange
of Accommodation and Term Loans and accrued interest to Series D
Convertible Preferred Stock
|
$ | 5,693,898 | $ | - | $ | 5,693,898 | ||||||
See notes
to consolidated financial statements.
F-14
nFinanSe
Inc.
(A Development Stage
Enterprise)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -FORMATION, BACKGROUND AND OPERATIONS
OF THE COMPANY
The
accompanying consolidated financial statements include the accounts of nFinanSe
Inc. (formerly Morgan Beaumont, Inc., which was originally incorporated under
the laws of the State of Florida on July 10, 2000) and those of its wholly-owned
subsidiaries, nFinanSe Payments Inc. and MBI Services Group, LLC (currently
dormant) (collectively the “Company,” “we, ” “us, ” “our”). All
significant intercompany accounts and balances have been eliminated in
consolidation. Because we are continuing to raise funds, and because our
revenues have been minimal, we are considered to be a development stage
enterprise pursuant to an applicable Accounting Standards Codification (“ASC”). Our accounting
policies are consistent with the criteria set forth in ASC and Securities and
Exchange Commission (“SEC”) guidance.
We began
operations by developing a technology platform to enable us to sell stored value
cards (“SVCs”) to the un-banked and under-banked market. Typically, this market
is primarily composed of “credit challenged” or “cash-based”
consumers
In August
2004, we consummated a merger and recapitalization with Pan American Energy Corp
(“PAEC”), a publicly traded company that was incorporated under the laws of the
State of Nevada on May 26, 2000. From a legal perspective, PAEC was the
surviving company and thus continued its public reporting obligations; however
for financial statement purposes, the transaction was treated as a reverse
merger and a recapitalization whereby we were deemed to be the acquirer and no
goodwill or other intangible assets were recorded. In connection with our merger
with PAEC, our fiscal year end was changed from December 31 to September
30. Because our distributor arrangements generally operate on a
weekly cycle, in 2006, we changed our year end to the Saturday closest to
December 31 of each year.
In 2005,
we began selling wholesale telecommunications services and we launched prepaid
phone cards in an effort to develop brand recognition in the credit challenged
or cash-based consumer market. However, the phone card operation struggled with
unacceptable operating losses which were draining resources from our core SVC
business. We made the decision to abandon MBI Services Group, LLC’s
prepaid telephone card business in the fourth quarter of fiscal
2006. We accounted for this discontinued operation using the
component-business approach. As such, the results of MBI Services Group, LLC
have been eliminated from ongoing operations for all periods presented and shown
as a single line item on the statements of operations entitled “Loss from
discontinued operations” for each period presented.
During
the years leading up to fiscal 2006, we were primarily focused on selling Visa®
and MasterCard® SVCs and experienced significant difficulties and interruptions
with our third-party card issuers due to administrative errors, defective cards
and poor service. Additionally, it became apparent to management that there was
a flaw in focusing solely on the sale of SVC products that did not include a
convenient load solution for consumers. Consequently, management made the
decision to expand our focus to include the development of a process, which
became known as the nFinanSe Network TM, to
allow the consumer to perform value loads in a retail environment. To enhance
the load center footprint, in fiscal 2006, we entered into agreements with
MoneyGram® and Western Union® whereby our SVCs could be loaded at their
locations.
Further,
in 2006, and as amended in June 2007, we signed an agreement with DFS Services,
LLC that permits us to provide Discover® Network-branded SVCs directly or
through a card issuing bank. We believe the Discover® Network SVC products have
multiple competitive advantages over the SVCs we were previously selling.
Consequently, we focused on implementing the agreement with DFS Services, LLC in
lieu of pursuing SVC sales through our existing arrangements. Accordingly, our
sales efforts were interrupted while we developed our new Discover® Network SVC
programs and abandoned our then-existing SVC programs by disposing of the
associated SVC inventory. The time and money lost due to the difficulties and
interruptions we experienced hindered our progress and ability to make a
profit.
F-15
In late
2006, we developed a new go-to-market strategy centered on marketing bank-issued
Discover® Network-branded SVCs through well-established prepaid card
distributors combined with the load performing ability of the nFinanSe
Network™. In 2007, we secured agreements with several prepaid card
distributors including Interactive Communications (“InComm”), which
distributes prepaid card products to retailers with more than 100,000 locations
throughout the United States. We had to source a new bank to issue
cards for InComm’s retailers and we began the task of integrating our network
with InComm’s. Additionally, the issuing bank required that we
immediately begin making applications for licenses in those states claiming
jurisdiction over SVCs. The general spend card is a relatively new product for
most distributors and it has taken time to integrate with distributors and to
market to their retail partners. During the fourth quarter of 2008, several
large InComm retailers began marketing our cards.
We have
obtained a United States Treasury, Federal Crime Enforcement Network Federal
Money Services Business License, which is required by some states to conduct our
operations. In addition, 43 states, along with the District of
Columbia, have established laws or regulations requiring entities loading money
on cards or processing such transactions, to be licensed by the state unless
that entity has a federal or state banking charter. Although we offer our
cards in conjunction with national banking institutions that have such federal
or state banking charters, on October 2, 2007, we created our wholly owned
subsidiary, nFinanSe Payments Inc., for the express purpose of acquiring the
required state licenses. We now have the requisite license from 41 states and
the District of Columbia. We do not plan to offer cards in the remaining two
states (Vermont and Hawaii) that require licenses and have not applied for a
license in either state.
In
September 2009, we completed an agreement with VISA® USA Inc. that permits us to
provide a co-branded VISA prepaid SVC product through a card-issuing
bank. We began marketing and implementing the agreement through our
existing channels in late 2009. Additionally, in November 2009 we
executed an agreement with American Express® Travel Related Services Company,
Inc. which allows us to market, offer and support an American Express® gift card
program.
Revenue
Recognition
We
generate the following types of revenues:
•
|
Wholesale
fees, charged to our prepaid card distributors when our SVCs are sold or
reloaded.
|
•
|
Transaction
fees, paid by the applicable networks and passed through by our card
issuing banks when our SVCs are used in a purchase or ATM
transaction.
|
•
|
Maintenance
fees, charged to an SVC with a cash balance for initial activation and
monthly maintenance.
|
•
|
Interest
revenue, on overnight investing of SVC balances by our card issuing
bank.
|
In July
2009, we made the decision to follow common industry practice in connection with
the initial sale of a reloadable SVC. As such, we lowered the retail price of
our reloadable general spend card from $5.95 collected at the point of sale to
$3.00 and we charge a $2.95 maintenance/activation fee to the card balance upon
activation by the card holder. As a result, in accordance with our
existing distribution contracts, the fees previously retained by the
retailer/distributor at the point of sale now exceed the amount that is
collected at point of sale. As such, we now pay to the distributor a “Retailer
Fee” when our SVCs are sold as opposed to collecting a wholesale fee. The
difference is recouped when we charge the initial $2.95 maintenance fee. The net
result is essentially the same, but the manner in which it is collected now
follows common industry practice. We still charge a wholesale fee for reload
transactions.
We
recognize revenue when (1) there is persuasive evidence of an arrangement
existing, (2) delivery has occurred, (3) our price to the buyer is fixed or
determinable and (4) collectibility of the receivables is reasonably assured. We
recognize the costs of these revenues, including the cost of printing the cards,
packaging and collateral material, at the time revenue is
recognized. Certain periodic card costs are recognized as
incurred.
Accounts Receivable and
Allowance for Doubtful Accounts
Our
credit terms to our prepaid card distributors for our wholesale fees and the
load value of gift cards and of the reloadable general spend cards vary by
customer but are less than two weeks. Payroll card loads are remitted by the
sponsor company directly to the issuing bank, in advance. Transaction fees are
paid daily, one day in arrears by our card networks, Discover® Network and
VISA®. Interest income is paid monthly in arrears by the card-issuing
bank approximately two weeks into the month following the recognition of such
fees or interest income. Maintenance fees are charged to active cards
with balances upon activation and then on the same day of each month in
arrears.
F-16
Accounts
receivable are determined to be past due if payment is not made in accordance
with the terms of our contracts. Receivables are written off when they are
determined to be uncollectible. Our customers are typically prepaid
card distributors and large multi-unit retailers. We perform ongoing credit
evaluations of our customers and, with the exception of some minimum cash
balances, we generally do not require collateral.
We
evaluate the allowance for doubtful accounts based upon our review of the
collectability of our receivables in light of historical experience, adverse
situations that may affect our customers’ ability to repay, estimated value of
any underlying collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
Use of
Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America (“GAAP”) requires
us to make certain estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements. The reported amounts of
revenues and expenses during the reporting period may be affected by the
estimates and assumptions we are required to make. Estimates that are critical
to the accompanying consolidated financial statements arise from our belief that
(1) we will be able to raise and generate sufficient cash to continue as a going
concern (2) all long-lived assets are recoverable, and (3) our inventory is
properly valued and deemed recoverable. In addition, stock-based
compensation expense represents a significant estimate. The markets
for our products are characterized by intense competition, rapid technological
development, evolving standards and regulations and short product life cycles,
all of which could impact the future realization of our assets. Estimates and
assumptions are reviewed periodically and the effects of revisions are reflected
in the period that they are determined to be necessary. It is at least
reasonably possible that our estimates could change in the near term with
respect to these matters.
Cash and Cash
Equivalents
For
purposes of the statement of cash flows, we consider all highly liquid
investments with an original maturity of thirteen weeks or less to be cash
equivalents.
Restricted
Cash
Funds
classified as restricted cash as at January 2, 2010 relate to loan advances on
our credit facility, as described in Note C – Credit Facility and Term
Notes.
