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EX-10.20 - ESP P&S AGREEMENT - LOCATEPLUS HOLDINGS CORPespps.htm
EX-31.2 - EXHIBIT 31.2 - LOCATEPLUS HOLDINGS CORPcfocert.htm
EX-23.1 - CONSENT - LOCATEPLUS HOLDINGS CORPconsent.htm
EX-31.1 - EXHIBIT 31.1 - LOCATEPLUS HOLDINGS CORPceocert.htm
EX-32.1 - EXHIBIT 32.1 - LOCATEPLUS HOLDINGS CORPsoxcert.htm
EX-10.21 - ESCROW AGREEMENT - LOCATEPLUS HOLDINGS CORPescrowagmt.htm
EX-10.18 - DUTCHESS DEBT CONVERSION AGREEMENT - LOCATEPLUS HOLDINGS CORPdebtconversionagmt.htm
EX-10.19 - SERIES A CONVERTIBLE STOCK PURCHASE AGREEMENT - LOCATEPLUS HOLDINGS CORPstockpurchaseagmt.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K


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

For the Fiscal Year Ended December 31, 2009

Commission File Number 000-49957
 
 
LocatePLUS Holdings Corporation
(Exact name of registrant as specified in its charter)
     
Delaware
 
04-3332304
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

     
100 Cummings Center, Suite 235m, Beverly, MA
 
01915
(Address of principal executive offices)
 
(Zip Code)
(978) 921-2727
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report.)
 
 
 
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 (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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
 
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. (Check one):
 
 
Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company x
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No ý
 

The aggregate market value of the voting common equity held by non-affiliates, computed by reference to the average bid and ask price of such common equity on March 25, 2010, is $5,248,330

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. As of March 25 2010 there were 49,984,100 shares of Common Stock, and 72,000 shares of Preferred Stock outstanding.

 
 
 
 
 
 
 
 

 

 

   Table of Contents  
   
Page
     
 
 
     
   ITEM 1
Description of Business
  1
     
   ITEM 1A 
Risk Factors
7
     
   ITEM 2
Description of Property
10
     
   ITEM 3
Legal Proceedings
11
     
   ITEM 4
Submission of Matters to a vote of Security Holders
11
     
 
 
     
   ITEM 5
Market for Common Equity and Related Stockholder Matters
11
     
   ITEM 6
Management's Discussion and Analysis of Financial Condition and Results of Operations
13
     
   ITEM 7 Financial Statements   19
 
   
 
   ITEM 8 Changes In and Disagreements with Accountants and Financial Disclosure 19
 
 
 
   ITEM 8A Controls and Proceedures 19
 
 
 
PART III    
 
 
 
   ITEM 9 Directors, Executive Officers, Promotoers, and Control Persons; Compliance with Section 16(a) of the Exchange Act   21
 
 
   ITEM 10 Executive Compensation   24
 
 
   ITEM 11 Security Ownership and Certain Beneficial Owners and Management   24
 
 
   ITEM 12 Certain Relationships and Related Transactions   25
 
 
   ITEM 13 Exhibits and Reports on Form 8-K  26
     
   ITEM 14 Principal Accountant Fees and Services 29



 

 


FORWARD LOOKING STATEMENTS

Certain statements in this Form 10-K, other than purely historical information, including estimates, projections, statements relating to the Company's business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled "Risk Factors" (refer to Item 1A). LocatePlus Holdings Corporation (“LPHC” or the “Company”) undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.


 
Overview

LocatePLUS Holdings Corporation , through itself and its wholly-owned subsidiaries LocatePLUS Corporation, Worldwide Information, Inc., Entersect Corporation, Dataphant, Inc., Metrigenics, Inc., and TruBackgrounds (collectively, the “LocatePLUS Group”), are business-to-business, business-to-government and business-to-consumer providers of public information via our proprietary data integration solutions.  We sell a CD-ROM-based product, Worldwide Information™, which enables users to search certain motor vehicle records and driver’s license information in multiple states.  Our LocatePLUSÔ product, which is accessible through the Internet, contains searchable and cross-referenced public information on individuals throughout the United States, including individuals’ names, addresses, dates of birth, Social Security numbers, prior residences, and, in certain circumstances, real estate holdings, recorded bankruptcies, liens, judgments, drivers’ license information and motor vehicle records.  Entersect Corporation provides self-screening for both resume and online dating services.  Entersect also provides services to law enforcement through an online database called Entersect Police Online (EPO). Dataphant provides information on virtually every land-based phone number in the United States and approximately 45% of the cell phone numbers in the United States.  Metrigenics, Inc., was formed to develop new ways to integrate biometrics with data.  On September 24, 2009 the Company acquired all the stock of Employment Screening Profiles, Inc.(d/b/a TruBackgrounds), a Florida corporation (“TruBackgrounds”), Oldsmar, Florida,  engaged in the business of developing and delivering integrated, customized web-enabled solutions designed to aid in background verification, applicant management and human resource collaboration processes.

Industry Background

We are a public information provider.  Users of our information have historically included law enforcement, other government agencies, law firms, investigation companies, private investigators and insurance companies.  Information is used by those entities for various activities ranging from legal discovery to the detection of fraud and the prevention of crime and terrorism.  Commercial businesses have increasingly availed themselves of our information services in connection with their identity validation and other business decisions.

Non-traditional users, such as individuals using job search and on-line dating service sites, have also begun to avail themselves of background information in response to concerns about identity theft.


 
The majority of the data in the database is publicly available and it is only through our proprietary matching and searching technology that creates significant value to the data.  Examples of such public data include:
 

· names and addresses
 
· aliases
 
· nationwide court records
 
· property ownership
 
· bankruptcies
 
· certain criminal records
 
 

The sources of these types of public data, however, are often fragmented and geographically dispersed.  In addition, the reliability of this information and the data provided by various sources may not be consistent.  In this environment, users that wish to use public information are faced with the time-consuming, costly and difficult task of gathering data from numerous locations and sources, verifying the information acquired and organizing it into a useful format.  While services and technologies have developed to enable remote access to certain information sources, there have historically been few comprehensive access points for information
available about individuals.  Traditional sources of information, including credit reporting services and other database services, make available only limited types of information for specific purposes, such as verifying credit worthiness.  Such services may also be limited by applicable law to specified uses and users.  Almost none of those sources are integrated in a manner that allows easy and rapid access to data.

Business Strategy

Our business plan is to provide an entire suite of information products and services for professionals in law enforcement agencies, law firms, insurance underwriting, fraud investigation, private equity funds, private investigation and financial institutions.  We believe that we will be able to compete with comparable services based upon the pricing of our services and based upon certain technical advantages incorporated in our systems.  We have proprietary matching and searching capabilities that give us an advantage over our competitors.  We also have the technology to gather virtually all the landline phone numbers and 45% of U.S. cell phone numbers.  To date, our products have primarily focused on the United States market.

Our Target Market and Screening of Users

Our products have historically been marketed and sold to federal, state and local government agencies (including law enforcement agencies), private investigators, human resource professionals and the legal profession.  Our products have been used in:
·  
crime and terrorism investigation
 
·  
detection of fraud
 
·  
“skip tracing”
 
·  
background checks
 
·  
legal due diligence
 
·  
Identity self certification
 
·  
Private security
 
·  
Risk-management

Entersect Corporation offers data for self-certification purposes in connection with job search and Internet dating services and has provided an additional channel in which to distribute the same data developed by LocatePLUS to law enforcement agencies.  All LocatePLUS  Group products are marketed and sold only to pre-screened business and government end users.  We require commercial customers to provide background information about their business need for data and about themselves, such as business licenses, bar admission cards or private investigator licenses.  Individuals involved in law enforcement must provide similar evidence of their authority.


 
To prevent the misuse of our data, we have adopted a three-tier security schema for our LocatePLUS Group products.  We believe that we lead the market in protecting access to our data.  With recent challenges in the industry relating to data access, we have been ahead of the curve in adopting a schema that restricts the most sensitive data.  Our groups are classified in the following manner.


Level
Industry Users
Sample Datasets Available to Users
I
General Business
Names, Addresses and Phone Numbers
Past Residences, Neighbors and Affiliates
Real Property
II
Private Investigators
Insurance
Attorneys/Law Firms
Government
Corporate Security
Level I Data, plus:
Liens and Judgments
Drivers’ Records
Certain Motor Vehicle Records
 
III
Law Enforcement
Level I and II Data, plus:
Comprehensive Criminal Records
Restricted Motor Vehicle Records
Certain Credit Reporting Data

 
LocatePLUSÔ

Our LocatePLUS database contains searchable and cross-referenced public information on individuals throughout the United States.  Information is presented in a dynamic, hyper-linked fashion, permitting users to rapidly identify and obtain personal information relating to individuals and their associated residences, possible acquaintances, and a variety of other types of data.  Our LocatePLUS database consists of approximately five billion individual data entries.  According to our estimates, we have data entries relating to approximately 225 million adult individuals in the United States

Datasets currently integrated in our LocatePLUS product include nationwide records relating to:

 · names and addresses
         · aliases
             · dates of birth
         · Social Security numbers
         · driver’s license information
         · residential address information (including dates of residence)
         · certain criminal arrest, conviction and incarceration records
 
 · real estate records
             · prior residences
         · recorded bankruptcies
         · liens
         · motor vehicle records
         · certain death records
         · phone numbers
         · vessel registrations
 



We believe that one of the significant advantages of our LocatePLUS product, in comparison with many products with which we compete, is the ability of LocatePLUS to “tie” data associated with a given individual to produce a single report.  Our LocatePLUS system uses a proprietary methodology to associate data in a manner that generally results in a matching of data entries across diverse data sources, allowing users to obtain a single, comprehensive data report about an individual, even when there is no single element that ties data entries together (such as a Social Security number).  This comprehensive data report is itself linked to other data potentially relevant to a business or government agency researching an individual, such as names and addresses of possible acquaintances, relatives and neighbors of that individual.  Another of the advantages that LocatePLUS Group has is its unlisted and cell phone data which we believe is superior to competitive offerings.


Worldwide Information
 
We produce CD-ROM products that enable users to quickly search motor vehicle records in multiple states through a dynamic search engine, known as Worldwide Information™.  Our Worldwide Information™ product enables users to search certain motor vehicle records and drivers’ license information in multiple states through a dynamic search engine.  Unlike many competing products, our Worldwide Information™ product enables users to rapidly identify vehicles or drivers using complete or partial search criteria.  We believe that this ability to search partial data is a valuable tool in circumstances in which incomplete information is available, as is often the case in criminal investigations.  Unlike data provided by Internet-based services, searches on our CD-ROM product are confidential and not available to any person other than the user of our CD-ROM product.  We believe that the confidential nature of this CD-ROM product makes it particularly attractive to law enforcement agencies, which must often conduct criminal investigations in strict secrecy.

Entersect

Entersect Corporation operates under the trade name of "Entersect," and provides self-screening for both resume and online dating services. Entersect also provides services to law enforcement through an online database called Entersect Police Online (EPO).

Dataphant

Dataphant has information on virtually every land-based phone numbers in the United States and approximately 45% of the cell phone numbers in the United States. Over the past five years other competitors have emerged with what appears to be similar offerings to Dataphant’s. We believe our process and technology continues to remain superior to these other sources that use alternative methods to acquire cell phone data This data is incorporated into our LocatePLUS, Entersect and Worldwide Information products.

Metrigenics

Metrigenics was formed to develop new ways to integrate biometrics with data.  In March, 2009, management made the decision to suspend funding of this subsidiary which consisted primarily of research and development costs, and is presently exploring strategic options with respect to this entity.

TruBackgrounds

On September 24, 2009 the Company acquired all the stock of Employment Screening Profiles, Inc.(ESP)(d/b/a Trubackgrounds), a Florida corporation (“Trubackgrounds”), located in Oldsmar, Florida, which is engaged in the business of developing and delivering integrated, customized Web-enabled solutions designed to aid in background verification, applicant management and human resource collaboration processes.Trubackgrounds serves large and small businesses with systems and information designed to enable intelligent decisions and reduce costs through automation. Trubackgrounds will continue to be operated as a wholly-owned subsidiary of the Company and will collaborate in providing enhanced service capability to the Company’s customers.


 
The following table summarizes the consideration paid for ESP (TruBackgrounds) and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date.
 
 
Consideration
 
   
Equity Instruments (9,000,000 common shares of LocatePlus Holdings)
$       900,000
   
Fair value of total consideration transferred
$       900,000
   
Recognized amounts of identifiable assets acquired and liabilities assumed
 
   
Financial assets
  $        14,578
Property, plant, and equipment
 $        40,837
Note Payable $  (148,000) 
Financial liabilities
 $       (5,828)
   
 Total identifiable net assets $     (98,413)
   
Goodwill $     998,413
  $     900,000

The fair value of the 9,000,000 shares of Common Stock of the Company paid for ESP (TruBackgrounds)($900,000) was determined on the basis of the closing market price of the Company’s Common Stock on the acquisition date. The 9,000,000 shares are subject to an escrow agreement that requires their delivery in full to the seller on or before September 1, 2011 upon the satisfaction of certain stated conditions

The goodwill of $998,413 arising from the acquisition consists largely of the synergies expected from combining the operations of the Company and TruBackgrounds. All of the goodwill was assigned to TruBackgrounds.

The fair value of the financial assets acquired includes accounts receivable with a fair value of $13,628 and prepaid expenses of $950.

The amount of TruBackgrounds’ revenue and earnings included in the Company’s consolidated income statement for the quarter ended December 31, 2009, and the revenue and earnings of the combined entity had the acquisition date been January 1, 2009 or January 1, 2008, are as follows:
 
 
  Revenue  Earnings
     
Actual from 9/24/2009 - 12/31/2009
$          272,714
$          44,693
     
Supplemental pro forma from 1/1/2009 - 12/31/2009
$       7,685,933
       $  (1,969,626)
 
 
 
Supplemental pro forma for 1/1/2008 - 12/31/2008    $       9,382,807        $  (1,358,151)
 
   
 



Sources of Our Data

Our operations depend upon information derived from a wide variety of automated and manual sources.  External sources of data include public records that are acquired from aggregators as well as directly from the agency capturing those records such as courts, county clerks, motor vehicle departments, and more.  In the event that any of our primary sources of data became unavailable to us, we believe that we would be able to integrate alternate sources of data without significant disruption to our business or operations, as there are currently a number of providers of such data.


