See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
Note 1. Description of Business and Summary of Significant Accounting Policies
Going Concern:
The Company has incurred substantial losses since inception, which has led to a continuing deficit in working capital. The Company believes its current available cash along with anticipated revenues may be insufficient to meet its anticipated cash needs for the foreseeable future. Consequently, the Companys ability to continue as a going concern is likely contingent on the Company receiving additional funds in the form of equity or debt financing. Accordingly, the Company is currently aggressively pursuing strategic financing alternatives in addition to its equity line of credit (see Note 4). The sale of additional equity or convertible debt securities would result in additional dilution to the Company's stockholders, and debt financing, if available, may involve covenants which could restrict operations or finances. There can be no assurance that financing will be available in amounts or on terms acceptable to the Company, if at all. If the Company cannot raise funds on acceptable terms, or achieve positive cash flow, it may not be able to continue to exist, conduct operations, grow market share, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, any of which would negatively impact its business, operating results and financial condition.
Description of Business
:
Payment Data Systems, Inc. and its subsidiaries (collectively referred to as the Company), provide integrated electronic payment services, including credit and debit card-based processing services and transaction processing via the automated clearinghouse (ACH) network to billers and retailers. In addition, the Company operates an Internet electronic payment processing service for consumers under the domain name www.billx.com.
Principles of Consolidation and Basis of Presentation:
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying financial statements have been presented assuming the Company will continue as a going concern.
Use of Estimates:
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition:
Revenue consists primarily of fees generated through the electronic processing of payment transactions and related services, and are recognized as revenue in the period the transactions are processed or when the related services are performed. Merchants may be charged for these processing services at a bundled rate based on a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. Certain merchant customers are charged a flat fee per transaction, while others may also be charged miscellaneous fees, including fees for chargebacks or returns, monthly minimums, and other miscellaneous services. Revenues derived from electronic processing of credit and debit card transactions that are authorized and captured through third-party networks are reported gross of amounts paid to sponsor banks as well as interchange and assessments paid to credit card associations (MasterCard and Visa). Revenue also includes any up-front fees for the work involved in implementing the basic functionality required to provide electronic payment processing services to a customer. Revenue from such implementation fees is recognized over the term of the related service contract. Sales taxes billed are reported directly as a liability to the taxing authority, and are not included in revenue.
Cash and Cash Equivalents
: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable:
Accounts receivable are reported at outstanding principal net of an allowance for doubtful accounts of approximately $32,000 and $38,000 at December 31, 2007 and 2006, respectively. The allowance for doubtful accounts is generally determined based on an account-by-account review. Accounts are charged off when collection efforts have failed and the account is deemed uncollectible. The Company normally does not charge interest on accounts receivable.
Property and Equipment
: Property and equipment are stated at cost. Depreciation and amortization are computed on a straight-line method over the estimated useful lives of the related assets, ranging from three to seven years. Leasehold improvements are amortized over the lesser of the estimated useful lives or remaining lease period. Expenditures for maintenance and repairs are charged to expense as incurred.
23
Concentration of Credit Risk:
Financial instruments that potentially expose the Company to credit risk consist of cash and cash equivalents, and accounts receivable. The Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to the extent of balances in excess of amounts that are insured by the FDIC. At December 31, 2007, the Company did not have any uninsured cash amounts. Trade receivables potentially subject the Company to concentrations of credit risk. The Companys customer base operates in a variety of industries and is geographically dispersed, however, the relatively small number of customers increases the risk. The Company closely monitors extensions of credit and credit losses have been provided for in the consolidated financial statements and have been within management's expectations. The Company did not record any bad debt expense in 2007. The Company recorded bad debt expense of $26,059 in 2006 and recorded bad debt write-offs of $5,675 and $278 to its allowance for doubtful accounts in 2007 and 2006, respectively. For the year ended December 31, 2007, 51% of total revenues were from sales to four customers. For the year ended December 31, 2006, 57% of total revenues were from sales to three customers.
