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EX-10.15 - EXHIBIT 10.15 - Seaniemac International, Ltd.v233008_ex10-15.htm
EX-10.13 - EXHIBIT 10.13 - Seaniemac International, Ltd.v233008_ex10-13.htm
EX-10.14 - EXHIBIT 10.14 - Seaniemac International, Ltd.v233008_ex10-14.htm
EX-31.1 - EXHIBIT 31.1 - Seaniemac International, Ltd.v233008_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - Seaniemac International, Ltd.v233008_ex32-1.htm
EX-10.21 - EXHIBIT 10.21 - Seaniemac International, Ltd.v233008_ex10-21.htm
EX-10.23 - EXHIBIT 10.23 - Seaniemac International, Ltd.v233008_ex10-23.htm
EX-10.16 - EXHIBIT 10.16 - Seaniemac International, Ltd.v233008_ex10-16.htm
EX-10.18 - EXHIBIT 10.18 - Seaniemac International, Ltd.v233008_ex10-18.htm
EX-10.19 - EXHIBIT 10.19 - Seaniemac International, Ltd.v233008_ex10-19.htm
EX-10.22 - EXHIBIT 10.22 - Seaniemac International, Ltd.v233008_ex10-22.htm
EX-10.17 - EXHIBIT 10.17 - Seaniemac International, Ltd.v233008_ex10-17.htm
 
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2011

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

Commission File Number: 000-54007

Compliance Systems Corporation
(Exact 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.)
     
780 New York Avenue, Suite A, Huntington, New York
 
11743
(Address of principal executive offices)
 
(Zip Code)

(516)  656-4197
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ 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   ¨ (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 ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of August 15, 2011, 281,783,997 shares of common stock of the issuer were outstanding.

 
 

 

INDEX PAGE

       
PAGE
         
PART I — FINANCIAL INFORMATION
   
         
Item 1
 
Financial Statements
 
1
   
Condensed Consolidated Balance Sheets June 30, 2011 (Unaudited) and December 31, 2010 (Audited)
 
1
   
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010
 
2
   
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010
 
3
   
Notes to Unaudited Condensed Consolidated Financial Statements
 
4
         
Item 2
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
13
Item 3
 
Quantitative and Qualitative Disclosures about Market Risk
 
16
Item 4
 
Controls and Procedures
 
17
         
PART II — OTHER INFORMATION
   
         
Item 1
 
Legal Proceedings
 
18
Item 2
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
18
Item 3
 
Defaults upon Senior Securities
 
18
Item 4
 
Removed and Reserved
 
18
Item 5
 
Other Information
 
18
Item 6
 
Exhibits
 
18
         
SIGNATURES
   

 
 

 

PART I
FINANCIAL INFORMATION

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

   
June 30, 2011
   
December 31, 2010
 
   
(unaudited)
       
ASSETS
           
             
Current Assets:
           
Cash
  $ 17,579     $ 19,014  
Accounts receivable, net
    1,563       30,085  
Prepaid expenses and other current assets
    27,086       26,111  
                 
Total Current Assets
    46,228       75,210  
                 
Total Assets
  $ 46,228     $ 75,210  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
               
                 
Current Liabilities:
               
Short-term and demand notes payable
  $ 475,899     $ 442,189  
Accounts payable and accrued expenses
    1,169,065       1,051,767  
Accrued officers' compensation
    890,000       770,000  
Current maturities of long-term debt
    335,980       300,175  
Total Current Liabilities
    2,870,944       2,564,131  
                 
Long-term debt - net of curent maturities
    79,853       93,457  
Warrant liability
    7,839       -  
                 
Total Liabilities
    2,958,636       2,657,588  
                 
Commitments
               
                 
Stockholders' Deficiency:
               
Convertible Preferred Stock, $0.001 par value:
               
Series A: 2,500,000 shares authorized, 2,293,750 shares issued and outstanding
    2,294       2,294  
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  
Series D: 100,000 shares authorized, 50,000 shares issued and outstanding
    50       -  
Common stock, $0.001 par value; 2,000,000,000 shares authorized,
               
281,783,997 shares issued and outstanding
    281,783       281,783  
Additional paid-in capital
    6,037,002       6,051,734  
Accumulated deficit
    (9,236,616 )     (8,921,268 )
Total Stockholders' Deficiency
    (2,912,408 )     (2,582,378 )
                 
Total Liabilities and Stockholders' Deficiency
  $ 46,228     $ 75,210  

See Notes to Condensed Consolidated Financial Statements

 
1

 

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenues
  $ -     $ -     $ -     $ -  
                                 
Operating Expenses:
                               
Selling, general and administrative expenses
    131,487       91,199       252,421       185,248  
                                 
Operating Loss
    (131,487 )     (91,199 )     (252,421 )     (185,248 )
                                 
Interest expense (including amortization of loan costs
                               
and related financing expenses)
    (46,414 )     (208,783 )     (68,298 )     (458,591 )
                                 
Warrant fair value adjustment
    5,371       -       5,371       -  
                                 
Loss From Continuing Operations
    (172,530 )     (299,982 )     (315,348 )     (643,839 )
                                 
Loss From Discontinued Operations
    -       (279,992 )     -       (589,180 )
                                 
Net Loss
    (172,530 )     (579,974 )     (315,348 )     (1,233,019 )
                                 
Preferred Dividends
    38,786       37,500       76,286       75,000  
                                 
Net Loss Attributable to Common Shareholders
  $ (211,316 )   $ (617,474 )   $ (391,634 )   $ (1,308,019 )
                                 
Basic and Diluted Per Share Data:
                               
Loss from continuing operations
  $ 0.00     $ 0.00     $ 0.00     $ 0.00  
Loss from discontinued operations
    -       0.00       -       0.00  
Net loss
  $ 0.00     $ 0.00     $ 0.00     $ 0.00  
                                 
Weighted Average Shares Outstanding -
                               
Basic and Diluted
    281,783,997       280,561,113       281,783,997       261,092,325  

