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EX-32.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - United eSystems, Inc.exh32-1_0610.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - United eSystems, Inc.exh31-2_0610.htm
EX-32.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - United eSystems, Inc.exh32-2_0610.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - United eSystems, Inc.exh31-1_0610.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark one)
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

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

Commission file number 000-49745

UNITED ESYSTEMS, INC.
(Exact name of registrant as specified in its charter)

 
Nevada
 
91-2150635
(State or other jurisdiction
 
(IRS Employer Identification No.)
of incorporation or organization)
   
 
2150 North Hwy 190
Covington, LA  70433
228-832-1597
(Address and telephone number of principal executive offices and principal place of business)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Yes x  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer
¨
   
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Yes ¨  No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:  As of August 13, 2010, 39,445,129 shares of the registrant’s common stock, $0.001 par value, were issued and outstanding.
 



 
 

 

UNITED ESYSTEMS, INC.
FORM 10-Q
June 30, 2010

INDEX


Page
     
   
4
     
   
 
4
     
   
 
5
     
 
6
     
   
 
7
     
   
 
8 – 14
     
   
15
     
   
21
     
21
     
   
 
     
   
22
     
22
     
   
22
     
   
22
     
   
22
     
   
22
     
   
22
     
   
 
23


 
-2-

 

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 about United eSystems, Inc. (the “Company”) and our subsidiaries, United Check Services, L.L.C. (United) and Netcom Data Southern Corp. (NDS), that are subject to risks and uncertainties.  Forward-looking statements include information concerning future financial performance, business strategy, projected plans and objectives.  Statements preceded by, followed by or that otherwise include the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “may increase,” “may fluctuate” and similar expressions of future or conditional verbs such as “will,” “should,” “would,” and “could” are generally forward-looking in nature and not historical facts.  Actual results may differ materially from those projected, implied, anticipated or expected in the forward-looking statements.  Readers of this quarterly report should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this report. The statements are representative only as of the date they are made.  The Company, United, and NDS (sometimes referred to herein on a consolidated basis as the Company, we, us, or similar phrasing) undertakes no obligation to update any forward-looking statement.

These forward-looking statements, implicitly and explicitly, include the assumptions underlying the statements and other information with respect to the Company's beliefs, plans, objectives, goals, expectations, anticipations, estimates, financial condition, results of operations, future performance and business, including management's expectations and estimates with respect to revenues, expenses, return on equity, return on assets, efficiency ratio, asset quality and other financial data and capital and performance ratios.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, these statements involve risks and uncertainties that are subject to change based on various important factors, some of which are beyond the control of the Company. The following factors, among others, could cause the Company's results or financial performance to differ materially from its goals, plans, objectives, intentions, expectations and other forward-looking statements:

 
·
general economic and industry conditions;

 
·
our capital requirements and dependence on the sale of our equity securities;

 
·
the liquidity of the Company’s common stock will be affected by the lack of a trading market;

 
·
intense industry competition;

 
·
fluctuations in the prevailing industry prices of check processing services;

 
·
shortages in availability of qualified personnel;

 
·
legal and financial implications of unexpected catastrophic events;

 
·
regulatory or legislative changes effecting check processing operations; and

 
·
reliance on, and the ability to attract, key personnel.

For a discussion of these and other risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in Item 1A of the Company’s 2009 Annual Report filed on Form 10-K with the SEC, which is available on the SEC’s website at www.sec.gov.  All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update this Quarterly Report on Form 10-Q to reflect events or circumstances after the date hereof.  New factors emerge from time to time, and it is not possible for us to predict which factors, if any, will arise.  In addition, the Company cannot assess the impact of each factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 
-3-

 

PART I.   FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

UNITED ESYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS

ASSETS
 
June 30,
2010
(Unaudited)
   
December 31,
2009
(Audited)
 
                                                                                                      
 
 
   
 
 
CURRENT ASSETS
           
Cash and Cash Equivalents
  $ 179,642     $ 228,213  
Restricted Cash
    251,136       271,624  
Trade Receivables, net
    98,022       93,021  
Deferred Tax Asset, current
    240,506       206,338  
Prepaid Interest
    52,000       104,000  
Prepaid Expenses
    34,883       30,584  
                 
Total Current Assets
    856,189       933,780  
                 
PROPERTY AND EQUIPMENT, NET
    33,859       52,400  
                 
OTHER ASSETS
               
Intangible Assets, net
    4,728,043       4,932,499  
Deferred Tax Asset, Non-current
    74,945       65,678  
Other
    63,315       85,250  
                 
Total Assets
  $ 5,756,351     $ 6,069,607  
                                                                                                                    
               
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES
               
ACH Settlements Payable
  $ 221,531     $ 258,019  
Current Portion Long-Term Debt
    1,434,600       2,422,100  
Accounts Payable and Accrued Liabilities
    37,161       63,022  
Customers’ Deposits
    29,605       13,605  
                 
Total Current Liabilities
    1,722,897       2,756,746  
                 
LONG TERM LIABILITIES
               
Notes Payable
    2,673,775       2,610,325  
                 
Total Liabilities
    4,396,672       5,367,071  
                 
STOCKHOLDERS' EQUITY
               
Common Stock - $.001 Par Value; 75,000,000 Shares Authorized, 39,445,129 and 34,272,629
  shares Issued and Outstanding at June 30, 2010 and December 31, 2009
    39,355       34,272  
Additional Paid-In Capital
    1,743,851       847,339  
Retained Earnings
    (423,527 )     (179,075 )
                 
Total Stockholders' Equity
    1,359,679       702,536  
                 
Total Liabilities and Stockholders' Equity
  $ 5,756,351     $ 6,069,607  
The accompanying notes are an integral part of these financial statements.

 
-4-

 

UNITED ESYSTEMS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

   
Three Months Ended
June 30,
     
Six Months Ended
June 30,
 
   
2010
     
2009
     
2010
     
2009
 
Revenues                                                                    
                             
ACH Services
$
341,190
   
$
179,429
   
$
614,226
   
$
425,275
 
Verification Services
 
9,349
     
62,482
     
29,667
     
129,343
 
Credit Card Services
 
388,680
     
450,501
     
767,163
     
958,368
 
Total Revenues
 
739,219
     
692,412
     
1,411,056
     
1,512,986
 
                               
Cost of Revenues
 
241,077
     
205,157
     
461,013
     
420,583
 
                               
Gross Profit
 
498,142
     
487,255
     
950,043
     
1,092,403
 
                               
Expenses:
                             
Operating
                             
Personnel costs
 
37,375
     
37,047
     
70,300
     
65,562
 
Travel
 
13,038
     
18,290
     
25,795
     
40,961
 
Amortization expense
 
152,208
     
134,568
     
298,536
     
269,136
 
Commissions and fees expense
 
37,046
     
32,819
     
83,430
     
84,242
 
Other
 
55,176
     
60,286
     
116,146
     
123,921
 
Total Operating Expenses
 
294,843
     
283,010
     
594,207
     
583,822
 
                               
Selling, General & Administrative
                             
Personnel costs
 
129,525
     
133,582
     
259,386
     
239,248
 
Legal and accounting
 
26,673
     
23,649
     
55,941
     
77,447
 
Marketing
 
6,590
     
8,993
     
12,329
     
17,249
 
Consulting
 
--
     
--
     
--
     
--
 
Other
 
3,315
     
3,477
     
 7,122
     
 5,137
 
Total Selling, General & Administrative
 
166,103
     
169,701
     
 334,778
     
 339,081
 
                               
Total Expenses
 
460,946
     
452,711
     
928,985
     
922,903
 
                               
Income from operations
 
  37,196
     
  34,544
     
 21,058
     
 169,500
 
                               
Other Income (expense):
                             