Inventories
Inventories
are charged to operations using the first in, first out method. Our inventory
costs generally arise from costs incurred to produce SVCs, including costs for
plastic and packaging, embossing fees, printing fees and
shipping. Inventories consist of the following:
January
2, 2010
|
January
3, 2009
|
|||||
Finished
cards
|
$
|
3,359,927
|
$
|
2,582,661
|
||
Inventory
in process
|
11,663
|
474,533
|
||||
3,371,590
|
3,057,194
|
|||||
Less
reserve for damaged and obsolete inventory at distributors and inventory
to be destroyed
|
1,954,700
|
171,415
|
||||
Total
Inventories
|
$
|
1,416,890
|
$
|
2,885,779
|
F-17
During
the fiscal year ended January 2, 2010 (“2009” or “fiscal 2009”), we
recognized impairment charges of $1,474,209 on certain inventory items printed
in 2007 that are scheduled to be destroyed or that have an expiration date of
less than six months prior to their expiration. During the fiscal
year ended January 3, 2009 (“2008” or “fiscal 2008”), in addition to
increasing our reserve for damaged and obsolete inventory at distributors, we
also recorded a $224,400 inventory impairment charge for gift cards printed in
2006 that have an expiration date of less than twelve months prior to their
projected date of deployment. These inventory impairment charges are
included in transaction and operating expenses in the accompanying statement of
operations.
Property and
Equipment
Property
and equipment are stated at cost. Major additions are capitalized, but minor
additions which do not extend the useful life of an asset, and maintenance and
repairs are expensed as incurred. Depreciation and amortization are provided
using the straight-line method over the shorter of the lease term, if any, or
the assets' estimated useful lives, which range from three to ten
years.
Long-Lived
Assets
In
accordance with applicable ASC guidance, we evaluate the recoverability of
long-lived assets and the related estimated remaining lives when events or
circumstances lead us to believe that the carrying value of an asset may not be
recoverable. During fiscal 2009, we recognized impairment charges of $375,212 on
an intangible asset related to a marketing incentive
agreement. During fiscal 2008, we recognized an impairment charge of
$149,743 on the same intangible asset. These impairment charges are
included in general and administrative expenses in the accompanying statements
of operations
As of
January 2, 2010, our estimates indicate that the remaining long-lived assets are
recoverable.
Advertising
Costs
Advertising
expenses, which were approximately $354,400 and $1,200,500 during fiscal 2009
and 2008, respectively, are expensed as incurred. The majority of advertising
for fiscal 2009 was related to attending trade shows and employing media
consultants, while the majority of advertising for fiscal 2008 was related to
national trade print advertising. At January 2, 2010 and January 3,
2009, we had approximately $30,800 and $224,600, respectively, in prepaid
marketing of which the majority is related to product placement payments and
advertising promotional payments made to a nation-wide retailer. The product
placement payments are being amortized as a reduction of revenue over the
contract period and the promotional payments are expensed when the advertising
event occurs.
Research and
Development
Research
and development costs, which approximated $1,075,400 and $1,243,800 during
fiscal 2009 and fiscal 2008, respectively, are expensed as
incurred. These costs are primarily related to network software
development, security compliance and systems maintenance.
Net Loss Per
Share
Basic net
loss per share is computed by dividing the net loss attributable to common
stockholders for the period after deducting dividends on our Series A
Convertible Preferred Stock (“Series A Preferred
Stock”) by the weighted average number of common shares outstanding
during the period. Diluted net loss per share is computed by dividing the net
loss for the period by the number of common and common equivalent shares
outstanding during the period (common stock equivalents arise from options,
warrants and convertible preferred stock). Because of our net losses, none of
these common stock equivalents have been dilutive at any time since our
inception; accordingly basic and diluted net loss per share are identical for
each of the periods in the accompanying consolidated statements of
operations.
F-18
The
following table lists the total of the Company’s common stock, par value $0.001
per share (the “Common
Stock”) and our common stock equivalents outstanding at January 2,
2010:
Description
|
Shares
of Common Stock and Common Stock Equivalents Outstanding
|
||
Common
Stock
|
9,542,887
|
||
Series
A Convertible Preferred Stock *
|
7,500,484
|
||
Series
B Convertible Preferred Stock *
|
1,000,000
|
||
Series
C Convertible Preferred Stock *
|
4,037,500
|
||
Series
D Convertible Preferred Stock *
|
43,318,380
|
||
Stock
Options
|
3,012,638
|
||
Warrants
|
57,759,385
|
||
Total
|
126,171,274
|
||
* as-converted.
|
Income
Taxes
Under the
ASC’s, deferred taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory rates applicable to future years to
differences between the financial statement carrying amounts and the tax basis
of existing assets and liabilities. The effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment
date. Significant temporary differences arise primarily from reserves for
inventory obsolescence, impairment charges and accounts payable and accrued
liabilities that are not deductible for tax reporting until they are realized
and/or paid. See Note D – Income Taxes.
Financial Instruments and
Concentrations
Financial
instruments, consist of cash, evidence of ownership in an entity and contracts
that both (1) impose on one entity a contractual obligation to deliver cash or
another financial instrument to a second entity, or to exchange other financial
instruments on potentially unfavorable terms with the second entity, and (2)
conveys to that second entity a contractual right (a) to receive cash or another
financial instrument from the first entity or (b) to exchange other financial
instruments on potentially favorable terms with the first entity. Our financial
instruments consist primarily of cash and cash equivalents, restricted cash,
short-term investment(s), accounts receivable, accounts payable, accrued
liabilities and credit facilities. The carrying values of these
financial instruments approximate their respective fair values due to their
short-term nature.
Financial
instruments that potentially subject us to significant concentrations of credit
risk consist primarily of cash and cash equivalents, restricted cash and
accounts receivable. We frequently maintain cash balances in excess of federally
insured limits. However, we believe that cash balances held in non interest
bearing accounts are fully insured at this time. As such, with interest rates at
historical lows, we have made the decision to maintain cash balances at more
than one bank to diversify our exposure and to use our non-interest-earning
balances to lower any banking fees. Our revenues and accounts receivable balance
is and is expected to be primarily composed of amounts generated from our
largest distributor, InComm. We have not experienced any losses from
receivables due from InComm.
Stock-Based
Compensation
We
account for stock-based compensation utilizing the fair value recognition
pursuant to an ASC. This statement requires us to recognize compensation expense
in an amount equal to the grant-date fair value of shared-based payments such as
stock options granted to employees. These options generally vest over
a period of time and the related compensation cost is recognized over that
vesting period.
F-19
The
following table summarizes our stock-based compensation expense:
Stock-based
compensation charged to:
|
For
the
fiscal
year ended
January 2, 2010
|
For
the
fiscal
year ended
January
3, 2009
|
||||||
Transaction
and operating expenses
|
$ | 3,575 | $ | 399 | ||||
Selling
and marketing expenses
|
125,410 | 218,165 | ||||||
General
and administrative expenses
|
341,352 | 1,701,872 | ||||||
Interest
expense
|
9,925 | 59,745 | ||||||
Total
stock-based compensation
|
$ | 480,262 | $ | 1,980,181 | ||||
Amounts
charged to interest expense represent the costs of warrants issued as
compensation to Mr. Bruce E. Terker, one of the Company’s directors, for
supplying a portion of the required collateral for bonds issued to support our
state money transmitter licenses.
Dividends on Preferred
Stock
Our
Series A Preferred Stock accrues dividends of 5% per annum, which are paid
semiannually and can be satisfied in cash or through the issuance of Common
Stock. Unless and until these dividends are declared and paid in
full, the Company is prohibited from declaring any dividends on its Common
Stock. Pursuant to the Company’s Amended and Restated Loan and
Security Agreement, dated November 26, 2008 (see Note C – Credit Facility and
Term Notes), the Company is limited to paying $500,000 in any fiscal year for
cash dividends or other cash distributions to the holders of shares of Series A
Preferred Stock. There are no dividend requirements on our Series B
Convertible Preferred Stock, on our Series C Convertible Preferred Stock or on
our Series D Convertible Preferred Stock.
Dividends
owed but not declared on our Series A Preferred Stock were $192,136 as of January 3, 2009, which were
subsequently satisfied through the issuance of Common Stock. On
August 11, 2009, the Company’s Board of Directors (the “Board”) declared
$179,772 in dividends due through June 30, 2009 to be paid through the issuance
of 391,565 shares of our Common Stock, which remain unpaid as of January 2,
2010. Dividends owed but not declared on our Series A Preferred Stock
were $204,609 as of January 2, 2010. During fiscal 2008, dividends
were also paid on the voluntary conversion of 320,000 shares of Series A
Preferred Stock into 320,000 shares of Common Stock, in the form of 1,301 shares
of Common Stock.
Fair
Value Measurements
In
October 2008, a clarification to the standard was issued. It
clarifies the application of fair value in inactive markets and allows for the
use of management's internal assumptions about future cash flows with
appropriately risk-adjusted discount rates when relevant observable market data
does not exist. The objective of the accounting standard has not changed and
continues to be the determination of the price that would be received in an
orderly transaction that is not a forced liquidation or distressed sale at the
measurement date.
At
January 2, 2010, the Company did not have any items to be measured at fair
value.
F-20
Reclassifications
Certain
amounts in the inception-to-date financial statements have been reclassified to
conform to the current year presentation.
Recently Issued Accounting
Pronouncements
In April
2009, an accounting standard regarding accounting for assets acquired and
liabilities assumed in a business combination that arise from contingencies was
released. It addresses the initial recognition, measurement and
subsequent accounting for assets and liabilities arising from contingencies in a
business combination, and requires that such assets acquired or liabilities
assumed be initially recognized at fair value at the acquisition date if fair
value can be determined during the measurement period. If the acquisition-date
fair value cannot be determined, the asset acquired or liability assumed arising
from a contingency is recognized only if certain criteria are
met. The standard also requires that a systematic and rational basis
for subsequently measuring and accounting for the assets or liabilities be
developed depending on their nature. The standard is effective for
assets or liabilities arising from contingencies in business combinations for
which the acquisition date is during or after 2010. The Company does not
anticipate that the adoption of this statement will have a material impact on
its consolidated financial statements, absent any material business
combinations.
In April
2009, the Financial Accounting Standards Board (the “FASB”) issued the
following three standards intended to provide additional application guidance
and enhance disclosures regarding fair value measurements and impairments of
securities:
One
standard provides additional guidance for estimating fair value when the volume
and level of activity for the asset or liability have decreased
significantly. The standard also provides guidance on identifying
circumstances that indicate a transaction is not orderly. Its
adoption did not affect the Company’s consolidated financial
statements.
