Item 1. Business
Business Summary
MyECheck, Inc. (“MyECheck” or the “Company”) is an early stage company engaged in the payment processing industry; specifically MyECheck provides electronic check image (“e-check”) services to merchants, payment services providers, banks and other businesses. MyECheck was founded and incorporated in Delaware in October 2004 to capitalize on opportunities created by the passing of The Check Clearing for the 21 st Century Act (“Check 21”). MyECheck has commenced formal business operations and is generating revenue.
MyECheck was created to satisfy the demand for an alternative payment solution to credit and debit cards for online commerce. MyECheck has developed and utilizes a proprietary method of creating and clearing Remotely Created Check (“RCC”) images on behalf of its e-commerce customers, having successfully implemented its proprietary RCC service that enables companies to accept real-time check payments from consumers and businesses online or over a telephone.
MyECheck provides additional services to support its RCC service including fraud loss prevention services. MyECheck also provides a number of services such as check remittance processing and remote deposit capture (“RDC”) services for brick and mortar companies, such as banks and retailers.
MyECheck entered into a merger agreement with Sekoya Holdings Ltd., a Nevada corporation in November 2007, amended and restated February 4, 2008. The merger was effective March 14, 2008. Shareholders of Sekoya at the time of the merger would own approximately 40% of the shares of the surviving company and shareholders of MyECheck would own approximately 60% of the surviving company, with all parties being diluted by additional financing to be completed following the Merger (excluding 2,000,000 shares held in escrow as remedies for breaches of the Merger Agreement)
Revenue is generated from transaction fees charged to companies that contract with MyECheck to utilize the Company’s services. MyECheck has experienced quarter over quarter revenue growth the last 12 months of 2008 and management believes that it will be possible for MyECheck to be generating positive operating cash flows within the second calendar quarter of 2009. As of January 2009, MyECheck was working to close additional pending merchant agreements.
About Check 21
Check 21 was signed into law on October 28, 2003, and became effective on October 28, 2004. Check 21 is designed to foster innovation in the payments system and to enhance its efficiency by reducing some of the legal impediments to check truncation. The law facilitates check truncation by creating a new negotiable instrument called a substitute check, which permits banks to truncate original checks, to process check information electronically, and to deliver substitute checks to banks that want to continue receiving paper checks. A substitute check is the legal equivalent of the original check and includes all the information contained on the original check. The law does not require banks to accept checks in electronic form nor does it require banks to use the new authority granted by the Act to create substitute checks.
Summary History of MyECheck
MyECheck started processing transactions on version one of its software platform in July of 2005 and continued through March of 2006, after which it ceased processing in order to further develop and refine its service offerings.
During the period from March of 2006 through September 2007, MyECheck redesigned and developed its software platform to better suit the demands of its prospective customers and to ensure the accurate performance of the software.
MyECheck has been sponsored by First Regional Bank, and successfully completed approval and check image file (ANSI X9.37) testing with the Federal Reserve Bank in the second quarter of 2007.
Version two of its software platform was launched in September of 2007 and MyECheck has been steadily ramping up transaction volume on the system since then.
The Services of MyECheck
MyECheck offers comprehensive, easily implemented solutions that include real-time check authorization, payment guarantee, check image creation and clearing and complete online reporting. Set out below are services that MyECheck provides and intends to provide as part of its business plan.
Remotely Created Check Service
Internet merchants and other companies wishing to accept payments online or over a telephone (“Merchants”) can directly integrate with MyECheck’s payment engine. Payor check data is collected by the Merchant either at the Merchant’s website or over the telephone, and is transmitted in real-time to MyECheck for processing.
MyECheck uses patent pending technology to generate RCCs in accordance with the Federal Reserve Check 21 specification. RCC images are formatted and are transmitted in near real-time to banks, or more commonly directly to the Federal Reserve for clearing on behalf of MyECheck’s partner bank(s).
MyECheck believes that its RCC service overcomes many of the shortcomings of Automated Clearing House (“ACH”) based e-check systems and cost-effectively provides higher transaction success rates, faster funds clearing and fewer returned items.
MyECheck believes that it is positioned to capture a significant market share of the alternative payments industry with a viable alternative payment method for online payments. Compared to other online payment methods, MyECheck works with more consumers, with the ability to guarantee payments at rates lower than non-guaranteed card processing rates.
Check Authorization Service
MyECheck offers Check Authorization Service which enables merchants to verify consumer provided data, check the status of the customer’s bank account, provide evidence that the consumer has authorized the check and predict the likelihood of a check being returned unpaid. Businesses that accept payments online through MyECheck utilize this service to provide greater assurance that the check will clear. Transactions can be approved or declined based upon the results of the Check Authorization Service.
Check Guarantee Service
MyECheck co-markets with Check Guarantee Providers to offer Check Guarantee Service. The Check Guarantee Provider warranties all approved checks and reimburses the Payee for financial losses incurred as a result of returned checks. The Check Guarantee Provider buys the returned checks that have been warranted from merchants for the full face value of the returned checks. MyECheck merchants utilize Check Guarantee Service so that they can ship products or provide services immediately without having to wait for the check to clear. The Check Guarantee Service also eliminates the need for Merchants to collect on returned checks from their customers. The Check Guarantee Providers are independent third parties whose services are offered to Merchants separately from the MyECheck service. MyECheck is not compensated by, and does not compensate, Check Guarantee Providers. MyECheck may in the future enter into compensated arrangements with Check Guarantee Providers.
Remote Deposit Capture and Remittance Processing
MyECheck provides Remote Deposit Capture and Remittance Processing Solutions that enable companies to scan paper checks at the brick and mortar point of sale or back office, and remit check images to MyECheck for processing. MyECheck formats the check images in accordance with the Federal Reserve Check 21 specification (ANSI X9.37) and transmits the files in near real-time directly into the check clearing system, as it does with its RCC image files. RDC reduces Merchant handling and administrative costs, eliminates paper check transportation, speeds clearing by an average of 2+ days and improves Merchant cash flow.
International Payment Service
Through relationships with foreign financial services organizations, MyECheck is planning to add international bank transfer payment services that will allow MyECheck merchants to accept non-card associated bank transfers in local currencies from the world’s largest global markets.
The methodology expected to be employed with the international service would prevent consumer initiated repudiation and charge-backs, eliminating most types of international payments fraud. This service facilitates funds collection in over 50 countries and provides bank transfer remitting capabilities to bank accounts in over 120 countries. The system currently supports 21 currencies and will perform foreign exchange if required.
Merchant Reporting
Through our Merchant interface, MyECheck provides the following reports:
In addition to the above, pertinent information is returned at the end of each transaction to facilitate reporting on the Merchant side.
Company Competition
Other new alternative payment brands have emerged and have experienced tremendous success in recent months and years. Management believes that MyECheck services are in many ways more viable, and possess greater revenue potential than other alternative payment services that have emerged.
Most other alternative payment services enable consumers to pay with either payment cards or ACH based e-checks. One of the shortcomings of many of these payment brands is that the consumer is redirected off of the merchant’s site in order to complete the transaction.
The check is the largest non-cash payment method in the US, demonstrating that people often prefer to use checks over cards. In the past 5 years, the number of online check transactions per quarter has grown from 742,660 to 318,484,650, approximately a 428% growth rate. In spite of this, many online merchants and businesses offer no alternative to cards, resulting in lost sales due to many consumers’ inability or unwillingness to purchase cards.
MyECheck provides access to more US consumers than any other payment method because it can be used to clear checks from 100% of US checking accounts, including business accounts and accounts where ACH does not work. MyECheck facilitates faster funds clearing than cards or ACH providing same day or next day availability of funds to the merchant’s bank. MyECheck also offers fraud control tools including bank account verification, negative check-writer database queries and payment guarantee at lower rates.
