SECURED FINANCIAL NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2009
(unaudited)
NOTE 4 - DERIVATIVE AND LIQUIDATING LIABILITIES- continued
The Liquidating Damages liability relates to the recognition of an expense for the anticipated failure by the Company to comply with certain registration rights held by the holders of the Convertible Notes and obtain an effective registration of the required shares issuable upon conversion of the Convertible Notes and the exercise of related the warrants, described earlier. We have recorded the maximum anticipated penalties to be incurred for the failure to register the required common shares potentially issuable for the conversion of the Convertible Notes and the exercise of the warrants, through September 26, 2007, the maturity date of the first installment of such Convertible Notes. The penalty calculated was based on 5% of the outstanding Convertible Notes, commencing on 180 days from the date of such Convertible Note agreements executed, through September 26, 2007. An expense has been recorded for the increase in the derivative liability during the year in the amount of $83,313 as a cost of maintaining such debt arrangements, as the terms of such debt arrangements are overly burdensome. There are no maximum penalty terms for the failure to obtain an effective Registration.
During 2008, $300,000 of the related convertible debt and accrued interest was retired via the issuance of 4,500,000 shares of common stock. As a result of the satisfaction of such convertible debt the attributed portion of such derivative liability of $503,873 was recorded as a contribution to paid in capital.
The fair value of the total derivative liabilities recorded of $462,185$362,864 as of JuneSeptember 30, 2009 is comprised of two components, one component of the liability estimated of $377,852$278,531 attributed to the Convertible Notes conversion factor of 70% of market, but not more than $0.10 and another component of the liability of liquidated damages estimated to be $84,333.
In February, 2009, the Company amended the terms of the convertible debt to eliminate the warrants and have a six month grace period with regards to the convertibility of such debt which expiresexpired in July 2009.
The estimated derivative liabilities recorded were computed utilizing the Black Scholes model, with the following assumptions for the three Convertible Note agreements executed as follows;
| | Convertible Note into Shares | |
Market Price of Stock | | $ | 0.09 | |
Exercise Price | | $ | 0.063 | |
Term | | Half Year | |
Volatility | | | 375 | % |
Risk Free Rate | | | 2.54 | % |
Number of Shares Assumed Issuable | | | 4,956,063 | |
| Convertible Note into Shares | |
| | $ | .13 | |
| | $ | .09 | |
| | |
| 210 % | |
| 2.31 % | |
Number of Shares Assumed Issuable | 3,568,366 | |
NOTE 5 - - EQUITY TRANSACTIONS
Common Stock
During the sixnine months ending JuneSeptember 30, 2009 the following equity transactions occurred:
On February 27, 2009 the Company issued 1,025,641 shares of its common stock to The Nutmeg Group, LLC in exchange for $40,000 in principal due on its convertible note.
On March 25, 2009 the Company issued 125,000 shares of its common stock to Stuart Stuart Miller and Richard Goulding as additional consideration for entering into a $50,000 loan with the Company. Terms of the loan were $50,000 principal amount, 90-day term, and 18 percent interest per annum. This stock was valued at $13,750.
On June 30, 2009, the Company sold 1,000,000 shares of its restricted common stock for the sum of $50,000 via a Private Placement Memorandum. These funds were used for both the purchase of inventory as well as Company operations.
On May 1, 2009, the Company entered into a Promissory Note with T Squared Investments, LLC with a principal amount of $100,000. Terms of the Note are 120 days and the Note carries a 15% interest rate per annum, compounded monthly. Our obligations under this note are collateralized by both our assets and the assets of HEB LLC, a principal stockholder which is also a lender to our company. As additional consideration we issued the lender five year common stock purchase warrants to purchase an aggregate of 2,000,000 shares of our common stock at exercise prices ranging from $0.05 to $$0.15 per share. Other than the exercise price of the warrants, all other terms of the warrants are identical among the series. These warrants contain a cashless exercise feature and the exercise price is subject to proportional adjustment in the event of stock splits, stock dividends recapitalizations and similar corporate events. The holder is not entitled to exercise the warrant if the effect of such exercise would be that the number of shares of common stock beneficially owned by the holder after giving effect to such exercise would be result in beneficial ownership by the holder and its affiliates of more than 4.99% of our then outstanding shares of common stock on such date. This provision may only be waived or amended by the consent of the holders of a majority of our outstanding common stock who are not our affiliates. These proceeds from this loan were used for both the purchase of inventory as well as Company operations.
On July 30, 2009 the Company issued 500,000 shares of Rule 144 restricted Company stock to an officer of the Company relating to the renewal of an employment contract. These shares were valued at the sum of $40,000.
On August 24, 2009 the Company issued 250,000 shares of its restricted common stock for $.05 cash per share relating to the exercise of a stock option previously granted to National Financial Communications.