Fair Value of Financial Instruments:
Cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term borrowings are reflected in the accompanying consolidated financial statements at cost, which approximates fair value because of the short-term maturity of these instruments.
Impairment of Long-Lived Assets
: The Company periodically reviews, on at least an annual basis, the carrying value of its long-lived assets, including property, plant and equipment, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To the extent fair value of a long-lived asset, determined based upon the estimated future cash inflows attributable to the asset, less estimated future cash outflows, are less than the carrying amount, an impairment loss is recognized.
Reserve for Losses on Merchant Accounts:
Disputes between a cardholder and a merchant periodically arise as a result of, among other things, cardholder dissatisfaction with merchandise quality or merchant services. Such disputes may not be resolved in the merchants favor. In these cases, the transaction is charged back to the merchant and the purchase price is refunded to the customer through the merchants acquiring bank, and charged to the merchant. If the merchant has inadequate funds, the Company must bear the credit risk for the full amount of the transaction. The Company evaluates its risk for such transactions and estimates its potential loss for chargebacks based primarily on historical experience and other relevant factors.
Advertising Costs:
Advertising is expensed as incurred. The Company incurred approximately $12,000 and $32,000 in advertising costs in 2007 and 2006, respectively.
Income Taxes:
Deferred tax assets and liabilities are recorded based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company is subject to the Texas margin tax effective January 1, 2007.
Stock-Based Compensation
: On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R) (revised 2004), Share-Based Payment, (SFAS 123(R)) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including grants of stock options and warrants, based on estimated fair values. Fair value is generally determined based on the closing price of the Companys common stock on the date of grant. SFAS 123(R) supersedes the Companys previous accounting under Accounting Principles Board Opinion No. 23, Accounting for Stock Issued to Employees (APB 25) for periods beginning in 2006.
The Company adopted SFAS 123(R) using the modified prospective transition method, which required the application of the accounting standard as of January 1, 2006. The Companys Consolidated Financial Statements as of December 31, 2006 reflects the impact of SFAS 123(R). The impact to the Company for adopting SFAS 123(R) in 2006 was compensation cost of $700.
Net Loss Per Share
: Basic and diluted losses per common share are calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Common stock equivalents, which consist of stock options and warrants and the convertible debt, were excluded from the computation of the weighted average number of common shares outstanding for purposes of calculating diluted loss per common share because their effect was antidilutive. See Notes 11 and 12 for disclosure of securities that could potentially dilute basic EPS in the future that were not included in the computation of diluted EPS because to do so would have been antidilutive for the periods presented.
24
Recent Accounting Pronouncements:
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109 (FIN 48). FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. FIN 48 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. FIN 48 was effective for the Company on January 1, 2007, and did not have a significant impact on its financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurement" ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, but does not expand the use of fair value in any new circumstances. In February 2008, the FASB granted a one-year deferral of the effective date of this statement as it applies to non-financial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis (e.g. those measured at fair value in a business combination and goodwill impairment). SFAS No. 157 is effective for all recurring measures of financial assets and financial liabilities (e.g. derivatives and investment securities) for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. The Company has completed its initial evaluation of the impact of SFAS No. 157 as it relates to our financial assets and liabilities and determined that its adoption is not expected to have a material impact on our financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, and early application is allowed under certain circumstances. The Company does not expect the adoption of SFAS No. 159 to have a significant impact on its consolidated financial position, results of operations or liquidity.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)), which replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements, which will enable users to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 141(R) will have an impact on accounting for business combinations once adopted, but the effect is dependent upon acquisitions at that time.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements -- an amendment of Accounting Research Bulletin No. 51 (SFAS 160), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent's ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company does not currently have non-controlling interests in any of its subsidiaries.
Note 2. Stock-Based Compensation
On January 11, 2006, the Company granted a total of 500,000 shares of common stock to its advisory board members for their consulting services valued at $42,500. The common stock is restricted and vested on January 11, 2007.