The
second standard requires disclosures about fair value of financial instruments
in interim reporting periods of publicly traded companies that were previously
only required to be disclosed in annual financial statements. As this
standard amends only the disclosure requirements about fair value of financial
instruments in interim periods, its adoption did not affect the Company’s
consolidated financial statements.
The third
standard amends current other-than-temporary impairment guidance in GAAP for
debt securities to make the guidance more operational and to improve the
presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements. This standard does not
amend existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities. The adoption of
this standard did not affect the Company’s consolidated financial
statements.
In
June 2009, the FASB issued a standard regarding accounting for transfers of
financial assets. The provisions of this standard amend previous
guidance by removing the concept of a qualifying special-purpose entity and
removing an exception regarding variable interest entities that were previously
considered qualifying special-purpose entities. The provisions of the standard
will become effective for us on January 3, 2010. The adoption of this
standard is not expected to affect the Company’s consolidated financial
statements.
NOTE
B - GOING CONCERN
Our
consolidated financial statements are prepared using GAAP as applicable to a
going concern, which contemplate the realization of assets and liquidation of
liabilities in the normal course of business. Our operations have
historically been funded primarily through equity capital. During
fiscal 2009, in order to fund our operations, we received short term financing
from several of our major stakeholders, two of which are affiliated with Mr.
Terker, one of our directors. From August through December 2009, we
issued 4,331,838 shares of Series D Preferred Stock and 43,318,380
warrants for the aggregate purchase price of $12,995,514, $7,301,616 of
which was paid by investors in cash and $5,693,898 was paid by investors through
the exchanges of a like amount of certain outstanding accommodation loans, term
loans and accrued interest payable thereon referred to here and described in
Note C. Because of our operating losses, at January 2, 2010, we have
a cash balance of approximately $3,794,800 which amount is not expected to be
adequate to meet our anticipated cash commitments in 2010. To meet
our cash needs, we expect to raise between $3 and $5 million in additional net
equity capital to fund our 2010 fiscal year operations. We estimate this
additional equity will be needed for us to reach a critical mass of cards in the
marketplace and achieve positive cashflow.
F-21
Although
we reasonably believe that we will be successful in raising the required equity
we need to fund our operations and cash commitments, no assurance can be given
that we will be able to do so. Additionally, we have incurred
significant losses and negative cash flows from operations since our inception,
and as a result no assurance can be given that we will be successful in
attaining profitable operations, especially when one considers the problems,
expenses and complications frequently encountered in connection with entrance
into established markets and the competitive environment in which we
operate.
These
factors, among others, indicate that we may be unable to continue as a going
concern for a reasonable period of time. Our consolidated financial statements
do not include any adjustments relating to the recoverability and classification
of recorded asset amounts or the amounts and classification of liabilities that
might be necessary should we be unable to continue as a going
concern.
NOTE
C – CREDIT FACILITY and TERM NOTES
Credit
Facility
On June
10, 2008, the Company and its wholly owned subsidiary, nFinanSe Payments Inc.
(collectively, the “Borrowers”), entered
into a Loan and Security Agreement (the “Original Loan
Agreement”) and, on November 26, 2008, entered into an Amended and
Restated Loan and Security Agreement (the “Amended and Restated Loan
Agreement”) with Ballyshannon Partners, L.P., Ballyshannon Family
Partnership, L.P., Midsummer Investment, Ltd., Porter Partners, L.P.
and Trellus Partners, L.P. (collectively, the “Lenders”). The
Original Loan Agreement established a revolving credit facility in the maximum
aggregate principal amount of $15,500,000 (the “Credit Facility”),
with the Borrowers’ obligations secured by a lien on substantially all of the
Company’s assets. Loans under the Original Loan Agreement (each, a
“Loan”) may be
used solely to make payments to card-issuing banks for credit to
SVCs. The Amended and Restated Loan Agreement modified the Original
Loan Agreement by establishing a sub-commitment of $3,400,000, pursuant to which
each Lender, excluding Midsummer Investment, Ltd., which did not participate in
the sub-commitment, in its sole discretion, may advance funds (each, an “Accommodation Loan”)
that may be used by the Company for working capital expenditures, working
capital needs and other general corporate purposes. Loans and
Accommodation Loans will be funded by the Lenders into separately controlled
accounts subject to the Lenders’ lien. Loan amounts deposited into a
lender-controlled loan account are reflected as Restricted Cash on our balance
sheet and bear interest at 6% per annum until withdrawn (for the sole purpose of
funding SVCs) from that deposit account, at which time they bear interest at 16%
per annum. Accommodation Loans are funded into a company-controlled
operating account and bear interest at 16% per annum. Loans may be
repaid and re-borrowed in accordance with the provisions of the Original Loan
Agreement. Accommodation Loans may be repaid and re-borrowed in
accordance with the provisions of the Amended and Restated Loan Agreement,
including the requirement that upon the occurrence and during an event of
default, Accommodation Loans will be repaid after the repayment in full of all
other loans under the Credit Facility.
Prior to
its conversion as discussed below, the maturity date of the Credit Facility was
November 25, 2009, one year after the initial borrowing. On October
29, 2009, the Lenders approved the extension of maturity for an additional six
months, or May 25, 2010, upon the satisfaction of certain conditions set forth
in the Amended and Restated Loan Agreement. The Credit Facility
provides for usual and customary events of default, including but not limited to
(i) the occurrence of a Material Adverse Change and (ii) the occurrence of a
Change of Control (as such terms are defined in the Amended and Restated Loan
Agreement). The Credit Facility contemplates that, with the Lenders’
consent, the maximum commitment may be increased to up to $20,000,000, and
additional lenders may be added.
As of
January 2, 2010, the Borrowers had drawn $500,000 under the Amended and Restated
Loan Agreement.
The
Lenders received warrants dated July 21, 2008 (the “Original Warrants”)
entitling the Lenders to purchase up to an aggregate of 1,007,500 shares of
Common Stock at an exercise price of $2.30 per share, which exercise price is
subject to customary adjustments for Common Stock splits and reverse stock
splits. The warrants expire after five years and may be exercised by
means of a “cashless exercise.” The Original Warrants were valued
using the Black-Scholes option pricing model at an aggregate fair value of
approximately $1.4 million, which amount was recorded as deferred financing
costs and is being amortized over the twelve-month period to the initial
maturity of the Original Loan Agreement on November 25, 2009.
F-22
As
consideration for providing the Accommodation Loans, the Company agreed to issue
new warrants (the “Accommodation Loan
Warrants”) to the Accommodation Lenders (as such term is defined in the
Amended and Restated Loan Agreement) entitling them to purchase up to an
aggregate of 1,700,000 shares of Common Stock at a per share price of $2.00,
which exercise price is subject to customary adjustments for Common Stock splits
and reverse stock splits. The Accommodation Loan Warrants expire on November 26,
2010.
The fair
value of these warrants of $314,940, determined using the Black-Scholes option
pricing model, was recorded as an increase to deferred financing costs and is
being amortized over the period to the maturity of the Credit Facility on
November 25, 2009. On February 3, 2009, as further consideration for
the commitment by the Accommodation Loan Lenders to fund up to $3.4 million in
Accommodation Loans, the Company also agreed to amend all warrants held by the
participating Accommodation Loan Lenders and any further Accommodation Loan
Warrants to be issued such that the exercise price was reduced to $1.00 per
share. This amendment to the existing warrants held by the
participating Accommodation Loan Lenders was valued using the Black-Scholes
option pricing model and the resulting aggregate fair value of $620,517 was
recorded as an increase to deferred financing costs.
Collins
Stewart LLC and Emerging Growth Equities, Ltd. (“EGE”) acted as
placement agents for Original Loan Agreement and shared equally a $310,000
fee. The placement agent fees are reflected in deferred financing
costs.
Mr.
Terker, a current member of the Board of Directors of the Company, has sole
voting and dispositive power over the securities held by Ballyshannon Partners,
L.P. and its affiliates, two of which are Accommodation Loan
Lenders. Mr. Terker has a financial interest in such entities, and,
as such, has a financial interest in the Amended and Restated Loan Agreement,
the Warrant Amendments and the Accommodation Loan Warrants.
Term
Loan Notes
Commencing
on May 7, 2009, the Company sold term loan notes (the “June Term Loan
Notes”) with a principal amount of $1,000,000. The June Term
Loan Notes accrue interest at 10% annually and were amended to mature on August
31, 2009. The Company’s obligations under the June Term Loan Notes
are secured by a lien on substantially all of its assets. The Term Loan
Notes were purchased by each of Ballyshannon Partners, L.P., Odyssey Capital
Group, L.P., Lancaster Investment Partners, L.P., 5 Star Partnership, L.P., EDJ
Limited and Trellus Partners, L.P.
The June
Term Loan Notes provide for usual and customary events of default, including but
not limited to (i) failure to pay interest or any fees within three business
days of the date when due, and (ii) the occurrence of any event of default under
the Amended and Restated Loan Agreement.
Mr.
Terker, a current member of the Board, has sole voting and dispositive power
over the securities held by Ballyshannon Partners, L.P. and its affiliates, two
of which are purchasers of the June Term Loan Notes. Mr. Terker has a
financial interest in such entities, and, as such, has a financial interest in
the offering of the June Term Loan Notes and the June and the Term Loan
Notes.
In
connection with the June Term Loan Notes, the purchasers of the June Term Loan
Notes entered into an Intercreditor Agreement with the Company and the
Accommodation Lenders. Upon the occurrence and during an event of
default under the June Term Loan Notes, the June Term Loan Notes shall be repaid
after the repayment in full of the Accounts Receivable Loans (as defined in the
Amended and Restated Loan Agreement) and prior to any repayment of the
Accommodation Loans.
Pursuant
to the terms and conditions of the June Term Loan Notes, the Company issued
warrants (the “June
Term Note Warrants”) to the purchasers of June Term Loan Notes, which, in
the aggregate, entitled such June Term Loan Note holders to purchase an
aggregate of 2,000,000 shares of Common Stock at a per share price of $0.50,
which exercise price is subject to customary adjustments for Common Stock splits
and reverse stock splits.