Because MyECheck does not use the ACH network, transactions are not subject to National Automated Clearing House Association (“NACHA”) regulation, including their rules, fees and fines. MyECheck RCCs are governed by Uniform Commercial Code (State check laws), and Check 21 law, which is more favorable to the Payee than NACHA rules and facilitates higher returned item collection rates. The lower number of returns and higher return collection rates translates to fewer losses, lower fees for payment guarantee and higher profit margins for MyECheck Merchants.
E-commerce & Internet Industry
Worldwide, more than one billion people are using the Internet. The number of American homes and businesses with broadband access capabilities tops 50 million, and a plethora of new services, entertainment options and time-saving solutions have become widely available. The U.S. population is becoming more tech-savvy, with at least 72% of American adults surfing the net on a regular basis. Confidence in security for online transactions is on the rise, as is the ease of use of most retail web sites.
Online advertising, including paid search inclusion at sites like Google and Yahoo!, has ballooned into a $10 billion business in the U.S. alone, threatening traditional advertising venues of all types.
Management believes that new methods of taking advantage of efficiencies created by the Internet are becoming widely accepted as access to high-speed broadband Internet connections become commonplace. Users of the Internet (both business and consumer) are multiplying around the globe, and many companies are earning substantial profits in serving those users.
The migration to more efficient payment mechanisms is affected by innovations, incentives, and regulation. While advances in technology have yielded numerous payment method alternatives, many have not been widely adopted. Numerous payment innovations have not been widely adopted because many payment system participants lacked sufficient incentives to change consumer behavior.
Gaining market adoption is a major challenge in the migration to efficient payment mechanisms. This can be particularly difficult considering the deep emotional attachment of consumers to more traditional payment forms, e.g., checks, in the United States. There are incentives that make U.S. consumers and businesses more likely to adopt less efficient and less secure payment instruments, such as credit and signature-based debit cards.
Weak authentication procedures are a main factor driving fraud. The legal and regulatory framework protects consumers differently based on the payment instrument used to make purchases.
According to a survey published June 29, 2006, approximately 74% of consumers would be willing to spend about $960 more per year on music, games, subscriptions, and other digital content online if they could use a form of payment that’s safer and more convenient than a credit or debit card. Given current estimates of active consumers online, that adds up to $14.4 billion in forgone sales annually for Internet-based content sellers, according to Javelin Strategy & Research.
Aside from those who say they would buy more if given alternatives, some 72% of online consumers said they have abandoned a purchase when it came time to make payment. The major finding of the poll is that the availability of secure and convenient payment options beyond traditional credit and debit cards can drive significant incremental purchases, subscriptions, and transactions.
Although many new payment schemes exist today with many more on the horizon, the vast majority of these systems continue to be based upon the two fundamental payment methods, credit and debit.
Successful solutions such as PayPal and more recently BillMeLater offer a slight twist to the traditional payment mechanism of credit cards. PayPal for example, whose primary merchant customers are small retailers who typically are not large enough to qualify for their own merchant account at a bank, offers consumer payment options consisting of either credit cards or bank debit through the ACH network.
BillMeLater is a credit based system whereby the consumer applies for and, if approved, is granted a line of credit at the time of the transaction.
All other e-check (online electronic check) solutions are based upon the ACH (automated clearing house) system. ACH transactions are bank electronic funds transfers whereby the consumer’s bank account is debited and the recipients account is credited. ACH transactions work reasonably well in most instances, however the system does suffer from some shortcomings which have impacted adoption.
ACH transactions are governed by NACHA, (the National Automated Clearing House Association), which imposes a substantial number of rules and regulations upon the transactions and their users. Compliance with the many, and continuously updating, NACHA operating rules can be complicated for Merchants.
ACH transactions take several days to clear through the system. During the clearing period the recipient has no way to determine if the transaction is even going clear or if it will result in an administrative return. ACH has more than 60 reasons why a transaction can fail. Many times it is because the consumer’s bank has chosen not to participate in ACH, or hasn’t performed the correct system integration.
Checks continue to be the number one non-cash payment method in the US, with the value of checks processed annually around one hundred trillion dollars. Up to 45% of adults either have no payment cards or have no available credit on their cards, meaning that as many as 80 Million US adults have no ability to buy online at the many websites that only accept cards.
Many online merchants are dissatisfied with credit card and ACH solutions, and many online industries such as travel and brokerage have no check solution at all. Management believes this provides MyECheck with a significant market opening.
Employees and Contractors
As of January 1, 2009, MyECheck had 5 full time employees and 6 independent contractors.
Leases
The Company leases its corporate office under a non-cancelable rental agreement through December 2009. Monthly payments at the inception of the lease terms were $ 8,576 and increase 4% annually.
Regulation
MyECheck is not currently subject to direct federal, state or local regulation, and laws or regulations applicable to access to or commerce on the Internet, other than regulations applicable to businesses generally. MyECheck provides transaction processing services and does not conduct transactions or hold or transfer cash itself. However, there can be no assurances that MyECheck will not be subject to such regulation in the future.
Cost of Compliance with Environmental Regulation
MyECheck currently has no costs associated with compliance with environmental regulations. However, there can be no assurances that MyECheck will not incur such costs in the future.
Software Development
In April 2006, MyECheck entered into an open ended software development agreement with R Systems International Ltd., a software product development company, and that agreement continues to be in effect. MyECheck also develops some of its software in-house and utilizes an independent contractor. During the past three years, research and development costs associated with the development of the software have been approximately $166,799.
MyECheck own proprietary software and intellectual property, and licenses patented technology from the Company founder Edward R Starrs.
Business Partners
MyECheck has entered into a Processor Agreement with First Regional Bank. First Regional Bancorp (NASDAQ: FRGB) is a bank holding company headquartered in Century City, California. Its subsidiary, First Regional Bank, specializes in providing businesses and professionals with the management expertise of a major bank and the personalized service of an independent. First Regional Bank offers the latest technology combined with a higher level of service, responsiveness and cost savings not found at other institutions.
First Regional Bank has sponsored MyECheck at the Federal Reserve Bank, and MyECheck is permitted to use First Regional Bank’s FedLine account to electronically access the Federal Reserve check clearing system.
MyECheck has entered into an Agreement with Cardinal Commerce Corporation, a global leader in enabling authenticated payments, secure transactions and alternative payment brands for both eCommerce and mobile commerce. CardinalCommerce enables payment brands such as Verified by Visa, MasterCard SecureCode, PayPal, eBillme, Bill Me Later, Google Checkout, MyECheck, and NetCash (with Western Union and NACHA Secure Vault Payments coming soon) to a network of over 30,000 merchants and thousands of Banks.
The Cardinal mobile platform leverages its merchant network, bank network and payment brands by linking them with end users’ mobile phones through an integrated mobile platform. Cardinal's proprietary and easily deployable technology provides consumers, merchants, card issuers, and processors the ability to conduct authenticated Internet, wireless and mobile transactions safely and securely. Headquartered in Cleveland, Ohio, with facilities in the United States, Europe and Africa, CardinalCommerce services a global customer base.
MyECheck is substantially reliant on these agreements for its business. If MyECheck develops a broader base of customers and vendor relationships, that reliance may decrease, but there can be no assurances as to the timing or extent of such growth.
The Company has entered into an agreement with Simon Properties Group Inc. (NYSE: SPG) and will be providing SPG with its comprehensive suite of electronic check processing services. This agreement allows Simon Property Group’s customers to use their checking accounts as a form of online. MyECheck’s patented system can clear checks from every U.S. checking account, even accounts that ACH cannot; thus providing online financial access to more consumers and businesses than any other payment method, at a fraction of the cost of card transactions.