Interest Income
 
5
     
598
     
466
     
1,060
 
Interest Expense
 
(137,282
)
   
(157,515
)
   
(309,411
)
   
(302,305
)
                               
Net Income (loss) before income taxes
 
(100,081
)
   
(122,373
)
   
(287,887
)
   
(131,745
)
                               
Income tax benefit (expense)
 
9,267
     
53,755
     
 43,435
     
 56,879
 
                               
Net (Loss) Income
$
  (90,814
)
 
$
  (68,618
)
 
$
 (244,452
)
 
$
 (74,866
)
                               
Net Income per Share
 
NM
     
NM
     
NM
     
NM
 


The accompanying notes are an integral part of these financial statements.

 
-5-

 
 
UNITED ESYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2010 AND 2009


   
Common Stock
   
Additional
Paid-In
   
Retained
   
Total
Stockholders'
 
   
Shares
   
Amount
   
Capital
   
Earnings
   
Equity
 
   
 
   
 
   
 
   
 
   
 
 
Balance at January 1, 2009
    34,316,667     $ 34,317     $ 850,346     $ 221,912     $ 1,106,575  
                                         
Employees’ exercise of stock options
    42,500       42       1,233       --       1,275  
                                         
Net Loss
    -       -       -       (74,866 )     (74,866 )
                                         
Balance at June 30, 2009
    34,359,167     $ 34,359     $ 851,579     $ 147,046     $ 1,032,984  
                                         
                                         
                                         
Balance at January 1, 2010
    34,272,629     $ 34,272     $ 847,339     $ (179,075 )   $ 702,536  
                                         
Private Placement Equity Offering
    5,072,500       5,073       893,522       -       898,595  
                                         
Employees’ exercise of stock options
    100,000       10       2,990       -       3,000  
                                         
Net Loss
    -       -       -       (244,452 )     (244,452 )
                                         
Balance at June 30, 2010
    39,445,129     $ 39,355     $ 1,743,851     $ (423,527 )   $ 1,359,679  

The accompanying notes are an integral part of these financial statements.


 
-6-

 

UNITED ESYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


   
Six Months Ended
June 30,
 
   
2010
     
2009
 
                                                                                                         
 
                   
 
     
 
                   
 
CASH FLOWS FROM OPERATING ACTIVITIES
             
Net (Loss)
$
(244,452
)
 
$
(74,866
)
Adjustments to Reconcile Net (Loss) to Net
             
Cash Provided by Operating Activities
             
Depreciation and Amortization
 
317,662
     
285,452
 
(Increase) in Trade Receivables
 
(5,001
)
   
(16,338
)
(Increase) in Prepaid Expenses
 
(4,299
)
   
(4,440
)
Decrease in Prepaid Interest
 
52,000
     
45,150
 
Decrease in Restricted Cash
 
20,488
     
253,531
 
Increase in Deferred Tax Asset
 
(43,435
)
   
(56,879
)
Decrease in ACH Settlements Payable
 
(36,488
)
   
(250,732
)
(Decrease) in Accounts Payable and Accrued Liabilities
 
(25,861
)
   
(24,444
)
Increase (Decrease) in Customer Deposits
 
16,000
     
(2,800
)
Net Cash Provided by Operating Activities 
 
46,614
     
153,634
 
               
CASH FLOWS FROM INVESTING ACTIVITIES
             
Acquisition of Property and Equipment
 
(2,496
)
   
(10,580
)
    Proceeds from Asset Purchase Escrow
 
--
     
61,818
 
Cash paid in Conjunction with acquisition of Portfolio Asset
 
(94,080
)
   
--
 
Net Cash Used in Investing Activities
 
(96,576
)
   
(51,238
)
               
CASH FLOWS FROM FINANCING ACTIVITIES
             
Net Proceeds from Private Placement Stock Offering
 
898,595
     
--
 
Proceeds from notes payable
 
94,000
     
--
 
    Proceeds from Employee Exercise of Stock Options
 
3,000
     
1,275
 
Principal paid on notes payable
 
(994,204
)
   
(152,183
)
Net Cash Provided by (Used in) Financing Activities
 
1,391
     
(150,964
)
               
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
 
(48,571
)
   
53,964
 
               
CASH AND CASH EQUIVALENTS – BEGINNING OF PERIOD
 
228,213
     
366,844
 
CASH AND CASH EQUIVALENTS – END OF PERIOD
$
179,642
   
$
420,808
 
               
SUPPLEMENTAL DISCLOSURES
             
Cash Paid During the Period for Interest
$
257,411
   
$
257,155
 
    Cash Paid During the Period for Taxes
$
--
   
$
5,000
 

The accompanying notes are an integral part of these financial statements.
 
 
-7-

 

UNITED ESYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A — PLAN OF REORGANIZATION AND CONTRIBUTION AGREEMENT

On March 30, 2005, Riverbend Telecom, Inc. (Riverbend) entered into an Agreement and Plan of Reorganization (the “Spin-Off Agreement”) between Riverbend and Riverbend Holdings, Inc. (Holdings), its wholly owned subsidiary, pursuant to which Riverbend transferred all of its assets, liabilities and other obligations to Holdings in consideration for Holdings common stock.  In addition, Riverbend distributed all of Holdings common stock to the then-existing four Riverbend stockholders (the “Spin-Off”), on a pro rata basis, one share of Holdings common stock for each Riverbend share held by the stockholders.  Holdings was formed for the purpose of effecting the reorganization of Riverbend and the subsequent distribution of all of the Holdings common stock to Riverbend’s current stockholders.  Holdings had previously filed a Form 10-SB with the Securities and Exchange Commission regarding its common stock under Section 12(g) of the Securities Exchange Act of 1934.

Upon consummation of the Spin-Off, Riverbend completed the contribution transaction with United Check Services, L.L.C. (United), a Louisiana limited liability company, according to the terms of a Contribution Agreement entered into on July 14, 2004, as amended by a Letter Agreement dated August 5, 2004 (collectively, the “Contribution Agreement”).  Pursuant to the Contribution Agreement, the equity owners of United contributed all of their limited liability membership interests in United to Riverbend in exchange for 15,315,000 shares of Riverbend’s common stock.  As a result of this transaction, United became a wholly-owned subsidiary of Riverbend, and the members of United became the majority stockholders of Riverbend, and the transaction was accounted for as a reverse acquisition.  As a result of the Spin-Off, the current telecommunications business of Riverbend is now carried on by Holdings, and the automated clearing house services business of United is now carried on by Riverbend, through its 100% ownership interest of United.