On August 24, 2009 the Company issued 250,000 shares of its restricted common stock to an employee as full settlement of stock due per his employment contract. These shares were valued at $ 25,000. The employee is no longer employed at the Company.
SECURED FINANCIAL NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2009
(unaudited)
NOTE 5 - EQUITY TRANSACTIONS- continued
A summary of Company options issued as of JuneSeptember 30, 2009 is as follows:
| | | | | | Weighted Average | | | | | | | Weighted Average | |
| | Stock Options | | Exercise Price | | | Stock Options | | Exercise Price | |
| | Outstanding | | Exercisable | | Outstanding | | Exercisable | | | Outstanding | | Exercisable | | Outstanding | | Exercisable | |
Balance – December 31, 2008 | | 2,000,000 | | 2,000,000 | | .10 | | .10 | | | | | | | | | | |
Granted | | - | | - | | - | | - | | | | | | | | | | |
Exercised | | - | | - | | - | | - | | | | | | | | | | |
Right Canceled | | - | | - | | - | | - | | | | | | | | | | |
Balance – June 30, 2009 | | | 2,000,000 | | | 2,000,000 | | $ | .10 | | | .10 | | |
Balance – September 30, 2009 | | | | | | | | | | | | | | |
The following table summarizes information about stock options outstanding and exercisable at March 31,September 30, 2009:
| | | Number Outstanding | | Weighted- Average Remaining Life in Years | | Weighted Average Exercise Price | | Number Exercisable | | | | | Number Outstanding | | Weighted- Average Remaining Life in Years | | Weighted Average Exercise Price | | Number Exercisable | |
Range of exercise prices: | | | | | | | | | | | Range of exercise prices: | | | | | | | | | | |
$.10 | | | | 2,000,000 | | 4.42 | | $ | .10 | | | | 2,000,000 | | |
$ | | .05 | | | | | | | | | | | |
These options issued in 2008 were fully vested and expensed in 2008.
A summary of the activity of warrants issued as of JuneSeptember 30, 2009 as follows:
| | | | | | Weighted Average | | | | | | | Weighted Average | |
| | Warrants | | Exercise Price | | | Warrants | | Exercise Price | |
| | Outstanding | | Exercisable | | Outstanding | | Exercisable | | | Outstanding | | Exercisable | | Outstanding | | Exercisable | |
Balance – December 31, 2008 | | 8,205,000 | | 8,205,000 | | $ | .24 | | $ | .24 | | | | | | | | | | | | |
Granted | | 2,000,000 | | 2,000,000 | | - | | - | | | | | | | | | | |
Exercised | | - | | - | | - | | - | | | | | | | | | | |
Canceled | | | - | | | - | | | - | | | - | | | | | | | | | | | | | | |
Balance – June 30, 2009 | | | 10,205,000 | | | 10,205,000 | | $ | .21 | | $ | .21 | | |
Balance – September 30, 2009 | | | | | | | | | | | | | | |
SECURED FINANCIAL NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2009
(unaudited)
NOTE 5 - EQUITY TRANSACTIONS- continued
The following table summarizes information about stock warrants outstanding and exercisable at JuneSeptember 30, 2009:
| | | Number Outstanding | | | Weighted- Average Remaining Life in Years | | | Weighted Average Exercise Price | | | Number Exercisable | |
Range of exercise prices: | | | | | | | | | | | | | |
$.05 to $.09 | | | | 1,285,000 | | | | 2.77 | | | $ | .06 | | | | 1,285,000 | |
$.10 to $.49 | | | | 6,460,000 | | | | 1.63 | | | | .12 | | | | 6,460,000 | |
$.50 | | | | 2,460,000 | | | | .66 | | | | .50 | | | | 2,460,000 | |
| | | Number Outstanding | | | Weighted- Average Remaining Life in Years | | | Weighted Average Exercise Price | | | Number Exercisable | |
Range of exercise prices: | | | | | | | | | | | | | |
$ | .05 to $.09 | | | | | | | | | | | | | | | | | |
$ | .10 to $.49 | | | | | | | | | | | | | | | | | |
$ | .50 | | | | | | | | | | | | | | | | | |
At JuneSeptember 30, 2009, there remains $65,730$28,734 of unamortized expense yet to be recorded related to all warrants outstanding.
