nFinanSe Inc. - FORM 10-Q

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - nFinanSe Inc.	exhibit_31-1.htm
EX-31.2 - EXHIBIT 31.2 - nFinanSe Inc.	exhibit_31-2.htm
EX-32.2 - EXHIBIT 32.2 - nFinanSe Inc.	exhibit_32-2.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-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 3, 2010

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

For the transition period from _____________ to _____________

Commission File Number 000-33389

nFinanSe Inc.

(Exact name of registrant as specified in its charter)

	Nevada	65-1071956
	(State or other jurisdiction of	(IRS Employer Identification No.)
	incorporation or organization)

	3923 Coconut Palm Drive, Suite 107
	Tampa, Florida	33619
	(Address of principal executive offices)	(Zip Code)

	Issuer’s telephone number, including area code:	(813) 367-4400

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes

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

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 21,244,410 shares of common stock, $0.001 par value, outstanding as of May 7, 2010

nFinanSe Inc.
A Development Stage Enterprise
Table of Contents
			Page No.
NOTE REGARDING FORWARD LOOKING STATEMENTS			1

PART I - FINANCIAL INFORMATION
	Item 1. Financial Statements:
		Consolidated Balance Sheets as of April 3, 2010 (unaudited) and January 2, 2010 (audited)	2
		Consolidated Statements of Operations (unaudited) for the thirteen weeks ended April 3, 2010 and April 4, 2009 and for the period July 10, 2000 (inception) to April 3, 2010	3
		Consolidated Statements of Cash Flows (unaudited) for the thirteen weeks ended April 3, 2010 and April 4, 2009, and for the period July 10, 2000 (inception) to April 3, 2010	4
		Notes to Consolidated Financial Statements (unaudited)	6

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		15
	Item 3. Quantitative and Qualitative Disclosures About Market Risk.		19
	Item 4T. Controls and Procedures.		20
PART II - OTHER INFORMATION
	Item 6. Exhibits.		21

SIGNATURES

-i-

FORWARD-LOOKING STATEMENTS

In this quarterly 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;
·	our real property leases and expenses related thereto;
·	our ability to fund our future cash needs through public or private equity offerings and debt financings;
·	whether our business strategy, expansion plans and hiring needs will significantly escalate our cash needs;
·	our need to raise additional capital and, if so, whether our success will depend on raising such capital;
·	our expectation of continued and increasing governmental regulation of the stored value card industry;
·	our anticipation of future earnings volatility;
·	our entrance into additional financings, which can result in a recognition of derivative instrument liabilities; and
·	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 the 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:

·	our ability to design and market our products;
·	the estimated timing of our product roll-outs;
·	our ability to protect our intellectual property rights and operate our business without infringing upon the intellectual property rights of others;
·	the changing regulatory environment related to our products;
·	whether or not markets for our products develop and, if they do develop, the pace at which they develop;
·	our ability to attract the qualified personnel to implement our growth strategies,
·	our ability to develop sales and distribution capabilities;
·	our ability to work with our distribution partners;
·	the accuracy of our estimates and projections;
·	our ability to fund our short-term and long-term financing needs;
·	changes in our business plan and corporate strategies; and
·	other risks and uncertainties discussed in greater detail in this quarterly report, including 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 the 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 quarterly report to reflect new events or circumstances unless and to the extent required by applicable law.

As used in this quarterly report, the terms “we,” “us,” “our,” “nFinanSe,” and “the Company” mean nFinanSe Inc. and subsidiaries unless otherwise indicated. All dollar amounts in this quarterly report are in U.S. dollars unless otherwise stated.

-1-

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

nFinanSe Inc.