In June
2009, the Company received permission from the required lenders of the Amended
and Restated Credit Agreement as well as the requisite holders of its Series A
Preferred Stock to issue up to an additional $1 million of Term Loans (the
“July Term
Loans”), Commencing on July 3, 2009, the Company sold the July Term Loans
with a principal amount of $1,000,000. The July Term Loans accrue
interest at 10% annually and mature on August 31, 2009. The July Term
Loans were purchased by each of Ballyshannon Partners, L.P., Odyssey Capital
Group, L.P. and Lancaster Investment Partners.
F-23
Pursuant
to the terms and conditions of the July Term Loans, the Company agreed to issue
warrants (the “July
Term Loan Warrants”) to the purchasers of the July Term Loans, which, in
the aggregate, entitled such holders to purchase a like amount of Common Stock
at a per share price equal to the conversion price of Series D Preferred stock
sold for cash, or 3,333,333 shares at $0.30 per share, which exercise price is
subject to customary adjustments for Common Stock splits and reverse stock
splits. Additionally, the Company agreed to modify the number and
exercise price of the June Term Note Warrants to a like amount. The
June Term Note Warrants were subsequently amended such that the total was
increased from 2,000,000 to 3,333,332 and the exercise price was reduced from
$0.50 to $0.30 in connection with the sale of the July Term Loans.
The June
Term Note Warrants and the July Term Loan Warrants (“Term Note Warrants”)
expire after a five-year term. The Term Note Warrants may not be
exercised by means of a “cashless exercise.” In the event that the
Company shall consolidate with or merge with or into another person or entity,
or the Company shall sell, transfer or lease all or substantially all of its
assets, or the Company shall change its Common Stock into property or other
securities (each, a “Triggering
Transaction”), the Term Note Warrants shall terminate and shall
thereafter represent only the right to receive the cash, evidences of
indebtedness or other property as the holders of the Notes would have received
had they been the record owner, at the time of completion of a Triggering
Transaction, of that number of shares of Common Stock receivable upon exercise
of the Term Note Warrants in full, less the aggregate exercise price payable in
connection with the full exercise of the Term Note Warrants. The Term
Note Warrants are not exercisable by the holders of the Term Loan Notes to the
extent that, if exercised, they or any of their affiliates would beneficially
own in excess of 9.99% of the then issued and outstanding shares of Common
Stock. The Term Note Warrants were valued using the Black-Scholes
option pricing model and the resulting aggregate fair value of $755,768 was
recorded as an increase to deferred financing costs.
As
written above, Mr. Terker, a current member of the Board, has sole voting and
dispositive power over the securities held by Ballyshannon Partners, L.P. and
its affiliates, two of which are recipients of Term Note
Warrants. Mr. Terker has a financial interest in such entities, and,
as such, has a financial interest in the June Term Loan Notes, the July Term
Loans and the Term Note Warrants.
The
Accommodation Loans, June Term Loan Notes, the July Term Loans and accrued
interest thereon were exchanged for Series D Preferred Stock on August 21, 2009
as described in Note H – Common Stock and Convertible Preferred Stock
Transactions. As of the exchange date, all unamortized deferred
financing costs were recorded to additional paid-in-capital. All Term
Note Warrants were amended in connection with the purchase of the Series D
Preferred Stock that reduced the exercise price to $0.01 per share.
NOTE
D – INCOME TAXES
We
recognized losses for both financial and tax reporting purposes during each of
the periods in the accompanying consolidated statements of operations.
Accordingly, no provisions for income taxes or deferred income taxes payable
have been provided for in the accompanying consolidated financial
statements.
We
believe that on December 28, 2006, we triggered the “change in control”
provisions of the Internal Revenue Code limiting our $16.1 million operating
loss carry forwards up to that date, to approximately $242,000 per year until
such carryforwards expire. Assuming our additional net operating loss carry
forwards incurred in fiscal years 2007, 2008 and 2009 are not disallowed by
taxing authorities because of such change in control provisions, at January 2,
2010, we have total net operating loss carry forwards of approximately $35.3
million for income tax purposes. In addition to the reduction of
operating loss carry forwards arising from the change in control, our net
operating loss carry forwards differ from our deficit primarily due to dividends
paid on Series A Convertible Preferred Stock and the loss on derivative
financial instruments and certain stock based compensation and impairment
expenses that are considered to be permanent differences between book and tax
reporting. These loss carry forwards expire in various years through the year
ending December 31, 2029. Components of our net current and
non-current deferred income tax assets, assuming an effective income tax rate of
39.5%, are approximately as follows at January 2, 2010:
Net
current deferred income tax asset:
|
||||
Accounts
payable and accrued liabilities
|
$ | 164,100 | ||
Deferred
revenues (net of receivables)
|
(51,700 | ) | ||
Prepaid
expenses and other assets
|
(89,100 | ) | ||
Subtotal
|
23,300 | |||
Less
valuation allowance
|
(23,300 | ) | ||
Net
current deferred income tax asset
|
$ | - | ||
Non-current
deferred income tax asset:
|
||||
Intangibles
|
$ | 10,600 | ||
Net
operating loss carry forwards
|
13,296,100 | |||
Subtotal
|
13,306,700 | |||
Less
valuation allowance
|
(13,306,700 | ) | ||
Non-current
deferred income tax asset
|
$ | - |
F-24
Our
deferred income tax assets are not recorded in the accompanying consolidated
balance sheet because we established valuation allowances to fully reserve them
as their realization did not meet the required asset recognition standard
established by accounting standards. The total valuation allowance increased by
approximately $3,876,900 for the fiscal year ended January 2, 2010.
NOTE
E - PROPERTY AND EQUIPMENT
Property
and equipment consists of the following:
Description
|
January
2, 2010
|
January
3, 2009
|
||||||
Furniture,
fixtures and equipment
|
$ | 952,435 | $ | 932,229 | ||||
Computer
software
|
200,462 | 200,462 | ||||||
Leasehold
improvements
|
196,840 | 196,840 | ||||||
1,349,737 | 1,329,531 | |||||||
Less
accumulated depreciation and amortization
|
(944,122 | ) | (703,785 | ) | ||||
Property
and equipment – net
|
$ | 405,615 | $ | 625,746 |
NOTE
F - COMMITMENTS AND CONTINGENCIES
Operating
Leases
We are
obligated under various operating lease agreements for our
facilities. Future minimum lease payments and anticipated common area
maintenance charges under all of our operating leases are approximately as
follows at January 2, 2010:
Fiscal
year ending
|
Amounts
|
|||
2010
|
$ | 215,800 | ||
2011
|
205,000 | |||
2012
|
156,300 | |||
2013
|
- | |||
2014
|
- | |||
Total
|
$ | 577,100 |
Rent
expense included in loss from continuing operations for fiscal 2009 and fiscal
2008, was approximately $261,800 and $362,300, respectively.
F-25
Employment
Agreements
We are
obligated under employment agreements with our Chief Executive Officer, Jerry R.
Welch, and our Chief Financial Officer, Raymond P. Springer. The
employment agreements had an initial term from September 5, 2006 to December 31,
2008 and were automatically renewed for two years with a new expiration date of
December 31, 2010. The employment agreements provide to Messrs. Welch
and Springer a current annual salary of $275,000 and $200,000, respectively.
Each agreement is to be automatically renewed indefinitely for succeeding terms
of two years unless otherwise terminated in accordance with the
agreement. Both Mr. Welch and Mr. Springer also receive
performance-based bonuses and certain medical and other benefits. If
we terminate Mr. Welch or Mr. Springer without cause, we will be required to pay
severance to them in the amount of compensation and benefits they would have
otherwise earned in the remaining term of their employment agreements or twelve
months, whichever period is shorter.
In
addition to the above, Messrs. Welch and Springer received certain stock options
as described in Note G – Stock Options and Warrants.
Service and Purchase
Agreements
We have
entered into renewable contracts with DFS Services LLC and VISA® U.S.A. Inc.,
our card networks, Palm Desert National Bank (“PDNB”), and First
Bank & Trust (“FB&T”), our
card-issuing banks, Metavante Corporation (“Metavante”), our
processor, and American Express® Travel Related Services Company, Inc., a gift
card program, that have initial expiration dates from June 30, 2010 through
December 26, 2014. Because the majority of the fees to be
paid are contingent primarily on card volume, it is not possible to calculate
the amount of the future commitment on these contracts. The Metavante and
FB&T agreements also require a minimum payment of $5,000 and $7,500 per
month, respectively. During fiscal 2009 and fiscal 2008, we made
aggregate payments of approximately $753,400 and $594,200, respectively to
Metavante, $13,700 and $2,100, respectively to PDNB and $147,400 and $111,500,
respectively, to FB&T under these agreements.
Our
agreements with PDNB and FB&T require us to maintain certain reserve
balances for our card programs. As of January 2, 2010, the reserve
balances held at PDNB and FB&T were $10,000 and $25,000,
respectively. These amounts are included in “Other assets” on the
Company’s balance sheet as of January 2, 2010.
Pending or Threatened
Litigation
We may
become involved in litigation from time to time in the ordinary course of
business. However at January 2, 2010, to the best of our knowledge, no such
litigation exists or is threatened.
Bond
Collateral
On
February 1, 2009, we completed a partial funding of collateral amounting to
approximately $500,000 for performance bonds issued in connection with our state
licensing efforts. The collateral, in the form of a letter of credit
arranged by Mr. Jeffrey Porter, was issued by a bank and was placed with the
insurance company that issued the various bonds which at the end of the year
aggregated approximately $9,600,000. Mr. Porter entered into a
Guarantee and Indemnification Agreement with the Company dated February 1, 2009.
Accordingly, we are currently contingently liable for the face amount of the
letter of credit. Mr. Porter was to be compensated in cash at 2% of the average
outstanding amount of the letter of credit per quarter paid in arrears, however,
he chose to take the compensation in the form of Series D Preferred Stock during
the August equity raise. The Guarantee and Indemnification Agreement can be
cancelled by the Company upon receiving a more favorable arrangement from
another party. Upon demand, the Company will be required to increase the
collateral up to 10% of the face amount of bonds issued by the insurance
company. On February 1, 2010, both the letter of credit and the Guarantee and
Indemnification Agreement were renewed for another twelve months.