See Notes to Condensed Consolidated Financial Statements

 
2

 

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

   
Six Months Ended June 30,
 
   
2011
   
2010
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (315,348 )   $ (1,233,019 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Interest/penalty accrued and not paid or imputed
    43,201       182,155  
Share based payments
    13,017       106,284  
Warrant exchange
    11,797       -  
Warrant fair value adjustment
    (5,371 )     -  
Depreciation and amortization
    -       40,912  
Amortization of deferred charges and debt discount
    -       124,942  
Bad debt expense
    288       61,266  
Changes in assets and liabilities:
               
Accounts receivable
    28,234       (90,111 )
Prepaid expenses and other current assets
    27,025       36,218  
Security deposits
    -       7,056  
Accounts payable and accrued expenses
    41,013       107,916  
Accrued officers' compensation
    120,000       240,000  
Deferred service revenue
    -       1,900  
Total adjustments
    279,204       818,538  
Net Cash Used in Operating Activities
    (36,144 )     (414,481 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net repayments of short-term and demand loans
    (15,291     (19,703 )
Proceeds from issuances of preferred stock
    50,000       -  
Proceeds from issuances of secured convertible debentures
    -       525,000  
Stock issuance costs
    -       (7,388 )
Loan costs paid in cash
    -       (90,662 )
Net Cash Provided By Financing Activities
    34,709       407,247  
                 
NET DECREASE IN CASH
    (1,435 )     (7,234 )
                 
CASH - Beginning of Period
    19,014       26,195  
                 
CASH - End of Period
  $ 17,579     $ 18,961  
                 
SUPPLEMENTAL INFORMATION:
               
Cash Paid During the Period for:
               
Interest
  $ 284     $ 60,000  
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
Reclassification of warrants to a liability
  $ 1,413     $ -  
Preferred dividends declared and accrued, but not paid
  $ 76,286     $ 75,000  
Insurance premium financed
  $ 27,999     $ -  
Value of common stock issued for debt repayment/services/future services
  $ -     $ 53,689  
Issuance of shares as a debt discount
  $ -     $ 12,960  
Loan costs paid in stock
  $ -     $ 124,200  
Value of common stock issued for acquisition
  $ -     $ 259,361  

See Notes to Condensed Consolidated Financial Statements

 
3

 

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
 
1.            Basis of Presentation:
 
The accompanying unaudited interim condensed consolidated financial statements of Compliance Systems Corporation and Subsidiaries (the “Company”) have been prepared by management in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for annual financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

The results of operations for the six months ended June 30, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011.  The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC on April 15, 2011.

The Company’s current business plan is to attempt to identify and negotiate with business targets for mergers of those entities with and into the Company.   No assurance can be given that the Company will be successful in identifying or negotiating with any target company.

On December 1, 2010, the Company entered into and consummated the transactions contemplated by an Agreement and Consent to Surrender of Collateral (“Surrender of collateral”) with Agile Opportunity Fund LLC (“Agile”).  As a result, the Company’s operating businesses are reflected as discontinued operations.  See Note 10 for a further discussion of discontinued operations.

Prior to the Surrender of Collateral, the Company operated its principal businesses through two of its subsidiaries, Call Compliance, Inc. (“CCI”) and Execuserve Corp. (“Execuserve”).  CCI provided compliance technologies, methodologies and services to the teleservices industry.   The business of Execuserve Corp. provided organizations who are hiring employees with tests and other evaluation tools and services to assess and compare job candidates. 

2.            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 June 30, 2011, the Company had stockholders’ and working capital deficiencies of $2,912,408 and $2,824,716, respectively.
 
Management believes the Company will continue to incur losses and negative cash flows from operating activities for the foreseeable future and will need additional equity or debt financing to sustain its operations until it can achieve profitability and positive cash flows, if ever. Management plans to seek additional debt and/or equity financing for the Company, but cannot assure that such financing will be available on acceptable terms. The Company's continuation as a going concern is dependent upon its ability to ultimately attain profitable operations, generate sufficient cash flow to meet its obligations, and obtain additional financing as may be required. The outcome of this uncertainty cannot be assured.
 
The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 
4

 

 COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
 Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
 
3.            Significant Accounting Policies Applicable to Interim Financial Statements:
 
A.   Loss per Share

Basic loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted loss per share gives effect to dilutive convertible securities, options, warrants and other potential common stock outstanding during the period, only in periods in which such effect is dilutive.   The following securities have been excluded from the calculation of net loss per share, as their effect would be anti-dilutive:

   
June 30, 2011
   
June 30, 2010
 
Convertible debentures and accrued interest
   
     
427,124,600
 
Preferred stock
   
587,231,900
     
537,231,900
 
Warrants
   
196,136,100
     
91,707,500
 
Stock options
   
40,000,000
     
45,000,000
 

B.   Fair Value of Financial Instruments

Substantially all of the Company’s financial instruments, consisting primarily of cash, accounts receivable, accounts payable and accrued expenses and all debt, are carried at, or approximate, fair value because of their short-term nature or because they carry market rates of interest.  The warrant liability was valued using the Black-Scholes option pricing model.  See Note 9F.

C.  Stock Based Compensation Arrangements

The Company accounts for stock-based compensation 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 dates, based on the estimated number of awards that are expected to vest and will result in charges to operations.

The Company valued these issuances utilizing a Black-Scholes option pricing model using the following assumptions:  share price, exercise price, expected volatility, risk-free rate and term.   

The risk-free interest rate used in the Black-Scholes valuation method is based on the implied yield currently available in U.S. Treasury securities at maturity with an equivalent term.  The Company has not declared or paid any dividends and does not currently expect to do so in the future.  The expected term of options represents the period that its stock-based awards are expected to be outstanding and was determined based on projected holding periods for the remaining unexercised shares.  Consideration was given to the contractual terms of its stock-based awards, vesting schedules and expectations of future employee behavior.  The volatility rate used was based upon an average volatility rate for two entities providing telecommunications.  The Company did not use the volatility rate for Company Common Stock as the Company Common Stock had not been trading for the sufficient length of time to accurately compute its volatility when these warrants were issued.  