NOTE 6 - - RELATED PARTY TRANSACTIONS
Mr. Jeffrey Schultz, president of the Company, Mr. Michael Fasci, chief financial officer of the Company, and Mr. David Rappa, president of VPS,RFN, have each advanced funds to the Company. As of JuneSeptember 30, 2009 the outstanding balances due each of these Company officers were as follows: Mr. Schultz has advanced $34,871 to the Company$15,587, Mr. Fasci $10,000 and Mr. Rappa has advanced $6,644.$4,144. These loans carry no interest and are payable upon demand. During the three months ending JuneSeptember 30, 2009, the Company repaidreduced the outstanding amounts owed Mr. SchulzSchultz and Mr. Rappa by the sums of $3,977$19,284 and $1,306 respectively.$2,500 respectively from the amounts due as of June 30, 2009.
NOTE 7 – SUBSEQUENT EVENTS
We have no subsequent events to disclose prior to November 13, 2009.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion is a discussion and analysis of our financial condition and results of operations for the three months and sixnine months ended JuneSeptember 30, 2009 and significant factors that could affect our prospective financial condition and results of operations. Historical results may not be indicative of future performance.
Overview
We are a valued added provider of payment transaction processing platforms and equipment marketed to and utilized by traditional “brick and mortar”, and Internet e-commerce merchants and those using mobile or wireless devices to conduct business. We operate through our wholly owned subsidiary formerly known as Virtual Payment Solutions, Inc. (VPS)On October 1, 2009 we changed the subsidiary name to RedFin Network, Inc. (RFN) allowing for ease of marketing and branding of our trade name and eliminating confusion relating to the products and services we sell. Our Company websites are www.securedfinancialnetwork.comand www.virtualpaymentsolutions.com www.redfinnet.com..
VPSRN markets its products and services through the branded name RedFin Network. These products and services today include:
Blue Bamboo H-25 Wireless all-in-one transaction terminal
Blue Bamboo P-25 printer and printer card swipe device
Blue Bamboo Blue Box table pay restaurant solution
Blue Bamboo PCI Compliant and Visa certified Payment Gateway
RedFin Sidebar QuickbooksQuickBooksâ interface
RedFin Windowsâ All-In-One-Desktop Terminal
All of the transaction products are integrated with the Payment Gateway, which connects merchants utilizing IP based terminals and wireless devices using Bluetooth, Ethernet, and GPRS to acquiring processors and banks for approval or denial of credit and debit card charges.
The RedFin Payment Gateway is a customized credit/debit card processing platform serving as the connection between the customercustomers at point-of-sale to the financial networks for the acceptance of card payment by merchants. Most card transactions worldwide are processed by third party providers in compliance with financial institutions. The Payment Gateway processes all credit card types which include Visa, MasterCard, American Express, Discover, JCB, and EBT through transaction terminals, virtual terminals, and wireless mobile devices. The Payment Gateway received its PCI/DSS Compliance in October 2008 and iswas listed on the Visa’s approved Payment Gateway list as ofin March 2009.2009
The PCI/DSS Standard was developed by the major credit card associations as a guideline to help organizations that process card payments prevent credit card fraud, cracking and various other security vulnerabilities and threats. A company processing, storing, or transmitting payment card data must be PCI compliant or risk losing their ability to process credit card payments and being audited and/or fined. Merchants and payment card service providers must validate their compliance periodically.
The Blue Bamboo Products and Payment Gateway is marketed through non-exclusive reseller agreements with ISO’S (Independent Sales Organizations) and VAR’s (Value Added Resellers) selling products and merchant services to end customers throughout the U.S. Revenue is generated from sales of terminal products, by monthly data plans required to operate wireless products, licensing fees for software and per transaction fees charged for each transaction passing through the Payment Gateway to end acquiring processors such as Vital, Global all First Data Networks, PaymentTech, Heartland, Valutec and others already integrated with the Payment Gateway. All Internet merchants, certain brick and mortar merchants using IP based transaction terminals, and mobile wireless transaction devices require a gateway to pass transactions from their customer’s use of a payment form to the acquiring bank/processor.
The Payment Gateway can also be re-branded for other large associations requiring their own name recognition by the ISO/Merchant customer base. Currently we private label the Payment Gateway for our customers Sure Gate, Blackstone Merchant Services, Diversified Check Solutions, Versatile Pay, TX Direct, Prospay and Versatile Pay.others.
The Payment Gateway has incorporated a shopping cart emulator, which allows Internet merchants currently using other competitive Payment Gateway’s to integrate with the RedFin Network in a quick and efficient manner without disruption of their business. The shopping cart emulator has integrated the top 120 carts currently used by Internet merchants.
VPS has developed a Windows based software for its Blue Bamboo P-25 printer and card-swiper for use with PC’s allowing for processing of credit/debit card, check, ACH, Check21 transactions. It has also developed the RedFin Sidebar allowing merchants to directly interface the RedFin Payment Gateway with QuickBooks.