On November 17, 2008, the Company announced that it had signed the California State Teachers’ Retirement Fund (CalSTRS) as a customer. CalSTRS primary responsibility is to provide retirement related benefits and services to teachers in public schools and community colleges. It administers retirement, disability and survivor benefits for California's 813,000 public school educators and their families from the state's 1,400 school districts, county offices of education and community college districts.
The Merger Agreement
MyECheck, Inc., a Delaware corporation (“MEC”) and Sekoya Holdings, Limited (a Nevada corporation) entered into a Merger Agreement in November 2007, which was amended and restated as of February 4, 2008, and was filed as an exhibit to the Report on Form 8-K filed on February 7, 2008 (the Report on Form 8-K and Merger Agreement are incorporated herein by reference). The merger was effective March 14, 2008.
A total of 2,000,000 shares otherwise issuable to MEC’s shareholders have been held back (the “Escrow Shares”) for purposes of compensating MEC and its officers, directors, employees, agents and affiliates should they sustain any loss due to a breach of Company’s representations, warranties, covenants or agreements contained in the Merger Agreement or any related document (a “Loss”).
Item 1A:
Item 1A: Risk Factors
MYECHECK IS A HIGH RISK, START-UP COMPANY AND, AS SUCH, THERE IS UNCERTAINTY REGARDING WHETHER IT WILL SUCCESSFULLY EXECUTE OUR BUSINESS PLAN, GENERATE ENOUGH REVENUE TO SUPPORT OPERATIONS, RECEIVE ANY INVESTMENT, OR ENGAGE ANY NEW CUSTOMERS.
“Going concern” opinion by auditors
The report of the auditors accompany the Company’s financial statements included herein notes that the Company has a net loss of $1,003,376 and net cash used in operations of $429,901 for the year ended December 31, 2008, and at December 31, 2008 had a working capital deficit of $329,323, an accumulated deficit of $2,370,320 and a stockholders’ deficit of $316,459. As a result of these factors, the auditors noted that there was “substantial doubt” about the Company’s ability to continue as a going concern.
Product Risk
There are no assurances that MyECheck will continue to be able to provide its services. Changes in laws or interpretation of existing laws may pose significant risk and may prevent MyECheck from providing its service. MyECheck is dependent on a bank relationship and there are assurances that MyECheck will be able to maintain its current bank relationships, or develop new bank relationships.
Market Risk
There are no assurances that the market demand for MyECheck’s services exist, or will continue to exist in the future. The Internet and high technology industries are rapidly evolving and changing, and new products or services may be introduced that may make MyECheck’s services less viable or obsolete.
Reliance on Key Employees
At least in its early stage, the Company's business depends to a large extent on retaining the services of its founder, Mr. Edward R Starrs (Chairman of the Board of Directors and Chief Executive Officer), as well as MyECheck’s Chief technical Officer Mr. R. Stephen Blandford and MyECheck’s Chief Financial Officer Mr. James R Heidinger. The Company's operations could be materially adversely affected if, for any reason, one or more of the above officers ceases to be active in MyECheck's management. MyECheck has minimized the possible loss of Mr. Starrs, Blandford and Heidinger to competitors by having each of them execute employment agreements containing non-competition and non-disclosure covenants. MyECheck has no key-person life insurance policy on any of the above-mentioned key personnel.
Financial Risk
There are no assurances that MyECheck will always have sufficient money to continue operations.
Competitive Risk
There are no assurances that MyECheck will be able to effectively compete against larger, better funded competitors. Although MyECheck is apparently first to market with its RCC service, competing services may be developed that may offer more advantages, cost less or may have higher sales and marketing success.
Dependence on the Internet
Because MyECheck’s products and services are provided directly over the Internet, the future success of MyECheck will depend in large part on whether the Internet proves to be a viable commercial marketplace. Whether because of inadequate development of the necessary infrastructure or as a result of fraud, or any other cause, if customers lack confidence in sourcing products over the Internet, MyECheck’s business, operating results and financial condition will be materially adversely affected.
Rapid Technologic Change; Dependence on New Product Development
The Internet market in which MyECheck intends to compete is characterized by rapid and significant technological developments, frequent new product introductions and enhancements, continually evolving business expectations and swift changes. To compete effectively in such markets, MyECheck must continually improve and enhance its products and services and develop new technologies and services that incorporate technological advances, satisfy increasing customer expectations and compete effectively on the basis of performance and price. MyECheck’s success will also depend substantially upon its ability to anticipate, and to adapt its products and services to its collaborative partner’s preferences. There can be no assurance that technological developments will not render some of MyECheck's products and services obsolete, or that MyECheck will be able to respond with improved or new products, services, and technology that satisfy evolving customers’ expectations. Failure by MyECheck to acquire, develop or introduce new products, services, and enhancements in a timely manner could have a material adverse effect on MyECheck’s business, financial condition and operations. Also, to the extent one or more of MyECheck's competitors introduces products and services that better address a customer’s needs, MyECheck’s business would be materially adversely affected.
Delays in New Product and Service Development and Introduction
The process of developing products and services such as those offered by MyECheck may prove to be extremely complex and it is highly likely that MyECheck will experience delays in developing and introducing new products and services in the future. If MyECheck is unable to develop and introduce new products, services or enhancements to existing products and services in a timely manner in response to changing market conditions or customer requirements, MyECheck's business, operating results and financial conditions would be materially adversely affected. Also, announcements of currently planned or other new products and services may cause customers to delay their subscription decisions in anticipation of such products and services, which could have a material adverse effect on MyECheck's business, operating results and financial condition, especially if the introduction of such products and services is delayed.
Flaws and Defects in Products and Services
Products and services as complex as those offered by MyECheck may contain undetected flaws or defects when first introduced or as new versions are released. Any inaccuracy or defects may result in adverse products and service reviews and a loss or delay in market acceptance. There can be no assurance that flaws or defects will not be found in MyECheck’s products and services. If found, flaws and defects would have a material adverse effect upon MyECheck’s business operations and financial condition.
Management of Potential Growth
MyECheck's ability to manage its future growth, if any, will require it to continue to implement and improve its operational, financial and management information systems and control and to hire and train new employees, including management and technical personnel, and also to motivate and manage its new employees and to integrate them into its overall operations and culture. Although the management team has successfully grown other companies, there can be no assurance that MyECheck will be able to perform such actions successfully. MyECheck's failure to manage growth effectively would have a material adverse effect on MyECheck’s results of operations and its ability to execute its business strategy.
Lack of a Public Market
There has not been a regular trading public market for MyECheck’s shares there are no assurances that a regular trading market will develop in the near term or that, if developed, it will be sustained. In the event a regular public trading market does not develop, any investment in MyECheck’s Common Stock would be highly illiquid. Accordingly, investors in MyECheck may not be able to readily sell their shares.
There are risks in trading in “microcap” stocks, including shares of the Company
The Securities and Exchange Commission has advised investors to use caution in investing in shares of “microcap” companies, which would include the Company. http://www.sec.gov/investor/pubs/microcapstock.htm. The Company encourages investors to consider the information provided by the SEC prior to making an investment in the Company’s stock.
Dividends
MyECheck has not paid any dividends or made distributions to its investors and is not likely to do so in the foreseeable future. MyECheck presently intends to retain earnings for use in its business. Additionally, MyECheck may fund a portion of its future expansion through debt financing, and a condition of such financing may prohibit the payment of dividends while the debt is outstanding. Therefore, management's goal is to build value by increasing the size of the business and not by paying dividends.
Competition
With the ever-growing popularity of the Internet and as computer hardware (i.e., servers) and creating/maintaining virtual private networks becomes more affordable, other on-line services may appear or are already established which will try to create an electronic link to provide similar products and services that MyECheck offers. Some of those businesses may have far greater financial and marketing resources, operating experience and name recognition than MyECheck. Potential competitors include PayPal, Google Checkout, BillMeLater and others. All these companies take different approaches to processing electronic transactions and to the best of MyECheck's knowledge, none of them currently offer services of the same type as MyECheck. Notwithstanding, these potential competitors, as well as the entry of more competitors offering similar services, could have a material adverse effect upon MyECheck's business, operating results and financial condition.