From time to time, the Company’s shares of common stock and warrants have been issued as payment to employees and non-employees for services. These are non-cash transactions that require management to make judgments related to the fair value of the shares issued, which affects the amounts reported in the Company’s consolidated financial statements for certain of its assets and expenses.

Share based payments amounted to $13,017 and $38,167 for the three months ended June 30, 2011 and 2010, respectively, and $13,017 and $106,284 for the six months ended June 30, 2011 and 2010, respectively.

D.   Subsequent Events

Management has evaluated subsequent events through the date of this filing.

 
5

 

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
 Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
 
4.            Merger and Surrender of Collateral:

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 became effective on February 9, 2010.

On December 1, 2010, the Company entered into and consummated the transactions contemplated by an Agreement and Consent to Surrender of Collateral with Agile.  As a result, the Company’s operating businesses are reflected as discontinued operations including the operations of Execuserve.  See Note 10 for a further discussion of discontinued operations.  

5.            Short-Term and Demand Notes Payable
 
Short-term and demand notes payable consist of the following:

   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
             
Nascap Corp. and accrued interest (A)
  $ 423,500     $ 402,500  
John Koehler (B)
    30,000       30,000  
Insurance premium financing (C)
    22,399       9,689  
Total
  $ 475,899     $ 442,189  
  
A.      Secured Demand Note – Nascap Corp. (“Nascap”)

In September 2006, CCI executed a secured $150,000 promissory note and related security agreement with Nascap.  Interest at 12% per annum was payable monthly in arrears and the note principal was due on demand.  The note was collateralized by the accounts receivable of the principal subsidiary and was unconditionally guaranteed by the Company.

As of March 31, 2009, the Company entered into a Loan Modification Agreement with 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 $73,500 and $52,500 at June 30, 2011 and December 31, 2010 respectively.   At both June 30, 2011 and December 31, 2010, $350,000 was outstanding on this note.

B.      Promissory Note – John Koehler (“Koehler”)
 
On October 1, 2003, the predecessor to Execuserve issued a $150,000 non-interest bearing promissory note to Koehler, an investor in the predecessor.  The note was amended on October 25, 2004.  Upon the acquisition of Execuserve by the Company, Koehler was owed $37,000.  The balance owed is being paid in monthly installments of $1,000.  The Company is in default as it has not made a payment since September 2010.  The balance due to Koehler at June 30, 2011 and December 31, 2010 totaled $30,000.
 
C.      Insurance Premium Financing
 
At December 31, 2010, the Company had an outstanding balance of $9,689 on a loan utilized to fund certain financed insurance premiums.  The loan was repaid in 2011.  In 2011, the Company received a new loan totaling $27,999 to fund certain insurance premiums.  The loan is payable over a nine-month term.  At June 30, 2011, the loan balance is $22,399.

 
6

 

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
 Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
 
6.            Long-term Debt
 
Long-term debt at June 30, 2011 and December 31, 2010 consists of the following:
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
Notes payable and accrued interest to officer/stockholder (A)
 
$
66,683
   
$
62,182
 
Notes payable and accrued interest to Execuserve officers (B)
   
151,900
     
       147,700
 
Other secured debt and accrued interest (C)
   
197,250
     
183,750
 
Total long-term debt
   
   415,833
     
393,632
 
Current maturities of long-term debt
   
335,980
     
300,175
 
Long-term debt less current maturities
 
$
79,853
   
$
93,457
 
 
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 executive officer and 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 had a maturity date 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.  In March 2011, the maturity date of the Brookstein New Note was extended to July 1, 2011 and was further extended in August 2011 to January 1, 2012.  Interest incurred on the note totaled $2,250 and $4,500 for the three and six months ended June 30, 2011 and 2010, respectively.  Accrued and unpaid interest totaled $15,750 and $11,250 at June 30, 2011 and December 31, 2010, respectively.   At both June 30, 2011 and December 31, 2010, $50,933 was outstanding on this note.

B.   Promissory Notes to Execuserve Officers

On February 9, 2010, concurrent with the acquisition of Execuserve, Execuserve issued promissory notes to two of its officers totaling $140,000 for amounts owed to them prior to the acquisition.  The notes bear interest at 6% per annum and are payable in monthly installments inclusive of interest of $2,707 subject to cumulative positive cash flow requirements of Execuserve as provided in the note agreements.  As Execuserve did not generate positive cash flow, no payments were made under the notes.  All accrued and unpaid interest and principal are due and payable on February 9, 2015. Interest incurred on the note totaled $2,100 and $4,200 for the three and six months ended June 30, 2011, respectively.  Interest incurred on the note totaled $2,100 and $3,268 for the three and six months ended June 30, 2010, respectively.  Accrued and unpaid interest totaled $11,900 at June 30, 2011 and $7,700 at December 31, 2010.   At June 30, 2011 and December 31, 2010, $140,000 was outstanding on these notes.

 
7

 

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
 
6.            Long-Term Debt (Continued)
 
C.   Ponzio Promissory Note Exchange Agreement –

 
The Company had outstanding unsecured demand loans due Henry A. Ponzio (“Ponzio”) 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 Agreement (the “Ponzio Exchange Agreement”) with 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 had a maturity date 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.  In March 2011, the maturity date of the Ponzio New Note was extended to July 1, 2011 and was further extended in August 2011 to January 1, 2012.  Accrued and unpaid interest as of June 30, 2011 and December 31, 2010 totaled $47,250 and $33,750, respectively.  At both June 30, 2011 and December 31, 2010, $150,000 was outstanding on this note.
 