On June 13, 2005, Riverbend effected a name change from Riverbend Telecom, Inc. to United eSystems, Inc. to better reflect the change in business operations as a result of the consummation of the Plan of Reorganization and the Contribution.

NOTE B — NATURE OF RECENT ACQUISITON AND PORTFOLIO ASSET PURCHASE

Acquisition of Netcom Data Southern Corp.

On August 22, 2008, United eSystems, Inc. (“eSystems”, “Company”) entered into a Stock Purchase Agreement (“Agreement”) with Netcom Data Southern Corp. (“NDS”), in which eSystems acquired all of the common stock of NDS.  The transaction was reported on Form 8-K on August 28, 2008, and the details of the transaction together with agreement between eSystems and NDS are included therein.

The Company entered into the transaction as means to diversify its electronic payments business.  Prior to the transaction, the majority of the Company’s revenue was derived from providing ACH payment services for business merchants.  For 2009, the Company’s gross revenues are now approximately 30% from its ACH payments business and 64% from credit card merchant processing services which are provided through contracts that NDS has with several sponsor banks in the United States.  The Board of Directors and management believe that the acquisition of NDS provides the opportunity to improve operating results and the possibility of creating future value.

Pursuant to the Agreement, the Company acquired all of the outstanding stock of NDS in exchange for approximately $272,000 of cash at closing, an unsecured promissory note payable of $2,720,000, and 7,800,000 shares of the Company’s restricted common stock which had an estimated fair value at the date of the acquisition of $.05 per share.  As a result of the transaction, all of the Company’s sales and marketing activities, as well as all of the customer service duties to manage the credit card merchant accounts of NDS will be conducted through NDS, which is now a wholly owned subsidiary of the Company.
 
 
 
-8-

 
 
A summary of the purchase price of NDS is as follows:
     
Cash paid to stockholders of NDS, net of cash acquired from NDS
  $ 272,099  
Direct acquisition costs paid by the Company
    35,329  
Promissory note issued to stockholders of NDS
    2,720,000  
Fair value of 7,800,000 shares of stock issued
    390,000  
                                                                                                      
       
Total purchase price
  $ 3,417,428  

The allocation of the NDS purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed are based on eSystems’ estimate of fair values and remaining economic lives as of the acquisition date and are summarized below:

Tangible assets acquired and liabilities assumed
     
Property and Equipment
  $ 14,503  
                                                                                                      
       
  Net tangible assets acquired
    14,503  
         
Identifiable intangibles
       
Customer relationships and contracts
    3,402,925  
         
Total purchase price
  $ 3,417,428  

The value allocated to customer relationships and contracts created as a result of the acquisition of NDS will be amortized over its estimated useful life of ten years.  Amortization expense related to NDS for the three months and six months ended June 30, 2010, was $78,360 and $156,720 respectively.

Portfolio Asset Purchases

On September 17, 2008, the Company, through its wholly owned subsidiary NDS, entered into and closed an Asset Purchase Agreement (the “Agreement”) with Netcom Data Corp. of N.Y. and American Timeshare Associates, Inc. (collectively the “Sellers”).  Under the terms of the Agreement the Company paid $2,275,000 in cash, plus 3,200,000 shares of its restricted common stock, in exchange for the assignment all of the Seller’s rights under a certain Independent Sales Organization Agreement (the “Bank Agreement”) with LaSalle Bank, N.A., a subsidiary of Bank of America (the “Bank”).  The terms of the Bank Agreement allow merchant customers of the Seller to utilize the credit card merchant processing services provided by the Bank.  As a result of the assignment of the Bank Agreement, NDS will perform certain services previously provided by the Sellers under the Bank Agreement and will receive all payments due therefore from the Bank.  Pursuant to the Agreement, 10% of the cash and stock paid at closing was escrowed, subject to an attrition formula applicable during the twelve months following the transaction date, whereby the Company may be reimbursed up to the amounts escrowed if the portfolio’s performance does not meet certain benchmarks during the applicable period.

The Company accounted for this transaction, the Netcom NY Asset Portfolio, as an asset purchase and the purchase price, which is based upon the total consideration paid, is included on its consolidated balance sheet as Intangible Assets.  The purchase price is amortized over a ten year period, commencing September 17, 2008.  Amortization expense related the Netcom NY Asset Portfolio for the three months and six months ended June 30, 2010, was $56,208, and $112,416, respectively.

On February 5, 2010, the Company acquired a 50% interest in a portfolio of credit card merchant accounts from Mr. Leo Daboub.  The Company obtained all of Mr. Daboub’s rights pursuant to a contract between Mr. Daboub and one of the Company’s vendors, a non-bank credit card processor.  Pursuant to the purchase, the Company now receives a portion of the fees associated with the credit card processing services provided to this portfolio of merchants. The Company paid $94,080 in cash at closing.  The agreement also provides for an earn-out formula under which the Company would pay up to an additional $23,520 six months following the closing if certain revenue targets are met.  The transaction was accounted for as an asset purchase based on the total consideration paid at closing of $94,080 in cash amortized over a period of 16 months.  The Company recognized $17,640 of amortization expense for the three months ended June 30, 2010, and $29,400 for the six months ended June 30, 2010.

 
-9-

 

NOTE C — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

As described in Notes A and B, UNITED ESYSTEMS, INC. (Company) serves as the holding company for United Check Services, L.L.C. (United) and Netcom Data Southern Corp (NDS).  United provides automated clearing house (ACH) services to businesses throughout the United States.  NDS is an independent sales organization that obtains merchant customers that utilize credit card processing services through several NDS sponsored banks.  NDS receives a portion of the fees charged for such services in exchange for acquiring the merchants and maintaining certain customer service functions.  The Company’s headquarters are in Covington, Louisiana, its ACH operations center is located in Gulfport, Mississippi, and the operations of NDS are conducted at its offices in Roswell, Georgia.

Basis of Presentation and Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, United and NDS.  All significant intercompany balances and transactions have been eliminated in consolidation.

The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of financial information for the interim periods presented.  These adjustments are of a normal recurring nature and include appropriate estimated provisions.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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.

Revenue Recognition

United charges customers a per transaction fee for its ACH services.  For these transactions, United recognizes only the fees generated as revenue.  United recognizes these fees as revenue when United has provided the service to its customers.  Fees for ACH services are based on contractually determined rates with each individual customer.  Settlements paid to customers for ACH transactions are submitted to the customer net of fees due to United.

NDS receives a portion of the fees generated from credit card merchant processing services which are provided through its contractual agreements with various sponsor banks.  Under these agreements the merchants’ transaction activity is reported and NDS’ portion of the fees are paid during the month following the month in which the transactions occurred.  Accordingly, NDS recognizes its revenue in the month in which such transactions are reported and payable, which is consistent with industry practices within the United States of America.

Basis of Accounting

The books and records of the Company are kept on the accrual basis of accounting, whereby revenues are recognized when earned and expenses are recognized when incurred.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation.  Depreciation is computed using primarily straight-line methods over the estimated useful lives of the related assets, which ranges from three to seven years.

Income Taxes

The Company reports its income taxes under a consolidated Federal tax return which includes the business activity of the Company, as well as the business activity of its wholly owned subsidiaries, United and NDS.

