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EX-31.2 - Seaniemac International, Ltd. | v185322_ex31-2.htm |
EX-31.1 - Seaniemac International, Ltd. | v185322_ex31-1.htm |
EX-32.2 - Seaniemac International, Ltd. | v185322_ex32-2.htm |
EX-32.1 - Seaniemac International, Ltd. | v185322_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
fiscal year ended December 31, 2009
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File Number: 333-134092
Compliance
Systems Corporation
(Name of
registrant as specified in its charter)
Nevada
|
20-4292198
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
50
Glen Street, Glen Cove, New York
|
11542
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (516) 674-4545
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
¨ Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.
¨ Yes x No
Indicate
by check mark if the registrant has (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. x Yes ¨ No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments 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.
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 x No
The
aggregate market value of the voting and non-voting common equity of the
registrant held by non-affiliates computed by reference to the closing sale
price of such common equity, as of the last business day of the registrant’s
most recently completed second fiscal quarter, was $2,922,073, assuming that all
stockholders, other than executive officers, directors and 5% stockholders of
the registrant, are non-affiliates.
As of
April 1, 2010, 276,011,662 shares of the common stock of the registrant were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
None
Introductory
Comment - Use of Terminology
Throughout
this Annual Report on Form 10-K, the terms the “Company,” “we,” “us” and “our”
refers to Compliance Systems Corporation and, unless the context indicates
otherwise, our subsidiaries, Call Compliance, Inc. (“Call Compliance”), Jasmin
Communications Inc., Call Center Tools Inc., Call Compliance.com Inc. and
Telephone Blocking Services Corporation, on a consolidated basis.
Note
Regarding Forward-Looking Statements
This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and
Section 21E of the Securities Exchange Act of 1934 (the “Exchange
Act”). To the extent that any statements made in this Form 10-K
contain information that is not historical, these statements are essentially
forward-looking. Forward-looking statements can be identified by the
use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate”
“expect,” “hope,” “intend,” “may,” “plan,” “potential,” “product,” “seek,”
“should,” “will,” “would” and variations of such
words. Forward-looking statements are subject to risks and
uncertainties that cannot be predicted or quantified and, consequently, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties include,
without limitation:
•
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our
ability to raise capital to finance our growth and operations, when needed
and terms advantageous to us;
|
•
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our
ability to locate and acquire appropriate business enterprises to
supplement and enhance our revenue and cash
flow;
|
•
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the
ability to manage growth, profitability and the marketability of our
services;
|
•
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general
economic and business conditions;
|
•
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the
effect on our business of recent credit-tightening throughout the United
States, especially within the construction and real estate
markets;
|
•
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the
effect on our business of recently reported losses within the financial,
banking and other industries and the effect of such losses on the income
and financial condition of our current and potential
clients;
|
•
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the
impact of developments and competition within the telephone solicitation
industry;
|
•
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adverse
results of any legal proceedings;
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•
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the
impact of current, pending or future legislation and regulation on the
telephone solicitation industry;
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•
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our
ability to maintain and enter into relationships with suppliers, vendors
or contractors of acceptable quality of goods and services on terms
advantageous to us;
|
•
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the
volatility of our operating results and financial
condition;
|
•
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our
ability to attract and retain qualified senior management personnel;
and
|
•
|
the
other risks and uncertainties detailed in this Form 10-K and, from time to
time, in our other filings with the Securities and Exchange
Commission.
|
Readers
of this Annual Report on Form 10-K should carefully consider such risks,
uncertainties and other information, disclosures and discussions which contain
cautionary statements identifying important factors that could cause our actual
results to differ materially from those provided in forward-looking
statements. Readers should not place undue reliance on
forward-looking statements contained in this Form 10-K. We do not
undertake any obligation to publicly update or revise any forward-looking
statements we may make in this Form 10-K or elsewhere, whether as a result of
new information, future events or otherwise.
2
PART
I
Item
1.
|
Business.
|
Organizational
Structure
Our
predecessor, GSA Publications, Inc. (“GSA”), was incorporated on November 17,
2003 in Nevada. Our business predecessor, Compliance Systems
Corporation (“CSC”), was incorporated on November 7, 2002 in Delaware pursuant
to a corporate reorganization of several closely related companies that had
commenced operations in December 2001. On February 10, 2006, CSC was
merged with and into GSA, although CSC was treated as the surviving corporation
for accounting purposes due to the fact that the prior owners of CSC obtained
approximately 85% of the surviving corporation’s stock as a result of the
merger. Following the effectiveness of the Merger, the surviving
corporation changed its name to “Compliance Systems Corporation” and began
operating the businesses previously conducted by CSC.
On
February 5, 2010, the registrant, Compliance Systems Corporation (the
“Company”), entered into an Agreement and Plan of Merger, dated as of February
5, 2010 (the “Merger Agreement”), with Execuserve Corp., a Virginia corporation
(“Execuserve”) and CSC/Execuserve Acquisition Corp., a Virginia corporation and
wholly-owned subsidiary of the Company. The Merger between Execuserve and
CSC/Execuserve Acquisition Corp. became effective on February 9, 2010 with
Execuserve being the surviving corporation becoming a wholly-owned by the
Company.
As part
of the Execuserve acquisition, Compliance Systems Corporation has realigned its
organizational structure to account for the Execuserve acquisition and its
operational management team. The Company's new Execuserve subsidiary
division will be managed by its Chief Executive Officer (“CEO”) and President
Jim Robinson. The Company's Call Compliance, Inc. (“CCI”) subsidiary will be led
by Stefan Dunigan as its CEO and President. Dean Garfinkel will remain as
Chairman of the Board of Directors and CEO of Compliance Systems Corporation and
Barry Brookstein will continue as a member of the Board of Directors and as
Secretary and Chief Financial Officer (“CFO”). Additionally, Tom Eley, the
former CEO of Execuserve was appointed to the Board of Directors of the
Company.
Our
Business
We
operate our principal businesses through two of our subsidiaries, Call
Compliance, Inc. and Execuserve Corp.
Call
Compliance, Inc.
We help
telemarketing operators ensure compliance in the highly regulated, strictly
enforced Do-Not-Call and other telemarketing guidelines
environment. CCI designs, develops and deploys compliance products
that we believe are effective, reliable, cost efficient and help alleviate many
of the burdens placed upon telemarketers.
Our
business is to provide compliance technologies, methodologies and services to
the teleservices industry. We have developed a compliance technology
called the TeleBlock® Call Blocking System which is a product that automatically
screens and blocks outbound calls against federal, state, and in-house
Do-Not-Call lists. A patent for TeleBlock was granted by the United
States Patent and Trademark Office in December of 2001.
TeleBlock
is made available via a platform managed by our alliance partner and primary
distributor. Our TeleBlock platform(s) resides on the national Signal System
7/Internet Protocol (“IP”) network which is utilized by Telephone carriers to
access the information required to set up and manage the routing of telephone
calls. Using Signal System 7, telephone calls can be set up more
efficiently and with greater security. Special services such as name
display, toll-free service, and number portability, are easier to add and manage
with Signal System 7.
3
Our
Signal System 7/IP based deployment enables TeleBlock to be offered to
subscribers via standard telephone company offerings, including, but not limited
to, analog telephone lines, T1s (a dedicated phone connection supporting data
rates of 1.544 Mbits per second) and PRIs (Primary Rate Interface), a class of
voice and data service intended for larger users. TeleBlock also is
offered to telephone subscribers via Voice over Internet Protocol (“VoIP”)
switches and via a Virtual Private Network (“VPN”) connection by predictive
dialer companies such as Stratasoft, TeleDirect, Marketel, Nobel and TouchStar,
as well as in partnership with Application Service Providers (a business that
provides computer-based services to customers over a network such as software
development) (“ASPs”) such as Thunder and VanillaSoft. We believe
delivering TeleBlock in this manner provides two significant
advantages. First, we believe it allows for TeleBlock to be easily
implemented by any off-shore telemarketing company that calls into the United
States. Such offshore entities can use the internet to establish dial
tone with TeleBlock almost immediately, as opposed to using their local
telephone carrier which, based upon geography, may not be able to obtain a
direct TeleBlock license. Currently, through our many VoIP
distributors, there are contact centers utilizing TeleBlock in such countries as
India, the Dominican Republic, the Philippines and Canada. Second,
the VoIP telephone service gives domestic companies that have existing contracts
with telephone carriers that do not license TeleBlock the ability to directly
obtain the TeleBlock service. We are in talks with many other
industry leaders to offer this VoIP version of TeleBlock that was first deployed
through our alliance partner and primary distributor in November
2002. Since that time, we have been working closely with our alliance
partner and primary distributor in an effort to enter into contracts with
telephone carriers to provide their customers with TeleBlock on a commercial
basis. To date, more than 40 telephone carriers and resellers,
including AT&T, Qwest, Verizon Business, XO and Paetec, have licensed
TeleBlock and offer it to their telemarketing customers. No assurance
can be provided that any such discussions will result in new licenses for our
Company, or that any licenses will result in our receipt of revenues or
profits.
In May
2007, we launched the Enhanced DialerID® program, a TeleBlock enhancement
service designed to ensure proper Caller ID telephone number delivery with Name
Display for contact centers. Our current DialerID® service allows our
subscribers to change their Caller ID Number, by campaign, right from the
subscriber’s TeleBlock web GUI interface by manipulating the SS7 message that
the serving Central Office switches transmit. Enhanced DialerID also
allows subscribers to manage the name associated with the CallerID Number that
their telephone systems and automated dialing systems transmit to their target
consumers, ensuring the proper name display and maintaining compliance with
certain Do-Not-Call rules. In addition, with this enhanced service,
subscribers can request specific telephone numbers to use for each target
market. By using our “Target Market” telephone numbers, contact
centers will not only be in compliance with applicable law by ensuring the
proper Name Display on called consumers telephones, but will benefit from an
improved answer rate and increased credibility within their target
markets.
We were
granted patent protection in Greece for a modified version of the TeleBlock
system in February 2006. We believe this patent protection applies
throughout the European Union and anticipate that having this patent protection
in place will enable us to market the TeleBlock technology throughout Europe, as
the EU countries move to implement Do-Not-Call programs similar to those in the
United States.
The
Company produces four online guides: the USA DNC Regulatory Guide,
the State Registration Guide, the Charitable Fundraising Regulatory Guide and
Canadian DNC Regulatory Guide. The Regulatory Guide is an up-to-date
compilation of all United States Federal and state Do-Not-Call
regulations. The Registration Guide assists telemarketers in
completing state commercial registration forms as required by each
state. These guides are marketed and sold by the Company in
conjunction with and co-branded by the American Teleservices Association
(“ATA”), the Newspaper Association of America (“NAA”) and the American Resort
Development Association (“ARDA”). In December 2008, the Company
introduced the Canadian Regulatory Guide, an up-to-date compilation of all
Canadian Do-Not-Call regulations for Canadian telemarketers. This
guide is presently marketed and sold by the ATA and the Canadian Resort
Development Association (“CRDA”). The Charitable Fundraising Guide made its
debut in March 2009 and was launched in conjunction with the law firm of
McMurray Cooke Peterson and Shuster. This guide is currently being offered by
the ATA and ARDA. We expect to target market this new guide through additional
association agreements.
In 2005,
we entered the emerging world of VoIP communications (the technology used to
transmit voice conversations over a data network using the Internet
Protocol). In order to accomplish this, our wholly owned subsidiary,
Jasmin Communications, Inc., doing business as Citadel Telephone Company
(“Citadel”), entered into a wholesale reseller agreement by which it is able to
sell TeleBlock-enabled dial tone, via VoIP, worldwide. Our VoIP
service is available at www.citadeltel.com. The Citadel TeleBlock
service provides us with yet another avenue by which TeleBlock can be offered to
the teleservices industry. Citadel is currently providing US dial
tone with TeleBlock throughout the USA and in countries such as India, Mexico,
the Dominican Republic and Canada. We recently launched TeleBlock
Office through Citadel. TeleBlock Office delivers a powerful tool for
teleservices employees who work remotely or agents who are representing a
company's products and services. This "Office in a Box" solution
provides all the capabilities that are needed for a home-office user such as
voice mail, follow me services and TeleBlock. We offer this service,
utilizing VoIP technology, for one low monthly subscription fee per
user.
4
The Patented TeleBlock
Service
TeleBlock
is a Do-Not-Call system that automatically blocks outbound calls to phone
numbers registered with state and federally mandated Do Not-Call lists, the
end-user’s (the telemarketer’s) own in-house proprietary Do-Not-Call list, and
other third party Do Not Call lists. The system blocks these calls
centrally, allowing for multiple offices and/or outsourced call centers to
efficiently manage their Do-Not-Call lists. The basic TeleBlock
system blocks these calls in the appropriate telephone company’s central
office. The system is a value-added feature treatment applied to the
telemarketer’s telephone lines (whether they are Plain Old Telephone Service
(“POTS”) lines, T1’s or T3’s. The system functions independently of
the telemarketers’ telephone equipment. TeleBlock is compatible with
all key systems, Private Branch Exchanges (“PBXs”), predictive dialers,
voice-messaging systems, fax broadcast equipment, etc.
Our
TeleBlock process automatically blocks a call by interfacing with a telemarketer
who dials a number appearing on any of the applicable Do-Not-Call lists, and
instantaneously providing a recorded “blocked number” message. Other
available features include standard or customized Special Information Tone
(“SIT”) tones for predictive dialers; “telemarketer-specific” customized
messages, and the ability of the system to transfer a “blocked” caller to an
Interaction Voice Response (“IVR”) system or other department in the
telemarketing organization. TeleBlock’s capabilities regarding
customized SIT tones allows for the identifiable disposition of calls within a
predictive dialer environment. The TeleBlock system provides for the
customization of Carrier Line Identification Display (“CLID”) messaging (a
method of identifying the originating calling party in the headers of a stored
voice mail message) via DialerID, either in stand-alone mode or in conjunction
with Campaign List Manager.
A
web-based Graphical User Interface (“GUI”) allows telemarketers to manage and
administer all of the lists against which they wish to block
calls. Available administrative features of TeleBlock
include: number override (to allow certain numbers on lists to be
called); full editing capabilities (additions/deletions/updates); searching
capability; and a reporting module with standard and customizable
reports. The system also allows the administrator to create and
change passwords, display Automatic Number Identification (“ANI”)/T1
authentication code tables, modify CLID messaging DialerID and to change lists
in real time based upon ANI/T1’s utilizing Campaign List Manager.
The
TeleBlock system reviews each outgoing call made by a telemarketer and compares
it against state and federal Do-Not-Call lists, the specific customer’s in-house
Do-Not-Call list, as well as an “override” (allow) list. Based upon
this comparison, the call is either blocked or processed like a normal
call.
Sales Channels And Revenue
Sources
All of
our TeleBlock business is now hosted by our alliance partner and primary
distributor. Historically, we distributed our products and services
through two distributors. Both of these distributors offered
TeleBlock service to their customers, which are telephone
companies. Our alliance partner and primary distributor is a
wholesale telecommunications services provider.
While
there are other distributors available to us should the need arise in the
future, management has made a business decision that it is not in our best
interest to enter into any additional distributor relationships at this
time. The Company believes that its relationship with our alliance
partner and primary distributor is strong and the risks associated with having
them as the sole distributor are minimal due to their size and financial
strength. Our contract with them provides for annual
renewal. We believe that our relationship with our alliance partner
and primary distributor will continue to be positive in the future as our
relationship is mutually beneficial. Our primary distributor has
contractual agreements with its customers (the telephone carriers) to provide
TeleBlock, and our primary distributor’s customers, in turn, have contractual
obligations with their customers (telemarketers) and therefore rely upon our
primary distributor to provide this service. If our primary
distributor chose not to renew our contract, we would attempt to enter into an
agreement with another company that could perform the same
services. At present, we have identified three other suitable
distributors all of whom, we believe, could provide similar levels of
service.
5
By
leveraging our Alliance Agreement with our primary distributor, which calls for
them to host and manage the TeleBlock platform and enable interconnection to and
from various distribution models, we believe we are best positioned to
efficiently sell licenses and connectivity. We own the database,
which is maintained on equipment we own at a co-location facility and
continually updated by us. (Our primary distributor receives a
contractually determined amount on a per query basis as compensation for
providing its services.) With our primary distributor providing the
backbone of this process, we have accomplished the dissemination of TeleBlock
access without having to build or adapt new infrastructure. Our
TeleBlock service is sold to end-user telemarketers in a variety of ways, all of
which produce revenue to us:
•
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The
telephone carrier channel model which supports the sales efforts of
existing sales channels of telephone carriers, such as AT&T, Verizon
Business, Paetec Communications and Qwest. Our distributor, on
our behalf, offers our TeleBlock product as a value-add for any of its
telephone company customers. The service is, in turn, provided
to end-user telemarketers, which use a telephone to solicit for goods or
services. The telephone carrier charges its customers a query
(transaction) fee for each call attempt made from any telephone line that
has the TeleBlock feature enabled. Our distributor, on our
behalf, charges the telephone carrier monthly for all call attempts made
by all of its customers. To date, more than 40 telephone
carriers and resellers, including AT&T, Lightpath, Qwest, Verizon
Business, XO, and Paetec have licensed TeleBlock and offer it to their
customers who telemarket.
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•
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Direct
sales targeting strategic prospects that rely upon the telephone to sell
their goods and services. Typically, these efforts are geared
toward enterprise customers that have offices throughout the
country. Our direct sales efforts assist these companies in
implementing the TeleBlock service by locating the right distributor
(telephone carrier) for their specific needs and
geography. These customers receive our service from their
carrier and we receive revenue from the carrier as described
above.
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•
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TeleBlock
is also offered by predictive dialer companies (i.e., companies that
manufacture hardware and software systems that aid telemarketing entities
in efficiently and cost-effectively managing their outbound calls) –
examples include TouchStar, Stratasoft, TeleDirect, Marketel and
Nobel. Predictive dialer access to TeleBlock is accomplished by
connecting the predictive dialer to our primary distributor’s platform
using a secure VPN connection. The dialer manufacturer charges
its customers a query (transaction) fee for each call attempt made from
its equipment that has the TeleBlock feature enabled. Our
distributor, on our behalf, charges the manufacturer monthly for all call
attempts made by all of their
customers.
|
•
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TeleBlock
is also offered by hosted “Sales Force Automation” and “Customer
Relationship Management” ASPs such as Thunder and
VanillaSoft. These Web-based software services embed access to
the IP-based TeleBlock service directly into their online
systems. Users of these ASP systems can then make telephone
calls directly from the Web-based GUI interface and have each such call
screened and blocked, via IP, against all Do-Not-Call lists via
TeleBlock. These companies charges their customers a query
(transaction) fee for each call attempt made from their equipment that has
the TeleBlock feature enabled. Our distributor, on our behalf,
charges monthly for all call attempts made by all of their
customers.
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The Industry and
Competition
We
believe our patent protection prevents any telephone company from providing the
same service that blocks call against Do-Not-Call lists. However,
there is one company that provides a service that is in some ways similar to
TeleBlock, and there are other companies that provide what is known in the
industry as database “scrubbing” services.
Gryphon
Networks (“Gryphon”) of Norwood, Massachusetts, offers a product similar to our
DialBlock® technology product. We believe our TeleBlock product is
different from the Gryphon Do-Not-Call compliance product since the Gryphon
product requires its users to dial an access code, followed by a PIN number, to
make use of the system. Once this is completed, the user completes a
session of telemarketing, and the numbers dialed during this session are
screened and blocked against Do-Not-Call numbers via a system maintained by
Gryphon. We believe the Gryphon system does not reside, like
TeleBlock, on the Signal System 7/IP network, so the screening/blocking does not
take place via the user’s telephone carrier. Instead, the
screening/blocking process is completed by an “off-network” system created and
managed by Gryphon. With the Gryphon system, each individual user
must log in (via the access code and PIN number) in order for the screening to
take place; accordingly, there is potential for individual callers to bypass the
log in process.
6
There
also are many companies that “scrub” lists for
telemarketers. Scrubbing is another word for database merging and
purging, as applied to the removal of Do-Not-Call numbers from prospect
lists. We believe scrubbing does not achieve the 100% compliance
required under state and federal Do-Not-Call laws. The American
Teleservices Association (“ATA”) has adopted a set of standards to be used by
its members which standards include the requirement of utilizing a failsafe
method to ensure compliance with DNC rules. Under these standards,
unlike blocking, scrubbing can only be considered failsafe when regular testing
procedures are implemented.
TeleBlock
enables telemarketers to meet the compliance demands of the agencies enforcing
Do-Not-Call rules. We believe TeleBlock leverages the reliability of
existing telecommunications technology to create the only Do-Not-Call compliance
system that screens and blocks outbound calls via a telemarketer’s telephone
carrier. We believe traditional database scrubbing techniques lack
the centralization and standardization necessary to achieve 100% Do-Not-Call
compliance. Based upon a sampling of our customers that we know scrub
their call data before utilizing TeleBlock, we consistently block between 0.5%
and 3.0% of scrubbed calls. As an example, assuming a company makes
one million calls per month, and has a Do-Not-Call scrubbing error rate of even
0.1%, that company faces a potential annual exposure of over $130 million in
fines at the federal level alone. Utilizing TeleBlock, telemarketers
could eliminate this exposure as TeleBlock’s error rate is
0%. Accordingly, we anticipate that Do-Not-Call compliance will be of
paramount importance for any company that telemarkets.
Certain
companies may have products and provide services which indirectly compete with
TeleBlock. Such indirect competitors include list brokers (companies
that sell phone lists), scrubbing companies (companies that clean phone lists of
duplicates, bad numbers and Do-Not-Call numbers), computer telephony providers
(companies that provide automated dialing equipment), systems integrators
(companies that offer contact management software) and hardware and software
suppliers (companies that sell scrubbing software and equipment).
Many of
our competitors have substantially greater financial, technical and marketing
resources, larger customer bases, longer operating histories, greater name
recognition and more established relationships in the industry than we
do. As a result, certain of these competitors may be able to develop
and expand their product and service offerings more rapidly, adapt to new or
emerging technologies and changes in customer requirements more quickly, take
advantage of acquisitions and other opportunities more readily, devote greater
resources to the marketing and sale of their services and adopt more aggressive
pricing policies than we can. We cannot be sure that we will compete
successfully with our existing competitors or with any new
competitors.
Our
Strategy
Notwithstanding
the problems and issues confronting us during these difficult economic times,
the Company is attempting to execute a plan that will position it to take full
advantage of the economic turnaround. While certain revenue streams
have not been significantly impacted by the economic downturn, we need to
further expand our client base, continue to increase our presence in the call
center industry, increase our product availability through various sales
channels and broaden our base of product offerings. We believe this
may be accomplished in part by the acquisition of synergistic
companies. Over the next 12 months, we will be working towards
achieving these objectives by:
•
|
Continuing to sell TeleBlock
through traditional wire line telephone carriers. We
continue to provide the TeleBlock service to our existing telephone
carriers and to pursue with our alliance partner and primary distributor,
other teleservices providers in an effort to expand our carrier footprint
nationally. Expanding this channel is essential to maintaining
the maximum commercial availability of our core product offering,
TeleBlock. During the first quarter 2009, AT&T Business
Solutions added the TeleBlock call blocking service to its outbound
business voice services, although it was not commercially available until
the Fall 2009. This provides a network-based call screening and
blocking feature to help telemarketers avoid calling numbers listed on
various Do Not Call lists.
|
7
•
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Expanding TeleBlock’s reach
into other countries that enact DNC-type legislation. We
continue to monitor various trends around the world with respect to
do-not-call legislation. As these regulations are enacted in
other countries, we are adjusting our marketing strategies
accordingly. We are presently distributing our TeleBlock
product in Canada via a number of Canadian distributors since the
production of the Canada DNC list late last year, and we continue to
explore the means of bringing TeleBlock to India and Australia for use in
such countries.
|
•
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Increasing TeleBlock sales
through expansion of Voice over IP (“VoIP”) which allows TeleBlock usage
anywhere in the world and in those areas where we lack distributors
locally. In 2006, we entered the world of VoIP
communications through one of our subsidiaries, Jasmin Communications,
Inc., doing business as Citadel Telephone Company
(“Citadel”). Citadel has launched our product offering and is
selling our services to new and existing clients. In order to
offer telephone services to the worldwide market, we transferred our
Citadel services to a new robust pre-pay platform, which will enable us to
offer our VoIP services to high volume customers worldwide without credit
risk. We continue to offer TeleBlock Office along with the TeleBlock
service for one low monthly subscription
fee.
|
•
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Increasing TeleBlock sales
through our strategic alliance with predictive dialer
companies. Predictive dialer companies are companies
that use a computerized system to automatically dial batches of telephone
numbers for connection to agents assigned to sales or other
campaigns. We have marketing agreements with several predictive
dialer companies that are deploying TeleBlock in the world-wide
market. A second co-location facility was added to enhance our
ability to support these distributors. We continue to support
this revenue channel by pursuing new marketing agreements with additional
Predictive Dialer and Customer Relationship Management
companies. Because these dialers communicate directly with the
TeleBlock system, and are not carrier dependent, this channel allows us to
continue to expand the sales of our products
internationally. This enables us to provide DNC blocking
services for foreign based companies calling into the United States and
calling within their own country.
|
•
|
Integration of TeleBlock into
an IP PBX telephone system. One of the leading IP PBX
telephone manufacturers, ShoreTel, Inc. has integrated TeleBlock into its
telephone system product line. This is the first telephone system
manufacturer’s product line to be fully integrated with
TeleBlock.
|
•
|
Increasing our online sales by
the addition of other online products. Our online guide
offerings have increased by the December 2008 release of the Canadian
Regulatory Guide, which is co-branded with various trade organizations,
one of which is the Canadian Resort Development
Association. This guide provides us with a very credible
presence in the Canadian and resort markets. Our online series
of guides was further expanded with the March 2009 release of our
Charitable Fundraising Regulatory Guide, which is presently co-branded
with the American Teleservices Association and the American Resort
Development Association. Unlike our existing guides that are
focused on Do-Not-Call related regulations, the Charitable Fundraising
Regulatory Guide is directed towards fundraising professionals. We believe
that this release will meaningfully add to our revenues and will provide
our company with access to a new and significant market for our core suite
of products,
|
•
|
Deployment of value added
services. During the 2007 fourth quarter, we launched
Enhanced Dialer ID, thereby providing our call center clients telephone
numbers for caller ID, in an effort to assist them with their target
marketing efforts and to improve their call centers’ answer
rates. Revenues from this product have not been adversely
affected by the recent economic downturn, and, in fact, are expected to
increase as we have had significant interest from the market for this
product. We anticipate that we will continue to add features to
our systems as deemed necessary to accommodate our customers’ needs and to
maintain our competitive position. We expect to launch a new
web GUI during the first quarter of 2010 that will provide our Enhanced
DialerID corporate clients web access to their
records.
|
• Growing through strategic
acquisitions. On February 5, 2010, we entered into an
Agreement and Plan of Merger, dated as of February 5, 2010 (the “Merger
Agreement”), with Execuserve Corp., a Virginia corporation. We
believe this strategic acquisition enables us to offer a broader product
offering to our existing customer base. We believe the Execuserve
product suite is synergistic to our current platform and provides us further
opportunities to expand. The Execuserve business is further discussed
below.
8
Research and
Development
We have
not spent any money on research and development during the last two
years.
Government
Regulation
Teleservices
companies are confronted with a patchwork of state and federal statutes and
regulations that govern virtually every element of their
operations. These rules are largely focused on outbound calls (i.e.,
calls originating with the marketer being made to consumers), but increasingly,
inbound calls (i.e., originating with the consumer) are falling within the
regulatory purview as well.