Reliance on license with affiliated party
The Company has entered into a memorandum of understanding with Ed Starrs, its founder and CEO, under which the Company will become the sole licensee of a newly granted patent for check processing technology. No royalties will be due for the patent for one year, and future royalties are subject to negotiation by the Company and Mr. Starrs. The Company believes that it will obtain a competitive advantage from the ability to access the patent. Failure to agree on future terms of the license could have a material adverse impact on the Company.
Item 1B.
Item 1B. Unresolved Staff Comments.
Not applicable
Item 2:
Item 2: Description of Property
MyECheck’s operates its executive offices from approximately 3,300 square feet of Class A office space in a business park located in El Dorado Hills, CA. Certain contractors operate from their homes located in various regions throughout the country. MyECheck’s primary operational data center is located in a tier IV data center in Sacramento, CA. Our telephone number is (916) 932-0900.
Item 3:
Item 3: Legal Proceedings
MyECheck may from time to time be involved in various claims, lawsuits, and disputes with third parties, actions involving allegations of discrimination, intellectual property infringement, or breach of contract actions incidental to the operation of its business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business. MyECheck is currently not aware of any such legal proceedings or claims that they believe will have, individually or in the aggregate, a material adverse affect on its business, financial condition or operating results.
MyECheck and Ed Starrs were sued in 2005 by an investor in a prior company in which Mr. Starrs was involved and which was developing a related, but different, technology. MyECheck intends to defend these claims vigorously. The investor is seeking return of approximately $350,000 and additional damages. The parties to the lawsuit reached a conditional settlement agreement in January 2009. No assurances can be provided that the settlement will be finalized. The matter is scheduled for trial in May 2009.
Item 4:
Item 4: Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fiscal period ended December 31, 2008.
PART II
Item 5:
Item 5: Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
The Company's Common stock is presently listed on the OTC Bulletin Board under the symbol "MYEC". Our common stock has been listed on the OTC Bulletin Board since October 2006. There is currently no active trading in our common stock and there has been no active trading since our common stock has been listed on the OTC Bulletin Board. Prior to the merger, any trading in the Company’s shares did not represent trading based on the current operations or business of the Company.
As of December 31, 2008, the approximate number of holders of Common Stock of the Company is 32. As of December 31, 2008, the approximate number of holders of Common Stock of the Company is 36.
Since our inception date, our boards of directors have not declared any dividend payments to the shareholders. The declaration and payment of dividends to holders of our common stock by us, if any, are subject to the discretion of our board of directors. Our board of directors will take into account such matters as general economic and business conditions, our strategic plans, our financial results and condition, contractual, legal and regulatory restrictions on the payment of dividends by us, and such other factors as our board of directors may consider to be relevant.
The company has never issued securities for any equity compensation plan.
On March 14, 2008, as a result of the Merger, the former shareholders of MEC became shareholders of approximately 60% of the Company’s outstanding common stock. The transaction was exempt from registration under Section 4(1) of the Securities Act of 1933.
MyECheck has entered into subscription agreements with Youngal Group Ltd. and Anshan Finance Ltd. (together the “Investors”) who have agreed, in the aggregate, to purchase 4,000,000 shares of MyECheck’s common stock following the Effective Time of the Merger. The shares were issued in reliance upon an exemption from the registration requirements of the Securities Act of 1933 provided by Regulation S. A total of 4,000,000 shares have been issued under those subscription agreements, but the Investors did not fully perform.
Item 6:
Item 6: Selected Financial Data
Omitted per Item 301 (c) of Regulation S-K.
Item 7.
Item 7. Management's Discussion and Analysis or Plan of Operation
The following discussion contains certain forward-looking statements that are subject to business and economic risks and uncertainties, and MyECheck's actual results could differ materially from those forward-looking statements. The following discussion regarding the financial statements of MyECheck should be read in conjunction with the financial statements and notes thereto.
MyECheck's prior full fiscal year ending December 31, 2007 is not indicative of MyECheck's current business plan and operations. Incorporated in October 2004, MyECheck currently has limited revenues and is deemed an early stage Company. This plan of operation will focus on MyECheck's business plan and operations current. There can be no assurance that MyECheck will generate positive cash flow and there can be no assurances as to the level of revenues, if any, MyECheck may actually achieve from its operations.
Implementation Plan
Following is an outline of MyECheck's plan to build a widely used payment system. The success of MyECheck depends on a number of factors including the careful selection and active participation of qualified Value Added Resellers (“VARs”) and Payment Service Providers (“PSPs”). The VARs / PSPs commitment to MyECheck will depend on the commercial viability of MyECheck’s solutions and web-based services.
MyECheck targets internet payment gateways and payments software and service providers for partnership and reseller opportunities. Early emphasis has been on building sales channels through partnerships. MyECheck has experienced early success in partnerships with Cardinal Commerce and is in discussions and other major PSPs.
In addition to its in-house direct sales department, MyECheck has engaged a number of specialized independent sales agents such as Sheffield Resource Network and others, who leverage their existing contacts for direct sales.
MyECheck has an active PR program and issues press releases on a regular basis which generate in-bound leads and interest from industry press. Company management conducts interviews with national press. MyECheck attends and exhibits at industry trade shows, conferences and other networking events.
MyECheck in-house sales force and independent sales agents also use email and cold calling marketing techniques, focusing on the industry’s largest target companies. MyECheck is currently in discussion with large Independent Sales Organizations (ISOs) regarding partnership and representation opportunities.
In addition to the effective marketing and distribution of MyECheck’s services, MyECheck’s infrastructure must be able to support a significant increase in transaction volume. MyECheck plans to enhance its infrastructure by adding a new data center and new hardware in anticipation of increased transaction volume. MyECheck plans to continue to scale it’s infrastructure in advance of the need.
Liquidity
As of December 31, 2008, MyECheck had cash on hand amounting to $23,999. MyECheck is currently operating cash flow negative and its operating expenses exceed its operating income.
There are currently no commitments for capital expenditures.
There are trends in sales that would have a material affect on MyECheck. In recent months there has been a marked increase in the number of applications for MyECheck’s services. Management expects this trend to continue throughout 2009, however there can be no assurances that the current trend will continue.
There are currently no guarantees or other off balance sheet arrangements.
Revenue from operations during the year period ended December 31, 2008 was $548,159. During the year ended December 31, 2007, revenue from operations was $46,051.
MyECheck started processing transactions on version one of its software platform in July of 2005 and continued through March of 2006, after which it ceased processing in order to further develop and refine its service offerings. During the period from March of 2006 through September 2007, MyECheck redesigned and developed its software platform to better suit the demands of its prospective customers and to ensure the accurate performance of the software. MyECheck launched revenue generating operations on version two of its software platform in September 2007.
The Company’s auditors have issued a “going concern” qualification to their opinion on the Company’s financial statements. The Company expects to require additional capital infusions during 2009 and may not survive without such capital infusions.
Item 7A:
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Omitted per Item 305(e) of Regulation S-K.
Item 8:
Item 8: Financial Statements
The consolidated financial statements required to be filed pursuant to this Item 8 begin on page of this report.
Item 9:
Item 9: Changes In Disagreements With Accountants on Accounting and Financial Disclosure
Berman & Company, P.A., the Company’s Independent Registered Public Accounting Firm (the “Firm”), have been the only auditor since inception and there have been no disagreements between MyECheck and the Firm.