On December 27, 2006, the Company granted a total of 9,392,277 shares of common stock to employees and independent director as a long-term incentive valued at $845,305. The common stock is restricted and vests on December 27, 2016. The Company also granted a total of 120,000 shares to an independent contractor as a long-term incentive and recorded $10,800 of deferred compensation. The common stock is restricted and vests equally over three years on the anniversary date of the grant.
25
On February 27, 2007, the Company executed employment agreements with Michael Long, Chief Executive Officer and Chief Financial Officer, and Louis Hoch, President and Chief Operating Officer, and subsequently issued 500,000 shares of common stock to each as a signing bonus under the terms of their respective employment agreements, for which the Company recorded $107,000 of expense. The Company also issued 2,500,000 shares of common stock to each as a long-term incentive under the terms of their respective employment agreements, for which the Company recorded $535,000 of deferred compensation. The incentive stock is restricted and vests annually over five years in increments of 500,000 shares beginning on February 28, 2009.
On November 1, 2007, Michael Long, Chief Executive Officer and Chief Financial Officer, and Louis Hoch, President and Chief Operating Officer, were each granted 3,085,715 shares of common stock by the Company as an annual bonus of $216,000 pursuant to the terms of their respective employment agreements. The number of shares granted to each officer was based on the closing price of the common stock on October 15, 2007, which was $0.07 per share.
During the years ended December 31, 2007 and 2006, the Company issued a total of 352,674 and 1,510,582 shares of common stock, respectively, under the terms of its Comprehensive Employee Stock Plan to independent contractors providing consulting services to the Company and recorded $28,000 and $176,862 of related expense, respectively. During the year ended December 31, 2006, the Company also issued 735,295 shares of restricted common stock to Carmen Electra under the terms of a license agreement with her and recorded $125,000 of expense.
Compensation cost related to non-vested common stock awards will be recognized in future years as follows:
|
|
|
Year ending December 31,
|
|
|
2008
|
$
|
431,000
|
2009
|
|
352,000
|
2010
|
|
349,000
|
2011
|
|
349,000
|
2012
|
|
238,000
|
2013
|
|
238,000
|
2014
|
|
238,000
|
2015
|
|
238,000
|
2016
|
|
202,000
|
2017
|
|
117,000
|
Total deferred compensation
|
$
|
2,752,000
|
The table above includes $1,193,500 of compensation cost related to non-vested common stock awards granted on January 9, 2008 (see Note 14).
Note 3. Issuance of Capital Stock
On January 18, 2007, the Company sold 3,000,000 shares of restricted common stock to Robert D. Evans, an individual investor, for a total offering price of $255,000 under a Stock Purchase Agreement. On March 1, 2007, the Company sold an additional 5,000,000 shares of restricted common stock to Robert D. Evans for a total offering price of $500,000 pursuant to a Stock Purchase Agreement.
Note 4. Equity Line of Credit
In February 2004, the Company executed an agreement for an equity line of credit with Dutchess Private Equities Fund, LP (Dutchess). Under the terms of the agreement and at its election, the Company could have received as much as $10 million in common stock purchases by Dutchess through August 13, 2007. During the years ended December 31, 2007 and 2006, the Company sold 3,923,409 and 4,055,048 shares of its common stock, respectively, to Dutchess pursuant to the equity line of credit and received total proceeds, net of issuance costs, of $354,429 and $452,021, respectively.
On June 11, 2007, the Company entered into an agreement for a new equity line of credit with Dutchess, which replaced the February 2004 agreement. Under the terms of the new agreement, at its election the Company may receive as much as $10 million in common stock purchases by Dutchess over a period of five years. The Company agreed to file with the Securities and Exchange Commission (SEC), and have declared effective before any funds may be received under the agreement, a registration statement registering the resale of the shares of the Companys common stock to be issued to Dutchess. The Company filed a registration statement on Form SB-2 with the SEC on August 23, 2007 to register the resale of these shares. On September 10, 2007, the SEC declared the registration statement effective. During the year ended December 31, 2007, the Company sold 1,333,913 shares of its common stock pursuant to the new equity line of credit and received total proceeds, net of issuance costs, of $69,207.