At the
federal level, the Federal Communications Commission (the “FCC”) has issued
regulations in response to Congressional passage of the Telephone Consumer
Protection Act in 1991. The Telemarketing and Consumer Fraud Act and
Abuse Protection Act of 1994 (the “Act”), issued by the FCC, required the
Federal Trade Commission (the “FTC”) to develop regulations to prevent
fraudulent and abusive practices by telemarketers. It further
required the FTC to develop rules against practices by telemarketers that a
reasonable telemarketer would consider coercive or abusive of a consumer’s right
to privacy, restrictions on the hours of the day and night when unsolicited
calls can be made to consumers, as well as disclosure
requirements. This Act provides for fines of up to $11,000 per
violation of any provision developed by the FTC. The FTC, in response
to this legislation, issued comprehensive regulations called the Telemarketing
Sales Rule that were substantially amended in 2002. These rules
govern virtually every aspect of the telemarketing process, including the
creation of a national DNC program administered and enforced by the FTC, the use
of predictive dialers, identification and payment disclosures, prohibitions
against misrepresentations, and many other areas.
Even
though comprehensive federal regulations are in place, all states have
additional and/or different rules and regulations that impact the teleservices
industry as well. Most importantly, there are 13 states that still
operate separate Do-Not-Call lists. In addition, the majority of
states have requirements governing commercial registration of telemarketers, as
well as rules governing a multitude of areas that are more restrictive than
comparable federal rules.
On
February 15, 2008, President Bush signed into law two bills concerning the
National Do-Not-Call Registry. The “Do-Not-Call Improvement Act of
2007,” prohibits the automatic removal of telephone numbers registered on the
Federal “Do-Not-Call” registry. Previously, telephone numbers were
removed from the registry after five years. The second bill, the
“Do-Not-Call Registry Fee Extension Act of 2007,” extends permanently the
authority of the Federal Trade Commission to charge fees to telemarketers
required to access the Federal “Do-Not-Call” registry and specifies the fees to
be charged. This legislation should strengthen the need for compliant
technology solutions such as TeleBlock.
There
have been numerous actions and settlements against telemarketers for violations
of Federal and state Do-Not-Call legislation. These actions have been brought by
various states and both the Federal Trade Commission (the “FTC”) and the Federal
Communications Commission (the “FCC”). In late 2007, FTC assessed $7.7 million
in penalties to companies not following the requirements of the national
Do-Not-Call legislation. Most recently, and for the first time, a
single action has been brought against a satellite cable company by the FTC in
conjunction with four states for violations of Federal and state Do-Not-Call
legislation.
Execuserve
Corp.
The
business of Execuserve Corp. is to provide organizations, who are hiring
employees, with tests and other evaluation tools and services to assess and
compare job candidates. We have developed a proprietary behavioral
assessment test called Hire-Intelligence™ which applies adaptive testing
techniques to probe each job candidate who takes the test for potential
behavioral strengths and weaknesses relevant to the job for which they are being
considered.
9
The
Hire-Intelligence test is also applied to a client’s best performing employees
to create a benchmark of job behaviors against which job candidates are
compared. In this way job candidates who take the Hire-Intelligence
assessment can be stack-ranked against each other. In addition to
this quantitative evaluation of job candidates, the adaptive test function of
Hire-Intelligence results in a very rich set of qualitative results which offer
hiring companies deep insights into the potential on-the-job behaviors of job
candidates.
In
addition to Hire-Intelligence, we have developed or licensed additional
employment tests and services. These include skills tests, literacy
tests for reading and writing, and a listening comprehension test.
Based on
Execuserve’s heritage as a search company that used video interviewing to
pre-screen job candidates, we have developed an online automated video interview
technology called Video-View. Job candidates login with a webcam and
answer a customized question set which is recorded for review by the hiring
company.
Sales Channels And Revenue
Sources
Execuserve
sells its products and service primarily through two channels:
|
1.
|
Directly
to hiring companies. We sell our products and services directly
to Human Resources departments and Hiring Managers of companies who are
hiring employees. We call on companies of all
sizes. Based on the volume of hiring and the internal staffing
capabilities of these sales prospects, we offer either full service or
self-service solutions, priced on either a pay-as-you-go or license
(subscription) basis.
|
|
2.
|
Online
eCommerce sales. Execuserve has developed and markets a number
of online portals which offer selected products and services to companies
with hiring needs who wish to evaluate and compare job candidates in-house
on a self-service basis. Two of these portals, hire-choice.com
and video-view.com, employ a credits-based purchase
model. Users buy credits online through an eCommerce
transaction, which can then be applied to purchase tests and other
services as needed.
|
The Industry and
Competition
The job
candidate assessment industry is made up largely of small and mid-sized
privately held companies. Financial information about these
competitors, therefore, is not readily available.
We
believe privately held Profiles International is the largest company
in the assessment industry. Profiles offers a number of assessment
products, which are sold primarily through resellers. The
majority of these resellers are Human Resources (“HR”)
consultants. Profiles also sells their assessment products and
services directly to larger companies.
Many of
our competitors have substantially greater financial, technical and marketing
resources, larger customer bases, longer operating histories, greater name
recognition and more established relationships in the industry than we
do. As a result, certain of these competitors may be able to develop
and expand their product and service offerings more rapidly, adapt to new or
emerging technologies and changes in customer requirements more quickly, take
advantage of acquisitions and other opportunities more readily, devote greater
resources to the marketing and sale of their services and adopt more aggressive
pricing policies than we can. We cannot be sure that we will compete
successfully with our existing competitors or with any new
competitors.
Our
Strategy
As
Execuserve becomes integrated into the Company, we believe our strategic
opportunities will be expanded, allowing us to pursue a growth
strategy. Starting from a fairly small core base of loyal users, we
need to further expand our client base, target specific industries which can
realize a high return on investment in better hiring through effective job
candidate evaluation, increase our product availability through various sales
channels and broaden our base of product offerings. Over the next 12
months, we will be working towards achieving these objectives
by:
10
•
|
Continuing to sell Execuserve
products and services directly to hiring
organizations. We continue to sell our full service and
self-service offerings directly to prospects identified through our
ongoing marketing and lead generation
efforts.
|
•
|
Developing offerings
specifically designed to meet the hiring needs of targeted industries and
job categories. A number of industries have significant
issues with high turnover and employee attrition. These
industries can realize a high return on investment in job candidate
assessment tools that can positively impact turnover and
attrition. In addition, improved hiring in certain job
categories can directly impact the revenue and profits of the hiring
organization. Execuserve is working to identify these
opportunities and develop proven solutions to improve
hiring.
|
•
|
Identifying and forming
reseller channel relationships with selected
organizations. A number of organizations sell to or work
with Human Resources departments, hiring manager, or job
candidates. These entities have the potential to become
reseller channels for our products and services. We will
identify these potential resellers and develop offerings which will
provide them with a revenue
opportunity.
|
•
|
Continuing to develop our
online eCommerce offerings. Small and mid-sized
businesses which hire between one and fifty employees a year most often do
not have formal Human Resources departments, nor have the resources to
employ HR consultants or pay annual license fees for assessment
services. We will continue to develop and deploy our eCommerce
offerings to this market.
|
Research and
Development
We have
an ongoing program of evaluating methodologies for the evaluation of job
candidates, and for the delivery of these methodologies. Current
research is primarily focused on how job candidate evaluation tools can be
integrated, and delivered over the internet.
Government
Regulation
Job
candidate evaluation companies must comply with relevant federal, state and
local employment law to ensure that their methodologies do not discriminate
against individuals based on prohibited attributes.
The
Constitution prohibits discrimination by federal and state governments. Private
sector discrimination is not directly constrained by the Constitution, but has
become subject to a growing body of federal and state law. Federal law prohibits
discrimination in a number of activities, including recruiting, hiring, job
evaluations, promotion policies, training, compensation and disciplinary action.
State laws often extend protection to additional categories or
employers.
In the
USA, discrimination in employment is prohibited by a collection of state and
federal laws, as well as by ordinances of counties and municipalities. Only
discrimination based on certain characteristics, known as protected categories,
is illegal. Protected categories include race, sex, pregnancy, religion,
national origin, disability, age, military service or affiliation, anticipated
military reserve deployment, bankruptcy, genetic information and citizenship
status.
In cases
of alleged discrimination where an employment test has been used, the plaintiff
must show “adverse effect”, i.e., proof of the discriminatory effects of the
test. For this reason, job candidate evaluation companies have their tests
evaluated by experts to ensure there is no bias that could inadvertently lead to
an adverse effect. The Hire-Intelligence assessment test has been evaluated for
adverse effect, and none has been found.
Employees
As of
March 31, 2010, we have seven employees. Of these seven, Call Compliance employs
three individuals and Execuserve employs the remaining four.
11
Item
1A.
|
Risk
Factors.
|
Disclosure
under Item 1A is not required of smaller reporting companies.
Item
1B.
|
Unresolved
Staff Comments.
|
Disclosure
under Item 1B is not required of smaller reporting companies.
Item
2.
|
Properties.
|
In
January 2005, the lease for our executive offices at 90 Pratt Oval, Glen Cove,
New York 11542 was assigned to the Company. This space was originally
leased to Automated Systems Nationwide Network, Inc., a company owned by Dean
Garfinkel, our Chairman, President and Chief Executive Officer. The
initial term of the lease expired on August 1, 2006; however, we elected to
exercise the five-year renewal option contained in the lease. The
renewal term expires July 31, 2011 and requires annual lease payments, real
estate taxes and common charges.
The
leased premises consist of 9,100 square feet. We sublet approximately
3,800 square feet to an unrelated third party through December 15,
2008. The sublease was on a month-to-month basis at a monthly rental
of $2,643.
On April
13, 2010, the Company and the lessor of its office space in Glen Cove, New York
mutually terminated the office space agreement between the two parties effective
December 31, 2009. The agreed upon terms of the lease termination were as
follows:
|
·
|
The
Company would pay $1,000 a month for 10.5 months starting April 15,
2010,
|
|
·
|
The
Company would provide the lessor with 1,675,000 5-year warrants with an
exercise price of $.02 a share,
|
|
·
|
The
Company is relieved of $39,000 in CAM expenses and real estate taxes owed
to the lessor,
|
|
·
|
The
Company has forgiven the $10,600 security deposit held with the lessor,
and
|
|
·
|
The
Company is relieved of future lease obligations effective January 1, 2010
through July 31, 2011, the former maturity date of the
lease.
|
Its
executive officers relocated to 50 Glen Street, Glen Cove NY
11542. The office will be used for administration and finance for all
wholly owned subsidiaries. The Company leases 1,000 Sq Feet, with a
24 month term effective January 25, 2010. The Company is
committed to pay $15,600 during the first year of the lease term, and $16,350
during second year of the lease term. The Company also has access to
the storage room in the basement of the building based upon the
two year agreement with the following terms: $1,200 for the first year
and $1,320 for the second year.
One of
the Company’s subsidiaries, Call Compliance, Inc., relocated to 111 Nesconset
Highway, Suite 220, Hauppauge, NY 11788. The Company leases 700 Sq Feet, with a
11.5 month term effective 1/15/2010. The Company is
committed to pay $9,117 during the lease term.
One of
the Company’s subsidiaries, Execuserve Corp., relocated to 6688 Main Street,
Gloucester, VA 23061. The Company leases 1,000 Sq Feet, with a 18 month
term effective 3/1/2010. The Company is committed to pay $10,800
during the lease term.
We
estimate our future minimum annual lease payments, payable monthly, to be as
follows:
Estimated
Minimum
|
||||
Year
|
Annual Lease Payment
|
|||
2010
|
$ | 30,917 | ||
2011
|
18,870 |
12
Item
3.
|
Legal
Proceedings.
|
We may
become a party to various legal proceedings arising in the ordinary course of
our business, but we are not currently a party to any legal proceeding that we
believe would have a material adverse effect on our financial position or
results of operations.
Item
4.
|
Submission
of Matters to a Vote of Security
Holders.
|
Not
applicable.
13
PART
II
Item
5.
|
Market
for Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
|
Market
Our
common stock is traded over-the-counter and has been available for quotation on
the OTC Bulletin Board under the trading symbol “COPI.OB” since May 9, 2007;
however, in April 2010, our symbol was appended with an “E” modifier to indicate
FINRA’s belief that we are not in compliance with FINRA’s eligibility
requirements, as discussed below. The following table sets forth the
range of high and low bid prices for our common stock for the periods indicated
as derived from reports furnished by the OTC Bulletin Board. The
information reflects inter-dealer prices, without retail mark-ups, mark-downs or
commissions and may not necessarily represent actual transactions.
High
|
Low
|
|||||||
Quarter Ended
|
Bid Price
|
Bid Price
|
||||||
March
31, 2008
|
$ | 0.107 | $ | 0.015 | ||||
June
30, 2008
|
0.030 | 0.009 | ||||||
September
30, 2008
|
0.023 | 0.007 | ||||||
December
31, 2008
|
0.016 | 0.003 | ||||||
March
31, 2009
|
$ | 0.005 | $ | 0.005 | ||||
June
30, 2009
|
0.019 | 0.015 | ||||||
September
30, 2009
|
0.020 | 0.016 | ||||||
December
31, 2009
|
0.009 | 0.009 |
We failed
to file timely this Annual Report on Form 10-K, which was due on April 15,
2010. Because this was our first late filing of a periodic report
under the Exchange Act, FINRA appended our symbol with an “E” modifier to
indicate its belief that we are not in compliance with FINRA’s eligibility
requirements and advised us that if we were to fail to file this Annual Report
on Form 10-K within the 30-day grace period provided by FINRA, we would become
ineligible for continued listing on the OTCBB. Since we have filed
this Annual Report on Form 10-K within the applicable grace period, we expect
that the “E” modifier we will be removed from our symbol after we file this
Annual Report on Form 10-K and FINRA determines that we remain eligible for
continued listing on the OTCBB.
Holders
As of
April 2, 2010, we had 131 stockholders of record, and an unknown number of
additional holders whose stock is held in “street name.”
Dividends
No
dividends have been declared or paid on our common stock, and we do not
anticipate that any dividends will be declared or paid in the foreseeable
future. Dividends on our common stock are subordinated to dividend
and liquidation rights of the holders of the Series B Senior Convertible Voting
Non-Redeemable Preferred Stock and the rights of Agile Opportunity Fund, LLC
(“Agile”) to interest payments and repayment of principal when due under the two
Secured Convertible Notes (collectively, the “Agile Debentures”) we sold to
Agile in March 2008 (the “Agile March 2008 Debenture”) and September 2008 (the
“Agile September 2008 Debenture”), each in the principal amount of $300,000 and
maturing in November 2009. These debentures were converted into new notes in
February 2010.
14
Securities Authorized for
Issuance under Equity Compensation Plans
The
following table shows information as of December 31, 2009 with respect to each
equity compensation plan and individual compensation arrangements under which
our equity securities are authorized for issuance to employees or
non-employees.
Plan Category
|
Number of securities to
be issued upon
exercise of outstanding
options, warrants and
rights
(A)
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
(B)
|
Number of securities
remaining available for future
issuance under equity
compensation plans
(excluding securities
reflected in column (A))
(C)
|
|||||||||
Equity
compensation plans approved by security holders
|
0 | N/A | N/A | |||||||||
Equity
compensation plans not approved by security holders
|
45,000,000 | $ | 0.026 | 0 | ||||||||
Total
|
45,000,000 | $ | 0.026 | 0 |
On
January 4, 2008, our board of directors granted options to purchase an aggregate
45 million shares of our common stock to four employees, including our Chief
Executive Officer (20 million underlying shares) and Chief Financial Officer (10
million underlying shares).
Each of
such options has an exercise price of $0.026 per share, the per share closing
market price of our common stock on the date of grant. The options
are terminable on the earlier of:
(i)
|
the
first anniversary of the optionee's
death;
|
(ii)
|
the
date of the termination of the optionee's employment or other relationship
with the Company for cause;
|
(iii)
|
the
first anniversary of the date (A) on which the optionee's employment or
other relationship with the Company is terminated without cause (except if
such termination be by reason of death or permanent and total disability
of the optionee); or (B) the optionee voluntarily terminates his
employment or other relationship with the
Company;
|
(iv)
|
the
first anniversary of the date of Optionee's permanent and total
disability, within the meaning of such term in Section 22(e) of the
Internal Revenue Code; or
|
(v)
|
January
4, 2013.
|
Item
6.
|
Selected
Financial Data.
|
Disclosure
under Item 6 is not required of smaller reporting companies.
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Overview and Recent
Developments
In
October, 2008, the Company entered into a non-binding memorandum of
understanding (“MOU”) with a wholesale Voice-over-Internet-Protocol (“VoIP”)
transport company, began its due diligence, negotiated and drafted definitive
documents, and retained auditors for preparation of the acquisition target
company’s financial statements. The MOU contemplated the Company acquiring the
transport company for a combination of cash, promissory notes and securities of
the Company. Completion of the acquisition was anticipated to occur by the
end of the first quarter of 2009, having expended funds to complete the due
diligence and audit of the acquisition company along with working towards the
finalization of the documents. Ultimately, the transaction was
not entered into by the Company.
15
As
anticipated, the Company drew down the remainder of its $600,000 credit facility
with Agile Opportunity Fund, LLC by borrowing $300,000 in September 2008, and
utilized these funds to finance operations through the end of 2008, including
costs of approximately $70,000 related to the proposed acquisition of the VoIP
company, as well as significant sales and marketing expenditures that were made
in anticipation of the 2008 commercial release of TeleBlock by the country’s
largest telephone carrier. Unfortunately, the timetable was pushed back into
2009 and as a consequence the Company’s sales and marketing initiatives were
curtailed accordingly.
The full
effects of the economic downturn on revenues were realized in the first two
months of 2009, as revenues for that period as compared to 2008 contracted by
approximately 30%. While the decrease in revenues is similar to
decreases in revenues across many industries, a major portion of the Company’s
decrease is attributable to reduced telemarketing efforts within the time share
industry, a major contributor to the Company’s revenues. During 2009,
the Company’s revenues declined significantly, but the Company was also able to
reduce operating expenses significantly.
In
response to the financial difficulties encountered as a result of these
turbulent times, a number of cost-cutting measures have been implemented to give
the Company the time needed to obtain sufficient financing to continue operating
while other options are pursued and explored. Two positions have been eliminated
- one in sales and one in accounting. Additionally, the Company has
negotiated, and received, 60 day credit terms from several of its material
suppliers, vendors and creditors, and also reduced and/or eliminated several
other expenses. Finally, the Company’s two executive officers and
former controller have deferred their February and March 2009
salaries. The officers continued to defer part of their
salaries in 2009 and all dividends on B shares were suspended during
2009. Certain interest has been accrued but not paid.
These
measures, however, in and of themselves, were not sufficient to cover the
Company’s short-term cash flow shortfall. On March 31, 2009, an
agreement with an existing lender was modified, increasing funding up to
$750,000 at the lender’s discretion, of which the Company never exceeded
$350,000 of the $750,000 limit. The loan modification grants a
security interest in the Company’s assets and the lender also received two
classes of warrants, both of which have an exercise price of $0.05 per
share. Additionally, the chief financial officer has loaned the
company $50,000, the interim necessary funds that were needed to continue
operations until the negotiations with the lender were completed.
On
September 21, 2009, the Company sold and issued the Agile September 2009
Debenture in the principal amount of $100,000. Interest is accruing
on the Agile September 2009 Debenture at 30% per annum, with interest payable
monthly at a rate of 15% per annum. All of the Agile Debentures were
converted into new notes dated February 2010.
On
November 23, 2009, the Company sold and issued the Agile November 2009 Debenture
in the original principal amount of $80,000. The Agile November 2009
Debenture is to bear interest at the rate of 15% per annum, payable monthly,
although the Agile November 2009 Debenture further provides that, in addition to
interest, Agile is entitled to an additional payment, at maturity or whenever
principal is paid, such that Agile’s annualized return on the amount of
principal payment so paid equals 30%. All of the Agile
Debentures were converted into new notes dated February 2010.
During
the first quarter 2009, AT&T Business Solutions added the TeleBlock call
blocking service to its outbound business voice services. This provides a
network-based call screening and blocking feature to help telemarketers avoid
calling numbers listed on various Do Not Call lists. Ultimately, this service
was not commercially available until the Fall of 2009.
Critical Accounting
Policies
The
Company’s consolidated financial statements and related public information are
based on the application of generally accepted accounting principles in the
United States (“GAAP”). The Company’s significant accounting policies
are summarized in Note 2 to its annual consolidated financial
statements. While all of these significant accounting policies impact
its financial condition and results of operations, the Company views certain of
these policies as critical. Policies determined to be critical are
those policies that have the most significant impact on our consolidated
financial statements. The Company’s critical accounting policies are
discussed below.
16
Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets as of the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. These estimates can also affect supplemental information
contained in our external disclosures including information regarding
contingencies, risk and financial condition. The Company believes its
use of estimates and underlying accounting assumptions adhere to GAAP and are
consistently applied. It bases its estimates on historical experience
and on various assumptions that management believes are reasonable under the
circumstances. Actual results may differ materially from these
estimates under different assumptions or conditions.
Revenue
Recognition
The
Company earns a fee for each telephone solicitor’s call attempt (whether or not
the call is completed) which generates a query to a data base of Do-Not-Call
telephone numbers. Through its principal subsidiary, the Company has
an annually renewable contract with its data base distributor to perform the
following functions:
•
|
Provide
connectivity to the telephone companies and access data base information
from the data base that the Company manages, updates and maintains, as
required to operate the telephone call processing
platform. This platform is where the telephone call queries are
routed from the telemarketers over various telephone carrier
networks.
|
•
|
Contract
with telephone carriers to sell our TeleBlock service to their end
users.
|
•
|
Provide
billing and collection services.
|
As
compensation for the distributor’s services, the Company pays the distributor
contractually determined amounts on a per query basis. The
distributor submits monthly remittances together with the related monthly
activity reports. The Company has a contractual right to audit such
reports. Revenue is accrued based upon the remittances and reports
submitted. Any adjustments to revenue resulting from these audits are
recorded when earned if significant. Historically, these adjustments
have not been significant. In the event that such adjustments do
become material in the future, it is possible that, at times, the Company may
have to revise previously reported interim results. The telephone
carriers in turn sell the TeleBlock service to their customers. The
carriers bill their customers for TeleBlock and assume all credit risk with
regard to their customers. The Company has no credit risk with
respect to the end-users.
Impairment of Long-Lived
Assets
Long-lived
assets, including our property, equipment, capitalized software and patents are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets might not be
recoverable. Conditions that would necessitate an impairment
assessment include a significant decline in the observable market value of an
asset, a significant change in the extent or manner in which an asset is used,
or any other significant adverse change that would indicate that the carrying
amount of an asset or group of assets is not recoverable. For
long-lived assets used in operations, an impairment loss is only recorded if the
asset’s carrying amount is not recoverable through its undiscounted,
probability-weighted cash flows, including estimated net proceeds if the Company
were to sell the long-lived asset. When applicable, the Company
measures the impairment loss based on the difference between the carrying amount
and estimated fair value.
The
Company periodically reviews its long-lived assets, in light of our history of
operating losses, but under the methodology described above, it have not been
required to record any impairment losses. Should applicable external
factors such as competition, governmental regulations or other market conditions
change in such a way as to be materially adverse to its business, impairment
losses might be required in the future.
17
Results of Operations for
Year Ended December 31, 2009 Compared to the Year Ended December 31,
2008
Management
believes the following selected revenue and expense data, the percentage
relationship between revenues and major categories in our consolidated
statements of operations and the percentage change in the dollar amounts of each
of the items presented is important in evaluating the performance of its
business operations.
Year Ended December 31,
|
||||||||||||||||||||||||
2009
|
2008
|
2009 vs. 2008
|
||||||||||||||||||||||
Percentage
|
Percentage
|
Amount
|
Percentage
|
|||||||||||||||||||||
of
|
of
|
Increase
|
Increase
|
|||||||||||||||||||||
Amount
|
Revenues
|
Amount
|
Revenues
|
(Decrease)
|
(Decrease)
|
|||||||||||||||||||
Revenues
|
$ | 1,230,236 | 100.0 | % | $ | 1,857,242 | 100.0 | % | $ | (627,006 | ) | (33.8 | ) % | |||||||||||
Gross
margin
|
650,322 | 52.9 | 927,073 | 49.9 | (176,751 | ) | (29.9 | ) | ||||||||||||||||
Selling,
general and administrative expenses
|
1,749,635 | 142.2 | 2,142,180 | 115.3 | (392,545 | ) | (18.3 | ) | ||||||||||||||||
Interest
expense
|
266,025 | 21.6 | 143,431 | 7.7 | 122,594 | 85.5 | ||||||||||||||||||
Amortization
of loan costs and related financing expense
|
157,263 | 12.8 | 75,687 | 4.1 | 81,576 | 107.8 | ||||||||||||||||||
Operating
loss
|
(1,522,601 | ) | (123.8 | ) | (1,434,225 | ) | (77.2 | ) | 88,376 | 6.2 | ||||||||||||||
Gain
on extinguishment of debt, net
|
— | — | 8,525 | 0.5 | (8,525 | ) | (100.0 | ) | ||||||||||||||||
Net
loss
|
(1,522,601 | ) | (123.8 | ) | (1,425,700 | ) | (76.7 | ) | 96,901 | 6.8 | ||||||||||||||
Preferred
dividends
|
150,000 | 12.2 | 150,000 | 8.1 | — | — | ||||||||||||||||||
(1,672,601 | ) | (136.0 | ) | (1,575,700 | ) | (84.8 | ) | 96,901 | 6.1 |
For the
year ended December 31, 2009, revenues were $1,230,236 compared to revenues of
$1,857,242 for the corresponding period in 2008, a decrease of $627,006 or
33.8%. This decrease was principally the result of a revenue decrease
of $642,326 from the Company’s principal TeleBlock distributor due to a loss of
147.4 million call counts, or 42.9%, for the Company’s TeleBlock service between
the comparable periods. Although TeleBlock revenues have decreased
across all industries, a major portion of the Company’s decrease in TeleBlock
revenues is attributable to reduced telemarketing efforts within the time share
industry, a major contributor to the Company’s revenues. These decreases were
partially offset by an increase of $62,300 in revenue from Enhanced Call ID.
Revenues from the Company’s principal TeleBlock distributor comprised 82.1% and
87.6% of the Company’s annual revenues for 2009 and 2008,
respectively. There also were decreases in revenues from the
Company’s VoIP services, declining database management fees from the Company’s
TeleBlock subscribers, lower commissions and other incidental revenue of
$46,980.
The
Company’s key TeleBlock distributor was sold in May 2009. The Company
does not believe that the change in ownership of the distributor will have any
material adverse effect on the Company’s revenues or financial
condition.
For the
year ended December 31, 2009, cost of revenues totaled $579,914, a decrease of
$350,255, or 37.7%, when compared to cost of revenues of $930,169 for the same
period last year. Fees payable to the Company’s principal distributor
decreased by $248,250 as a result of the lower calls hosted on their
database. Production and back-up site hosting fees and costs related
to decreased revenues from the Company’s VoIP, as well as software amortization
expense, decreased by a total of $107,873. Increased costs of
revenues, including costs associated with the Company’s online registration
guide and enhanced caller ID, partially offset these decreases by an aggregate
of $5,868.
18
As a
percentage of revenues, cost of revenues for the 2009 year decreased to 47.1%
from 50.1% for the 2008 year. This decrease reflects a decline in TeleBlock
revenues when compared to total revenues as well as decreased software
amortization expense and lower production and back-up site hosting fees that are
attributable to the TeleBlock platform. As a percentage of revenues,
cost of revenues related to our primary distributor-sourced revenues was 49.2%
in 2009 and 52.8% in 2008.