Regulatory Restrictions on our Business

Both Federal and state laws regulate the sale of data.  Recently, consumer advocates and Federal regulators have voiced concerns regarding public access to, or commercial use of, personal information.  As a result, increased pressure has been placed upon Federal and state legislators to regulate the dissemination or commercial use of personal information.

One such legislative enactment that has had an effect on our business was the Financial Services Modernization Act of 2000, also known as the “Gramm-Leach-Bliley Act”.  Among other things, this law restricts the collection, use, and transfer of certain data that includes “credit header” information, which had historically functioned as the backbone of our data resources.  Implementation of this law’s restrictions by the Federal Trade Commission significantly limited the availability of certain data for our database, but we have subsequently developed datasets that function independently of “credit header” information.  Although we have not engaged counsel to review this matter or the conduct of our operations generally, we believe that our operations are currently unaffected by the Gramm-Leach-Bliley Act or any law specifically applicable to the dissemination of data concerning individuals.  More recently, Congress has been addressing the access to public data such as ours. The Fair Credit Reporting Act (“FCRA”) (15 U.S.C. §§ 1681-1681u). Rules were adopted implementing the Act by the Federal Trade Commission. These rules  became effective on November 1, 2009. See 16 C.F.R. § 681. The final rules require each financial institution and creditor that holds any consumer account, or other account for which there is a reasonably foreseeable risk of identity theft, to develop and implement an Identity Theft Prevention Program (ITPP) for combating identity theft in connection with new and existing accounts. The Program must include reasonable policies and procedures for detecting, preventing, and mitigating identity theft. These and other potential restrictions on our use of personal information, however, could limit the usefulness and have a material adverse affect on operations, our products, including our LocatePLUS product, and our operations.  Federal and state law prohibits us from selling information about minors.  Our products have been designed to prevent the dissemination of such data.

Distribution of Our Products

We distribute our content both directly and through channel partner arrangements, by which third parties access our databases in consideration for a royalty.

Competition

Current competitors for our LocatePLUS and Entersect include ChoicePoint, IRB, MerlinData, and Lexis-Nexis.  Many of the companies that currently compete with this product, as well as other companies with whom we may compete in the future, are national or international in scope and have greater resources than we do.  Those resources could enable those companies to initiate price cuts or take other measures in an effort to gain market share in our target markets.
 
Our Worldwide Information product primarily competes with the registries of motor vehicles of various states that sell their data to screened users.  These state agencies generally provide data in “raw form” without the search capabilities that we provide in our Worldwide Information product.
 
TruBackgrounds is in the human resources screening industry which is a 4 billion dollar market consisting of over 3,000 vendors providing background check services to staffing agencies and businesses nationwide. The majority of competitors are typcially small providers that serve a select clientele either regionally or by industry type. More significant competitors such as Choicepoint, First Advantage, and HireRight are large organizations that offer a vast array of products that include drug screening, biometric validation, and much more. Prominent trade associations along with government resources show that the pre-employment screening market is continuing to grow significantly.

 

Employees
 
As of December 31, 2009, the LocatePLUS Group had 53 employees.  We believe that our relations with our employees are good.


The Company operates in a rapidly changing economic and technological environment that presents numerous risks, many of which are driven by factors that the Company cannot control or predict. The following discussion, as well as the "Critical Accounting Policies and Estimates" discussion in Item 6 of this Annual Report on Form 10-K highlights some of these risks.

You should carefully consider the risks described below before buying shares of the Company's common stock, as well as other information provided to you in this document, including information in the section of this document entitled "Forward Looking Statements". An investment in the Company's common stock is highly speculative. The risks and uncertainties described below are not the only risks the Company faces. Additional risks and uncertainties not currently known to the Company, or that the Company currently deems immaterial, may impair the Company's business operations. If any of the adverse events described in this Item 1A actually occur, the Company's business, results of operations and financial condition could be materially adversely affected, the trading price of the Company's common stock could decline, and you might lose all or part of your investment.

THE COMPANY HAS A HISTORY OF OPERATING LOSSES, AND IF THE COMPANY CONTINUES TO INCUR OPERATING LOSSES, IT MAY BE UNABLE TO CONTINUE OPERATIONS.

The Company had net losses of $2,845,570, and $1,333,612 for the years ended December 31, 2009 and 2008, respectively. The Company had an accumulated deficit of $53,227,511, and a net stockholders' deficit of $8,994,330 and had negative working capital as of December 31, 2009. The Company may never be profitable. If the Company continues to incur operating losses and fails to become a profitable company, it may be unable to continue its operations. The extent of the Company's future losses and the timing of its potential profitability are highly uncertain. The Company's future growth and profitability depends solely on its ability to successfully market its products. The Company must continue to enhance the features and functionality of its products to meet customer requirements and competitive demands. In addition, the failure of future product enhancements to operate as expected could delay or prevent future sales of its products. If future customers do not adopt, purchase and successfully deploy the Company's products and its planned product enhancements, the Company's revenues could be adversely impacted.

OUR AUDITORS HAVE SUBSTANTIAL DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN, AND IF THE COMPANY IS UNABLE TO GENERATE INCREASED BUSINESS VOLUME OR OBTAIN ADDITIONAL FINANCING, THE COMPANY MAY BE REQUIRED TO CEASE OR CURTAIL ITS OPERATIONS.

In their report prepared in conjunction with the Company's December 31, 2009 financial statements, the Company's auditors included an explanatory paragraph stating that, because the Company has incurred recurring net losses, has an accumulated deficit and has minimal working capital as of December 31, 2009, there is substantial doubt about the Company's ability to continue as a going concern.


 

THE COMPANY'S OPERATING RESULTS FLUCTUATE AND ARE DIFFICULT TO PREDICT, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.

The Company's revenues in any particular period may be lower than revenues in a preceding or comparable period. Factors contributing to fluctuations, some of which are beyond the Company's control, include:
 
·  
fluctuations in its customers' businesses;
·  
timing and market acceptance of new products or enhancements introduced by the Company or its competitors;
·  
timing and level of expenditures for sales, marketing and product development; changes in the prices of the Company's or its competitors' products; and general industry trends;
·  
fluctuations in overall economic activity

In addition, the Company has historically operated with no significant backlog. Any significant deferral of orders for its products would cause a shortfall in revenues for any given fiscal period. As a result, the Company's revenues may vary significantly from quarter to quarter. If the Company's quarterly revenue or operating results fall below the expectations of investors or public market, its stock price could be adversely impacted.

THE COMPANY MAY BE UNABLE TO OBTAIN THE CAPITAL NECESSARY TO FUND ITS OPERATIONS.

The Company has a need to raise additional capital through debt or equity financing to fund operations. As of December 31, 2009, the Company had $53,546 in cash available to fund its operations, and had a working capital deficit of $8,266,601. In 2010, it will need to raise additional capital or obtain additional debt financing in order to be able to fund its operations. The Company may not get funding when it needs it or on favorable terms. In addition, the amount of capital that a firm such as the Company is able to raise often depends on variables that are beyond its control, such as the share price of its stock and its trading volume. As a result, the Company may not be able to secure financing on terms attractive to it, or at all. If the Company is able to consummate a financing arrangement, the amount raised may not be sufficient to meet its future needs and may be highly dilutive. If the Company cannot raise adequate funds to satisfy its capital requirements, it may have to scale-back or eliminate operations.

THE COMPANY HAS A HISTORY OF LOSSES, AND SUCH LOSSES MAY CONTINUE IN THE FUTURE IF THE COMPANY IS UNABLE TO SECURE SUFFICIENT BUSINESS TO COVER ITS OVERHEAD AND OPERATING EXPENSES.

The Company has not been profitable and will continue to generate losses, and potentially require additional external funding, until sales of its products can be increased to sufficient levels for the Company to generate a profit and positive cash flow, of which there can be no assurance that such levels can be attained.

THE COMPANY OPERATES IN HIGHLY COMPETITIVE INDUSTRIES WITH MANY PARTICIPANTS.

The Company operates in a highly competitive environment, competing on the basis of product offerings, quality, service and pricing. Competition is particularly intense and is increasing. The Company has a number of existing competitors, some of which are very large, with significantly greater technological and financial resources, brand recognition, and established relationships with the major customers in each market. In addition, new competitors may enter the industry as a result of shifts in technology. The Company does not offer any assurances that it will be able to compete successfully against existing or future competitors.


 
 
THE COMPANY MAY BE UNABLE TO ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL.

The Company's future success is dependent on its ability to attract and retain talented personnel. There is intense competition for qualified personnel, and the Company may not be able to attract and retain qualified personnel necessary for the development and introduction of new products or to replace qualified personnel that may leave its employ. Part of the Company's compensation program includes stock options and stock grants. If the Company's stock price continues to perform poorly it may adversely affect its ability to retain or attract key employees.

THE COMPANY’S DATA MAY BECOME OUT OF DATE OR INACCESSIBLE

The Company depends for its success on access to a continuous supply of accurate and timely data. Data sources may become too expensive or providers may become unable to provide accessibility for a variety of physical, technical or legal reasons. Inability to supply timely and accurate data can cause a rapid deterioration in the Company’s customer base or force it to discount its services to the point where they cannot produce an operating profit.

THE COMPANY MAY BE SUBJECT TO INTELLECTUAL PROPERTY LITIGATION AND INFRINGEMENT CLAIMS, WHICH COULD CAUSE IT TO INCUR SIGNIFICANT EXPENSES OR PREVENT THE COMPANY FROM SELLING ITS PRODUCTS.

Intellectual property litigation can be costly and time-consuming and can divert the attention of management and key personnel from other business issues. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. A successful claim by a third party of patent or other intellectual property infringement by the Company could compel it to enter into costly royalty or license agreements or force it to pay significant damages and could even require it to stop selling certain products.

CHANGES IN ACCOUNTING MAY AFFECT THE COMPANY'S REPORTED EARNINGS AND OPERATING INCOME.

U. S. generally accepted accounting principles and accompanying accounting pronouncements, implementation guidelines, and interpretations for many aspects of the Company's business, such as revenue recognition, accounting for investments, and treatment of goodwill or amortizable intangible assets, are highly complex and involve subjective judgments. Changes in these rules or their interpretation or changes in the Company's products or business could significantly change the Company's reported earnings and operating income and could add significant volatility to those measures, without a comparable underlying change in cash flow from operations. See “Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" of this report.

THE COMPANY IS EXPOSED TO RISKS FROM RECENT LEGISLATION REQUIRING COMPANIES TO EVALUATE INTERNAL CONTROL OVER FINANCIAL REPORTING.

Section 404 of the Sarbanes-Oxley Act of 2002 requires the Company's management to report on the operating effectiveness of the Company's internal controls over financial reporting as of December 31, 2010. Livingston & Haynes, LP, our independent registered public accounting firm, will be required to attest to the effectiveness of the Company's internal control over financial reporting beginning with the year ended December 31, 2010. The Company must establish an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements. The Company expects that the cost of this program will require it to incur expenses and to devote resources to Section 404 compliance on an ongoing basis.

It is difficult for the Company to predict how long it will take to complete management's assessment of the effectiveness of the Company's internal control over financial reporting for each year and to remediate any deficiencies in our internal control over financial reporting. As a result, we may not be able to complete the assessment and process on a timely basis. In the event that the Company's chief executive officer, chief financial officer or independent, registered public accounting firm determine that the Company's internal control over financial reporting is not effective as defined under Section 404, the Company cannot predict how regulators will react or how the market prices of the Company's shares will be affected.

 
 
ACQUISITIONS AND JOINT VENTURES MAY HAVE AN ADVERSE EFFECT ON THE COMPANY'S
BUSINESS.

The Company may make acquisitions or enter into joint ventures as part of its long-term business strategy. Any such transaction involves significant challenges and risks including that the transaction does not advance the Company's business strategy, that the Company doesn't realize a satisfactory return on the investment it makes, or that the Company may experience difficulty in the integration of new employees, business systems, and technology, or diversion of management's attention from its other business activities. These factors could adversely affect the Company's operating results or financial condition.
 

 
Facilities
 
LocatePLUS Holdings Corporation, LocatePLUS Corporation, Metrigenics Inc., and Worldwide Information, Inc. are headquartered in Beverly, Massachusetts, where we lease approximately 20,000 square feet.  The lease on that facility expires on March 30, 2015, and our annual lease obligation is approximately $371,020.

Dataphant, Inc. is located in Austin, Texas, where it leases approximately 3,000 square feet pursuant to a month-to-month lease (which includes the use of office equipment, with current monthly rent of $3,680).

Entersect Corporation is located in Santa Ana, California, where it leases approximately 1,900 square feet pursuant to a month-to-month lease with current monthly rent of $4,012.

TruBackgrounds is located in Oldsmar, Florida, where it leases approximately 1,400 square feet with a current monthly rent of $1,956. The lease on this location expires on August 31, 2011


Intellectual Property

Publicly available data concerning individuals is generally non-proprietary.  As a result, our intellectual property consists largely of certain trade secrets and know-how associated with the integration of databases and our ability to link diverse datasets.  We rely on a combination of confidentiality agreements, restrictions on access to our proprietary systems, and contractual provisions (such as in our user agreements) to protect our intellectual property.

We have registered LOCATEPLUS.COMâ as a trademark with the United States Patent and Trademark Office.  We maintain LOCATEPLUSÔ, WORLDWIDE INFORMATION™, ENTERSECT™, CareerScan™, and TrustmeID™ as unregistered trademarks relating to our products.  We may, from time to time, claim certain other rights under trademark law, however, we currently have no other marks registered or pending with the United States Patent and Trademark Office or the equivalent agency of any other country.

In 2003, we filed for patent protection covering certain aspects of two of our products.  We have filed for patent protection covering certain aspects of our unique search product, "Bull's Eye," that electronically matches database information with current public phone and utility information to identify current information.  We also filed, through our Entersect Corporation, for patent protection covering certain aspects of our self-validation products Career Screen™ and TrustmeID™.


 
 
On November 16, 2009, an execution was obtained against LocatePlus Holdings Corporation in a lawsuit styled Thomas Nolan v. LocatePlus Holdings Corporation, in the Essex County Superior Court in Massachusetts, C.A. No. ESCV2006-02125, in the amount of One Hundred Sixty Thousand Two Hundred and Sixty Nine and 45/100 Dollars ($160,269.45).  The execution was in connection with a default judgment entered against the Company on January 11, 2007.  The default judgment was appealed by the Company on or about April 1, 2009, and the appeal was subsequently dismissed on June 25, 2009.  The underlying cause of action was brought to enforce a default judgment obtained against the Company in Oregon.  The Company is actively engaged in settlement discussions with the Plaintiff.