F-26
On
February 19, 2008, the Company completed the funding of collateral amounting to
approximately $1.8 million required for the performance bonds issued in
connection with our state licensing efforts. The collateral, in the form of a
one-year letter of credit issued by a bank, was placed with the insurance
company that issued the various bonds aggregating to a face amount of
approximately $7.2 million. The issuing bank required that the letter of credit
be guaranteed by Mr. Porter, one of our major stockholders, and Bruce E. Terker,
a member of our Board and a current major stockholder. Of the total
collateral amount, Mr. Porter arranged for approximately $1 million, and the
remainder was provided by Mr. Terker. In connection with this accommodation, the
Company and Messrs. Porter and Terker entered into respective Guaranty and
Indemnification Agreements. Accordingly, we were contingently liable for the
face amount of the letter of credit of approximately $1.8 million, which expired
February 2009. Mr. Porter was compensated in cash at 2% of the $1 million in
collateral per quarter paid in arrears. Mr. Terker agreed to be compensated in
the form of warrants to purchase 33,912 shares of our common stock at a purchase
price of $3.35 per share, which was earned ratably over the course of the year.
The Guarantee and Indemnification Agreements were cancelled in February
2009.
NOTE
G - STOCK OPTIONS AND WARRANTS
On March
1, 2007, our stockholders approved the 2007 Omnibus Equity Compensation Plan
(the “2007
Plan”) which combined the 709,850 shares that were issued and outstanding
under the Company’s 2004 Stock Option Plan with the 2,300,000 shares available
for issuance under the 2007 Plan. On May 8, 2008 at the Company’s
Annual Stockholders’ Meeting, the Company’s stockholders voted to amend the 2007
Plan by increasing the number of authorized shares available for issuance by
1,000,000 shares, thus providing a total of 4,009,850 shares for issuance under
the combined plans. As of January 2, 2010, we had 997,212 shares
available under the combined plans for future option grants and 3,012,638 total
options outstanding, consisting of 2,891,388 options issued to employees and
non-employee directors and 121,250 options issued to consultants. Such options
vest over various periods up to three years and expire on various dates through
2019.
The fair
value of each option grant is estimated at the date of grant using the
Black-Scholes option valuation model with the following weighted average
assumptions for the periods ended January 2, 2010 and January 3,
2009:
Fiscal
2009
|
Fiscal
2008
|
||||||||
Expected
term in years
|
5 | 5 | |||||||
Expected
stock price volatility
|
165% - 191 | % | 73% - 165 | % | |||||
Risk
free interest rate
|
1.50% - 2.31 | % | 1.50% - 3.08 | % | |||||
Dividend
yield
|
0 | % | 0 | % |
Expected
stock price volatility is determined using historical volatility of the
Company's stock. The average expected life was estimated based on
historical employee exercise behavior.
The
following table summarizes our stock option activity during the fiscal years
ended January 2, 2010 and January 3, 2009:
Number
of
Options
|
Weighted
average
exercise
Price
per share
(price
at date of grant)
|
|||||||
Outstanding
at December 29, 2007
|
2,403,696 | $ | 3.59 | |||||
Granted
|
510,750 | $ | 3.33 | |||||
Cancelled
|
(272,667 | ) | $ | 3.34 | ||||
Outstanding
at January 3, 2009
|
2,641,779 | $ | 3.57 | |||||
Granted
|
661,250 | $ | 0.78 | |||||
Cancelled
|
(290,391 | ) | $ | 2.23 | ||||
Outstanding
at January 2, 2010
|
3,012,638 | $ | 3.09 | |||||
Options granted at or above market value during the year January 2, 2010 | 661,250 |
F-27
The
following table summarizes information regarding options that are outstanding at
January 2, 2010:
Options
outstanding
|
Options
exercisable
|
||||||||||
Range
of
exercise
prices
|
Number
outstanding
|
Weighted
average
remaining
contractual
life
in years
|
Weighted
average
exercise
price
|
Number
Exercisable
|
Weighted
average
exercise
price
per
share
|
||||||
$0.25-$1.02
|
549,500 | 9.4 | $ | 0.72 | 12,750 | $ | 0.75 | ||||
$1.30-$2.20
|
1,102,402
|
7.1
|
$
|
1.54
|
1,102,263
|
$
|
1.54
|
||||
$2.30-$3.75
|
507,963
|
6.1
|
$
|
3.42
|
460,102
|
$
|
3.44
|
||||
$4.00-$32.00
|
852,773
|
6.0
|
$
|
6.42
|
823,482
|
$
|
6.50
|
||||
3,012,638
|
7.0
|
$
|
3.09
|
2,398,597
|
$
|
3.60
|
The
grant-date fair value of options granted during fiscal 2009 and fiscal 2008 was
approximately $318,400 and $1.1 million, respectively. The total fair
value of shares vested during fiscal 2009 was approximately
$480,300. At January 2, 2010, we estimate the aggregate stock-based
compensation attributable to unvested options was approximately $343,500, which
amount is expected to be recognized over a period of approximately three
years.
Officer Stock
Options
On
February 23, 2009, the Compensation Committee recommended to the Board and the
Board granted to our Chief Executive Officer, Jerry R. Welch, 250,000 stock
options at an exercise price of $1.00 per share, which, using the Black-Scholes
option pricing model, were valued at an aggregate of
$143,840. Options to purchase 50,000 shares will become fully vested
on the anniversary date of the grant and 50,000 options will vest ratably over
the 12 months beginning March 31, 2010. Of the final 150,000 options, 75,000
were to vest on the first anniversary date of the grant and 75,000 were to vest
ratably over the 12 months beginning March, 2010, provided the Company had
positive earnings before interest, tax, depreciation and amortization (“EBITDA”
in any month prior to September 30, 2009. The Company failed to achieve positive
EBITDA and the 150,000
stock options were subsequently forfeited by Mr. Welch.
On
February 23, 2009, the Compensation Committee recommended to the Board and the
Board granted to our Chief Financial Officer, Raymond P. Springer, 50,000 stock
options at an exercise price of $1.00 per share, which, using the Black-Scholes
option pricing model, were valued at an aggregate of $28,768. The
options will become fully vested in two years, with one half vesting on the
anniversary date of the grant and 1/12 of the remaining grant vesting monthly
thereafter.
On
January 29, 2009 , the Compensation Committee recommended to the Board and the
Board granted to six officers of the Company an aggregate of 116,000 stock
options at an exercise price of $1.02 per share, which, using the Black-Scholes
option pricing model, were valued at an aggregate of $113,555. The options
become fully vested in two years, one half vests on the anniversary date of the
grant and 1/12 of the remaining grant vests monthly thereafter.
On
December 15, 2008, the Company issued a total of 42,750 stock options (750 stock
options to each employee (including seven officers) except our CEO) at an
exercise price of $0.75 per share. The options vest one third at the
one-year anniversary of the grants and then ratably for the following 24
months. The options were valued using the Black-Scholes option
pricing model at an aggregate fair value of approximately $30,000, which is
being recognized as stock-based compensation expense over the vesting period of
the options.
On May
12, 2008, our compliance officer was awarded 20,000 stock options at an exercise
price of $2.30 per share, which were valued using the Black-Scholes option
pricing model at an aggregate fair value of approximately
$28,900. The options vest one third at the one-year anniversary of
the grants and then ratably for the following 24 months. The fair value of these
options is being recognized as stock-based compensation expense over the vesting
period of the options.
F-28
On
January 24, 2008, Messrs. Welch and Springer were awarded 95,000 and 45,000
stock options, respectively, at an exercise price of $4.00 per share, which were
valued using the Black-Scholes option pricing model at aggregate fair values of
approximately $234,000 and $111,000, respectively. These amounts were
recognized as stock-based compensation expense as the options
vested. The options were divided into 28 equal installments,
with the first seventeen installments vesting on January 28, 2008 and additional
installments vesting on the final day of each month through December 31,
2008. At January 3, 2009, all options have vested and all
compensation expense related to these options has been recognized.
On
January 24, 2008, the Board also awarded a total of 155,000 stock options to
eight other officers at an exercise price of $4.00 per share, which were valued
using the Black-Scholes option pricing model at an aggregate fair value of
approximately $381,300. The options vest one-third at the one-year
anniversary of the grants and then ratably for the following 24 months. The fair
value of these options is being recognized as stock-based compensation expense
over the vesting period of the options.
At
various dates during fiscal 2008, the Company issued a total of 93,000 stock
options to other non-officer employees at exercises prices ranging from $1.30 to
$4.00. The options vest one third at the one-year anniversary of the
grants and then ratably for the following 24 months. The options were valued
using the Black-Scholes option pricing model at an aggregate fair value of
approximately $192,000, which is being recognized as stock-based compensation
expense over the vesting period of the options.
Non Employee Director
Options
In May
2008, 60,000 options were granted to the non-employee members of our Board. The
options, which were 100% vested on the date of grant with an exercise price of
$2.20, were valued using the Black-Scholes option pricing model at an aggregate
fair value of approximately $83,000. This amount was included in employee and
director stock-based compensation in the statement of operations for the year
ended January 3, 2009.
Outstanding
Warrants
The
following table summarizes information on warrants issued and outstanding at
January 2, 2010 that allow the holder to purchase a like amount of Common
Stock.