7.            Related Party Transactions:
 
A.  Garfinkel

The Company had a verbal management agreement with an entity wholly-owned by Dean Garfinkel (“Garfinkel”), the Company’s former president and chief executive officer.  Under the terms of this verbal agreement, the Company received customer service support, content updates and promotional and growth support for the Regulatory Guide line of business.  The Company was responsible for accounting, software upgrades, web changes, and hardware and internet costs.  In consideration, the Company was committed to pay 50% of the Company’s net revenues from this line of business and 75% of the Company’s net above the 2009 base year.  For the three and six months ended June 30, 2010, the Company paid approximately $10,500 and $21,000, respectively.  This Management Agreement ended on June 30, 2010.
 
8.            Commitments:
 
A.  Employment Agreements
  
The Company has employment agreements with its two executive officers through November 30, 2011. One of the officers resigned in November 2010.  These officers deferred receiving the payments of their salaries totaling in 2011 and 2010. The payment of accrued salaries owing to the officer who resigned in the amount of $380,000 is currently under negotiations.  Minimum annual aggregate amounts due under the remaining employment agreement are $220,000 in 2011.

 
8

 
 
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
 
9.            Capital Transactions:
 
A.  Issuance of Deferred Salary Warrants –

 
Brookstein has been deferring all or a portion of his salary since January 1, 2009.  

Effective January 1, 2011, Brookstein agreed to continue deferring his full salary.  The amount of such deferred salaries for the three and six  months ending June 30, 2011 totaled $60,000 and $120,000.  As compensation, the Company granted to Brookstein Deferred Salary Warrants to purchase 12.0 million shares (each a “2011 Deferred Salary Warrant Share”) of Company Common Stock at $0.001 per 2011 Deferred Salary Warrant Share at the rate of 100 Deferred Salary Warrants for each $1 of deferred salary for a term of five years.  The Company valued these issuances utilizing a Black-Scholes option pricing model with the following assumptions:  share price: $0.0008 - $0.0011; exercise price: $0.001; expected volatility: 27%; risk-free rate: 2.01% – 2.24%; term: 5 years.  

Effective July 1, 2011, Brookstein agreed to continue deferring his full salary.  The amount of such deferred salaries for the three months ending September 30, 2011 will total $60,000.  As compensation, the Company granted to Brookstein Deferred Salary Warrants to purchase 6.0 million shares of Company Common Stock at $0.001 per Deferred Salary Warrant Share at the rate of 100 Deferred Salary Warrants for each $1 of deferred salary for a term of five years.

B.  Issuance of Dividend Accrual Warrants – Series B Senior Subordinated Convertible Voting Preferred Stock (the “Series B Preferred Stock”)

The Company has failed to pay dividends on the 1.25 million outstanding shares of its Series B Preferred Stock.  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.

All of the outstanding shares of Series B Preferred Stock are held by Brookstein and Spirits Management, Inc. ("Spirits"), a company wholly-owned 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.

The Company deferred dividends totaling $37,500 and $75,000 for the three and six months ended June 30, 2011, $30,000 due to Brookstein, and $45,000 due to Spirits.  To compensate Brookstein and Spirits for the failure to pay dividends when due, 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 $0.001 per Dividend Accrual Warrant Share at a rate of 100 Dividend Accrual Warrants for every $1 of dividend accrued during the prior three and six month periods.  The Company issued Dividend Accrual Warrants totaling 1.5 million and 3.0 million to Brookstein and 2.25 million and 4.50 million to Spirits for the three and six months ended June 30, 2011, respectively.  The Company valued these issuances using the Black-Scholes option pricing model with the following assumptions: share price:  $0.0006 - $0.001; strike price: $0.001; expected volatility: 27%; risk free interest rate: 1.76% - 2.24%; term: 5 years.  

For each of the three months ended June 30, 2011 and June 30, 2010, dividends totaled $37,500.  For each of the six months ended June 30, 2011, dividends totaled $75,000.  Accrued dividends totaled $375,000 and $300,000 at June 30, 2011 and December 31, 2010, respectively, and are included in accounts payable and accrued expenses on the consolidated balance sheet.

 
9

 

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

9.            Capital Transactions (Continued)
 
C.  Issuance of Deferred Interest Payment Warrants –

The Company continued to fail to pay interest on the promissory notes that were previously issued to Brookstein, Ponzio and Nascap (the “Note Holders”).  To compensate the Note Holders for the failure to pay interest on their promissory notes for the three and six months ended June 30, 2011, the Company granted to such Note Holders warrants (each, a “2011 Deferred Interest Payment Warrant”) to purchase shares of Common Stock at the rate of 100 2011 Deferred Interest Payment Warrants for every $1 of interest not paid.  For the three and six months ended June 30, 2011, 1,950,000 and 3,900,000 Deferred Interest Payment Warrants were issued and have terms substantially identical to the Deferred Salary Warrants and Dividend Accrual Warrants. The Company valued these issuances using the Black-Scholes option pricing model with the following assumptions: share price:  $0.0008 - $0.0011; strike price: $0.001; expected volatility: 27%; risk free interest rate: 2.01% - 2.24 %; term: 5 years

The Company will not pay interest to the Note Holders in the third quarter of 2011.  To compensate them, the Company granted 2011 Deferred Interest Payment Warrants to purchase shares of Common Stock at the rate of 100 Deferred Interest Payment Warrants for every $1 of interest not paid.  The Company issued a total of 1,950,000 Deferred Interest Payment Warrants on July 1, 2011.

D.  Issuance of Series D Senior Convertible Voting Redeemable Preferred Stock (“Series D Preferred Stock”) and Issuance of Dividend Accrual Warrants –

During the six months ended June 30, 2011, Mr. Brookstein purchased 50,000 shares of Series D Preferred Stock for capital contributions of $50,000.  

Terms of the Series D Preferred include the following:
 
1.
Each holder of any shares of Series D Preferred (each, a “Series D Holder”) shall be entitled, effective as of the date of issuance of such shares, to receive, and shall be paid quarterly in arrears, on the last day of each of June, September, December and March of every calendar year, commencing June 30, 2011, dividends, accruing quarterly, in an amount equal to $0.12 per annum per share (as appropriately adjusted for any stock splits, stock dividends, combinations, and the like with respect to the Series D Preferred Stock), with respect to each outstanding share of Series D Preferred Stock owned of record by such Series D Holder.
 