The Company will continue its objective to keep a low cost efficient overhead by outsourcing warehousing and terminal products handling non-exclusively to Paragon Services, Inc. located in Georgia ( www.paragonservices.net ) and JR’s POS Depot located in South Florida ( www.jrsposdepot.com ) all trusted names in the payment products distribution marketplace. In addition, all Level 1 and 2 customer service related questions have also been outsourced to CardWare International with a 24/7 response to customer trouble tickets within 15 minutes.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. - continued
|
Overview - continued
On May 13, 2009 the Company announced that VPS has developed and will launch shortlylaunched its Windows based program for itsthe Blue Bamboo P-25M Card Swiper/Printer and its RedFin “Sidebar” application for point-of-sale transactions (POS). The application will enable mobile merchants and brick and mortar businesses a tool to instantly swipe, transact, and print receipts for credit and debit card transactions using the P-25M with virtually any office computer through a simple online download. The Company launched these products in May 2009.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. - continued |
Overview – continued
In September of 2009 RedFin Network products and services were approved to be sold on the Chase Paymentech internal marketplace website. Nearly 300 internal Chase sales reps refer their merchant services customers to this site for selection of transaction terminals and services.
The Company will continue its objective to keep a low cost efficient overhead by outsourcing warehousing and terminal products handling non-exclusively to TASQ, one of the largest distributors of point-of-sale equipment and services in North America (www.tasq.com) and JR’s POS Depot located in South Florida all trusted names in the payment products distribution marketplace. In addition, all Level 1 and 2 customer service related questions have also been outsourced to CardWare International with a 24/7 response to customer trouble tickets within 15 minutes.
Results of Operation for the Three Months Ended JuneSeptember 30, 2009 Compared to the Three Months Ended JuneSeptember 30, 2008
The Company generates revenues from the sale of the Blue Bamboo wireless terminals, its recurring monthly data plans and sales of its RedFin Gateway transaction platform. The Company’s revenue increased $169,301,$109,411, or approximately 371%123%, in the quarter ended JuneSeptember 30, 2009 compared to the same period in 2008. The increase in sales was attributable to the sales of the Company’s Blue Bamboo wireless terminals, the associated product accessories, and the sales of the data plans required to operate the terminals.
Our cost of goods sold includes the payment processing terminals we sell as well as the recurring expenses to maintain the service to the terminals. Our cost of goods also includes the monthly licensing fees associated with maintaining and operating our payment gateway. Our cost of goods sold as a percentage of revenues was approximately 85%78% for the three months ended JuneSeptember 30, 2009 as compared to 74%approximately 117% for the comparable period in 2008. The increasedecrease in our cost of goods sold as a percentage of revenues in the 2009 period as compared to the 2008 period reflects the Company’s useincreased purchases of its Payment Gatewayterminals due to generate revenues in 2009 compared to no Gateway revenue in the 2008 period.increased sales. The Company pays a recurring minimum $10,695 monthly fee to its Payment Gateway provider Blue Bamboo. As our sales increase the amount of this monthly fee will be amortizeis being amortized over a greater revenue number which should resultresulted in a reduction in cost of sales as a percentage of revenues in the balance of 2009, although we are unable at this time to predict the percentage.revenues.
Total operating expenses for the three months ended JuneSeptember 30, 2009 increased approximately $98,384,$205,615, or approximately 35%87%, from the comparable period in 2008, and primarily included increases in:
| ● | administrative expenses, which includes rent, salaries and general overhead costs increased approximately $35,335$83,707 in the secondthird quarter of 2009 as compared to the secondthird quarter of 2008 as a resultor approximately 69%. This primarily included salaries and other compensation increases of the Companys increased sales effort.$60,809 and Gateway customer service fees increases of $7,337. We anticipate that administrative expenses will remain at the same levels for the final six mothsthree months of the year as they did for the first sixnine months and that they should not significantly increase during the balance of 2009. |
| ● | professional and consulting fees, which includesinclude sales and marketing consultants as well as investor relations services, increased approximately $55,324$40,944 or approximately 227%200%, in the secondthird quarter of 2009 from the comparable period in 2008 as a result of the increased need for professional help in expanding the CompanysCompany’s business and meeting the needs of the investment community..community. We anticipate that professional and consulting fees during the balance of 2009 will not significantly increase. |
| ● | Interest expense increased approximately $56,291,$79,921, or approximately 46%87%, in the secondthird quarter of 2009 from the comparable period in 2008 as a result of increased borrowing expenses and the expenses associated with the T Squared warrant issuance..expenses. |
We reported other income of $75,826 which represents the elimination of payroll taxes and accumulated penalties and interest associated with such taxes. Negotiations with the IRS had these taxes and penalties transferred to another liable party.