There is pending litigation in the matter of Sharon Taylor, et al. v. Biometric Access Company, et al., in the US District Court for the Eastern District of Texas, C.A. No. 2:07-CV-00018.  The matter is styled as a class action suit brought by the plaintiff class against a group of defendant companies under the Driver Privacy Protection Act, 18 USC §2721 et seq.  The defendants filed a joint Motion to Dismiss which was granted by the Court.  The plaintiff class has filed an appeal of the dismissal of the case, which is being vigorously opposed.  The likelihood of success of the defendants’ opposition to the appeal is excellent.  The potential for loss is negligible.

There is pending litigation in the matter of Sam Wiles, Carol Watkins, Jackson Wills and Sarah Smith, Individually and on behalf of all others Similarly Situated, in the US District Court for the Western District of Missouri, C.A. No. 09-4164-CV-C-NKL.  The matter is styled as a class action suit brought by the plaintiff class against the Company, alleging a violation of the Driver Privacy Protection Act, 18 USC §2721, et. seq., and is one of several similar actions brought by the class against a number of companies in the same industry as the Company.  The Company is vigorously defending the suit, and believes that its defenses to the plaintiff class’s claims are strong.


On December 15, 2009, the Company filed a definitive proxy statement asking shareholders for their written consent  (a) to increase our authorized shares by adding a new authorization of Preferred Shares and  (b) to authorize action by our officers to carry out the foregoing tasks. The purpose of this authorization was to successfully complete an agreed-upon exchange of approximately $1,817,828 of Convertible Debentures owned by Dutchess Private Equities Fund, Ltd. into 72,000 shares of new Series A Preferred Shares.

On December 29, 2009 the Company obtained the consent of a majority of the record holders of its Common Stock to the foregoing actions.

 
 
 
Market Information

The following tables set forth the high and low closing sales prices per share for our Common Stock, each quarter during fiscal years 2007, 2008, and 2009 as reported by the Pink Sheets under the symbol LPHC.PK.
 

 
2007
 
Three months ended
 
March 31
June 30
September 30
December 31
 
High
Low
High
Low
High
Low
High
Low
LPHC.PK
.42
.18
.22
.09
.15
.08
.12
.04
 

 
2008
 
Three months ended
 
March 31
June 30
September 30
December 31
 
High
Low
High
Low
High
Low
High
Low
LPHC.PK
.15
.04
.28
.04
.14
.02
.05
.01
 

 
2009
 
Three months ended
 
March 31
June 30
September 30
December 31
 
High
Low
High
Low
High
Low
High
Low
LPHC.PK
.05
.01
.15
.02
.17
.08
.19
.10
 
Holders
As of December 31, 2009 there were approximately 442 holders of record of our Common Stock and 1 holder of record of our Preferred Stock.

 
 
 
Common Stock
 
We have never declared or paid a cash dividend.  At this time, we do not anticipate paying dividends in the future.  We are under no legal or contractual obligation to declare or to pay dividends, and the timing and amount of any future cash dividends or distributions is at the discretion of our Board of Directors and will depend, among other things, on our future after-tax earnings, operations, capital requirements, borrowing capacity, financial condition and general business conditions.  We plan to retain any earnings for use in the operation of our business and to fund future growth.

Preferred Stock
 
On December 31, 2009 the Company issued 72,000 shares of its Series A Preferred Stock $1 par value to a major creditor, Dutchess Private Equities Fund, Ltd. (“Dutchess”) in exchange for $1,817,828 of indebtedness held by Dutchess plus a Warrant to purchase up to 1,125,000 shares of the Company’s Common Stock. The 72,000 shares of new Series A Preferred Stock  pay a dividend of 1% per annum of the par value per share in cash or in Series A Preferred Stock.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table reflects equity compensation granted or issued by us as of December 31, 2009, to employees and non-employees (such as directors, consultants, advisors, vendors, customers, suppliers and lenders) in exchange for consideration in the form of goods or services.
 
Plan Category
Number of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted-average exercise price of Outstanding options, Warrants and rights
Number of securities remaining available for future issuance under equity compensation plans(1)
       
Equity Compensation Plans approved by security holders:
     
Common Stock
226,987
$38.83
964,210


Recent Sales of Unregistered Securities

The following is a list of our securities sold within the past three years without registration under the Securities Act of 1933, as amended.

Effective December 30, 2009, all indebtness of the Company to Dutchess Private Equities Fund, Ltd. was satisfied through the issuance of 72,000 shares of Preferred Class Common Stock that was authorized by a majority of shareholders of Common Stock through a Written Consent process.
 
        On March 20, 2007, we issued a secured convertible debenture to Cornell Capital Partners ( now YA Global Investments, L.P. ) in the aggregate principal amount of $6,000,000 of which $3,000,000 was advanced immediately.  The second installment of $2,000,000 was to be advanced immediately prior to the filing by the Company with the Securities and Exchange Commission (the "Commission") of the Registration Statement.  The last installment of $1,000,000 was to be advanced immediately prior to the date the Registration Statement was declared effective by the Commission.   The remaining $3,000,000 was not funded due to the Company failing to file the necessary Registration Statement. The Debentures mature on the third anniversary of the date of issuance. The holder of the Debentures may convert at any time amounts outstanding under the Debentures into shares of common stock of the Company at a fixed conversion price per share equal to $0.314.  Under the Purchase Agreement the debentures are secured by substantially all of the Company's, and its wholly owned subsidiaries’ assets.



 
Under the Purchase Agreement, we also issued to Cornell Partners ( now YA Global Investments, L.P. ) five-year warrants in six separate series as follows:

A Warrants to purchase 2,384,814 shares of common stock at $0.314 per share;
B Warrants to purchase 2,186,079 shares of common stock at $0.343 per share;
C Warrants to purchase 2,017,919 shares of common stock at $0.372 per share;
D Warrants to purchase 1,748,863 shares of common stock at $0.429 per share;
E Warrants to purchase 1,499,026 shares of common stock at $0.50 per share;
F Warrants to purchase 1,500,000 shares of common stock at $0.01 per share.

On December  11,  2007,  the Company received a letter dated December 6, 2007 ( the "Notice Letter"), from  YA  Global  Investments,  L.P.,  (formerly  known  as Cornell Capital Partners,  L.P.)  notifying  the  Company  of certain Events of Default under the Secured  Convertible  Debenture  dated  March  20,  2007  of  the  Company  (the "Debenture").  As a result of this default, the entire note has been re-classified as short term.

Purchases of Equity Securities

In November, 2009, the Company repurchased 2,000,000 shares of its Common Stock at $0.125 from an independent investor. This purchase was done in the form of a two year, 5.5% convertible note in the amount of $250,000. This note is convertible into shares of the Company’s Common Stock at a conversion price of twelve and one half cents ($0.125). All interest payable in relation to this note was prepaid.

 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our consolidated financial condition and results of operations together with “Selected Financial Data” and our consolidated financial statements and related notes included elsewhere in this Annual Report.  This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.  Our actual results may differ materially from those anticipated in these forward-looking statements because of certain factors, including, but not limited to, those presented below.

Overview

The LocatePLUS Group is a business-to-business and business-to-government provider of public information via our proprietary data integration solutions.  We provide a broad range of investigative and background verification products including a CD-ROM-based product that enables users to search certain motor vehicle records and driver’s license information in multiple states through a dynamic search engine, using complete or partial information as well as a database that is accessible through the Internet, known as LocatePLUS, which contains searchable and cross-referenced public information on individuals throughout the United States, including individuals’ names, addresses, dates of birth, Social Security numbers, prior residences, and, in certain circumstances, real estate holdings, recorded bankruptcies, liens, judgments, drivers’ license information and motor vehicle records.  The Company also provides personal information for self-certification purposes through its EntersectÔ product line.

We distribute our content directly through the Internet and the mail, and through channel partner arrangements, by which third-party channel partners sell our products into markets that we do not concentrate on.

On September 24, 2009 the Company acquired all the stock of Employment Screening Profiles, Inc.(d/b/a Trubackgrounds), a Florida corporation, which is engaged in the business of developing and delivering integrated, customized Web-enabled solutions designed to aid in background verification, applicant management and human resource collaboration processes.


 
Trubackgrounds serves large and small businesses with systems and information designed to enable intelligent decisions and reducing costs through automation. Trubackgrounds will continue to be operated as a wholly-owned subsidiary of the Company and will collaborate in providing enhanced service capability to the Company’s customers.

Our products generally consist primarily of publicly available – and therefore non-proprietary – information, we integrate data in our products in a proprietary manner that allows users to access data rapidly and efficiently.  Our LocatePLUS product utilizes proprietary methodologies to link data from different sources associated with a given individual to a single background report, even though the sources of data with respect to a given individual may be incomplete or contain only partial information with respect to that individual.

Revenue is recognized upon delivery of requested data to the customer provided that no significant obligations remain, evidence of the arrangement exists, the fee is fixed or determinable, and collectability is reasonably assured.

Our costs of revenue consist primarily of our costs to obtain data. We obtain our data from multiple sources and have entered into various license agreements with the related data providers.  In 2009 and 2008, we recorded $1,704,889 and $1,600,583, respectively, in costs related to these agreements.  In the event that any of our primary sources of data became unavailable to us, we believe that we would be able to integrate alternate sources of data without significant disruption to our business or operations, as there are currently a number of providers of such data.

Our selling and marketing expenses consist of salaries and commissions paid to sales representatives for the products that we offer, as well as advertising and trade show expenses.

General and administrative expenses consist of payroll and related expenses for non-sales, executive and administrative personnel, facilities expenses, insurance, professional services expenses, travel and other miscellaneous expenses.

Interest expense is attributable to various notes issued through the year ended December 31, 2009.  As of December 31, 2009, we had gross notes payable (current and long-term) totaling $3,588,799.

We have incurred significant net losses since our inception.  We incurred net losses of $2,845,570 in 2009 and $1,333,612 in 2008.  Our accumulated deficit as of December 31, 2009 was $53,227,511.

Our ultimate success is dependent upon our ability to secure additional financing to meet our working capital and ongoing project development needs.  To achieve our business objectives, we must raise additional capital, which may consist of future debt or equity offerings.  Any such financings may be dilutive to existing investors.

Results of Operations

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Revenues.  Revenue decreased 9.4% to $7,260,952 from $8,013,600 in the year ended December 31, 2008 to. This decrease is primarily attributable to a decrease in revenues associated with channel partners, partially offset by increased revenue related to the TruBackgrounds acquisition in September, 2009.

Cost of revenues.  For the year ended December 31, 2009, our cost of revenue was $1,760,298 (24% of revenue) as opposed to $1,691,293 (21% of revenue) for the year ended December 31, 2008. This increase is primarily attributable to increased third party data costs.


 
 
Selling and marketing expenses.  Selling and marketing expenses for the year ended December 31, 2009 were $1,179,221, as compared to $1,591,405 for the year ended December 31, 2008, a decrease of 26%.  The primary reason for the reduction is due to the elimination of non-essential marketing activities and also to a reduction in personnel related expenses.

General and administrative expenses.  General and administrative expenses for the year ended December 31, 2009 were $4,998,011 as compared to $5,366,168 for the year ended December 31, 2008, a decrease of 7%.  This decrease is attributable to various cost cutting efforts by management and also to a reduction in personnel related expenses.

Research and development expenses.  Research and development expenses for the year ended December 31, 2009 were $29,645 as compared to $194,728 for the year ended December 31, 2008, a decrease of 85%. This decrease is attributable to management’s decision to suspend funding of the Metrigenics’ product development project and also a reduction in personnel related expenses.

Interest expense.  Interest expense increased  to $514,714 for the year ended December 31, 2009, from $511,542 for the year ended December 31, 2008, due to additional notes payable issued in 2009.

Other Income. Other income decreased to $4,466 for the year ended December 31, 2009, from $7,924 for the year ended December 31, 2008, a decrease of 44%. Other income is derived from the collection of previously written off bad debts.

Finance Related Expenses.  Finance related expenses which amounted to $294,765 in 2009 are attributable to the expenses related to the restructuring of certain notes payable during the year.

Loss on termination of research and development project.  This non-recurring expense in 2009 of $586,334 is attributable to the write off of costs associated with a discontinued product development project.

Gain on extinguishment of debt.  This non-recurring item in 2009 of $127,000 is attributable to the extinguishment of certain payables pertaining to the loss on termination of research and development project.
 
Loss on permanent impairment of investment.  The non-recurring expense in 2009 of $875,000 is attributable to the write off of an asset originally booked in 2004 that is now fully impaired in the opinion of management. Prior to the fourth quarter of fiscal year 2009, the asset had been evaluated on a quarterly basis with the evaluation reserve shown as “impairment of assets” in Stockholders’ (Deficit) Equity. This reserve totaled $873,500 at December 31, 2008.

 
Liquidity and Capital Resources
 
    From our incorporation in 1996 through December 31, 2009, we raised approximately $43 million through a series of private placements and public offerings of equity and convertible debt to fund marketing and sales efforts and develop our products and services.
 
    As of December 31, 2009, our cash and cash equivalents totaled $53,546
 
    On March 20, 2007, we issued a secured convertible debenture to Cornell Capital Partners ( now YA Global Investments, L.P. ) in the aggregate principal amount of $6,000,000 of which $3,000,000 was advanced immediately.  The second installment of $2,000,000 was to be advanced immediately prior to the filing by the Company with the Securities and Exchange Commission (the "Commission") of the Registration Statement.  The last installment of $1,000,000 was to be advanced immediately prior to the date the Registration Statement was declared effective by the Commission.   The remaining $3,000,000 was not funded due to the Company failing to file the necessary Registration Statement. The Debentures mature on the third anniversary of the date of issuance. The holder of the Debentures may convert at any time amounts outstanding under the Debentures into shares of common stock of the Company at a fixed conversion price per share equal to $0.314.  Under the Purchase Agreement the debentures are secured by substantially all of the Company's, and its wholly owned subsidiaries’ assets.