Item 9A:
Item 9A: Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer (the "Certifying Officers") are responsible for establishing and maintaining disclosure controls and procedures for the Company. The Certifying Officers have designed such disclosure controls and procedures to ensure that material information is made known to them, particularly during the period in which this report was prepared. The Certifying Officers have evaluated the effectiveness of the Company's disclosure controls and procedures within 90 days of the date of this report and believe that the Company's disclosure controls and procedures are effective based on the required evaluation. There have been no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of consolidated financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. There has been no change in the Company’s internal control over financial reporting during the year ended December 31, 2008 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company’s management, including the Company’s CEO and CFO, does not expect that the Company’s disclosure controls and procedures or the Company’s internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Management 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. Based on this evaluation, management concluded that the company’s internal control over financial reporting was effective as of December 31, 2008.
Berman & Company, P.A., the Company’s independent registered public accounting firm, has not issued an attestation report on the effectiveness of the Company’s internal controls over financial reporting since we are not yet required to comply with this provision of Section 404(B) of the Sarbanes-Oxley Act.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ending December 31, 2008, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B:
Item 9B: Other Information
None
Item 10:
Item 10: Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
There is no involvement by any of Director, Executive Officer or Control Person in bankruptcy, criminal proceeding, injunctions, or violation of securities law in the past 5 years.
The following table sets forth the names and ages of the current directors and executive officers of MyECheck, the principal offices and positions with MyECheck held by each person and the date such person became a director or executive officer of MyECheck. The executive officers of MyECheck are elected annually by the Board of Directors. The directors serve one year terms until their successors are elected. The executive officers serve terms of one year or until their death, resignation or removal by the Board of Directors. There are no family relationships between any of the directors and executive officers. In addition, there was no arrangement or understanding between any executive officer and any other person pursuant to which any person was selected as an executive officer.
The directors and executive officers of MyECheck are as follows:
Edward R Starrs
Mr. Starrs has 20 years experience as an international business executive with management experience in multiple industries. He has been an officer and director of MyECheck since its formation in 2004. Previously, Mr. Starrs was President of Starnet Systems International, Inc., a wholly owned subsidiary of a public company that was processing more than $2 billion annually in Internet transactions.
Mr. Starrs owned and operated several successful companies including, ERS Marketing, Inc., where he produced over $20 million in contracts for his clients, and Bay Distributing, Inc. a major distributor of over 800 product categories to Fortune 500 accounts.
From January, 2002 through October, 2004, Mr. Starrs was President of Digency, Inc., an online payment processing company engaged in credit card and eCheck transaction processing for Internet Merchants.
Starrs has also held senior management positions with Fortune 100 companies including McCaw Communications, Inc. (AT&T), and AMF, Inc., the world’s largest sporting goods conglomerate.
R Stephen Blandford
Mr. Blandford possesses more than 15 years experience as a Senior Information Technology Professional including serving as CTO for companies in the online entertainment and gaming industries.
Mr. Blandford’s professional experience includes i2 Corp, MXM Media, Maxum Entertainment Group, Perspective Technologies, WinStreak and others.
From January 2002 through October 2004, Mr. Blandford was Chief Technology Officer for Digency, Inc., an online payment processing company engaged in credit card and eCheck transaction processing for Internet Merchants.
Mr. Blandford has expertise in the design and implementation of Java streaming media solutions for multiple platforms, using Coldfusion, PHP, & SQL DBs. For more than a decade Blandford has architected systems featuring virtually every emerging technology.
James Heidinger, BS, CPA
During the period from 2000 through 2005, Mr. Heidinger served as Chief Financial Officer for ORBA Financial Management, an investment and insurance sales and marketing firm licensed in all 50 states. With over 450 independent registered representatives and premium and investment sales of over $750 million, ORBA is the top production leader for Western Reserve Life and InterSecurities, both subsidiaries of AEGON NV, the third largest international insurance firm in the world and a major investor in ORBA Financial Management.
Previously, Mr. Heidinger was recruited to create and implement a corporate accounting system, provide financial statements, perform a systems conversion and set up a cash management system for Cucina Holdings, Inc. a $50 million food and beverage manufacturer, wholesaler and retailer. Its branded names include Java City Coffee, Caravali Coffees and La Petite Boulangerie.
Audit Committee Financial Expert
We do not have an audit committee financial expert as we believe the cost related to retaining a financial expert at this time is prohibitive. Further, because we are only beginning our commercial operations, at the present time, we believe the services of a financial expert are not warranted.
Conflicts of Interest
The only conflict that we foresee is that our officers and directors devote time to projects that do not involve us.
SECTION 16(A) BENEFICIAL OWNER REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934 requires that the Company's directors, executive officers, and persons who own more than 10% of registered class of the Company's equity securities, or file with the Securities and Exchange Commission (SEC), initial reports of ownership and report of changes in ownership of common stock and other equity securities of the Company. Officers, directors, and greater than 10% beneficial owners are required by SEC regulation to furnish the Company with copies of all Section 16(a) reports they file.
Code of Ethics
The Company has adopted code of ethics for all of the employees, directors and officers.
Item 11:
Item 11: Executive Compensation
On January 1, 2007, MyECheck entered into a three year Employment Agreement with Mr. Edward R Starrs, MyECheck's President and Chief Executive Officer, whereby MyECheck will pay Mr. Starrs an annual salary of $240,000. The Agreement also requires MyECheck to provide, at its expense, complete health insurance coverage for Mr. Starrs and his children.
MyECheck pays. R Stephen Blandford, MyECheck's Vive President of Technology and Chief Technology Officer, an annual salary of $90,000 and provides health insurance coverage for Mr. Blandford .
MyECheck pays Mr. James R Heidinger, MyECheck's Vice President of Finance and Chief Financial Officer, an annual salary of $135,000 and provides complete health insurance coverage for Mr. Heidinger.
MyECheck does not provide compensation for its directors.
The following table sets forth the total compensation MyECheck pays its Officers.
Option/SAR Grants
There are no stock option, retirement, pension, or profit sharing plans for the benefit of our officers and directors.
Long-Term Incentive Plan Awards
We do not have any long-term incentive plans.
Compensation of Directors
We do not have any plans to pay our directors any compensation for Board participation.
Indemnification
The Corporation Laws of the State of Nevada and MyECheck's Bylaws provide for indemnification of MyECheck's Directors for liabilities and expenses that they may incur in such capacities. In general, Directors and Officers are indemnified with respect to actions taken in good faith in a manner reasonably believed to be in, or not opposed to, the best interests of MyECheck, and with respect to any criminal action or proceeding, actions that the indemnitee had no reasonable cause to believe were unlawful. Furthermore, the personal liability of the Directors is limited as provided in MyECheck's Articles of Incorporation
Regarding indemnification for liabilities arising under the Securities Act of 1933, which may be permitted to directors or officers under Nevada law, we are informed that, in the opinion of the Securities and Exchange Commission, indemnification is against public policy, as expressed in the Act and is, therefore, unenforceable.
Item 12:
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information with respect to MyECheck's equity securities owned of record or beneficially by (i) each Officer and Director of MyECheck; (ii) each person who owns beneficially more than 5% of each class of MyECheck's outstanding equity securities; and (iii) all Directors and Executive Officers as a group, after giving effect to Merger and to the financing and warrant transactions described herein.
* Anshan Finance Ltd has agreed to purchase 2,000,000 shares from MyECheck for $1,000,000, and may be entitled to warrants from MyECheck to acquire an additional 2,000,000 shares from MyECheck at the price of $2.00 per share. Youngal Group Ltd. has agreed to purchase 2,000,000 shares from MyECheck for $1,000,000, and may be entitled to warrants from MyECheck to acquire an additional 2,000,000 shares from MyECheck at the price of $4.00 per share. Youngal Group Ltd. owes MyECheck $400,000 pursuant to a subscription receivable and the remaining investment has been received by MyECheck.