 
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Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method.  Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to change in tax rates and laws.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained.  The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.  Tax positions taken are not offset or aggregated with other positions.  Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority.  The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above would be reflected as a liability for unrecognized tax benefits in the consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.  Interest and penalties associated with unrecognized tax benefits would be classified as additional income taxes in the statement of operations.

Advertising

Advertising costs are charged to operations when incurred.

Statement of Cash Flow Information

For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

NOTE D — RESTRICTED CASH

Restricted cash consists primarily of funds maintained in United’s primary bank account to facilitate ACH transactions.  The Company has restricted this cash from operations in order to ensure that sufficient funds are maintained to process and settle customer’s ACH transactions.

NOTE E — NOTES PAYABLE

Due to Shareholders

On September 4, 2008, and September 8, 2008, the Company entered into two notes payable with two existing shareholders of the Company for a total principal amount of $70,000.  The notes provide for interest only payments at a rate of 10% per annum payable monthly thereafter, with the entire principal balances due and payable two years from inception of the notes.  During the six months ended June 30, 2010, the Company paid $52,500 in principal, thereby reducing the outstanding balance due these shareholders from $70,000 at both December 31, 2009, to $17,500 as of June 30, 2010.

On February 5, 2010, the Company entered into an additional note payable with Mr. Leon Nowalsky, a current shareholder, for a total principal amount of $47,500, to assist with the acquisition of a credit card portfolio asset.  The note provides for interest to accrue at 6% per annum, payable in two years from inception of the note.  The note may be prepaid without penalty.  The outstanding principal balance at June 30, 2010 was $47,500.  Mr. Nowalsky currently owns approximately 10.1% of the Company’s outstanding common stock.

NDS Acquisition – Share Purchase Note

On August 22, 2008, as part of the acquisition of NDS, the Company issued an unsecured note (the “Share Purchase Note”) payable to the shareholders of NDS.  The Share Purchase Note bears interest at 5.5% for the first twelve months and 9.5% for the following twenty-four months, when the Share Purchase Note is due in full.  Pursuant to the terms of the Share Purchase Note, the Company will make interest-only payments each month and will make three principal payments of $180,000 on each anniversary date of the note with one final balloon payment representing the

 
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then outstanding principal and accrued interest on the third anniversary of the issue date of the Share Purchase Note. During August 2009, the Company executed an amendment to the Share Purchase Note whereby the scheduled principal payment of $180,000 due on August 22, 2009, was amended to require a $30,000 principal payment which was paid by the Company.  Mr. William Plummer, a current employee, shareholder, and director of the Company, was formerly the majority shareholder of NDS and will receive a majority of the payments on the Share Purchase Note.  As of June 30, 2010, the outstanding principal balance of the Share Purchase Note was $2,675,000.

NDS Acquisition – Sorrentino Note

On August 22, 2008, in order to facilitate the cash payment due at the closing of the acquisition of NDS, the Company issued a non-interest bearing secured promissory note (the “Sorrentino Note”) and entered into and closed a security agreement (the “Security Agreement”) with Robert J. Sorrentino.  The terms of the Sorrentino Note provide that the Company may draw up to $500,000 from Sorrentino with advanced written notice to and subject to the approval of Sorrentino for a period of up to seven months.  The Company drew $280,000 immediately upon issuance of the Sorrentino Note.  Commencing on the seven-month anniversary of the issue date of the Sorrentino Note, the Company will make twenty-four equal monthly installments in an amount sufficient to repay the entire outstanding principal balance during such twenty-four month period.  The Sorrentino Note is secured by the Security Agreement, which grants Sorrentino a security interest in all of the assets existing, owned, or hereafter acquired by the Company.  In lieu of payment of interest, the Company granted Sorrentino 4,800,000 shares of its common stock with an estimated fair value of $0.05 per share.  The Company has recognized the value of the shares issued ($240,000) as prepaid interest, and is amortizing this amount over the total life of the note of 30 months.  On May 27, 2009, the Company executed an Amendment to the Loan Agreement with Sorrentino (“Sorrentino Amendment”) which reduced the amount of monthly principal payments as provided for in the original Sorrentino Note.   Under the Sorrentino Amendment, the Company made an initial payment of $15,350 in principal and began making monthly principal payments of $7,675 thereafter, continuing through February 28, 2011, at which time all remaining principal becomes due and payable.  Under the original terms, monthly principal payments would have been approximately $17,770.  During the year ended December 31, 2009, the Company’s principal payments totaled $38,375 thereby reducing the outstanding principal balance of these notes to $357,425 as of December 31, 2009, and the related amount of prepaid interest reflected in the Company’s consolidated balance sheet totaled $104,000, which is classified as current.  During the six months ended June 30, 2010, the Company obtained an additional $47,000 under the Sorrentino Note to assist with the acquisition of a portfolio asset of credit card accounts.  The Company also made at total of $46,050 of principal payments, and amortized $52,000 of prepaid interest during the six months ended June 30, 2010.  Mr. Sorrentino currently owns approximately 22.7% of our outstanding common stock.

Thermo Credit Note

On September 17, 2008, in order to facilitate the cash payment due at the closing of the purchase of the portfolio of credit card merchant services accounts from Netcom Data Corp. of N.Y. and American Timeshare Associates, Inc., the Company, NDS, and United (collectively the “Debtors”) borrowed $2,128,500 from Thermo Credit, LLC, a Colorado limited liability company (the “Lender”) pursuant to a Loan, Pledge, and Security Agreement (the “Loan Agreement”) and a Promissory Note (the “Note”) which provide for interest at the greater of 15% per annum or 8% in excess of the prime rate, plus other fees.  Accrued and unpaid interest on the outstanding principal balance of the Note is due and payable monthly commencing on October 31, 2008 and the Note matures and becomes due in full on March 17, 2009, with the Company having the right to extend the maturity to September 17, 2009 with Lender’s approval (not to be unreasonably withheld or delayed).  In the event of such extension, the Note is payable as follows:  (a) one payment of accrued and unpaid interest on March 31, 2009;  (b) five monthly payments of principal plus accrued and unpaid interest thereon in an amount necessary to amortize the outstanding principal balance of the Note as of March 17, 2009 over a period of 24 months commencing on April 30, 2009 and continuing on the same day of each calendar month thereafter (or if no such corresponding date, on the last date of such calendar month); and (c) a final payment of all principal plus accrued and unpaid interest on September 17, 2009.  The Loan Agreement grants the Lender a security interest in all of the assets, now owned, or hereafter acquired by the Debtors, and pledges all of the outstanding common stock of NDS and all of the outstanding membership interests of UCS to the Lender.  Two of the Company’s minority shareholders serve on the board of directors for Thermo Credit, LLC.

On March 17, 2009, the Company executed an Amendment to its Loan Agreement with Thermo Credit LLC under which the due date of the loan was extended until March 31, 2010, and the interest rate was increased by 3% APR.  In conjunction with the Amendment, the Company paid $69,158 in principal on March 17, 2009, and $20,000 per

 
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month thereafter through September 30, 2009, reducing the outstanding principal balance by December 31, 2009, to $1,930,000.  On March 31, 2010 the Company executed an Amendment to the Agreement further extending the due date of the loan until June 30, 2010.  On March 16, 2010, the Company paid $920,000 in principal which reduced the outstanding principal balance at March 31, 2010, to $1,010,000.  On June 30, 2010, the Company executed an additional Amendment to the Agreement which extended the due date of the loan until December 31, 2010.