Warrants
issued in connection with/as:
|
Number
outstanding
|
Exercise
price
per share
|
Expiration
date
|
|||
Partial
compensation for our placement agent in connection with the sale of our
Series A Convertible Preferred Stock on December 28, 20061
|
320,000
|
$0.01
|
December
28, 2011
|
|||
Partial
compensation for our placement agent in connection with the sale of our
Series B Convertible Preferred Stock and Common Stock on June 29,
20071
|
120,928
|
$0.01
|
June
29, 2012
|
|||
Partial
compensation for our placement agents in connection with the sale of our
Series C Convertible Preferred Stock and Common Stock on June 12, 2008 as
amended for participation in the August 2009 Securities Purchase
Agreements 1,2
|
54,575
|
$0.01
|
June
12, 2013
|
|||
Partial
compensation for our placement agents in connection with the sale of our
Series C Convertible Preferred Stock and Common Stock on June 12, 2008
2
|
54,575
|
$2.53
|
June
12, 2013
|
|||
Compensation
for Mr. Bruce E. Terker in connection with the Guarantee and
Indemnification Agreements for bond collateral required for our state
licensing initiative1,3
|
33,912
|
$0.01
|
3,716
on April 1, 2013, 8,455 on June 30, 2013, 8,455 on September 30, 2013
and
8,455
on December 31, 2013 and 4,831 on February 15,
2013
|
F-29
Pursuant
to Securities Purchase Agreements dated June 29, 2007, as amended for
participation in the August 2009 Securities Purchase Agreements1
|
1,175,000
|
$0.01
|
June
29, 2012
|
|||
Pursuant
to Securities Purchase Agreements dated June 29, 2007, as amended for
participation in the August 2009 Securities Purchase Agreements1
|
100,000
|
$0.30
|
June
29, 2012
|
|||
Pursuant
to Securities Purchase Agreements dated June 29, 2007, as amended for
participation in the June 12, 2008 Securities Purchase Agreements4
|
131,600
|
$2.30
|
June
29, 2012
|
|||
Pursuant
to Securities Purchase Agreements dated June 29, 2007
|
105,000
|
$5.00
|
June
29, 2012
|
|||
Pursuant
to Securities Purchase Agreements dated June 12, 2008, as amended for
participation in the August 2009 Securities Purchase Agreements 1
|
1,820,625
|
$0.01
|
June
12, 2013
|
|||
Pursuant
to Securities Purchase Agreements dated June 12, 2008, as amended for
participation in the August 2009 Securities Purchase Agreements 1
|
156,250
|
$0.30
|
June
12, 2013
|
|||
Pursuant
to Securities Purchase Agreements dated June 12, 2008
|
751,875
|
$2.30
|
June
12, 2013
|
|||
Pursuant
to Securities Purchase Agreements dated August through September
2009
|
43,318,380
|
$0.01
|
Various
dates from August 2014 through December 2014
|
|||
Pursuant
to Loan and Security Warrant Agreements dated July 21, 2008 as amended for
participation in August 2009 Securities Purchase Agreements 1,5
|
1,007,500
|
$0.01
|
July
21, 2013
|
|||
Accommodation
Loan Warrant Agreements as amended for participation in August 2009
Securities Purchase Agreements 1,6
|
1,700,000
|
$0.01
|
Various
dates from November 2010 through March 2011
|
|||
Term
Note Warrant Agreements 1,7,8
|
6,666,665
|
$0.01
|
Various
dates from May 2010 through July 2010
|
|||
Warrants
held by DFS Services LLC dated November 12, 2007
|
200,000
|
$3.00
|
November
12, 2010
|
|||
Consulting
services agreement dated April 1, 2006
|
37,500
|
$5.00
|
Various
dates through 2011
|
|||
Cooperation
Agreement dated November 22, 2006
|
5,000
|
$1.20
|
November
22, 2011
|
|||
Total
warrants and weighted average exercise price per share outstanding at
January 2, 2010
|
57,759,385
|
$0.07
|
F-30
1. Pursuant
to the terms of the Stock Purchase Agreements dated August through September
2009, each investor who invested an amount equal to or greater than 25% of the
amounts invested in prior transactions involving stock or certain accommodation
loans and term loans had the exercise price of any Company warrants held by such
investor reduced to (i) $0.30 per share of Common Stock, if they invested
$100,000 or more, of which 256,250 were re-priced as such, or (ii) $0.01 per
share of Common Stock, if they invested $250,000 or more of which 12,899,205
were re-priced as such. Except for such re-pricing, the warrants
remained unchanged and in full force and effect.
2. Collins
Stewart LLC and EGE acted as placement agents for the June 12, 2008 Securities
Purchase and Exchange Agreements transactions and received, as partial
compensation, warrants to purchase 109,150 shares of Common Stock, exercisable
at $2.53 per share and expiring on June 12, 2013, which were valued using the
Black-Scholes option pricing model at an aggregate fair value of approximately
$184,300.
3. On
February 19, 2008, we completed the funding of collateral required for bonds
issued in connection with our state licensing efforts amounting to approximately
$1.8 million. Approximately $0.8 million of the collateral for the
letter of credit was provided by Mr. Terker, one of the Company’s directors. In
connection with this accommodation, the Company and Mr. Terker entered into a
Guaranty and Indemnification Agreement. Mr. Terker agreed to be
compensated in the form of warrants to purchase 33,912 shares of the Common
Stock at a purchase price of $3.35 per share, which would be earned ratably over
the course of the year and expensed to interest expense as the warrants were
earned. As of April 3, 2009, all of these warrants had been earned.
The aggregate fair value of these warrants, which was estimated using the
Black-Scholes option pricing model at $59,745, was recognized as non-cash
interest expense as the warrants were earned. These were subsequently re-priced
as a result of the August Stock Purchase Agreements (see note 1
above).
4. As
part of the terms of the June 12, 2008 Securities Purchase Agreements, for each
investor who invested an amount equal to at least 50% of such investor’s
investment in the Company’s June 29, 2007 offer and sale of Common Stock, Series
B Convertible Preferred Stock and Warrants, such investor’s existing June 2007
Warrants were amended such that the exercise price per share of such investor’s
June 2007 Warrants was reduced from $5.00 per share to $2.30 per
share. Except for the above-referenced amendment, the June 2007
Warrants remained unchanged and in full force and effect.
5. As
part of the Original Loan Agreement, the Lenders received warrants dated July
21, 2008, entitling the Lenders to purchase up to an aggregate of 1,007,500
shares of Common Stock at an exercise price of $2.30 per share, which exercise
price is subject to customary adjustments for Common Stock splits and reverse
stock splits. Pursuant to an amendment, the warrant shares were
re-priced (see 1 above) to an exercise price of $0.01 per share. The warrants
were valued using the Black-Scholes option pricing model at an aggregate fair
value of $1,538,953, which amount was recorded as deferred financing costs and
is being amortized, beginning in fiscal December 2008, over the twelve month
period to the maturity of the Amended and Restated Loan Agreement on November
25, 2009.
6. On
November 26, 2008, the Company amended the Original Loan Agreement and
subsequently issued to the Accommodation Lenders (as such term is defined in the
Original Loan Agreement) warrants entitling them to purchase an aggregate of
1,700,000 shares of Common Stock at an exercise price of $2.00 per share with an
expiration date two years from issuance. The warrants were
valued using the Black-Scholes option pricing model at an aggregate fair value
of $40,775. In addition, the warrants issued to the Accommodation
Lenders under the Original Loan Agreement were re-priced from $2.30 to
$1.00. The cost of re-pricing these warrants, using the Black-Scholes
option pricing model, was estimated at $314,940. The amounts were
recorded as deferred financing costs and were amortized to non-cash interest
expense, beginning in December 2008 over the twelve month period to the maturity
of the Amended and Restated Loan Agreement on November 25, 2009, up to the
exchange for Series D Preferred Stock. The balance of deferred
financing costs as of the exchange date was recorded to additional
paid-in-capital. These warrants were subsequently re-priced to $0.01
as part of the August 2009 Stock Purchase Agreements (see 1 above).
7. On
May 7, 2009, the Company commenced the sale of June Term Loan Notes in an amount
not to exceed $1,000,000. In connection with the sale, the Company
issued June Term Note Warrants to the purchasers of June Term Loan Notes, which,
in the aggregate, entitled such holders to purchase an aggregate of 2,000,000
shares of Common Stock, $0.001 par value per share, at a per share price of
$0.50, which exercise price is subject to customary adjustments for common stock
splits and reverse stock splits. The Term Note Warrants were valued
using the Black-Scholes option pricing model and the resulting aggregate fair
value of $755,768 was recorded as an increase to deferred financing
costs. The June Term Note Warrants were subsequently amended such
that the total was increased from 2,000,000 to 3,333,332 and the exercise price
was reduced from $0.50 to $0.30 in connection with the sale of the July Term
Loans. The amounts were recorded as deferred financing costs and were amortized,
in June to non-cash interest expense. The balance in deferred
financing costs as of the exchange date relating to the June Term Notes was
recorded to additional paid-in-capital These warrants were
subsequently re-priced to $0.01 as part of the August 2009 Stock Purchase
Agreements (see note 1 above).
8. On
July 3, 2009 the Company commenced the sale of July Term Loans in an amount not
to exceed $1,000,000. In connection with the sale, the Company issued July Term
Loan Warrants to the purchasers of June Term Loans, which, in the aggregate,
entitled such holders to purchase an aggregate of 3,333,333 shares of the
Company’s common stock, $0.001 par value per share, at a per share price of
$0.30, which exercise price is subject to customary adjustments for common stock
splits and reverse stock splits. The value of the July Term Loans
Warrants was recorded to additional paid-in-capital as the July Term Loans were
exchanged for Series D Preferred Stock. These warrants were
subsequently re-priced to $0.01 as part of the August 2009 Stock Purchase
Agreements (see note 1 above).
F-31
Summary
of Warrants outstanding by Exercise Price:
Exercise
Price
per
Share
|
Number
of
Warrants
Outstanding
|
|||
$ 0.01
|
56,217,585
|
|||
$ 0.30
|
256,250
|
|||
$ 1.20
|
5,000
|
|||
$ 2.30
|
883,475
|
|||
$ 2.53
|
54,575
|
|||
$ 3.00
|
200,000
|
|||
$ 5.00
|
142,500
|
|||
Total
warrants weighted average exercise price
|
$ 0.07
|
57,759,385
|
NOTE
H – COMMON STOCK AND CONVERTIBLE PREFERRED STOCK TRANSACTIONS
The
Company has four series of convertible preferred stock, designated Series A,
Series B, Series C and Series D.
Dividends
Dividends
on the Series A Preferred Stock accrue and are cumulative from the date of
issuance of the shares of Series A Preferred Stock, whether or not earned or
declared by the Board. Until paid, the right to receive dividends on the Series
A Preferred Stock accumulates, and the dividends are payable semiannually at our
option either in cash or in shares of common stock, on June 30 and December 31
of each year, commencing on June 30, 2007, at a dividend rate on each share of
Series A Preferred Stock of 5%.