Under the Purchase Agreement, we also issued to Cornell Partners ( now YA Global Investments, L.P. ) five-year warrants in six separate series as follows:

    A Warrants to purchase 2,384,814 shares of common stock at $0.314 per share;
    B Warrants to purchase 2,186,079 shares of common stock at $0.343 per share;
    C Warrants to purchase 2,017,919 shares of common stock at $0.372 per share;


 
    D Warrants to purchase 1,748,863 shares of common stock at $0.429 per share;
    E Warrants to purchase 1,499,026 shares of common stock at $0.50 per share;
    F Warrants to purchase 1,500,000 shares of common stock at $0.01 per share.
 
    On December  11,  2007,  the Company received a letter dated December 6, 2007 ( the "Notice Letter"), from  YA  Global  Investments,  L.P.,  (formerly  known  as Cornell Capital Partners,  L.P.)  notifying  the  Company  of certain Events of Default under the Secured  Convertible  Debenture  dated  March  20,  2007  of  the  Company  (the "Debenture").  As a result of this default, the entire note has been re-classified as short term.
 
   On January 26, 2009 the Company announced that it had received the consent of a majority  of  the  shareholders  of  record  to amend the Certificate of Incorporation to increase the number of shares of Common Stock authorized for issuance by the Corporation  from  25,000,000  shares  to  50,000,000  shares.  The reason for increasing the number of authorized shares was to ensure that shares were available to allow for conversions of debt into stock.
 
    On December 29, 2009 the Company had received the consent of a majority of the shareholders of record  to amend its Certificate of Incorporation, and on December 31, 2009 it had amended the Certificate of Incorporation  to permit an increase in  the number of authorized shares by adding 1,000,000 shares of Preferred Stock to the already authorized 50,000,000 shares of Common Stock.
 
    On December 31, 2009 the Company issued 72,000 shares of its Series A Preferred Stock to a major creditor, Dutchess Private Equities Fund, Ltd. (“Dutchess”) in exchange for $1,817,828 of indebtedness held by Dutchess plus a Warrant to purchase up to 1,125,000 shares of the Company’s Common Stock.
 
    The 72,000 shares of new Series A Preferred Stock issued to Dutchess have a par value of $1.00 per share and a $25 liquidation preference. They are restricted as to resale. They pay a dividend of 1% per annum of the par value per share in cash or in Series A Preferred Stock. Holders will have a vote on any matters affecting the Series A Preferred Stock. The shares are convertible at any time into the Company’s Common Stock at 41.66 shares of Common Stock per share of Preferred Stock (fully converted, 3,001,680 shares of Common Stock). The Company can force conversion of Preferred Stock not to exceed 4.99% of total Common Stock outstanding if the 10-day moving average closing price per share of the Company’s Common Stock shall exceed $.50 per share. Holders also have a right to “put” their shares to the Company at $25.00 per share, not to exceed in the aggregate for any calendar quarter:  $15,000 through the last 6 months of 2010, $25,000 through the last quarter of 2011 and $35,000 per quarter thereafter.

Commitments and Contingencies

Operating Leases

We lease office space and equipment under various operating lease agreements which terminate on various dates through 2015.  Rent expense amounted to $421,387 and $544,199 during 2009 and 2008, respectively.  The decrease is due to the restructuring and extension of the lease at the Beverly, MA location.

Capital Leases

Through December 31, 2008, we entered into certain long-term equipment lease agreements.  These agreements were classified as capital leases and expired in 2008.

 
 
 
License Agreements

The following represents the contractual obligation and commercial commitments as of December 31, 2009.
 
                         
Contractual Obligations
 
Total
   
Less than
 1 Year
   
1-3
 Years
   
3-5
 Years
 
Long-Term Debt including current portion
  $ 3,588,799     $ 3,469,234     $ 119,565       -  
Operating Leases
    1,999,707       406,766       758,154       834,787  
License Agreements     405,000        405,000               
Total
  $ 5,993,506        $ 4,281,000     $ 877,719     $ 834,787  
 

The financial statements of the Company have been prepared on a "going concern" basis, which assumes the realization of assets and the liquidation of liabilities in the ordinary course of business. However, such realization of assets and liquidation of liabilities are subject to a significant number of uncertainties. There are a number of factors that have negatively impacted the Company's liquidity, and may impact the Company's ability to function as a going concern. The Company has sustained net losses of $1,970,570, and $1,333,612 for the years ended December 31, 2009 and 2008, respectively. The Company has an accumulated deficit of $52,352,511, a stockholders' deficit of 7,194,330 and a working capital deficit of $8,242,017 at December 31, 2009. Additionally, the Company had a cash balance of $53,546 at December 31, 2009. The above factors raise substantial doubt about the Company's ability to continue as a going concern.

The Company has taken a number of actions to reduce operating expenses, and to improve the salability of its products. The Company's major objective is to increase its order volume. Short and long-term liquidity needs require either significant improvement in operating results and/or the obtaining of additional capital. There can be no assurance that the Company's plans to achieve adequate liquidity will be successful. If the Company's operations continue to deteriorate due to increased competition, or other adverse events, it will be required to obtain additional sources of funds through asset sales, capital market transactions, financing from third parties or a combination thereof. The Company has not been able to attain operating profitability from continuing operations and may not be able to be profitable on a quarterly or annual basis in the future. Management's initiatives over the last two years, including cost reductions, securing debt financing and restructuring existing debt agreements have been designed to improve operating results and liquidity, and to better position the Company to compete under current market conditions. However, the Company may, in the future, be required to seek new sources of financing or additional accommodations from its existing lenders or other financial institutions, or it may seek equity infusions from private investors. The Company's ability to fund its operations is heavily dependent on the growth of its revenues over current levels in order to achieve profitable operations. The Company may be required to further reduce operating costs in order to meet its obligations. If the Company is unable to achieve profitable operations or secure additional sources of capital, there would be substantial doubt about its ability to continue operations. No assurances can be given that management's initiatives will be successful, or that any such additional sources of financing, lender accommodations or equity infusions will be available.

Critical Accounting Policies

We have identified the policies below as critical to our business operations and the understanding of our results of operations.  The impact and any associated risks related to these policies on our business operations are discussed throughout this section where such policies affect our reported and expected financial results.  For a detailed discussion on the application of these and other accounting policies, see Note 2 in the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.  Note that our preparation of our Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period.  There can be no assurance that actual results will not differ from those estimates.

 
 
Our accounting policies that are the most important to the portrayal of our financial condition and results, and which require the highest degree of management judgment relate to revenue recognition and the provision for uncollectible accounts receivable.  We estimate the likelihood of customer payment based principally on a customer’s credit history and our general credit experience.  To the extent our estimates differ materially from actual results, the timing and amount of revenues recognized or bad debt expense recorded may be materially misstated during a reporting period.

Certain Related Party Transactions

On September 24, 2009 the Company acquired all the stock of Employment Screening Profiles, Inc.(d/b/a Trubackgrounds), a Florida corporation (“Trubackgrounds”), engaged in the business of developing and delivering integrated, customized Web-enabled solutions designed to aid in background verification, applicant management and human resource collaboration processes. Trubackgrounds was owned by Derrick Spatorico, who received 9,000,000 shares of the Company’s Common Stock in payment for Trubackgrounds.

On September 25, 2009 Mr. Spatorico became a Director of the Company and on February 25, 2010 he became acting President and Chief Executive Officer. Mr. Spatorico’s stock is subject to an escrow agreement by the terms of which he is to receive all of the stock out of escrow no later than September 1, 2011.

At December 31, 2009, the Company has outstanding notes payable totaling $348,000 to Derrick Spatorico.
 
Use of Our Assets
 
    None

Recently Issued Accounting Pronouncements
 
On January 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157 “Fair Value Measurements” (SFAS No. 157), which provides a consistent definition of fair value that focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over company-specific inputs.  SFAS No. 157 requires expanded disclosures about fair value measurements and establishes a three-level hierarchy for fair value measurements based on the observable inputs to the valuation of an asset or liability at the measurement date.  The standard also requires that a company consider its own nonperformance risk when measuring liabilities carried at fair value, including derivatives.  In February 2008 the Financial Accounting Standards Board (FASB) approved the FASB Staff Position (FSP) No. FAS 157-2,


 
“Effective Date of FASB Statement No. 157” (FSP No. FAS 157-2), that permits companies to partially defer the effective date of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed as fair value in the financial statements on a nonrecurring basis.  FSP No. FAS 157-2 does not permit companies to defer recognition and disclosure requirements for financial assets and financial liabilities or for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually.  SFAS No. 157 is effective for financial assets and financial liabilities and for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually for fiscal years beginning after November 15, 2007.  The provisions of SFAS No. 157 are applied prospectively.  The Company has decided to defer adoption of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.  These include fixed assets.  The effect of adopting SFAS No. 157 on January 1, 2008 was not material and no adjustment to Accumulated deficit was required.  The Company is currently unable to quantify the effect, if any, that the adoption of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities will have on its financial condition and results of operations.
 
    The carrying amounts of cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, deferred revenue, current portion of capital lease obligations, current portion of notes payable and convertible notes payable approximate fair value because the best valuation for them is the use in the business and the short maturity of those instruments.

Off-Balance-Sheet Arrangements

The Company has no off-balance-sheet arrangements currently in effect or in effect during the year ended December 31, 2009, including but not limited to any guarantee contracts that has the characteristics defined in paragraph 3 of FASB Interpretation No. 45 (November 2002), as amended; any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement, any obligation that could be accounted for as a derivative instrument, or any obligation arising out of a variable interest (as referenced in FASB Interpretation No. 46, as amended).

 
 
        Our financial statements as of and for the twelve months ended December 31, 2009 and December 31, 2008 are set forth in the section of this Annual Report beginning on page F-1.


None



 Evaluation of disclosure controls and procedures.
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.  Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
 
 
Internal control over financial reporting is defined as a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, 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 and includes those policies and procedures that:
 

 
 
 
 
 
Our management, including the Acting Chief Financial Officer and Acting Chief Executive Officer evaluated the effectiveness of our internal control over financial reporting as of December 31, 2009, based on the standards and framework established by the Committee of Sponsoring Organizations of the Treadway Commission, COSO.  Based upon the evaluation performed it was concluded that our disclosure controls and procedures were not effective as of December 31, 2009.

Based on our evaluation for the period ended December 31, 2009, our Chief Executive Officer has concluded that at the end of this reporting period we have identified matters that would constitute material weaknesses (as such term is defined under the Public Company Accounting Oversight Board Auditing Standard No.  2) in our  internal  controls  over  financial reporting. It is concluded that because material weaknesses exist, internal controls over financial reporting are not effective at this time.

The material weakness relate to the financial closing process, a lack of segregation of financial responsibilities and the need for additional qualified financial accounting personnel. Based on the evaluation performed, disclosure controls and procedures were not effective for the twelve months ended December 31, 2009.
 
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes In Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the year ended December 31, 2009, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Following the twelve months ended December 31, 2009, we have taken specific actions to remediate the reportable conditions and material weaknesses, including the devotion of additional resources to the quarterly closing process, and realignment of certain financial responsibilities to achieve stronger segregation of financial duties, and the engagement of a contract Chief Financial Officer.  We intend to continue to further strengthen our controls and procedures regarding the closing  process over the next twelve months.

 

 
The following table sets forth specific information regarding our executive officers and directors as of March 31, 2010 .
 
 

Executive Officers and Directors
Age
Positions
Christian Williamson
37
Chairman of the Board, Governance Committee Member
Derrick Spatorico
41
Director, Acting President and Chief Executive Officer, Treasurer, Compensation Committee Member
Richard Pyle
65
Director, Governance Committee Chairman, Audit Committee Member
Patrick Murphy
56
Director and Secretary
James Ahern
69
Director, Compensation Committee Chairman
George Isaac
65
Director, Audit Committee Chairman, Compensation Committee Member
Bart Valdez
47
Director, Governance Committee Member, Compensation Committee Member, Audit Committee Member


Current Directors and Officers

Christian Williamson, Chairman, and Governance Committee Member, is currently  Vice  President  of  Global Market Strategies at Danaher Corporation, a $10 billion industrial conglomerate which operates within multiple  platforms  including  water treatment. Mr. Williamson joined the Trojan Technologies Division of  Danaher in 2001  through  the  acquisition  of  Advanced  UV  Solutions and was promoted to Vice-President,  Global  Market  Strategies  in  January  2008  - Executive Team Member.  Prior  to  that,  Mr.  Williamson  was Managing Director, Environmental Contaminant  Treatment  since  2001.  Prior  to that Mr. Williamson was Managing Partner  for  Advanced  UV  Solutions,  LLP, a "spin-off" of the consulting firm Hydro  Geo Chem, Inc. The main goal of AUVS was to liquidate the asset for Hydro Geo  Chem  through  the sale of the AUVS Company. Mr. Williamson holds a B.S. in Engineering Mathematics and a Doctorate in Hydrology with an emphasis in Systems Engineering  from  The  University  of  Arizona
 
                    Derrick Spatorico, Director, Acting President and Chief Executive Officer, and Treasurer,  Mr.  Spatorico joined the Board on September 25, 2009 in conjunction with the Company’s purchase of Employment Screening Profiles (TruBackgrounds) which he had previously owned. Mr. Spatorico is an active venture investor and an attorney at law practicing in New York. He is intimately familiar with civil and criminal litigation as well as corporate, commercial transaction, and real estate law. He is legal counsel to various corporations ranging in size from small, single shareholder to large multi-national corporations.    Mr. Spatorico also sits on the Board of a number of local charities and philanthropic institutions. Following the resignation of Interim President and Chief Executive Office, Geoffrey Lee on February 25, 2010, the Board of Directors appointed Mr. Spatorico to the position of Acting President and Chief Executive Officer.

Richard Pyle, Director, Governance Committee Chairman, and Audit Committee Member,  is currently a commercial real estate investor and has held executive or  management positions over the past thirty years at companies such as Spencer Products,  Inc, AMG Industries and Procter and Gamble. Mr. Pyle is also a former Professor  of  Management of The University of Massachusetts. In addition to his extensive  career,  Mr.  Pyle  currently  sits  or  has  sat  on  the  Board  of organizations such as The Salvation Army, Becker College, and The Boys and Girls Club.  Mr.  Pyle  holds  a  PhD  in  Business  from the University of Massachusetts  and  an  MBA  from  The  University  of  Michigan.