2.
Each share of Series D Preferred Stock has a liquidation preference of $1 per share.
 
3.
Each share of Series D Preferred Stock shall entitle its holder to 10,000 votes on all matters submitted to the vote of stockholders of the Company.
 
4.
Prior to December 31, 2020, the Company has the right, but not the obligation, to redeem the then outstanding shares of Series D Preferred Stock at a rate of $1 per share.
 
5.
Each share of Series D Preferred Stock is convertible into 1,000 shares of Company Common Stock.

The Company has failed to pay dividends on the 50,000 outstanding shares of its Series D Preferred Stock.  As with the Series B Preferred Stock Discussed above, dividends may only be paid out of funds legally available for such purpose.  

For the three and six months ended June 30, 2011, dividends totaled $1,286.  Accrued dividends totaled $1,286 at June 30, 2011 and are included in accounts payable and accrued expenses on the consolidated balance sheet.

The Company deferred dividends totaling $1,286 for both the three and six months ended June 30, 2011,   To compensate Brookstein for the failure to pay dividends when due, 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 $0.001 per Dividend Accrual Warrant Share at a rate of 100 Dividend Accrual Warrants for every $1 of dividend accrued during the prior three month period.  The Company issued Dividend Accrual Warrants totaling 128,600 for the three and six months ended June 30, 2011, respectively.  The Company valued these issuances using the Black-Scholes option pricing model with the following assumptions: share price:  $0.0006; strike price: $0.001; expected volatility: 27%; risk free interest rate: 1.76%; term: 5 years.

 
10

 

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

9.            Capital Transactions (Continued)

E.  Issuance of Warrants for Extension of Investment Banking Agreement –

On April 26, 2011, the Company extended its investment banking agreement with Cresta Capital Strategies, LLC to April 26, 2012.  As a retainer, the Company issued a five-year warrant to purchase 50 million shares of the Company’s Common Stock at an exercise price of $0.001 per share.

 F.  Warrant Exchange Agreements –

The Company entered into separate warrant exchange agreements with Brookstein, Spirits, Garfinkel, Ponzio and Nascap to purchase an aggregate of 128.13 million shares of Company Common Stock.  The warrant holders included the Company’s chairman of the board, chief executive officer and chief financial officer and a company in which such officer is the sole equity owner, as well as the Company’s former president and chief executive officer.  Each of the warrant exchange agreements were dated as of May 12, 2011 and provided for the exchange of the warrants then held by such warrant holders (the “Old Warrants”) for new warrants (the “New Warrants”).  The number of shares of Common Stock issuable upon exercise of the New Warrants is equal to the number of shares of Common Stock that were issuable upon exercise of the Old Warrants.  The Old Warrants had exercise prices ranging from $0.05 to $0.001 per share (a weighted average exercise price of $0.022 per share) and had exercise periods expiring from June 23, 2014 through March 31, 2016 (typically, five years after the date of issuance of the subject warrants).  However, the Old Warrants contained certain anti-dilution provisions which caused the effective exercise prices to be reduced to less than $0.001 per share.  The New Warrants all have an exercise price of $0.001 per share and expire on May 11, 2016.  The New Warrants contain cashless exercise provisions.  The anti-dilution provisions of the New Warrants are primarily limited to stock splits and corporate transactions involving mergers and consolidations while the Old Warrants contained anti-dilution provisions that caused the reduction in the exercise prices of the Old Warrants whenever the Company issued stock or derivative securities with an effective purchase price less than the then exercise price of the subject Old Warrants.  The Company had issued the Old Warrants in connection with the (x) accrual of dividends due on preferred stock of the Company owned by certain of the warrant holders, (y) deferral of the payment of interest due on promissory notes of the Company owned by certain of the warrant holders and (z) deferral of salary due certain of the warrant holders in their capacities as executive officers of the Company.

As a result of the exchanges, the Company recognized a charge of $11,797 for the three and six months ended June 30, 2011, respectively, which is classified as part of interest expense.

As the New Warrants contain “cashless exercise” provisions, the value of the New Warrants were recognized as liabilities and not as part of stockholders’ deficiency.  In addition, the Company is required to revalue the New Warrants at the end of each reporting period with the change in value reported on the statement of operations.  The Company valued these issuances using the Black-Scholes option pricing model with the following assumptions at May 12, 2011 and June 30, 2011: share price:  $0.0006 - $0.0007; strike price: $0.001; expected volatility: 27%; risk free interest rate: 1.76% - 1.89%; term: 5 years.  The Company recognized a gain on the value of the New Warrants of $5,371 for the three and six months ended June 30, 2011, respectively.

 
11

 

COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

10.          Discontinued Operations:
 
As discussed above in Notes 1 and 4, the Company entered into and consummated the transactions contemplated by an Agreement and Consent to Surrender of Collateral with Agile.  As a result, the Company’s operating businesses are reflected as discontinued operations.  Revenues and net loss for the operating businesses for the three and six months ended June 30, 2010 are as follows:

   
For the three months ended
June 30, 2010
   
For the six months ended
June 30, 2010
 
Total revenues
  $ 317,271     $ 598,326  
Cost of revenues, operating and interest expenses
    597,263       1,187,506  
Loss from operations
  $ (279,992 )   $ (589,180 )

11.          Recent Accounting Pronouncements:
 
Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying consolidated financial statements.