26
Note
5. Notes Payable
On August 21, 2006, the Company entered into a zero-discount promissory note with Dutchess. Pursuant to terms of the promissory note, the Company received $500,000 and promised to pay Dutchess $625,000 with a maturity date of August 21, 2007, which represents an effective annual interest rate of 41%. The Company also issued 1,042,000 shares of restricted common stock to Dutchess as an incentive for the investment and agreed to register the common stock issued pursuant to the promissory note on the next registration statement filed by the Company. In addition, the Company agreed to pay all financing proceeds raised during the term of the note exceeding the aggregate amount of $500,000 towards prepayment of the note. The balance of the note payable was $359,280 on December 31, 2006. On March 9, 2007, the Company received $500,000 in readily available funds from its sale of 5,000,000 shares of common stock on March 1, 2007 (see Note 3), which brought the aggregate amount of financing raised during the term of the note to approximately $890,000. Accordingly, the Company repaid the balance of the note in full on March 12, 2007 in the amount of $300,734. At December 31, 2007, the Company had no borrowings under any note.
Note
6. Property and Equipment
The following is a summary of property and equipment at December 31:
|
|
|
|
|
|
|
2007
|
|
2006
|
Furniture and fixtures
|
$
|
175,856
|
|
$
|
175,856
|
Equipment
|
|
484,765
|
|
|
476,253
|
Software
|
|
333,985
|
|
|
312,510
|
Leasehold improvements
|
|
15,992
|
|
|
15,992
|
Total property and equipment
|
|
1,010,598
|
|
|
980,611
|
Less: accumulated depreciation
|
|
(898,526)
|
|
|
(822,995)
|
Net property and equipment
|
$
|
112,072
|
|
$
|
157,616
|
Note 7. Accrued Expenses
Accrued expenses consist of the following balances at December 31:
|
|
|
|
|
|
|
2007
|
|
2006
|
Accrued salaries
|
$
|
174,945
|
|
$
|
238,277
|
Reserve for merchant losses
|
|
209,220
|
|
|
167,520
|
Customer deposits
|
|
80,499
|
|
|
133,093
|
Accrued taxes
|
|
3,308
|
|
|
56,181
|
Accrued professional fees
|
|
29,073
|
|
|
14,167
|
Other accrued expenses
|
|
56,856
|
|
|
30,687
|
Total accrued expenses
|
$
|
553,901
|
|
$
|
639,925
|
Note
8. Operating Leases
The Company has a lease expiring October 31, 2009 for approximately 4,500 square feet that serves as the Companys headquarters. Rental expense under the operating lease was $81,126 for each of the years ended December 31, 2007 and 2006. Future minimum lease payments required under the operating lease are as follows:
|
|
|
Year ending December 31,
|
|
|
2008
|
$
|
81,126
|
2009
|
|
67,605
|
Total minimum lease payments
|
$
|
148,731
|
27
Note
9. Related Party Transactions and Guarantees
Beginning in December 2000, the Company pledged as loan guarantees certain funds held as money market funds and certificates of deposit to collateralize margin loans for the following executive officers of the Company: (1) Michael R. Long, then Chairman of the Board of Directors and Chief Executive Officer; (2) Louis A. Hoch, then President and Chief Operating Officer; (3) Marshall N. Millard, then Secretary, Senior Vice President, and General Counsel; and (4) David S. Jones, then Executive Vice President. Mr. Millard and Mr. Jones are no longer employees of the Company. The margin loans were obtained in March 1999 from institutional lenders and were secured by shares of the Company's common stock owned by these officers. The pledged funds were held in the Companys name in accounts with the lenders that held the margin loans of the officers. The Company's purpose in collateralizing the margin loans was to prevent the sale of its common stock owned by these officers while it was pursuing efforts to raise additional capital through private equity placements. The sale of that common stock could have hindered the Company's ability to raise capital in such a manner and compromised its continuing efforts to secure additional financing. The highest total amount of funds pledged for the margin loans guaranteed by the Company was approximately $2.0 million. The total balance of the margin loans guaranteed by the Company was approximately $1.3 million at December 31, 2002. At the time the funds were pledged, the Company believed they would have access to them because (a) their stock price was substantial and the stock pledged by the officers, if liquidated, would produce funds in excess of the loans payable, and (b) with respect to one of the institutional lenders (who was also assisting the Company as a financial advisor at the time), even if the stock price fell, they had received assurances from that institutional lender that the pledged funds would be made available as needed. During the fourth quarter of 2002, the Company requested partial release of the funds for operating purposes, which request was denied by an institutional lender. At that time, their stock price had fallen as well, and it became clear that both institutional lenders would not release the pledged funds since the value of the stock pledged by the officers was less than the loans payable and the officers were unable to repay the loans. In light of these circumstances, the Company recognized a loss on the guarantees of $1,278,138 in the fourth quarter of 2002 and recorded a corresponding payable under related party guarantees on their balance sheet at December 31, 2002 because it became probable at that point that they would be unable to recover their pledged funds. During the quarter ended March 31, 2003, the lenders applied the pledged funds to satisfy the outstanding balances of the loans. The total balance of the margin loans guaranteed by the Company was zero at December 31, 2007.