 
   Patrick Murphy, Secretary and Director,  is the Chairman of the Pulsar Network, Inc. Board of Directors. A graduate of the Harvard Law School and practicing in Massachusetts for the last twenty years, he also provides consulting services to growing businesses. He is familiar with government relations, public relations, and has experience in developing resources and assets. Prior to his career in law he was a manager at a prominent social service agency and handled personnel and operation issues in a crisis-based environment.

 
  James Ahern, Director and Compensation Committee Chairman, is the COO of the Tracy Group, a Casino Management  and  Development  Company.  The  Tracy  Group  focuses  on  work-out strategies,  development  of  management and marketing strategies, and ground-up development  for  a  variety  of  clients. Prior to joining the Tracy Group, Mr. Ahearn  had  extensive  experience in executive management in a variety of areas including  30 years experience with the Federal Bureau of Investigation where he was  nominated  by  the  Director of the FBI for the highest award for executive service  in  the  U.S. Department of Justice.  Mr. Ahearn recently served on the Board  of  Directors,  and  acted as a consultant to Trackpower, Inc., a company operating  two  race  tracks/casinos  in  New  York  State.  He  has held gaming licenses  in  New  York, Arizona, Oregon and Washington, as well as the National Indian  Gaming  Commission.
 
                  George Isaac, Director and Audit Committee Chairman, a Massachusetts Certified Public Accountant and is affiliated with the  Massachusetts  Board  of  Certified  Public  Accountants  and  the American Institute  of  Certified Public Accountants. He is experienced in all areas of  financial  management  having  practiced  as  a  CPA  for  25 years within a financial  career  that  reaches  back  nearly 40 years. His experience includes management,  business  consulting,  budgeting,  managerial  accounting,  risk management,  internal  controls,  tax advice and preparation, financial planning and  reporting,  audit  functions, banking functions, and all treasury functions including  SEC  compliance. Specifically, his current practice involves services as  a  consulting  CFO.  In  the past he has served as CFO for a publicly traded company,  a  managing  partner  of  a  public  accounting  firm, and  has  managed a commercial office building. As a board member of a community bank and a publicly traded company he has served as a member and is familiar with the functioning of board  audit  committees, executive committees, and compensation committees. His experience  includes  the negotiation of significant expansion and growth credit availability  but  also downsizing to maintain profitability where necessary. He is  proficient  in  Russian  and  German.  For the past five years Mr. Isaac has served  as  a  consulting  Chief  Financial  Officer  for  several  closely held businesses  in  Massachusetts with responsibility for all financial planning and reporting,  tax  preparation, banking and related treasury functions for each of his  clients.

  Bart Valdez, Director, Governance Committee Member, Compensation Committee Member, and Audit Committee Member, joined the Board on April 15, 2009 upon the resignation of Ralph Caruso. He is the former President of the Employee Screening Segment of First Advantage, a leading risk mitigation and business solutions provider. Mr. Valdez began his career at First Advantage in 2001 where he developed and executed a strategic plan that improved an $18M regional employment verification company into a $253M global talent acquisition business.  Additionally, Mr. Valdez has been credited with improving financial performance from an EBITDA loss of $5M in 2003 to an EBITDA gain of $36M in 2006. Prior to his employment with First Advantage, Mr. Valdez worked as Vice President of Business Development at Employee Information Services, Inc., where he managed all aspects of finance, information services, sales partnerships, and operations. Mr. Valdez has a B.S. in Management from Colorado State University and a Masters of Business Administration with a concentration in Finance from the University of Colorado.

Each of the directors holds such his or her office until his or her successor is duly chosen and qualified, or until his or her earlier resignation or removal. The Company is not aware of any family relationships between any of the officers and any of the Company’s directors. Each of the officers holds such office until his or her successor shall have been duly chosen and shall have been qualified, or until his earlier resignation or removal. We have entered into severance agreements with a number of our employees the cost of which are not considered to be material.

 

 
Former Directors and Officers

John R. Latorella, a former Chairman of our Board of Directors, ceased to be a member of the Board on January 26, 2009.

Sonja P. Bejjani, a former member of our Board of Directors, ceased to be a member of the Board on January 26, 2009.

James C. Fields, a former member of our Board of Directors, ceased to be a member of the Board on January 26, 2009.

Ralph Caruso, a former member of our Board of Directors, resigned from the Board on April 15, 2009.

David Skerrett, a former member of our Board of Directors, resigned from the Board on September 25, 2009.

Section 16 Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than 10% beneficial owners are required to furnish us with copies of all forms they file pursuant to Section 16(a).
 
Except as set forth in the preceding paragraph, and based solely on review of the copies of such reports furnished to us and written representations from reporting persons that no other reports were required, to our knowledge, all such persons complied with all of the Section 16(a) filing requirements applicable to them with respect to 2009.
 
Audit Committee
 
The Audit Committee of the Board of Directors is responsible for the appointment, compensation and oversight of our independent auditors, reviews the scope of the audit services provided by our independent accountants, and reviews our accounting practices and internal accounting controls.  Mr Isaac and Mr. Pyle are members of the Audit Committee. Mr. Isaac is the Chairman of the Audit Committee.
­
Compensation Committee

The Compensation Committee of the Board of Directors reviews and recommends to the Board of Directors the salaries, benefits and stock option grants of all employees, consultants, directors and other individuals compensated by us.  The Compensation Committee also administers our equity compensation plan and other employee benefits plans that we may adopt from time to time. The Chairman of the Compensation Committee is James Ahearn. He is joined on the Committee by George Issac and Derrick Spatorico.

Code of Ethics

The Company adopted a Code of Ethics in May 2004.

 


 
 
Summary Compensation Table

The following table sets forth, for 2009, 2008, and 2007, certain compensation paid by us, including salary, bonuses and certain other compensation, to our Chief Executive Officer and all other executive officers whose annual compensation for the years ended December 31, 2009, 2008 and 2007 exceeded $100,000 (the “Named Executive Officers”).

 
Name and
Principal Position
 
 
 
Year
 
 
 
Salary
($)
 
 
Bonus
($)
 
 
Severance
($)
Options
Awards
(shares)
Non-Equity
Incentive
Plan
Comp ($)
Non-
Qualified
Deferred
Comp ($)
All
Other
Comp
($)
Totals
($)
Geoffrey Lee(5)
2009
125,000
-
-
-
39,773
-
-
164,773
Interim CEO
                 
                   
James C. Fields(3)
2009
49,038
         
-
49,038
Former President,CEO,
2008
252,190
-
-
 
-
-
13,200(4)
265,390
Acting CFO, Secretary
2007
212,631
-
600,000(1)
-
-
13,200(4)
225,831
                   
                   
Jon R. Latorella
2008
60,215
 
250,000
     
15,000(2)
325,215
Former Chairman of the Board & CEO
2007
231,468
325,0000
-
-
-
-
15,000(2)
571,468
 
(1)   On November 8, 2007, Mr. Fields was issued stock options to purchase 600,000 shares of our Common Stock with an exercise price of $0.11 per
        share. The options were terminated on June 1, 2009
(2)   Mr. Latorella and his family were allowed use of company vehicles, the value of which is approximately $1,100 per month to Mr. Latorella.
(3)   Mr. Fields commenced his employment with us in 2001. Mr. Fields became an executive officer with the Company on March 31, 2003.
(4)   Beginning in April 2004, Mr. Fields was allowed the use of a company-leased vehicle, the value of which was approximately $1,100 per month.

In March  2007, Mr. Latorella resigned from the position of President and CEO. Mr. Latorella  ceased to be a Board Member on January 26,  
2009 .

In May 2007, Mr. Fields was elected by the Board of Directors to the position of President and CEO. Mr. Fields ceased to be a Board member  
January 26, 2009 and was terminated as an officer on February 23, 2009.
(5)   On February 10, 2010, Mr. Lee resigned from his position as Interim President and CEO. Mr. Lee has resumed his former position of President of Entersect.


OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

None

Director Compensation

Compensation to outside members of the Board for services rendered through December 31, 2009 has not yet been fully distributed. Director compensation for services rendered in 2009 totaled $202,083.

 
 
As of the close of business on March 25, 2010 , there were 49,984,089 shares of Common Stock issued and outstanding.  There were also unexercised options and warrants issued to purchase shares of Common Stock outstanding on that date.  Of these, 2,991,067 issued shares and 4,613,712 options, warrants, and convertible shares were owned by officers, directors and over 5% stockholders.

The following table sets forth certain information known to us with respect to the beneficial ownership of our Common Stock as of the close of business on March 31, 2010, by:
 
 
-Each of our directors;
 
-Each of our executive officers;
 
-Each person known to us to beneficially own more than 5% of either class of our common stock; and
 
-All of our directors and executive officers as a group.
 
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission.  In computing the number of shares beneficially owned by a person and the percentage of ownership of that


 
person, shares of common stock underlying options or warrants held by that person that are currently exercisable or will become exercisable within 60 days of December 31, 2009 are deemed outstanding, while such shares are not deemed outstanding for computing percentage ownership of any other person.  To our knowledge, except as indicated in the footnotes to this table, each stockholder identified in the table possesses sole voting and investment power with respect to all shares shown as beneficially owned by such stockholder.  Each of our directors and executive officers can be contacted at 100 Cummings Center, Suite 235M, Beverly, Massachusetts 01915.
 
 
Common Stock
 
Beneficial Owner
Number of Shares Beneficially Owned
Percentage
of Class
Directors
   
Christian Williamson
1,628,880
3.3%
Bart Valdez
           605,005
1.2%
Richard Pyle
57,182
-
George Isaac
   
James Ahern
   
Officers
   
Derrick Spatorico
650,000
1.3%
    Patrick Murphy 550,000 1.1%
5% or More Shareholders
   
James C. Fields(2)
19,866,461
39.7%
Special Situation Funds(1)
1,410,000
2.8%
All directors and executive officers as a group (5 persons)
       3,491,067
6.9%
 
*
Less than one percent of outstanding shares.
 
(1)   Includes 505,000 shares and 200,000 shares issuable upon the exercise of warrants with an exercise price of $7.50 per share held by Special
        Situations Fund III, L.P. and 505,000 shares and 200,000 shares issuable upon the exercise of warrants with an exercise price of $7.50 per share
        held by Special Situations Private Equity Fund, L.P
(2)  The Company understands that these were originally issued by the Company’s transfer agent to Dutchess Private Equities Fund, II LP  in
        conversion of outstanding indebtedness and subsequently transferred to Mr. Fields. The issuance of   these shares and their transfer to Mr. Fields
        is the subject of legal challenge by the Company.

 
On June 17, 2002, the Board of Directors adopted our Interested Parties Transaction Policy, pursuant to which the Company will not enter into any agreement, arrangement or understanding with any director, officer, or 5% or greater stockholder of unless (i) the terms of such agreement, arrangement or understanding are consistent with the terms of equivalent agreements or arrangements that the Company could obtain from third parties; and (ii) the agreement, arrangement or understanding is fair to the Company.

Jon R. Latorella

The Board of Directors accepted the resignation of its President and Chief Executive Officer, Jon Latorella, effective March 23, 2007. Effective January 26, 2009 he ceased to be a member of our Board

James C. Fields

On February 23, 2009, Mr. Fields was removed as Chief Executive Officer, Acting Chief Financial Officer, and Treasurer by the Board of Directors.

Use of Company Cars.
        Through February 23, 2009, Mr. Fields received a vehicle allowance of $1,000 per month in accordance with his employment agreement. 



 
 
Reports of Form 8-K – 2009 & 2008

On February 25, 2010 , we filed a Form 8-K and reported under item 5.02 the resignation of Geoffrey Lee as Interim President and Chief Executive Officer. Mr. Lee resumed his previous position as President of Entersect, a wholly owned subsidiary of LocatePlus Holdings. Following the resignation of Mr. Lee, the Board of Directors appointed current Board member, Derrick Spatorico to the position of Acting President and Chief Executive Officer.

On December 31, 2009, we filed a Form 8-K and reported under item 8.01 that the Company had received the consent of a majority of the shareholders of record  to amend its Certificate of Incorporation, and on December 31, 2009 it had amended the Certificate of Incorporation  to permit an increase in  the number of authorized shares by adding 1,000,000 shares of Preferred Stock to the already authorized 50,000,000 shares of Common Stock. Furthermore, that Company announced that it had issued 72,000 shares of its Series A Preferred Stock to a major creditor, Dutchess Private Equities Fund, Ltd. (“Dutchess”) in exchange for $1,817,828 of indebtedness held by Dutchess plus a Warrant to purchase up to 1,125,000 shares of the Company’s Common Stock.

On September 25, 2009, we filed a Form 8-K and reported under items 1.01 and 5.02 that the Company had acquired all of the stock of Employment Screening Profiles, Inc.(d/b/a Trubackgrounds), a Florida corporation (“Trubackgrounds”), Oldsmar (Tampa) Florida,  engaged in the business of developing and delivering integrated, customized Web-enabled solutions designed to aid in background verification, applicant management and human resource collaboration processes.  At this time, the Board of Directors accepted the voluntary resignation of David Skerrett and voted to appoint Derrick Spatorico, founder of TruBackgrounds, as a member of the Board of Directors.

On August 17, 2009, we filed a Form 8-K and reported under item 1.01 and announced a strategic alliance between the Company and the MindBreeeze Enterprise Search Division of Fabasoft Corporation, Needham, Massachusetts, a leading provider of enterprise content management solutions. The strategic alliance enables the two companies to market and deliver a sophisticated public records search solution – Mindbreeze PR (Mindbreeze Public Records) that seamlessly connects users to the critical background information they need – from sources both in side and outside the enterprise firewall.

On June 1, 2009, we filed a Form 8-K and reported under item 1.01 and announced  a confidential settlement agreement with James Fields, former Chief Executive Officer and President.  The agreement resolves all issues between LocatePLUS Holdings Corporation and Mr. Fields concerning previously disclosed litigation.

On May 29, 2009, we filed a Form 8-K and reported under items 8.01 and 9.01 that Christian Williamson, Chairman of the Board had issued a letter to shareholders.

On April 17, 2009, we filed a Form 8-K and reported under item 5.01 announcing that at a meeting of the Board of Directors held on April 15, 2009, the Board accepted the resignation of Director Ralph Caruso from the Board of Directors due to an increased demand from other business matters. Following the resignation of Mr. Caruso, the Board voted to extend the open seat on the Board of Directors to Bart Valdez. 