NOTE F — STOCK OPTIONS

On March 30, 2005, the Company entered into a non-qualified stock option agreement, whereby the Company granted 312,000 options to its CFO.  On February 15, 2006, the Company entered into non-qualified stock option agreements with four key employees, granting a total of 90,000 options, which included 32,500 options to its CFO.  All of the options have an exercise price of $.03 per share, and were fully vested as of the date of the grant.  The option agreements terminate five years from the date they were granted.  During 2008, a total of 100,000 shares of non-qualified stock options were exercised in 2008.  During the six months ended June 30, 2010, a total of 100,000 of the non-qualified options were exercised and 212,000 expired unexercised.  All of the exercised options were options previously granted in 2005 to the CFO.

On August 20, 2008, the Board of Directors adopted the 2008 Incentive Stock Plan and granted at total of 1,157,000 options to employees of United.  All of the options have an exercise price of $.05 per share and were fully vested as of the date of the grant.  The options terminate five years from the date granted.  None of these options have been exercised.

NOTE G — SIGNIFICANT CONCENTRATIONS

Cash

At June 30, 2010, and December 31, 2009, the Company maintained balances with financial institutions in excess of FDIC insured limits.  The Company has not experienced any losses and does not believe that significant credit risk exists as a result of this practice.

Major Customers

During the six months ended June 30, 2010, the Company had no transactions with any one customer that amounted to 10% or more of the Company’s gross revenue.

NOTE H — COMMITMENTS

Operating Leases

Effective August 22, 2008, in conjunction with the acquisition of NDS, the Company entered into a thirty-six month lease with the existing Lessor of the NDS office facilities in Roswell, Georgia, at a rate of $4,000 per month.  The lease is automatically renewable for additional one year periods beyond the initial thirty-six month terms unless the Company as Lessee elects not to extend by providing written notice to the Lessor at least five days prior to the expiration of the initial term.

On October 28, 2008, United exercised an option effective November 1, 2008, to extend its leased office facilities at its present location in Gulfport, Mississippi, for an additional three year term beginning at $2,200 per month on the effective date, and increasing by $150 per month after twelve months, and an additional $150 per month after twenty four months.

Employment Contracts

In connection with the Company’s acquisition of NDS, the Company entered into employment contracts with two key employees of NDS, each having a three-year term.  The employment contracts address compensation and termination.

 
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ACH Processing Agreement

On August 4, 2006, United entered into an ACH processing agreement that provided for the utilization of an internet based ACH processing system, inclusive of bank and processing fees.  The term of the agreement is 60 months, and renewable for successive 12 month periods thereafter.  If management elects to terminate this agreement during its initial term without cause, the agreement provides for a liquidation fee equal to the average monthly processing volume at termination times the number of months remaining in the agreement, subject to a maximum of $66,000.

NOTE I — RELATED PARTY TRANSACTIONS

As disclosed in Note E, the Company has notes payable with minority shareholders and with an entity for which two minority shareholders serve on the board of directors.

NOTE J — EARNINGS PER SHARE

The weighted average common shares outstanding amounted to 39,345,129, and 34,335,101, for the three months ended June 30, 2010, and 2009, respectively.  Weighted average common shares outstanding were 37,691,662 and 18,291,667, for the six months ended June 30, 2010, and 2009, respectively.  Options to purchase 302,000 shares at $.03 per share, and options to purchase 1,157,000 shares at $.05 per share were outstanding during the six months ended June 30, 2010.  Options to purchase 259,500 shares at $.03 per share, and options to purchase 1,157,000 shares at $.05 per share were outstanding at June 30, 2009.  None of these options were included in the computation of diluted earnings per share because the options’ weighted average exercise price was greater than the estimated market price of the common shares.



 

 
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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Executive Summary

The Company is an electronic payments service provider headquartered in Covington, Louisiana, that caters mostly to small and medium size businesses who handle significant volumes of electronic transactions as an integral part of their business.  Since 1998, we have provided electronic ACH (Automated Clearing House) payments via our internet-based, encrypted systems, to assist merchants in the collection of their sales and accounts receivables.  Our processing systems may also be used to transmit payments such as loan proceeds, customer refunds, travel expenses, commission payments, and payroll direct deposits. We act as the merchant’s ACH processor and clear transactions electronically through the Federal Reserve Banking System.  We are paid based on a fee per each ACH transaction we process, and typically receive our fees at the time we are settling collected proceeds electronically to each of our merchants.

The ACH Network has been in use for in excess of 30 years, serving a variety of customers, including over 20,000 financial institutions, 3.5 million businesses, and 135 million individuals.  The ACH business is divided between traditional banks, large “in-house” processors, and independent processors.  We currently concentrate on independent processors service customers that utilize electronic commerce but find that outsourcing is a more cost effective solution.  The independent processors find they are able to provide custom tailored solutions and better transaction pricing than the merchants could individually obtain from traditional banks.  We have established ourselves as a quality provider of ACH processing services with proven results utilizing state of-the-art technology.

In addition, the Company, through its acquisition of NDS, now offers additional services including credit and debit card services, real-time account verification, and identity verification services.  Such services are complimentary to our ACH payment services and with their addition it allows us to provide a more comprehensive line of services to our existing and prospective business customers.

Results of Operations

In this section, we provide more detailed information about our operating results and changes in financial position.  This section should be read in conjunction with the financial statements and related notes include in this Form 10-Q, and in conjunction with our Form 10-K previously filed for the year ended December 31, 2009.

Three Months and Six Months Ended June 30, 2010 compared to the Three Months and Six Months Ended June 30, 2009

Revenues

Our revenue is mostly generated by providing payment services which include Automated Clearing House (ACH) processing services as well as earning residual revenue from credit card merchant services for business customers.  We also provide real-time electronic account verification services, as well as identity and age verification services.  The majority of our customers utilize our services to collect their gross receipts or accounts receivable electronically.  However, ACH processing services may also be utilized for other purposes, including direct deposit of employee payroll, employee travel advances, payments to non-employee contractors, and inter-company transfers.  We recognize our ACH revenue upon completion of the service being provided and residual credit card services revenue upon receipt from our sponsoring banks which is consistent with industry practices within the United States of America.

For the three months ended June 30, 2010, revenues were $739,219, compared to $692,412 for the three months ended June 30, 2009, representing an increase of $46,807, or approximately 6.8%.  This increase is mostly related to the increase in ACH services of $161,761, partially offset by the decrease in verification services of $53,133, together with the decrease in Credit Card Services of $61,821.  The increase in our ACH services business represents increases in the volume of business conducted by several of our existing customers.   The decrease in Credit Card Services and verification services relate to the decreases in our volume of business as a result of reductions in consumer activity associated with general economic conditions, together with voluntary reductions in pricing to some or our customers in order to maintain accounts.  We also discontinued servicing certain industries which, due to

 
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regulatory changes, were no longer engaged in internet based transactions and therefore no longer needed to utilize our verification services.