(A Development Stage Enterprise)

CONSOLIDATED BALANCE SHEETS

	April 3,			January 2,
	2010			2010
	(unaudited)			(audited)
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	1,700,911		$	3,794,788
Restricted cash		403,252			343,075
Receivables:
Accounts (net of allowance for doubtful accounts of $0 and $0, respectively)		147,303			189,015
Other		15,107			13,519
Prepaid expenses and other current assets, including prepaid marketing costs of approximately $122,200 and $30,800, respectively		406,173			236,758
Inventories		949,065			1,416,890
Total current assets		3,621,811			5,994,045
PROPERTY AND EQUIPMENT (net of accumulated depreciation of $1,002,312 and $944,122, respectively)		398,617			405,615

OTHER ASSETS		54,934			54,932

TOTAL ASSETS	$	4,075,362		$	6,454,592

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable	$	363,463		$	347,936
Accrued personnel costs		185,081			88,231
Credit facility and term loans outstanding		500,000			500,000
Deferred revenues		50,000			51,667
Other accrued liabilities		49,343			44,365
Total current liabilities		1,147,887			1,032,199

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock - $0.001 par value: 25,000,000 shares authorized; 16,758,487 and 12,537,984 shares issued and outstanding on April 3, 2010 and January 2, 2010, respectively, as follows:
Series A Convertible Preferred Stock – 9,330,514 shares authorized; 7,500,484 and 7,500,484 shares issued and outstanding with a liquidation value of $7,971,062 and $7,877,563 (including undeclared and unpaid accumulated dividends in arrears of $470,578 and $377,079) at April 3, 2010 and January 2, 2010, 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 April 3, 2010 and January 2, 2010		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 April 3, 2010 and January 2, 2010		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 April 3, 2010 and January 2, 2010		4,332			4,332
Common stock - $0.001 par value: 200,000,000 shares authorized; 21,244,410 and 9,344,108 shares issued and outstanding as of April 3, 2010 and January 2, 2010, respectively		21,244			9,543
Additional paid-in capital		71,542,467			71,421,315
Deficit accumulated during the development stage		(68,653,106	)		(66,025,335	)
Total stockholders’ equity		2,927,475			5,422,393

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	4,075,362		$	6,454,592

See notes to consolidated financial statements.

-2-

nFinanSe Inc.

(A Development Stage Enterprise)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the thirteen weeks ended April 3, 2010			For the thirteen weeks ended April 4, 2009			For the period July 10, 2000 (inception) to April 3, 2010
REVENUES	$	54,692		$	(5,654	)	$	1,310,058

OPERATING EXPENSES
Transaction and operating expenses		922,777			540,762			8,973,260
Selling and marketing expenses		405,553			499,096			10,253,475
General and administrative expenses		1,330,712			1,511,232			37,406,389
Total operating expenses		2,659,042			2,551,090			56,633,124

Loss before other income (expense)		(2,604,350	)		(2,556,744	)		(55,323,066	)

Other income (expense):
Interest expense		(23,465	)		(773,511	)		(5,269,741	)
Interest income		44			-			1,164,469
Gain on derivative instruments		-			-			1,449,230
Loss from litigation		-			-			(105,500	)
Loss on debt extinguishment		-			-			(4,685,518	)
Registration rights penalties		-			-			(98,649	)
Other income (expense)		-			(1,609	)		(95,510	)
Total other income (expense)		(23,421	)		(775,120	)		(7,641,219	)

Loss from continuing operations		(2,627,771	)		(3,331,864	)		(62,964,285	)

Loss from discontinued operations		-			-			(3,861,579	)

Net loss		(2,627,771	)		(3,331,864	)		(66,825,864	)
Dividends paid on Series A Convertible Preferred Stock		-			-			(1,827,244	)
Undeclared and unpaid dividends on Series A Convertible Preferred Stock		(93,499	)		(93,499	)		(470,578	)
Net loss attributable to common stockholders	$	(2,721,270	)	$	(3,425,363	)	$	(69,123,686	)
Net loss per share - basic and diluted	$	(0.23	)	$	(0.36	)
Weighted average number of shares outstanding		11,857,474			9,400,108

See notes to consolidated financial statements.

-3-

nFinanSe Inc.