For the
year ended December 31, 2009, selling, general, and administrative expenses
totaled $1,749,635 and were $392,545, or 18.3%, lower than selling, general, and
administrative expenses of $2,142,180 for the same period last
year. Salaries and benefits decreased by $166,214, attributable to
the January 2008 grant of options to purchase 45 million shares of Company
common stock to the Company’s two executive officers and two other employees
that were valued at $162,000 as well as salary reductions in 2009 of $124,214
primarily due to the elimination of two employees. Consulting and accounting
fees decreased by $63,744 and $48,182, respectively, and was due to financial
and internal control requirements performed during 2008 that did not recur in
2009. In addition, the Company reduced investment banking fees by
$71,500 and stock transfer fees by $19,806 between the 2008 and 2009
periods. Further, there were additional decreases in employee travel
and related expenses of $31,902, net rent expense of $9,913, investor relations
fees of $12,833, advertising expenses of $24,724, equipment rental of $16,987
and insurance of $21,679 between the 2008 and 2009 periods. These
decreases in expenses were partly offset by a $120,000 increase in salaries to
the Company’s two executive officers during the first half of 2009; these
officers had voluntarily reduced their salaries by one-half for a one-year
period ending in July 2008. The Company also incurred higher
marketing consultant fees of $5,000, higher commissions of $15,891 related to
increased CNAM revenues, and higher utility expenses of $6,870. Other
selling, general and administrative expenses increased by a net aggregate amount
of $19,145.
As a
percentage of revenues, selling, general, and administrative expenses for the
year were 142.2% in 2009 and 115.3% in 2008, reflecting a decrease in expenses
that is less than the decrease in revenues. The increase in this
percentage is principally due to significant declines in revenues during 2009.
Selling, general and administrative expenses also decreased, but not to the
extent of revenues.
Interest
expense for the year ended December 31, 2009 was $266,025, a $122,594, or 85.5%,
increase from interest expense of $143,431 for the same period last
year. This increase reflects additional interest of $103,783 on the
Agile Debentures that were sold and issued in May and September 2008 and
September and November 2009 as well as higher interest of $17,520 on the Nascap
Restated Note as the principal outstanding increased to $350,000 from $150,000
in April 2009. In addition, the Company incurred interest of $7,594
during 2009 on the Brookstein Note that was entered into early in 2009. These
increases were offset by a decrease of $6,303 in other interest expense. As a
percentage of revenues, interest expense for the year ended December 31, 2009
increased to 21.6% from 7.7% compared to the same period last year.
The
Company’s annual loan cost amortization and related financing expense, including
loan penalties and amortization of loan discount, increased by $81,576, or
101.8%, to $157,263 for the year ended December 31, 2009 from 75,687 for the
2008 year. Deferred loan costs and loan discount amortized during the
2009 and 2008 periods are related to the debentures that were sold and issued to
Agile in May and September 2008 and September and November 2009. As a
percentage of revenues, loan cost amortization and related financing expense for
the year ended December 31, 2009 increased to 12.8% from 4.1% when compared to
the same period last year.
The
Company assesses its current prospects for future profitability by separating
its statement of operations into two principal components: (a) its business
operations, represented by the gross margin to selling, general and
administrative expense shortfall and (b) its total business financing expense,
represented by the total of interest expense and loan cost amortization and
other financing charges. Total business financing expense increased during 2009
by $195,645, or 85.9%, to $423,288 in the 2009 year from $227,643 in the 2008
year. As a percentage of revenues, total business financing expense
increased for the 2009 year by 22.1 percentage points to 34.4% in 2009 from
12.3% in 2008. The Agile Debentures that were sold and issued in May
and September 2008 and September and November 2009 increased this year’s total
business financing expense by $226,377 for the 2009 period when compared to
2008.
19
For the
reasons set forth above, the Company’s 2009 net loss increased by $96,901, or
6.8%, to $1,522,601 in 2009 quarter from $1,425,700 in 2008. As a
percentage of revenues, the net loss increased by 47.0 percentage points to
123.8% in 2009 from 76.8% in 2008.
Dividends
of $150,000 were accrued on the Series B Preferred Stock during 2009 and 2008
and are taken into account when computing loss per common share. As a
percentage of revenues, preferred dividends were 12.2% and 8.1% for the 2009 and
2008 years, respectively. The dividends were not paid during 2009 as Nevada law
prohibited such payment.
For the year ended December 31, 2009
and 2008, the Company’s annual effective tax rate was estimated to be 0%.
Accordingly, no tax benefit or cost was recognized in either of such
periods. The Company believes that future taxable losses, as
well as those incurred
from February 10, 2006 (the date on which the Company was no longer considered a
subchapter S corporation for federal tax purposes) to December 31, 2009, will be
available to offset subsequent future taxable income, if
any.
Liquidity
and Capital Resources
Cash used
in operating activities of $491,455 and $882,845 for the 2009 and 2008 years,
respectively, was comprised of the net loss, reduced by non-cash items of
$392,798 and $476,987, plus or minus the effect of changes in assets and
liabilities. The net loss as adjusted for non-cash items was
$1,129,803 for the year ended December 31, 2009, compared to $948,713 for the
same period in 2008. This increase of $181,090 was due to a higher
net loss of $96,901, the 2008 issuance of non-qualified stock options valued at
$162,000 that were not a factor in 2009 and decreased depreciation and
amortization charges of $72,581. These increases were offset by
higher interest and penalties that were effectively financed of $81,616,
increased loan cost amortization costs of $58,821 and the 2008 debt
extinguishment gain of $8,525. The changes in assets and liabilities
increased the Company’s net cash used in operating activities by $655,848 and
$65,868 in 2009 and 2008, respectively.
Cash used
in investing activities was $1,436 for the year ended December 31, 2009 and
$56,284 for the year ended December 31, 2008, an decrease of $54,848,
principally due to lower expenditures for computer equipment and software
enhancements in 2009 compared to the prior year.
Cash
provided by financing activities was $310,864 during the year ended December 31,
2009 and was $226,269 during the 2008 comparable period, resulting in an
increase of $84,595. During 2009, the Company received an additional $200,000 in
borrowings from an existing lender and a director, officer and shareholder
loaned the Company $50,000. In addition, the Company sold and issued to Agile
convertible debentures totaling $180,000 during 2009. These increases in cash
were partially offset by debt repayments of $97,914 and payments of deferred
loan costs on the Agile September and November 2009 Debentures of $21,222. Cash
provided by financing activities during 2008 was attributable to the issuance of
the Initial Agile Debenture for $600,000. This increase was partially offset by
the payment of dividends of $150,000 on the Company’s Series B preferred stock,
payment of deferred loan and acquisition costs of $105,500 and debt repayments
totaling $118,231.
The net
decrease in cash was $182,027 and $712,860 for the years ended December 31, 2009
and 2008, respectively.
The
Company’s working capital deficits were $2,147,255 and $840,977 as of December
31, 2009 and 2008, respectively. Current assets decreased by
$219,288, or 42.0%, due to a decrease in cash of $182,027 and a decrease in
prepaid expenses of $89,141, partially offset by increases in accounts
receivable of $51,880. Current liabilities increased by $1,086,992, or 79.7%,
and were principally due to an increase in accounts payable and accrued expenses
of $428,669, the deferral of accrued officer’s salary totaling $335,000, an
increase of $304,982 attributable to the Agile September and November 2009
Debentures and the accrual of interest due Agile on all of its debentures and
the amortization of loan discounts attributable to the Agile
debentures. In addition, there was an increase in short-term and
demand notes payable of $68,341. The decrease of $50,000 in current
maturities of long-term debt partially offset the increase in current
liabilities.
20
On May 6,
2008, the Company obtained new financing primarily to fund operations and, as
required, in connection with possible acquisitions of companies that would
diversify and broaden the Company’s service offerings and product
base. This new financing consisted of the sale and issuance on May 6,
2008 of the Initial Original Agile Debenture in the principal amount of $300,000
and the commitment for the sale and issuance of the Additional Original Agile
September 2009 Debenture in the principal amount of $300,000. The
Additional Original Agile September 2008 Debenture was sold and issued to Agile
on September 2, 2008. Interest is accruing on the Agile
debentures at 30% per annum, with interest payable monthly at a rate of 15% per
annum. The Company was unable to retire the Agile 2008 Original
Debentures that matured on November 6, 2009. On such maturity date,
the Company owed Agile a total of $738,625 that was comprised of principal in
the amount of $600,000 and accrued interest of $138,625. The Company
has received a three month extension on the Agile 2008 Original Debentures All
of the Agile Debentures were rolled into new notes dated February
2010.
On
September 21, 2009, the Company sold and issued the Agile September 2009
Debenture in the principal amount of $100,000. Interest is accruing
on the Agile September 2009 Debenture at 30% per annum, with interest payable
monthly at a rate of 15% per annum. All of the Agile Debentures were
rolled into new notes dated February 2010.
On
November 23, 2009, the Company sold and issued the Agile November 2009 Debenture
in the original principal amount of $80,000. The Agile November 2009
Debenture is to bear interest at the rate of 15% per annum, payable monthly,
although the Agile November 2009 Debenture further provides that, in addition to
interest, Agile is entitled to an additional payment, at maturity or whenever
principal is paid, such that Agile’s annualized return on the amount of
principal payment so paid equals 30%. All of the Agile
Debentures were converted into new notes dated February 2010.
The
Company’s loan from Nascap was modified in March 2009, increasing funding up to
$750,000 at the lender’s discretion. The original loan amount was
$150,000. In connection with the loan modification, the Company
agreed to grant Nascap 40 Class A and 40 Class B warrants for each dollar of
principal outstanding under the loan facility on such date between April 1, and
June 30, 2009 on which such principal amount was the greatest. The
greatest amount of principal outstanding under the loan facility was
$350,000. These warrants each have an exercise price of $0.05 per
share. The warrants were granted on June 30, 2009 and consisted of 7 million
Class A warrants and 7 million Class B warrants.
Agreements
with two additional lenders were modified on June 24, 2009. The Company’s chief
financial officer had loaned the Company an aggregate of $50,000 during the 2009
first fiscal quarter, and a second lender loaned the Company $150,000 in April
2006. Both notes continue to bear interest at 18% per annum, payable monthly in
arrears. The stated maturity date on the modified notes is now
January 1, 2011. These notes were originally demand
notes. As consideration for entering into the loan modification
agreements, the note holders were granted an aggregate of 4 million Class A
warrants and 4 million Class B warrants. Each of these warrants
entitles its holder to purchase one share of Company common stock at a purchase
price of $0.05 per Warrant Share and expires on June 23, 2014.
The
Company has been deferring a portion of the salaries of Garfinkel and
Brookstein, its principal executive officers. During the fourth quarter of 2009,
Garfinkel deferred $55,000 of his salary and Brookstein deferred $50,000 of his
salary. In June of 2009, the Company agreed to grant five-year warrants (each, a
“Fourth Quarter 2009 Deferred Salary Warrant”) to purchase shares (each, a
“Fourth Quarter 2009 Deferred Salary Warrant Share”) of Company Common Stock at
$0.05 per Fourth Quarter 2009 Deferred Salary Warrant Share. Under this
agreement, for every $1 of salary deferred during a fiscal quarter, the Company
is obligated to issue 40 Fourth Quarter 2009 Deferred Salary Warrants.
Accordingly, as of December 31, 2009, Garfinkel was granted 2.2 million Fourth
Quarter 2009 Deferred Salary Warrants and Brookstein was granted 2 million
Fourth Quarter 2009 Deferred Salary Warrants. The Company believes the grants of
these Fourth Quarter 2009 Deferred Salary Warrants were exempt from the
registration requirements of the Securities Act, by reason of the exemption from
registration granted under Section 4(2) of the Securities Act, due to the fact
that the grants were conducted pursuant to transactions not involving any public
offering.
The
Company has failed to pay dividends on the 1.25 million outstanding shares of
its Series B Senior Subordinated Convertible Voting Preferred Stock (the “Series
B Preferred Stock”) that were payable on the last day of each month during the
fourth fiscal quarter of 2009. Dividends on the Series B Preferred
Stock may only be paid out of funds legally available for such
purpose. Under Nevada law, generally, a corporation’s distribution to
stockholders may only be made if, after giving effect to such distribution, (i)
the corporation would be able to pay its debts as they become due in the usual
course of action and (ii) the corporation’s total assets equal or exceed the sum
of the corporation’s liabilities plus the amount that would be needed, if the
corporation was to be dissolved at the time of distribution, to satisfy the
preferential rights upon dissolution of stockholders whose rights are superior
to those receiving the distribution.
21
All of
the outstanding shares of Series B Preferred Stock are held by Brookstein and
Spirits. Although the Company has been and currently is unable
to pay the Series B Preferred Stock dividends when due, the dividends have been
and are continuing to be accrued until such time as the monthly dividends can
lawfully be paid under Nevada law. For the fourth fiscal quarter of
2009, the amount of dividends not paid on the Series B Preferred Stock totaled
$37,500, consisting of $15,000 due Brookstein and $22,500 due
Spirits. To compensate the holders of the outstanding Series B
Preferred Stock for the failure to pay dividends when due, in June 2009, the
Company agreed to grant five-year warrants (each, a “Dividend Accrual Warrant”)
to purchase shares (each, a “Dividend Accrual Warrant Share”) of Company Common
Stock to such holders at $0.05 per Dividend Accrual Warrant Share, at the rate
of 40 Deferred Accrual Warrants for every $1 of dividend accrued during the
fiscal quarter. Accordingly, the Company granted 600,000 Dividend
Accrual Warrants to Brookstein and 900,000 Dividend Accrual Warrants to
Spirits. The Company believes the grants of these Dividend Accrual
Warrants were exempt from the registration requirements of the Securities Act,
by reason of the exemption from registration granted under Section 4(2) of the
Securities Act, due to the fact that the grants were conducted pursuant to
transactions not involving any public offering.
As noted
previously, the Company has failed to pay Series B Preferred Stock dividends
when due. The Company anticipates that it will be necessary to
continue to defer these dividend payments for each of Brookstein and Spirits
through the first six months of 2010. The amount of deferred
dividends for the first six month of 2010 will total $75,000: $30,000 due to
Brookstein, and $45,000 due to Spirits. Brookstein and Spirits have
each agreed to such non-payments, subject to their each receiving five-year
warrants (each, a “First Half 2010 Series B Deferred Dividend Warrant”) to
purchase shares (each, a “First Half 2010 Series B Deferred Dividend Warrant
Share”) of Company Common Stock to such holders at $0.01 per First Half 2010
Series B Deferred Dividend Warrant Share. The First Half 2010 Series
B Deferred Dividend Warrants were granted as of January 1, 2010: 3
million to Brookstein, 4.5 million to Spirits. The Company
believes the grants of these First Half 2010 Series B Deferred Dividend Warrants
were exempt from the registration requirements of the Securities Act, by reason
of the exemption from registration granted under Section 4(2) of the Securities
Act, due to the fact that the grants were conducted pursuant to transactions not
involving any public offering.
During
the fourth quarter of 2009, we failed to pay interest on the promissory notes we
previously issued to Brookstein, Ponzio and Nascap. The Company’s
obligations under these notes were secured by the security interests which
Brookstein, Ponzio and Nascap subordinated to the security interest we granted
to Agile in connection with the issuance of the Agile A&R
Debenture. The principal amounts of such notes and the amounts of
interest not paid during the fourth quarter of 2009 are as follows:
Name of Noteholder
|
Principal Amounts of Note
|
Interest Not Paid
|
||||||
Barry
M. Brookstein
|
$ | 50,000 | $ | 2,250 | ||||
Henry
A. Ponzio
|
$ | 150,000 | $ | 6,750 | ||||
Nascap
Corp.
|
$ | 350,000 | $ | 10,500 |
To
compensate Brookstein, Ponzio and Nascap for the failure to pay interest on
their promissory notes during the fourth quarter of 2009, the Company granted to
such noteholders warrants (each, a “Fourth Quarter 2009 Deferred Interest
Payment Warrant”) to purchase shares of Common Stock at the rate of 40 Fourth
Quarter 2009 Deferred Interest Payment Warrants for every $1 of interest not
paid. The Fourth Quarter 2009 Deferred Interest Payment Warrants have
terms substantially identical to the Fourth Quarter 2009 Deferred Salary
Warrants and Dividend Accrual Warrants.
As noted
previously, the Company has been deferring a portion of the salaries of
Garfinkel and Brookstein, its principal executive officers. The
Company anticipates that it will be necessary to continue to defer these
executive officers’ salaries through the first six months of
2010. The amount of deferred salary for the first six months of 2010
for each of the executive officers will total $120,000. Garfinkel and
Brookstein each agreed to such deferments, subject to their each receiving
five-year warrants (each, a “First Half 2010 Deferred Salary Warrant”) to
purchase 12 million shares (each, a “First Half 2010 Deferred Salary Warrant
Share”) of Company Common Stock at $0.01 per First Half 2010 Deferred Salary
Warrant Share. The First Half 2010 Deferred Salary Warrants were
granted as of January 1, 2010. The Company believes the grants of
these Deferred Salary Warrants were exempt from the registration requirements of
the Securities Act, by reason of the exemption from registration granted under
Section 4(2) of the Securities Act, due to the fact that the grants were
conducted pursuant to transactions not involving any public
offering.
22
As noted
previously, the Company has failed to pay interest due on the promissory notes
payable to Brookstein, Ponzio and Nascap. The Company anticipates that it will
be necessary to continue to fail to timely pay interest on these promissory
notes through the first six months of 2010. The amount of interest that will
become payable on the promissory notes for the first six months of 2010 will
total $39,000; $4,500 due to Brookstein, $13,500 due to Ponzio and $21,000 due
to Nascap. Brookstein, Ponzio and Nascap each agreed to such non-payments,
subject to their each receiving five-year warrants (each, a “First Half 2010
Deferred Salary Warrant”) to purchase an aggregate of 4.6 million shares (each,
a “First Half 2010 Deferred Interest Warrant Share”) of Company Common Stock at
$0.01 per First Half 2010 Deferred Interest Warrant Share. The First Half 2010
Deferred Interest Warrants were granted as of January 1, 2010; 450,000 to
Brookstein, 1.35 million to Ponzio and 2.1 million to Nascap. The Company
believes the grants of these First Half 2010 Deferred Interest Warrants were
exempt from the registration requirements of the Securities Act, by reason of
the exemption from registration granted under Section 4(2) of the Securities
Act, due to the fact that the grants were conducted pursuant to transactions not
involving any public offering.
The
Company has a substantial payable due its outside counsel, the law firm of
Moritt Hock Hamroff & Horowitz, LLP (“Moritt Hock”). In
consideration for Moritt Hock agreeing to provide services in the future, for
which Moritt Hock will continue to charge its customary fees, the Company has
granted to Moritt Hock 7.5 million five-year warrants (each, a “Moritt Hock
Warrant”), each Moritt Hock Warrant entitling its holder to purchase one share
of Company Common Stock at a purchase price of $0.01. The Company
believes the grant of the Moritt Hock Warrants were exempt from the registration
requirements of the Securities Act, by reason of the exemption from registration
granted under Section 4(2) of the Securities Act, due to the fact that the grant
was conducted pursuant to transactions not involving any public
offering.
The
Company’s primary need for cash during the next twelve months is to fund
payments of operating costs. In addition, the Company is presently in
negotiations to obtain additional financing to fund operations.
Going
Concern
The
Company’s continued losses raise substantial doubt about its ability to continue
as a going concern. Operating losses have resulted from a shortfall
of sales revenues to cover the Company’s operating and marketing expenditures
during the implementation of the Company’s operating plan, which targets
significant sales growth and is long-range in nature. The Company’s ability to
operate as a going concern is dependent upon its ability to increase revenues,
control costs and operate profitably. The Company (i) has and continues to seek
reductions in its operating expenses and (ii) has retained an investment banker
to explore acquisition opportunities that may diversify the Company’s existing
range of products and services, as well as to assist the Company in obtaining
additional financing as required. There is no assurance that the
Company will be successful in attaining these objectives or that attaining such
objectives will result in operating profits, positive cash flows or an overall
improvement in the Company’s financial position.
Historically,
the Company has relied upon private financing to fund its operations and expects
to continue to do so. The current economic environment is impacting
the Company’s ability to obtain any needed financing. No assurance
can be given that financing will be available when needed or, if available, such
financing will be on terms beneficial to the Company.
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market
Risk.
|
Disclosure
under Item 7A is not required of smaller reporting companies.
23
Item
8.
|
Financial
Statements and Supplementary Data.
|
We set
forth below a list of our audited financial statements included in this Annual
Report on Form 10-K and their location.
Item
|
Page *
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheets at December 31, 2009 and 2008
|
F-2
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2009 and
2008
|
F-3
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the Years Ended December
31, 2009 and 2008
|
F-4
|
|
Consolidated
Statement of Cash Flows for the Years Ended December 31, 2009 and
2008
|
F-5
|
|
Notes
to Consolidated Financial Statements
|
F-6
|
* Page
F-1 follows page 38 to this Annual Report on Form 10-K.
Item
9.
|
Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosure.
|
Not
applicable.
Item
9A(T).
|
Controls
and Procedures.
|
Evaluation
of Disclosure Controls and Procedures
Our
management conducted an evaluation, with the participation of its Chief
Executive Officer (CEO) and its Chief Financial Officer (CFO), of the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange
Act”)) as of the end of the period covered by this Annual Report on Form 10-K.
Based upon that evaluation the CEO and CFO concluded that our disclosure
controls and procedures were not effective in reporting, on a timely basis,
information required to be disclosed by us in the reports we file or submit
under the Exchange Act, because of material weaknesses in internal control over
financial reporting as of December 31, 2009, as described
below.
Management’s
Annual Report on Internal Control over Financial Reporting
Management
is responsible for the preparation of our financial statements and related
information. Management uses its best judgment to ensure that the financial
statements present fairly, in material respects, our financial position and
results of operations in conformity with generally accepted accounting
principles.
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. Under the supervision of management, including the Chief
Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), we conducted
an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
published in 1992 and subsequent guidance prepared by the Commission
specifically for smaller public companies. Based on that evaluation, our
management concluded that our internal control over financial reporting not
effective as of December 31, 2009 because of the existence of material
weaknesses as described below.
A
material weakness in internal control over financial reporting is defined by
Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard No. 5
as a deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material
misstatement of the Company’s annual or interim financial statements will not be
prevented or detected on a timely basis.
24
We
identified two material weaknesses relating to financial reporting
functions:
On
January 1, 2010, the Controller, who performs all of the financial reporting
functions and has been with the Company for many years, voluntarily left for
another employment opportunity. Because of the timing of her departure,
management did not have time to find a replacement with sufficient SEC/public
company reporting experience as well as a background of the Company’s processes
and transactions to perform the year-end preparation and compilation of the
financial statements. Thus, material adjustments to the financial information
were made to correct mistakes.
Because
of the small size of the Company, the Company has always experienced issues
related to segregation of duties, its allocation of functions to individual
employees. The Company has optimized its allocation of functions based on its
limited staff, but further cuts in the current year have exacerbated this issue.
In the past, while identified by management as a deficiency in control,
segregation of duties has not been considered a material weakness because the
former Controller had built many controls and reconciliations into her own work
flow to check herself since she knew that it was not likely that someone else
would catch a mistake, since there is no one else available at the Company to
review her work. However, as a result of her departure at such a critical time,
despite the fact that these controls and reconciliations were documented as part
of the control activities in process documentation, the new Controller did not
have sufficient time to fully understand all of the different types of
transactions the Company engages in and the information flow, consequently, not
all of these built-in controls were maintained during the preparation and
compilation period, resulting in adjustments to the financial
information.
Management
has already made efforts to remediate and correct these issues by hiring an
outside consultant with substantial SEC/public company reporting experience to
assist in the drafting of the reporting documents and manage the reporting
process. Moreover, management believes that over time, the current Controller
will grasp all of the nuances of the Company’s transactions and be fully able to
prepare and compile the financial information once he has had further experience
at the Company and re-instituted some of the former Controller checks and
reconciliations.
Notwithstanding
the above, management believes that the consolidated financial statements
included in this Annual Report on Form 10-K, fairly present, in all material
respects, our financial condition, results of operations and cash flows for the
periods presented in accordance with generally accepted accounting
principles.
Our
internal control over financial reporting includes policies and procedures that
pertain to the maintenance of records that accurately and fairly reflect, in
reasonable detail, transactions and dispositions of assets; and provide
reasonable assurances that: (1) transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States; (2) receipts and expenditures are being
made only in accordance with authorizations of management and the directors of
our Company; and (3) unauthorized acquisition, use, or disposition of our assets
that could have a material effect on our financial statements are prevented or
timely detected.
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
This
annual report does not include an attestation report of Holtz Rubinstein
Reminick LLP, our 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 us to provide only
Management's Report in this annual report.
As noted
above, management is disclosing material weaknesses in internal control over
financial reporting that resulted from employment changes which occurred in the
first fiscal quarter of 2010. These changes have materially affected our
internal control over financial reporting as of December 31, 2009 because they
affected our ability to prepare the year-end financial information in a timely
and accurate way.
25
Changes
in Internal Controls Over Financial Reporting
There
have been no changes in our internal controls over financial reporting that
occurred during our last fiscal quarter to which this Annual Report on Form 10-K
relates that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting. We are committed to
improving our financial organization. As part of this commitment, we intend to
continue to educate our management personnel to comply with U.S. GAAP and SEC
disclosure requirements and to increase management oversight of accounting and
reporting functions in the future.
Item
9B.
|
Other
Information.
|
None.
26
PART
III
Item 10.
|
Directors,
Executive Officers and Corporate
Governance.
|
Directors and Executive
Officers
As part
of the Execuserve acquisition, Compliance Systems Corporation has realigned its
organizational structure to account for the Execuserve acquisition and its
operational management team. The Company's new Execuserve subsidiary
division will be managed by its CEO and President Jim Robinson. The Company's
Call Compliance, Inc. subsidiary will be led by Stefan Dunigan as its CEO and
President. Dean Garfinkel will remain as Chairman of the Board of
Directors and CEO of Compliance Systems Corporation and Barry Brookstein will
continue as a member of the Board of Directors and as Secretary and CFO.
Additionally, Tom Eley, the former CEO of Execuserve will be appointed to the
Board of Directors of the Company.
The
following table sets forth the names and positions of our executive officers and
directors. Our directors are elected at our annual meeting of
stockholders and serve for one year or until successors are elected and
qualify. The Board appoints the Company’s officers, and their terms
of office are at the discretion of the Board, except to the extent governed by
an employment contract.
As of
April 24, 2010, our directors and executive officers, their age, principal
positions, the dates of their initial election or appointment as directors or
executive officers, and the expiration of their terms are as
follows:
Name
|
Age
|
Principal Positions
|
Periods Served
|
|||
Dean
Garfinkel
|
51
|
Chairman
of the Board, Chief Executive Officer and President
|
February
2006 to Present
|
|||
Barry
Brookstein
|
68
|
Chief
Financial Officer and Director
|
February
2006 to Present
|
|||
Tom
Eley
|
|
74
|
|
Director
|
|
February
2010 to Present
|
Our
directors and executive officers are not directors or executive officers of any
other company that files reports with the Commission, nor have they been
involved in any bankruptcy proceedings, criminal proceedings, any proceeding
involving any possibility of enjoining or suspending our directors and officers
from engaging in any business, securities or banking activities, and have not
been found to have violated, nor been accused of having violated, any federal or
state securities or commodities laws.
The
following is a brief description of the background of our directors and
executive officers, as furnished by such directors and executive
officers.
Dean Garfinkel currently
serves as Chairman of the Board of Directors and CEO of Compliance Systems
Corporation. Mr. Garfinkel served prior to February 2010 as CSC’s and each of
its subsidiaries’ Chairman of the Board and Chief Executive Officer from such
entities’ formation through CSC’s merger with and into our company in February
2006. Since the 2006 merger, he has served as our and each of our
subsidiaries’ Chairman of the Board, President and Chief Executive
Officer. Mr. Garfinkel served as Chief Executive Officer and a
director of ASN Voice & Data Corp., a telecommunications company he founded
in 1991, which specialized in providing voice and data systems for the financial
sector. Mr. Garfinkel also has served as a communications consultant
to Fortune 500 companies and other businesses for over 20 years. Mr.