Derivative and liquidating liabilities during the three months ending JuneSeptember 30, 2009, increaseddecreased by $19,567.$103,665. The changes in derivative and liquidating liabilities and liquidating income each quarter are a result of the price changes in our stock each quarter and the impact this stock price change has on our convertible debt.
Net loss for the three months ended JuneSeptember 30, 2009 was $(343,949)$(297,875) compared to a net loss of $(263,501)$(254,631) for the comparable period in 2008. The increase in loss was primarily attributable to an increase in our total expenses as the sales of the company continue to grow.
Although the Company expects to generate increased revenues in the balance of 2009, due to sales of its wireless terminals and gateway transaction revenue, the Company expects to continue to incur losses at least through the third quarterend of 2009, and there can be no assurance that the Company will achieve or maintain profitability, generate revenue or sustain future growth.
Results of Operation for the SixNine Months Ended JuneSeptember 30, 2009 Compared to the SixNine Months Ended JuneSeptember 30, 2008
The Company’s revenue in the sixnine months ending JuneSeptember 30, 2009 increased $308,961,$418,372, or approximately 634%304%, compared to in the same period in 2008. The significant increase in sales was attributable to the sales of the Company’s Blue Bamboo wireless terminals, the associated product accessories, and the sales of the data plans required to operate the terminals.
The Company’s cost of goods sold expense of $307,708$462,174 increased $274,077$324,850 in the sixnine months ending JuneSeptember 30, 2009 or approximately 815%237% compared to $33,631$137,324 in the same period in 2008. This increaseOur cost of goods sold as a percentage of revenues was approximately 83% for the nine months ended September 30, 2009 as compared to approximately 99% for the comparable period in 2008. As described earlier in this report, the decrease in our cost of goods sold as a percentage of revenues in the 2009 period as compared to the 2008 period reflects the Company’s increased purchases of terminals due to the significant increase in product sales during the period.increased sales.
Total operating expenses for the sixnine months ended JuneSeptember 30, 2009 increased approximately $155,562,$457,043, or approximately 23%57%, from the comparable period in 2008, and primarily included increases in:
● administrative expenses, which includes rent, salaries and general overhead costs decreased approximately $55,251 or 14% in the first six months of 2009 as compared to the first six months of 2008 as a result of the Companys more efficient use of it’s assets. | ● | administrative expenses, which include rent, salaries and general overhead costs, increased approximately $125,425 or 31% in the first nine months of 2009 as compared to the first nine months of 2008. The primary reasons for this increase were increases in salaries and other compensation of $103,280, increased sales commissions of $13,562, and increases in payroll taxes of $6,976. |
● professional and consulting fees, which includes sales and marketing consultants as well as investor relations services increased approximately $59,556 or approximately 76%, in the first six months of 2009 from the comparable period in 2008 as a result of the increased need for professional help in expanding the Companys | ● | professional and consulting fees, which include sales and marketing consultants as well as investor relations services, increased approximately $99,938 or approximately 100%, in the first nine months of 2009 from the comparable period in 2008 as a result of the increased need for professional help in expanding the Company’s business and meeting the needs of the investment community. |
● Interest expense increased approximately $149,171, or approximately 72%, in the first six months of 2009 from the comparable period in 2008 as a result of increased borrowing expenses and the expenses associated with the T Squared warrant issuance. | ● | Interest expense increased approximately $229,090, or approximately 77%, in the first nine months of 2009 from the comparable period in 2008 as a result of increased borrowing expenses. |
The Company’s Derivative and Liquidating Liabilites expenseincome of $462,185$195,884 on JuneSeptember 30, 2009 decreased $484,006 or approximately 51%increased $248,161 compared to JuneSeptember 30, 2008. This reductionincrease is attributable to the increase in our stock price as well as the elimination and renegotiation of a portion of our convertible debt.
Net loss for the sixnine months ended JuneSeptember 30, 2009 was $(601,609)$(899,485) compared to a net loss of $(605,387)$(859,993) for the comparable period in 2008. The decrease in loss was primarily attributable to an increase in the sales of the company as we continue to grow.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate adequate amounts of cash to meet the company's needs for cash. At JuneSeptember 30, 2009 we had $0a cash overdraft of $19378 and working capital deficit of $4,387,907$4,569,355 as compared to cash on hand of $3,706 and a working capital deficit of $4,029,163$3,872,029 at December 31, 2008. With the exception of our limited existing credit line with Commercial Holding AG, we have no current agreements, arrangements, or understanding for such needed capital. As of JuneSeptember 30, 2009 the Company has used the entire $700,000 credit line and had a principal balance due on the credit line of $820,584.$975,584.
The Company had total assets of $342,099$524,739 at JuneSeptember 30, 2009 as compared to $242,117 at December 31, 2008. This overall increase in total assets is due to increases in both our inventory and accounts receivable offset by the amortization of out deferred financing fees. The Company had total liabilities of $4,645,432$5,048,447 at JuneSeptember 30, 2009 as compared to $3,725,372$4,114,146 at June 30,December 31, 2008.