(A Development Stage Enterprise)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the thirteen weeks ended April 3, 2010			For the thirteen weeks ended April 4, 2009			For the period July 10, 2000 (inception) to April 3, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(2,627,771	)	$	(3,331,864	)	$	(66,825,864	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		58,190			63,006			1,550,123
Provision for inventory obsolescence		577,869			59,926			1,491,305
Provision for bad debts		-			-			461,972
Amortization of intangible assets		-			-			15,485
Stock-based compensation and consulting		115,822			109,417			8,681,818
Purchased in process research and development		-			-			153,190
Gain on derivative instruments		-			-			(1,449,230	)
Loss on debt extinguishments		-			-			4,685,518
Loss on disposal of assets		-			1,609			29,572
Loss from impairment of assets		-			118,276			3,319,504
Debt forgiveness as a result of litigation settlement		-			-			(50,000	)
Non-cash interest expense		-			555,767			3,621,924
Other non-cash expense		-			474			15,881
Changes in assets and liabilities, net:
Restricted cash		(60,177	)		(48,750	)		(403,252	)
Receivables		40,124			15,639			(462,119	)
Prepaid expenses and other current assets		(169,415	)		161,764			(167,861	)
Inventories		(110,044	)		2,684			(3,784,365	)
Other assets		(2	)		15,996			(4,121	)
Assets of discontinued operations		-			-			(229,060	)
Accounts payable and accrued liabilities		117,355			(354,281	)		828,979
Accrued registration rights penalties		-			-			98,649
Deferred revenues		(1,667	)		(2,084	)		50,000
NET CASH USED IN OPERATING ACTIVITIES		(2,059,716	)		(2,632,421	)		(48,371,952	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(51,192	)		-			(2,184,505	)
Early redemption of short-term investment		-			-			(2,504	)
Investment in Product Benefits Systems Corporation		-			-			(15,737	)
Cash advanced under note receivable		-			-			(202,000	)
Other		-			-			(15,000	)
NET CASH USED IN INVESTING ACTIVITIES		(51,192	)		-			(2,419,746	)

(Continued)

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nFinanSe Inc.

(A Development Stage Enterprise)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the thirteen weeks ended April 3, 2010		For the thirteen weeks ended April 4, 2009		For the period July 10, 2000 (inception) to April 3, 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
Proceeds from issuance of Series D Convertible Preferred Stock		-		-		7,253,199
Proceeds from borrowings		-		2,700,000		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	)
Payments for stock issuance costs		-		-		(1,519,289	)
Proceeds from the exercise of stock warrants		17,031		-		17,031
Proceeds from the exercise of vested stock options		-		-		8,249
Proceeds from the issuance of Common Stock		-		-		18,000,775
NET CASH PROVIDED BY FINANCING ACTIVITIES		17,301		2,700,000		52,492,609

NET CHANGE IN CASH AND CASH EQUIVALENTS		(2,093,877	)		67,579		1,700,911

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		3,794,788			475,608		-

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	1,700,911		$	543,187	$	1,700,911

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	23,465		$	216,942	$	1,112,827
Income taxes paid	$	-		$	-	$	-

SUPPLEMENTAL DISCLOSURE 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 exchanged for Common Stock	$	9,998		$		$	9,998
Warrants issued to DFS Services, LLC	$	-		$	-	$	535,302
Warrants issued to Lenders	$	-		$	894,682	$	1,530,381
Conversion of Series A Convertible Preferred Stock to Common Stock	$	-		$	-	$	1,828
Dividends on Series A Convertible Preferred Stock	$	-		$	189,053	$	1,827,244
Declared and unpaid dividends on Series A Convertible Preferred Stock	$	179,772		$	-	$	179,772
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

See notes to consolidated financial statements.

-5-

nFinanSe Inc.

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A -FORMATION, BACKGROUND AND OPERATIONS OF THE COMPANY

Background

The accompanying consolidated financial statements include the accounts of nFinanSe Inc. (formerly Morgan Beaumont, Inc.) and those of its wholly owned subsidiaries, nFinanSe Payments Inc. and MBI Services Group, LLC (currently dormant) (collectively, the “Company,” “we, ” “us, ” or “our”). All significant inter-company balances and transactions have been eliminated. 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 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. Because we are continuing to raise funds, and because our revenues have been minimal, we are considered to be a development stage enterprise as defined in an ASC.

nFinanSe Inc. is a provider of stored value cards (“SVCs”), for a wide variety of markets, including grocery stores, convenience stores, general merchandise stores and direct to customer through on-line or direct marketing activities. 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.