Garfinkel also has served, since 2004, on the Executive Board of Directors of
the American Teleservices Association, a trade association.
Barry Brookstein served as
CSC’s and each of its subsidiaries’ Chief Financial Officer from such entities’
formation through CSC’s merger with and into our company in February
2006. Since the 2006 merger, he has served as our and each of our
subsidiaries’ Chief Financial Officer, Treasurer and director. Prior
to joining CSC, Mr. Brookstein devoted his full-time to his accounting
practice. Mr. Brookstein also currently devotes a portion of his time
to his private accounting practice. Mr. Brookstein is a graduate of
Pace University and has over 40 years of experience in public
accounting.
27
Tom Eley has been appointed to
the Board of Directors of Compliance Systems Corporation. Mr. Eley has over 30
years of sales and management experience, having served as Vice President and
General Manager of European Operations for Paradyne Corporation and Vice
President of U.S. Sales for MDSI, a Schlumberger Company. Previously, Mr. Eley
held various sales management positions with IBM and Control Data Corporation.
He holds a Bachelor of Science degree in Physics from the College of William and
Mary and is a graduate of the IBM Systems Research Institute.
Significant
Employees
As of
April 24, 2010, our other significant personnel, their ages, positions, the
dates of employment, are as follows:
Name
|
Age
|
Principal Positions
|
Periods Served
|
|||
Stephan
Dunigan
|
38
|
CEO
and President – Call Compliance Inc.
|
February
2010 to Present
|
|||
Jim
Robinson
|
52
|
CEO
and President – Execuserve Corp.
|
February
2010 to Present
|
Stefan Dunigan CEO and
President of CCI from February 2010 to present. From 2001 to February
2010 Mr. Dunigan was the Company’s VP of Operations. From 1999 to 2001, Mr.
Dunigan was Director of Operations for ASN Voice & Data Corp. Mr.
Dunigan’s principal responsibilities include the development and implementation
of the systems necessary to successfully launch and administer our wide array of
compliance services and solutions. Additionally, Mr. Dunigan is
pro-actively involved in product enhancement and both end-user and telephone
carrier support, among other duties. Mr. Dunigan brings nearly ten
years of hands-on experience with all facets of the public telecommunication
network, and is considered an expert in broadband delivery and
design.
Jim Robinson, President &
CEO of Execuserve Corp. from February 2010 to Present, Mr. Robinson holds an MBA
from the University of California, Berkeley and has extensive management and
consulting experience. He managed a team with worldwide product, sales and
support responsibilities at AMF before becoming an independent business
consultant in 1996. Jim has worked with Execuserve Corp. since
2007.
Section 16(a) Compliance by
Officers and Directors
We do not
have a class of securities registered under Section 12(b) or Section 12(g) of
the Exchange Act in 2007 and, as such, our officers, directors and 10%
stockholders were, and current are, not subject to the reporting requirements of
Section 16(a).
Code of
Ethics
On
February 10, 2006, our Board of Directors adopted a written Code of Ethics
designed to deter wrongdoing and promote honest and ethical conduct, full, fair
and accurate disclosure, compliance with laws, prompt internal reporting and
accountability to adherence to the Code of Ethics. Our Code of Ethics
applies to all of our employees and directors, including our Chief Executive
Officer, Chief Financial Officer and Controller. This Code of Ethics
was filed as an exhibit to the Registration Statement on Form SB-2 filed with
the SEC on May 12, 2006.
Committees
Our Board
of Director serves as the audit committee. Our board does not have an
outside director as a financial expert due to the lack of capital needed to
attract a qualified expert. Absent his positions as an executive
officer, director and principal stockholder, our board believes that Mr.
Brookstein would qualify as a financial expert.
We do not
have a nominating committee or a method in place for the consideration of
director-nominees. Our Board of Directors will consider any
appropriately qualified person for directorship with our
company. Stockholders wishing to submit the name of an appropriately
qualified person for a directorship should direct any such submission to our
secretary at our principal offices.
28
Item
11.
|
Executive
Compensation.
|
General
The
following table sets forth, with respect to our fiscal years ended December 31,
2009 and 2008, all compensation earned by or paid to all persons who served as
our chief executive officer at any time during our fiscal year ended December
31, 2009 and such other executive officer and other employees of our company who
were employed by our company as of the close of business on December 31, 2009
and whose total annual salary and bonus earned during our fiscal year ended
December 31, 20098 exceeded $100,000.
SUMMARY
COMPENSATION TABLE
|
|
Option
|
All
Other
|
|||||||||||||||
Name and Principal Position
|
Year
|
Salary
|
Awards
|
Compensation
|
Total
|
|||||||||||||
Dean
Garfinkel, Chairman of
|
2009
|
$ | 55,000 | $ | 520 | (2) | $ | 20,448 | (4) | $ | 75,968 | |||||||
the
Board and Chief
|
2008
|
$ | 180,000 | (1) | $ | 72,000 | (2) | $ | 26,841 | (3) | $ | 278,841 | ||||||
Executive
Officer
|
|
|||||||||||||||||
Barry
Brookstein, Chief
|
2009
|
$ | 90,000 | $ | 480 | (5) | $ | 18,594 | (8) | $ | 109,074 | |||||||
Financial
Officer
|
2008
|
$ | 180,000 | (7) | $ | 36,000 | (5) | $ | 14,007 | (6) | $ | 230,007 | ||||||
|
||||||||||||||||||
Stefan
Dunigan,
|
2009
|
$ | 120,000 | 0 | $ | 8,813 | (11) | $ | 128,813 | |||||||||
CEO
and President –
|
2008
|
$ | 120,000 | 36,000 | (9) | $ | 8,915 | (10) | $ | 164,915 |
(1)
|
Excludes
$60,000 in deferred compensation that was paid during
2008.
|
(2)
|
Represents
the three grants for salary deferral during 2009 for a total of 7,400,000
five-year stock purchase warrants at an exercise price of $0.05 per
share. Represents the grant on January 4, 2008 of a five-year
option to purchase 20 million shares of our common stock, at an exercise
price of $0.026 per share. Reference the footnotes to the
financial which discloses the assumptions made in valuing these options
and warrants.
|
(3)
|
Mr.
Garfinkel received a $12,000 car lease allowance and $14,841 for
insurance, repairs and gas in 2008.
|
(4)
|
Mr.
Garfinkel received a $12,000 car lease allowance and $8,448 for insurance,
repairs and gas in 2009.
|
(5)
|
Represents
the three grants for salary deferral during 2009 for a total of 6,800,000
five-year stock purchase warrants at an exercise price of $0.05 per
share. Represents the grant on January 4, 2008 of a five-year
option to purchase ten million shares of our common stock, at an exercise
price of $0.026 per share. Reference the footnotes to the
financial which discloses the assumptions made in valuing these options
and warrants.
|
(6)
|
Mr.
Brookstein received a $12,000 car lease allowance and $2,007 for
insurance, repairs and gas in 2008.
|
(7)
|
Mr.
Brookstein deferred $120,000 of salary which was subsequently exchanged
for Series C Preferred Stock.
|
(8)
|
Mr.
Brookstein received a $12,000 car lease allowance and $6,594 for
insurance, repairs and gas in 2009.
|
(9)
|
Represents
the grant on January 4, 2008 of a five-year option to purchase 10 million
shares of our common stock, at an exercise price of $0.026 per
share. Reference the footnotes to the financial which discloses
the assumptions made in valuing these options and
warrants.
|
(10)
|
Mr.
Dunigan received $8,915 for an automobile lease and gas in
2008.
|
(11)
|
Mr.
Dunigan received $8,813 for an automobile lease and gas in
2009.
|
(12)
|
Mr.
Dunigan was promoted to CEO and President of Call Compliance Inc.
effective February 2010
|
29
Employment Agreements with
Executive Officers
Call
Compliance Inc. entered into 5-year employment agreements, effective as of
December 1, 2001, with each of Dean Garfinkel, our Chairman of the Board, Chief
Executive Officer and President, and Barry Brookstein, our Chief Financial
Officer, Secretary, Treasurer and director. Messrs. Garfinkel and
Brookstein’s employment contracts were extended for five years and currently
expire on November 30, 2011. Under the terms of their respective
employment agreements, Mr. Garfinkel receives a base salary of $240,000 per year
and Mr. Brookstein receives a base salary of $240,000 per year. Each
officer is entitled to an annual bonus from the bonus pool, the amount to be
determined in the sole discretion of the Board, and an allowance for an
automobile of up to $1,000 per month plus reimbursement for maintenance,
insurance and gasoline also to be determined in the sole discretion of the
Board. Each employment agreement provides for health insurance and
other standard benefits and contains certain non-competition prohibitions which
require that each officer not engage in any business activities which directly
compete with our business while he or she is employed by us, or is one of our
principal stockholders.
As
described above, Messrs. Garfinkel and Brookstein’s respective employment
agreements provide for an annual bonus from a bonus pool, with the amount of
each bonus to be determined in the sole discretion of the Board. The
bonus pool shall be equal to a percentage of our pre-tax profits, if any, after
the service of any debt on a calendar year basis, starting with 25% of the first
$10 million in pretax earnings, and 10% of any pretax earnings in excess of $10
million. For the fiscal years ended December 31, 2009 and 2008, no
bonuses were awarded. At present, Messrs. Garfinkel and Brookstein’s
employment agreements are guaranteed by the Company, as the parent company of
Call Compliance, Inc.
Deferred
salary from 2007 was paid in equal amounts during the first six months of
2008.
Salaries
were also deferred during 2009 for Mr. Brookstein ($150,000) and Mr.
Garfinkel (185,000). The officers also deferred 100% of the salaries
for the first 6 months of 2010.
Mr.
Dunigan does not have an employment agreement with the Company.
Outstanding Equity Awards at
Fiscal Year-End
The
following tables set forth, for each person listed in the Summary Compensation
Table set forth in the “General” subsection above, as of April 2,
2009:
•
|
with
respect to each option award -
|
|
•
|
the
number of shares of our common stock issuable upon exercise of outstanding
options that have been earned, separately identified by those exercisable
and unexercisable;
|
|
•
|
the
number of shares of our common stock issuable upon exercise of outstanding
options that have not been earned;
|
|
•
|
the
exercise price of such option; and
|
|
•
|
the
expiration date of such option; and
|
•
|
with
respect to each stock award -
|
|
•
|
the
number of shares of our common stock that have been earned but have not
vested;
|
|
•
|
the
market value of the shares of our common stock that have been earned but
have not vested;
|
|
•
|
the
total number of shares of our common stock awarded under any equity
incentive plan that have not vested and have not been earned;
and
|
|
•
|
the
aggregate market or pay-out value of our common stock awarded under any
equity incentive plan that have not vested and have not been
earned.
|
Option
Awards and Warrant Awards
Number of
|
Number of
|
Equity Incentive
|
|||||||||||||||
Securities
|
Securities
|
Plan Awards:
|
|||||||||||||||
Underlying
|
Underlying
|
Number of
|
|||||||||||||||
Unexercised
|
Unexercised
|
Securities Underlying
|
Option
|
Option
|
|||||||||||||
Options
|
Options
|
Unexercised
|
Exercise
|
Expiration
|
|||||||||||||
Name
|
Exercisable
|
Unexercisable
|
Unearned Options
|
Price
|
Date
|
||||||||||||
Dean
Garfinkel
|
40,219,514 | 0 | 0 | $ | 0.031 |
1/14/2013
|
|||||||||||
Barry
Brookstein
|
36,540,000 | 0 | 0 | $ | 0.030 |
1/14/2013
|
|||||||||||
Stefan
Dunigan
|
10,000,000 | 0 | 0 | $ | 0.026 |
1/14/2013
|
30
Stock
Awards
Equity Incentive
|
||||||||||||||||
Plan Awards:
|
||||||||||||||||
Number
|
Market or
|
|||||||||||||||
Number of
|
Market Value
|
of Unearned
|
Pay-Out Value of
|
|||||||||||||
Shares That
|
of Shares That
|
Shares That
|
Unearned Shares
|
|||||||||||||
Name
|
Have Not Vested
|
Have Not Vested
|
Have Not Vested
|
Have Not Vested
|
||||||||||||
Dean
Garfinkel
|
0 | $ | — | 0 | $ | — | ||||||||||
Barry
Brookstein
|
0 | — | 0 | — | ||||||||||||
Stefan
Dunigan
|
0 | — | 0 | — |
Board of Directors Policy on
Executive Compensation
Executive
Compensation
Our
executive compensation philosophy is to provide competitive levels of
compensation by recognizing the need for multi-discipline management
responsibilities, achievement of our company’s overall performance goals,
individual initiative and achievement, and allowing our company to attract and
retain management with the skills critical to its long-term
success. Management compensation is intended to be set at levels that
we believe is consistent with that provided in comparable
companies. Our company’s compensation programs are designed to
motivate executive officers to meet annual corporate performance goals and to
enhance long-term stockholder value. Our company's executive
compensation has four major components: base salary, performance incentive,
incentive stock options and other compensation.
Executive
Base Salaries
Base
salaries are determined by evaluating the various responsibilities for the
position held, the experience of the individual and by comparing compensation
levels for similar positions at companies within our principal
industry. We review our executives’ base salaries and determine
increases based upon an officer’s contribution to corporate performance, current
economic trends and competitive market conditions.
Performance
Incentives
We
utilize performance incentives based upon criteria relating to performance in
special projects undertaken during the past fiscal year, contribution to the
development of new products, marketing strategies, manufacturing efficiencies,
revenues, income and other operating goals to augment the base salaries received
by executive officers.
Incentive
Stock Options
Our
company uses stock options as a means to attract, retain and encourage
management and to align the interests of executive officers with the long-term
interest of our company’s stockholders.
Benefits
and Other Compensation
Our
company offers health to its executive officers, which are similar to the
benefits offered to all of its employees. Our company also provides
an automobile allowance to its two senior executive officers as additional
compensation.
31
Retirement
and Post Retirement Benefits
Our
company does not offer a post-retirement health plan to its executive officers
or employees.
Director
Compensation
Directors
do not receive any cash compensation for their service as members of our Board
of Directors, but they are reimbursed for reasonable out-of-pocket expenses
incurred in connection with their duties as directors. Upon
establishing a stock option plan, which we have not done as of the date of
filing this Form 10-K, we anticipate that directors will be granted options to
purchase common stock thereunder.
Compensation Committee
Interlocks And Insider Participation
The Board
does not have a compensation committee, and none of our executive officers has
served as a director or member of the compensation committee of any other entity
whose executive officers served on our Board.
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
We
currently have outstanding four classes of voting securities: our common stock,
Series A Senior Convertible Voting Non-Redeemable Preferred Stock (the “Series A
Preferred Stock”), Series B Senior Subordinated Convertible Voting Redeemable
Preferred Stock (the “Series B Preferred Stock”) and Series C Senior
Subordinated Convertible Voting Redeemable Preferred Stock (the “Series C
Preferred Stock” and, collectively with the Series A Preferred Stock and Series
B Preferred Stock, the “Preferred Stock”). The Company has
irrevocably waived its right to redeem the Series C Preferred
Stock. Each share of Preferred Stock currently entitles its holder to
cast 100 votes on each matter voted upon by our stockholders.
The
following tables set forth information with respect to the beneficial ownership
of shares of each class of our voting securities as of April 24, 2010,
by:
•
|
each
person known by us to beneficially own 5% or more of the outstanding
shares of such class of stock, based on filings with the Securities and
Exchange Commission and certain other
information,
|
•
|
each
of our current “named executive officers” and directors,
and
|
•
|
all
of our current executive officers and directors as a
group.
|
Beneficial
ownership is determined in accordance with the rules of the SEC and includes
voting and investment power. In addition, under SEC rules, a person
is deemed to be the beneficial owner of securities which may be acquired by such
person upon the exercise of options and warrants or the conversion of
convertible securities within 60 days from the date on which beneficial
ownership is to be determined.
The term
“named executive officers” is defined in the SEC rules as those persons who are
required to be listed in the Summary Compensation Table provided under Item 10
of this Annual Report on Form 10-K.
Except as
otherwise indicated in the notes to the following table,
•
|
we
believe that all shares are beneficially owned, and investment and voting
power is held by, the persons named as owners,
and
|
•
|
the
address for each beneficial owner listed in the table is c/o Compliance
Systems Corporation, 50 Glen Street, Glen Cove NY
11542
|
Series A Senior Convertible
Voting Non-Redeemable Preferred Stock
Amount and Nature of
|
Percentage
|
|||||||
Name and Address of Stockholder
|
Beneficial Ownership
|
of Class
|
||||||
Barry
Brookstein (1)
|
200,000 | (2) | 8.7 | % | ||||
All
executive officers and directors as a group (two persons)
|
200,000 | (2) | 8.7 | % |
32
(1)
|
Mr.
Brookstein is our Chief Financial Officer and a member of our board of
directors.
|
(2)
|
Does
not include 262,500 shares of Series A Preferred Stock pledged to Mr.
Brookstein to secure loans made by Mr. Brookstein to the
pledgors.
|
Series B Senior Subordinated
Convertible Voting Redeemable Preferred Stock
Amount and Nature of
|
Percentage
|
|||||||
Name and Address of Stockholder
|
Beneficial Ownership
|
of Class
|
||||||
Barry
Brookstein (1)
|
1,250,000 | (2) | 100.0 | % | ||||
All
executive officers and directors as a group (two
persons)
|
1,250,000 | (2) | 100.0 | % |
(1)
|
Mr.
Brookstein is our Chief Financial Officer and a member of our board of
directors.
|
(2)
|
Includes
750,000 shares of Series B Preferred Stock owned by a company in which Mr.
Brookstein serves as an executive officer and director and holds a
majority of its outstanding stockholder voting
power.
|
Series C Senior Subordinated
Convertible Voting Redeemable Preferred Stock
Amount
and Nature of
|
Percentage
|
|||||||
Name and Address of
Stockholder
|
Beneficial Ownership
|
of Class
|
||||||
Barry
Brookstein (1)
|
857,593 | (2) | 46.9 | % | ||||
Dean
Garfinkel (3)
|
466,750 | 25.5 | % | |||||
All
executive officers and directors as a group (two persons)
|
1,324,343 | (2) | 72.4 | % |
(1)
|
Mr.
Brookstein is our Chief Financial Officer and a member of our board of
directors.
|
(2)
|
Includes
(a) 450,601 shares of Series C Preferred Stock owned by a company in which
Mr. Brookstein serves as an executive officer and director and holds a
majority of its outstanding stockholder voting
power.
|
(3)
|
Mr.
Garfinkel is our Chairman of the Board, Chief Executive Officer and
President.
|
Common
Stock
Amount and Nature of
|
Percentage
|
|||||||
Name and Address of Stockholder
|
Beneficial Ownership
|
of Class
|
||||||
Barry
Brookstein (1)
|
286,795,131 | (2)(10) | 52.1 | % | ||||
Dean
Garfinkel (3)
|
94,625,127 | (4)(10) | 26.1 | |||||
Stefan
Dunigan (5)
|
18,319,514 | (6) | 6.2 | |||||
Summit
Trading LLC (7)
|
38,666,667 | 14.0 | ||||||
Agile
Opportunity Fund (8)
|
207,647,000 | (9) | 87.1 | |||||
All
executive officers and directors as a group (two persons)
|
381,420,258 | (2)(4) | 59.9 | % |
(1)
|
Mr.
Brookstein is our Chief Financial Officer and a member of our board of
directors.
|
(2)
|
Includes
(a) 63,512 shares of our common stock owned by Mr. Brookstein’s minor
children for which Mr. Brookstein has custodial control, (b) 10,000,000
shares of our common stock issuable upon exercise of an option granted to
Mr. Brookstein in January 2008, which shares are purchasable within the
next 60 days, (c) 20,000,000 shares of our common stock issuable upon
conversion of the 200,000 shares of Series A Preferred Stock beneficially
owned by Mr. Brookstein, which shares are convertible within the next 60
days, (d) 125,000,000 shares of our common stock issuable upon conversion
of the 1,250,000 shares of Series B Preferred Stock beneficially owned by
Mr. Brookstein, which shares are convertible within the next 60 days, and
(e) 85,759,300 shares of our common stock issuable upon conversion of the
857,593 shares of Series C Preferred Stock beneficially owned by Mr.
Brookstein, which shares are convertible within the next 60
days.
|
(3)
|
Mr.
Garfinkel is our Chairman of the Board, Chief Executive Officer and
President.
|
33
(4)
|
Includes
(a) 95,268 shares of our common stock owned by Mr. Garfinkel’s minor
children for which Mr. Garfinkel has custodial control, (b) 20,000,000
shares of our common stock issuable upon exercise of an option granted to
Mr. Garfinkel in January 2008, which shares are purchasable within the
next 60 days, and (c) 46,675,000 shares of our common stock issuable upon
conversion of the 466,750 shares of Series C Preferred Stock beneficially
owned by Mr. Garfinkel, which shares are convertible within the next 60
days.
|
(5)
|
Mr.
Dunigan is our Vice President of
Operations.
|
(6)
|
Includes
(a) 7,500,000 shares of common stock issuable upon conversion of 75,000
shares of Series A Preferred Stock, which are shares convertible within
the next 60 days, and (b) 10 million shares of our common stock issuable
upon exercise of an option granted to Mr. Dunigan in January 2008, which
option is currently exercisable.
|
(7)
|
The
mailing address for Summit Trading Limited is 120 Flagler Avenue, New
Smyrna Beach, Florida 32169.
|
(8)
|
The
address for Agile Opportunity Fund LLC is 1175 Walt Whitman Road – Suite
100A, Melville, New York 11747.
|
(9)
|
Includes
207,647,000 million shares issuable upon conversion of debentures
aggregating to $1,765,000 in principal amount owned of record by the
beneficial owner, which debentures are currently convertible into such
shares. Does not include shares issuable upon conversion of
interest that is accrued or may accrue under the
debentures.
|
(10) Dean
Garfinkel, our chairman of the board, president and chief executive officer, and
Barry Brookstein, our chief financial officer, have entered into "Rule 10b5-1
plans" pursuant to which they each initiated binding, irrevocable sell orders,
with respect to up to 1.5 million shares of our common stock owned by each of
them, at a price at or above $0.05 per share. The sale period began
October 1, 2008 and terminated on September 30, 2009. No sales were
made under this plan..
Dean R.
Garfinkel, our chairman of the board, president and chief executive officer, and
Barry M. Brookstein, our chief financial officer, have entered into "Rule 10b5-1
plans," each dated as of September 9, 2009, pursuant to which they each
initiated binding, irrevocable sell orders, with respect to up to 3.0 million
shares of our common stock owned by each of them, at a price at or above $0.05
per share. The sale period began September 1, 2009 and terminates on
August 31, 2010. No sales have been made to date as the market price
of our common stock remains below the threshold sale price under their Rule
10b5-1 plans. Under these 10b5-1 plans, Messrs. Garfinkel and
Brookstein are prohibited from exercising any subsequent influence over how,
when or whether to effectuate any sale of their shares.
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Certain Relationships and
Related Transactions
On March
3, 2009, one the Company’s senior executive officers and principal stockholders
loaned the Company $50,000, due on demand, with interest at 18%. On
June 24, 2009, this note was exchanged for a secured note with a stated maturity
date of January 1, 2011. The note bears interest at
18%. As of December 31, 2009 accrued and unpaid interest totaled
$2,250.
The
Company has failed to pay dividends on the 1.25 million outstanding shares of
its Series B Senior Subordinated Convertible Voting Preferred Stock (the “Series
B Preferred Stock”) that were payable on the last day of each month during
2009. Dividends on the Series B Preferred Stock may only be paid out
of funds legally available for such purpose. Under Nevada law,
generally, a corporation’s distribution to stockholders may only be made if,
after giving effect to such distribution, (i) the corporation would be able to
pay its debts as they become due in the usual course of action and (ii) the
corporation’s total assets equal or exceed the sum of the corporation’s
liabilities plus the amount that would be needed, if the corporation was to be
dissolved at the time of distribution, to satisfy the preferential rights upon
dissolution of stockholders whose rights are superior to those receiving the
distribution.
34
All of
the outstanding shares of Series B Preferred Stock are held by Barry M.
Brookstein, the chief financial officer and principal stockholder, and Spirits
Management, Inc. (“Spirits”), an entity controlled by
Brookstein. Although the Company has been and currently is unable to
pay the Series B Preferred Stock dividends when due, the dividends have been and
are continuing to be accrued until such time as the monthly dividends can
lawfully be paid under Nevada law. As of December 31, 2009, the
amount of dividends not paid on the Series B Preferred Stock totaled $150,000,
consisting of $60,000 due Brookstein and $90,000 due
Spirits. To compensate the holders of the outstanding Series B
Preferred Stock for the failure to pay dividends when due, the Company has
agreed to grant five-year warrants (each, a “Dividend Accrual Warrant”) to
purchase shares (each, a “Dividend Accrual Warrant Share”) of Company common
stock to such holders at $0.05 per Dividend Accrual Warrant
Share. The holders are to be granted, as of the last day of each
fiscal quarter, 40 Deferred Accrual Warrants for every $1 of dividend accrued
during the prior three month period. Accordingly, the Company granted
1.2 million Dividend Accrual Warrants to Brookstein and 1.8 million Dividend
Accrual Warrants to Spirits as of June 30, 2009 and granted 600,000 Dividend
Accrual Warrants to Brookstein and 900,000 Dividend Accrual Warrants to Spirits
as of September 30, 2009 for dividends accrued during the third quarter 2009,
2009 and granted 600,000 Dividend Accrual Warrants to Brookstein and 900,000
Dividend Accrual Warrants to Spirits as of September 30, 2009 for dividends
accrued during the fourth quarter 2009.
.
During
the year ended December 31, 2008, the Company paid dividends of $150,000 on its
outstanding Series B Preferred Stock.
Item
14.
|
Principal
Accounting Fees and Services.
|
Holtz
Rubinstein Reminick LLP (“Holtz Rubinstein”) has served as our independent
certified public accountants since October 2007.
Principal Accountant Fees
and Services
The
following table sets forth the fees billed by our independent certified public
accountants for the years ended December 31, 2009 and 2008 for the categories of
services indicated.
Fiscal Year Ended December 31,
|
||||||||
Category
|
2009
|
2008
|
||||||
Audit
fees (1)
|
$ | 67,500 | $ | 67,500 | ||||
Audit-related
fees (2)
|
0 | 0 | ||||||
Tax
fees (3)
|
0 | 0 |
(1)
|
Consists
of fees billed for the audit of our annual financial statements, review of
financial statements included in our Quarterly Reports on Form 10-Q and
services that are normally provided by the accountant in connection with
statutory and regulatory filings or
engagements.
|
(2)
|
Consists
of assurance and related services that are reasonably related to the
performance of the audit and reviews of our financial statements and are
not included in “audit fees” in this
table.
|
(3)
|
Consists
of professional services rendered for tax compliance, tax advice and tax
planning. The nature of these tax services is tax
preparation.
|
Audit Committee
Approval
We do not
have an audit committee of our board of directors. We believe that
each member of our board has the expertise and experience to adequately serve
our stockholders’ interests while serving as directors. Since we are
not required to maintain an audit committee and our full board acts in the
capacity of an audit committee, we have not elected to designate any member of
our board as an “audit committee financial expert.”
Pre-Approval
Policy
We
understand the need for Holtz Rubenstein to maintain objectivity and
independence in its audit of our financial statements. To minimize
relationships that could appear to impair the objectivity of Holtz Rubenstein,
our board of directors has restricted the non-audit services that Holtz
Rubenstein may provide to us and has determined that we would obtain even these
non-audit services from Holtz Rubenstein only when the services offered by Holtz
Rubenstein are more effective or economical than services available from other
service providers.