The
Series B, Series C and Series D Preferred Stock are not entitled to
dividends
Voting
The
holders of the Series A, Series B, Series C and Series D Preferred Stock have
full voting rights and powers equal to the voting rights and powers of holders
of Common Stock and are entitled to notice of any stockholders’ meeting in
accordance with our bylaws, as amended, and are entitled to vote with respect to
any question upon which holders of Common Stock are entitled to vote, including,
without limitation, for the election of directors, voting together with the
holders of common stock as one class. Each holder of shares of Series A, Series
B, Series C and Series D Preferred Stock is entitled to vote on an as-converted
basis.
As long
as at least 33% of the shares of Series A Preferred Stock issued remain
outstanding, the holders of at least a majority of the outstanding Series A
Preferred Stock, voting as a separate class, are entitled to designate and elect
one member of the Board.
As long
as at least 33% of the shares of Series A Preferred Stock remain outstanding,
the consent of the holders of at least 50% of the shares of Series A Preferred
Stock at the time outstanding is necessary for effecting (i) any amendment,
alteration or repeal of any of the provisions of the Certificate of
Designations, Right and Preferences of the Series A Preferred Stock in a manner
that will adversely affect the rights of the holders of the Series A Preferred
Stock; (ii) the authorization or creation by us of, or the increase in the
number of authorized shares of, any stock of any class, or any security
convertible into stock of any class, or the authorization or creation of any new
class of preferred stock (or any action that would result in another series of
preferred stock), in each case, ranking in terms of liquidation preference,
redemption rights or dividend rights, pari passu with or senior to, the Series A
Preferred Stock in any manner; and (iii) our entrance into any indebtedness in
an amount greater than $1,000,000. These listed actions by us will no longer
require a vote of the holders of Series A Preferred Stock at such time as we
first earn an annual EBITDA of at least $10,000,000 over any trailing 12-month
period and Stockholder’s Equity as recorded on our balance sheet first becomes
at least $15,000,000.
F-32
As long
as at least 33% of the shares of Series B Preferred Stock remain outstanding,
the holders of at least a majority of the outstanding Series B Preferred Stock,
(provided at least two holders of the shares of Series B Preferred Stock at the
time outstanding agree in such requisite vote), voting as a separate class,
shall be necessary for effecting, whether by merger, consolidation or otherwise
(i) any amendment, alteration or repeal of any of the provisions of the
Certificate of Designations, Right and Preferences of the Series B Preferred
Stock in a manner that will adversely affect the rights of the holders of the
Series B Preferred Stock; provided however, that no such consent shall be
required for the Company to amend the Company’s Articles of Incorporation to
increase the Company's shares of common stock or undesignated preferred stock;
and (ii) the authorization or creation by the Company of, or the increase in the
number of authorized shares of, any stock of any class, or any security
convertible into stock of any class, or the authorization or creation of any new
class of preferred stock (or any action which would result in another series of
preferred stock), in each case, ranking in terms of liquidation preference or
redemption rights, pari passu with or senior to, the Series B Preferred Stock in
any manner; provided, however, that no such consent shall be required for the
Company to amend the Company’s Articles of Incorporation to increase the
Company's shares of Common Stock or undesignated Preferred Stock.
At a
special meeting of holders of Series A and Series B Preferred Stock on June 2,
2008, the holders of Series A and Series B Preferred Stocks approved the
creation of a new series of convertible preferred stock, the Series C Preferred
Stock. The holders of Series A Preferred Stock also approved the
Company entering into an accounts receivable line of credit. The
holders of Series A and Series B Preferred Stocks also approved amendments to
their respective Certificates of Designations, Rights and Preferences, such that
the liquidation preferences of each of the Series A and Series B Preferred
Stocks will be paid on a pari passu basis with respect to each other and with
respect to the liquidation preference of the Series C Preferred
Stock.
At a
special meeting of holders of Series A, Series B and Series C Preferred Stock on
August 11, 2009, the holders of Series A, Series B and Series C Preferred Stocks
approved the creation of a new series of convertible preferred stock, the Series
D Preferred Stock. The holders of Series A, Series B and Series C
Preferred Stocks also approved amendments to their respective Certificates of
Designations, Rights and Preferences, such that the liquidation preferences of
the Series D Preferred Stock will be paid in precedence to the Series A, Series
B and Series C Preferred stock which are on a pari passu basis with respect to
each other and with respect to the liquidation preference.
Liquidation
Preference
In the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the Company, (a “Liquidation”), before any distribution of our assets is made to
or set apart for the holders of the Common Stock, the holders of each Series of
Preferred Stock are entitled to receive payment in an amount equal to the
greater of (i) $1.00 per share of Series A Preferred Stock, plus any accumulated
but unpaid dividends (whether or not earned or declared); $3.00 per shares of
Series B Preferred Stock; $2.00 per share of Series C Preferred Stock and $3.00
per share of Series D Preferred Stock and (ii) the amount such holder would have
received if such holder had converted its shares of Series A, Series B, Series C
or Series D Preferred Stock to Common Stock, subject to but immediately prior to
such Liquidation. If our assets available for distribution to the holders of
each Series of Preferred Stock are not sufficient to make in full such payment,
such assets shall be distributed first to the holders of Series D Preferred
Stock and then pro-rata among the holders of Series A, Series B and Series C
Preferred Stocks based on the aggregate liquidation preferences of the shares of
each Series of Preferred Stock held by each such holder.
Conversion
Shares of
the Series A, Series B and Series C Preferred Stock are convertible at any time
into shares of Common Stock on a one-for-one basis. Shares of the Series D
Preferred Stock are convertible at any time into shares of Common Stock on a
one-for-ten basis (one share of Series D Preferred Stock for 10 shares of Common
Stock). In addition, if 10% or less of the aggregate shares of Series
A Preferred Stock remain outstanding, or in the event of a sale, transfer or
other disposition of all or substantially all of our property, assets or
business to another corporation, in which the aggregate proceeds to the holders
of the Series A Preferred Stock would be greater on an as-converted basis, all
remaining outstanding shares of Series A Preferred Stock mandatorily convert
into Common Stock.
Issuance of Series A
Preferred Stock
On
December 28, 2006, we completed the exchange of all our then outstanding
convertible notes and all accrued but unpaid interest thereon, in the aggregate
amount of $5,327,934, into 5,327,934 shares of our Series A Preferred
Stock.
Further,
in a private placement occurring concurrently with the exchange, we sold an
additional 4,000,000 shares of our Series A Preferred Stock for aggregate gross
proceeds of $4,000,000 to certain accredited investors, including investors who
had been holders of the convertible notes. Because the market price of the
underlying Common Stock at that time was $1.25, we recognized a beneficial
conversion feature of $1,000,000, which was recorded as a preferred stock
dividend.
F-33
EGE acted
as placement agent for the December 28, 2006 transaction and received a fee of
$117,600 and a warrant to purchase 320,000 shares of Common Stock, exercisable
at $1.10 per share and expiring on December 28, 2011. Robert A.
Berlacher, who served on the Board from March 1, 2007 through October 25, 2007,
was a co-founder and director of EGE Holdings, a holding company with a 100%
ownership interest in EGE. Mr. Berlacher received no direct
compensation from EGE Holdings or EGE related to the Company’s sale of the
Series A Preferred Stock. Mr. Terker, a member of our Board, controls
two entities that are investors in EGE Holdings.
As of
January 3, 2009, 1,827,450 shares of the Series A Preferred Stock have been
converted into a like number of shares of Common Stock and 7,500,484 shares of
the Series A Preferred Stock remain outstanding.
Issuance of Series B
Preferred Stock
On June
29, 2007, the Company entered into securities purchase agreements with several
institutional and accredited investors, pursuant to which the Company sold to
the investors an aggregate of (i) 1,000,000 shares of Series B Preferred Stock
(ii) 2,023,199 shares of Common Stock and (iii) warrants to purchase 1,511,600
shares of Common Stock at an exercise price of $5.00 per share, for an aggregate
purchase price of $9,069,597.
EGE acted
as placement agent for the June 29, 2007 transaction and received a fee of
$634,872 and a warrant to purchase 120,928 shares of Common Stock, exercisable
at $3.30 per share and expiring on June 29, 2012. Robert A.
Berlacher, who served on the Board from March 1, 2007 through October 25, 2007,
was a co-founder and director of EGE Holdings, a holding company with a 100%
ownership interest in EGE. Mr. Berlacher received no direct compensation
from EGE Holdings or EGE related to the Company’s sale of the Series B Preferred
Stock, Common Stock and warrants. Mr. Bruce Terker, a member of our Board,
controls two entities that are investors in EGE Holdings.
Issuance of Series C
Preferred Stock
On March
31, 2008 and on May 16, 2008, we entered into Securities Purchase Agreements
(the “Purchase Agreements”), with certain accredited investors pursuant to which
the Company sold to the investors an aggregate of (i) 240,000 shares of Common
Stock at a stated purchase price of $2.50 per share, and (ii) warrants to
purchase 120,000 shares of Common Stock at an exercise price of $3.25 per share,
for an aggregate purchase price of $600,000. As part of the Purchase
Agreements executed on May 16, 2008, the Company sold to Bruce E. Terker (i)
200,000 shares of Common Stock, at a stated purchase price of $2.50 per share,
and (ii) warrants to purchase 100,000 shares of Common Stock at an exercise
price of $3.25 per share, for an aggregate purchase price of
$500,000. Mr. Terker is currently a member of the Board and is also a
stockholder of the Company. On March 21, 2008, Mr. Terker and the
Company had also entered into a Purchase Agreement whereby Mr. Terker purchased
200,000 shares of Common Stock and 100,000 warrants for an aggregate purchase
price of $500,000.
Pursuant
to the terms of the Purchase Agreements, each investor had a right to exchange
all of its Common Stock and warrants purchased under the Purchase Agreements for
securities (“Exchange Securities”) issued by the Company in connection with a
subsequent capital raising transaction (“Subsequent Issuance”) upon the same
terms and conditions offered to the purchasers in such Subsequent
Issuance. The March 21, 2008 Purchase Agreement with Mr. Terker was
amended on March 31, 2008 to grant Mr. Terker the same exchange
right.