In February 2007, the Company signed employment agreements with Mr. Long and Mr. Hoch that require each to repay his respective obligation to the Company in four equal annual payments of cash or stock or any combination thereof. On December 29, 2007, the Company accepted common stock and stock options valued at $133,826 and $112,343 from Mr. Long and Mr. Hoch, respectively, in satisfaction of their annual payments for 2007 as provided for under their employment agreements. Mr. Longs payment consisted of 1,285,714 shares of the Companys common stock valued at $96,429 and options to purchase a total of 898,334 shares of the Companys common stock at exercise prices ranging from $0.18 to $2.81 per share. These options were valued at $37,397. Mr. Hochs payment consisted of 1,061,041 shares of the Companys common stock valued at $79,623 and options to purchase a total of 765,000 shares of the Companys common stock at exercise prices ranging from $0.18 to $2.81 per share. These options were valued at $32,720. The common stock accepted from Mr. Long and Mr. Hoch was valued at $0.075 per share, which was the closing price of the common stock on December 19, 2007. The common stock accepted from Mr. Long and Mr. Hoch was recorded as treasury stock with a total cost of $176,052. The fair value of each stock option accepted from Mr. Long and Mr. Hoch was determined using the Black-Scholes option-pricing model. The options accepted from Mr. Long and Mr. Hoch were canceled on December 29, 2007 and resulted in a total direct charge to equity of $70,117.
The Company may institute litigation or arbitration in collection of the outstanding repayment obligations of Mr. Millard and Mr. Jones, which currently total approximately $293,000. Presently, the Company has refrained from initiating action to recover funds from Mr. Millard because he may have an offsetting claim in excess of his repayment obligation by virtue of the deferred compensation clause in his employment agreement based on the Companys preliminary analysis. The Company has not pursued the outstanding repayment obligation of Mr. Jones because the Company does not consider a recovery attempt to be cost beneficial. In order to attempt a recovery from Mr. Jones, the Company estimates that it would incur a minimum of $20,000 in estimated legal costs with no reasonable assurance of success in recovering his outstanding obligation of approximately $38,000. Because of the limited amount of the obligation, the Company also anticipates difficulty in retaining counsel on a contingency basis to pursue collection of this obligation. The ultimate outcome of this matter cannot presently be determined.
During the year ended December 31, 2007, the Company paid Herb Authier a total of $35,500 for consulting services related to network engineering and administration that he provided to the Company. The amount paid to Mr. Authier consisted of $7,500 in cash and 352,674 shares of the Companys common stock valued at $28,000. Mr. Authier is the father-in-law of Louis Hoch, the Companys President and Chief Operating Officer.