35
Our board
of directors has adopted policies and procedures for pre-approving all non-audit
work performed by Holtz Rubenstein or any other accounting firms we may
retain. Specifically, under these policies and procedures, our board
shall pre-approve the use of Holtz Rubenstein for detailed, specific types of
services within the following categories of non-audit services: merger and
acquisition due diligence and related accounting services; tax services;
internal control reviews; and reviews and procedures that we request Holtz
Rubenstein to undertake to provide assurances of accuracy on matters not
required by laws or regulations. In each case, the policies and
procedures require our board to set specific annual limits on the amounts of
such services which we would obtain from Holtz Rubenstein and require management
to report the specific engagements to the board and to obtain specific
pre-approval from the board for all engagements.
Board of Directors Approval
of Audit-Related Activities
Management
is responsible for the preparation and integrity of our financial statements, as
well as establishing appropriate internal controls and financial reporting
processes. Holtz Rubenstein is responsible for performing an
independent audit of our financial statements and issuing a report on such
financial statements. Our board’s responsibility is to monitor and
oversee these processes.
Our board
reviewed the audited financial statements of our company for the year ended
December 31, 2009 and met with both other members of management and the
independent auditors, separately and together, to discuss such financial
statements. Management and the auditors have represented to us that
the financial statements were prepared in accordance with generally accepted
accounting principles in the United States. Our board also received
written disclosures and a letter from our auditors regarding their independence
from us, as required by [Independence Standards Board Standard No. 1,] and
discussed with the auditors their independence with respect to all services that
our auditors rendered to us. Our board also discussed with the
auditors any matters required to be discussed by Statement on Auditing Standards
No. 61. Based upon these reviews and discussions, our board
authorized and directed that the audited financial statements be included in our
Annual Report on Form 10-K for the year ended December 31, 2009.
36
PART
IV
Item
15.
|
Exhibits,
Financial Statements
|
Financial
Statements
The
financial statements and schedules included in this Annual Report on Form 10-K
are listed in Item 8 and commence following page 38.
Exhibits
The
following exhibits are being filed as part of this Annual Report on Form
10-K.
Exhibit
|
||
Number
|
Exhibit Description
|
|
3.1
|
Composite
of Articles of Incorporation of Compliance Systems Corporation, as amended
to date.
|
|
3.2
|
Bylaws
of Compliance Systems Corporation (f/k/a GSA publications, Inc.), as
amended to date. [Incorporated by reference to Exhibit 3.2(iii)
to our Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.1
|
United
States Patent, dated December 11, 2001. [Incorporated by
reference to Exhibit 10.1 to our Registration Statement on Form SB-2,
filed with the SEC on May 12, 2006.]
|
|
10.3
|
Patent
License Agreement, dated April 11, 2002, between Call Compliance, Inc. and
Illuminet, Inc. [Incorporated by reference to Exhibit 10.4 to
our Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.4
|
CCI
Alliance Agreement, dated April 11, 2002, between Call Compliance, Inc.
and Illuminet, Inc. [Incorporated by reference to Exhibit 10.5
to our Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.5
|
Addendum
to Promissory Note, dated July 25, 2005, between Call Compliance, Inc. and
Barry Brookstein. [Incorporated by reference to Exhibit 10.6 to
our Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.6
|
Lease
Agreement, dated May 10, 2002, between Call Compliance, Inc. and Spirits
Management, Inc. [Incorporated by reference to Exhibit 99.1 to
our Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.7
|
Non-Negotiable
Promissory Note, dated December 1, 2002, between Call Compliance, Inc. and
Spirits Management, Inc. [Incorporated by reference to Exhibit
10.7 to our Registration Statement on Form SB-2, filed with the SEC on May
12, 2006.]
|
|
10.8
|
Non-Negotiable
Promissory Note, dated December 1, 2002, between Call Compliance, Inc. and
Telmax Co., Inc. [Incorporated by reference to Exhibit 10.9 to
our Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.9
|
Non-Negotiable
Promissory Note, dated December 1, 2002, between Call Compliance, Inc. and
Phone Tel New Corp. [Incorporated by reference to Exhibit 10.10
to our Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.10
|
Guaranty,
dated December 1, 2002, among Call Compliance, Inc., Call Compliance.com,
Inc. and Telmax Co., Inc. [Incorporated by reference to Exhibit
10.11 to our Registration Statement on Form SB-2, filed with the SEC on
May 12, 2006.]
|
|
10.11
|
Guaranty,
dated December 1, 2002, among Call Compliance, Inc., Call Compliance.com,
Inc. and PhoneTel New Corp. [Incorporated by reference to
Exhibit 10.12 to our Registration Statement on Form SB-2, filed with the
SEC on May 12, 2006.]
|
|
10.12
|
Guaranty,
dated December 1, 2002, among Call Compliance, Inc., Call Compliance.com,
Inc. and Tele-Serv, Inc. [Incorporated by reference to Exhibit
10.13 to our Registration Statement on Form SB-2, filed with the SEC on
May 12, 2006.]
|
|
10.13
|
Guaranty,
dated December 1, 2002, among Call Compliance, Inc., Call Compliance.com,
Inc. and Spirits Management, Inc. [Incorporated by reference to
Exhibit 10.14 to our Registration Statement on Form SB-2, filed with the
SEC on May 12, 2006.]
|
37
10.14
|
Patent
Security Agreement, dated as of 2003 [sic], between
Compliance Systems Corporation and Call Compliance.Com,
Inc. [Incorporated by reference to Exhibit 10.21 to our
Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.15
|
Promissory
Agreement, dated July 15, 2004, among Call Compliance, Inc., Tele-Serv,
Inc. and Compliance Systems Corporation. [Incorporated by
reference to Exhibit 10.23 to our Registration Statement on Form SB-2,
filed with the SEC on May 12, 2006.]
|
|
10.16
|
Promissory
Agreement, dated July 15, 2004, among Call Compliance, Inc., Telmax Co.,
Inc. and Compliance Systems Corporation. [Incorporated by
reference to Exhibit 10.24 to our Registration Statement on Form SB-2,
filed with the SEC on May 12, 2006.]
|
|
10.17
|
Promissory
Agreement, dated July 15, 2004, among Call Compliance, Inc., PhoneTel New
Corp. and Compliance Systems Corporation. [Incorporated by
reference to Exhibit 10.25 to our Registration Statement on Form SB-2,
filed with the SEC on May 12, 2006.]
|
|
10.18
|
Promissory
Agreement, dated July 15, 2004, among Call Compliance, Inc., Spirits
Management, Inc. and Compliance Systems
Corporation. [Incorporated by reference to Exhibit 10.26 to our
Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.19
|
Lease
Agreement, dated October 18, 2004, between DELL Financial Services L.P.
and Call Compliance, Inc. [Incorporated by reference to Exhibit
99.2 to our Registration Statement on Form SB-2, filed with the SEC on May
12, 2006.]
|
|
10.20
|
Assignment
of Lease with Consent of Landlord, dated January 26, 2005, between
Automated Systems Nationwide Network, Inc. and Call Compliance,
Inc. [Incorporated by reference to Exhibit 99.3 to our
Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.21
|
Sublease
Modification Agreement, dated January 26, 2005, between Automated Systems
Nationwide Network, Inc. and Intellidyne LLC. [Incorporated by
reference to Exhibit 99.4 to our Registration Statement on Form SB-2,
filed with the SEC on May 12, 2006.]
|
|
10.22
|
Addendum
to Promissory Agreement, dated July 25, 2005, between Compliance Systems
Corporation and Barry Brookstein. [Incorporated by reference to
Exhibit 10.27 to our Registration Statement on Form SB-2, filed with the
SEC on May 12, 2006.]
|
|
10.23
|
Addendum
to Promissory Agreement, dated July 26, 2005, between Compliance Systems
Corporation and Spirits Management, Inc. [Incorporated by
reference to Exhibit 10.28 to our Registration Statement on Form SB-2,
filed with the SEC on May 12, 2006.]
|
|
10.24
|
Non-Negotiable
Promissory Note, dated July 1, 2005, between Compliance Systems
Corporation and Alison Garfinkel. [Incorporated by reference to
Exhibit 10.29 to our Registration Statement on Form SB-2, filed with the
SEC on May 12, 2006.]
|
|
10.25
|
Non-Negotiable
Promissory Note, dated July 1, 2005, between Compliance Systems
Corporation and Dean Garfinkel. [Incorporated by reference to
Exhibit 10.30 to our Registration Statement on Form SB-2, filed with the
SEC on May 12, 2006.]
|
|
10.26
|
Promissory
Note, dated August 1, 2005, between Compliance Systems Corporation and
Brad Friedman. [Incorporated by reference to Exhibit 10.31 to
our Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.27
|
Separation,
Mutual Release and Stock Purchase Agreement, dated September 20, 2005,
among Alison Garfinkel, Compliance Systems Corp and Call Compliance,
Inc. [Incorporated by reference to Exhibit 99.5 to our
Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.28
|
Employment
Agreement dated September 30, 2005 between Call Compliance, Inc. and Barry
Brookstein. [Incorporated by reference to Exhibit 10.35 to our
Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.29
|
First
Amendment to Employment Agreement dated December 1, 2001, dated September
30, 2005, between Call Compliance, Inc. and Barry
Brookstein. [Incorporated by reference to Exhibit 10.35 to our
Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.30
|
Employment
Agreement dated September 30, 2005 between Call Compliance, Inc. and Dean
Garfinkel. [Incorporated by reference to Exhibit 10.36 to
Amendment Number 1 to our Registration Statement on Form SB-2/A, filed
with the SEC on August 11, 2006.]
|
|
10.31
|
First
Amendment to Employment Agreement dated December 1, 2001, dated September
30, 2005, between Call Compliance, Inc. and Dean
Garfinkel. [Incorporated by reference to Exhibit 10.36 to
Amendment Number 1 to our Registration Statement on Form SB-2/A, filed
with the SEC on August 11,
2006.]
|
38
10.32
|
Promissory
Note, dated October 28, 2005, between Compliance Systems Corporation and
Henry A. Ponzio. [Incorporated by reference to Exhibit 10.34 to
our Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.33
|
Secured
Convertible Debenture, dated November 30, 2005, issued to Montgomery
Equity Partners, Ltd. [Incorporated by reference to Exhibit
10.37 to our Registration Statement on Form SB-2, filed with the SEC on
May 12, 2006.]
|
|
10.34
|
Securities
Purchase Agreement, dated November 30, 2005, between Compliance Systems
Corporation and Montgomery Equity Partners, Ltd. [Incorporated
by reference to Exhibit 10.38 to our Registration Statement on Form SB-2,
filed with the SEC on May 12, 2006.]
|
|
10.35
|
Investor
Registration Rights Agreement, dated November 30, 2005, between Compliance
Systems Corporation and Montgomery Equity Partners,
Ltd. [Incorporated by reference to Exhibit 10.39 to our
Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.36
|
Debenture,
dated November 30, 2005, issued to Montgomery Equity Partners,
Ltd. [Incorporated by reference to Exhibit 10.40 to our
Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.37
|
Pledge
and Escrow Agreement, dated November 30, 2005, between Compliance Systems
Corporation and Montgomery Equity Partners, Ltd. [Incorporated
by reference to Exhibit 10.41 to our Registration Statement on Form SB-2,
filed with the SEC on May 12, 2006.]
|
|
10.38
|
Security
Agreement, dated November 30, 2005, between Compliance Systems Corporation
and Montgomery Equity Partners, Ltd. [Incorporated by reference
to Exhibit 10.42 to our Registration Statement on Form SB-2, filed with
the SEC on May 12, 2006.]
|
|
10.39
|
Lock-up
Agreement, dated November 30, 2005, between Compliance Systems Corporation
and Montgomery Equity Partners, Ltd. [Incorporated by reference
to Exhibit 10.43 to our Registration Statement on Form SB-2, filed with
the SEC on May 12, 2006.]
|
|
10.40
|
Stock
Purchase Agreement, dated November 30, 2005, between Compliance Systems
Corporation and certain stockholders listed
therein. [Incorporated by reference to Exhibit 10.45 to our
Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.41
|
Securities
Purchase Agreement, dated March 8, 2006, between Compliance Systems
Corporation and Montgomery Equity Partners, Ltd. [Incorporated
by reference to Exhibit 10.47 to our Registration Statement on Form SB-2,
filed with the SEC on May 12, 2006.]
|
|
10.42
|
Secured
Convertible Debenture, dated March 8, 2006, issued to Montgomery Equity
Partners, Ltd. [Incorporated by reference to Exhibit 10.48 to
our Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.43
|
Pledge
and Escrow Agreement, dated March 8, 2006, among Compliance Systems
Corporation, Montgomery Equity Partners, Ltd. and David Gonzalez,
Esq. [Incorporated by reference to Exhibit 10.49 to our
Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.44
|
Investor
Registration Rights Agreement, dated March 8, 2006, between Compliance
Systems Corporation and Montgomery Equity Partners,
Ltd. [Incorporated by reference to Exhibit 10.50 to our
Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.45
|
Insider
Pledge and Escrow Agreement, dated March 8, 2006, among Compliance Systems
Corporation, Montgomery Equity Partners, Ltd. and David Gonzalez,
Esq. [Incorporated by reference to Exhibit 10.51 to our
Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.46
|
Insider
Pledge and Escrow Agreement, dated March 8, 2006, among Compliance Systems
Corporation, Montgomery Equity Partners, Ltd. and David Gonzalez,
Esq. [Incorporated by reference to Exhibit 10.52 to our
Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.47
|
Security
Agreement, dated March 8, 2006, between Compliance Systems Corporation and
Montgomery Equity Partners, Ltd. [Incorporated by reference to
Exhibit 10.53 to our Registration Statement on Form SB-2, filed with the
SEC on May 12, 2006.]
|
|
10.48
|
Security
Agreement, dated March 8, 2006, between Telephone Blocking Services
Corporation and Montgomery Equity Partners, Ltd. [Incorporated
by reference to Exhibit 10.54 to our Registration Statement on Form SB-2,
filed with the SEC on May 12, 2006.]
|
|
10.49
|
Security
Agreement, dated March 8, 2006, between CallCenter Tools, Inc. and
Montgomery Equity Partners, Ltd. [Incorporated by reference to
Exhibit 10.55 to our Registration Statement on Form SB-2, filed with the
SEC on May 12, 2006.]
|
39
10.50
|
Security
Agreement, dated March 8, 2006, between Jasmin Communications, Inc. and
Montgomery Equity Partners, Ltd. [Incorporated by reference to
Exhibit 10.56 to our Registration Statement on Form SB-2, filed with the
SEC on May 12, 2006.]
|
|
10.51
|
Security
Agreement, dated March 8, 2006, between Call Compliance.com, Inc. and
Montgomery Equity Partners, Ltd. [Incorporated by reference to
Exhibit 10.57 to our Registration Statement on Form SB-2, filed with the
SEC on May 12, 2006.]
|
|
10.52
|
Security
Agreement, dated March 8, 2006, between Call Compliance, Inc. and
Montgomery Equity Partners, Ltd. [Incorporated by reference to
Exhibit 10.58 to our Registration Statement on Form SB-2, filed with the
SEC on May 12, 2006.]
|
|
10.53
|
Termination
Agreement, dated March 7, 2006, between Call Compliance, Inc. and
Montgomery Equity Partners, Ltd. [Incorporated by reference to
Exhibit 10.59 to our Registration Statement on Form SB-2, filed with the
SEC on May 12, 2006.]
|
|
10.54
|
Irrevocable
Transfer Agent Instructions, dated March 8, 2006, by and between Call
Compliance Systems Corporation and Montgomery Equity Partners,
Ltd. [Incorporated by reference to Exhibit 10.60 to our
Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
10.55
|
$150,000
Promissory Note, dated September 30, 2006, issued by Call Compliance.com,
Inc. to Nascap Corp. [Incorporated by reference to Exhibit
10.61 to Amendment Number 2 to our Registration Statement on Form SB-2/A,
filed with the SEC on November 2, 2006.]
|
|
10.56
|
Security
Agreement, dated March 8, 2006 by and between Call Compliance, Inc. and
Nascap Corp. [Incorporated by reference to Exhibit 10.62 to
Amendment Number 2 to our Registration Statement on Form SB-2/A, filed
with the SEC on November 2, 2006.]
|
|
10.57
|
Guaranty
Agreement, dated September 30, 2006, by Compliance Systems Corporation in
favor of Nascap Corp. [Incorporated by reference to Exhibit
10.63 to Amendment Number 2 to our Registration Statement on Form SB-2/A,
filed with the SEC on November 2, 2006.]
|
|
10.58
|
Consent,
dated September 30, 2006, of Montgomery Equity Partners, Ltd. to the
issuance by Call Compliance, Inc. of a $150,000 Promissory Note to Nascap
Corp. [Incorporated by reference to Exhibit 10.64 to Amendment
Number 2 to our Registration Statement on Form SB-2/A, filed with the SEC
on November 2, 2006.]
|
|
10.59
|
Subordination
Agreement, dated September 30, 2006, by Montgomery Equity Partners, Ltd.
in favor of Nascap Corp. [Incorporated by reference to Exhibit
10.65 to Amendment Number 2 to our Registration Statement on Form SB-2/A,
filed with the SEC on November 2, 2006.]
|
|
10.60
|
Agreement,
dated January 3, 2006, between Compliance Systems Corporation and
Montgomery Equity Partners, Ltd. [Incorporated by reference to
Exhibit 10.66 to Amendment Number 3 to our Registration Statement on Form
SB-2/A, filed with the SEC on January 11, 2007.]
|
|
10.61
|
Security
Agreement, dated March 10, 2006, between the Compliance Systems
Corporation and Montgomery Equity Partners, Ltd. [Incorporated
by reference to Exhibit 10.4 to our Current Report on Form 8-K (Date of
Report: March 10, 2006), filed with the SEC on March 10,
2006.]
|
|
10.62
|
Form
of Subsidiary Security Agreement, dated March 10, 2006, between our
subsidiaries and Montgomery Equity Partners, Ltd. [Incorporated
by reference to Exhibit 10.5 to our Current Report on Form 8-K (Date of
Report: March 10, 2006), filed with the SEC on March 10,
2006.]
|
|
10.63
|
Securities
Purchase Agreement, dated March 16, 2007, between Compliance Systems
Corporation and Cornell Capital Partners, LP. [Incorporated by
reference to Exhibit 10.15 to our Current Report on Form 8-K (Date of
Report: March 16, 2007), filed with the SEC on March 23,
2007.]
|
|
10.64
|
Investor
Registration Rights Agreement, dated March 16, 2007, between Compliance
Systems Corporation and Cornell Capital Partners,
LP. [Incorporated by reference to Exhibit 10.25 to our Current
Report on Form 8-K (Date of Report: March 16, 2007), filed with the SEC on
March 23, 2007.]
|
|
10.65
|
Secured
Convertible Debenture, dated March 16, 2007, issued to Cornell Capital
Partners, LP. . [Incorporated by reference to
Exhibit 10.35 to our Current Report on Form 8-K (Date of Report: March 16,
2007), filed with the SEC on March 23, 2007.]
|
|
10.66
|
Letter
Agreement, effective as of December 6, 2007, among Compliance Systems
Corporation and YA Global Investments, LLC and Montgomery Equity Partners,
LP. [Incorporated by reference to Exhibit 10.67 to our Current
Report on Form 8-K (Date of Report: December 12, 2007), filed with the SEC
on December 12, 2007.]
|
|
10.67
|
Letter
Agreement, effective as of December 1, 2007, between Compliance Systems
Corporation and The Investor Relations Group Inc. [Incorporated
by reference to Exhibit 10.68 to our Current Report on Form 8-K (Date of
Report: December 12, 2007), filed with the SEC on December 12,
2007.]
|
40
10.68
|
Pledge
and Escrow Agreement, dated March 16, 2007, among Compliance Systems
Corporation, Cornell Capital Partners, LP and David Gonzalez,
Esq. [Incorporated by reference to Exhibit 10.7 to our Current
Report on Form 8-K (Date of Report: March 16, 2007), filed with the SEC on
March 23, 2007.]
|
|
10.69
|
Irrevocable
Transfer Agent Instructions, dated March 16, 2007, among Compliance
systems Corporation, Cornell Capital Partners, LP and Continental Stock
Transfer & Trust Company. [Incorporated by reference to
Exhibit 10.8 to our Current Report on Form 8-K (Date of Report: March 16,
2007), filed with the SEC on March 23, 2007.]
|
|
10.70
|
Amended
and Restated Irrevocable Transfer Agent Instructions, dated March 16,
2007, among Compliance Systems Corporation, Cornell Capital Partners, LP
and Continental Stock Transfer & Trust
Company. [Incorporated by reference to Exhibit 10.9 to our
Current Report on Form 8-K (Date of Report: March 16, 2007), filed with
the SEC on March 23, 2007.]
|
|
10.71
|
Form
of Debentures sold in September 2007. [Incorporated by
reference to Exhibit 10.1 to our Quarterly Report on Form 10-QSB for the
quarter ended September 30, 2007, filed with the SEC on November 14,
2007.]
|
|
10.72
|
Letter
of Compliance Systems Corporation, dated August 7, 2007, addressed to
Cornell Capital Partners, LP. [Incorporated by reference to
Exhibit 10.2 to our Quarterly Report on Form 10-QSB for the quarter ended
September 30, 2007, filed with the SEC on November 14,
2007.]
|
|
10.73
|
Form
of Option Agreement, dated as of January 4, 2008, with respect to options
granted by Compliance Systems Corporation to Dean Garfinkel (20,000,000
shares) and Barry M. Brookstein (10,000,000
shares). [Incorporated by reference to Exhibit 10.1 to our
Current Report on Form 8-K (Date of Report: January 4, 2008), filed with
the SEC on February 15, 2008.]
|
|
10.74
|
Securities
Purchase Agreement dated as of May 6, 2008, between Compliance Systems
Corporation and Agile Opportunity Fund, LLC. [Incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K (Date of
Report: May 6, 2008), filed with the SEC on May 12,
2008.]
|
|
10.75
|
Secured
Convertible Debenture of Compliance Systems Corporation, dated May 6,
2008, in the principal amount of $300,000 and payable to Agile Opportunity
Fund, LLC. [Incorporated by reference to Exhibit 10.2 to our
Current Report on Form 8-K (Date of Report: May 6, 2008), filed with the
SEC on May 12, 2008.]
|
|
10.76
|
Security
Agreement dated as of May 6, 2008, between Compliance Systems Corporation
and Agile Opportunity Fund, LLC. [Incorporated by reference to
Exhibit 10.3 to our Current Report on Form 8-K (Date of Report: May 6,
2008), filed with the SEC on May 12, 2008.]
|
|
10.77
|
Limited
Non-Recourse Guaranty Agreement dated as of May 6, 2008, between Dean
Garfinkel and Agile Opportunity Fund, LLC. [Incorporated by
reference to Exhibit 10.4 to our Current Report on Form 8-K (Date of
Report: May 6, 2008), filed with the SEC on May 12,
2008.]
|
|
10.78
|
Limited
Non-Recourse Guaranty Agreement dated as of May 6, 2008, between Barry
Brookstein and Agile Opportunity Fund, LLC. [Incorporated by
reference to Exhibit 10.5 to our Current Report on Form 8-K (Date of
Report: May 6, 2008), filed with the SEC on May 12,
2008.]
|
|
10.79
|
Limited
Non-Recourse Guaranty Agreement, dated as of May 6, 2008, between Spirits
Management, Inc. and Agile Opportunity Fund, LLC. [Incorporated
by reference to Exhibit 10.6 to our Current Report on Form 8-K (Date of
Report: May 6, 2008), filed with the SEC on May 12,
2008.]
|
|
10.80
|
Stock
Pledge Agreement, dated as of May 6, 2008, between (sic) Agile Opportunity
Fund, LLC, Dean Garfinkel and Barry Brookstein. [Incorporated by reference
to Exhibit 10.7 to our Current Report on Form 8-K (Date of Report: May 6,
2008), filed with the SEC on May 12, 2008.]
|
|
10.81
|
Warrant
Certificate of Compliance Systems Corporation, dated as of May 6, 2008,
registered in the name of Cresta Capital Strategies,
LLC. [Incorporated by reference to Exhibit 10.8 to our Current
Report on Form 8-K (Date of Report: May 6, 2008), filed with the SEC on
May 12, 2008.]
|
|
10.82
|
Secured
Convertible Debenture of Compliance Systems Corporation, dated September
2, 2008, in the principal amount of $300,000 and payable to Agile
Opportunity Fund, LLC. [Incorporated by reference to Exhibit
10.2 to our Current Report on Form 8-K (Date of Report: September 2,
2008), filed with the SEC on September 5, 2008.]
|
|
10.83
|
Warrant
Certificate of Compliance Systems Corporation, dated as of September 2,
2008, registered in the name of Cresta Capital Strategies,
LLC. [Incorporated by reference to Exhibit 10.3 to our Current
Report on Form 8-K (Date of Report: September 2, 2008), filed with the SEC
on September 5, 2008.]
|
41
10.84
|
Consulting
Agreement, executed as of December 1, 2008, between Compliance Systems
Corporation and Summit Trading Limited. [Incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K (Date of
Report: December 1, 2008), filed with the SEC on December 5,
2008.]
|
|
10.85
|
Agreement
to Amend and Restate Secured Convertible Debentures, dated as of January
31, 2009, between Compliance Systems Corporation and Agile Opportunity
Fund, LLC [Incorporated by reference to Exhibit 10.1 of the registrant’s
Current Report on Form 8-K (Date of Report: January 26, 2009), filed with
the Securities and Exchange Commission on April 14,
2009].
|
|
10.86
|
Amended
and Restated Secured Convertible Debenture of Compliance Systems
Corporation, dated May 6, 2008, in the principal amount of $300,000 and
payable to Agile Opportunity Fund, LLC [Incorporated by reference to
Exhibit 10.6 of the registrant’s Current Report on Form 8-K (Date of
Report: January 26, 2009), filed with the Securities and Exchange
Commission on April 14, 2009].
|
|
10.87
|
Amended
and Restated Secured Convertible Debenture of Compliance Systems
Corporation, dated September 2, 2008, in the principal amount of $300,000
and payable to Agile Opportunity Fund, LLC[Incorporated by reference to
Exhibit 10.7 of the registrant’s Current Report on Form 8-K (Date of
Report: January 26, 2009), filed with the Securities and Exchange
Commission on April 14, 2009].
|
|
10.88
|
Waiver
and Standstill Agreement, dated as of January 26, 2009, between Compliance
Systems Corporation, Call Compliance, Inc. and Nascap Corp [Incorporated
by reference to Exhibit 10.8 of the registrant’s Current Report on Form
8-K (Date of Report: January 26, 2009), filed with the Securities and
Exchange Commission on April 14, 2009].
|
|
10.89
|
Loan
Modification Agreement, dated as of March 31, 2009, among Compliance
Systems Corporation, Call Compliance, Inc. and Nascap Corporation
[Incorporated by reference to Exhibit 10.12 of the registrant’s Current
Report on Form 8-K (Date of Report: January 26, 2009), filed with the
Securities and Exchange Commission on April 14, 2009].
|
|
10.90
|
Amended
and Restated Promissory Note of Call Compliance, Inc., dated March 31,
2009, in the principal amount of up to $750,000 and payable to Nascap
Corporation [Incorporated by reference to Exhibit 10.13 of the
registrant’s Current Report on Form 8-K (Date of Report: January 26,
2009), filed with the Securities and Exchange Commission on April 14,
2009].
|
|
10.91
|
Form
of Class A Warrant Certificate of Compliance Systems Corporation
registered in the name of Nascap Corp. [Incorporated by reference to
Exhibit B to the Loan Modification Agreement made Exhibit 10.12 of the
registrant’s Current Report on Form 8-K (Date of Report: January 26,
2009), filed with the Securities and Exchange Commission on April 14,
2009].
|
|
10.92
|
Form
of Class B Warrant Certificate of Compliance Systems Corporation
registered in the name of Nascap Corp. [Incorporated by reference to
Exhibit C to the Loan Modification Agreement made Exhibit 10.12 of the
registrant’s Current Report on Form 8-K (Date of Report: January 26,
2009), filed with the Securities and Exchange Commission on April 14,
2009].
|
|
10.93
|
Promissory
Note of Call Compliance, Inc., dated as of March 3, 2009, in the principal
amount of $50,000 and payable to Barry Brookstein [Incorporated by
reference to Exhibit 10.16 of the registrant’s Current Report on Form 8-K
(Date of Report: January 26, 2009), filed with the Securities and Exchange
Commission on April 14, 2009].
|
|
10.94
|
Corporate
Guaranty, dated March 3, 2009, of Compliance Systems Corporation in favor
of Barry Brookstein [Incorporated by reference to Exhibit 10.17 of the
registrant’s Current Report on Form 8-K (Date of Report: January 26,
2009), filed with the Securities and Exchange Commission on April 14,
2009].
|
|
10.95
|
Promissory
Note of Compliance Systems Corporation, dated as of March 2, 2009, in the
principal amount of $24,750 and payable to Pretect, Inc [Incorporated by
reference to Exhibit 10.18 of the registrant’s Current Report on Form 8-K
(Date of Report: January 26, 2009), filed with the Securities and Exchange
Commission on April 14, 2009].
|
|
10.96
|
Agreement
and Plan of Merger, dated as of February 9, 2010, with Execuserve Corp,
CSC/Execuserve Acquisition Corp, W.Thomas Eley, James A. Robinson, Jr.,
and Robin Rennockl [Incorporated by reference to Exhibit 10.18 of the
registrant’s Current Report on Form 8-K (Date of Report: February 5,
2010), filed with the Securities and Exchange Commission on February 5,
2010].
|
42
10.97
|
Purchase
of Software and Intellectual Property, dated April 7, 2010, from Thomas
Joseph Koty in exchange for Restricted shares and warrants [Incorporated
by reference to Exhibit 10.18 of the registrant’s Current Report on Form
8-K (Date of Report: January 26, 2009), filed with the Securities and
Exchange Commission on April 14, 2009].
|
|
10.98
|
Cancellation
of Lease, dated April 13, 2010, [Incorporated by reference to
Exhibit 10.18 of the registrant’s Current Report on Form 8-K (Date of
Report: January 26, 2009), filed with the Securities and Exchange
Commission on April 14, 2009].
|
|
14.1
|
Code
of Ethics. [Incorporated by reference to Exhibit 14.1 to our
Registration Statement on Form SB-2, filed with the SEC on May 12,
2006.]
|
|
16.1
|
Letter
of BP Audit Group, PLLC, dated October 10, 2007, addressed to the
SEC. [Incorporated by reference to Exhibit 16.1 to our Current
Report on Form 8-K (Date of Report: October 4, 2007), filed with the SEC
on October 10, 2007.]
|
|
21.1
|
Subsidiaries. [Incorporated
by reference to Exhibit 21.1 to our Annual Report on Form 10-KSB for the
year ended December 31, 2007, filed with the SEC on March 28,
2008.]
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Dean Garfinkel.
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Barry M.
Brookstein
|
|
32.1
|
Section
1350 Certification of Dean Garfinkel.
|
|
32.2
|
|
Section
1350 Certification of Barry M.
Brookstein.
|
43
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Compliance
System Corporation and Subsidiaries:
We have
audited the accompanying consolidated balance sheets of Compliance System
Corporation and Subsidiaries (the "Company") as of December 31, 2009 and 2008,
and the related consolidated statements of operations, stockholders’ deficiency,
and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2009 and 2008, and the consolidated results of their operations and their
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered continued losses
from operations since inception, and as of December 31, 2009, had stockholders’
and working capital deficiencies of $2,297,933 and $2,147,255,
respectively. These factors raise substantial doubt about the
Company’s ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Holtz
Rubenstein Reminick LLP
Melville,
New York
May 17,
2010
F-1
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
December 31,
|
||||||||
2009
|
2008
|
|||||||
ASSETS:
|
||||||||
Current
assets:
|
||||||||
Cash
|
$ | 26,195 | $ | 208,222 | ||||
Accounts
receivable, net
|
134,774 | 82,895 | ||||||
Prepaid
expenses and other current assets
|
142,172 | 231,312 | ||||||
Total
current assets
|
303,141 | 522,429 | ||||||
Property,
equipment and capitalized software costs, net
|
71,048 | 98,225 | ||||||
Deferred
loan costs, net
|
11,560 | 66,411 | ||||||
Patents,
net
|
18,785 | 20,285 | ||||||
Security
deposits
|
10,600 | 18,100 | ||||||
Total
Assets
|
$ | 415,134 | $ | 725,450 | ||||
LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY:
|
||||||||
Current
liabilities:
|
||||||||
Short-term
and demand notes payable
|
$ | 379,265 | $ | 310,925 | ||||
Accounts
payable and accrued expenses
|
842,924 | 414,255 | ||||||
Accrued
officers’ compensation
|
335,000 | — | ||||||
Secured
convertible debenture and accrued interest thereon
|
892,275 | 587,293 | ||||||
Current
maturities of long-term debt
|
933 | 50,933 | ||||||
Total
current liabilities
|
2,450,396 | 1,363,406 | ||||||
Long-term
debt, less current maturities
|
209,000 | — | ||||||
Deferred
service revenue and other deferred credits
|
53,670 | 57,006 | ||||||
Total
liabilities
|
2,713,067 | 1,420,412 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders’
deficiency:
|
||||||||
Convertible
Preferred Stock, $0.001 par value:
|
||||||||
Series
A: 2,500,000 shares authorized, 2,293,750 and 2,500,000 shares issued and
outstanding, respectively
|
2,294 | 2,500 | ||||||
Series
B: 1,500,000 shares authorized, 1,250,000 shares issued and
outstanding
|
1,250 | 1,250 | ||||||
Series
C: 2,000,000 shares authorized, 1,828,569 shares issued and
outstanding
|
1,829 | 1,829 | ||||||
Common
stock, $.001 par value; 2,000,000,000 shares authorized, 194,611,662 and
169,286,662 shares issued and outstanding, respectively
|
194,612 | 169,287 | ||||||
Additional
paid-in capital
|
5,738,510 | 5,843,999 | ||||||
Accumulated
deficit
|
(8,236,428 | ) | (6,713,827 | ) | ||||
Total
stockholders’ deficiency
|
(2,297,933 | ) | (694,962 | ) | ||||
Total
liabilities and stockholders’ deficiency
|
$ | 415,134 | $ | 725,450 |
See
accompanying notes to consolidated financial statements.
F-2
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Revenues
|
$ | 1,230,236 | $ | 1,857,242 | ||||
Cost
of revenues
|
579,914 | 930,169 | ||||||
Gross
margin
|
650,322 | 927,073 | ||||||
Operating
expenses:
|
||||||||
Selling,
general and administrative expenses
|
1,749,635 | 2,142,180 | ||||||
Interest
expense
|
266,025 | 143,431 | ||||||
Amortization
of loan costs and related financing expense
|
157,263 | 75,687 | ||||||
Total
operating expenses
|
2,172,923 | 2,361,298 | ||||||
Operating
loss
|
(1,522,601 | ) | (1,434,225 | ) | ||||
Gain
on extinguishment of debt, net
|
— | 8,525 | ||||||
Net
loss
|
(1,522,601 | ) | (1,425,700 | ) | ||||
Preferred
dividends
|
150,000 | 150,000 | ||||||
Loss
attributable to common shareholders
|
$ | (1,672,601 | ) | $ | (1,575,700 | ) | ||
Basic
and diluted per share data:
|
||||||||
Loss
per share
|
$ | (.01 | ) | $ | (.01 | ) | ||
Weighted
average shares outstanding
|
176,066,525 | 137,575,649 |
See
accompanying notes to consolidated financial statements.
F-3
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ (DEFICIENCY) EQUITY
Years
Ended December 31, 2009 and 2008
Preferred
Stock
|
Total
|
|||||||||||||||||||||||||||||||
Series
A
|
Series
B
|
Series
C
|
Shares
|
Amount
|
Additional
Paid-In
Capital
|
Accumulated
Deficiency
|
Shareholders’
Equity
(Deficiency)
|
|||||||||||||||||||||||||
Balances,
January 1 ,2008
|
$ | 2,500 | $ | 1,250 | $ | 1,886 | 128,149,238 | $ | 128,149 | $ | 5,588,900 | $ | (5,288,127 | ) | $ | 434,558 | ||||||||||||||||
Cashless
exercise of warrants
|
— | — | — | 2,756,757 | 2,757 | (2,757 | ) | — | — | |||||||||||||||||||||||
Common
stock issued for services
|
— | — | — | 27,666,667 | 27,667 | 162,333 | — | 190,000 | ||||||||||||||||||||||||
Common
stock issued to secured convertible debenture purchaser
|
— | — | — | 5,000,000 | 5,000 | 89,000 | — | 94,000 | ||||||||||||||||||||||||
Conversion
of 57,140 shares of Series C Preferred Stock to common
stock
|
— | — | (57 | ) | 5,714,000 | 5,714 | (5,657 | ) | — | — | ||||||||||||||||||||||
Stock
based compensation value
|
— | — | — | — | — | 162,000 | — | 162,000 | ||||||||||||||||||||||||
Warrant
issuance value
|
— | — | — | — | — | 180 | — | 180 | ||||||||||||||||||||||||
Preferred
dividends
|
— | — | — | — | — | (150,000 | ) | — | (150,000 | ) | ||||||||||||||||||||||
Net
loss
|
— | — | — | — | — | — | (1,425,700 | ) | (1,425,700 | ) | ||||||||||||||||||||||
Balances,
December 31, 2008
|
2,500 | 1,250 | 1,829 | 169,286,662 | 169,287 | 5,843,999 | (6,713,827 | ) | (694,962 | ) | ||||||||||||||||||||||
Common
stock issued for services
|
— | — | — | 100,000 | 100 | 4,900 | — | 5,000 | ||||||||||||||||||||||||
Common
stock issued to secured convertible debenture purchaser
|
— | — | — | 4,600,000 | 4,600 | 57,200 | — | 61,800 | ||||||||||||||||||||||||
Warrant
issuance value
|
— | — | — | — | — | 2,830 | — | 2,830 | ||||||||||||||||||||||||
Conversion
of 206,250 shares of Series A Preferred Stock to common
stock
|
(206 | ) | 20,625,000 | 20,625 | (20,419 | ) | — | — | ||||||||||||||||||||||||
Preferred
Dividends
|
— | — | — | — | — | (150,000 | ) | — | (150,000 | ) | ||||||||||||||||||||||
Net
loss
|
— | — | — | — | — | — | (1,522,601 | ) | (1,522,601 | ) | ||||||||||||||||||||||
Balances,
December 31, 2009
|
$ | 2,294 | $ | 1,250 | $ | 1,829 | 194,611,662 | $ | 194,612 | $ | 5,738,510 | $ | (8,236,428 | ) | $ | (2,297,933 | ) |
See
accompanying notes to consolidated financial statements.
F-4
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$ | (1,522,601 | ) | $ | (1,425,700 | ) | ||
Adjustments
to reconcile net loss to net cash used by operating
activities:
|
||||||||
(Gain)
on extinguishment of debt
|
— | (8,525 | ) | |||||
Depreciation
of property and equipment
|
36,113 | 108,694 | ||||||
Amortization
of deferred charges and intangibles
|
228,764 | 169,943 | ||||||
Value
of warrants expensed
|
1,430 | — | ||||||
Interest/penalty
accrued and not paid or imputed on related party
transactions
|
126,491 | 44,875 | ||||||
Stock
based compensation
|
— | 162,000 | ||||||
Changes
in assets and liabilities:
|
||||||||
Accounts
receivable
|
(51,879 | ) | 10,504 | |||||
Prepaid
expenses and other current assets
|
50,114 | 35,182 | ||||||
Accounts
payable and accrued expenses
|
308,419 | 81,093 | ||||||
Accrued
officers’ compensation
|
335,000 | (60,000 | ) | |||||
Deferred
credits
|
(3,336 | ) | (911 | ) | ||||
Total
adjustments
|
1,031,116 | 542,855 | ||||||
Net
cash used by operating activities
|
(491,485 | ) | (882,845 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Deposits
and other
|
7,500 | — | ||||||
Payments
for property, equipment and capitalized software
|
(8,936 | ) | (56,284 | ) | ||||
Net
cash used by investing activities
|
(1,436 | ) | (56,284 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Deferred
loan costs
|
(21,222 | ) | (105,500 | ) | ||||
Proceeds
from issuance of secured convertible debentures
|
180,000 | 600,000 | ||||||
Net
increases in short-term and demand loans
|
152,086 | (32,263 | ) | |||||
Proceeds
from related party loans
|
50,000 | — | ||||||
Preferred
stock dividends
|
— | (150,000 | ) | |||||
Repayments
of long-term debt
|
(50,000 | ) | (85,968 | ) | ||||
Net
cash provided by financing activities
|
310,864 | 226,269 | ||||||
NET
DECREASE IN CASH
|
(182,027 | ) | (712,860 | ) | ||||
CASH
– beginning of year
|
208,222 | 921,082 | ||||||
CASH
– end of year
|
$ | 26,165 | $ | 208,222 | ||||
SUPPLEMENTAL
INFORMATION:
|
||||||||
Interest
paid
|
$ | 139,533 | $ | 124,442 | ||||
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
||||||||
Common
stock issued for services
|
$ | 5,000 | $ | 190,000 | ||||
Value
of common stock issued to secured convertible debenture
purchaser
|
$ | 61,800 | $ | 94,000 | ||||
Conversion
of Series A Preferred Stock to common stock
|
$ | 206,250 | $ | 57,140 | ||||
Insurance
premiums financed
|
$ | 31,004 | $ | 32,279 | ||||
Preferred
Dividends declared and approved, but not paid
|
$ | 150,000 | $ | — | ||||
Issuance
of promissory note to vendor
|
$ | 24,750 | $ | — | ||||
Value
of warrants issued to debt holders
|
$ | 1,400 | $ | — | ||||
Cashless
exercise of stock warrants
|
$ | — | $ | 2,757 | ||||
Value
of warrants issued to investment banker
|
$ | — | $ | 180 |
See
accompanying notes to consolidated financial statements.
F-5
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Organization,
Business Description and Going
Concern
|
A.
|
Organization and
Business Description
|
Compliance
Systems Corporation (the “Company”) was incorporated in Nevada on November 17,
2003 under the name “GSA Publications, Inc.” (“GSA”). On February 10, 2006, the
Company’s business predecessor, Compliance Systems Corporation, a corporation
incorporated in Delaware on November 7, 2002 (“CSC”) pursuant to a corporate
reorganization of several closely related companies that had commenced
operations in December 2001, was merged with and into GSA (the “CSC/GSA
Merger”). CSC was treated as the surviving corporation of the CSC/GSA Merger for
accounting purposes due to the fact that the prior owners of CSC acquired
approximately 85% of the surviving corporation’s stock as a result of the
CSC/GSA Merger. Following the effectiveness of the CSC/GSA Merger, the surviving
corporation changed its name to “Compliance Systems Corporation” and, directly
and through the Company’s wholly-owned subsidiaries, began operating the
businesses previously conducted by CSC. Unless the context otherwise implies,
the term “Company” in these financial statements includes Company and its
wholly-owned subsidiaries on a consolidated basis.
The
Company, with headquarters in Glen Cove, New York, is in the business of
providing tools to assist telemarketing companies in complying with federal and
state “Do-Not-Call” laws and regulations collectively (“DNC regulations”). The
Company’s patented TeleBlock technology allows telemarketers to automatically
screen and block outbound calls in real-time against federal, state, third-party
and in-house do-not-call lists. In addition, the Company markets various on-line
guides, providing up-to-the-minute e-mail alerts of new and proposed
telemarketing legislation as well as access to regularly updated information
regarding DNC regulations governing the domestic and Canadian teleservices
industries. The Company also offers consultation services to telemarketing
companies focusing on their technologies, procedures and policies to determine
whether the telemarketer is in compliance with the various telemarketing laws
and regulations. Under generally accepted accounting principles, the Company
operates in a single business segment.
B.
|
Liquidity and Going
Concern
|
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has suffered continued
losses from operations since its inception. At December 31, 2009, the Company
had stockholders’ and working capital deficiencies of $2,297,933 and $2,147,255,
respectively. The Company’s stockholders’ and working capital deficiencies at
December 31, 2008 were $694,962 and $840,977, respectively. Between May and
September 2008, the Company sold secured convertible debentures in the aggregate
principal amount of $600,000 and 5,000,000 shares of the common stock, par value
$0.001 per share (the “Common Stock”), of the Company for total gross proceeds
of $600,000. Additional secured convertible debentures were sold between
September and November 2009 in the aggregate principal amount of $180,000 and
4,600,000 shares of the Common Stock of the Company for total gross proceeds of
$180,000. The Company’s debt holder also extended the maturity date based on new
notes issued in February 2010 for the secured convertible debentures sold during
2008. The 2008 debentures were originally scheduled to mature on November 6,
2009.
The
prolonged trend of net losses incurred over the last seven fiscal years raise
substantial doubt about the Company’s ability to continue as a going concern.
Such continuation is dependent upon the Company’s ability to obtain additional
financing, increase revenues, control costs and operate profitably. To this end,
the Company has retained an investment banking firm to explore acquisition
opportunities that may diversify the Company’s existing range of services, as
well as to assist the Company in obtaining additional financing as required.
There is no assurance that the Company will be successful in attaining these
objectives or that attaining such objectives will result in operating profits,
positive cash flows or an overall improvement in the Company’s financial
position in future periods. The accompanying financial statements do not include
any adjustments that might be necessary if the Company is unable to continue as
a going concern.
F-6
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
|
Summary
of Significant Accounting Policies
|
A.
|
Use of
Estimates
|
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures 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.
B.
|
Cash
|
At
certain times, bank balances may exceed coverage provided by the Federal Deposit
Insurance Corporation, however, due to the size and strength of the financial
institutions where such balances are held, such exposure to loss is considered
minimal.
C.
|
Accounts
Receivable
|
Accounts
receivable historically have not required any significant write-offs for credit
losses. Based on management’s evaluation of collectibility, an allowance for
doubtful accounts of approximately $8,710 and $8,950 at December 31, 2009 and
2008, respectively, has been provided applicable to certain peripheral service
and commission receivables. For the Company’s TeleBlock services, the Company’s
end-users remit their payments to telephone carriers as part of their monthly
payments. The telephone carriers are billed for the applicable portion of these
payments pursuant to contractual arrangements with a very large connectivity and
database provider, such database including among other things the Do-Not-Call
lists. Monthly remittances are made to the Company by this connectivity and
database provider. Based on the financial strength of this provider, the Company
does not provide an allowance for doubtful accounts for these
receivables.
D.
|
Property, Equipment,
Depreciation and
Amortization
|
Fixed
assets are stated at cost less accumulated depreciation. These assets, including
assets acquired under capital leases, are depreciated on a straight-line basis
over their estimated useful lives (generally two to five years). Leasehold
improvements are amortized over 39 to 55 months. Depreciation and amortization
expenses are classified according to their applicable operating expense
categories on the consolidated statements of operations. Repairs and maintenance
are expensed as incurred. Renewals and betterments are capitalized. When fixed
assets are retired or disposed of, the related cost and accumulated depreciation
or amortization are removed from the accounts and any gain or loss is recognized
in operations.
E.
|
Capitalized Software
Cost and Amortization
|
Included
in fixed assets is the capitalized cost of internal-use software, including
software used to upgrade and enhance processes supporting the Company’s
business. The Company capitalizes costs incurred during the application
development stage related to the development of internal-use software and
amortizes these costs over the estimated useful life of five years. Costs
incurred related to design or maintenance of internal-use software is expensed
as incurred.
F.
|
Amortization of
Deferred Loan and Related
Costs
|
Loan
costs of $62,680 were incurred in connection with the sale and issuance in May
2008 of a convertible debenture (the “Initial Agile Debenture”) in the principal
amount of $300,000 to Agile Opportunity Fund, LLC (“Agile”). These deferred loan
costs are being amortized to loan cost amortization over the eighteen month term
of the Initial Agile Debenture. Additional loan costs of $43,000 were incurred
in connection with the sale and issuance in September 2008 of a second
convertible debenture (the “Additional Agile Debenture”) in the principal amount
of $300,000 to Agile. These additional deferred loan costs are being amortized
over fourteen months, the term of the Additional Agile Debenture. As the Agile
Initial Debenture and/or Agile Additional Debenture (Collectively, the “Agile
Debentures”) are converted into Common Stock, if ever, the proportionate amounts
of unamortized loan costs related to the amounts of the Agile Debentures so
converted will be expensed. Loan cost amortization charged to expense with
respect to the Agile Debentures was $39,269 and $66,411 for the twelve months
ended December 31, 2008 and 2009, respectively. These costs were fully amortized
as of December 31, 2009.
F-7
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Additional
loan costs were incurred in connection with the sale and issuance in September
and November 2009 convertible debentures (2009 Debentures) in the principal
amount of $180,000 to Agile Opportunity Fund, LLC (“Agile”). The Company
incurred loan costs of $15,722 on the May 2009 debenture in the amount of
$100,000 that matured on March 21, 2010. Additional loan costs of $5,500 were
incurred on the November 2009 debenture that matures on May 22, 2010. These
deferred loan costs totaling $21,220 are being amortized over the respective
terms of the debentures. Loan cost amortization charged to expense with respect
to the 2009 Debentures was $9,662 for the twelve months ended December 31, 2009.
The balance of $11,560 will be charged to expense in 2010.
G.
|
Patents
|
The
Company owns the TeleBlock Do-Not-Call blocking patent, which is recorded at
cost and is being amortized over its expected 15-year life on a straight-line
basis. The Company also has an approved registration for its patent in Europe,
which is being amortized over 17.75 years through September 2024. The weighted
average expected life of the patents at December 31, 2009 is approximately 13.5
years.
H.
|
Long-Lived
Assets
|
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets might not be recoverable.
Conditions that would necessitate such review include a significant decline in
the observable market value of an asset, a significant change in the extent or
manner in which an asset is used or any other significant adverse change that
would indicate that the carrying amount of an asset or group of assets is not
recoverable. For long-lived assets used in operations, impairment losses only
are recorded if the asset’s carrying amount is not recoverable through its
undiscounted, probability-weighted cash flows. Impairment losses are measured as
the difference between the carrying amount and estimated fair value. Long-lived
assets are considered held for sale under applicable criteria. No assets were
held for sale at December 31, 2009 and 2008. There are no impairment charges in
the accompanying financial statements.
I.
|
Deferred Service
Revenue, Sub-Lease Income and Other Deferred
Credits
|
Deferred
revenue applicable to annual regulatory guide and registration guide service
contracts is recorded when payments are received, generally by credit card, and
is amortized ratably to income over the service period, typically twelve months.
Deferred sub-lease revenue is recognized over the one-year term of the
applicable sub-lease. Deferred rent expense, applicable to the Company’s renewed
premises lease, represents the excess of straight-line rent expense over rental
payments made.
J.
|
Share Based Payment
Arrangements
|
The
Company accounts for share based payment arrangements in accordance with
guidance provided by the Financial Accounting Standards Board Accounting
Standards Codification (“ASC”). This guidance addresses all forms of share-based
payment awards including shares issued under employee stock purchase plans,
stock options, restricted stock and stock appreciation rights, as well as share
grants and other awards issued to employees and non-employees under
free-standing arrangements. These awards are recorded at costs that are measured
at fair value on the awards’ grant date, based on the estimated number of awards
that are expected to vest and will result in a charge to
operations.
K.
|
Revenues
|
The
Company earns a fee for each telephone solicitor’s call attempt which generates
a query to a database of “Do Not Call” telephone numbers. These inquiries are
first routed through telephone carriers and then to a database distributor and
the volume of queries is tracked by the distributor and such data is available
to the Company for monitoring. Distributors submit monthly remittances together
with the related monthly activity reports. The Company has the contractual right
to audit such reports. The Company records its revenues based on the remittances
and reports submitted. Any applicable adjustments, which historically have not
been significant, are recorded when billed, upon resolution of the difference
with the distributor.
F-8
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
L.
|
Cost of
Revenues
|
The
Company’s cost of revenues is comprised of fees paid to distributors of its
patented technology and its database administrators as well as depreciation of
the capitalized costs of software used to maintain the databases.
M.
|
Advertising
|
All
advertising costs are expensed as incurred. Such costs were $216,991 and
$243,692 for the years ended December 31, 2009 and 2008,
respectively.
N.
|
Income
Taxes
|
The
Company's policy for recording interest and penalties associated with audits is
to record such items as a component of income before income taxes. Penalties are
recorded in other expense and interest paid or received is recorded in interest
expense or interest income, respectively, in the statement of operations. There
were no amounts accrued for penalties or interest as of or during the years
ended December 31, 2009 and 2008. The Company does not expect its unrecognized
tax benefit position to change during the next twelve months. Management is
currently unaware of any issues under review that could result in significant
payments, accruals or material deviations from its current
position.
Net
operating losses (“NOLs”) may be utilized under certain conditions as a
deduction against future income to offset against future taxes. Internal Revenue
Code (“IRC”) Section 382 and the regulations promulgated under IRC Section 382
limit the utilization of NOLs due to ownership changes. If it is determined that
a change in control has taken place, utilization of the Company’s NOLs will be
subject to severe limitations in future periods, which would have an effect of
eliminating the future tax benefits of the NOLs. Income tax benefits resulting
from net losses incurred for the twelve months ended December 31, 2009 and 2008
were not recognized as the Company’s annual effective tax rate for both periods
was estimated to be 0%.
The
Company sustained taxable losses of approximately $1,224,000 and $1,394,000 for
the years ended December 31, 2009 and 2008, respectively.
O.
|
Loss Per
Share
|
Basic and
diluted loss per common share is computed on a historical basis by dividing net
loss by the weighted average number of common shares actually outstanding. Due
to losses, 46,139,514 shares of Common Stock issuable upon exercise of
outstanding warrants and 45 million shares of Common Stock issuable upon
exercise of outstanding options, as well as an aggregate of 537,231,900 shares
of Common Stock issuable upon the conversion of outstanding Preferred Stock, are
anti-dilutive, and accordingly, are not included in the calculation of diluted
loss per share.
P.
|
Fair Value of
Financial Instruments
|
The
carrying amounts of cash, accounts receivable, current liabilities and long-term
debt reported on the balance sheet approximate their fair value. The fair value
of accounts receivable and current liabilities approximate their book value due
to the short maturity of those items. With respect to long-term debt, the
Company believes the fair value approximates book value based on the level of
credit risk assumed by the applicable lender.
F-9
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Q.
|
Recent Accounting
Pronouncements
|
In March
2008, FASB issued accounting guidance which amends and expands the disclosure
requirements for derivative instruments to require qualitative disclosure about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of and gains and losses on derivative instruments and
disclosures about credit-risk-related contingent features in derivative
agreements. The guidance is effective for the Company beginning with the
Company’s fiscal year ending December 31, 2009. The Company is required to
increase disclosures in the financial statements related to derivative
instruments held by the Company, if any.
In April
2008, FASB issued accounting guidance for determining the useful lives of
intangible assets. The factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of an intangible
asset were outlined. This guidance is effective for financial statements issued
for fiscal years beginning after December 15, 2008 and interim periods within
those years. The adoption of the guidance by the Company did not have a material
effect on the Company’s financial statements.
In June
2008, FASB issued guidance for determining whether instruments granted in
share-based payment transactions are participating securities prior to vesting
and, therefore, need to be included in the earnings allocation in computing
earnings per share. This guidance is effective for financial statements issued
for fiscal years beginning after December 15, 2008 and interim periods within
those years. The adoption of this guidance by the Company did not have a
material effect on the Company’s financial statements.
In June
2008, the Emerging Issues Task Force (“EITF”) provided guidance on how to
determine if certain instruments (or embedded features) are considered indexed
to a company’s own stock, including instruments similar to warrants issued by a
company to purchase its stock. This guidance requires companies to use a
two-step approach to evaluate an instrument’s contingent exercise and settlement
provisions in determining whether the instrument should be indexed to its own
stock. Although it is effective for fiscal years beginning after December 15,
2008, the guidance provides that any outstanding instrument at the adoption date
is required to be restated for accounting purposes through a cumulative
adjustment to retained earnings as of the adoption date. The adoption of this
guidance did not have a material effect on the Company’s financial
statements.
In May
2009, FASB issued guidance which establishes general standards of accounting for
and disclosures of events that occur after the balance sheet date of financial
statements but before the financial statements are issued or available to be
issued. This guidance requires the disclosure of the date through which an
entity has evaluated subsequent events, as well as whether the date is the date
the financial statements were issued or the date the financial statements were
available to be issued. The guidance is effective for interim and annual periods
ending after June 15, 2009 and was adopted by the Company in the second quarter
of 2009. The adoption of this guidance did not have any impact on the Company’s
results of operations or financial position.
In June
2009, FASB established the FASB Accounting Standards Codification (“ASC”) as the
single source of authoritative U.S. accounting and reporting standards for
non-governmental entities. In addition to guidance issued by the Securities and
Exchange Commission (“SEC”), the ASC significantly changes the way financial
statement preparers, auditors and academics perform accounting research. ASC is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The establishment of ASC did not have any material
impact on the Company’s results of operations or financial
position.
Other
accounting guidance that has been issued or proposed by FASB and other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the Company’s financial statements
upon their respective adoptions.
F-10
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3.
|
Property,
Equipment and Capitalized Software
Cost
|
Major
categories of property, equipment and capitalized software cost at December 31,
2009 and 2008 consist of the following:
Estimated
|
December 31,
|
|||||||||
Useful Life
|
2009
|
2008
|
||||||||
Furniture
and fixtures
|
5
years
|
$ | 379,593 | $ | 370,057 | |||||
Leasehold
improvements
|
39-55
months
|
14,048 | 14,048 | |||||||
Capitalized
software cost
|
2-5
years
|
505,099 | 505,699 | |||||||
Total,
at cost
|
898,740 | 889,804 | ||||||||
Less:
Accumulated depreciation and amortization
|
827,692 | 791,579 | ||||||||
Property,
equipment and capitalized software cost, net
|
$ | 71,048 | $ | 98,225 |
Depreciation
and amortization expense of property, equipment and capitalized software was
$36,113 and $108,694 for the years ended December 31, 2009 and 2008,
respectively.
4.
|
Patents
|
Patents
at December 31, 2009 and 2008 consist of the following:
Remaining
|
December 31,
|
|||||||||
Useful Life
|
2009
|
2008
|
||||||||
European
patent
|
14.8
years
|
$ | 19,963 | $ | 19,963 | |||||
United
States patent
|
7.0
years
|
6,500 | 6,500 | |||||||
Total,
at cost
|
26,463 | 26,463 | ||||||||
Less:
Accumulated amortization
|
7,678 | 6,178 | ||||||||
Patents,
net
|
$ | 18,785 | $ | 20,285 |
The
European patent was approved in February 2006. Amortization expense
was $1,500 and $1,500 for the years ended December 31, 2009 and 2008,
respectively. Estimated annual amortization for both patents is
approximately $1,500 per year through 2016, $1,070 per year thereafter through
2023 and $792 in 2024.
5.
|
Short-Term
and Demand Notes Payable
|
A.
|
Secured Demand
Note
|
In
September 2006, the Company’s principal subsidiary executed a secured $150,000
promissory note and related security agreement with a third-party
entity. Interest at 12% per annum is payable monthly in arrears and
the note principal is due on demand. The note was collateralized by
the accounts receivable of the subsidiary’s principal customers and is
unconditionally guaranteed by the Company.
As of
March 31, 2009, the Company entered into a Loan Modification Agreement with
Nascap Corp (“Nascap”). The original Nascap note was amended and
restated as a revolving line of credit promissory note (“Nascap Restated Note”)
in the principal amount not to exceed $750,000. The Nascap Restated
Note contains the same terms and conditions as the original note, except for the
revolving line of credit nature of the debt. As consideration for
entering into the Loan Modification Agreement, the Company agreed to issue
Nascap twenty Class A and twenty Class B warrants for each $1.00 of principal
outstanding under the Nascap Restated Note on April 30, 2009. Each
Class A and Class B warrant entitles the holder to purchase one share of the
Company’s common stock at $0.05 per share. The Class B warrants
require the holder to pay the exercise price in the form of cancellation of
amounts outstanding under the Nascap Restated Note prior the payment of the
exercise price in the form of cash. Accrued and unpaid interest on
the Nascap note totaled $10,500 at December 31, 2009. At
December 31, 2009 and 2008, respectively, $350,000 and $150,000 was outstanding
on this note.
F-11
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
B.
|
Unsecured Demand Note
Payable
|
The
Company had outstanding unsecured demand loans due a stockholder in the
aggregate principal amount of $150,000 at December 31, 2008. This demand loan
bore interest at the rate of 18% per annum, payable monthly in
arrears.
As of
June 24, 2009, the Company entered into a Promissory Note Exchange whereby
Ponzio delivered and assigned to the Company the promissory note of CCI, dated
April 27, 2006, in the principal amount of $150,000 and payable to Ponzio in
exchange for the Company’s issuing and delivering to Ponzio the Company’s 18%
Senior Subordinated Secured Promissory Note, dated June 24, 2009, in the
principal amount of $150,000 and payable to Ponzio (the “Ponzio New
Note”).
The
Ponzio New Note has a stated maturity of January 1, 2011 and bears interest at
the rate of 18% per annum (20%, in the case of a default under the Ponzio New
Note), with interest payable monthly in arrears. Accordingly, the
balance outstanding as of December 31, 2009 is included in long term
debt.
C.
|
Short-Term Insurance
Premium Financing
|
At
December 31, 2009 and 2008, the Company had an outstanding balance of $10,515
and $10,925, respectively, on loans utilized to fund certain financed insurance
premiums. Both loans are payable over 9 month terms and are being
paid according to their respective terms.
D. Pretect
Note
The
Pretect obligation arose from consulting services provided by Pretect in
connection with the Company’s review of its internal control over financial
reporting and disclosure controls and procedures. The Pretect Note
provides for no interest (except in the event of default) and repayment of the
principal amount in twelve equal monthly installments, commencing on April 1,
2009. The Balance outstanding as of December 31, 2009 is
$8,250.
6. Agile
Debentures
A. Agile
Original 2008 Debentures –
On May 6,
2008, the Company entered into a Securities Purchase Agreement (the “Agile
Purchase Agreement”) with Agile Opportunity Fund LLC (“Agile”). The Agile
Purchase Agreement contemplated the Company’s immediate sale to Agile of a
secured convertible debenture of the Company (the “Initial Original Agile
Debenture”) in the original principal amount of $300,000 and having a maturity
date of November 6, 2009, and a potential sale of a second secured convertible
debenture (the “Additional Original Agile Debenture” and, collectively with the
Initial Original Agile Debentures, the “Agile Original 2008 Debentures”) in the
same original principal amount and having the same maturity date as the Initial
Original Agile Debenture. The purchase price of each of the Agile Original 2008
Debentures was $300,000. The Agile Purchase Agreement further provided that, for
no further consideration, the Company issue to Agile 3 million shares (each, an
“Initial Original Equity Incentive Share”) of Company common stock in connection
with the sale and issuance of the Initial Original Agile Debenture and an
additional 2 million shares (each, an “Additional Original Equity Incentive
Share” and, collectively with the Initial Original Equity Incentive Shares, the
“Agile Original Equity Incentive Shares”) of Company common stock in connection
with the sale and issuance of the Additional Original Agile
Debenture.
The Agile
Original 2008 Debentures bear interest at the rate of 15% per annum, payable
monthly, although the Agile Original 2008 Debentures further provide that, in
addition to interest, Agile is entitled to an additional payment, at maturity or
whenever principal is paid, such that Agile’s annualized return on the amount of
principal paid equals 30%. The principal and all accrued and unpaid
interest under the Agile Original 2008 Debentures are, at the option of Agile,
convertible into shares of Company common stock at a conversion price of $0.05
per share (subject to an anti-dilution adjustment).
F-12
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
Company’s obligations under the Agile Original 2008 Debentures are, with a
limited exception, secured by a first priority security interest in all of the
Company’s assets and the Company’s two executive officers and sole members of
the Company’s board of directors, Dean Garfinkel and Barry M. Brookstein, as
well as an entity wholly-owned by Brookstein, have provided limited non-recourse
guarantees and pledges of all of their shares of Company serial preferred stock
as further security for the full satisfaction of all of the Company’s
obligations under the Agile Original 2008 Debentures.
The
Initial Equity Incentive Shares were collectively valued at $66,000. The cost of
these shares was recorded as a discount on the Initial Original Agile Debenture
and is being amortized over the Initial Original Agile Debenture’s eighteen
month term. The Additional Original Equity Incentive Shares were valued at
$28,000 and such cost is being amortized over the fourteen month remaining term
of the Agile Original 2008 Debentures.
Effective
as of January 31, 2009, the Company entered into an Agreement to Amend and
Restate with Agile pursuant to which the Agile Original 2008 Debentures were
amended to allow the Company, in certain circumstances, a five business day cure
period prior to the formal declaration of an “Event of Default.” Prior to this
amendment, Agile was not required to formally notify the Company before the
declaration of an Event of Default.
B.
Agile September 2009 Debenture –
On
September 21, 2009, the Company sold and issued to Agile a Secured Convertible
Debenture (the “Agile September 2009 Debenture”) in the original principal
amount of $100,000 pursuant to the Omnibus Amendment and Securities Purchase
Agreement, dated as of September 18, 2009 (the “Agile September 2009 Securities
Purchase Agreement”), between the Company and Agile. The Agile September 2009
Debenture was rolled into a new note effective February 2010.
The Agile
September 2009 Debenture is to bear interest at the rate of 15% per annum,
payable monthly, although the Agile September 2009 Debenture further provides
that, in addition to interest, Agile is entitled to an additional payment, at
maturity or whenever principal is paid, such that Agile’s annualized return on
the amount of principal payment so paid equals 30%. The principal and all
accrued and unpaid interest under the Agile September 2009 Debenture are, at the
option of Agile, convertible into shares (each, an “Agile September 2009
Debenture Share”) of Company common stock at a conversion price of $0.05 per
share (subject to anti-dilution adjustment).
The
Company’s obligations under the Agile September 2009 Debenture are secured by
all of its assets and are subject to limited non-recourse guarantees of Dean R.
Garfinkel, the Company’s chief executive officer, Barry M. Brookstein, the
Company’s chief financial officer, and an entity in which Brookstein is the sole
owner. Such guarantees have been secured by a pledge of the preferred stock
owned by the guarantors.
C.
Agile November 2009 Debenture –
On
November 23, 2009, the Company sold and issued to a Secured Convertible
Debenture (the “Agile November 2009 Debenture”) in the original principal amount
of $80,000 pursuant to the Second Omnibus Amendment and Securities Purchase
Agreement, dated as of November 23, 2009 (the “Agile November 2009 Securities
Purchase Agreement”), between the Company and Agile. The Agile November 2009
Debenture was converted to a new note effective February 2010..
The Agile
November 2009 Debenture is to bear interest at the rate of 15% per annum,
payable monthly, although the Agile November 2009 Debenture further provides
that, in addition to interest, Agile is entitled to an additional payment, at
maturity or whenever principal is paid, such that Agile’s annualized return on
the amount of principal payment so paid equals 30%. The principal and all
accrued and unpaid interest under the Agile November 2009 Debenture is, at the
option of Agile, convertible into shares (each, an “Agile November 2009
Debenture Share”) of Common Stock at a conversion price of $0.05 per share
(subject to anti-dilution adjustment).
F-13
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
Company’s obligations under the Agile November 2009 Debenture are secured by all
of the assets of the Corporation and are subject to limited non-recourse
guarantees of Dean R. Garfinkel, the Company’s chief executive officer, Barry M.
Brookstein, the Company’s chief financial officer, and an entity in which Mr.
Brookstein is the sole owner. Such guarantees have been secured by a
pledge of the preferred stock owned by the guarantors.
The total
gross consideration received from Agile in connection with the sale and issuance
of the Agile November 2009 Debenture, the extension of the maturity date of the
2008 Debentures and the issuance of the 2.6 million Agile November 2009 Equity
Incentive Shares was $80,000.
7.
|
Long-Term
Debt
|
Long-term
debt at December 31, 2009 and 2008 consists of the following:
December 31,
|
||||||||
2008
|
2008
|
|||||||
Notes
payable and accrued interest to officer/stockholder (A)
|
$ | 53,183 | $ | 933 | ||||
Other
unsecured debt, due March 31, 2009
|
— | 50,000 | ||||||
Other
secured debt and accrued interest (B)
|
156,750 | — | ||||||
Total
long-term debt
|
209,933 | 50,933 | ||||||
Current
maturities of long-term debt
|
933 | 50,933 | ||||||
Long-term
debt less current maturities
|
$ | 209,000 | $ | — |
(A) Brookstein
Promissory Note Exchange Agreement -
As of
June 24, 2009, the Company entered in to a Promissory Note Exchange Agreement
(the “Brookstein Exchange Agreement”) with Barry M. Brookstein (“Brookstein”)
and simultaneously consummated the transactions contemplated by the Brookstein
Exchange Agreement. Brookstein, a director and principal stockholder of the
Company, is the Company’s chief financial officer. Under the
Brookstein Exchange Agreement, Brookstein delivered and assigned a promissory
note of Call Compliance, Inc., one of the Company’s wholly-owned subsidiaries
(“CCI”), dated March 3, 2009, in the principal amount of $50,000 and payable to
Brookstein (the “Brookstein Original Note”) in exchange for the Company issuing
and delivering to Brookstein the Company’s 18% Senior Subordinated Secured
Promissory Note, dated June 24, 2009, in the principal amount of $50,000 payable
to Brookstein (the “Brookstein New Note”). In connection with such
exchange, the Company granted Brookstein a senior subordinated security interest
(the “Brookstein Security Interest”) in all of the Company’s assets to secure
the Company’s obligations under the Brookstein New Note, as evidenced and
subject to the terms and conditions of a Security Agreement, dated June 24, 2009
(the “Brookstein Security Agreement”), between Brookstein and the
Company. As further consideration for entering into the Brookstein
Exchange Agreement, Brookstein was granted 1 million Class “A” common stock
purchase warrants of the Company (each, a “Brookstein Class A Warrant”) and 1
million class “B” common stock purchase warrants of the Company (each, a
“Brookstein Class B Warrant”). Each of these warrants entitles its
holder to purchase one share of Company common stock at a purchase price of
$0.05 per share. The Brookstein Class A Warrants and Brookstein Class B Warrants
expire on June 23, 2014. If any amount (principal or interest) is
outstanding under the Brookstein New Note, the purchase price upon exercise of
any of the Brookstein Class B Warrants must be paid by the reduction of the
amount outstanding under the Brookstein New Note.
The
Brookstein Original Note was due on demand and bore interest at the rate of 18%
per annum, payable monthly in arrears.
The
Brookstein New Note has a stated maturity of January 1, 2011 and bears interest
at the rate of 18% per annum (20%, in the case of a default under the Brookstein
New Note), with interest payable monthly in arrears. As of December
31, 2009, accrued and unpaid interest totaled $2,250.
F-14
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(B) Ponzio
Promissory Note Exchange Agreement -
As of
June 24, 2009, the Company entered into a Promissory Note Exchange Agreement
(the “Ponzio Exchange Agreement”) with Henry A Ponzio (“Ponzio”) and
simultaneously consummated the transactions contemplated by the Ponzio Exchange
Agreement. Under the Ponzio Exchange Agreement, Ponzio delivered and assigned to
the Company a promissory note of CCI, dated April 27, 2006, in the principal
amount of $150,000 and payable to Ponzio (the “Ponzio Original Note”) in
exchange for the Company’s issuing and delivering to Ponzio the Company’s 18%
Senior Subordinated Secured Promissory Note, dated June 24, 2009, in the
principal amount of $150,000 and payable to Ponzio (the “Ponzio New Note”). In
connection with such exchange, the Company granted Ponzio a senior subordinated
security interest (the “Ponzio Security Interest”) in all of the Company’s
assets to secure the Company’s obligations under the Ponzio New Note, as
evidenced and subject to the terms and conditions of a Security Agreement, dated
June 24, 2009 (the “Ponzio Security Agreement”), between Ponzio and the Company.
As further consideration for entering into the Ponzio Exchange Agreement, Ponzio
was granted 3 million Class A warrants (each, a “Ponzio Class A Warrant”) and 3
million Class B warrants (each, a “Ponzio Class B Warrant”). Each of these
warrants entitles its holder to purchase one share of common stock (each, a
“Warrant Share”) at a purchase price of $0.05 per Warrant Share. The Ponzio
Class A Warrants and Ponzio Class B Warrants expire on June 23, 2014. If any
amount (principal or interest) is outstanding under the Ponzio New Note, the
purchase price upon exercise of any of the Ponzio Class B Warrants must be paid
by the reduction of such amounts outstanding under the Ponzio New
Note.
The
Ponzio Original Note was due on demand and bore interest at the rate of 18% per
annum, payable monthly in arrears.
The
Ponzio New Note has a stated maturity of January 1, 2011 and bears interest at
the rate of 18% per annum (20%, in the case of a default under the Ponzio New
Note), with interest payable monthly in arrears. Accrued and unpaid
interest as of December 31, 2009 totaled $6,750.
8.
|
Income
Taxes
|
The
Company has identified its federal tax return and its state tax return in New
York as "major" tax jurisdictions. Based on the Company's evaluation,
it has concluded that there are no significant uncertain tax positions requiring
recognition in the Company's financial statements. The Company's
evaluation was performed for the 2006 through 2009 tax years, which years
include the 2006 tax year of its predecessor company, GSA Publications, Inc.,
and the Company’s C Corporation tax years of 2006 through 2009. The
Company believes that its income tax positions and deductions would be sustained
on audit and does not anticipate any adjustments that will result in a material
change to its financial position.
The
Company's policy for recording interest and penalties associated with audits is
to record such items as a component of income before income
taxes. Penalties are recorded in other expense and interest paid or
received is recorded in interest expense or interest income, respectively, in
the statement of operations. There were no amounts accrued for
penalties or interest as of or during the years ended December 31, 2009 and
2008. The Company does not expect its unrecognized tax benefit
position to change during the next twelve months. Management is
currently unaware of any issues under review that could result in significant
payments, accruals or material deviations from its position.
In
connection with the CSC/GSA Merger in February 2006, the Company’s and its
subsidiaries’ “S” corporation elections were terminated. For the
2009, 2008, 2007 and 2006 fiscal years, the Company sustained tax losses of
$1,224,000, $1,394,000, $1,322,000 and $839,000,
respectively. Accordingly, there were no provisions for current or
deferred federal or state income taxes for these years. The income
tax benefit for these years differs from the amount of income tax determined by
applying the statutory federal income tax rate to continuing operations before
income taxes as a result of the following:
Federal
income tax benefit at statutory rate
|
34 | % | ||
Loss
not producing tax benefits
|
(34 | ) | ||
Income
tax benefit
|
— | % |
F-15
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
Company has provided a valuation allowance against the total of the net deferred
tax assets due to the uncertainty of future realization. The increase
in this valuation allowance for the year ended December 31, 2009 was $516,955
and the increase in this allowance for the year ended December 31, 2008 was
$251,720. The components of deferred tax assets and liabilities at
December 31, 2009 and 2008 are as follows:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Current
Deferred Tax Liabilities:
|
||||||||
Prepaid
expenses
|
$ | (7,394 | ) | $ | (3,938 | ) | ||
Total
current deferred tax liabilities
|
(7,394 | ) | (3,938 | ) | ||||
Non-Current
Deferred Tax Assets (Liabilities):
|
||||||||
Property,
equipment and capitalized software
|
8,538 | 51 | ||||||
Unamortized
revenue rights
|
(140,344 | ) | (163,467 | ) | ||||
Deferred
income and deferred credits
|
21,468 | 22,322 | ||||||
Net
operating loss carry-forward
|
1,911,839 | 1,422,183 | ||||||
Total
non-current deferred tax assets
|
1,801,501 | 1,281,089 | ||||||
Total
deferred tax assets
|
1,794,106 | 1,277,151 | ||||||
Less:
Valuation allowance
|
1,794,106 | 1,277,151 | ||||||
Net
deferred tax asset
|
$ | 0 | $ | 0 |
9.
|
Commitments
and Contingencies
|
A.
|
Minimum Operating
Lease Commitments
|
The
Company leased office space in Glen Cove, New York. The lease
requires minimum annual rentals plus operating expenses through July 31,
2011. The Company, through December 15, 2008, sublet a portion of
such facilities on a month to month basis. Rent expense, including
deferred rent expense, net of sublease income, for the year ended December 31,
2009 and 2008 was:
Gross Rent
Expense
|
Sublease
Income
|
Net Rent
Expense
|
||||||||||
Year
ended December 31, 2009
|
$ | 64,267 | — | $ | 64,267 | |||||||
Year
ended December 31, 2008
|
$ | 95,560 | $ | (36,333 | ) | $ | 59,227 |
The
Company was able to terminate its lease effective December 31, 2009 (Reference
Note 13).
B.
|
Employment Agreements
and Contribution of Accrued
Salary
|
The
Company has employment agreements with its two executive officers through
November 30, 2011. During 2007, the officers waived one-half of their salary for
a one-year period ending July 1, 2008. These officers deferred
salaries totaling $335,000 during 2009. Minimum annual aggregate
amounts due under these employment agreements are as follows: 2010:
$480,000 and 2011: $440,000.
C. Retention of Marketing
Communications Agency
On
September 1, 2008, the Company retained the services of Greenstone Fontana
Corp., a marketing communications agency, to execute a marketing communications
program in accordance with the Company’s existing business plan and develop an
advertising campaign including website development and enhancements, as well as
the preparation of all relevant advertising materials inclusive of catalogs,
data sheet and folders. The one-year agreement requires monthly cash payments of
$10,000 and the issuance of three-year warrants to purchase up to 1.2 million
shares of Common Stock, issuable in twelve equal monthly installments through
September 2009. The warrants are exercisable at a purchase price of $0.05 per
share. This agreement was terminated effective July 1, 2009. Accordingly,
warrants were issued only during the first six months of 2009. The warrants were
valued using a Black-Scholes option pricing model.
F-16
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
D. Retention of Investor and
Public Relations Consultant
Pursuant
to a Consulting Agreement, executed as of December 1, 2008, the Company retained
the services of Summit Trading Limited, an investor and public relations
consultant, to provide one or more plans, for coordination in executing the
agreed-upon plan, and for using various business services as agreed by both the
Company and Summit. The plans and services may include the following:
consulting with the Company’s management concerning marketing surveys,
availability to expand investor base, investor support, strategic business
planning, broker relations, conducting due diligence meetings, attendance at
conventions and trade shows, assistance in the preparation and dissemination of
press releases and stockholder communications, review and assistance in updating
a business plan, review and advise on the capital structure for the Company,
assistance in the development of an acquisition profile and structure,
recommending financing alternatives and sources and consulting on corporate
finance and/or investment banking issues. This agreement is
limited to the United States and has a term of two years. The Company
has the right, but not the obligation, to renew this agreement. The
agreement required the issuance of 26,666,667 shares of Common Stock that were
valued at $140,000. This value was amortized to expense over a
two-year period beginning December 1, 2008.
10.
|
Concentrations
|
For the
years ended December 31, 2009 and 2008, sales through the Company’s principal
distributor comprised approximately 82% and 88%, respectively, of the Company’s
revenues. At December 31, 2009 and 2008, amounts due from the
principal distributor comprised 79% and 84%, respectively, of the Company’s
trade receivables.
11.
|
Related Party
Transactions
|
A.
|
Related Party
Loan
|
On March
3, 2009, one the Company’s senior executive officers and principal stockholders
loaned the Company $50,000, due on demand, with interest at 18%. On
June 24, 2009, this note was exchanged for a secured note with a stated maturity
date of January 1, 2011. The note bears interest at
18%. As of December 31, 2009 accrued and unpaid interest totaled
$2,250.
B.
|
Preferred Stock
Dividends
|
The
Company has failed to pay dividends on the 1.25 million outstanding shares of
its Series B Senior Subordinated Convertible Voting Preferred Stock (the “Series
B Preferred Stock”) that were payable on the last day of each month during
2009. Dividends on the Series B Preferred Stock may only be paid out
of funds legally available for such purpose. Under Nevada law,
generally, a corporation’s distribution to stockholders may only be made if,
after giving effect to such distribution, (i) the corporation would be able to
pay its debts as they become due in the usual course of action and (ii) the
corporation’s total assets equal or exceed the sum of the corporation’s
liabilities plus the amount that would be needed, if the corporation was to be
dissolved at the time of distribution, to satisfy the preferential rights upon
dissolution of stockholders whose rights are superior to those receiving the
distribution.
F-17
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
All of
the outstanding shares of Series B Preferred Stock are held by Barry M.
Brookstein, the chief financial officer and principal stockholder, and Spirits
Management, Inc. (“Spirits”), an entity controlled by Brookstein. Although the
Company has been and currently is unable to pay the Series B Preferred Stock
dividends when due, the dividends have been and are continuing to be accrued
until such time as the monthly dividends can lawfully be paid under Nevada law.
As of December 31, 2009, the amount of dividends not paid on the Series B
Preferred Stock totaled $150,000, consisting of $60,000 due Brookstein and
$90,000 due Spirits. To compensate the holders of the outstanding Series B
Preferred Stock for the failure to pay dividends when due, the Company has
agreed to grant five-year warrants (each, a “Dividend Accrual Warrant”) to
purchase shares (each, a “Dividend Accrual Warrant Share”) of Company common
stock to such holders at $0.05 per Dividend Accrual Warrant Share. The holders
are to be granted, as of the last day of each fiscal quarter, 40 Deferred
Accrual Warrants for every $1 of dividend accrued during the prior three month
period. Accordingly, the Company granted 1.2 million Dividend Accrual Warrants
to Brookstein and 1.8 million Dividend Accrual Warrants to Spirits as of June
30, 2009 and granted 600,000 Dividend Accrual Warrants to Brookstein and 900,000
Dividend Accrual Warrants to Spirits as of September 30, 2009 for dividends
accrued during the third quarter 2009
.
During
the year ended December 31, 2008, the Company paid dividends of $150,000 on its
outstanding Series B Preferred Stock.
12.
|
Common
Stock Transactions
|
A.
|
Treasury Stock and
Warrants
|
In May
2005, the Company purchased 4,097,570 shares of Common Stock from a then senior
executive officer, director and principal stockholder who was resigning her
positions with the Company. The consideration for the treasury shares
included warrants to purchase 819,514 shares of Common Stock with an exercise
price of $0.30506 per share. These warrants, which expire on June 1,
2010, were subsequently assigned to another senior executive officer, director
and principal stockholder pursuant to a domestic relations settlement
agreement.
B.
|
Issuance and Exercise
Debt Extension Warrants
|
On
September 24, 2007, in exchange for one-year extensions of the 2006 Debentures
and 2007 Debenture, the Company issued five-year warrants to purchase an
aggregate of 3 million shares of Common Stock at an exercise price of $0.004 per
share. These warrants provided for cashless exercise at the option of
the holders.
On
January 29, 2008, the holders exercised their warrants, electing cashless
exercise. The Company issued a total of 2,756,757 shares of Common
Stock to the warrant holders, which issuance fully satisfied all of the
Company’s obligations under the warrants.
C.
|
Issuance of Non-Plan
Common Stock Purchase
Options
|
On
January 4, 2008, the Company’s board of directors granted five-year options to
purchase a total of 45 million shares of Common Stock. Of such
options, options to purchase an aggregate of 30 million shares were granted to
the Company’s two senior executive officers, directors and principal
stockholders executive officers and options to purchase an additional aggregate
15 million shares were granted to two other employees. The options
are exercisable through January 4, 2013 and have an exercise price of $0.026 per
share, the per share closing market price of the Common Stock on the date of
grant. The options are subject to earlier expiration as follows: (a)
on the date of termination of employment for cause; or (b) one year after
termination of employment: (i) voluntarily by the employee, (ii) by the Company,
but without cause, or (iii) by reason of the optionee’s death or permanent and
total disability. The Company recorded a charge to operations of
$162,000 in connection with the grant of these option awards. The
options were valued using a Black-Scholes option pricing model with the
following additional inputs: Expected term: 2.5 years; risk-free
interest rate: 2.885%; and volatility: 16.92%. The volatility rate
used was based upon an average volatility rate for two entities providing
telecommunications services and who are customers of the Company. The
Company did not use the volatility rate for the Common Stock as the Common Stock
has not been trading for the sufficient length of time to accurately compute its
volatility.
F-18
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
D.
|
Shares/Warrants Issued
in Connection with the Sale and Issuance of the Initial Agile
Debenture
|
In
connection with the sale and issuance of the Initial Agile Debenture, and for no
further consideration, the Company issued to Agile 3 million shares of Common
Stock (the “Initial Equity Incentive Shares”). The Initial Equity
Incentive Shares were valued at $66,000; such valuation being based on the
closing price of Common Stock of $0.022 per share on May 5, 2008, the business
day prior to the sale and issuance of the Initial Agile
Debenture. The cost of the Initial Equity Incentive Shares was
recorded as a discount on the Initial Agile Debenture and is being amortized
over the eighteen month term of the Initial Agile Debenture.
The
Company issued to its investment banker, Cresta Capital Strategies, LLC,
five-year warrants (the “Cresta Initial Warrants”) to purchase 900,000 shares of
Common Stock (the “Cresta Warrant Shares”), at a purchase price of $0.05 per
share, in connection with the Company’s sale and issuance of the Initial Agile
Debenture and the issuance of the 3 million Initial Equity Incentive Shares to
Agile. The Cresta Initial Warrants were valued at $180 using a
Black-Scholes option pricing model with the following additional inputs:
expected term: 5 years; risk-free interest rate: 3.07%; and volatility
17.62%. The volatility rate used was based upon an average volatility
rate for two entities providing telecommunications services and who are
customers of the Company. The Company did not use the volatility rate
for the Common Stock as the Common Stock has not been trading for the sufficient
length of time to accurately compute its volatility. The cost of the
Cresta Initial Warrants is included in deferred loans costs and is being
amortized over the Initial Agile Debenture’s eighteen month term.
E.
|
Shares/Warrants Issued
in Connection with the Sale and Issuance of the Additional Agile
Debenture
|
The
Company issued to Agile 2 million shares of Common Stock (the “Additional Equity
Incentive Shares”), in connection with the sale and issuance of the Additional
Agile Debenture, and for no further consideration. The Additional
Equity Incentive Shares were valued at $28,000; such valuation being based on
the closing price of Common Stock of $0.014 per share on August 29, 2008, the
business day prior to the sale and issuance of the Additional Agile
Debenture. The cost of the Additional Equity Incentive Shares was
recorded as a discount on the Additional Agile Debenture and is being amortized
over the fourteen month term of the Additional Agile Debenture.
In
connection with its sale and issuance of the Additional Agile Debenture and the
issuance of the 2 million Additional Equity Incentive Shares to Agile, the
Company issued to Cresta five-year warrants (the Cresta Additional Warrants”) to
purchase 800,000 shares (the “Cresta Additional Warrant Shares”) of Common Stock
at a purchase price of $0.05 per share. The Cresta Additional
Warrants were deemed to have minimal value using a Black-Scholes option pricing
model with the following additional inputs: expected term: 5 years; risk-free
interest rate: 3.06%; and volatility 17.34%. The volatility rate used
was based upon an average volatility rate for two entities providing
telecommunications services and who are customers of the Company. The
Company did not use the volatility rate for the Common Stock as the Common Stock
has not been trading for the sufficient length of time to accurately compute its
volatility.
F. Shares/Warrants Issued in
Connection with the Sale and Issuance of the Agile September 2009
Debenture
In
connection with the sale and issuance of the Agile September 2009 Debenture and
for no further consideration, the Corporation issued to Agile 2 million shares
(each, an “Agile September 2009 Equity Incentive Share”) of Company common
stock. The Agile September 2009 Equity Incentive Shares were
collectively valued at $28,000 and such cost is being amortized over the six
month term of the Agile September 2009 Debenture.
In
connection with the sale and issuance of the Agile September 2009
Debenture, the Company issued to its investment banker, Cresta
Capital Strategies, LLC, five-year warrants to purchase 400,000 shares
of Company common stock at a purchase price of $0.05 per
share. The warrants were deemed to have minimal value using the
Black-Scholes option pricing model with the following additional inputs:
expected volatility: 21.82%; risk free interest rate: 2.43%; term: 5
years. The volatility rate used was based upon an average volatility
rate for two entities providing telecommunications services and who are
customers of the Company. The Company did not use the volatility rate
for the common stock as the common stock had not been trading for the sufficient
length of time to accurately compute its volatility when these warrants were
issued.
F-19
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
G. Shares/Warrants Issued in
Connection with the Sale and Issuance of the Agile November 2009
Debenture
In
connection with the sale and issuance of the Agile November 2009 Debenture, (i)
Agile extended the maturity date to February 22, 2010 (and were further extended
upon the execution of the Execuserve Corp. Acquisition (Reference Note 13) of
the Agile Original 2008 Debentures and (ii) the Corporation issued to Agile 2.6
million shares (each, an “Agile November 2009 Equity Incentive Share”) of the
Common Stock of the Company. The Agile November 2009 Equity Incentive
Shares were collectively valued at $33,800 and such cost is being amortized over
the six month term of the Agile November 2009
Debentures.
In
connection with the sale and issuance of the Agile November 2009 Debenture and
the 2.6 million Agile November 2009 Equity Incentive Shares, the Company issued
to its investment banker, Cresta Capital Strategies, LLC, five-year warrants
(each, a “Cresta November 2009 Warrant”) to purchase 320,000 shares (each, a
“Cresta November 2009 Warrant Share”) of Common Stock at a purchase price of
$0.05 per share. The warrants were deemed to have minimal value using the
Black-Scholes option pricing model with the following additional inputs:
expected volatility: 21.82%; risk free interest rate: 2.43%; term: 5 years. The
volatility rate used was based upon an average volatility rate for two entities
providing telecommunications services and who are customers of the Company. The
Company did not use the volatility rate for the common stock as the common stock
had not been trading for the sufficient length of time to accurately compute its
volatility when these warrants were issued.
H.
|
Conversion of
Preferred Stock to Common
Stock
|
During
2009, 206,250 shares of the 2,500,000 share of Series A Preferred Stock issued
and outstanding were converted into 20,625,000 shares of Common
Stock. There are remaining 2,293,750 shares of series A Preferred
Stock issued and outstanding as of December 31, 2009.
During
2008, 57,140 shares of Series C Preferred Stock were converted into 5,714,000
shares of Common Stock. There were remaining 1,828,569 shares of
Series C Preferred Stock issued and outstanding as of December 31, 2009 and
2008.
I.
|
Issuance of Common
Shares/Warrants for Prior and Current
Services
|
(1)
|
Issuance of Shares to
Investment Banker
|
On March
17, 2008, the Company issued 1,000,000 shares of common Stock to Cresta as
partial payment for agreeing to provide investment banking
services. The aggregate share value was $50,000, based on the $0.05
market price of the Common Stock per share on March 14, 2008, the business day
prior to entering into the agreement.
(2)
|
Issuance of Warrants to
Marketing Communications
Agency
|
During
the last quarter of 2008 and through the first six months of 2009, the Company
issued Greenstone Fontana Corp. three year warrants to purchase an aggregate of
900,000 shares of Common Stock at a purchase price of $0.05 per
share. The warrants were issued in 100,000 warrant installments
effective the first calendar day of each of month from October 2008 through June
2009. These warrants were deemed to have minimal value using a
Black-Scholes option pricing model with the following additional input ranges:
expected volatility: 17.73% - 24.15%; risk free interest rate: 1.12% - 2.28%;
term: 3 years. The volatility rate used was based upon an average volatility
rate for two entities providing telecommunications services and who are
customers of the Company. The Company did not use the volatility rate
for Company common stock as the common stock had not been trading for the
sufficient length of time to accurately compute its volatility when these
warrants were issued
(3)
|
Issuance of Shares to Investor
and Public Relations
Consultant
|
On
December 1, 2008, the Company agreed to issue 26,666,667 shares of Common Stock
to Summit Trading Limited as payment for investor and public relations
services. The aggregate value of such 26,666,667 shares was $140,000,
based on the average of the closing bid and ask prices on December 1, 2008 of
$0.00525 per share.
(4) Issuance of Shares to Pretect,
Inc.
F-20
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On March
2, 2009, the Company satisfied a payable due Pretect, Inc. (“Pretect”) in the
amount of $29,750 by issuing to Pretect (i) 100,000 shares of Company common
stock and (ii) a promissory note in the principal amount of $24,750 (the
“Pretect Note”). The Pretect obligation arose from consulting services
provided by Pretect in connection with the Company’s review of its internal
control over financial reporting and disclosure controls and
procedures. The Pretect Note provides for no interest (except in the
event of default) and repayment of the principal amount in twelve equal monthly
installments, commencing on April 1, 2009.
J. Issuance
of Warrants to Nascap –
The
aggregate 14 million warrants issued to Nascap as of June 30, 2009 pursuant to
the Nascap Modification Agreement were deemed to have minimal value using the
Black-Scholes option pricing model with the following additional inputs:
expected volatility: 21.67%; risk free interest rate: 2.66%; term: 5
years. The volatility rate used was based upon an average volatility
rate for two entities providing telecommunications services and who are
customers of the Company. The Company did not use the volatility rate
for Company common stock as the common stock had not been trading for the
sufficient length of time to accurately compute its volatility when these
warrants were issued.
K. Issuance
of Warrants in Connection with the Promissory Note Exchange Agreements dated
June 24, 2009 –
The
aggregate 8 million warrants issued to Ponzio and Brookstein as of June 24, 2009
pursuant to their loan modification agreements with the Company were deemed to
have minimal value using a Black-Scholes option pricing model with the following
additional input ranges: expected volatility: 21.75%; risk free interest rate:
2.66%; term: 5 years. The volatility rate used was based upon an average
volatility rate for two entities providing telecommunications services and who
are customers of the Company. The Company did not use the volatility
rate for Company common stock as the common stock has not been trading for the
sufficient length of time to accurately compute its volatility when these
warrants were issued.
L. Issuance
of Deferred Salary Warrants –
The
Company’s chief executive officer, Dean R. Garfinkel, chief financial officer,
Barry M. Brookstein, and controller, Cecilia Carfora, have been deferring all or
a portion of their salaries since January 1, 2009. The amount of
deferred salaries totaled $350,000 as of December 31, 2009, consisting of
$185,000 due Garfinkel, $150,000 due Brookstein and $15,000 due Ms.
Carfora. The Company has agreed to grant these officers Deferred
Salary Warrants, as of the last day of each fiscal quarter, at the rate of 40
Deferred Salary Warrants for every $1 of salary deferred during such quarter,
except for the quarter ended June 30, 2009, where the number of Deferred Salary
Warrants will be based on the amount of salary accrued through June 30,
2009. Accordingly, as of June 30, 2009, Garfinkel was granted 3.4
million Deferred Salary Warrants, Brookstein was granted 2.8 million Deferred
Salary Warrants and Ms. Carfora was granted 600,000 Deferred Salary Warrant,,
for the three months ending September 30, 2009, Garfinkel was granted 1.8
million Deferred Salary Warrants and Brookstein was granted as of 1.2 million
Deferred Salary Warrants for salary deferred during the third quarter 2009,
and for the three months ending December 31, 2009, Garfinkel was
granted 2.2 million Deferred Salary Warrants and Brookstein was granted as of
2.0 million Deferred Salary Warrants for salary deferred during the fourth
quarter 2009.
The 6.8
million Deferred Salary Warrants granted as of June 30, 2009, the 3.0 million
Deferred Salary Warrants granted as of September 30, 2009 and the 4.2 million
Deferred Salary Warrants granted as of December 31, 2009 were deemed to have
minimal value using the Black-Scholes option pricing model with the following
additional inputs: expected volatility: 21.51 -24.29%; risk free interest rate:
2.28 - 2.66%; term: 5 years. The volatility rate used was based upon
an average volatility rate for two entities providing telecommunications
services and who are customers of the Company. The Company did not
use the volatility rate for Company common stock as the common stock has not
been trading for the sufficient length of time to accurately compute its
volatility.
F-21
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
M. Issuance
of Dividend Accrual Warrants –
The 3
million Dividend Accrual Warrants granted as of June 30, 2009, the 1.5 million
Dividend Accrual Warrants granted as of September 30, 2009 and December 31, 2009
the were deemed to have minimal value using the Black-Scholes option pricing
model with the following additional inputs: expected volatility: 21.51 – 24.29%;
risk free interest rate: 2.28 - 2.66%; term: 5 years. The volatility rate used
was based upon an average volatility rate for two entities providing
telecommunications services and who are customers of the Company. The Company
did not use the volatility rate for common stock as the common stock had not
been trading for the sufficient length of time to accurately compute its
volatility when these warrants were issued.
13.
|
Subsequent
Events
|
On
February 5, 2010, the Company entered into an Agreement and Plan of Merger,
dated as of February 5, 2010 (the “Merger Agreement”), with Execuserve Corp., a
Virginia corporation (“Execuserve”), CSC/Execuserve Acquisition Corp., a
Virginia corporation and wholly-owned subsidiary of the Company (“Merger Sub”),
W. Thomas Eley (“Eley”), James A. Robinson, Jr. (“Robinson”) and Robin Rennockl
(“Rennockl”). The Merger Agreement contemplated, among other matters,
the consummation of the following transactions:
(a)
|
merger (the “Merger”) of Merger
Sub with and into Execuserve, with Execuserve being the surviving
corporation and wholly-owned by the
Company;
|
(b)
|
issuance of an aggregate of
19,915,285 shares (each, a “Merger Share”) of Common Stock of the Company
in exchange for all of the issued and outstanding common and preferred
stock of Execuserve (collectively, (the “Execuserve
Shares”);
|
(c)
|
issuance of an additional
28,114,495 shares (each, a “Exchanged Debt Share”) of Company Common Stock
in exchange for certain outstanding debt of Execuserve in the aggregate
principal amount of $647,000 (the “Execuserve Exchanged
Debt”);
|
(d)
|
issuance of an aggregate
7,970,220 shares (each, a “Retention Share”) of Company Common Stock to
certain employees of Execuserve, including Robinson, who is to receive
3,170,220 Retention Shares, and Rennockl, who is to receive 4,000,000
Retention Shares;
|
(e)
|
satisfaction of certain other
debt (the “Satisfied Debt”) of Execuserve, including approximately $28,000
owed to Eley relating to charges made on Eley’s personal credit card for
Execuserve’s benefit and on a corporate charge card account which Eley had
personally guaranteed the payment of all charges on such
account;
|
(f)
|
Execuserve retaining Eley as a
consultant pursuant to a written consulting
agreement;
|
(g)
|
Execuserve retaining Robinson as
its chief executive officer and president pursuant to a written Employment
Agreement;
|
(h)
|
Execuserve retaining Rennockl as
its Vice President of Sales pursuant to a written Employment
Agreement;
|
(i)
|
Eley being elected to the
Company’s Board of
Directors;
|
(j)
|
all of the Merger Shares,
Exchanged Debt Shares and Retention Shares being subject to lock-up
arrangements pursuant to which each of the recipients of such shares would
be entitled to sell or otherwise dispose of up to 25% of the shares such
recipient received beginning six months following the effective date of
the Merger, up to 50% of the shares such recipient received beginning
twelve months following the effective date of the Merger, up to 75% of the
shares such recipient received beginning eighteen months following the
effective date of the Merger and all of the shares such recipient received
beginning 24 months following the effective date of the
Merger.
|
The
Merger became effective on February 9, 2010. As a result of the
Merger’s effectiveness, among other matters, (i) the Company became obligated to
issue all of the Merger Shares, Exchanged Debt Shares and Retention Shares, (ii)
the Company tendered payment in full against the Satisfied Debt, (iii)
Execuserve retained Eley as a consultant, Robinson as its Chief Executive
Officer and President and Rennockl as its Vice President of Sales, and (iv) Eley
became a member of the Company’s Board of Directors.
As
Execuserve becomes integrated into the Company, we believe our strategic
opportunities will be expanded, allowing us to pursue a growth
strategy. Starting from a fairly small core base of loyal users, we
need to further expand our client base, target specific industries which can
realize a high return on investment in better hiring through effective job
candidate evaluation, increase our product availability through various sales
channels and broaden our base of product offerings.
F-22
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In
connection with the consummation of the Merger and in order to fund the future
operations of the Company and Execuserve, to fund the payment of outstanding
accounts payable of the Company and Execuserve, including the Satisfied Debt,
and to restructure the debt currently owed to Agile by the Company and
Execuserve, the Company agreed to borrow additional funds from Agile and
restructure the outstanding indebtedness owed to Agile by the Company and
Execuserve pursuant to an Amended and Restated Securities Purchase Agreement,
dated as of February 5, 2010 (the “Agile A&R Agreement”), among the Company,
Execuserve, Spirits Management Inc. (“Spirits”), Barry Brookstein
(“Brookstein”), Dean Garfinkel (“Garfinkel”) and Agile. Garfinkel is
the President, Chief Executive Officer and a director of the Company, Brookstein
is the Chief Financial Officer and a director of the Company and Spirits is a
New York corporation in which Brookstein is an executive officer and the sole
shareholder.
The
following represents the unaudited condensed pro forma financial results of the
Company as if the acquisition of Execuserve had occurred as of the beginning of
the annual period presented. Unaudited condensed pro forma results
are based upon accounting estimates and judgments that the Company believes are
reasonable. The unaudited condensed pro forma results also include
adjustments to interest expense as all existing convertible notes and bridge
loans of Execuserve were repaid or converted to common stock upon execution of
the acquisition. The condensed pro forma results are not necessarily
indicative of the actual results of operations of the Company had the
acquisition occurred at the beginning of the years presented, nor does it
purport to represent the results of operations for future periods.
For the years ended December
31,
|
2009
|
2008
|
||||||
Total
revenues
|
$
|
1,303,027
|
$
|
2,069,240
|
||||
Net
loss
|
$
|
(1,691,035
|
)
|
$
|
(1,745,876
|
)
|
||
Earnings
per share
|
$
|
(.01
|
)
|
$
|
(.01
|
)
|
The Agile
A&R Agreement is an amendment and restatement of the previous agreements
between the Company, Spirits, Brookstein, Garfinkel and Agile. These
previous agreements were dated as of May 6, 2008, January 31, 2009, September
21, 2009 and November 23, 2009. Under such previous agreements, the
Company sold and issued to Agile secured convertible debentures (the “Existing
Company Debentures”) in the aggregate principal amount of $780,000 and 9.6
million shares (the “Existing Company Shares”) of Company Common Stock for gross
proceeds of $780,000. The Company had granted Agile a security
interest in substantially all of the Company’s assets (subject to then existing
security interests granted others) to secured the Company’s obligations under
the Existing Company Debentures and Spirits, Brookstein and Garfinkel had
pledged their shares of preferred stock of the Company as further security for
the payment of amounts due under the Existing Company Debentures.
In
addition, between November 16, 2007 and June 8, 2008, Execuserve had sold and
issued to Agile secured convertible promissory notes (the “Existing Execuserve
Notes”) in the aggregate principal amount of $460,000 and warrants (the
“Existing Execuserve Warrants”) to purchase shares of the common stock of
Execuserve or Execuserve’s successor by merger. Execuserve had
granted Agile a security interest in substantially all of Execuserve’s assets
(subject to then existing security interests granted others) to secured
Execuserve’s obligations under the Existing Execuserve Notes.
As of the
date of the Agile A&R Agreement, accrued and unpaid interest under the
Existing Company Debentures totaled $21,925 and accrued and unpaid interest
under the Existing Execuserve Notes totaled $117,319.
The Agile
A&R Agreement contemplated, among other matters, the following
transactions:
(a)
|
Agile providing the Company with
$525,000 in new funds (the “New Agile
Funds”);
|
(b)
|
amending and restating the
obligations of the Company and Execuserve contained in the Existing
Company Debentures and Existing Execuserve Notes, and the new obligations
arising in connection with the loan of the New Agile Funds, into one
Amended and Restated Secured Convertible Debenture of the Company in the
principal amount of $1,765,000 (the “Agile A&R Debenture”) with a
maturity date of February 1, 2011 and delivering to Agile the Agile
A&R Debenture, with the obligations under the Agile A&R Debenture
being guaranteed by Call Compliance Inc., another wholly-owned subsidiary
of the Company, and
Execuserve;
|
F-23
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(c)
|
subordination of the security
interests in the assets of the Company held by Brookstein, Henry A. Ponzio
(“Ponzio”) and Nascap Corp. (“Nascap”), to the security interest in the
assets of the Company held by
Agile;
|
(d)
|
repayment (through the use of a
portion of the New Agile Funds) to Agile of $10,000 of accrued and unpaid
interest under the Existing Company Debentures and $50,000 of accrued and
unpaid interest under the Existing Execuserve Notes, with the remaining
portions of the accrued and unpaid interest under both the Existing
Company Debentures and Existing Execuserve Notes, totaling $79,244, being
acknowledged as a remaining obligation of the Company due and payable on
the maturity date of the Agile A&R
Debenture;
|
(e)
|
termination of the Existing
Execuserve Warrants; and
|
(f)
|
issuance to Agile of 2.4 million
shares (the “Agile A&R Shares”) of Company Common
Stock.
|
The
transactions contemplated by the Agile A&R Agreement were consummated as of
February 9, 2010.
The
principal and accrued and unpaid interest under the Agile A&R Debenture is
convertible, in whole or part, at a per share price equal to the market price of
the Company Common Stock on the date of conversion exercise. If the
market price of the Company Common Stock decreases between the date of
conversion exercise and the date the stock certificate evidencing the subject
conversion shares are delivered to Agile, the Company is obligated to issue to
Agile additional shares of Company Common Stock to the effect that Agile
receives a total number of shares that Agile would have received if Agile had
made the conversion exercise on the date on which the stock certificate had been
delivered to Agile. The Agile A&R Debenture provides for cashless
exercise.
In
consideration for their agreeing to subordinate their security interests to the
security interest of Agile, effective as of February 9, 2010, the Company issued
1 million shares of Company Common Stock to Brookstein, 3 million shares of
Company Common Stock to Ponzio and 7 million shares to Nascap (collectively, the
(“Subordination Shares”).
In
connection with the consummation of the Merger, the Company issued to Summit
Trading Limited (“Summit”) 12 million shares of Company Common Stock as
consideration for services rendered with respect to the Merger Agreement in
addition to shares of Company Common Stock previously issued to Summit
(reference is made to the Company’s filing of a Current Report on Form 8-K,
dated December 5, 2008).
During
the fourth quarter of 2009, the Company failed to pay interest on the promissory
notes that were previously issued to Brookstein, Ponzio and
Nascap. The Company’s obligations under these notes were secured by
the security interests that Brookstein, Ponzio and Nascap subordinated to the
security interest we granted to Agile in connection with the issuance of the
Agile A&R Debenture. The principal amounts of such notes and the
amounts of interest not paid during the fourth quarter of 2009 are as
follows:
Name of Noteholder
|
Principal Amounts of Note
|
Interest Not Paid
|
||||||
Barry
M. Brookstein
|
$ | 50,000 | $ | 2,250 | ||||
Henry
A. Ponzio
|
$ | 150,000 | $ | 6,750 | ||||
Nascap
Corp.
|
$ | 350,000 | $ | 10,500 |
To
compensate Brookstein, Ponzio and Nascap for the failure to pay interest on
their promissory notes during the fourth quarter of 2009, the Company granted to
such noteholders warrants (each, a “Fourth Quarter 2009 Deferred Interest
Payment Warrant”) to purchase shares of Common Stock at the rate of 40 Fourth
Quarter 2009 Deferred Interest Payment Warrants for every $1 of interest not
paid. For the Fourth Quarter 2009, 780,000 Deferred Interest Payment
Warrants were issued and have terms substantially identical to the Fourth
Quarter 2009 Deferred Salary Warrants and Dividend Accrual
Warrants.
F-24
COMPLIANCE
SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
Company has a substantial payable due its outside counsel, the law firm of
Moritt Hock Hamroff & Horowitz, LLP (“Moritt Hock”). In
consideration for Moritt Hock agreeing to provide services in the future, for
which Moritt Hock will continue to charge its customary fees, the Company has
granted to Moritt Hock 7.5 million five-year warrants (each, a “Moritt Hock
Warrant”), each Moritt Hock Warrant entitling its holder to purchase one share
of Company Common Stock at a purchase price of $0.01.
On April
7, 2010, the Company entered into an agreement with the owner and developer (the
“Seller”) of certain software and intellectual proprerty rights. In exchange for
the transfer of the software and intellectual property, the Company will provide
the Seller with the following:
|
·
|
2,750,000
restricted shares of the Compliance Systems Corporation common stock,
and
|
|
·
|
500,000
warrants to purchase shares of Compliance Corporation Common Stock at a
per Warrant Share exercise price of
$.05.
|
On April
13, 2010, the Company and the lessor of its office space in Glen Cove, New York
mutually terminated the office space agreement between the two parties effective
December 31, 2009. The agreed upon terms of the lease termination were as
follows:
|
·
|
The
Company would pay $1,000 a month for 10.5 months starting April 15,
2010,
|
|
·
|
The
Company would provide the lessor with 1,675,000 5-year warrants with an
exercise price of $.02 a share,
|
|
·
|
The
Company is relieved of $39,000 in CAM expenses and real estate taxes owed
to the lessor,
|
|
·
|
The
Company has forgiven the $10,600 security deposit held with the lessor,
and
|
|
·
|
The
Company is relieved of future lease obligations effective January 1, 2010
through July 31, 2011, the former maturity date of the
lease.
|
F-25
SIGNATURES
Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: May
15, 2010
|
Compliance
Systems Corporation.
|
|
By:
|
/s/ Dean Garfinkel
|
|
Dean
Garfinkel, President
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature and Name
|
Capacities
|
Date
|
||
/s/ Dean Garfinkel
|
Chief
Executive Officer, President
|
May
15, 2010
|
||
Dean
Garfinkel
|
and
Director
|
|||
(Principal
Executive Officer)
|
||||
/s/ Barry M. Brookstein
|
Chief
Financial Officer and Director
|
May
15, 2010
|
||
Barry
M. Brookstein
|
(Principal
Financial Officer and
|
|||
|
Principal
Accounting Officer)
|
|
44