At JuneSeptember 30, 2009 our current assets increased approximately $172,542$394,109 from December 31, 2008 and included increases in accounts receivable $26,469,$51,556, and inventory $100,113, and deposits paid to our product supplier of $49,470.$346,882. Our customary terms offered our customers are payment prior to shipment. Most of our sales transactions are pre-paid by credit card or ACH. The inventory increase in 2009 reflects increased purchases of terminal products and accessories related to our increased sales. The Company anticipates inventory levels to remain steady through the end of the year.
At JuneSeptember 30, 2009 our current liabilities increased approximately $531,286$934,301 from December 31, 2008, and included increases in accounts payable ($35,993)326,704), notes payable and secured convertible notes ($172,970)284,463), accrued expenses ($175,886)239,967), our line of credit ($243,000)398,000), and was offset by a decrease in derivative and liquidating liabilities ($96,563)195,884).
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. - continued |
At JuneSeptember 30, 2009, we had $1,945,470$1,887,323 of notes payable which includes:
| ● | $65,000 principal amount of 10% notes (HEB Notes) which is due between September and December 2009. Interest has accrued under thesethe notes which totals $10,815$12,453 at JuneSeptember 30, 2009. |
| ● | $1,410,000 principal amount of short-term notes (Container Financing Notes) issued in 2005, averaging 90 days, with a specific rate of return to acquire funds to invest in high yield activities. At JuneSeptember 30, 2009 there is unpaid interest due and accruing in the amount of $943,617$1,007,588 on these notes, all of which are in default and accruing interest at 18% per annum. |
| | |
| ● | $312,232 principal amount of 7% note (Nutmeg Note) which is due December 31, 2009. |
| | |
| ● | $50,000 principal At September 30, 2009 there is unpaid interest due and accruing in the amount of 18% note (Miller/Goulding Note) which is due June 30, 2009. Interest has been paid through June 30, 2009 and principal was repaid July 6, 2009.$16,347. |
| | |
| ● | $100,000 principal amount of 10% note (T Squared Note) which is due August 31, 2009. At JuneSeptember 30, 2009 there is unpaid interest due and accruing in the amount of $2,500.$6,250. |
Between September 2006 and October 2006 we sold an aggregate of $597,500 principal amount secured convertible notes which were due between September 2007 and October 2007. The notes are convertible into shares of our common stock as described in greater detail in Note 4 to the Notes to Consolidated Financial Statements appearing elsewhere in this report which is generally the lesser of 60% of the market value of our stock or $0.10 per share. We were obligated to file a registration statement with the Securities and Exchange Commission to register the shares of common stock underlying these notes and the warrants we issued the investor in the transaction. We have not filed this registration statement and are liable for liquidated damages which are $462,185 at June 30, 2009. At December 31, 2008 we owed $297,500 principal amount of convertible notes. In February 2009 the Company negotiated an amendment to the terms of the original notes. The significant terms of the amendment were as follows:
| ● | Principal amount is to be $352,232 |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. - continued
|
Liquidity and Capital Resources - continued
| ● | Maturity date is December 31, 2009, |
| ● | Note carries 7% per annum interest rate |
| ● | The warrant provision of the original notes is null and void |
| ● | The lender immediately converted $40,000 of principal into 1,025,641 shares of our common stock thereby reducing the principal to $312,232 |
| ● | Conversion rights at 70% of the market value of our stock are frozen until July 1, 2009, and |
| ● | If we should default under the terms of the amendment, the original note terms then apply |
Finally, at June 30, 2009 our balance sheet reflects $820,584 due under a line of credit. In April 2008 we entered into a Credit and Loan Agreement with Commercial Holding, AG pursuant to which we were extended a $500,000 line of credit which we secured by the stock of our subsidiary, Virtual Payment Solutions, Inc., and all of that company’s assets. Upon the granting of this line of credit we issued Commercial Holdings, AG 2,000,000 shares of our common stock together with five-year warrants to purchase an additional 1,000,000 shares of our common stock with an exercise price of $0.25 per share. In December 2008 the agreement was amended to increase the maximum amount available under the facility to $700,000. As consideration for this amendment we issued Commercial Holding, AG 2,000,000 shares of our common stock together with five-year warrants to purchase an additional 1,000,000 shares of our common stock with an exercise price of $0.10 per share Interest on the outstanding amount is 10% per annum, payable monthly. We have used the proceeds for general working capital.