Basis of Presentation

The consolidated financial statements contained herein have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial statements, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements do not include all the information and footnotes required by GAAP for annual financial statements. In addition, certain comparative figures for the prior year and inception to date period may have been reclassified to conform with the current year’s presentation. In the opinion of management, the accompanying consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals and adjustments) to fairly present the financial position of the Company at April 3, 2010 and January 2, 2010, its results of operations for the thirteen weeks ended April 3, 2010 and April 4, 2009 (“1Q2010” and “1Q2009”) and its cash flows for 1Q2010 and 1Q2009. Operating results for 1Q2010 are not necessarily indicative of the results that may be expected for the fiscal year ending January 1, 2011. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010.

Revenue Recognition

We generate the following types of revenues:

•	Wholesale fees, charged to our prepaid card distributors when our general purpose reloadable cards are reloaded and our gift cards are sold.
•	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.

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.

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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 general purpose reloadable 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 and interest income are 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.

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. Management believes accounts receivable are fully collectible; therefore, no allowance for doubtful accounts has been established.

Use of Estimates

The preparation of consolidated financial statements in conformity with 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 April 3, 2010 relate to loan advances on our credit facility, as described in Note C – Credit Facility.

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:

		April 3, 2010		January 2, 2010
Finished cards	$	3,251,718	$	3,359,927
Inventory in process		14,177		11,663
		3,265,895		3,371,590
Less reserve for damaged and obsolete inventory		2,316,830		1,954,700
Total Inventories	$	949,065	$	1,416,890

We have a policy of reserving the full inventory carrying cost for any cards that are on our books with six months or less to expiration. This policy results in a higher reserve percentage being charged in the period of time beginning twelve months prior to a card’s expiration and continuing until the card is fully reserved at the point six months from expiration. This policy resulted in an increase in inventory reserves charges of approximately $362,000 for 1Q2010. During the fiscal year ended January 2, 2010, 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.

-7-

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 ASC 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.

We did not incur any impairment charges in 1Q2010. During 1Q2009, we recognized impairment charges of approximately $118,300 on an intangible asset related to a marketing incentive agreement. These impairment charges are included in general and administrative expenses in the accompanying statements of operations

As of April 3, 2010 our estimates indicate that all remaining long-lived assets are recoverable.

Advertising Costs

Advertising expenses, which were approximately $121,200 and $82,700 during 1Q2010 and 1Q2009, respectively, are expensed as incurred. The majority of advertising for both 1Q2010 and 1Q2009 was related to attending trade shows and employing media consultants. At April 3, 2010, we had approximately $122,200 in prepaid marketing of which the majority is related to product placement inducement payments and advertising promotional payments made to a nationwide retailer. The product placement inducement 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 $275,000 and $267,000 during 1Q2010 and 1Q2009, 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.

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 April 3, 2010:


Description		Shares of Common Stock and Common Stock Equivalents Outstanding

Common Stock		21,244,410
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		3,052,638
Warrants		44,946,931

Total		125,100,343
* as-converted into Common Stock.

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Income Taxes

Under certain 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.

Financial Instruments and Concentrations

Financial instruments, as defined in a certain ASC’s, 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, Interactive Communications (“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.

The following table summarizes our stock-based compensation expense:


Stock-based compensation charged to:		1Q2010		1Q2009

Transaction and operating expenses	$	1,229	$	804
Selling and marketing expenses		25,867		28,838
General and administrative expenses		84,387		79,775
Consulting expense		4,339		-
Interest expense		-		9,925
Total stock-based compensation	$	115,822	$	119,342

Amounts charged to consulting expense represent the cost of options issued in conjunction with an internet-based sales development agreement. The prior year amount 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 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 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 and declared on our Series A Preferred Stock were $179,772 as of December 31, 2009. Dividends owed but not declared on our Series A Preferred Stock were $290,806 as of April 3, 2010.

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Fair Value Measurements

At April 3, 2010, the Company did not have any items to be measured at fair value.