28
Note 10. Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred tax assets and liabilities are as follows at December 31:
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
Gross deferred tax assets:
|
|
|
|
|
|
Warrant expense
|
$
|
3,228,000
|
|
$
|
3,228,000
|
Loss on related party guarantees
|
|
435,000
|
|
|
435,000
|
Net operating loss carryforwards
|
|
13,638,000
|
|
|
13,106,000
|
Other items
|
|
78,000
|
|
|
77,000
|
Total deferred tax assets
|
|
17,379,000
|
|
|
16,846,000
|
Gross deferred tax liabilities:
|
|
|
|
|
|
Depreciation and other items
|
|
2,000
|
|
|
53,000
|
Total deferred tax liabilities
|
|
2,000
|
|
|
53,000
|
Net deferred tax asset
|
|
17,377,000
|
|
|
16,793,000
|
Less: valuation allowance
|
|
(17,377,000)
|
|
|
(16,793,000)
|
Net deferred tax asset recorded
|
$
|
-
|
|
$
|
-
|
The Companys federal income tax returns for the years ended December 31, 2002 through December 31, 2007 remain subject to examination by authorities. If applicable, the Company would recognize interest expense and penalties related to uncertain tax positions in interest expense. As of December 31, 2007, the Company had not accrued any interest related to uncertain tax provisions.
The Company has net operating loss carryforwards for tax purposes of approximately $40.1 million that begin to expire in the year 2020. In October 1999, the Company issued common stock pursuant to a private placement offering. As a result, an ownership change occurred under Section 382 that limits the utilization of pre-change net operating loss carryforwards. Approximately $3.5 million of the total net operating loss is subject to the Section 382 limitations.
The reconciliation of income tax computed at the U.S. federal statutory tax rates to total income tax expense is as follows for the year ended December 31:
|
|
|
|
|
|
|
2007
|
|
2006
|
Tax (benefit) at statutory rate -- 34%
|
$
|
(585,000)
|
|
$
|
(475,000)
|
Change in valuation allowance
|
|
584,000
|
|
|
474,000
|
Permanent and other differences
|
|
1,000
|
|
|
1,000
|
Income tax expense
|
$
|
-
|
|
$
|
-
|
Note
11. Employment Benefit Plans
Stock Option Plans
: The Board of Directors and stockholders approved the 1999 Employee Comprehensive Stock Plan ("Employee Plan") to provide qualified incentive stock options (ISOs) and non-qualified stock options (NQSOs) as well as restricted stock grants to key employees. Under the terms of the Employee Plan, the exercise price of ISOs must be equal to 100% of the fair market value on the date of grant (or 110% of fair market value in the case of an ISO granted to a 10% stockholder/grantee). There is no price requirement for NQSOs, other than that the option price must exceed the par value of the common stock. The Company has reserved 30,000,000 shares of its common stock for issuance pursuant to the Employee Plan.
The 1999 Non-Employee Director Plan ("Director Plan") was approved by the Board of Directors and stockholders in 1999. Under the Director Plan, non-employee directors may be granted options to purchase shares of common stock at 100% of fair market value on the date of grant. The Company has reserved 1,500,000 shares of its common stock for issuance pursuant to the Director Plan.
29
Option activity under the Employee Plan and Director Plan is as follows:
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
Outstanding, December 31, 2005
|
5,516,170
|
|
$ 0.61
|
Granted
|
-
|
|
-
|
Canceled
|
(15,000)
|
|
0.20
|
Exercised
|
-
|
|
-
|
Outstanding, December 31, 2006
|
5,501,170
|
|
0.61
|
Granted
|
-
|
|
-
|
Canceled
|
(1,663,334)
|
|
0.96
|
Exercised
|
-
|
|
-
|
Outstanding, December 31, 2007
|
3,837,836
|
|
$ 0.61
|
There was an aggregate of 15,157,607 options to purchase the Companys common stock available for future grants under the Employee and Director Plans at December 31, 2007. There were no stock options granted during 2007 or 2006.