In the
event an investor exercised its exchange rights, such investor was entitled to
exchange its Common Stock and warrants for the number of Exchange Securities
that it would have received in the Subsequent Issuance for the same investment
it had previously made under the Purchase Agreements. The investors’
exchange rights under the Purchase Agreements automatically terminated if no
Subsequent Issuance occurred within six months following the date of the
Purchase Agreements.
On June
12, 2008, the Company entered into Securities Purchase Agreements (the “Series C
Purchase Agreements”), with several institutional and accredited investors
(collectively, the “Purchase Investors”), pursuant to which the Company sold to
the Purchase Investors an aggregate of (i) 832,500 shares of Common Stock, (ii)
3,225,000 shares of Series C Preferred Stock and (iii) warrants to purchase
2,028,750 shares of Common Stock at an exercise price of $2.30 per share (the
“Purchase Warrants”), for an aggregate purchase price of
$8,115,000.
Pursuant
to the terms of the Series C Purchase Agreements, each Purchase Investor who
invested $500,000 or less received (i) shares of Common Stock at a purchase
price of $2.00 per share, and (ii) Purchase Warrants to purchase a number of
shares of Common Stock equal to 50% of the shares of Common Stock purchased by
such Purchase Investor; provided, however, that at such time as such Purchase
Investor, together with its affiliates, owned 750,000 shares of Common Stock,
each such Purchase Investor received (A) shares of Series C Preferred Stock at
the purchase price of $2.00 per share, and (B) Purchase Warrants to purchase a
number of shares of Common Stock equal to 50% of the Series C Preferred Stock
purchased by such Purchase Investor. Each Purchase Investor who
invested over $500,000 received (x) Series C Preferred Stock at the purchase
price of $2.00 per share, and (y) Purchase Warrants to purchase a number of
shares of Common Stock equal to 50% of the Preferred Shares purchased by such
Purchase Investor.
F-34
Pursuant
to the terms of the Series C Purchase Agreements, in consideration for
participation in the offer and sale of the Common Stock, Series C Preferred
Stock and the Purchase Warrants, for each Purchase Investor who invested an
amount equal to at least 50% of such Purchase Investor’s investment in the
Company’s June 29, 2007 offer and sale of Common Stock, Series B Preferred Stock
and Warrants (described above under Issuance of Series B Preferred Stock) such
Purchase Investor’s June 2007 Warrants were amended as of the closing date of
the Series C Purchase Agreements such that the exercise price per share of such
Purchase Investor’s June 2007 Warrants was reduced from $5.00 per share to $2.30
per share. Except for this amendment, the June 2007 Warrants remained
unchanged and in full force and effect.
Also on
June 12, 2008, the Company entered into Securities Exchange Agreements (the
“Exchange Agreements”), with several institutional and accredited investors (the
“Exchange Investors” and, together with the Purchase Investors, the
“Investors”). Pursuant to the Exchange Agreements, the Company issued
(i) an aggregate of 587,500 shares of Common Stock and 812,500 shares of Series
C Preferred Stock in exchange for the surrender by the Exchange Investors of
1,120,000 shares of Common Stock purchased by the Exchange Investors from the
Company between March 21, 2008 and May 16, 2008, and (ii) warrants to purchase
up to 700,000 shares of Common Stock at an exercise price of $2.30 per share
(“Exchange Warrants” and, together with the Purchase Warrants, the “Warrants”)
in exchange for the surrender by the Exchange Investors of Warrants to purchase
up to 560,000 shares of Common Stock at an exercise price of $3.25 per share
purchased by the Exchange Investors between March 21, 2008 and May 16,
2008.
Pursuant
to the terms of the Series C Purchase Agreements and the Exchange Agreements,
the Company is required, upon request from the Investors to file with the SEC, a
registration statement (the “Registration Statement”) to enable the resale by
the Investors of the Common Stock, and the shares of Common Stock into which the
Series C Preferred Stock is convertible and into which the Warrants are
exercisable (collectively, the “Conversion Shares”). The Company is
required to use its best efforts to cause the Registration Statement to become
effective and to file with the SEC such amendments and other required filings as
may be necessary to keep the Registration Statement effective until the earliest
of the date when (A) all such Common Stock and Conversion Shares have been sold,
(B) all such Common Stock and Conversion Shares may be sold without volume or
manner-of-sale restrictions pursuant to Rule 144, or (C) the second anniversary
of the closing date of the Series C Purchase Agreements and Exchange
Agreements.
The
Warrants entitle the Investors to purchase up to an aggregate of 2,728,750
shares of Common Stock at an exercise price of $2.30 per share, which exercise
price is subject to customary adjustments for Common Stock splits and reverse
stock splits. The Warrants expire after a five-year term and may be
exercised by means of a “cashless exercise.” In the event of a
Triggering Transaction, the Warrants will terminate and will thereafter
represent only the right to receive the cash, evidences of indebtedness or other
property as the Investors would have received had they been the record owner, at
the time of completion of a Triggering Transaction, of that number of shares of
Common Stock receivable upon exercise of the Warrants in full, less the
aggregate exercise price payable in connection with the full exercise of the
Warrants. The Warrants are not exercisable by the Investors to the
extent that, if exercised, they or any of their affiliates would beneficially
own in excess of 9.99% of the then issued and outstanding shares of Common
Stock. With respect to the securities purchased by Midsummer
Investment, Ltd. (“Midsummer”), the Company has agreed that the Series C
Preferred Stock and Purchase Warrants held by Midsummer will not be converted or
exercised (as the case may be) such that Midsummer or any of its affiliates
would own in excess of 4.9% of the then issued and outstanding shares of Common
Stock.
In the
aggregate, pursuant to the Purchase Agreements executed on March 28, 2008, the
Purchase Agreements executed on March 31, 2008, the Series C Purchase Agreements
executed on June 12, 2008 and the Purchase Agreements, dated as of March 21,
2008 and May 16, 2008, between the Company and Mr. Terker, as amended, the
aggregate purchase price paid for the Series C Preferred Stock, Common Stock and
Warrants was $10,915,000.
Collins
Stewart LLC and EGE acted as placement agents for the above-described
transactions and shared equally share a $535,600 fee and a warrant to purchase
109,150 shares of Common Stock, exercisable at $2.53 per share and expiring on
June 12, 2013. Robert A. Berlacher, a former member of the Board and
a current stockholder of the Company, was a co-founder and director of EGE
Holdings, a holding company with a 100% ownership interest in
EGE. Mr. Berlacher received no direct compensation from EGE Holdings
or EGE related to the Company’s sale or exchange of Common Stock, Series C
Preferred Stock and the Warrants. Mr. Bruce Terker, a member of our
Board, controls two entities that are investors in EGE Holdings,
Ltd.
Issuance of Series D
Preferred Stock
From
August through December, the Company entered into Securities Purchase Agreements
(the “Purchase
Agreements”), with several institutional and accredited investors,
including Ballyshannon Partners, LP, Mr. Robert Berlacher, Porter Partners, LP,
Midsummer Investment, Ltd. and Trellus Offshore Fund Ltd., all of which
beneficially own five percent or more of the Common Stock (collectively, the
“Investors”),
pursuant to which the Company issued 4,331,838 shares of its Series D
Convertible Preferred Stock, $0.001 par value per share (“Series D Preferred
Stock”), and warrants (the “Warrants”) to
purchase 43,318,380 shares of Common Stock, at an exercise price of $0.01 per
share, for the aggregate purchase price
of $12,995,514, $7,301,616 of which was paid by Investors
in cash and $5,693,898 was paid by Investors through the exchanges of a like
amount of certain outstanding accommodation loans, term loans and accrued
interest payable thereon.
F-35
Pursuant
to the terms of the Purchase Agreements, each Investor who invested an amount
equal to or greater than 25% of the amounts invested in prior transactions
involving stock or certain accommodation loans and term loans had the exercise
price of any Company warrants held by such Investor reduced to (i) $0.30 per
share of Common Stock, if they invested $100,000 or more, of which 206,250 were
re-priced as such, or (ii) $0.01 per share of Common Stock, if they invested
$250,000 or more of which 12,899,207 were re-priced as such.
The
Warrants entitle the Investors to purchase shares of Common Stock at an exercise
price of $0.01 per share, which exercise price is subject to customary
adjustments for Common Stock splits and reverse stock splits. The
Warrants are exercisable during the period commencing on the first anniversary
of the date of the Warrant and expiring four (4) years thereafter, and may be
exercised by means of a “cashless exercise.” In the of a Triggering
Transaction, the Warrants shall terminate and shall thereafter represent only
the right to receive the cash, evidences of indebtedness or other property as
the Investors would have received had they been the record owner, at the time of
completion of a Triggering Transaction, of that number of shares of Common Stock
receivable upon exercise of the Warrants in full, less the aggregate exercise
price payable in connection with the full exercise of the
Warrants. The Warrants are not exercisable by the Investors to the
extent that, if exercised, they or any of their affiliates would beneficially
own in excess of 9.99% of the then issued and outstanding shares of Common
Stock. With respect to the securities purchased by Midsummer, the
Company has agreed that the Series D Preferred Stock and Warrants held by
Midsummer shall not be converted or exercised (as the case may be) such that
Midsummer or any of its affiliates would own in excess of 4.9% of the then
issued and outstanding shares of Common Stock.
EGE
received fees of $34,400 in connection with the introduction of certain new
investors for the above-described transactions. Robert A. Berlacher,
a current stockholder of the Company, is a co-founder and director of EGE
Holdings, a holding company with a 100% ownership interest in
EGE. Mr. Berlacher received no compensation from EGE Holdings or EGE
related to the Company’s sale of Series D Preferred Stock and the
Warrants. Bruce E. Terker, a member of our Board, controls two
entities that are investors in EGE Holdings.
NOTE
I –OTHER RELATED PARTY TRANSACTIONS
At
January 2, 2010, accounts payable and accrued personnel costs include
approximately $43,600 owed to various officers for accrued vacation and $29,000
owed to our directors.
End
of Financial Statements.
F-36