As of December 31, 2008, the Company determined that the balance due pursuant to a subscription receivable owed by Youngal Group Ltd was deemed uncollectible. The Company wrote off the balance due of $400,000 as a provision for uncollectible stock subscriptions at December 31, 2008.
Except as described above, there are currently no options, warrants, rights or other securities conversion privileges granted to our officers, directors or beneficial owners.
Securities Authorized for Issuance Under Equity Compensation Plans.
We have no equity compensation plans.
Item 13:
Item 13: Certain Relationships and Related Transactions
MyECheck has entered into subscription agreements with Youngal Group Ltd. and Anshan Finance Ltd. (together the “Investors”) who have agreed, in the aggregate, to purchase 4,000,000 shares of MyECheck’s common stock (the “Shares”) following the Effective Time of the Merger. The Shares will be issued in reliance upon an exemption from the registration requirements of the Securities Act of 1933 (the “Act”) provided by Regulation S and may only be transferred in accordance with the provisions of Regulation S, pursuant to an effective registration under the Act, or pursuant to an available exemption from registration under the Act
In connection with the sale of the Shares, MyECheck has entered into warrant agreements with Youngal Group Ltd. and Anshan Finance Ltd. (the “Warrants”). The terms of the Warrants provide the Investors the opportunity to purchase up to 4,000,000 additional shares of MyECheck’s common stock for a purchase price of $4.00 per share or $2.00 per share, respectively. The Warrants may only be exercised following the effective time of the proposed merger between MyECheck and Sekoya and the right to exercise the warrants terminates as of 5:00 p.m. local time in Vancouver, B.C. on the third anniversary of issuance. The Warrants were to be issued in reliance upon an exemption from the registration requirements of the Act provided by Regulation S and may only be transferred in accordance with the provisions of Regulation S, pursuant to an effective registration under the Act, or pursuant to an available exemption from registration under the Act.
The Investors are affiliates of Shirley Wong, a promoter of Sekoya.
MyECheck is not required as a Bulletin Board listed company to have independent directors and at the present time does not have any directors who are not also members of management.
Item 14:
Item 14: Principal Accountant Fees and Services
1) Audit Fees
The aggregate fees billed for the last two fiscal years for professional services rendered by the principal accountant for the audit of the Company's annual financial statements and review of financial statements included in the Company's Form 10-Qs or services that are normally provided by the accountant in connection with statutory and regulatory engagements for those fiscal years was:
2008 - Berman & Company, P.A. $40,000
2007 - Berman & Company, P.A. $36,000
2) Audit - Related Fees
The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountants that are reasonably related to the performance of the audit or review of the Company's financial statements and are not reported in the preceding paragraph:
2008 - Berman & Company, P.A. None
2007 - Berman & Company, P.A. $6,000
3) Tax Fees - None
The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning was:
2008 - Berman & Company, P.A. - None
2007 - Berman & Company, P.A. None
4) All Other Fees
The aggregate fees billed in each of the last two fiscal years for the products and services provided by the principal accountant, other than the services reported in paragraphs (1), (2), and (3) was:
2008 - Berman & Company, P.A. None
2007 - Berman & Company, P.A. None
Item 15:
Item 15: Exhibits
Exhibit No.
Description
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14 of the Securities and Exchange Act of 1934 as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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 on this 31st day of March, 2009.
MyECheck, Inc.
(Registrant)
By: /s/ Ed Starrs
Ed Starrs
President and Chief Executive Officer
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
Title
Date
/s/ Ed Starrs
March 31, 2009
Edward Robert Starrs
President, Chief Executive Officer,
Chairman of the Board, Director
/s/ James Heidinger
March 31, 2009
James Ronald Heidinger
Vice President of Finance,
Chief Financial Officer, Treasurer, Director
/s/ Robert Stephen Blandford
March 31, 2009
Robert Stephen Blandford
Vice President of Technology,
Chief Technology Officer, Secretary, Director
MYECHECK, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
Contents
See accompanying notes to financial statements.
MyECheck, Inc. and Subsidiary
Consolidated Statements of Operations
See accompanying notes to financial statements.
See accompanying notes to financial statements.
See accompanying notes to financial statements.
MyECheck, Inc. And Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and
Note 1 Basis of Presentation, Organization and Nature of Operations
MyECheck, Inc. (“MEC”) (“the Company”) was incorporated in the state of Delaware on October 29, 2004. The Company’s office is located in El Dorado Hills, California.
Sekoya Holdings, Ltd. (“Sekoya”) was incorporated in Nevada on May 19, 2005, and was in the process of developing an online payment system for use in the Chinese online community. Sekoya never achieved revenues and was a development stage company. See discussion of reverse acquisition and recapitalization.
Reverse Acquisition and Recapitalization
On March 14, 2008, Sekoya Holdings, Ltd. (“Sekoya”), a then shell corporation, merged with MEC and MEC became the surviving corporation. This transaction was accounted for as a reverse acquisition. Sekoya did not have any operations and majority-voting control was transferred to MEC. The transaction also requires a recapitalization of MEC. Since MEC acquired a controlling voting interest, it was deemed the accounting acquirer, while Sekoya was deemed the legal acquirer. The historical financial statements of the Company are those of MEC, and of the consolidated entities from the date of merger and subsequent.
Since the transaction is considered a reverse acquisition and recapitalization, the guidance in SFAS No. 141 does not apply for purposes of presenting pro-forma financial information.
Pursuant to the Merger, Sekoya’s majority stockholder cancelled 125,000,000 shares of common stock and the Company concurrently issued 39,562,501 shares of common stock to MEC. Upon the closing of the reverse acquisition, MEC stockholders held 60% of the issued and outstanding shares of common stock.
In connection with the reverse acquisition and recapitalization, all share and per share amounts have been retroactively restated.
Nature of Operations
The Company provides the following services:
(A) Electronic Check Processing
Provided to merchants who transact business over the internet allowing them to process checks electronically from their customers.
(B) Financial Verification
Provided to merchants to check the status of their customer’s bank account in order to provide greater assurance that the check will clear.
MyECheck, Inc. And Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and
(C) Guarantee Services
Guarantee services provide the merchant with guaranteed payment on any returned items for a fee on all items processed as a means to insure guaranteed payment for products sold or services rendered.
(D) Identity Services
In 2007, identity services were provided to merchants to verify that the user of the Company’s check processing service is valid providing the merchant with greater assurance that the customer is the true identity holder of the bank account.
Note 2 Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of MEC and Sekoya (collectively, the “Company”). All intercompany accounts have been eliminated in consolidation.
Risks and Uncertainties
The Company operates in an industry that is subject to intense competition and rapid technological change and is in a state of fluctuation as a result of the credit crisis occurring in the United States. The Company's operations are subject to significant risk and uncertainties including financial, operational, technological, and regulatory risks including the potential risk of business failure.
Also see Note 3 regarding going concern matters.
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.
A significant estimate in 2008 and 2007 included a 100% valuation allowance for deferred taxes due to the Company’s continuing and expected future losses.
MyECheck, Inc. And Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. At December 31, 2008 and 2007, the Company had no cash equivalents.
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits. At December 31, 2008 and 2007, there were no balances that exceeded the federally insured limit.
At December 31, 2008, the Company’s bank wrote off a liability recorded on the books as a cash overdraft in the amount of $41,373. The Company recorded the forgiveness as other income.
Accounts Receivable
Accounts receivable represents obligations from customers that are subject to normal collection terms. The Company periodically evaluates the collectability of its accounts receivable and considers the need to adjust an allowance for doubtful accounts based upon historical collection experience and specific customer information. Actual amounts could vary from the recorded estimates.
Concentrations
Statement of Position 94-6, “Disclosure of Certain Significant Risks and Uncertainties”, addresses corporate vulnerability to concentrations. For the Company, the exposure area includes the concentration with certain of its customers as it pertained to accounts receivable and sales.