 
12

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements necessarily involve known and unknown risks, uncertainties and other factors that may cause the actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performances, or achievements expressed or implied by such forward-looking statements. Readers are cautioned to review carefully all discussions containing forward-looking statements due to the risks and uncertainties which can materially affect the Company's business, operations, financial condition and future prospects. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “could,” “seek,” “intend,” “expect,” “anticipate,” “assume,” "hope," “plan,” “believe,” “estimate,” “predict,” “approximate,” “potential,” “continue” or the negative of such terms.  Statements including these words and variations of such words, and other similar expressions, are forward-looking statements.  Although the Company believes that the expectations reflected in the forward-looking statements are reasonable based upon its knowledge of its business and industry, the Company cannot predict or guarantee its future results, levels of activity, performances or achievements, or that such expectations will otherwise be realized.  Moreover, neither the Company nor any other person assumes responsibility for the accuracy and completeness of such statements.

Forward-looking statements represent the Company's expectations and beliefs concerning future events, based on information available to the Company as of the date of this Form 10-Q, and are subject to various risks and uncertainties. Such risks and uncertainties include without limitation:
● the Company’s ability to raise capital to finance its operations and growth, when needed and terms advantageous to the Company;
● the Company’s ability to locate and acquire appropriate business enterprises to supplement and enhance our revenue and cash flow;
● the ability to manage growth, profitability and the marketability of our services;
● the effect on our business of recent credit-tightening throughout the United States, especially within the construction and real estate markets;
● 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 potential clients;
● adverse results of any legal proceedings;
● the Company’s ability to enter into relationships with suppliers, vendors or contractors of acceptable quality of goods and services on terms advantageous to us;
● the volatility of our operating results and financial condition;
● the Company’s ability to attract and retain qualified senior management personnel; and
● other risks and uncertainties set forth in this Form 10-Q, the Company’s Form 10-K for the year ended December 31, 2010, and, from time to time, in the Company’s other filings with the Securities and Exchange Commission.

Readers of this Quarterly Report on Form 10-Q should carefully consider such risks, uncertainties and other information, disclosures and discussions which contain cautionary statements identifying important factors that could cause the Company’s actual results to differ materially from those provided in forward-looking statements.  Readers should not place any undue reliance on forward-looking statements contained in this Form 10-Q.  The Company disclaims any intent or obligation to update or revise any forward-looking statements, whether in response to new information, unforeseen events or changed circumstances, except as required to comply with the disclosure requirements of the federal securities laws.
 
Overview and Recent Developments
  
On December 1, 2010, the Company entered into and consummated the transactions contemplated by an Agreement and Consent to Surrender of Collateral (“Surrender of collateral”) with Agile Opportunity Fund LLC (“Agile”).  As a result, the Company’s operating businesses are reflected as discontinued operations.  

The Company’s current business plan is to attempt to identify and negotiate with business targets for mergers of those entities with and into the Company.   No assurance can be given that the Company will be successful in identifying or negotiating with any target company

Prior to the Surrender of Collateral, the Company operated its principal businesses through two of its subsidiaries, Call Compliance, Inc. (“CCI”) and Execuserve Corp. (“Execuserve”).  CCI provided compliance technologies, methodologies and services to the teleservices industry.   The business of Execuserve Corp. provided organizations who are hiring employees with tests and other evaluation tools and services to assess and compare job candidates

 
13

 

Critical Accounting Policies
 
The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) with certain amounts based on management’s best estimates and judgments. To determine appropriate carrying values of assets and liabilities that are not readily available from other sources, management uses assumptions based on historical results and other factors that they believe are reasonable. Actual results could differ from those estimates.

The Company’s critical accounting policies are described in Note 2 to the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.  There have been no material changes to our critical accounting policies as of and for the six and three months ended June 30, 2011.

Results of Operations for the Three and Six Months Ended June 30, 2011 (“2011”) Compared to the Three and Six Months Ended June 30, 2010 (“2010”)

Going Concern

Our financial statements have been prepared assuming that we will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  The Company’s continued losses and negative operating cash flows raise substantial doubt about its ability to continue as a going concern.  

The Company’s primary need for cash during the next twelve months is to fund payments of operating costs. Historically, the Company has relied upon private debt and equity financing to fund its operations and expects to continue to do so.  Our auditors included a “going concern” qualification in their auditors’ report for the year ended December 31, 2010. Such “going concern” qualification may make it more difficult for us to raise funds when needed. 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.

Continuing Operations

As a result of the Surrender of Collateral, the Company’s operating businesses were classified as discontinued operations.  Operating expenses represent those incurred primarily to enable the Company to satisfy the requirements of a reporting company.

The Company incurred a loss from continuing operations of $172,530 and $299,982 for the three months ending June 30, 2011 and 2010, respectively.  The Company incurred a loss from continuing operations for the six months ending June 30, 2011 and 2010 of $315,348 and $643,839, respectively.

Selling and general and administrative expenses consist primarily of officer’s salary and professional fees for accounting and auditing services, legal fees and consulting services.  Selling and general and administrative expenses for the three months ended June 30 2011 and 2010 amounted to $131,487 and $91,999, respectively.  For the six months ending June 30, 2011 and 2010, selling and general and administrative expenses amounted to $252,421 and $185,248, respectively.  Operating expenses consist of the following for the three and six months ended June 30, 2011 and 2010.

   
For the three
months ended
June 30, 2011
   
For the three
months ended
June 30, 2010
   
For the six
months ended
June 30, 2011
   
For the six
months ended
June 30, 2010
 
Officer’s salary
  $ 60,000     $ 60,000     $ 120,000     $ 120,000  
Payroll taxes and insurance
    10,421       4,000       19,663       8,000  
Professional fees
    45,023       19,875       73,586       37,000  
Other
    16,043       7,324       39,172       20,248  
                                 
Total
  $ 131,487     $ 91,199     $ 252,421     $ 185,248  

For the three months ended June 30, 2011 and 2010, interest expense amounted to $46,414 and $208,783, respectively.  Interest expense for the six months ended June 30, 2011 and 2010 amounted to $68,298, and $458,591 respectively.  This decrease is primarily related to the Surrender of Collateral on the Agile Debentures in December 2010.