Recently Issued Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. The amendments in this update require, among other things, new disclosures and clarifications of existing disclosures related to transfers in and out of Level 1 and Level 2 fair value measurements, further disaggregation of fair value measurement disclosures for each class of assets and liabilities, and additional details of valuation techniques and inputs utilized. The adoption of this standard is not expected to affect the Company’s consolidated financial statements.

In January 2010, the FASB issued Accounting Standards Update No. 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash. This update requires that dividends declared and payable in a combination of stock and cash, at the shareholders election, be included in earnings per share prospectively and not considered a stock dividend for purposes of computing earnings per share. To date, the Company has not declared dividends in this manner so this update has had no impact on the Company’s computation of earnings per share.

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. Because of our operating losses, at April 3, 2010, we have a cash balance of approximately $1,700,900 which is not expected to be adequate to meet our anticipated cash commitments in 2010. To meet our cash needs, we expect to raise between $5 and $8 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 cash flow.

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

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.

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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 April 3, 2010, the Borrowers had drawn $500,000 in Loans under the Amended and Restated Loan Agreement.

Mr. Terker, a current member of the Board of Directors of the Company (the “Board”), has sole voting and dispositive power over the securities held by Ballyshannon Partners, L.P. and its affiliates, two of which were 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.

NOTE D - 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 April 3, 2010, we had 957,212 shares available under the combined plans for future option grants and 3,052,638 total options outstanding, consisting of 2,931,388 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 April 3, 2010 and April 4, 2009:


	1Q2010	1Q2009
Expected term in years	5	5
Expected stock price volatility	167%	165 - 191%
Risk free interest rate	1.78%	1.50%
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 three month period ended April 3, 2010:

	Number of Options		Weighted average exercise price per share (price at date of grant)
Outstanding at January 2, 2010	3,012,638	$	3.09
Granted	40,000	$	0.75
Cancelled	-	$	-
Outstanding at April 3, 2010	3,052,638	$	3.06

Options granted at or above market value during the three month period ended April 3, 2010	40,000

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The following table summarizes information regarding options that are outstanding at April 3, 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	589,500	9.2	$	0.72	254,271	$	0.80
$1.30-$2.20	1,102,402	6.9	$	1.54	1,102,402	$	1.54
$2.30-$3.75	507,963	6.0	$	3.42	478,185	$	3.44
$4.00-$32.00	852,773	5.8	$	6.42	829,857	$	6.48
	3,052,638	6.9	$	3.06	2,664,715	$	3.35

The grant-date fair value of options granted during 1Q2010 and 1Q2009 was approximately $3,800 and $286,000, respectively. The total fair value of shares vested during the three-month period ended April 3, 2010 was approximately $115,800. At April 3, 2010, we estimate the aggregate stock-based compensation attributable to unvested options was approximately $231,500, which amount is expected to be recognized over a period of approximately three years.

Officer Stock Options

On January 4, 2010, the Board approved the repricing of all existing officer options to $0.50. The options were originally issued at exercise prices ranging from $0.75 to $11.00. The cost of the repricing of these options was valued using the Black-Scholes option pricing model at an aggregate fair value of approximately $9,729. This repricing is subject to stockholder approval at the annual meeting scheduled for June 17, 2010. The fair value of these options will be recognized as stock-based compensation expense upon stockholder approval.

On January 28, 2010, the Board awarded a total of 8,796,385 stock options to eight officers at an exercise price of $0.50 per share, which were valued using the Black-Scholes option pricing model at an aggregate fair value of approximately $804,893. The options vest over ratably the next ten calendar quarters. These grants are subject to stockholder approval. The fair value of these options will be recognized as stock-based compensation expense over the vesting period of the options, once stockholder approval is obtained.

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.

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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.

Non Employee Director Options

In February 2010, 40,000 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 $0.75, were valued using the Black-Scholes option pricing model at an aggregate fair value of approximately $4,000. This amount was included in employee and director stock-based compensation in the statement of operations for the quarter ended April 3, 2010.