At December 31, 2008 and 2007, the Company had a concentration of accounts receivable with one customer of 97% and 0%, respectively.
During the years ended December 31, 2008 and 2007, respectively, the Company earned 96% and 99%, respectively, of its revenues from one customer.
Fair Value of Financial Instruments
The carrying amounts of the Company’s short-term financial instruments, including accounts payable, accrued expenses, accrued compensation - related parties, accrued rent, loans payable - related parties and loans payable - other, approximate fair value due to the relatively short period to maturity for these instruments.
MyECheck, Inc. And Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and
Minority Interest
Under generally accepted accounting principles, when losses applicable to the minority interest in a subsidiary exceed the minority interest in the equity capital of the subsidiary, the excess is not charged to the minority interest since there is no obligation of the minority interest to make good on such losses. The Company, therefore, has included losses applicable to the minority interest against its interest. If future earnings do materialize, the Company will be credited to the extent of such losses previously absorbed. For financial reporting purposes, minority interest will not be presented until the minority’s share of profit exceeds its previously recorded deficit.
Revenue Recognition
The Company follows the guidance of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 for revenue recognition. The Company records revenue when all of the following have occurred; (1) persuasive evidence of an arrangement exists, (2) product delivery has occurred, (3) the sales price to the customer is fixed or determinable, and (4) collectibility is reasonably assured.
Services are performed under a contract with a customer, which states the services to be utilized and the terms and fixed price for all services under contract. The price of these services may be a fixed fee per transaction and/or a percentage of the transaction processed depending on the service.
Revenue from electronic check processing is derived from fees collected from merchants to convert merchant customer check data into an electronic image of a paper draft, which allows the Company to deposit the funds to the merchant’s bank through check 21 image clearing with the Federal Reserve on behalf of the bank. The Company recognizes the revenue related to electronic check processing fees when the services are performed.
Revenue from financial verification is derived from fees collected from merchants to process requests to validate financial verifications to an outside service provider under contract with the Company. This revenue is recognized when the transaction is processed, since the Company has no further obligations.
Revenue from check guarantee services is derived from fees collected from merchants to process transaction to an outside service provider under contract with the Company. This revenue is recognized when the transaction is processed, since the Company has no further obligations.
In 2007, revenue from identity verification was derived from fees collected from merchants to process requests to validate identity verifications to an outside service provider under contract with the Company. This revenue was recognized when the transaction was processed, since the Company had no further obligations.
MyECheck, Inc. And Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and
Processing Expense
During 2007, the Company’s processing model changed, whereby, the Company decided to no longer settle merchant accounts. Instead, the merchants would hold their own account at the Company’s sponsoring bank. This change allowed for the elimination of bank processing fees and return item charges levied on the company for merchant activity. The Company recorded processing expense as a component of general and administrative expense.
Earnings per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. At December 31, 2008 and 2007, the Company had no common stock equivalents that could potentially dilute future earnings (loss) per share; hence, a separate computation of diluted earnings (loss) per share is not presented, as the Company reflects a net loss and the effect of considering any common stock equivalents if outstanding would have been anti-dilutive.
Income Taxes
The Company accounts for income taxes under the liability method in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
The Company adopted the provisions of FASB Interpretation No. 48; “Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not, that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating the Company’s tax positions and tax benefits, which may require periodic adjustments. At December 31, 2008 and 2007, the Company did not record any liabilities for uncertain tax positions.
MyECheck, Inc. And Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and
Advertising
In accordance with Statement of Position 93-7, costs incurred for producing and communicating advertising of the Company, are charged to operations as incurred. Advertising expense for the years ended December 31, 2008 and 2007 was $41,457 and $57,766, respectively.
Research and Development
The Company expenses all research and development costs as incurred for which there is no alternative future use. During years ended December 31, 2008 and 2007, these costs primarily consisted of software development fees.
Stock-Based Compensation
All share-based payments to employees will be recorded and expensed in the statement of operations as applicable under SFAS No. 123R “Share-Based Payment”. The Company has not issued any stock based compensation during the years ended December 31, 2008 and 2007 to employees.
Non-Employee Stock Based Compensation
Stock-based compensation awards issued to non-employees for services will be recorded at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in Emerging Issues Task Force Issue EITF No. 96-18, “Accounting for Deficit Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” (“EITF 96-18”). For the years ended December 31, 2008 and 2007, the Company has not issued any stock based compensation to third parties.
Segment Information
The Company follows Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." During 2008 and 2007, the Company only operated in one segment; therefore, segment information has not been presented.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. It also defines fair value and established a hierarchy that prioritizes the information used to develop assumptions. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 157 did not have a material effect on the Company’s financial position, results of operations or cash flows.
MyECheck, Inc. And Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and
In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value. The unrealized gains and losses on items for which the fair value option has been elected should be reported in earnings. The decision to elect the fair value option is determined on an instrument-by-instrument basis, should be applied to an entire instrument and is irrevocable. Assets and liabilities measured at fair values pursuant to the fair value option should be reported separately in the balance sheet from those instruments measured using other measurement attributes. SFAS No. 159 is effective as of the beginning of the Company’s 2008 fiscal year. The adoption of SFAS No. 159 did not have a material effect on the Company’s financial position, results of operations or cash flows.
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”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, changes in a parent’s ownership of a noncontrolling interest, calculation and disclosure of the consolidated net income attributable to the parent and the noncontrolling interest, changes in a parent’s ownership interest while the parent retains its controlling financial interest and fair value measurement of any retained noncontrolling equity investment. SFAS 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The adoption of SFAS No. 160 is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS 141R, “Business Combinations” (“SFAS 141R”), which replaces FASB SFAS 141, “Business Combinations”. This Statement retains the fundamental requirements in SFAS 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. SFAS 141R will require an entity to record separately from the business combination the direct costs, where previously these costs were included in the total allocated cost of the acquisition. SFAS 141R will require an entity to recognize the assets acquired, liabilities assumed, and any non-controlling interest in the acquired at the acquisition date, at their fair values as of that date. This compares to the cost allocation method previously required by SFAS No. 141. SFAS 141R will require an entity to recognize as an asset or liability at fair value for certain contingencies, either contractual or non-contractual, if certain criteria are met. Finally, SFAS 141R will require an entity to recognize contingent consideration at the date of acquisition, based on the fair value at that date. This Statement will be effective for business combinations completed on or after the first annual reporting period beginning on or after December 15, 2008. Early adoption of this standard is not permitted and the standards are to be applied prospectively only. Upon adoption of this standard, there would be no impact to the Company’s results of operations and financial condition for acquisitions previously completed. The adoption of SFAS No. 141R is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.
MyECheck, Inc. And Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and
In January 2008, the SEC released SAB No. 110, which amends SAB No. 107 which provided a simplified approach for estimating the expected term of a “plain vanilla” option, which is required for application of the Black-Scholes option pricing model (and other models) for valuing share options. At the time, the Staff acknowledged that, for companies choosing not to rely on their own historical option exercise data (i.e., because such data did not provide a reasonable basis for estimating the term), information about exercise patterns with respect to plain vanilla options granted by other companies might not be available in the near term; accordingly, in SAB No. 107, the Staff permitted use of a simplified approach for estimating the term of plain vanilla options granted on or before December 31, 2007. The information concerning exercise behavior that the Staff contemplated would be available by such date has not materialized for many companies. Thus, in SAB No. 110, the Staff continues to allow use of the simplified rule for estimating the expected term of plain vanilla options until such time as the relevant data becomes widely available. The Company does not expect its adoption of SAB No. 110 to have a material impact on its financial position, results of operations or cash flows.