On February 25, 2009, we filed a Form 8-K and reported under items 5.02 and 9.01 announcing that at a meeting of the Board of Directors held on February 18, 2009, the Board of Directors voted to terminate the  employment  of James C. Fields, the then current President, Chief Executive Officer,  Acting Chief Financial Officer and Treasurer. Following this decision, the Board voted to appoint Geoffrey Lee, President of Entersect, a wholly owned subsidiary  of  LocatePLUS  Holdings  and  Vice President of Online Services for LocatePLUS  as Interim Chief Executive Officer and President. At a Board meeting held  on February 24, 2009, the Board elected Mr. Lee to the additional position of  Acting  Treasurer.  Item 9.01 of this filing contained a Press Release to the effect of the announcement under 5.02 and is attached to this filing.

On January 30, 2009, we filed a Form 8-K and reported under item 5.02 that at a meeting of the Board of Directors held on January 29, 2009, the Board had voted to elect current Director, Patrick Murphy to the position of Corporate Secretary.


 
On January 26, 2009, we filed a Form 8-K and reported under items 5.02 and 8.01 that the Company had received the consent of a majority  of  the  shareholders  of  record  to amend the Certificate of Incorporation to increase the number of shares of Common Stock authorized for issuance by the Corporation  from
25,000,000  shares  to  50,000,000  shares and to  the  elimination of the current classification  of  the  Directors  into  different terms and replacement with a uniform  one  year  term  for all directors, the reduction of the Board to seven members and the election of the following individuals to the Board of Directors:
Dr. Christian T. Williamson
Richard L. Pyle
David Skerrett
Ralph Caruso
Patrick F. Murphy
James Ahern
George G. Isaac

On December 12, 2008, we filed a Form 8-K and reported under item 5.02 that at a meeting of the Board of Directors on December 1, 2008, the Board voted to extend an offer for the position of Director to George Isaac.  On December 11, 2008, Mr. Isaac accepted.

On November 7, 2008, we filed a Form 8-K and reported under item 5.02 that at a meeting of the Board of Directors on November 3, 2008, the Board voted to appoint current member, Christian Williamson as Chairman of the Board.

On October 9, 2008, we filed a Form 8-K and reported under item 5.02 that at a meeting for the Board of Directors on October 2, 2008, the Board voted to increase its size to nine members and authorized its CEO to offer the new Board seats to Christian Williamson and Richard Pyle to serve a one year term.
 
On September 30, 2008, we filed a Form 8-K and reported under item 8.01 that at the Annual Meeting, the individuals proposed by Management were elected and appointed to the Board of Directors.

On August 14, 2008, we filed a Form 8-K and reported under item 5.02 that Mr. Latorella had stepped down as Chairman of the Board and that James C. Fields, the current President and CEO had been appointed to the position of Chairman.

On August 14, 2008, we filed a Form 8-K and reported under item 2.02 reporting unaudited second quarter financial results. In addition, we also attached under item 7.01 a shareholder letter.

On June 2, 2008, we filed a Form 8-K and reported under item 1.01 that the Board of Directors has entered into an employment agreement with James C. Fields, its current President and Chief Executive Officer.   Additionally, we reported under item 5.02 that the Board of Directors had elected two new members to the Board.

On January 7, 2008, we filed a Form 8-K and reported under item 2.04 that by  letter  received  December  11,  2007,  dated December 6, 2007 ( the "Notice Letter"),  YA  Global  Investments,  L.P.,  (formerly  known  as Cornell Capital Partners,  L.P.)  notified  the  Company  of certain Events of Default under the Secured  Convertible  Debenture  dated  March  20,  2007  of  the  Company  (the "Debenture").



Exhibits

 
3.1
Second Amended and Restated Certificate of Incorporation of LocatePLUS Holdings Corporation, as filed with the Secretary of State of the State of Delaware on March 19, 2002.(1)
 
3.2
By-Laws of LocatePLUS Holdings Corporation.(1)
 
4.1
Warrant and Unit Agreement by and between LocatePLUS Holdings Corporation and Transfer Online, Inc., dated March 22, 2002.(1)
 
4.2
Form of Warrant Certificate.(2)
 
4.3
Form of Unit Certificate.(2)
 
4.4
Form of Class A Voting Common Stock Certificate.(2)
 
4.5
Form of Class B Non-voting Common Stock Certificate.(2)
 
4.6
Form of Restricted Warrant Agreement (Warrant to Purchase Shares of Class A Voting Common Stock).(1)
 
4.7
Form of Restricted Warrant Agreement (Warrant to Purchase Shares of Class B Non-voting Common Stock).(2)
 
4.8
$10,000 Convertible Promissory Note, dated March 9, 2001.(1)
 
4.9
Amended Form of Warrant Certificate.(3)
 
4.10
Amendment to $10,000 Convertible Promissory Note, dated July 23, 2002.(3)
 
5.1
Opinion of Geoffrey T. Chalmers, Esq. (5)
 
10.1
Master Lease Agreement between Cummings Properties, Inc. and Worldwide Information, Inc., dated November 20, 1999.(1)
 
10.2
Secured Note, dated June 1, 2001.(1)
 
10.3
Purchase Agreement dated July 8, 2005, by and between LocatePLUS Holdings Corporation and certain Investors named therein, as amended August 12, 2005.(4)
 
10.4
Form of 3% Senior Convertible Note dated July 8, 2005 and August 15, 2005, by and between LocatePLUS Holdings Corporation and each of the Investors named in Exhibit 10.26. (4)
 
10.5
Registration Rights Agreement dated July 8, 2005, by and between LocatePLUS Holdings Corporation and certain Investors named therein, as amended August 12, 2005. (4)
 
10.6
Form of Common Stock Purchase Warrant issued to the Investors named in Exhibit 10.26. (4)
 
10.7
Debenture, dated December 29, 2005, by and between LocatePLUS Holdings Corporation and Dutchess Private Equities Fund II, L.P. (5)
 
10.8
Debenture Registration Rights Agreement, dated December 29, 2005 by and between LocatePLUS Holdings Corporation and Dutchess Private Equities Fund II, L.P. (5)
 
10.9
Warrant Agreement Dated December 30, 2005(5)
        10.10
Security Agreement Dated December 30, 2005(5)
        10.11
Subscription Agreement Dated December 30, 2005(5)
        10.12
Debenture, dated July 21, 2006, by and between LocatePLUS Holdings Corporation and Dutchess Private Equities Fund, L.P. (5)
        10.13
Debenture Registration Rights Agreement, dated July 21, 2006 by and between LocatePLUS Holdings Corporation and Dutchess Private Equities Fund, L.P. (5)
        10.14
Warrant Agreement Dated July 21, 2006 (5)
        10.15
Security Agreement Dated July 21, 2006(5)
        10.16
Subscription Agreement Dated July 21, 2006(5)
        10.17
Addendum Dated October 18, 2006 to Debenture Dated December 29, 2005 and Debenture Dated July 21, 2006(5)
        10.18
Debt Conversion Agreement dated As of November 4, 2009 by and between the Company and Dutchess Private Equities Fund, Ltd., (6)
        10.19
Series A Convertible Stock Purchase Agreement dated as of November 4, 2009 by and between the Company and Dutchess Private Equities Fund, Ltd., (6)
        10.20
Purchase and Sale Agreement dated September 25, 2009 by and among the Company, Employment Screening Profiles, Inc., (“Trubackgrounds”) and Derrick Spatorico. (6)
        10.21
Escrow Agreement dated as of November 25, 2009 by and between the Company and Derrick Spatorico (6)
 
21.1
Subsidiaries of LocatePLUS Holdings Corporation.(1)


 
 
23.1
Consent of Geoffrey T. Chalmers, Esq. (filed with exhibit 5.1)
 
23.2
Consent of Livingston and Haynes P.C. (5)
 
23.5
Consent of Livingston & Haynes, P.C.
 
31.1
302 Certification of the Chief Executive Officer
 
31.2
302 Certification of the Chief Financial Officer
 
32
906 Certification of C.E.O. and C.F.O.
 
(1)
Filed as an Exhibit to Form SB-2, filed with the Securities and Exchange Commission on March 28, 2002 (Registration No. 333-85154).
 
(2)
Filed as an Exhibit to Form SB-2/A, filed with the Securities and Exchange Commission on June 21, 2002 (Registration No. 333-85154).
 
(3)
Filed as an Exhibit to Form SB-2/A, filed with the Securities and Exchange Commission on July 24, 2002 (Registration No. 333-85154).
 
(4)
Filed as Exhibit to Form 8-K, filed with the Securities and Exchange Commission on July 13, 2005.
 
(5)
Filed as Exhibit to Form SB-2/A, filed with the Securities and Exchange Commission on January 4, 2007, (Registration No. 333-138311
 
(6)
Filed herewith

 
Audit Fees
During 2009, our principal accountant, Livingston & Haynes, P.C. (L&H) billed $116,950 in connection with the audit of our annual financial statements and the review of our quarterly financial statements.
Tax Fees
During 2009, L&H billed us $14,500 for tax related services.



 
Signatures

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

LOCATEPLUS HOLDINGS CORPORATION


      /s/ Derrick Spatorico
Derrick Spatorico, Acting President, Chief Executive
 Officer, and Treasurer

           March 31 , 2010


 
 
 

Independent Auditors' Report


To the Stockholders and Board of Directors of
LocatePLUS Holdings Corporation
Beverly, Massachusetts

We have audited the accompanying consolidated balance sheet of LocatePLUS Holdings Corporation as of December 31, 2009, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the year ended December 31, 2009 and December 31, 2008.  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 audit.

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 provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LocatePLUS Holdings Corporation and its subsidiaries as of December 31, 2009, and the results of its consolidated operations and its consolidated cash flows for the years ended December 31, 2009, and December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As disclosed in the financial statements, the Company has an accumulated deficit at December 31, 2009 and has suffered substantial net losses in each of the last two years, which raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans in regard to these matters are disclosed in Note 1.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.




/s/LIVINGSTON & HAYNES, P.C.
Livingston & Haynes, P.C.
Wellesley, Massachusetts

March 31, 2010
 
 

 
 
   
 
Consolidated Condensed Balance Sheets
 
   
   
December 31,
2009
   
December 31,
2008
 
Assets
           
Current assets:
           
  Cash and cash equivalents
  $ 53,546     $ 92,465  
  Accounts receivable
    760,933       510,964  
  Prepaid expenses and other current assets
    3,017       99,903  
                 
      Total current assets
    817,496       703,332  
                 
Property and equipment, net
    68,371       715,553  
Intangible assets     1,022,997       79,464  
Other assets
    100,468       122,917  
                 
      Total assets
  $ 2,009,332     $ 1,621,266  
                 
Liabilities and Stockholders’ (Deficit) Equity
               
Current liabilities:
               
  Accounts payable
    1,370,805       1,139,317  
  Accrued expenses
    3,992,513       3,474,152  
  Deferred revenue
    284,360       306,875  
  Notes Payable
    148,000       607,883  
  Convertible notes payable
    3,288,419       2,586,992  
                 
      Total current liabilities
    9,084,097       8,115,219  
                 
Long term convertible notes payable
    119,565       247  
Shares subject to mandatory redemption
    1,800,000       1,500,000  
                 
      Total liabilities
    11,003,662       9,615,466  
                 
Commitments and contingencies
               
                 
Stockholders’ (deficit) equity:
               
   Common Stock , $0.01 par value,
      25,000,000 and 50,000,000 shares authorized
               
      23,795,500 and 49,993,700 shares issued and
      outstanding at December 31, 2008 and 2009 respectively
    499,937       237,955  
   Preferred Stock , $1.00 par value,
      1,000,000 shares authorized and
               
      72,000 shares issued and outstanding at December 31, 2009     -       -  
  Additional paid-in capital
    39,206,050       39,395,136  
  Warrants
    3,627,194       3,627,194  
  Shares pending issuance     900,000        
  Impairment on Assets
    -       (873,500 )
  Accumulated deficit
    (53,227,511 )     (50,380,985 )
                 
      Total stockholders’ equity
    (8,994,330 )     (7,994,200 )
                 
      Total liabilities and stockholders’ equity
   $ 2,009,332      $ 1,621,266  
                 

The accompanying notes are an integral part of these un-audited consolidated financial statements.
See accompanying notes and accountants report
 
 
 
 
 

 
 
 
 
LocatePLUS Holdings Corporation  
Consolidated Statements of Operations  
 
     
   
For the twelve
months ended
December 31,
 
   
2009
   
2008
 
 
           
 
           
Revenue
    7,260,952       8,013,600  
 
               
Cost of Revenue
    1,760,298       1,691,293  
                 
Gross Profit
  $ 5,500,654     $ 6,322,307  
                 
Operating expenses:
               
   Sales and marketing
    1,179,221       1,591,405  
   General and administrative
    4,998,011       5,366,168  
   Research and development
    29,645       194,728  
                 
      Total operating expenses
  $ 6,206,877     $ 7,152,301  
                 
Operating loss
    (706,223 )     (829,994 )
                 
Other income (expense):
               
   Interest expense
    (514,714 )     (511,542 )
   Other income
    4,466       7,924  
   Finance related expenses     (294,765 )     -  
   Loss on termination of research and development project     (586,334 )     -  
   Gain on extinguishment of debt     127,000       -  
   Loss on permanent impairment of investment     (875,000     -  
                 
Net loss
  $ (2,845,570 )   $ (1,333,612 )
                 
Basic and diluted net loss per share
  $ (0.06)     $ (0.08)  
                 
Shares used in computing basic
and diluted net loss per share
    44,445,410       16,538,323  
 
 
 
 
The accompanying notes are an integral part of these un-audited consolidated financial statements.
See accompanying notes and accountants report
 

 
 
 

  LocatePLUS Holdings Corporation  
  Consolidated Statement of Stockholders' Equity  
               
 
                     
 
 
   
Common stock
   
Share Pending
   
Additional
   
Warrants
   
Impairment
   
Accumulated
   
Total stockholders’
 
   
Shares
   
Amount
   
Issuance
   
paid-in capital
         
on assets
   
deficit
   
equity (deficit)
 
Balance at December 31, 2007
     11,397,657       113,977             39,218,416       3,692,378       (861,350 )     (49,047,373 )     (6,883,952 )
Issuance of shares
     12,397,870       123,978             176,720       (65,184 )                     235,514  
Adjustment to impairment
                                          (12,150 )             (12,150 )
Net loss
                                                  (1,333,612 )     (1,333,612 )
Balance at December 31, 2008
     23,795,527       237,955             39,395,136       3,627,194       (873,500 )     (50,380,985 )     (7,994,200 )
Issuance of shares
    26,198,190       261,982             (189,086 )                     (956 )     71,940  
Adjustment to impairment
                 