Outstanding Warrants

The following table summarizes our warrant activity during the three month period ended April 3, 2010:

	Number of Warrants		Weighted average exercise price per share (price at date of grant)
Outstanding at January 2, 2010	57,759,385	$	0.07
Exercised	(11,701,523)	$	0.01
Forfeited	(1,110,931)	$	0.01
Outstanding at April 3, 2010	44,946,931	$	0.09

On March 25, 2010, Mr. Terker, a member of our Board, and entities controlled by Mr. Terker elected the cashless option to exercise 11,109,308 warrants with an exercise price of $0.01 resulting in the issuance of 9,998,377 shares of Common Stock and the forfeiture of 1,110,931 warrants. On March 29, 2010, Mr. Harris, a member or our Board, paid to the Company $17,031.46 for the exercise of 1,703,146 warrants with an exercise price of $0.01 for the issuance of 1,703,146 shares of our Common Stock.

Summary of Warrants outstanding by Exercise Price:

Exercise Price per Share	Number of Warrants Outstanding
$ 0.01	43,405,131
$ 0.30	256,250
$ 1.20	5,000
$ 2.30	883,475
$ 2.53	54,575
$ 3.00	200,000
$ 5.00	142,500
$ 0.09	44,946,931

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NOTE E - 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 April 3, 2010:

Twelve months ending		Amounts
April 2011	$	211,100
April 2012		206,200
April 2013		104,200
April 2014		-
April 2015		-

Total	$	521,500

Rent expense included in loss from continuing operations for 1Q2010 and 1Q2009, was approximately $54,400 and $60,000, respectively.

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 D – 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, PDNB and FB&T agreements also require a minimum payment of $5,000, $3,000 and $7,500 per month, respectively. During 1Q2010 and 1Q2009, we made aggregate payments of approximately $63,200 and $323,700, respectively, to Metavante, $7,000 and $0, respectively, to PDNB and $28,000 and $62,300, 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 April 3, 2010.

Pending or Threatened Litigation

We may become involved in certain other litigation from time to time in the ordinary course of business. To the best of our knowledge, no material 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 2009 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.

End of Financial Statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview. nFinanSe Inc. is a provider of 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.

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 October 3, 2009 fall within the referenced guidelines. Accordingly, we report our activities in this report in accordance with this 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.

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 2007, we secured agreements with several prepaid card distributors including 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 purpuse reloadable 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. 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. 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 PDNB that permits us to offer Visa-branded general purpose reloadable SVCs.

At April 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.

Revenues. We produce revenues through four general types of transactions:

•	Wholesale fees, charged to our prepaid card distributors when our general purpose reloadable cards are reloaded and our gift cards are sold.
•	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.

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Revenues for the thirteen weeks ended April 3, 2010 (“1Q2010”) and the thirteen weeks ended April 4, 2010 (“1Q2009”) were $54,692 and ($5,654), respectively. Included in the revenue for both 1Q2010 and 1Q2009 is amortization of $30,000 of marketing funds paid to a national retailer. 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 1Q2010 were $84,692, compared with $24,346 for 1Q2009.

Operating Expenses. Operating expenses for 1Q2010 increased $107,952 to $2,659,042 compared with $2,551,090 for 1Q2009, a 4% increase. The changes in our operating expenses are attributable to the following:

Transaction and operating expenses. Transaction and operating expenses for 1Q2010 and 1Q2009 were $922,777 and $540,762, respectively, a 71% increase. The components of expense are:

Description		1Q2010		1Q2009
SVC card cost, program and transaction expenses	$	137,621	$	287,124
Inventory reserves		577,869		59,926
Stock-based compensation		1,229		804
Customer service expenses		206,058		192,908
Total Transaction and Operating Expenses	$	922,777	$	540,762

SVC card cost, program and transaction expenses decreased 52% to $137,621 for 1Q2010 from $287,124 for 1Q2009. The decrease in the 1Q2010 was due to the implementation of a method that eliminated the costs charged by our processor to maintain our inactive card inventory on their system, which was initially implemented in May 2009.

Inventory reserves expense increased $517,943 when comparing 1Q2010 with 1Q2009. This is primarily due our policy of reserving the full inventory carrying cost for any cards that are on our books with six months or less to expiration. This policy results in a higher reserve percentage being charged in the period of time beginning twelve months prior to a card’s expiration and continuing until the card is fully reserved at the point six months from expiration. The increase in inventory reserves of $517,943 was primarily attributable to our policy.