Summarized information about stock options outstanding is as follows at December 31, 2007:
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|
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Options Outstanding
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Options Exercisable
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Range of Exercise Prices
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Options Outstanding
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Weighted Average Remaining Contractual Life
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Weighted Average Exercise Price
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Number of Options
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Weighted Average
Exercise Price
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$0.08 - $0.14
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3,230,000
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|
6.9 years
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|
$0.11
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|
3,230,000
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|
$0.11
|
$0.18 - $0.26
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179,500
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5.2 years
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$0.18
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|
179,500
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|
$0.18
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$0.86 - $0.88
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87,668
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|
3.8 years
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|
$0.87
|
|
87,668
|
|
$0.87
|
$1.88 - $2.07
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|
109,001
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3.1 years
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|
$2.06
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|
109,001
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|
$2.06
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$2.81 - $11.25
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231,667
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1.3 years
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|
$4.66
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|
231,667
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|
$4.66
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|
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3,837,836
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6.3 years
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$0.46
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|
3,837,836
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$0.46
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Employee Stock Purchase Plan
: The Company established the 1999 Employee Stock Purchase Plan ("ESPP") under the requirements of Section 423 of the Internal Revenue Code (the "Code") to allow eligible employees to purchase the Companys common stock at regular intervals. Participating employees may purchase common stock through voluntary payroll deductions at the end of each participation period at a purchase price equal to 85% of the lower of the fair market value of the common stock at the beginning or the end of the participation period. Common stock reserved for future employee purchases under the plan aggregated 755,828 shares at December 31, 2007. There were no shares issued under the ESPP in 2007 or 2006.
401(k) Plan:
The Company has a defined contribution plan (the "401(k) Plan") pursuant to Section 401(k) of the Code. All eligible full and part-time employees of the Company who meet certain age requirements may participate in the 401(k) Plan. Participants may contribute between 1% and 15% of their pre-tax compensation, but not in excess of the maximum allowable under the Code. The 401(k) Plan allows for discretionary and matching contributions by the Company. In 2007, the Company made a required minimum contribution of $3,451 in total to non-key employees because the 401(k) Plan was determined to be top-heavy. The Company made no contributions during 2006.
Note
12. Stock Warrants
At December 31, 2007, there were outstanding vested warrants that expire on June 2, 2010 to purchase 2,179,121 shares of common stock at an exercise price of $11.38.
Note 13. Stockholder Rights Plan
On February 28, 2007, the Companys Board of Directors amended the terms of the Common Stock Rights Agreement between the Company and American Stock Transfer & Trust Company, as Rights Agent. The Company amended the definition of an Acquiring Person in the Rights Agreement to mean any Person who is, or which shall be, the Beneficial Owner of 20% or more of the shares of Common Stock then outstanding and amended the definition of Purchase Price in the Rights Agreement to be $0.10 for each share of Common Stock issued pursuant to the exercise of a Right.
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Note 14. Subsequent Events
Subsequent to December 31, 2007 and through March 26, 2008, the Company sold 40,000 shares of unregistered common stock to Dutchess Private Equities Fund, LP pursuant to the equity line of credit (see Note 4) and received total proceeds, net of issuance costs, of $1,637.
Subsequent to December 31, 2007 and through March 26, 2008, the Company granted a total of 256,775 shares of common stock under the terms of its Comprehensive Employee Stock Plan to independent contractors providing consulting services to the Company and recorded $14,500 of related expense.
On January 9, 2008, the Company granted a total of 21,300,000 shares of common stock to employees and independent director as a long-term incentive valued at $1,171,500. The common stock is restricted and vests on January 9, 2018. The Company also granted a total of 600,000 shares of unrestricted common stock under the terms of the Company's Employee Comprehensive Stock Plan to certain employees and recorded $33,000 of compensation expense. The Company also granted a total of 400,000 shares of common stock valued at $22,000 to its advisory board members. The common stock is restricted and vests on January 9, 2009.
On January 11, 2008, the Company signed an agreement to sell selected patents and patent applications to PCT Software Data, LLC, subject to customary closing conditions. On January 17, 2008, the Company completed the sale of selected patents and patent applications to PCT Software Data, LLC for net proceeds of approximately $750,000. The patents and patent applications sold relate to bill payments made with debit and stored value cards. The Company retained a worldwide, non-exclusive license under the patents for use with all current and future customers.
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