 
                      873,500               873,500  
Shares Pending Issuance
                    900,000                                       900,000  
Net loss
                                                    (2,845,570 )     (2,845,570 )
Balance at December 31, 2009
    49,993,717     $ 499,937       900,000     $ 39,206,050     $ 3,627,194        -     $ (53,227,511 )   $ (8,994,330 )
 
 
 
 
 

The accompanying notes are an integral part of these un-audited consolidated financial statements.
See accompanying notes and accountants report
 

 
 
   
 
Consolidated Statements of Cash Flows
 
   
For the year ended December 31,
2009
   
For the year ended December 31,
2008
 
Cash flows from operating activities:
           
Net loss
  $ (2,845,570 )   $ (1,333,612 )
  Adjustments to reconcile net loss to net
               
   cash used in operating activities:
               
      Depreciation and amortization of property and equipment
    101,613       562,728  
      Loss on termination of property and equipment     459,334       1,836  
      Provision for doubtful accounts     (7,000 )     (72,164 )
      Interest expense related to warrants issued with debt
    345,457       343,225  
      Acquisition of Goodwill     (998,413 )     -  
      Shares pending issuance     900,000       -  
      Conversion of payable to debt     75,000        -  
      Loss on investment     (1,500      -  
      Conversion of debt to equity securities     85,062       -  
      Loss on permanent impairment of investment     875,000       -  
      Stock Based Compensation
    -       26,636  
      Changes in assets and liabilities:
               
        Accounts receivable     (242,968 )     282,722  
        Prepaid expenses and other assets
    195,219       169,789  
        Accounts payable     256,490       (120,106 )
        Accrued expenses
    518,361       47,652  
        Deferred revenue
    (22,516     147,574  
        Security deposits
    (21,004 )     192,574  
                 
          Net cash provided (used by) by operating activities
    (327,435 )     238,851  
                 
Cash flows from investing activities:
               
        Purchases of property and equipment     (40,837 )     -  
                 
           Net cash used in investing activities     (40,837 )     -  
                 
Cash flows from financing activities:
               
      Repayment of debt     (20,647 )     (204,650 )
      Proceeds from issuance of debt
    350,000       -  
      Payments of obligations under capital lease     -       (37,878 )
                 
            Net cash provided (used) in financing activities     329,353       (242,528 )
                 
Net decrease in cash and cash equivalents
    (38,919     (3,677 )
                 
Cash and cash equivalents, beginning of period
    92,465       96,142  
                 
Cash and cash equivalents, end of period
   $ 53,546      $ 92,465  
                 
 
 
The accompanying notes are an integral part of these un-audited consolidated financial statements.
See accompanying notes and accountants report
 
 
 
 
 
 
LocatePLUS Holdings Corporation
 
Notes to Consolidated Financial Statements

1.
Nature of Business and Basis of Presentation

 LocatePLUS Holdings Corporation , through itself and its wholly-owned subsidiaries LocatePLUS Corporation, Worldwide Information, Inc., Entersect Corporation, Dataphant, Inc., Metrigenics, Inc., and TruBackgrounds (collectively, the “LocatePLUS Group”), are business-to-business, business-to-government and business-to-consumer providers of public information via our proprietary data integration solutions.  We sell a CD-ROM-based product, Worldwide Information™, which enables users to search certain motor vehicle records and driver’s license information in multiple states.  Our LocatePLUSÔ product, which is accessible through the Internet, contains searchable and cross-referenced public information on individuals throughout the United States, including individuals’ names, addresses, dates of birth, Social Security numbers, prior residences, and, in certain circumstances, real estate holdings, recorded bankruptcies, liens, judgments, drivers’ license information and motor vehicle records.  Entersect Corporation provides self-screening for both resume and online dating services.  Entersect also provides services to law enforcement through an online database called Entersect Police Online (EPO). Dataphant provides information on virtually every land-based phone number in the United States and approximately 45% of the cell phone numbers in the United States.  Metrigenics, Inc., was formed to develop new ways to integrate biometrics with data.  On September 24, 2009 the Company acquired all the stock of Employment Screening Profiles, Inc.(d/b/a TruBackgrounds), a Florida corporation (“TruBackgrounds”), located in Oldsmar, Florida,  engaged in the business of developing and delivering integrated, customized web-enabled solutions designed to aid in background verification, applicant management and human resource collaboration processes.
 
Liquidity and Operations

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business.  The Company has incurred substantial losses in each of the last two years, and has incurred an accumulated deficit of $53,227,511 through December 31, 2009.  These circumstances raise substantial doubt about the Company's ability to continue as a going concern.  These financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
On March 20, 2007, we issued a secured convertible debenture to Cornell Capital Partners ( now YA Global Investments, L.P. ) in the aggregate principal amount of $6,000,000 of which $3,000,000 was advanced immediately.  The second installment of $2,000,000 was to be advanced immediately prior to the filing by the Company with the Securities and Exchange Commission (the "Commission") of the Registration Statement.  The last installment of $1,000,000 was to be advanced immediately prior to the date the Registration Statement was declared effective by the Commission.   The remaining $3,000,000 was not funded due to the Company failing to file the necessary Registration Statement. The Debentures mature on the third anniversary of the date of issuance. The holder of the Debentures may convert at any time amounts outstanding under the Debentures into shares of common stock of the Company at a fixed conversion price per share equal to $0.314.  Under the Purchase Agreement the debentures are secured by substantially all of the Company's, and its wholly owned subsidiaries’ assets.

Under the Purchase Agreement, we also issued to Cornell Partners ( now YA Global Investments, L.P. ) five-year warrants in six separate series as follows:

 
A Warrants to purchase 2,384,814 shares of common stock at $0.314 per share;
 
B Warrants to purchase 2,186,079 shares of common stock at $0.343 per share;
 
C Warrants to purchase 2,017,919 shares of common stock at $0.372 per share;
 
D Warrants to purchase 1,748,863 shares of common stock at $0.429 per share;
 
E Warrants to purchase 1,499,026 shares of common stock at $0.50 per share;
 
F Warrants to purchase 1,500,000 shares of common stock at $0.01 per share.


 
2.           Summary of Significant Accounting Policies

 
Cash Equivalents
 
The Company considers all money market funds, bank certificates of deposit, and short term investments with original maturities of three months or less at the date of purchase to be cash equivalents.

 
Concentration of Credit Risk
Financial instruments that subject the Company to credit risk consist of cash and cash equivalents, accounts receivable and notes receivable.  The risk with respect to cash and cash equivalents is minimized by the Company’s policies in which such investments are placed only with highly rated financial institutions and in instruments with relatively short maturities.  The financial stability of these financial institutions is constantly reviewed by senior management.  The carrying value of cash and cash equivalents approximates their fair value.

Property and Equipment
 
Property and equipment are carried at cost less accumulated depreciation.  Depreciation is calculated using the straight-line method at rates sufficient to write off the cost of the assets over their estimated useful lives.

 
Intangible Assets
Intangible assets consist of deferred financing costs and goodwill.

The Company had incurred costs when obtaining financing through Cornell Funding which are capitalized and are being amortized using the straight-line method over the three-year term of the related financing agreement.  For tax purposes, these costs will be amortized over the same three-year term.

The Company acquired goodwill through the acquisition of the assets and liabilities of ESP (TruBackgrounds).

Goodwill
 
The Company has elected to account for goodwill resulting from the acquisition of assets, in accordance with statement of financial accounting standards No. 142, which prohibits the amortization for goodwill since it has an indefinite life. The statement requires that goodwill be tested for impairment on an annual basis. If goodwill is impaired, an impairment loss will be recognized and charged against earnings in the year in which goodwill becomes impaired. There was no impairment for the years ended December 31, 2009 or 2008. However, for tax purposes, goodwill is being amortized ratably over a fifteen-year period.

 
Income Taxes
 
The Company accounts for income taxes using the liability method under which deferred tax assets and liabilities are determined based on differences between financial reporting and income tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.  The majority of the Company’s deferred tax asset has been established for the expected future benefit of net operating tax loss and credit carryforwards.  A valuation reserve against net deferred tax assets is required if, based upon available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

 
Revenue Recognition
 
The Company provides access to public information such as bankruptcies, real estate transactions and motor vehicles and drivers’ licenses. Revenue is recognized when the information requested

 

 
by a customer is displayed or downloaded, there is evidence of an arrangement, the fees are fixed or determinable, and collectability is reasonably assured.

 
Costs of Revenues and Software Development Costs
 
Costs of revenues consist primarily of costs for data acquisition, materials and expenses associated with compact disks and costs for license agreements related to data acquisition, software development and maintenance costs.

 
Software development costs are charged to operations as incurred, as they relate to ongoing maintenance of data and the Company’s website.  The Company evaluates certain software development costs for capitalization in accordance with the American Institute of Certified Public Accountants Statement of Position 98-1 (“SOP 98-1”), “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.”  Costs incurred relating to the Company’s own personnel and outside consultants who are directly associated with software developed for internal use may be capitalized.  Costs eligible for capitalization under SOP 98-1 have been immaterial to date.

 
Stock Compensation Plans

Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), “Share Based Payment” (“SFAS No. 123(R)”) using the modified prospective transition method.  No stock-based compensation expense was recognized in the income statement for the years ended December 31, 2009 and 2008. There are currently no options granted under the Company’s stock-based employee compensation plans.

Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the consolidated statements of cash flows. SFAS No. 123(R) requires the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (“excess tax benefits”) to be classified and reported as both an operating cash outflow and a financing cash inflow on a prospective basis upon adoption.
 
       SFAS No. 123R requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the Black-Scholes option valuation model, which incorporates various assumptions including volatility, expected life, and interest rates. The assumptions used for the years ended December 31, 2009 and 2008 
               and the resulting estimates of weighted-average fair value per share of options granted during those periods are as follows:

 
For the twelve months ended
 
December 31
 
2009
2008
Expected life
6 years
6 years
Volatility
33%
31%
Risk free interest rate
0.45 %
0.36 %
Dividend yields
-
-
Weighted-average fair value of options granted during the period
-
-

The expected life of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. For 2009 and 2008, expected stock price volatility is based on a combination of historical volatility of the Company’s stock and the one-year implied volatility of its traded options, for the related vesting periods. Prior to the adoption of SFAS 123R, expected stock price volatility was estimated using only historical volatility of the Company’s stock. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term. The Company has not paid dividends in the past and does not plan to pay any dividends in the near future.


 
 
Earnings Per Share
 
Basic earnings per share is based upon the weighted average number of common shares outstanding during each period.  Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the period.  The computation of diluted earnings per share does not assume the issuance of potential common shares that have an anti-dilutive effect.  Diluted per share computations are not presented since the effect would be anti-dilutive.

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

 
Recent Pronouncements

 
On January 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157 “Fair Value Measurements” (SFAS No. 157), which provides a consistent definition of fair value that focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over company-specific inputs.  SFAS No. 157 requires expanded disclosures about fair value measurements and establishes a three-level hierarchy for fair value measurements based on the observable inputs to the valuation of an asset or liability at the measurement date.  The standard also requires that a company consider its own nonperformance risk when measuring liabilities carried at fair value, including derivatives.  In February 2008 the Financial Accounting Standards Board (FASB) approved the FASB Staff Position (FSP) No. FAS 157-2, “Effective Date of FASB Statement No. 157” (FSP No. FAS 157-2), that permits companies to partially defer the effective date of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed as fair value in the financial statements on a nonrecurring basis.  FSP No. FAS 157-2 does not permit companies to defer recognition and disclosure requirements for financial assets and financial liabilities or for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually.  SFAS No. 157 is effective for financial assets and financial liabilities and for nonfinancial assets and nonfinancial liabilities that are re-measured at least annually for fiscal years beginning after November 15, 2007.  The provisions of SFAS No. 157 are applied prospectively.

 
The carrying amounts of cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, deferred revenue, current portions of capital lease obligations, current portion of notes payable and convertible notes payable approximate fair value because the best valuation for them is the use in the business and the short maturity of those instruments.

 
 
3.
Accounts Receivable, Trade
 
Trade accounts receivable are presented net of an allowance for doubtful collections of $95,000 at December 31, 2009 and $102,000 at December 31, 2008.  In determining this allowance, objective evidence that a single receivable is uncollectible as well as a historical pattern of collections of accounts receivable that indicate that the entire face amount of a portfolio of accounts receivable may not be collectible is considered at each balance sheet date.

4.
Property and Equipment
Property and equipment consist of the following at December 31, 2009 and 2008:

 
December 31,
 
2009
 
2008
       
Equipment
 $     4,638,081
 
 $     4,597,245
Vehicles
22,343
 
22,343
Software (see note below)
332,587
 
918,920
Furniture and fixtures
389,783
 
389,783
Leasehold improvements
624,142
 
624,142
 
6,006,936
 
6,552,433
Less accumulated depreciation and amortization
5,938,565
 
5,836,880
Property and equipment, net
 $         68,371
 
 $       715,553


 
Depreciation and amortization expense was $101,613 and $62,730 for the years ended December 31, 2009 and 2008, respectively.

 
Note:  Management determined that it no longer made sense from a strategic or economic perspective to continue to include in the Company’s future product plans a development project which was initiated in 2005 and which had subsequently been put on hold.  Accordingly, the capitalized costs recorded to date were written off, resulting in a net loss on disposal of $586,334 which was recorded in the year ended December 31, 2009.

5.
Prepaid expenses and other current assets
 
Prepaid expenses and other current assets consist of the following at December 31, 2009 and 2008:

 
December 31,
 
2009
 
2008
       
Other
$   3,017
 
$   24,903
Prepaid consulting fees
-
 
75,000
       
Total
 $         3,017
 
 $       99,903




 
6.    Intangible assets
               Intangible assets consist of the following at December 31,

 
December 31,
 
2009
 
2008
       
Deferred financing costs
$295,000
 
$295,000
Goodwill
998,413
 
0
Total
$1,293,413
 
$295,000
Less: accumulated amortization
$270,416
 
$172,083
       
 
$1,022,997
 
$122,917

Amortization expense for the years ended December 31, 2009 and 2008 was $98,333.

Future amortization expense for the next five years is:

2010
 $     24,548
2011
 $           -
2012
 $           -
2013
 $           -
2014
 $           -

7.    Other assets
 
Other assets consist of the following at December 31, 2009 and 2008:

 
December 31,
 
2009
 
2008
       
Security deposits
 $       100,468
 
 $         77,964
Restricted trading securities
-
 
1,500
       
Total
 $       100,468
 
 $         79,464

Restricted trading securities consist of 200,000 restricted shares of common stock in Data Evolution Holdings, Inc., which trades over the counter under the symbol DTEV.  These shares were acquired as part of an agreement to provide service and data to DEH. As of December 31, 2009, The Company has decided that the asset is fully impaired and the adjusted carrying value is now zero.

 
 
8.
Accrued Expenses
 
Accrued expenses consist of the following at December 31, 2009 and 2008:

 
December 31,
 
2009
 
2008
       
Accrued interest
 $     3,233,902
 
 $     3,227,400
Accrued legal settlements
292,351
 
-
Board of Director fees
210,049
 
 -
Accounting fees
91,000
 
91,000
Payroll
 90,133
 
87,931
Other
75,078
 
67,821
       
Total
 $     3,992,513
 
 $     3,474,152

9.
Notes Payable

Notes payable consist of the following:

During 2003, the Company issued subordinated promissory notes in the amount of $2.3 million, bearing simple interest ranging from 10% and 12% per annum.  The balance of this debt at December 31, 2008, is $102,000.  In 2007, the terms of these notes were re-negotiated and now bear interest ranging from 19% to 30%. As of December 31, 2009 the balance on these notes remains unpaid and the notes are now classified as demand.

On March 20, 2007, we issued a secured convertible debenture to Cornell Capital Partners ( now YA Global Investments, L.P. ) in the aggregate principal amount of $6,000,000 of which $3,000,000 was advanced immediately.  The second installment of $2,000,000 was to be advanced immediately prior to the filing by the Company with the Securities and Exchange Commission (the "Commission") of the Registration Statement.  The last installment of $1,000,000 was to be advanced immediately prior to the date the Registration Statement was declared effective by the Commission.   The remaining $3,000,000 was not funded due to the
Company  failing to file the necessary Registration Statement. The Debentures mature on the third anniversary of the date of issuance. The holder of the Debentures may convert at any time amounts outstanding under the Debentures into shares of common stock of the Company at a fixed conversion price per share equal to $0.314.  Under the Purchase Agreement the debentures are secured by substantially all of the Company's, and its wholly owned subsidiaries’ assets.

Under the Purchase Agreement, we also issued to Cornell Partners ( now YA Global Investments, L.P. ) five-year warrants in six separate series as follows:

 
A Warrants to purchase 2,384,814 shares of common stock at $0.314 per share;
 
B Warrants to purchase 2,186,079 shares of common stock at $0.343 per share;
 
C Warrants to purchase 2,017,919 shares of common stock at $0.372 per share;
 
D Warrants to purchase 1,748,863 shares of common stock at $0.429 per share;
 
E Warrants to purchase 1,499,026 shares of common stock at $0.50 per share;
 
F Warrants to purchase 1,500,000 shares of common stock at $0.01 per share.

Also in connection with the sale and issuance of the Debentures, the Company entered into a settlement agreement with Dutchess Private Equities Fund, Ltd. for the settlement of a dispute regarding the amount due under debt instruments issued by the Company to Dutchess during


 
2005 and 2006.  Pursuant to the terms of the Settlement, the Company immediately paid a cash amount of $1,500,000 with two additional cash payments in the amount of $300,000 each to be made on the date that (i) the Company files the Registration Statement (or, if earlier, within 45 days) and (ii) the Registration Statement is declared effective (or, if earlier, within 145 days).  The Company also issued a Note in the amount of $1,500,000 and agreed to reduce to $0.10 per share the exercise price of the warrants issued to Dutchess.  Dutchess agreed to terminate any security interest in the Company’s assets upon the Initial Payment.

On December  11,  2007,  the Company received a letter dated December 6, 2007 ( the "Notice Letter"), from  YA  Global  Investments,  L.P.,  (formerly  known  as Cornell Capital Partners,  L.P.)  notifying  the  Company  of certain Events of Default under the Secured  Convertible  Debenture  dated  March  20,  2007  of  the  Company  (the "Debenture").  As a result of this default, the entire note has been re-classified as short term.

Effective December 30, 2009, all indebtness to Dutchess Private Equities Fund, Ltd. has been settled through the issuance of 72,000 shares of Preferred Class Common Stock that was authorized by a majority of shareholders of Common Stock through a Written Consent process.

In November, 2009, the Company repurchased 2,000,000 shares of its Common Stock at $0.125 from an independent investor. This purchase was done in the form of a two year, 5.5% convertible note in the amount of $250,000. This note is convertible into shares of the Company’s Common Stock at a conversion price of twelve and one half cents ($0.125). All interest payable in relation to this note was prepaid.

During 2009, the Company issued several one-year convertible promissory notes totaling $375,000, bearing simple interest of 8% per annum.  The balance of this debt at December 31, 2009, is $375,000.

10.           Commitments and Contingencies

Operating Leases
 
The Company leases office space and equipment under various non-cancelable operating lease agreements which terminate on various dates through 2015.  Rent expense amounted to $421,387 and $544,199 during 2009 and 2008, respectively.

 
Future minimum payments under non-cancelable operating leases are as follows:

Year ending December 31,
 
2010
$    394,730
2011
387,138
2012
371,016
2013
371,016
2014 and future
463,770
Total
$ 1,987,670

 
Capital Leases
 
As of December 31, 2009, no balance remained due on capital leases.

 
License Agreements
 
The Company obtains its data from multiple sources and has entered into various license agreements with the related data providers.  In 2009 and 2008, the Company recorded $1,760,299 and $1,691,293 respectively in costs related to these agreements.  In the event that any of the primary sources of data are no longer available to the Company, management believes that it

 
 
 
would be able to integrate alternate sources of data without significant disruption to the business or operations, as there are currently a number of providers of such data.  The Company is required to make minimum payments under these agreements as follows:

The following represents the contractual obligation and commercial commitments as of December 31, 2009.
 
                         
Contractual Obligations
 
Total
   
Less than
 1 Year
   
1-3
 Years
   
3-5
 Years
 
Long-Term Debt including current portion
  $ 3,588,799     $ 3,469,234     $ 119,565       -  
Operating Leases
    1,999,707       406,766       758,154       834,787  
License Agreements     405,000       405,000              
Total
  $ 5,993,506     $ 4,281,000     $ 877,719     $ 834,787  

 
The Company’s operations depend upon information that includes public records.  If material changes were to occur in federal or state laws regulating or prohibiting the distribution of public records, particularly credit header records, the Company’s financial condition and results of operations could be materially affected.  In the event that such a termination occurred, management believes it could acquire replacement data from other sources; however, such termination might have an adverse effect on the Company’s operations.

 
Legal Proceedings

 
 None

11.           Income Taxes
 
Deferred tax assets consist of the following at December 31:


 
2009
2008
     
Net operating loss carry forwards
 $         15,000,000
 $     14,735,000
Stock based compensation
390,000
450,000
Bad debt reserve
39,000
44,400
Investment loss
5,000
5,000
Gross deferred tax assets
15,434,000
15,234,400
     
Valuation allowance
(15,434,000)
(15,234,400)
Net deferred tax assets
 $                   -
 $                   -

The Company has provided a valuation allowance for the full amount of the deferred tax assets since realization of these future benefits is not sufficiently assured.  When the Company achieves

 
 
profitability, these deferred tax assets may be available to offset future income tax liabilities and expenses.

            The net increase in the valuation allowance was approximately $200,000 for 2009 and 2008.

At December 31, 2009, the Company had net operating loss carryforwards for federal and state income tax reporting purposes of approximately $37 million and $20 million respectively.  The federal and state net operating loss carry forwards expire through 2027.

Certain substantial changes in the Company’s ownership may occur.  As a result, under the provisions of the Internal Revenue Code, the amount of net operating loss carryforwards available annually to offset future taxable income may be limited.  The amount of this annual limitation is
determined based upon the Company’s value prior to the ownership changes taking place.  Subsequent ownership changes could further affect the limitation in future years.

12.
Common Stock and Preferred Stock
As of December 31, 2009, the Company has authorized capital stock of 50,000,000 shares of Common Stock, par value $0.01 per share, and 1,000,000 shares of Preferred Stock, par value $1.00 per share (“Preferred Stock”).  As of the date hereof, there are outstanding 49,770,826 shares of Common Stock, 72,000 shares of Preferred Stock. In accordance with the FASB codification 480-10, the Preferred Stock has been classified on the balance sheet as shares subject to mandatory redemption.

Voting

The holders of Preferred Stock shall be entitled to the number of votes equal to the number of whole shares of Common Stock into which such shares of Preferred Stock be converted.

The holders of the Common Stock are entitled to one vote for each share held at all meetings of stockholders.  There shall be no cumulative voting.

Dividends

Holders of shares of Preferred Stock shall be entitled to receive, cumulative dividends to be paid quarterly, in cash or in Preferred Stock, at the option of the Company, at the rate of twenty five cents ($.25) per share, prior and in preference to any declaration or payment of any dividend to the holders of shares of Common Stock.

Liquidation

As of December 31, 2009 and 2008, the holders of shares of Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders before any payment will be made to the holders of the Common Stock or any other class or series of stock ranking on liquidation junior to the Preferred Stock, an amount in cash per share equal to the greater of: (i) the original purchase price paid with respect to each share of Preferred Stock held by such holder, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such share, plus any dividends declared but unpaid on such shares, or (ii) the amount such holder would receive if such shares of Preferred Stock are converted to Common Stock immediately prior to any such liquidation, dissolution or winding up of the Company.

 
 
After payment has been made in full to the Preferred Stock, any remaining assets available for distribution will be distributed among Common Stock holders.

Redemption Rights

On or after December 31, 2009, the Company shall redeem from all the holders of the Preferred Shares, at the beginning of each quarter, those amounts of Preferred Shares at a price of $25.00 per share set forth below:

From:
Through:
 
# of Preferred Shares
       
Closing Date
December 31, 2010
 
                            600
March 31, 2011
December 31, 2011
 
                         1,000
March 31, 2012
December 31, 2012
 
                         1,400

The number of shares of Preferred Stock to be redeemed for the following years ending December 31 are:

2010
      2,400
2011
      4,000
2012
      5,600
2013
           -
2014
           -

Conversion Rights

At the option of the holders of Preferred Stock can convert at any time upon their Preferred Shares into 41.66 shares of the Company’s Common Stock, par value $0.01 per share.

13.           Stock Option Plans
 
On November 16, 1999, the Board of Directors approved the Incentive and Non-Qualified Stock Option Plan as amended (the “1999 Plan”).  Under the terms of the 1999 Plan, the Company is authorized to grant incentive and nonqualified stock options to purchase shares of common stock to its employees, officers and directors, and consultants or advisors.

The Board of Directors administers the Plan.  A maximum of 15,000,000, shares, or 300,000 after adjusting for the reverse split, of Class A Voting Common Stock has been approved for issuance under the 1999 Plan of which 6,061 post split shares are available for grant at December 31, 2008.  The options are not transferable except by will or domestic relations order. As of November 16, 2009, all options under this plan have expired.

 
On March 28, 2003, the Board of Directors approved the Incentive and Non-Qualified Stock Option Plan (the “2003 Plan”) which was approved by the stockholders at the May 29, 2003 annual meeting.  Under the terms of the 2003 Plan, the Company is authorized to grant incentive and nonqualified stock options to purchase shares of common stock to its employees, officers and directors, and consultants or advisors.  The Board of Directors administers the 2003 Plan.  A maximum of 25,000,000 shares, or 500,000 after adjusting for the reverse split, of Class A Voting Common Stock and 25,000,000 shares, or 500,000 after adjusting for the reverse split, of Class B Non-Voting Common Stock, or a combined total of 1,000,000 post split shares have been approved for issuance under the 2003 Plan of which 964,000 are available for grant at December 31, 2009.  The options are not transferable except by will or domestic relations order.



 
The Board of Directors determines the exercise price and vesting period of the options at the date of grant.  The exercise price for incentive stock options shall not be less than 100% of the fair market value of the Company’s stock on the date of grant.  The option exercise period will not exceed ten years from the date of grant.  The options are generally fully exercisable when issued to directors and consultants and exercisable 25% per year and continuing over four years for employees (based on continual employment). If a grantee owns stock representing more than 10%
 
of the outstanding shares on the date such an incentive option is granted, the price shall be at least 110% of fair market value and the maximum term of the options will be five years.

 
The following table presents activity under the Plans adjusting for the reverse split for the years ended December 31, 2009 and2008


   
Weighted average
 
Shares
exercise price
     
Outstanding at December 31, 2007
            410,906
 $     29.87
Granted
600,000
 $       0.11
Exercised
-
-
Forfeited / Canceled
 -
-
     
Outstanding at December 31, 2008
         1,010,906
 $     12.21
Issued
-
-
Exercised
-
-
Canceled
          (783,919)
 $       4.60
     
Outstanding at December 31, 2009
            226,987
 $     38.83


 
The following summarizes information relating to options outstanding at December 31, 2009:

   
                                 Options outstanding
 
Options exercisable
 
     
 
 
 
       
 
     
weighted average remaining
 
Weighted average
     
Weighted average
Range of exercise price
 
Shares
 
contractual life (years)
 
exercise price
 
Shares
 
exercise price
                     
$10.00-$15.00
 
  123,237
 
2.67
 
$   10.07
 
 123,237
 
$    10.07
$15.00-$75.00
 
 103,750
 
4.48
 
$   73.00
 
103,750
 
$    73.00
   
226,987
 
3.50
 
$   38.83
 
 226,987
 
$    38.83




14.
Defined Contribution Retirement Plan
 
The Company sponsors a defined contribution retirement plan under the provisions of Section 401(k) of the Internal Revenue Code, which covers substantially all employees.  The Company may make discretionary matching contributions up to 1% of employee contributions.  Company contributions vest ratably over a six-year period.  Company matching contributions amounted to $15,582 and $9,416 in 2009 and 2008, respectively.

15.
Segment Information
 
The Company operates in a single business segment

16           Financial Statement Presentation
Certain amounts in the 2008 consolidated financial statements have been reclassified to conform to the 2009 presentation.