For the six months ended June 30, 2010, revenues were $1,411,056, compared to $1,512,986 for the six months ended June 30, 2009, representing a decrease of $101,930, or approximately 6.7%.  This decrease is mostly related to the decrease in verification services of $99,676 and the decrease in credit card services of $191,205, partially offset by the increase in ACH services of $188,951.  As previously stated, the increase in our ACH business represents increases in the volume of business conducted by several of our existing customers, while the decrease in credit card and verification services related to the decreases in our volume of business as a result of reduction in consumer activity associated with general economic conditions, together with voluntary reduction in pricing to some of our customers in order to maintain accounts.  We also discontinued servicing certain industries which, due to regulatory changes, have discontinued their internet based transactions and therefore no longer needed to utilize our verification services.

Cost of Revenue and Gross Profit

Cost of revenues includes the costs incurred in conjunction with the items processed as well as costs associated with the residual credit card revenue we now receive through NDS, our wholly owned subsidiary.  These costs include the direct transactional costs incurred with respect to ACH processing and software as well as direct costs associated with the revenue generated from credit card merchant processing services.

The following table presents the composition of cost of revenue for the three months ended June 30, 2010 and 2009:

Cost of Revenue:
 
Three Months
Ended
June 30,
2010
 
Percentage
     
Three Months
Ended
June 30,
2009
 
Percentage
   
Variance
Dollars
 
                                    
   
 
                
   
                
     
                
 
                
 
   
 
                
 
  ACH Services
 
$
106,665
 
44.3
%
 
$
83,014
 
40.5
%
 
$
23,651
 
  
                               
  Verification Services
   
3,544
 
 1.5
%
   
26,775
 
13.1
%
   
 (23,231
)
  
                               
  Credit Card Services
   
130,868
 
54.2
%
   
95,368
 
46.4
%
   
35,500
 
                                 
Total Cost of Revenue
 
$
241,077
 
100.0
%
 
$
205,157
 
100.0
%
 
$
35,920
 

For the three months ended June 30, 2010, cost of revenues was $241,077, compared to $205,157 for the three months ended June 30, 2009, representing an increase of $35,920, or approximately 17.5%.  This increase is mostly attributable to the increase in our ACH services business resulting from increases in our volume of business with several of our existing customers, together with increases in costs associated with our credit card services business.  These increases were partially offset by decreases in our cost of revenue associated with our verification services.

With respect to our verification services, cost of sales is down substantially for the three months ended June 30, 2010, compared to the same period in the prior year, as a result of the discontinuation of services provided to several significant verification service customers previously engaged in the online tobacco industry.  In conjunction with recent legislation, effective June 30, 2010, these customers have wound down their operations and discontinued the use of our age verification service.

For the three months ended June 30, 2010, our credit card services cost of revenue increased while our credit card revenue decreased.  During the three months ended June 30, 2010, as we continue to experience unfavorable economic conditions and reduced consumer activity, we had to reduce pricing in some cases in order to maintain merchants and as a result our cost of revenues has not decreased in proportion to our credit card services revenue.

For the three months ended June 30, 2010, our gross profit was $498,142, compared to $487,255 for the three months ended June 30, 2009, representing an increase of $10,887, or approximately 2.2%.  Our gross profit stated as

 
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a percentage of revenues was 67.4% for the three months ended June 30, 2010, compared to 70.4% for the three months ended June 30, 2009.  The decrease in cost of revenues as a percentage of revenue reflects the effect of the increase in our ACH service revenue as previously described, partially offset by increases in our cost of credit card services as a result of general economic conditions as previously described.

The following table presents the composition of cost of revenue for the six months ended June 30, 2010 and 2009:

Cost of Revenue:
 
Six Months
Ended
June 30,
2010
 
Percentage
     
 Six Months
Ended
June 30,
2009
 
Percentage
   
Variance
Dollars
 
                                    
   
 
                
   
                
     
                
 
                
 
   
 
                
 
  ACH Services
 
$
176,995
 
38.4
%
 
$
165,235
 
39.3
%
 
$
11,760
 
  
                               
  Verification Services
   
10,906
 
 2.4
%
   
68,042
 
16.2
%
   
 (57,136
)
  
                               
  Credit Card Services
   
273,112
 
59.2
%
   
187,306
 
44.5
%
   
85,806
 
                                 
Total Cost of Revenue
 
$
461,013
 
100.0
%
 
$
420,583
 
100.0
%
 
$
40,430
 

For the six months ended June 30, 2010, cost of revenues was $461,013, compared to $420,583 for the six months ended June 30, 2009, representing an increase of $40,430, or approximately 9.6%.  This increase is mostly attributable to the increase in our ACH services business resulting from increases in our volume of business with several of our existing customers, together with increases in costs associated with our credit card services business.  These increases were partially offset by decreases in our cost of revenue associated with our verification services.

With respect to our verification services, cost of sales is down substantially for the six months ended June 30, 2010, compared to the same period in the prior year, as a result of the discontinuation of services provided to several significant verification service customers previously engaged in the online tobacco industry.  In conjunction with recent legislation, effective June 30, 2010, these customers have wound down their operations and discontinued the use of our age verification service.

For the six months ended June 30, 2010, our credit card services cost of revenue increased while our credit card revenue decreased.  During the six months ended June 30, 2010, as we continue to experience unfavorable economic conditions and reduced consumer activity, we had to reduce pricing in some cases in order to maintain merchants and as a result our cost of revenues has not decreased in proportion to our credit card services revenue.

For the six months ended June 30, 2010, our gross profit was $950,043, compared to $1,092,403 for the six months ended June 30, 2009, representing a decrease of $142,360, or approximately 13.0%.  Our gross profit stated as a percentage of revenues was 67.3% for the six months ended June 30, 2010, compared to 72.2% for the six months ended June 30, 2009.  The decrease in cost of revenues as a percentage of revenue reflects the effect of the increase in our ACH service revenue as previously described, partially offset by increases in our cost of credit card services as a result of general economic conditions as previously described.

Operating Expenses

Operating expenses include costs of personnel, computer maintenance and expenses, supplies, internet services, delivery charges, telecommunications expenses, travel, and other costs associated with our payment services operations.

For the three months ended June 30, 2010, operating expenses were $294,843, compared to $283,010 for the three months ended June 30, 2009, representing an increase of $11,833 or approximately 4.2%.  The increases in operating costs related mostly to increases in amortization expense of $17,640, and commissions and fees expenses of $4,227, partially offset by decreases in travel expense of $5,252, and other expenses of $5,110.
 