Customer service expenses increased by $13,150 to $206,058, when comparing 1Q2010 with 1Q2009 due to increased staffing to cover higher call volumes.

Selling and marketing expenses. Selling and marketing expenses decreased $93,444 to $405,553 when comparing 1Q2010 with 1Q2009, a 19% decrease. The components of expense are:

Description		1Q2010		1Q2009
Advertising and marketing expenses	$	200,343	$	153,229
Sales force expenses		179,343		317,029
Stock-based compensation		25,867		28,838
Total Selling and Marketing Expenses	$	405,553	$	499,096

Advertising and marketing expenses increased 30%, or $47,114, to $200,343 when comparing 1Q2010 with 1Q2009. This increase is primarily attributable to an on-line advertising initiative to drive demand for our product by directing customers to our website.

Sales force expenses decreased $137,686 to $179,343, a 43% decrease for 1Q2010 when compared with 1Q2009. The principal components of this decrease are 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 to four employees at the end of the 1Q2010 from a total of seven employees at the end of the 1Q2009. In addition, rent expense decreased due to the elimination of our Dallas sales office in 2009.

Stock-based compensation decreased in 1Q2010 due to forfeiture of options and the termination of stock based compensation expense associated with the reduction of sales force employees.

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General and administrative expenses. General and administrative expenses decreased 12%, or $180,520, to $1,330,713 during 1Q2010 when compared with 1Q2009. The components of expense are:

Description		1Q2010		1Q2009
Payroll, benefits and taxes	$	715,159	$	773,803
Stock-based compensation		84,387		79,775
Professional, legal and licensing expense		196,220		185,894
Office and occupancy expenses		57,996		73,614
Impairment expense		-		118,276
Other administrative expense		276,951		279,870
Total General and Administrative Expenses	$	1,330,713	$	1,511,232

When comparing 1Q2010 with 1Q2009, changes in the expense categories are primarily attributable to:

	Ÿ	decreased payroll, benefits and taxes expenses of $58,644, due primarily to lower general and administrative payroll in 1Q2010 than 1Q2009;
	Ÿ	increased stock-based compensation expense of $4,612, which is primarily attributable to the issuance of immediately vested options to our board directors in 1Q2010;
	Ÿ	increased professional, legal and licensing expense of $10,326 due primarily to increased legal fees incurred in connection with the exercise of warrants;
	Ÿ	decreased office and occupancy expenses of $15,618 in 1Q2010 due primarily to a refund for the overpayment of common area maintenance for our corporate office; and
	Ÿ	impairment of asset charge of $118,276 in 1Q2009 to write-down the balance of the expected value of a marketing incentive agreement compared with none in Q12010.

Loss Before Other Income (Expense). As a result of the above, loss before other income (expense) for 1Q2010 and 1Q2009 was $2,604,350 and $2,556,744, respectively.

Other Income (Expense):

Interest expense. Interest expense was $23,465 for 1Q2010 and $773,511 for 1Q2009. All of the interest expense in 1Q2010 was in cash, and consisted of:

	Ÿ	$279 paid to finance our D&O insurance policy;
	Ÿ	$10,000 for payment to Mr. Jeffrey Porter under his agreement to provide the required collateral for bonds issued to states in connection with licensing; and
	Ÿ	$13,186 interest accrued for funds advanced under the Amended and Restated Loan Agreement.

In 1Q2009, cash interest expense was $217,744 and primarily consisted of:

	Ÿ	$85,598 was paid to the lenders for funds advanced under the terms of the Amended and Restated Loan and Security Agreement;
	Ÿ	$114,902 for the amortization of placement fees and legal fees incurred in connection with the Amended and Restated Loan and Security Agreement; and
	Ÿ	$16,109 for payment to Mr. Jeffrey Porter under his agreement to provide the required collateral for bonds issued to states in connection with licensing.

In 1Q2009, non-cash interest expense was $555,767 and consisted of:

	Ÿ	$545,842 for the amortization of the cost of the warrants issued under the Amended and Restated Loan Agreement; and
	Ÿ	$9,925 for the fair value of warrants earned during the period under the Guaranty and Indemnification Agreement between the Company and Mr. Terker.