We do not have any commitments for capital expenditures. While we were able to raise $100,000 in May 2009 through the issuance of a secured promissory note and an additional $50,000 of new capital during June 2009 through the sale of shares of our common stock in a private placement.,placement, our sources of cash are the availability of funds under our line of credit and cash on hand. At JuneSeptember 30, 2009 we had a bank overdraft of $34,067$19,378 and there were no funds available under our line of credit.credit which is due on December 31, 2009. The Company continues to raise cash through the sales of its common stock and borrowing to fund its daily operations and to meet payroll. As sales have increased the demand to borrow additional funds in deceasingThe Company is currently workingcontinues to work with a number of potential lenders to provide funding for both operations and product inventory. These efforts are ongoing. There is no assurance that we will be able to obtain funds at favorable terms to the Company. As described elsewhere herein, we do not have sufficient funds to pay our outstanding debt obligations which are approximately $4,645,432$5,048,447 and we believe we will need approximately $2,000,000 of additional working capital to fund our ongoing operations. The Company believes it will be sucessful in raisingexpects to negotiate an extension of its credit line as well as an extension of the required funds.due date. These negotiations are ongoing In addition, in the event we should fail to pay the interest under the line of credit which would result in an event of default, or if any other events should occur which would otherwise result in an event of default under the agreement, the amounts due under the credit line would become immediately due and payable. In addition, the line of credit matures on December 31, 2009 and we do not presently have the funds necessary to satisfy this obligation. If we were unable to pay these amounts, the lender could seek to foreclose on the assets of our subsidiary which represents substantially all of our operations. If we are unable to raise the necessary capital, we could be forced to curtail some or all of our operations and it is likely that investors would lose their entire investment in our company.
Going Concern
Our financial statements have been prepared on the basis that we will operate as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have incurred net losses each year since inception and have relied on the sale of our securities from time to time and loans from third parties to fund our operations. These recurring operating losses have led our independent registered public accounting firm Sherb & Co, LLP to include a statement in its audit report relating to our audited consolidated financial statements for the years ended December 31, 2008 and 2007 expressing substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain the necessary financing to meet our obligations and repay our liabilities when they become due and to generate profitable operations in the future. We plan to continue to provide for our capital requirements through the sale of equity securities, however, we have no firm commitments from any third party to provide this financing and we cannot assure you we will be successful in raising working capital as needed. There are no assurances that we will have sufficient funds to execute our business plan, pay our obligations as they become due or generate positive operating results.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Not Applicable
Item 4T. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures. We maintain "disclosure controls and procedures" as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Under the supervision and with the participation of our senior management, consisting of Jeffrey Schultz, our Principal Executive Officer and Michael Fasci, our Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our Principal Executive Officer and Chief Financial Officer concluded, as of the Evaluation Date, that our disclosure controls and procedures are not effective such that the information relating to us required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Principal Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure as a result of continuing material weaknesses in our internal controls over financial reporting.
Due to the small size and limited financial resources, the Company’s Principal Executive Officer and Chief Financial Officer are the only individuals involved in the accounting and financial reporting. Furthermore, our PEO performs his duties in Florida while our CFO performs his in Massachusetts. As a result, there is no segregation of duties within the accounting function, leaving all aspects of financial reporting and physical control of cash in the hands of the same individual, our CFO. Usually, this lack of segregation of duties represents a material weakness; however, to remedy the matter, subject to the availability of sufficient capital the Company plans to hire additional in-house accounting personnel in Florida as we expect sales in the short-term to reach levels where it is warranted. This will allow our CFO to spend more time performing high end accounting duties and make better use of his time. The PEO and CFO (both of whom also comprise the Board of Directors) examine and approve all cash transactions. However, until such remedial actions are complete, it is likely that we will have continuing material weaknesses in our internal control over financial reporting which will result in continuing material weaknesses in our disclosure controls and procedures.
There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter of the period covered by this report that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. | Legal Proceedings. |
None.
Not Applicable.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
On May 1,July 30, 2009 the Company entered into a Promissory Note with T Squared Investments, LLC with a principal amount of $100,000. Terms of the Note are 120 days and the Note carries a 15% interest rate per annum, compounded monthly. Our obligations under this note are collateralized by both our assets and the assets of HEB LLC, a principal stockholder which is also a lender to our company. As additional consideration we issued the lender five year common stock purchase warrants to purchase an aggregate of 2,000,000500,000 shares of our common stock at exercise prices ranging from $0.05 to $$0.15 per share. Other than the exercise price of the warrants, all other terms of the warrants are identical among the series. These warrants contain a cashless exercise feature and the exercise price is subject to proportional adjustment in the event of stock splits, stock dividends recapitalizations and similar corporate events. The holder is not entitled to exercise the warrant if the effect of such exercise would be that the number of shares of common stock beneficially owned by the holder after giving effect to such exercise would be result in beneficial ownership by the holder and its affiliates of more than 4.99%Michael Fasci, an officer of our then outstandingcompany, relating to the renewal of an employment contract. These shares of common stock on such date. This provision may only be waived or amended by the consent of the holders of a majority of our outstanding common stock who are not our affiliates. These proceeds from this loan were used for both the purchase of inventory as well as Company operations.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. - continued
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On June 30, 2009, the Company sold 1,000,000 shares of its restricted common stock forvalued at the sum of $50,000 via a Private Placement Memorandum to one$40,000. The recipient was an accredited investor in a transactionand the issuance was exempt from registration under the Securities Act of 1933 in reliance uponon an exemption provided by Regulation D. No commission or finders fee was paid for this investment.