 
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Our amortization expense increased in conjunction with the acquisition of a portfolio of merchant accounts during the three months ended June 30, 2010.  The increases in our commissions and fees expenses were associated with the amendment we made to our Thermo Credit loan facility whereby we extended the due date of the loan.  These increases were partially offset by decreases in travel expenses which reflected a reduced amount of travel compared to the prior year when we had recently completed the acquisition of NDS.  We also now place greater utilization on internet based training programs for our independent sales agents, which reduces the travel costs of our sales managers.  The decrease in other expenses relates mostly to reductions in meals and entertainment expenses of $4,162, office expenses of $2,182, telephone expenses of $1,876, and insurance expenses of $1,904, partially offset by increases in leases expenses of $2,550, recruitment expenses of $1,493, and dues and subscriptions of $771.  The reductions in our meals and entertainment expenses relate to changes in the way we train and support our independent sales agents.  The decreases in our office, telephone, and insurance expenses relate mostly to changes we’ve made since our acquisition of Netcom to eliminate duplicate costs, such as migrating to a more paperless office, and implementing an internet based phone system that eliminates most of the cost associated with intercompany communication amongst our staff.  These reductions in other expenses were partially offset by increases in such other costs as lease expenses of $2,550, recruitment expenses of $1,493, and dues and subscriptions expenses of $771.  During the current quarter, we paid certain costs and fees assocated with one of our office leases which arise periodically.  We also increased recruitment expenses as well as dues and subscriptions in conjunction with our efforts to increase our network of independent sales agents.

For the six months ended June 30, 2010, operating expenses were $594,207, compared to $583,822 for the six months ended June 30, 2009, representing an increase of $10,385 or approximately 1.8%.  The increase in operating costs related mostly to increases in amortization expense of $29,400, and personnel costs of $4,738, partially offset by decreases in travel expense of $15,166, and other expenses of $7,775.
 
Our amortization expense increased in conjunction with the acquisition of a portfolio of merchant accounts during the six months ended June 30, 2010.  Our personnel costs increased earlier in the year and were actually higher during the first calendar quarter than in the current quarter, related to transition of certain personnel whereby we incurred certain severance costs associated with this transition.  These increases were partially offset by decreases in travel expenses which reflected a reduced amount of travel compared to the prior year when we had recently completed the acquisition of NDS.  We also now place greater utilization on internet based training programs for our independent sales agents, which reduces the travel costs of our sales managers.  The decrease in other expenses relates mostly to reductions in meals and entertainment expenses of $5,130, office expenses of $7,469, freight of $1,675, telephone expenses of $1,616, and insurance expenses of $1,887, partially offset by increases in leases expenses of $5,150, recruitment expenses of $2,351, and dues and subscriptions of $2,044.  The reductions in our meals and entertainment expenses relate to changes in the way we train and support our independent sales agents.  The decreases in our office, freight, telephone, and insurance expenses relate mostly to changes we’ve made since our acquisition of Netcom to eliminate duplicate costs, such as migrating to a more paperless office, and implementing an internet based phone system that eliminates most of the cost associated with intercompany communication amongst our staff.
 
Selling, General, and Administrative Expenses

For the three months ended June 30, 2010, our selling, general, and administrative expenses were $166,103, compared to $169,701 for the three months ended June 30, 2009, representing a decrease of $3,598, or approximately 2.1%.  This decrease is mostly due to decreases in personnel costs of $4,057, marketing expenses of $2,403, and other expenses of $162, partially offset by increases in legal and accounting costs of $3,024.  The decrease in personnel costs reflects outsourcing some of our computer maintenance function instead of maintaining staff for these duties.  The decrease in marketing expenses relate mostly to the continued elimination of certain duplicate or non-productive costs compared to the same period in 2009.  The decrease in other expenses of $162 related mostly to decreases in business gifts.

For the six months ended June 30, 2010, our selling, general, and administrative expenses were $334,778, compared to $339,081 for the six months ended June 30, 2009, representing a decrease of $4,303, or approximately 1.3%.  This decrease is mostly due to decreases in legal and accounting costs of $21,506, and marketing expenses of $4,903, partially offset by increases in personnel costs of $20,138 and other expenses of $1,985.  The decrease in legal and accounting costs related to increased costs during the first quarter of 2009 related to our annual meeting

 
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and other legal services which did not occur in the first six months of the current year.  The decrease in marketing expenses related to the elimination of certain duplicate or non-productive costs compared to the prior year.  The increase in personnel costs reflects additions made to our sales management team in conjunction with increasing our recruitment efforts for independent sales agents.  The increase in other expenses related mostly to increases in SEC filing fees in conjunction with the completion of our private equity offering earlier in the year.

Results of Operations

We reported a net loss for the three months ended June 30, 2010, of $90,814 compared to $68,618 for the three months ended June 30, 2009, representing an increase of $22,196.  This increase is mostly attributable to the decrease in our credit card revenue during the three months ended June 30, 2010, together with increases in amortization expense, partially offset by the reduction in interest expense, and reductions in our selling, general, and administrative expenses resulting from our continued cost saving measures, compared to the same period in the prior year.  Because we recognize significant amortization expenses related to our intangible assets and a portion of our interest expense related to our Sorrentino Note is non-cash, we reported a net loss for the three months ended June 30, 2010, but continued to produce net positive cash flow from our operations.

For the six months ended June 30, 2010, we reported a net loss of $244,452 compared to $74,866 for the six months ended June 30, 2009, representing an increase of $169,586.  This increase is mostly attributable to the decrease in revenue during the current six months, together with the reduction in interest expense as a result of eliminating approximately $900,000 of our note payable with Thermo Credit LLC beginning in March 2010, and our continued cost saving measures which have reduced some of our selling, general, and administrative expenses, compared to the same period in the prior year.  Because we now recognize significant amortization expenses related to our intangible assets and record non-cash interest expense related to our Sorrentino Note, we reported a net loss for the six months ended June 30, 2010, but continued to produce net positive cash flow from our operations.

Liquidity and Capital Resources

Per our Consolidated Statements of Cash Flows, net cash provided by operating activities for the six months ended June 30, 2010, was $46,614, compared to $153,634 for the six months ended June 30, 2009, or a decrease of $107,020.  The decrease in cash provided by operating activities is due mostly to the increase in our net loss of $244,452 together with the various adjustments necessary to reconcile net loss to net cash provided by operations for each of the respective periods presented.

For the six months ended June 30, 2010, adjustments decreasing our net loss of $244,452 included depreciation and amortization of $317,662, the decrease in prepaid interest of $52,000, and the increase in customer deposits of $16,000, offset by adjustments that increased our net loss, such as the increase in accounts receivable of $5,001, the increase in prepaid expenses of $4,299, the increase in deferred tax asset of $43,435, the decrease in ACH settlements payable of $36,488, and the decrease in accounts payable and accrued liabilities of $25,861.

For the six months ended June 30, 2009, adjustments decreasing our net loss of $74,866 included depreciation and amortization of $285,452, and the decrease in prepaid interest of $45,150, partially offset by adjustments that increased our net loss, such as the increase in trade receivables of $16,338, the decrease in accounts payable and accrued liabilities of $25,836, and the increase in prepaid expenses of $4,440, and the decrease in customer deposits of $2,800.

Net cash used in investing activities was $96,576 for the six months ended June 30, 2010, and $5,131 for the six months ended June 30, 2009.  During the six moths ended June 30, 2010, we completed the purchase of an interest in a portfolio of merchant credit card processing accounts, and made modest improvement to some of our customer relations software systems.  During the six months ended June 30, 2009, we made improvements to our telecommunications systems in order to create efficiencies between our Gulfport, Mississippi and Roswell, Georgia offices, and received $61,818 as part of our escrow reimbursement associated with our Netcom NY asset portfolio purchase.

Net cash provided by financing activities was $1,391 for the six months ended June 30, 2010, compared to cash used in financing activities of $69,158 for the six months ended June 30, 2009.  During the six months ended June 30, 2010, we completed a private placement offering of our common stock which provided net proceeds of $898,595,

 
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and we executed notes payable with two of our existing shareholders totaling $94,000 which helped facilitate the initial purchase price of the portfolio asset previously described.  We also repaid $994,204 in outstanding principal, comprised mostly of a reduction of $920,000 in our outstanding principal balance with Thermo Credit, and the repayment of approximately $72,520 of outstanding notes payable with shareholders, and received $3,000 in proceeds from the exercise of employee stock options.  For the six months ended June 30, 2009, we made a principal payment of $69,161 in conjunction with an amendment to our credit facility with Thermo Credit, LLC, whereby we extended the due date of the loan.

On February 28, 2010, we completed a private placement of 5,072,500 shares of our common stock, at $.20 per share, to a limited number of investors, generating gross proceeds of $1,014,500.  The offer and sale was conducted on behalf of the company by a FINRA-licensed broker-dealer who served as placement agent in the offering and received a sales commission equal to 7% of the gross proceeds of the offering, or $71,015, and a financial advisory/management fee equal to 2% of the gross proceeds of the offering, or $20,290.  We also had accrued offering costs of $24,600.  As a result of the transaction we received net proceeds of $898,595.

To date we have financed our capital expenditure needs from cash flows generated from our operations.  At this time, we believe we have sufficient operations and existing non-restricted cash to fund our needs for the next twelve months.

Our future expansion is planned from two sources.  First, we plan to continue to expand our use of independent sales organizations (ISO’s) to assist in the growth of our ACH and verification service business.  While there are costs associated with this increase, the majority of additional sales costs will be funded through the additional sales produced from these selling activities.  We have and plan to continue to structure our sales compensation plans based on commissions only, and employ the use of independent sales representatives already engaged in selling financial products and/or services that are complementary to ACH services.  Accordingly, we believe we can continue to expand these sales activities from our internally generated cash flow.

Second, we believe we will also expand future operations through acquisitions which are accretive to our current earnings at the time of acquisition.  During 2008, we completed two such acquisitions, NDS and the portfolio asset purchase, as means of increasing our volume of business while at the same time expanding our payment services to include credit card services.  In February 2010 we completed the purchase of an additional portfolio of credit card merchant accounts which supplemented our growth.  Going forward, management expects our public company status to enhance our ability to attract qualified personnel, obtain additional working capital, and facilitate acquisitions more effectively than could be accomplished by remaining a private, closely-held entity.  At this time, we have no understanding, arrangement or agreement to make any acquisitions, but continue to actively seek such opportunities as a means to accelerate revenue and earnings growth.

Recent General Economic Conditions
 
In light of the slowdown in the economy and challenges within the financial sector and credit markets it has become more difficult for many companies to evaluate their future operations.  Although we have been able to complete financing transactions which facilitated the acquisition of NDS on August 22, 2008, and the purchase of the portfolio asset on September 17, 2008, and completed a private placement in February 2010, we believe that access to future financing may continue to be difficult until such time as general economic conditions improve.  At this time we have not experienced any material negative impact from recent economic conditions, but we believe it is reasonable to expect that our payment processing business, both for ACH and for credit card transactions could be negatively impacted by these conditions.  Accordingly, we believe that the following factors should be taken into consideration:

·  
We may experience reductions in the amount of payments we process for merchants as a result of a downturn in consumer activity and consumer confidence.
·  
We may be negatively impacted in our credit card processing business if consumers are unable to maintain existing credit card limits or have credit card services terminated.
·  
We may experience difficulties in maintaining or re-financing our existing credit facilities at either equivalent or more favorable rates.
·  
New sources of borrowed capital may become more expensive or unavailable which may inhibit our ability to grow.
·  
Competition may become more intense and we may be required to reduce pricing to maintain the business we have and/or to obtain new business through our existing sales force.
 
 
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Recent Legislation

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), was signed into law July 21, 2010.   The Act spans over 2,300 pages and affects almost every aspect of the U.S. financial services industry. The objectives ascribed to the Act by its proponents in Congress and by the President include restoring public confidence in the financial system, preventing another financial crisis, and allowing any future asset bubble to be detected and deflated before another financial crisis ensues.  The Dodd-Frank Act affects a profound increase in regulation of the financial services industry, and gives U.S. governmental authorities more information and more authority in broad and significant areas, with wholly discretionary authority to write and interpret new rules which may have a significant effect on the banking industry, and as a result could have an effect on our business operations.

The Act also affects various reporting requirements for companies, that report to the Securities and Exchange commission.  Smaller reporting companies, such as ours, are permanently relieved from the requirement to have an attestation report from the Company’s independent auditors on Section 404 internal controls.

At this time, although we believe the relief provided regarding Section 404 internal controls attestation are beneficial to the Company, and we are not currently aware of any direct negative impact the Act may have on our business operations, due to the broad open ended authority provided in the overall legislation our business could be negatively impacted in the future.

Inflation

Inflation has not had a material effect on the operations of the Company in the past.  At the present time there is a substantial doubt that such conditions will adversely affect the Company for the foreseeable future.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As a smaller reporting company, the Company is not required to provide the information required by this Item.

ITEM 4(T). CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

Management is responsible for maintaining effective disclosure controls and procedures.  As of the end of the period covered by this Quarterly Report on Form 10-Q, management evaluated the effectiveness and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)).  Based on that evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in reports that are filed or submitted under the Exchange Act are recorded, processed, summarized and reported to management within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in internal controls over financial reporting during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 
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PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

We are not engaged in any material legal proceedings which involve us, any of our subsidiaries or any of our properties.

ITEM 1A.  RISK FACTORS.

As a smaller reporting company, the Company is not required to provide the information required by this Item.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

During the quarter ended June 30, 2010, we did not have any sales of securities in transactions that were not registered under the Securities Act of 1933, as amended, that have not been reported in a Form 8-K.

ITEM 3.  DEFAULT UPON SENIOR SECURITIES.

None.

ITEM 4.  [REMOVED AND RESERVED]

None.

ITEM 5.  OTHER INFORMATION.

None.

ITEM 6.  EXHIBITS.

               
   
10.1
 
Fourth Amendment to Agreements, dated June 30, 2010, to the Thermo Credit, LLC Loan, Pledge and Security Agreement and related Promissory Note (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on July 2, 2010).
31.1
 
Certification of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2
 
Certification of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1
 
Certification of Principal Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2
 
Certification of Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.*
_______________
* Filed herewith.



 
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Pursuant to the requirements 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.

 
UNITED ESYSTEMS, INC.
                                                                  
      
Date:   August 17, 2010      
By: /s/ Walter Reid Green, Jr.
 
      Walter Reid Green, Jr.
 
      Chief Executive Officer, President and
      Chief Financial Officer
 
      (Principal Executive Officer and Principal Financial Officer)



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