Loss from Continuing Operations. Loss from continuing operations was $2,627,771 for 1Q2010 or $704,093 lower than the loss from continuing operations of $3,331,864 for 1Q2009.

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Liquidity and Capital Resources. From inception to April 3, 2010, we have raised net proceeds of approximately $52.2 million from financing activities. We used these proceeds to fund operating and investing activities. We had a cash balance of approximately $1,700,000 as of April 3, 2010.

Net cash used in operating activities was approximately $2.1 million and $2.6 million for 1Q2010 and 1Q2009, respectively. The decrease in cash used in operations was primarily due to lower operating losses during the current thirteen weeks compared with the same period of the prior year. This was primarily due to lower selling and marketing expenses, lower general and administrative expenses, and lower cash interest expense.

Net cash used in investment activities for 1Q2010 was approximately $51,200 consisting of purchases of property and equipment, primarily for additional computer hardware to improve the capacity of the nFinanSe NetworkTM. We recorded minimal investment activity for 1Q2009.

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 make Accommodation Loans 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.

During 1Q2010, cash provided by financing activities was $17,031 from the cash exercise of 1,703,146 warrants at an exercise price of $0.01 per share. During 1Q2009, the cash provided by financing activities of $2.7 million was the result of $2.7 million of Accommodation Loan borrowings under the Amended and Restated Loan Agreement. As of April 3, 2010, we had drawn $500,000 under the Amended and Restated Loan Agreement.

Changes in Number of Employees and Location. 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.

Off-Balance Sheet Arrangements:

Operating Leases

Twelve months ending		Amounts

April 2011	$	211,100
April 2012		206,200
April 2013		104,200
April 2014		-
April 2015		-

Total	$	521,500

Employment Agreements

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In addition to the above, Messrs. Welch and Springer received certain stock options as described in Note D – Stock Options and Warrants.

Service and Purchase Agreements

Pending or Threatened Litigation

We may become involved in certain other litigation from time to time in the ordinary course of business. To the best of our knowledge, no material 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.

Critical Accounting 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 we will generate adequate cash to continue as a going concern and that all long-lived assets are 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, short product life cycles and price competition, 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.

See Note A — “Formation, Background and Operations of the Company” to the consolidated financial statements, regarding the effect of certain recent accounting pronouncements on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

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Item 4T. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

An evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Securities Exchange Act”), as of April 2, 2010 was carried out by us under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. 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 are effective.

Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.

Change in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 6. Exhibits.

Exhibit Number		Description of Exhibit

4.1		Form of Amendment No. 3 to Warrants (as executed by Mr. Terker (and his affiliates including Argosy Capital Group III LP, Ballyshannon Family Partnership LP, Ballyshannon Partners LP, Odyssey Capital Group LP, Bruce E. Terker, Bruce Terker IRA and Cynthia Terker)) (attached as Exhibit 99.1 to that certain Form 8-K, filed by the Company with the Securities and Exchange Commission on March 1, 2010).

4.2		Form of Amendment No. 3 to Warrants (as executed by Mr. Harris (and his affiliates including 5 Star Partnership and Donald A. Harris)) (attached as Exhibit 99.2 to that certain Form 8-K, filed by the Company with the Securities and Exchange Commission on March 1, 2010).

*31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

*31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

*32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* filed herewith.

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SIGNATURES

In accordance with the requirements of the Securities and 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.

Date: May 13, 2010	By:	/s/ Jerry R. Welch

		Jerry R. Welch, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)

	NFINANSE INC.

Date: May 13, 2010	By:	/s/ Raymond P. Springer

		Raymond P. Springer, Chief Financial Officer (Principal Financial Officer)

	NFINANSE INC.

Date: May 13, 2010	By:	/s/ Jerome A. Kollar

		Jerome A. Kollar, Vice President Finance and Controller (Principal Accounting Officer)

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nFinanSe Inc. - FORM 10-Q - May 13, 2010

Attached files

nFinanSe Inc. Reports