 
14

 

The Company’s loan cost amortization and related financing expense, including amortization of loan discount, was $127,484 and $176,002 for the three and six months ended June 30, 2010.  Deferred loan costs and loan discount amortized during 2010 were related to the debentures that were issued to Agile.

Discontinued Operations

The results of the discontinued operations for the three months ended June 30, 2010 are as follows:

Total revenues
 
$
317,271
 
Cost of revenues, operating and interest expenses
   
597,263
 
Loss from operations
 
$
     (279,992)
 
 
The results of the discontinued operations for the six months ended June 30, 2010 are as follows:

Total revenues
 
$
598,326
 
Cost of revenues, operating and interest expenses
   
1,187,506
 
Loss from operations
 
$
     (589,180)
 
 
For the reasons set forth above, the Company’s 2011 net loss for the three month period decreased by $407,444 to $172,530 in 2011 from $579,974 in 2010 and decreased by $917,671 to $315,348 in 2011 from $1,233,019 in 2010.  

Dividends of $37,500 and $75,000 were accrued on the Series B Preferred Stock for the three and six months ended June 30, 2010, respectively.  Dividends of $38,786 and $76,286 were accrued on the Series B Preferred Stock and Series D Preferred Stock for the three and six months ended June 30, 2011, respectively.  The dividends are taken into account when computing loss per common share.  Accrued dividends total $376,286 at June 30, 2011.
 
The Company’s annual effective tax rate was estimated to be 0% for both 2011 and 2010. Accordingly, no tax benefit or cost was recognized in either of such periods.  During the current and prior periods, the Company did not record an income tax benefit for net deferred tax assets generated due to the uncertainty of their realization.

Warrant Exchange

On May 12, 2011, the Company exchanged warrants (the “Old Warrants”)  to purchase an aggregate of 128.13 million shares of our Common Stock, with exercise prices ranging between $0.05 and $0.001 per share and expiration dates between June 23, 2014 and March 31, 2016, for new warrants (the “New Warrants”) to purchase the same number of shares of our common stock at an exercise price of $0.001 per share and having an expiration date of May 11, 2016.  The New Warrants, which all expire on May 11, 2016, permit “cashless exercise,” a right which was not provided for in the Old Warrants.  The New Warrants also contain anti-dilution provisions that are not as advantageous to the warrant holders as the anti-dilution provisions applicable to the Old Warrants.

 As a result of the exchanges, the Company recognized a charge of $11,797 for the three and six months ended June 30, 2011, respectively, which is classified as part of interest expense.

As the New Warrants contain “cashless exercise” provisions, the value of the New Warrants were recognized as liabilities and not as part of stockholders’ deficiency.  In addition, the Company is required to revalue the New Warrants at the end of each reporting period with the change in value reported on the statement of operations.  The Company valued these issuances using the Black-Scholes option pricing model. The Company recognized a gain on the value of the New Warrants of $5,371 for the three and six months ended June 30, 2011, respectively.

 
15

 

 Liquidity and Capital Resources

At June 30, 2011, we had a cash balance of $17,579 compared to $19,014 at December 31, 2010.

Cash used in operating activities of $36,144.  The decrease in cash was primarily attributable to funding the loss for the period.

Net cash provided by financing activities was $34,709.  The Company received $50,000 from the issuance of its newly created Series D Preferred Stock and repaid $15,291 of short term and demand loans.

Due to cash flow difficulties, the Company has issued warrants to various officers and other companies and individuals for deferred salaries, dividend payments and accrued interest on various debt securities.  See Note 9 of the Consolidated Financial Statements for a more detailed explanation.

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.  On April 26, 2011, the Company extended its investment banking agreement with Cresta Capital Strategies, LLC to April 26, 2012.  As a retainer, the Company issued a five-year warrant to purchase 50 million shares of the Company’s Common Stock at an exercise price of $0.001 per share.
 
The Company’s current business plan is to attempt to identify and negotiate with business targets for mergers of those entities with and into the Company. The Company’s expected expenses are comprised of operating expenses related to the business plan as well as those that enable the Company to satisfy the requirements of a reporting company. 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.

Off-Balance Sheet Arrangements

As of June 30, 2011, there were no off-balance sheet arrangements.

Item 3.   Quantitative and Qualitative Disclosures about Market Risk.

This item is not applicable to smaller reporting companies.

 
16

 

Item 4.   Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Our management conducted an evaluation, with the participation of its Chief Executive Officer (CEO)/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 Quarterly Report on Form 10-Q. Based upon that evaluation, the CEO/CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
 
Management’s Quarterly 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 CEO/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 was effective as of June 30, 2011.
 
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.
 
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 quarterly report on Form 10-Q 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.

 
17

 
 
PART II
OTHER INFORMATION

Item 1.   Legal Proceedings.

Not applicable.

Item 1A. Risk Factors.

Not applicable.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.

Effective May 12, 2011, we exchanged warrants (the “Old Warrants”) to purchase an aggregate of 128.13 million shares of Company Common Stock held by five persons and entities for new warrants to purchase an identical number of shares of Company Common Stock.  The Old Warrants had exercise prices ranging between $0.05 and $0.001 per share and expiration dates between June 23, 2014 and March 31, 2016.  Each of the New Warrants has an exercise price of $0.001 per share.  The New Warrants, which all expire on May 11, 2016, permit “cashless exercise,” a right which was not provided for in the Old Warrants.  The New Warrants contain anti-dilution provisions that are not as advantageous to the warrant holders as the anti-dilution provisions applicable to the Old Warrants.  The persons and entities participating in the exchange included our chairman of the board, chief executive officer and chief financial officer and a company in which such person is the sole equity owner, as well as a former president and chief executive officer of our Company.  We had issued the Old Warrants in connection with the (x) accrual of dividends due on preferred stock of our company owned by certain of the warrant holders, (y) deferral of the payment of interest due on promissory notes of our company owned by certain of the warrant holders and (z) deferral of salary due certain of the warrant holders in their capacities as executive officers of our company.  We believe that the issuances of the New 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 issuances were conducted pursuant to transactions not involving any public offering.

Item 3.   Defaults upon Senior Securities.

None.
 
Item 4.   Submission of Matters to a Vote of Security Holders.

Not applicable.
 
Item 5.   Other Information.

Not applicable.
 
Item 6.   Exhibits.

The following exhibits are being filed as part of this Quarterly Report on Form 10-Q.
 
Exhibit
Number
 
Description
     
10.1
 
Agreement and Consent to Surrender of Collateral dated December 1, 2010, among Compliance Systems Corporation, Call Compliance Inc., Execuserve Corp. and Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.8 of the registrant’s Current Report on Form 8-K (Date of Report: December 1, 2010), filed with the Securities and Exchange Commission on March 2, 2011].
10.2
 
Warrant Certificate of Compliance Systems Corp., dated January 1, 2011, evidencing 6,000,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.2 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].

 
18

 
 
10.3
 
Warrant Certificate of Compliance Systems Corp., dated January 1, 2011, evidencing 225,000 common stock purchase warrants registered in the name of Barry M. Brookstein. Incorporated by reference to Exhibit 10.3 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.4
 
Warrant Certificate of Compliance Systems Corp., dated January 1, 2011, evidencing 675,000 common stock purchase warrants registered in the name of Henry A. Ponzio. [Incorporated by reference to Exhibit 10.4 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.5
 
Warrant Certificate of Compliance Systems Corp., dated January 1, 2011, evidencing 1,050,000 common stock purchase warrants registered in the name of Nascap Corp. [Incorporated by reference to Exhibit 10.5 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.6
 
Warrant Certificate of Compliance Systems Corp., dated March 31, 2011, evidencing 1,500,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.6 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.7
 
Warrant Certificate of Compliance Systems Corp., dated March 31, 2011, evidencing 2,250,000 common stock purchase warrants registered in the name of Spirits Management Inc. [Incorporated by reference to Exhibit 10.7 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.8
 
Warrant Certificate of Compliance Systems Corp., dated April 1, 2011, evidencing 6,000,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.8 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.9
 
Warrant Certificate of Compliance Systems Corp., dated April 1, 2011, evidencing 225,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.9 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.10
 
Warrant Certificate of Compliance Systems Corp., dated April 1, 2011, evidencing 675,000 common stock purchase warrants registered in the name of Henry A. Ponzio. [Incorporated by reference to Exhibit 10.10 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.11
 
Warrant Certificate of Compliance Systems Corp., dated April 1, 2011, evidencing 1,050,000 common stock purchase warrants registered in the name of Nascap Corp. [Incorporated by reference to Exhibit 10.11 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.12
 
Warrant Certificate of Compliance Systems Corp., dated April 26, 2011, evidencing 50,000,000 common stock purchase warrants registered in the name of Cresta Capital Strategies, LLC. [Incorporated by reference to Exhibit 10.12 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.13
 
Warrant Exchange Agreement, dated May 12, 2011, between Compliance Systems Corp. and Dean Garfinkel, evidencing the exchange of 26,900,000 common stock purchase warrants.
10.14
 
Warrant Exchange Agreement, dated May 12, 2011, between Compliance Systems Corp. and Barry M. Brookstein, evidencing the exchange of 55,340,000 common stock purchase warrants.
10.15
 
Warrant Exchange Agreement, dated May 12, 2011, between Compliance Systems Corp. and Spirits Management, Inc., evidencing the exchange of 14,850,000 common stock purchase warrants.
10.16
 
Warrant Exchange Agreement, dated May 12, 2011, between Compliance Systems Corp. and Henry A. Ponzio, evidencing the exchange of 10,320,000 common stock purchase warrants.
10.17
 
Warrant Exchange Agreement, dated May 12, 2011, between Compliance Systems Corp. and Nascap Corp., evidencing the exchange of 20,720,000 common stock purchase warrants.
10.18
 
Warrant Certificate of Compliance Systems Corp., dated June 30, 2011, evidencing 1,500,000 common stock purchase warrants registered in the name of Barry M. Brookstein.
10.19
 
Warrant Certificate of Compliance Systems Corp., dated June 30, 2011, evidencing 128,600 common stock purchase warrants registered in the name of Barry M. Brookstein.
10.20
 
Warrant Certificate of Compliance Systems Corp., dated July 1, 2011, evidencing 6,000,000 common stock purchase warrants registered in the name of Barry M. Brookstein.
10.21
 
Warrant Certificate of Compliance Systems Corp., dated July 1, 2011, evidencing 225,000 common stock purchase warrants registered in the name of Barry M. Brookstein.
10.22
 
Warrant Certificate of Compliance Systems Corp., dated July 1, 2011, evidencing 675,000 common stock purchase warrants registered in the name of Henry A. Ponzio.
10.23
 
Warrant Certificate of Compliance Systems Corp., dated April 1, 2011, evidencing 1,050,000 common stock purchase warrants registered in the name of Nascap Corp.
31.1
 
Rule 13a-14(a)/15d-14(a) Certification of Barry M. Brookstein.
32.1
 
Section 1350 Certification of Barry M. Brookstein.
101.INS**
 
XBRL Instance
101.SCH**
 
XBRL Taxonomy Extension Schema
101.CAL**
 
XBRL Taxonomy Extension Calculation
101.DEF**
 
XBRL Taxonomy Extension Definition
101.LAB**
 
XBRL Taxonomy Extension Labels
 
**XBRL
 
Iinformation is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 
19

 

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:  August 22, 2011
Compliance Systems Corporation.
     
 
By: 
/s/ Barry M. Brookstein
   
Barry M. Brookstein, 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/ Barry M. Brookstein
 
Chief Executive Officer, President, Chief Financial Officer
 
August 22, 2011
Barry M. Brookstein
 
and Director
   
   
(Principal Executive Officer, Principal Financial Officer
And Principal Accounting Officer)