Section 4(2) of that act.
On August 24, 2009 we issued 250,000 shares of our common stock upon the exercise of a stock option previously granted to National Financial Communications resulting in gross proceeds to us of $12,500. The issuance of the common stock was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 3(a)(9) of that act.
On August 24, 2009 we also issued 250,000 shares of our common stock to Anthony Ribas, a former employee, as full settlement of stock due under the terms of his employment contract. These shares were valued at $ 25,000. The recipient was an accredited investor and the issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of that act.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Submission of Matters to a Vote of Security Holders. |
None.
Item 5. | Other Information. |
Mr. Jeffrey Schultz, president of Secured Financial Network, Inc.the Company, Mr. Michael Fasci, chief financial officer of the Company, and Mr. David Rappa, president of Virtual Payment Solutions Inc.RFN, have each advanced funds to the Company. As of JuneSeptember 30, 2009 the outstanding balances due each of these Company officers were as follows: Mr. Schultz has advanced $34,871 to the Company$15,587, Mr. Fasci $10,000 and Mr. Rappa has advanced $6,644.$4,144. These loans carry no interest and are payable upon demand. These proceeds were primarily, but not exclusively, used to purchase inventory for the Company. During the three months ending JuneSeptember 30, 2009, the Company repaidreduced the outstanding amounts owed Mr. SchulzSchultz and Mr. Rappa by the sums of $3,977$19,284 and $1,306 respectively.$2,500 respectively from the amounts due as of June 30, 2009.
During the three months ended September 30, 2009 the Company changed the name of its wholly owned subsidiary “Virtual Payment Solutions, Inc.” to “The RedFin Network, Inc.” This name change was facilitated by the Company’s desire to eliminate any confusion by the Company’s existing and potential customer base that we were not competing directly against them for business.
On MayJuly 30, 2009 the Company renewed a one-year employment agreement with its Chief Financial Officer, Michael Fasci, which included an annual salary of $80,000. This is the same salary as the previous 1 2009 we engaged Flagler Communications Group, Inc. to provide public relations, communication, advisory and consulting services to us underyear period. A copy of the terms of a six month agreement. As compensation for its services, Flagler Communicationsemployment agreement is entitled to a monthly fee of $2,500 and reimbursement for reasonable out of pocket expenses.
In May 2009 we engaged DMS Consulting, LLC to provide financial communication services for us underincluded in the terms of a 90 day agreement for a fee of $2,500 per month.
exhibits.
Exhibit No. | Description |
| |
4.1 | Promissory Note in the principal amount of $100,000 to T Squared Investments, LLC dated May 1, 2009 * |
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4.2 | Form of Common Stock Purchase Warrant issued to T Squared Investments, LLC * |
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4.3 | Form of option granted to Flagler Communications Group (included in Exhibit 10.15 hereto) |
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10.14 | Form of ConsultingEmployment Agreement with DMS Consulting, LLCdated July 30, 2009 between Secured Financial Network, Inc. and Michael Fasci * |
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10.15 | Form of Consulting Agreement with Flagler Communications Group dated May 1, 2009 *
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31.1 | Certification of Principal Executive Officer as Required by Rule 13a-14(a)/15d-14* |
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| Certification of Principal Financial Officer as Required by Rule 13a-14(a)/15d-14* |
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| Certification of Principal Executive Officer as Required by Rule 13a-14(b) and Rule 15d- 14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code* |
| |
| Certification of Principal Financial Officer as Required by Rule 13a-14(b) and Rule 15d- 14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code* |
* Filed herewith
SIGNATURES
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.
| | |
| SECURED FINANCIAL NETWORK, INC. |
| | |
Date: August 14,November 13, 2009 | By: | /s/ Jeffrey L. Schultz |
| Jeffrey L. Schultz |
| Title: Principal Executive OfficerPresident, CEO |
| | |
| | |
Date: August 14,November 13, 2009 | By: | /s/ Michael Fasci |
| Michael Fasci |
| Title: Chief Financial Officer |
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