In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities-An Amendment of FASB Statement No. 133.” (“SFAS 161”). SFAS 161 establishes the disclosure requirements for derivative instruments and for hedging activities with the intent to provide financial statement users with an enhanced understanding of the entity’s use of derivative instruments, the accounting of derivative instruments and related hedged items under Statement 133 and its related interpretations, and the effects of these instruments on the entity’s financial position, financial performance, and cash flows. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company does not expect its adoption of SFAS 161 to have a material impact on its financial position, results of operations or cash flows.
In April 2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 142-3, “Determination of the Useful Life of Intangible Assets”. This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, and other GAAP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating the impact of SFAS FSP 142-3, but does not expect the adoption of this pronouncement will have a material impact on its financial position, results of operations or cash flows.
MyECheck, Inc. And Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to AU section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company is currently evaluating the impact of SFAS 162, but does not expect the adoption of this pronouncement will have a material impact on its financial position, results of operations or cash flows.
In May 2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1 “Accounting for Convertible Debt instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis. The Company does not believe the adoption of FSP APB 14-1 will have a significant effect on its financial position, results of operations or cash flows.
In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market For That Asset Is Not Active” (“FSP FAS 157-3”), with an immediate effective date, including prior periods for which financial statements have not been issued. FSP FAS 157-3 amends FAS 157 to clarify the application of fair value in inactive markets and allows for the use of management’s internal assumptions about future cash flows with appropriately risk-adjusted discount rates when relevant observable market data does not exist. The objective of FAS 157 has not changed and continues to be the determination of the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date. The adoption of FSP FAS 157-3 is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.
Other accounting standards have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date and are not expected to have a material impact on the financial statements upon adoption.
MyECheck, Inc. And Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and
Reclassifications
Certain amounts in the year 2007 financial statements have been reclassified to conform to the year 2008 presentation. The results of these reclassifications did not materially affect financial position, results of operations or cash flows.
Note 3 Going Concern
As reflected in the accompanying financial statements, the Company has a net loss of $1,003,376 and net cash used in operations of $429,901 for the year ended December 31, 2008; and a working capital deficit of $329,323, an accumulated deficit of $2,370,320 and stockholders’ deficit of $316,459 at December 31, 2008.
The ability of the Company to continue as a going concern is dependent on Management's plans, which include the raising of capital through debt and/or equity markets. The Company will require additional funding during the next twelve months to finance the growth of its current and expected operations and achieve strategic objectives. Additionally, the Company will need to continually generate revenues through its current business operations in order to generate enough cash flow to fund operations through 2009. The Company is also dependent on maintaining their positive approval status with the Federal Reserve. If the Company were to lose this approval, their ability to provide services would be affected negatively.
The Company believes its current available cash, along with anticipated revenues, may be insufficient to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 4 Loans Payable and Capital Stock Subscribed
(A) Loans Payable - related parties
During the year ended December 31, 2007, the Company received working capital advances from certain of its officers aggregating $19,059. These loans were non-interest bearing, unsecured and due on demand. During the year ended December 31, 2007, the Company repaid $119,214 in loans to these officers.
MyECheck, Inc. And Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and
During the year ended December 31, 2008, Company received working capital advances from certain of its officers aggregating $17,317. During the year ended December 31, 2008 the Company repaid $22,000 in loans to these officers.
(B) Loans Payable - other
During the year ended December 31, 2007, the Company repaid $2,500 to a third party.
During the year ended December 31, 2008, the Company received working capital advances from a third party aggregating $1,300. These loans were non-interest bearing, unsecured and due on demand. During the year ended December 31, 2008, the Company repaid $335 in loans to a third party.
(C) Capital Stock Subscribed and Related Stock Issuance
In connection with the March 14, 2008 Merger, the Company had agreed to sell 4,000,000 units of common stock at $0.50/unit for $2,000,000 to third parties. Each unit consists of one share of common stock and one warrant. The Company will issue 2,000,000 warrants exercisable at $2/share and 2,000,000 warrants exercisable at $4/share. The warrants expire two years from the grant date. At December 31, 2007, the Company had received $1,200,000, and during the year ended December 31, 2008, the Company received an additional $400,000 for aggregate consideration of $1,600,000.
On July 24, 2008, under the terms of the Merger, the Company issued 4,000,000 shares of common stock in exchange for $2,000,000, which included a subscription receivable of $400,000. In addition, the previously recorded stock subscription liability, of $1,200,000 received during 2007, was reclassified to equity, as the stock was issued. On December 31, 2008, the Company deemed the subscription receivable to be uncollectible and recognized a provision for uncollectible subscription receivable of $400,000. The Company reflects this provision as a component of general and administrative expense.
Because the subscription was not paid in full, the Company did not issue the warrants.
Note 5 Commitments and Contingencies
(A) Litigations, claims and assessments
From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business. The Company is currently not aware of any such legal proceedings or claims, other than disclosed below; that they believe will have, individually or in the aggregate, a material adverse affect on its business, financial condition or operating results.
MyECheck, Inc. And Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and
During 2005, a lawsuit against the Company was filed in the State of California. The plaintiffs claim the Company is using the technology created by the plaintiff company. The Company is defending these claims based on its position that the technology is different and the parties entered into a settlement agreement regarding the investment when the relationship with the plaintiffs had ended. On January 13, 2009, all parties involved in the litigation reached a conditional settlement agreement. The conditional settlement agreement is expected to be finalized by April 16, 2009, if and when final, would settle the case without any further liability to the Company and would be settled directly with the Company’s Chief Executive Officer. No assurances can be provided that the settlement will be finalized. The matter is scheduled for trial in May, 2009.
At December 31, 2008, it was not possible to provide an assessment as to the likelihood of an unfavorable outcome; therefore, no estimate of the range of potential loss is possible.
(B) Accrued Rent
Effective May 1, 2007, the Company executed a repayment plan for $104,969 in rent payments that have been in default. The Company agreed to repay the outstanding balance within twenty-four months plus 9% interest for total repayment of $115,092 ($4,796/month). The Company has $18,784 of scheduled repayments remaining during 2009. During 2008, the Company repaid $53,265 of the accrued rent.
(C) Operating Lease
The Company leases its corporate office under a non-cancelable rental agreement from May 2005 through December 2009. Monthly payments at the inception of the lease terms were $ 8,576 and increase 4% annually.
At the inception of the lease, the Company’s CEO paid $12,864 as a security deposit. This payment was included as a component of the CEO’s loan account and was repaid to the CEO during 2007.
Total rent expense amounted to approximately $114,449 and $111,617 for the years ended December 31, 2008 and 2007, respectively.
(D) Employment Agreement
On January 1, 2007, the Company executed a three-year employment agreement with its Chief Executive Officer. Compensation is $240,000 per year. At December 31, 2008, the company had accrued compensation of $63,993 to the Chief Executive Officer.
MyECheck, Inc. And Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and
Note 6 Income Taxes
SFAS No. 109 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards. SFAS No. 109 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets.
The Company has a net operating loss carryforward for tax purposes totaling approximately $1,716,000 at December 31, 2008 expiring through the year 2028. Internal Revenue Code Section 382 places a limitation on the amount of taxable income that can be offset by carryforwards after a change in control (generally greater than a 50% change in ownership). Temporary differences, which give rise to a net deferred tax asset, are as follows:
Significant deferred tax assets at December 31, 2008 and 2007 are approximately as follows:
The valuation allowance at December 31, 2007 was approximately $499,000. The net change in valuation allowance during the year ended December 31, 2008 was an increase of approximately $239,000. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation allowance as of December 31, 2008.
MyECheck, Inc. And Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and
The actual tax benefit differs from the expected tax benefit for the years ended December 31, 2008 and 2007 (computed by applying the U.S. Federal corporate tax rate of 34% to income before taxes and 8.84% for California state taxes, a blended rate of 39.83%) as follows: