Item 1.Business.
Organizational Structure
Compliance Systems Corporation (the “Company”) was incorporated in Nevada on November 17, 2003 under the name “GSA Publications, Inc.” (“GSA”). On February 10, 2006, the Company’s business predecessor, Compliance Systems Corporation, a corporation incorporated in Delaware on November 7, 2002 (“CSC”) pursuant to a corporate reorganization of several closely related companies that had commenced operations in December 2001, was merged with and into GSA (the “CSC/GSA Merger”). CSC was treated as the surviving corporation of the CSC/GSA Merger for accounting purposes due to the fact that the prior owners of CSC acquired approximately 85% of the surviving corporation’s stock as a result of the CSC/GSA Merger. Following the effectiveness of the CSC/GSA Merger, the surviving corporation changed its name to “Compliance Systems Corporation” and, directly and through the Company’s wholly-owned subsidiaries, began operating the businesses previously conducted by CSC. Unless the context otherwise implies, the term “Company” in these financial statements includes Company and its wholly-owned subsidiaries on a consolidated basis.
On February 5, 2010, the registrant, Compliance Systems Corporation (the “Company”), entered into an Agreement and Plan of Merger, dated as of February 5, 2010 (the “Merger Agreement”), with Execuserve Corp., a Virginia corporation (“Execuserve”) and CSC/Execuserve Acquisition Corp., a Virginia corporation and wholly-owned subsidiary of the Company. The Merger between Execuserve and CSC/Execuserve Acquisition Corp. became effective on February 9, 2010 with Execuserve being the surviving corporation becoming a wholly-owned subsidiary of the Company .
On December 1, 2010, the Company entered into and consummated the transactions contemplated by an Agreement and Consent to Surrender of Collateral (“Surrender of Collateral”) with Agile Opportunity Fund LLC (“Agile”). As a result, the Company surrendered its operating net assets to Agile.
Our Business
The Company’s current business plan is to attempt to identify and negotiate with business targets for mergers of those entities with and into the Company. No assurance can be given that the Company will be successful in identifying or negotiating with any target company.
Prior to the Surrender of Collateral, we operated our principal businesses through two of our subsidiaries, Call Compliance, Inc. (“CCI”) and Execuserve Corp. (“Execuserve”). CCI provided compliance technologies, methodologies and services to the teleservices industry. We developed a compliance technology called the TeleBlock® Call Blocking System which is a product that automatically screens and blocks outbound calls against federal, state, and in-house Do-Not-Call lists. A patent for TeleBlock was granted by the United States Patent and Trademark Office in December of 2001. The business of Execuserve Corp. provided organizations, who are hiring employees, with tests and other evaluation tools and services to assess and compare job candidates. We had developed a proprietary behavioral assessment test called Hire-Intelligence™ which applied adaptive testing techniques to probe each job candidate who takes the test for potential behavioral strengths and weaknesses relevant to the job for which they are being considered.
In March 2012, we entered into a letter of indication and interest which contemplated our acquisition of an entity for our stock. As contemplated, we would acquire such entity and issue to the owners of such entity such number of shares of our common stock that would result in such owners holding, immediately following consummation of the acquisition, 95% of our common stock on a fully-diluted basis. The letter of indication and interest further contemplates that $500,000 of our secured debt will be converted into shares of our common stock and our remaining debt at the time of consummation of the acquisition will not exceed $350,000 which will be paid ratably over the eighteen months following the acquisition. In connection with the entering into the letter of indication and interest, persons affiliated with the entity paid an aggregate of $50,000 to certain of our vendors and professional service providers. Such payments were made on our behalf, being used to pay for professional services to be rendered in connection with our audit for our year ended December 31, 2011 and the acquisition transaction, as well as outstanding amounts owed to certain vendors and such professionals. If the acquisition is not consummated, such $50,000 in aggregate payments shall be deemed a loan bearing interest at 8% per annum and due on July 31, 2012. We have only begun to conduct our due diligence on the proposed transaction and no assurance can be given that the proposed acquisition will be completed, nor can any assurance be given that the acquisition will result in any increase in shareholder values in our Company.
Employees
As of April 9, 2012, we have one employee.
Item 1A.
Item 1A.Risk Factors.
Disclosure under Item 1A is not required of smaller reporting companies.
Item 1B.
Item 1B.Unresolved Staff Comments.
Disclosure under Item 1B is not required of smaller reporting companies.
Item 2.
Item 2.Properties.
The Company’s executive officers relocated to 780 New York Avenue, Suite A, Huntington 11743. The office is used for administration and finance for all Company activities.
Item 3.
Item 3.Legal Proceedings.
We may become a party to various legal proceedings arising in the ordinary course of our business, but we are not currently a party to any legal proceeding that we believe would have a material adverse effect on our financial position or results of operations.
Item 4.
Item 4.Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market
Our common stock is traded over-the-counter and has been available for quotation on the OTC Bulletin Board under the trading symbol “COPI.OB” since May 9, 2007. The following table sets forth the range of high and low bid prices for our common stock for the periods indicated as derived from reports furnished by the OTC Bulletin Board. The information reflects inter-dealer prices, without retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.
Holders
As of April 9, 2012, we had 76 stockholders of record, and an unknown number of additional holders whose stock is held in “street name.”
Sales of Securities
There were no securities sold by us during the three months ended December 31, 2011 without registration under the Securities Act.
Dividends
No dividends have been declared or paid on our common stock, and we do not anticipate that any dividends will be declared or paid in the foreseeable future. Dividends on our common stock are subordinated to dividend and liquidation rights of the holders of the Series B Senior Convertible Voting Non-Redeemable Preferred Stock (“Series B Preferred Stock”) and Series D Senior Convertible Voting Redeemable Preferred Stock (“Series D Preferred Stock”).
Securities Authorized for Issuance under Equity Compensation Plans
The following table shows information as of December 31, 2011 with respect to each equity compensation plan and individual compensation arrangements under which our equity securities are authorized for issuance to employees or non-employees.
On January 4, 2008, our board of directors granted options to purchase an aggregate 40 million shares of our common stock to three officers, including Barry M. Brookstein, Chairman of the Board, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer (“Brookstein”) (10 million underlying shares), Dean Garkinkel, the Company’s former Chairman of the Board and Chief Executive officer (“Garfinkel”) (20 million underlying shares) and Stefan Dunigan, CCI’s former Chief Executive Officer and President (“Dunigan”) (10 million underlying shares).
Each of such options has an exercise price of $0.026 per share, the per share closing market price of our common stock on the date of grant. The options are terminable on the earlier of:
(i) the first anniversary of the optionee's death;
(ii) the date of the termination of the optionee's employment or other relationship with the Company for cause;
(iii) the first anniversary of the date (A) on which the optionee's employment or other relationship with the Company is terminated without cause (except if such termination be by reason of death or permanent and total disability of the optionee); or (B) the optionee voluntarily terminates his employment or other relationship with the Company;
(iv) the first anniversary of the date of Optionee's permanent and total disability, within the meaning of such term in Section 22(e) of the Internal Revenue Code; or
(v) January 4, 2013.
The options issued to Garfinkel and Dunigan expired one year after the termination of their employment with the Company.
Item 6.
Item 6.Selected Financial Data.
Disclosure under Item 6 is not required of smaller reporting companies.
Item 7.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview and Recent Developments
On November 18, 2010, Agile had notified the Company that Agile deemed us to be in default under the various Agile Debentures. The default related to the Company’s failure to make interest payments under the Agile Debentures, which totaled $281,939 as of October 31, 2010, the most recent interest payment date under the Agile Debentures. The Company had five business days in which to cure such default. The Company failed to cure the default and, effective November 23, 2010, an Event of Default under the Agile Debentures was deemed to have occurred. The occurrence of an Event of Default resulted in the acceleration of all amounts due under the Agile Debentures. We had previously granted Agile a first priority security interest in all of our assets. In addition, CCI and Execuserve guaranteed all of our obligations under the Agile Debentures and granted Agile a first priority security interest in all of their respective assets. Accordingly, upon the occurrence of the Event of Default, Agile was entitled to enforce its rights as a secured lender, including the right to foreclose on all of the assets of the Company, CCI and Execuserve (collectively, the “Collateral”), up to the amount owing under the Agile Debentures. The Surrender Agreement contemplated that Agile accept the Collateral in full satisfaction of the indebtedness evidenced by the Agile Debentures and that the Company, CCI and Execuserve surrender, assign and transfer to Agile the Collateral in full satisfaction of the indebtedness evidenced by the Agile Debentures. The acceptance, surrender, assignment and transfer of the Collateral were deemed effective as of the date of the Surrender Agreement. Accordingly, effective as of December 1, 2010, all of the assets of the Company, CCI and Execuserve were surrendered, assigned and transferred to Agile and our obligations under the Agile Debentures were deemed fully satisfied. As a result, the Company’s operating businesses are reflected as discontinued operations.
The Company’s current business plan is to attempt to identify and negotiate with business targets for mergers of those entities with and into the Company. No assurance can be given that the Company will be successful in identifying or negotiating with any target company.
Critical Accounting Policies
The Company’s consolidated financial statements and related public information are based on the application of generally accepted accounting principles in the United States (“GAAP”). The Company’s significant accounting policies are summarized in Note 2 to its annual consolidated financial statements. While all of these significant accounting policies impact its financial condition and results of operations, the Company views certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our consolidated financial statements. The Company’s critical accounting policies are discussed below.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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.
Stock Based Compensation Arrangements
The Company accounts for stock-based compensation arrangements in accordance with guidance provided by the Financial Accounting Standards Board Accounting Standards Codification (“ASC”). This guidance addresses all forms of share-based payment awards including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights, as well as share grants and other awards issued to employees and non-employees under free-standing arrangements. These awards are recorded at costs that are measured at fair value on the awards’ grant dates, based on the estimated number of awards that are expected to vest and will result in charges to operations.
From time to time, the Company’s shares of common stock and warrants have been issued as payment to employees and non-employees for services. These are non-cash transactions that require management to make judgments related to the fair value of the shares issued, which affects the amounts reported in the Company’s consolidated financial statements for certain of its assets and expenses.
Income Taxes
The Company accounts for income taxes under the provisions of Financial Accounting Standards Board's ("FASB") Accounting Standard Codification ("ASC") 740 "Income Tax". ASC 740 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company has adopted the provisions of FASB ASC 740-10-05 “Accounting for Uncertainty in Income Taxes.” The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Results of Operations for Year Ended December 31, 2011 (“2011”) Compared to the Year Ended December 31, 2010 (“2010”)
Going Concern
Our financial statements have been prepared assuming that we will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company’s continued losses and negative operating cash flows raise substantial doubt about its ability to continue as a going concern.
The Company’s primary need for cash during the next twelve months is to fund payments of operating costs. Historically, the Company has relied upon private debt and equity financing to fund its operations and expects to continue to do so. Our auditors included a “going concern” qualification in their auditors’ report for the year ended December 31, 2011. Such “going concern” qualification may make it more difficult for us to raise funds when needed. The current economic environment is impacting the Company’s ability to obtain any needed financing. No assurance can be given that financing will be available when needed or, if available, such financing will be on terms beneficial to the Company.
Continuing Operations
As a result of the Surrender of Collateral, the Company’s operating businesses were classified as discontinued operations. Operating expenses represent those incurred primarily to enable the Company to satisfy the requirements of a reporting company.
The Company incurred a loss from continuing operations of $543,588 in 2011 and $1,221,036 in 2010.
Selling and general and administrative expenses consist primarily of officer’s salary and professional fees for accounting and auditing services, legal fees and consulting services. Selling and general and administrative expenses amounted to $447,320 in 2011 and $348,588 in 2010. Operating expenses consist of the following for the years ended December 31, 2011 and 2010.
Interest expense decreased by $542,523 to $109,213 for 2011 from $651,736 for 2010. This decrease is primarily related to the Surrender of Collateral on the Agile Debentures in December 2010.
The Company’s loan cost amortization and related financing expense, including amortization of loan discount, was $0 for 2011 compared to $220,712 for 2010. Deferred loan costs and loan discount amortized during 2010 were related to the debentures that were issued to Agile.
Discontinued Operations
The results of the discontinued operations for the year ended December 31, 2010 are as follows:
In addition, as a result of the Surrender of Collateral, the Company recognized a gain of $1,413,255 in the year ended December 31, 2010. In 2011, the Company wrote-off the loans and accrued interest due to the former stockholders of Execuserve in the amount of $153,003. Such write-off was recognized as a gain on the Surrender of Collateral for the year ended December 31, 2011.
For the reasons set forth above, the Company’s 2011 net loss decreased by $294,255 to $390,585 in 2011 from $684,840 in 2010.
Dividends of $150,000 were accrued on the Series B Preferred Stock for both 2011 and 2010. Dividends of $4,286 were accrued on the Series D Preferred Stock in 2011. Series D Preferred Stock was issued in March 2011 and April 2011. The dividends are taken into account when computing loss per common share. The Company has failed to pay dividends on the outstanding shares of its Series B Preferred Stock and Series D Preferred Stock in 2011 and 2010. Dividends on the Preferred Stock may only be paid out of funds legally available for such purpose. Under Nevada law, generally, a corporation’s distribution to stockholders may only be made if, after giving effect to such distribution, (i) the corporation would be able to pay its debts as they become due in the usual course of action and (ii) the corporation’s total assets equal or exceed the sum of the corporation’s liabilities plus the amount that would be needed, if the corporation was to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of stockholders whose rights are superior to those receiving the distribution. Accrued dividends total $454,286 at December 31, 2011.
The Company’s annual effective tax rate was estimated to be 0% for both 2011 and 2010. Accordingly, no tax benefit or cost was recognized in either of such periods. During the current and prior year, the Company did not record an income tax benefit for net deferred tax assets generated due to the uncertainty of their realization.
Warrant Exchange
On May 12, 2011, the Company exchanged warrants (the “Old Warrants”) to purchase an aggregate of 128.13 million shares of our Common Stock, with exercise prices ranging between $0.05 and $0.001 per share and expiration dates between June 23, 2014 and March 31, 2016, for new warrants (the “New Warrants”) to purchase the same number of shares of our common stock at an exercise price of $0.001 per share and having an expiration date of May 11, 2016. The New Warrants, which all expire on May 11, 2016, permit “cashless exercise,” a right which was not provided for in the Old Warrants. The New Warrants also contain anti-dilution provisions that are not as advantageous to the warrant holders as the anti-dilution provisions applicable to the Old Warrants.
As a result of the exchanges, the Company recognized a charge of $11,797 for the year ended December 31, 2011, which is classified as part of interest expense.
As the New Warrants contain “cashless exercise” provisions, the value of the New Warrants were recognized as liabilities and not as part of stockholders’ deficiency. In addition, the Company is required to revalue the New Warrants at the end of each reporting period with the change in value reported on the statement of operations. The Company valued these issuances using the Black-Scholes option pricing model. The Company recognized a gain on the value of the New Warrants of $12,945 for the year ended December 31, 2011.
Liquidity and Capital Resources
At December 31, 2011, we had a cash balance of $529 compared to $19,014 at December 31, 2010.
Cash used in operating activities of $59,993 for the year ended December 31, 2011. The decrease in cash was primarily attributable to funding the loss for the year.
Net cash provided by financing activities was $41,508 for the year ended December 31, 2011. The Company received $50,000 from the issuance of its newly created Series D Preferred Stock, proceeds from loans from Brookstein of $11,775 and repaid $20,267 of short term and demand loans.
The Company’s primary need for cash during the next twelve months is to fund payments of operating costs. In addition, the Company is presently in negotiations to obtain additional financing to fund operations. On April 26, 2011, the Company extended its investment banking agreement with Cresta Capital Strategies, LLC to April 26, 2012. As a retainer, the Company issued a five-year warrant to purchase 50 million shares of the Company’s Common Stock at an exercise price of $0.001 per share.
The Company’s current business plan is to attempt to identify and negotiate with business targets for mergers of those entities with and into the Company. The Company’s expected expenses are comprised of operating expenses related to the business plan as well as those that enable the Company to satisfy the requirements of a reporting company. No assurance can be given that financing will be available when needed or, if available, such financing will be on terms beneficial to the Company.
Recent financing transactions other than with Agile include the following:
The Company’s loan from Nascap Corp. (“Nascap”) was modified in March 2009, increasing funding up to $750,000 at the lender’s discretion. The original loan amount was $150,000. The greatest amount of principal outstanding under the loan facility was $350,000, which is the balance owed at December 31, 2011.
Agreements with two additional lenders were modified on June 24, 2009. Brookstein had loaned the Company an aggregate of $50,000 during the 2009 first fiscal quarter, and a second lender loaned the Company $150,000 in April 2006. Both notes continue to bear interest at 18% per annum, payable monthly in arrears. The extended maturity dates on the modified notes were January 1, 2012. Both notes are now due on demand as the Company did not repay the notes.
In the fourth quarter of 2011, Brookstein loaned the Company $11,775 for working capital purposes. The loans are non-interest bearing and are due on demand.
In addition, due to cash flow difficulties, the Company has issued warrants to various officers and other companies and individuals as follows:
Issuance of Deferred Salary Warrants
Brookstein (and Garfinkel before his resignation from the Company) have been deferring all or a portion of their salaries since January 1, 2009. The amount of deferred salaries totaled $1,010,000 as of December 31, 2011, consisting of $630,000 due Brookstein and $380,000 due Garfinkel. Warrants have been issued on a quarterly basis. See Note 11F of the Consolidated Financial Statements.
Issuance of Deferred Dividend Warrants
The Company has failed to pay dividends on the outstanding shares of its Series B Preferred Stock and Series D Preferred Stock in 2011 and 2010. Warrants have been issued to both Brookstein and Spirits Management Inc. (“Spirits”) on a quarterly basis. See Note 11G of the Consolidated Financial Statements.
Issuance of Deferred Interest Payment Warrants
Commencing in the fourth quarter of 2009, the Company failed to pay interest on the promissory notes that were previously issued to Brookstein, Henry Ponzio and Nascap (the “Note Holders”). To compensate the Note Holders for the failure to pay interest on their promissory notes, the Company granted to such Note Holders warrants on a quarterly basis. See Note 11H of the Consolidated Financial Statements.
Off -Balance Sheet Arrangements
As of December 31, 2011, there were no off balance sheet arrangements.
Item 7A.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk.
Disclosure under Item 7A is not required of smaller reporting companies
Item 8.
Item 8.Financial Statements and Supplementary Data.
We set forth below a list of our audited financial statements included in this Annual Report on Form 10-K and their location.
*	Page follows page 31 to this Annual Report on Form 10-K.
Item 9.
Item 9.Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A.
Item 9A.Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management conducted an evaluation, with the participation of its Chief Executive Officer (CEO)/Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, the CEO/CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for the preparation of our financial statements and related information. Management uses its best judgment to ensure that the financial statements present fairly, in material respects, our financial position and results of operations in conformity with generally accepted accounting principles.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision of management, including the Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission published in 1992 and subsequent guidance prepared by the Commission specifically for smaller public companies. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2011.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of our Company; and (3) unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements are prevented or timely detected.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This annual report does not include an attestation report of Holtz Rubenstein Reminick LLP (“Holtz Rubenstein”), our registered public accounting firm, regarding internal control over financial reporting. Management's Report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only Management's Report in this annual report.
Changes in Internal Controls Over Financial Reporting
There have been no changes in our internal controls over financial reporting that occurred during our last fiscal quarter to which this Annual Report on Form 10-K relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. We are committed to improving our financial organization. As part of this commitment, we intend to continue to educate our management personnel to comply with U.S. GAAP and SEC disclosure requirements and to increase management oversight of accounting and reporting functions in the future.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10.Directors, Executive Officers and Corporate Governance.
Directors and Executive Officers
The following table sets forth the names and positions of our executive officers and directors. Our directors are elected at our annual meeting of stockholders and serve for one year or until successors are elected and qualify. The Board appoints the Company’s officers, and their terms of office are at the discretion of the Board, except to the extent governed by an employment contract.
As of April 12, 2011, our directors and executive officers, their age, principal positions, the dates of their initial election or appointment as directors or executive officers, and the expiration of their terms are as follows:
Name
Age
Principal Positions
Periods Served
Barry Brookstein
Chairman of the Board, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer
February 2006 to Present
Brookstein is a director and chief financial officer of Organic Alliance, Inc. He has not been involved in any bankruptcy proceedings, criminal proceedings, any proceeding involving any possibility of enjoining or suspending our directors and officers from engaging in any business, securities or banking activities, and has not been found to have violated, nor been accused of having violated, any federal or state securities or commodities laws.
The following is a brief description of the background of our director/executive officer, as furnished by such director and executive officer.
Barry Brookstein served as the Chief Financial Officer of CSC and each of its subsidiaries from such entities’ formation through CSC’s merger with and into our company in February 2006. Since the 2006 merger, he has served as the Chief Financial Officer of the Company and each of our subsidiaries, as well as Secretary, Treasurer and director of the Company. Effective November 23, 2010, he became the Chairman of the Board and Chief Executive Officer of the Company upon the resignation of Garfinkel. Prior to joining CSC, Mr. Brookstein devoted his full-time to his accounting practice. Mr. Brookstein also currently devotes a portion of his time to his private accounting practice. Mr. Brookstein is a graduate of Pace University and has over 40 years of experience in public accounting.
As part of the Execuserve acquisition, the Company had realigned its organizational structure to account for the Execuserve acquisition and its operational management team. Execuserve was managed by its CEO and President Jim Robinson. Additionally, Tom Eley, the former CEO of Execuserve was appointed to the Board of Directors of the Company. CCI was led by Stefan Dunigan as its CEO and President. Both left the Company as part of the Surrender of Collateral transaction. Mr Eley resigned from the Board effective June 14, 2010.
On November 23, 2010, Garfinkel resigned as the Company’s Chairman of the Board of Directors and CEO.
Section 16(a) Compliance by Officers and Directors
We do not have a class of securities registered under Section 12(b) or Section 12(g) of the Exchange Act in 2007 and, as such, our officers, directors and 10% stockholders were, and current are, not subject to the reporting requirements of Section 16(a).
Code of Ethics
On February 10, 2006, our Board of Directors adopted a written Code of Ethics designed to deter wrongdoing and promote honest and ethical conduct, full, fair and accurate disclosure, compliance with laws, prompt internal reporting and accountability to adherence to the Code of Ethics. Our Code of Ethics applies to all of our employees and directors, including our Chief Executive Officer, Chief Financial Officer and Controller. This Code of Ethics was filed as an exhibit to the Registration Statement on Form SB-2 filed with the SEC on May 12, 2006.
Committees
Our Board of Directors serves as the audit committee. Our board does not have an outside director as a financial expert due to the lack of capital needed to attract a qualified expert. Absent his positions as an executive officer, director and principal stockholder, our board believes that Mr. Brookstein would qualify as a financial expert.
We do not have a nominating committee or a method in place for the consideration of director-nominees. Our Board of Directors will consider any appropriately qualified person for directorship with our company. Stockholders wishing to submit the name of an appropriately qualified person for a directorship should direct any such submission to our secretary at our principal offices.
Item 11.
Item 11. Executive Compensation.
The following table sets forth, with respect to our fiscal years ended December 31, 2011 and 2010, all compensation earned by or paid to all persons who served as our chief executive officer at any time during our fiscal year ended December 31, 2011 and such other executive officers and other employees of our company who were employed by our company as of the close of business on December 31, 2011 and whose total annual salary and bonus earned during our fiscal years ended December 31, 2011 and 2010 exceeded $100,000.
SUMMARY COMPENSATION TABLE
(1) Represents the aggregate fair value in accordance with FASB ASC 718 with respect to warrants issued for salary deferrals, dividend deferrals and interest deferrals during 2011 and 2010. Amounts also include the value of warrants issued to Spirits, a company wholly-owned by Brookstein. Reference the footnotes to the financial statements which discloses the assumptions made in valuing these options and warrants.
(2) Mr. Brookstein received a $11,000 car lease allowance and $2,813 for insurance, repairs and gas in 2010.
(3) Mr. Garfinkel resigned from the Company effective November 23, 2010.
(4) Represents the grants for salary deferral during 2010 for a total of 20,750,000 five-year stock purchase warrants at an exercise price of $0.01 per share. Represents the grants for salary deferral during 2009 for a total of 7,400,000 five-year stock purchase warrants at an exercise price of $0.05 per share. Reference the footnotes to the financial which discloses the assumptions made in valuing these options and warrants.
(5) Mr. Garfinkel received a $13,046 car lease allowance and $8,839 for insurance, repairs and gas in 2010.
(6) Mr. Dunigan was promoted to CEO and President of Call Compliance Inc. effective February 2010. He left the Company in connection with the Surrender of Collateral transaction with Agile on December 1, 2010.
(7) Mr. Dunigan received $7,680 for an automobile lease and gas in 2010.
Employment Agreements with Executive Officers
CCI had a five-year employment agreement with Brookstein which expired on November 30, 2011 and is now on a month-to-month basis. Under the terms of his employment agreement, Mr. Brookstein receives a base salary of $240,000 per year. He is also entitled to an annual bonus from the bonus pool, the amount to be determined in the sole discretion of the Board, and an allowance for an automobile of up to $1,000 per month plus reimbursement for maintenance, insurance and gasoline also to be determined in the sole discretion of the Board. His employment agreement provides for health insurance and other standard benefits and contains certain non-competition prohibitions which require that each officer not engage in any business activities which directly compete with our business while he is employed by us or is one of our principal stockholders.
CCI also had a five-year employment agreement with Dean Garfinkel, our former Chairman of the Board, Chief Executive Officer and President. Mr. Garfinkel received a base salary of $240,000 and had benefits as Mr. Brookstein. Mr. Garfinkel resigned from the Company on November 23, 2010.
As described above, Messrs. Brookstein’s and Garfinkel’s respective employment agreements provide for an annual bonus from a bonus pool, with the amount of each bonus to be determined in the sole discretion of the Board. The bonus pool shall be equal to a percentage of our pre-tax profits, if any, after the service of any debt on a calendar year basis, starting with 25% of the first $10 million in pretax earnings, and 10% of any pretax earnings in excess of $10 million. For the fiscal years ended December 31, 2011 and 2010, no bonuses were awarded. At present, Mr. Brookstein’s employment agreement is guaranteed by the Company as the parent company of CCI.
Both Mssrs. Brookstein and Garfinkel deferred some or all of their respective salaries in 2009 through 2011. In 2009, Mr. Brookstein deferred $150,000 of his salary and Mr. Garfinkel deferred $185,000. In 2010 and 2011, Mr. Brookstein deferred his total base annual salary of $240,000 per year and Mr. Garfinkel deferred $195,000 in 2010 prior to his resignation. At December 31, 2011, salaries owed to Mr. Brookstein total $630,000 and $380,000 to Mr. Garfinkel. The Company is in negotiations with Mr. Garfinkel for the payment of his deferred salary. Mr. Brookstein has continued to defer his base annual salary in 2012.
Mr. Dunigan did not have an employment agreement with the Company.
Outstanding Equity Awards at Fiscal Year-End
The following tables set forth, for each person listed in the Summary Compensation Table set forth in the “General” subsection above, as of December 31, 2011:
• with respect to each option award -
• the number of shares of our common stock issuable upon exercise of outstanding options that have been earned, separately identified by those exercisable and unexercisable;
• the number of shares of our common stock issuable upon exercise of outstanding options that have not been earned;
• the exercise price of such option; and
• the expiration date of such option; and
• with respect to each stock award -
• the number of shares of our common stock that have been earned but have not vested;
• the market value of the shares of our common stock that have been earned but have not vested;
• the total number of shares of our common stock awarded under any equity incentive plan that have not vested and have not been earned; and
• the aggregate market or pay-out value of our common stock awarded under any equity incentive plan that have not vested and have not been earned.
Option Awards and Warrant Awards
* Includes 21,600,000 warrants issued to Spirits, a company wholly-owned by Brookstein.
Stock Awards
Board of Directors Policy on Executive Compensation
Executive Compensation
Our executive compensation philosophy is to provide competitive levels of compensation by recognizing the need for multi-discipline management responsibilities, achievement of our company’s overall performance goals, individual initiative and achievement, and allowing our company to attract and retain management with the skills critical to its long-term success. Management compensation is intended to be set at levels that we believe is consistent with that provided in comparable companies. Our company’s compensation programs are designed to motivate executive officers to meet annual corporate performance goals and to enhance long-term stockholder value. Our company's executive compensation has four major components: base salary, performance incentive, incentive stock options and other compensation.
Executive Base Salaries
Base salaries are determined by evaluating the various responsibilities for the position held, the experience of the individual and by comparing compensation levels for similar positions at companies within our principal industry. We review our executives’ base salaries and determine increases based upon an officer’s contribution to corporate performance, current economic trends and competitive market conditions.
Performance Incentives
We utilize performance incentives based upon criteria relating to performance in special projects undertaken during the past fiscal year, contribution to the development of new products, marketing strategies, manufacturing efficiencies, revenues, income and other operating goals to augment the base salaries received by executive officers.
Incentive Stock Options
Our company uses stock options as a means to attract, retain and encourage management and to align the interests of executive officers with the long-term interest of our company’s stockholders.
Benefits and Other Compensation
Our company offers health to its executive officers, which are similar to the benefits offered to all of its employees. Our company also provides an automobile allowance to its two senior executive officers as additional compensation.
Retirement and Post Retirement Benefits
The Company does not offer a post-retirement health plan to its executive officers or employees.
Director Compensation
Directors do not receive any cash compensation for their service as members of our Board of Directors, but they are reimbursed for reasonable out-of-pocket expenses incurred in connection with their duties as directors. Upon establishing a stock option plan, which we have not done as of the date of filing this Form 10-K, we anticipate that directors will be granted options to purchase common stock thereunder.
Compensation Committee Interlocks And Insider Participation
The Board does not have a compensation committee, and none of our executive officers has served as a director or member of the compensation committee of any other entity whose executive officers served on our Board.
Item 12.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
We currently have outstanding five classes of voting securities: our common stock, Series A Senior Convertible Voting Non-Redeemable Preferred Stock (“Series A Preferred Stock”), Series B Preferred Stock, Series C Senior Subordinated Convertible Voting Redeemable Preferred Stock (“Series C Preferred Stock”) and Series D Preferred Stock) (collectively, the “Preferred Stock”). The Company has irrevocably waived its right to redeem the Series C Preferred Stock. Each share of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock currently entitles its holder to cast 100 votes on each matter voted upon by our stockholders. Each share of Series D Preferred Stock entitles its holder to cast 1,000 votes on each matter voted upon by our stockholders.
The following tables set forth information with respect to the beneficial ownership of shares of each class of our voting securities as of April 9, 2012 by:
• each person known by us to beneficially own 5% or more of the outstanding shares of such class of stock, based on filings with the Securities and Exchange Commission and certain other information,
• each of our current “named executive officers” and directors, and
• all of our current executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and investment power. In addition, under SEC rules, a person is deemed to be the beneficial owner of securities which may be acquired by such person upon the exercise of options and warrants or the conversion of convertible securities within 60 days from the date on which beneficial ownership is to be determined.
The term “named executive officers” is defined in the SEC rules as those persons who are required to be listed in the Summary Compensation Table provided under Item 10 of this Annual Report on Form 10-K.
Except as otherwise indicated in the notes to the following table,
• we believe that all shares are beneficially owned, and investment and voting power is held by, the persons named as owners, and
• the address for each beneficial owner listed in the table is c/o Compliance Systems Corporation, 780 New York Avenue, Suite A, Huntington NY 11743
Series A Senior Convertible Voting Non-Redeemable Preferred Stock
(1)
Mr. Brookstein is our Chairman of the Board, Chief Executive Officer, Chief Financial Officer, Treasurer and Secretary.
Series B Senior Subordinated Convertible Voting Redeemable Preferred Stock
(1) Mr. Brookstein is our Chairman of the Board, Chief Executive Officer, Chief Financial Officer, Treasurer and Secretary.
(2) Includes 750,000 shares of Series B Preferred Stock owned by Spirits in which Mr. Brookstein serves as an executive officer and director and is the sole stockholder.
Series C Senior Subordinated Convertible Voting Redeemable Preferred Stock
(1) Mr. Brookstein is our Chairman of the Board, Chief Executive Officer, Chief Financial Officer, Treasurer and Secretary.
(2) Includes (a) 450,601 shares of Series C Preferred Stock owned by a company in which Mr. Brookstein serves as an executive officer and director and and is the sole stockholder and (b) 4,764 shares of Series C Preferred Stock owned by Mr. Brookstein’s minor children for which Mr. Brookstein has custodial control.
(3) Mr. Garfinkel is our former Chairman of the Board, Chief Executive Officer and President.
(4) Includes 7,146 shares of Series C Preferred Stock owned by Mr. Garfinkel’s minor children for which Mr. Garfinkel has custodial control.
Series D Senior Convertible Voting Redeemable Preferred Stock
(1) Mr. Brookstein is our Chairman of the Board, Chief Executive Officer, Chief Financial Officer, Treasurer and Secretary.
Common Stock
(1) Mr. Brookstein is our Chairman of the Board, Chief Executive Officer, Chief Financial Officer, Treasurer and Secretary.
(2) Includes (a) 63,512 shares of our common stock owned by Mr. Brookstein’s minor children for which Mr. Brookstein has custodial control, (b) 10,000,000 shares of our common stock issuable upon exercise of an option granted to Mr. Brookstein in January 2008, (c) 96,818,600 shares of our common stock issuable upon the exercise of warrants granted to Mr. Brookstein at various times, (d) 23,850,000 shares of our common stock issuable upon the exercise of warrants granted to Spirits, a company wholly-owned by Brookstein, at various times, (e) 20,000,000 shares of our common stock issuable upon conversion of the 200,000 shares of Series A Preferred Stock, (f) 50,000,000 shares of our common stock issuable upon conversion of the 500,000 shares of Series B Preferred Stock, (g) 75,000,000 shares of our common stock issuable upon conversion of the 750,000 shares of Series B Preferred Stock by Spirits, (h) 40,699,200 shares of our common stock issuable upon conversion of the 406,992 shares of Series C Preferred Stock, (i) 45,060,100 shares of our common stock issuable upon conversion of the 450,601 shares of Series C Preferred Stock by Spirits, (j) 50,000,000 shares of our common stock issuable upon conversion of the 50,000 shares of Series D Preferred Stock and (g) 476,400 shares of our common stock issuable upon conversion of the 4,764 shares of Series C Preferred Stock owned by Mr. Brookstein’s minor children for which Mr. Brookstein has custodial control.
(3) Mr. Garfinkel is our former Chairman of the Board, Chief Executive Officer and President.
(4) Includes (a) 95,267 shares of our common stock owned by Mr. Garfinkel’s minor children for which Mr. Garfinkel has custodial control, (b) 26,900,000 shares of our common stock issuable upon the exercises of warrants granted to Mr. Garfinkel at various times, (c) 46,675,000 shares of our common stock issuable upon conversion of the 466,750 shares of Series C Preferred Stock beneficially owned by Mr. Garfinkel and (d) 714,600 shares of our common stock issuable upon conversion of the 7,146 shares of Series C Preferred Stock owned by Mr. Garfinkel’s minor children for which Mr. Garfinkel has custodial control.
(5) Mr. Dunigan was the CEO and President of CCI. He left the Company as part of the Surrender of Collateral transaction with Agile.
(6) Includes 7,500,000 shares of common stock issuable upon conversion of 75,000 shares of Series A Preferred Stock.
(7) The mailing address for Summit Trading Limited is 120 Flagler Avenue, New Smyrna Beach, Florida 32169.
Item 13.
Item 13.Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
On March 3, 2009, Brookstein loaned the Company $50,000, due on demand, with interest at 18%. On June 24, 2009, this note was exchanged for a secured note with a extended maturity date of January 1, 2012. The note bears interest at 18%. As of December 31, 2011, accrued and unpaid interest totaled $20,250.
In 2011, Brookstein loaned the Company $11,775. The loans do not bear interest and are due on demand.
Brookstein and Garfinkel have been deferring all or a portion of their salaries since January 1, 2009. In 2011, Brookstein deferred his total salary of $240,000. As compensation, the Company granted to Brookstein Deferred Salary Warrants to purchase shares of Common Stock at the rate of 100 Deferred Salary Warrants for each $1 of deferred salary. In 2011, Brookstein received 24,000,000 Deferred Salary Warrants.
The Company has failed to pay dividends on the outstanding shares of its Series B Preferred Stock and Series D Preferred Stock. All of the outstanding shares of Series B Preferred Stock and are held by Brookstein and Spirits and all of the outstanding shares of Series D Preferred Stock are held by Brookstien. Although the Company has been and currently is unable to pay the dividends when due, the dividends have been and are continuing to be accrued until such time as the monthly dividends can lawfully be paid under Nevada law. The Company deferred dividends totaling $154,286 for the year ended December 31, 2011: $64,286 due to Brookstein, and $90,000 due to Spirits. As compensation, the Company granted to each of them Dividend Accrual Warrants to purchase shares of Common Stock at the rate of 100 Deferred Salary Warrants for each $1 of dividends accrued. In 2011, Brookstein received 6,486,600 Dividend Accrual Warrants and Spirits received 9,000,000 Dividend Accrual Warrants.
Commencing in the fourth quarter of 2009, the Company failed to pay interest on the promissory notes that were previously issued to the Note Holders which includes Brookstein. To compensate Brookstein for the failure to pay interest on his promissory note, the Company granted to Brookstein warrants to purchase shares of common Stock at the rate of 100 Deferred Interest Payment Warrants for every $1 of interest not paid. Brookstein received 900,000 Deferred Interest Payment Warrants in 2011 for unpaid accrued interest totaling $9,000.
Item 14.
Item 14. Principal Accounting Fees and Services.
Holtz Rubenstein has served as our independent certified public accountants since October 2007.
Principal Accountant Fees and Services
The following table sets forth the fees billed by our independent certified public accountants for the years ended December 31, 2011 and 2010 for the categories of services indicated.
(1) Consists of fees billed for the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.
(2) Consists of assurance and related services that are reasonably related to the performance of the audit and reviews of our financial statements and are not included in “audit fees” in this table.
(3) Consists of professional services rendered for tax compliance, tax advice and tax planning. The nature of these tax services is tax preparation.
Audit Committee Approval
We do not have an audit committee of our board of directors. We believe that each member of our board has the expertise and experience to adequately serve our stockholders’ interests while serving as directors. Since we are not required to maintain an audit committee and our full board acts in the capacity of an audit committee, we have not elected to designate any member of our board as an “audit committee financial expert.”
Pre-Approval Policy
We understand the need for Holtz Rubenstein to maintain objectivity and independence in its audit of our financial statements. To minimize relationships that could appear to impair the objectivity of Holtz Rubenstein, our board of directors has restricted the non-audit services that Holtz Rubenstein may provide to us and has determined that we would obtain even these non-audit services from Holtz Rubenstein only when the services offered by Holtz Rubenstein are more effective or economical than services available from other service providers.
Our board of directors has adopted policies and procedures for pre-approving all non-audit work performed by Holtz Rubenstein or any other accounting firms we may retain. Specifically, under these policies and procedures, our board shall pre-approve the use of Holtz Rubenstein for detailed, specific types of services within the following categories of non-audit services: merger and acquisition due diligence and related accounting services; tax services; internal control reviews; and reviews and procedures that we request Holtz Rubenstein to undertake to provide assurances of accuracy on matters not required by laws or regulations. In each case, the policies and procedures require our board to set specific annual limits on the amounts of such services which we would obtain from Holtz Rubenstein and require management to report the specific engagements to the board and to obtain specific pre-approval from the board for all engagements.
Board of Directors Approval of Audit-Related Activities
Management is responsible for the preparation and integrity of our financial statements, as well as establishing appropriate internal controls and financial reporting processes. Holtz Rubenstein is responsible for performing an independent audit of our financial statements and issuing a report on such financial statements. Our board’s responsibility is to monitor and oversee these processes.
Our board reviewed the audited financial statements of our company for the year ended December 31, 2011 and met with both other members of management and the independent auditors, separately and together, to discuss such financial statements. Management and the auditors have represented to us that the financial statements were prepared in accordance with generally accepted accounting principles in the United States. Our board also received written disclosures and a letter from our auditors regarding their independence from us, as required by PCAOB Rule 3526 and discussed with the auditors their independence with respect to all services that our auditors rendered to us. Our board also discussed with the auditors any matters required to be discussed by AU 380, “Communications with Audit Committees.” Based upon these reviews and discussions, our board authorized and directed that the audited financial statements be included in our Annual Report on Form 10-K for the year ended December 31, 2011.
Our board of directors has adopted policies and procedures for pre-approving all non-audit work performed by Holtz Rubenstein or any other accounting firms we may retain. Specifically, under these policies and procedures, our board shall pre-approve the use of Holtz Rubenstein for detailed, specific types of services within the following categories of non-audit services: merger and acquisition due diligence and related accounting services; tax services; internal control reviews; and reviews and procedures that we request Holtz Rubenstein to undertake to provide assurances of accuracy on matters not required by laws or regulations. In each case, the policies and procedures require our board to set specific annual limits on the amounts of such services which we would obtain from Holtz Rubenstein and require management to report the specific engagements to the board and to obtain specific pre-approval from the board for all engagements.
Board of Directors Approval of Audit-Related Activities
Management is responsible for the preparation and integrity of our financial statements, as well as establishing appropriate internal controls and financial reporting processes. Holtz Rubenstein is responsible for performing an independent audit of our financial statements and issuing a report on such financial statements. Our board’s responsibility is to monitor and oversee these processes.
Our board reviewed the audited financial statements of our company for the year ended December 31, 2011 and met with both other members of management and the independent auditors, separately and together, to discuss such financial statements. Management and the auditors have represented to us that the financial statements were prepared in accordance with generally accepted accounting principles in the United States. Our board also received written disclosures and a letter from our auditors regarding their independence from us, as required by PCAOB Rule 3526, and discussed with the auditors their independence with respect to all services that our auditors rendered to us. Our board also discussed with the auditors any matters required to be discussed by AU 380, “Communications with Audit Committees.” Based upon these reviews and discussions, our board authorized and directed that the audited financial statements be included in our Annual Report on Form 10-K for the year ended December 31, 2011.
PART IV
Item 15.
Item 15. Exhibits, Financial Statements
Financial Statements
The financial statements and schedules included in this Annual Report on Form 10-K are listed in Item 8 and commence following page 33.
Exhibits
The following exhibits are being filed as part of this Annual Report on Form 10-K.
Exhibit
Number
Exhibit Description
3.1
Composite of Articles of Incorporation of Compliance Systems Corporation, as amended to date.
3.2
Bylaws of Compliance Systems Corporation (f/k/a GSA publications, Inc.), as amended to date. [Incorporated by reference to Exhibit 3.2(iii) to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.1
United States Patent, dated December 11, 2001. [Incorporated by reference to Exhibit 10.1 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.2
Addendum to Promissory Note, dated July 25, 2005, between Call Compliance, Inc. and Barry Brookstein. [Incorporated by reference to Exhibit 10.6 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.3
Addendum to Promissory Agreement, dated July 25, 2005, between Compliance Systems Corporation and Barry Brookstein. [Incorporated by reference to Exhibit 10.27 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.4
Addendum to Promissory Agreement, dated July 26, 2005, between Compliance Systems Corporation and Spirits Management, Inc. [Incorporated by reference to Exhibit 10.28 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.5
Non-Negotiable Promissory Note, dated July 1, 2005, between Compliance Systems Corporation and Dean Garfinkel. [Incorporated by reference to Exhibit 10.30 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.6
Employment Agreement dated September 30, 2005 between Call Compliance, Inc. and Barry Brookstein. [Incorporated by reference to Exhibit 10.35 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.7
First Amendment to Employment Agreement dated December 1, 2001, dated September 30, 2005, between Call Compliance, Inc. and Barry Brookstein. [Incorporated by reference to Exhibit 10.35 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.8
Employment Agreement dated September 30, 2005 between Call Compliance, Inc. and Dean Garfinkel. [Incorporated by reference to Exhibit 10.36 to Amendment Number 1 to our Registration Statement on Form SB-2/A, filed with the SEC on August 11, 2006.]
10.9
First Amendment to Employment Agreement dated December 1, 2001, dated September 30, 2005, between Call Compliance, Inc. and Dean Garfinkel. [Incorporated by reference to Exhibit 10.36 to Amendment Number 1 to our Registration Statement on Form SB-2/A, filed with the SEC on August 11, 2006.]
10.10
Promissory Note, dated October 28, 2005, between Compliance Systems Corporation and Henry A. Ponzio. [Incorporated by reference to Exhibit 10.34 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
10.11
$150,000 Promissory Note, dated September 30, 2006, issued by Call Compliance.com, Inc. to Nascap Corp. [Incorporated by reference to Exhibit 10.61 to Amendment Number 2 to our Registration Statement on Form SB-2/A, filed with the SEC on November 2, 2006.]
10.12
Security Agreement, dated March 8, 2006 by and between Call Compliance, Inc. and Nascap Corp. [Incorporated by reference to Exhibit 10.62 to Amendment Number 2 to our Registration Statement on Form SB-2/A, filed with the SEC on November 2, 2006.]
10.13
Guaranty Agreement, dated September 30, 2006, by Compliance Systems Corporation in favor of Nascap Corp. [Incorporated by reference to Exhibit 10.63 to Amendment Number 2 to our Registration Statement on Form SB-2/A, filed with the SEC on November 2, 2006.]
10.14
Consent, dated September 30, 2006, of Montgomery Equity Partners, Ltd. to the issuance by Call Compliance, Inc. of a $150,000 Promissory Note to Nascap Corp. [Incorporated by reference to Exhibit 10.64 to Amendment Number 2 to our Registration Statement on Form SB-2/A, filed with the SEC on November 2, 2006.]
10.15
Securities Purchase Agreement, dated March 16, 2007, between Compliance Systems Corporation and Cornell Capital Partners, LP. [Incorporated by reference to Exhibit 10.15 to our Current Report on Form 8-K (Date of Report: March 16, 2007), filed with the SEC on March 23, 2007.]
10.16
Investor Registration Rights Agreement, dated March 16, 2007, between Compliance Systems Corporation and Cornell Capital Partners, LP. [Incorporated by reference to Exhibit 10.25 to our Current Report on Form 8-K (Date of Report: March 16, 2007), filed with the SEC on March 23, 2007.]
10.17
Secured Convertible Debenture, dated March 16, 2007, issued to Cornell Capital Partners, LP. [Incorporated by reference to Exhibit 10.35 to our Current Report on Form 8-K (Date of Report: March 16, 2007), filed with the SEC on March 23, 2007.]
10.18
Pledge and Escrow Agreement, dated March 16, 2007, among Compliance Systems Corporation, Cornell Capital Partners, LP and David Gonzalez, Esq. [Incorporated by reference to Exhibit 10.7 to our Current Report on Form 8-K (Date of Report: March 16, 2007), filed with the SEC on March 23, 2007.]
10.19
Irrevocable Transfer Agent Instructions, dated March 16, 2007, among Compliance systems Corporation, Cornell Capital Partners, LP and Continental Stock Transfer & Trust Company. [Incorporated by reference to Exhibit 10.8 to our Current Report on Form 8-K (Date of Report: March 16, 2007), filed with the SEC on March 23, 2007.]
10.20
Amended and Restated Irrevocable Transfer Agent Instructions, dated March 16, 2007, among Compliance Systems Corporation, Cornell Capital Partners, LP and Continental Stock Transfer & Trust Company. [Incorporated by reference to Exhibit 10.9 to our Current Report on Form 8-K (Date of Report: March 16, 2007), filed with the SEC on March 23, 2007.]
10.21
Form of Debentures sold in September 2007. [Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-QSB for the quarter ended September 30, 2007, filed with the SEC on November 14, 2007.]
10.22
Letter of Compliance Systems Corporation, dated August 7, 2007, addressed to Cornell Capital Partners, LP. [Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-QSB for the quarter ended September 30, 2007, filed with the SEC on November 14, 2007.]
10.23
Form of Option Agreement, dated as of January 4, 2008, with respect to options granted by Compliance Systems Corporation to Dean Garfinkel (20,000,000 shares) and Barry M. Brookstein (10,000,000 shares). [Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (Date of Report: January 4, 2008), filed with the SEC on February 15, 2008.]
10.24
Securities Purchase Agreement dated as of May 6, 2008, between Compliance Systems Corporation and Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (Date of Report: May 6, 2008), filed with the SEC on May 12, 2008.]
10.25
Secured Convertible Debenture of Compliance Systems Corporation, dated May 6, 2008, in the principal amount of $300,000 and payable to Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K (Date of Report: May 6, 2008), filed with the SEC on May 12, 2008.]
10.26
Security Agreement dated as of May 6, 2008, between Compliance Systems Corporation and Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K (Date of Report: May 6, 2008), filed with the SEC on May 12, 2008.]
10.27
Limited Non-Recourse Guaranty Agreement dated as of May 6, 2008, between Dean Garfinkel and Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K (Date of Report: May 6, 2008), filed with the SEC on May 12, 2008.]
10.28
Limited Non-Recourse Guaranty Agreement dated as of May 6, 2008, between Barry Brookstein and Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.5 to our Current Report on Form 8-K (Date of Report: May 6, 2008), filed with the SEC on May 12, 2008.]
10.29
Limited Non-Recourse Guaranty Agreement, dated as of May 6, 2008, between Spirits Management, Inc. and Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.6 to our Current Report on Form 8-K (Date of Report: May 6, 2008), filed with the SEC on May 12, 2008.]
10.30
Stock Pledge Agreement, dated as of May 6, 2008, between (sic) Agile Opportunity Fund, LLC, Dean Garfinkel and Barry Brookstein. [Incorporated by reference to Exhibit 10.7 to our Current Report on Form 8-K (Date of Report: May 6, 2008), filed with the SEC on May 12, 2008.]
10.31
Warrant Certificate of Compliance Systems Corporation, dated as of May 6, 2008, registered in the name of Cresta Capital Strategies, LLC. [Incorporated by reference to Exhibit 10.8 to our Current Report on Form 8-K (Date of Report: May 6, 2008), filed with the SEC on May 12, 2008.]
10.32
Secured Convertible Debenture of Compliance Systems Corporation, dated September 2, 2008, in the principal amount of $300,000 and payable to Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K (Date of Report: September 2, 2008), filed with the SEC on September 5, 2008.]
10.33
Warrant Certificate of Compliance Systems Corporation, dated as of September 2, 2008, registered in the name of Cresta Capital Strategies, LLC. [Incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K (Date of Report: September 2, 2008), filed with the SEC on September 5, 2008.]
10.34
Agreement to Amend and Restate Secured Convertible Debentures, dated as of January 31, 2009, between Compliance Systems Corporation and Agile Opportunity Fund, LLC [Incorporated by reference to Exhibit 10.1 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.35
Amended and Restated Secured Convertible Debenture of Compliance Systems Corporation, dated May 6, 2008, in the principal amount of $300,000 and payable to Agile Opportunity Fund, LLC [Incorporated by reference to Exhibit 10.6 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.36
Amended and Restated Secured Convertible Debenture of Compliance Systems Corporation, dated September 2, 2008, in the principal amount of $300,000 and payable to Agile Opportunity Fund, LLC[Incorporated by reference to Exhibit 10.7 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.37
Waiver and Standstill Agreement, dated as of January 26, 2009, between Compliance Systems Corporation, Call Compliance, Inc. and Nascap Corp [Incorporated by reference to Exhibit 10.8 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.38
Loan Modification Agreement, dated as of March 31, 2009, among Compliance Systems Corporation, Call Compliance, Inc. and Nascap Corporation [Incorporated by reference to Exhibit 10.12 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.39
Amended and Restated Promissory Note of Call Compliance, Inc., dated March 31, 2009, in the principal amount of up to $750,000 and payable to Nascap Corporation [Incorporated by reference to Exhibit 10.13 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.40
Form of Class A Warrant Certificate of Compliance Systems Corporation registered in the name of Nascap Corp. [Incorporated by reference to Exhibit B to the Loan Modification Agreement made Exhibit 10.12 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.41
Form of Class B Warrant Certificate of Compliance Systems Corporation registered in the name of Nascap Corp. [Incorporated by reference to Exhibit C to the Loan Modification Agreement made Exhibit 10.12 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.42
Promissory Note of Call Compliance, Inc., dated as of March 3, 2009, in the principal amount of $50,000 and payable to Barry Brookstein [Incorporated by reference to Exhibit 10.16 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.43
Corporate Guaranty, dated March 3, 2009, of Compliance Systems Corporation in favor of Barry Brookstein [Incorporated by reference to Exhibit 10.17 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.44
Purchase of Software and Intellectual Property, dated April 7, 2010, from Thomas Joseph Koty in exchange for Restricted shares and warrants [Incorporated by reference to Exhibit 10.18 of the registrant’s Current Report on Form 8-K (Date of Report: January 26, 2009), filed with the Securities and Exchange Commission on April 14, 2009].
10.45
Omnibus Amendment and Securities Purchase Agreement, dated as of September 18, 2009, between Compliance Systems Corporation and Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.1 of the Form 8-K (Date of Report: September 18, 2009) of Compliance Systems Corp., filed with the Securities and Exchange Commission on September 22, 2009.]
10.46
Secured Convertible Debenture of Compliance Systems Corporation, dated September 21, 2009, in the principal amount of $100,000 and payable to Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K (Date of Report: September 18, 2009) of Compliance Systems Corp., filed with the Securities and Exchange Commission on September 22, 2009.]
10.47
Second Omnibus Amendment and Securities Purchase Agreement, dated as of November 23, 2009, between Compliance Systems Corporation and Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (Date of Report: November 23, 2009) of Compliance Systems Corp., filed with the Securities and Exchange Commission on November 30, 2009.]
10.48
Secured Convertible Debenture of Compliance Systems Corporation, dated November 23, 2009, in the principal amount of $80,000 and payable to Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K (Date of Report: November 23, 2009) of Compliance Systems Corp., filed with the Securities and Exchange Commission on November 30, 2009.]
10.49
Agreement and Plan of Merger, dated as of February 5, 2010, among Execuserve Corp., Compliance Systems Corporation, CSC/Execuserve Acquisition Corp., W. Thomas Eley, James A. Robinson, Jr. and Robin Rennockl. [Incorporated by reference to Exhibit 2.2 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.50
Consulting Agreement, dated as of February 9, 2010, between Execuserve Corp. and W. Thomas Eley. [Incorporated by reference to Exhibit 10.1 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.51
Employment Agreement, dated as of February 9, 2010, between Execuserve and Jim Robinson. [Incorporated by reference to Exhibit 10.2 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.52
Employment Agreement, dated as of February 9, 2010, between Execuserve and Robin Rennockl. [Incorporated by reference to Exhibit 10.3 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.53
Promissory Note of Execuserve Corp., dated as of February 9, 2010 and payable to W. Thomas Eley. [Incorporated by reference to Exhibit 10.4 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.54
Promissory Note of Execuserve Corp., dated as of February 9, 2010 and payable to Jim Robinson. [Incorporated by reference to Exhibit 10.5 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.55
Form of Lock-Up Agreement to be entered into between Compliance Systems Corporation and each person or entity receiving common stock of Compliance Systems Corporation pursuant to or in accordance with the Agreement and Plan of Merger. [Incorporated by reference to Exhibit 10.6 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.56
Amended and Restated Securities Purchase Agreement, dated as of February 5, 2010, among Compliance Systems Corporation, Execuserve Corp., Spirits Management Inc., Barry Brookstein, Dean Garfinkel and Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.7 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.57
Amended and Restated Security Agreement, dated as of February 9, 2010, between Compliance Systems Corporation and Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.8 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.58
Guaranty Agreement, dated as of February 9, 2010, among Call Compliance Inc., Execuserve Corp. and Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.9 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.59
Guarantor Security Agreement, dated as of February 9, 2010, between Execuserve Corp. and Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.10 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.60
Guarantor Security Agreement, dated as of February 9, 2010, between Call Compliance Inc. and Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.11 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.61
Subordination Agreement, dated as of February 9, 2010, between Agile Opportunity Fund, LLC and Barry M. Brookstein. [Incorporated by reference to Exhibit 10.12 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.62
Subordination Agreement, dated as of February 9, 2010, between Agile Opportunity Fund, LLC and Nascap Corp. [Incorporated by reference to Exhibit 10.13 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.63
Subordination Agreement, dated as of February 9, 2010, between Agile Opportunity Fund, LLC and Henry A. Ponzio. [Incorporated by reference to Exhibit 10.14 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.64
Warrant Certificate of Compliance Systems Corp., dated February 11, 2010, evidencing 7.5 million common stock purchase warrants registered in the name of Moritt Hock Hamroff & Horowitz LLP. [Incorporated by reference to Exhibit 10.15 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.65
Warrant Certificate of Compliance Systems Corp., dated December 31, 2009, evidencing 2.2 million common stock purchase warrants registered in the name of Dean R. Garfinkel. [Incorporated by reference to Exhibit 10.16 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.66
Warrant Certificate of Compliance Systems Corp., dated December 31, 2009, evidencing 2.0 million common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.17 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.67
Warrant Certificate of Compliance Systems Corp., dated December 31, 2009, evidencing 600,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.18 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.68
Warrant Certificate of Compliance Systems Corp., dated December 31, 2009, evidencing 900,000 common stock purchase warrants registered in the name of Spirits Management Inc. [Incorporated by reference to Exhibit 10.19 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.69
Warrant Certificate of Compliance Systems Corp., dated January 1, 2010, evidencing 3,000,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.20 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.70
Warrant Certificate of Compliance Systems Corp., dated January 1, 2010, evidencing 4,500,000 common stock purchase warrants registered in the name of Spirits Management Inc. [Incorporated by reference to Exhibit 10.21 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.71
Amended and Restated Secured Convertible Debenture of Compliance Systems Corporation, dated February 9, 2010, payable to Agile Opportunity Fund, LLC and in the principal amount of $1,765,000. [Incorporated by reference to Exhibit 10.22 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.72
Warrant Certificate of Compliance Systems Corp., dated December 31, 2009, evidencing 90,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.23 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.73
Warrant Certificate of Compliance Systems Corp., dated December 31, 2009, evidencing 270,000 common stock purchase warrants registered in the name of Henry A. Ponzio. [Incorporated by reference to Exhibit 10.24 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.74
Warrant Certificate of Compliance Systems Corp., dated December 31, 2009, evidencing 420,000 common stock purchase warrants registered in the name of Nascap Corp. [Incorporated by reference to Exhibit 10.25 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.75
Warrant Certificate of Compliance Systems Corp., dated January 1, 2010, evidencing 12 million common stock purchase warrants registered in the name of Dean R. Garfinkel. [Incorporated by reference to Exhibit 10.26 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.76
Warrant Certificate of Compliance Systems Corp., dated January 1, 2010, evidencing 12 million common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.27 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.77
Warrant Certificate of Compliance Systems Corp., dated January 1, 2010, evidencing 450,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.28 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.78
Warrant Certificate of Compliance Systems Corp., dated January 1, 2010, evidencing 1,350,000 common stock purchase warrants registered in the name of Henry A. Ponzio. [Incorporated by reference to Exhibit 10.29 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.79
Warrant Certificate of Compliance Systems Corp., dated January 1, 2010, evidencing 2,100,000 common stock purchase warrants registered in the name of Nascap Corp. [Incorporated by reference to Exhibit 10.30 of the registrant’s Current Report on Form 8-K (Date of Report: February 5, 2010), filed with the Securities and Exchange Commission on February 17, 2010].
10.80
Independent Sales Representative Agreement, dated June 15, 2010, between Execuserve Corp. and EPC, LLC. [Incorporated by reference to Exhibit 10.1 of the registrant’s Current Report on Form 8-K (Date of Report: June 14, 2010), filed with the Securities and Exchange Commission on June 18, 2010].
10.81
Asset Purchase Agreement, dated April 7, 2010, between Thomas Joseph Koty and Call Compliance.com, Inc. [Incorporated by reference to Exhibit 10.22 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2010), filed with the Securities and Exchange Commission on June 24, 2010].
10.82
Letter Agreement, dated April 13, 2010, between Chestnut Cove Development LLC and Compliance Systems Corporation. [Incorporated by reference to Exhibit 10.23 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2010), filed with the Securities and Exchange Commission on June 24, 2010].
10.83
Omnibus Amendment and Securities Purchase Agreement, dated as of July 1, 2010, among Compliance Systems Corporation, Execuserve Corp., Call Compliance, Inc., Spirits Management Inc., Barry Brookstein, Dean Garfinkel and Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.1 of the registrant’s Current Report on Form 8-K (Date of Report: June 30, 2010), filed with the Securities and Exchange Commission on July 12, 2010].
10.84
Secured Convertible Debenture of Compliance Systems Corporation, dated July 1, 2010, in the principal amount of $175,000 and payable to Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.2 of the registrant’s Current Report on Form 8-K (Date of Report: June 30, 2010), filed with the Securities and Exchange Commission on July 12, 2010].
10.85
Warrant Certificate of Compliance Systems Corporation, dated June 30, 2010, evidencing 1,500,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.3 of the registrant’s Current Report on Form 8-K (Date of Report: June 30, 2010), filed with the Securities and Exchange Commission on July 12, 2010].
10.86
Warrant Certificate of Compliance Systems Corporation, dated June 30, 2010, evidencing 2,250,000 common stock purchase warrants registered in the name of Spirits Management, Inc. [Incorporated by reference to Exhibit 10.4 of the registrant’s Current Report on Form 8-K (Date of Report: June 30, 2010), filed with the Securities and Exchange Commission on July 12, 2010].
10.87
Warrant Certificate of Compliance Systems Corporation, dated July 7, 2010, evidencing 6 million common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.5 of the registrant’s Current Report on Form 8-K (Date of Report: June 30, 2010), filed with the Securities and Exchange Commission on July 12, 2010].
10.88
Warrant Certificate of Compliance Systems Corporation, dated July 7, 2010, evidencing 4.5 million common stock purchase warrants registered in the name of Dean R. Garfinkel. [Incorporated by reference to Exhibit 10.6 of the registrant’s Current Report on Form 8-K (Date of Report: June 30, 2010), filed with the Securities and Exchange Commission on July 12, 2010].
10.89
Warrant Certificate of Compliance Systems Corporation, dated July 7, 2010, evidencing 225,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.7 of the registrant’s Current Report on Form 8-K (Date of Report: June 30, 2010), filed with the Securities and Exchange Commission on July 12, 2010].
10.90
Warrant Certificate of Compliance Systems Corporation, dated July 7, 2010, evidencing 675,000 common stock purchase warrants registered in the name of Henry A. Ponzio. [Incorporated by reference to Exhibit 10.8 of the registrant’s Current Report on Form 8-K (Date of Report: June 30, 2010), filed with the Securities and Exchange Commission on July 12, 2010].
10.91
Warrant Certificate of Compliance Systems Corporation, dated July 7, 2010, evidencing 1.05 million common stock purchase warrants registered in the name of Nascap Corp. [Incorporated by reference to Exhibit 10.9 of the registrant’s Current Report on Form 8-K (Date of Report: June 30, 2010), filed with the Securities and Exchange Commission on July 12, 2010].
10.92
Warrant Certificate of Compliance Systems Corporation, dated as of September 30, 2010, evidencing 1,500,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.1 of the registrant’s Current Report on Form 8-K (Date of Report: September 30, 2010), filed with the Securities and Exchange Commission on October 4, 2010].
10.93
Warrant Certificate of Compliance Systems Corporation, dated as of September 30, 2010, evidencing 2,250,000 common stock purchase warrants registered in the name of Spirits Management, Inc. [Incorporated by reference to Exhibit 10.2 of the registrant’s Current Report on Form 8-K (Date of Report: September 30, 2010), filed with the Securities and Exchange Commission on October 4, 2010].
10.94
Warrant Certificate of Compliance Systems Corporation, dated as of October 1, 2010, evidencing 6 million common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.3 of the registrant’s Current Report on Form 8-K (Date of Report: September 30, 2010), filed with the Securities and Exchange Commission on October 4, 2010].
10.95
Warrant Certificate of Compliance Systems Corporation, dated as of October 1, 2010, evidencing 4.5 million common stock purchase warrants registered in the name of Dean R. Garfinkel. [Incorporated by reference to Exhibit 10.4 of the registrant’s Current Report on Form 8-K (Date of Report: September 30, 2010), filed with the Securities and Exchange Commission on October 4, 2010].
10.96
Warrant Certificate of Compliance Systems Corporation, dated as of October 1, 2010, evidencing 225,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.5 of the registrant’s Current Report on Form 8-K (Date of Report: September 30, 2010), filed with the Securities and Exchange Commission on October 4, 2010].
10.97
Warrant Certificate of Compliance Systems Corporation, dated as of October 1, 2010, evidencing 675,000 common stock purchase warrants registered in the name of Henry A. Ponzio. [Incorporated by reference to Exhibit 10.6 of the registrant’s Current Report on Form 8-K (Date of Report: September 30, 2010), filed with the Securities and Exchange Commission on October 4, 2010].
10.98
Warrant Certificate of Compliance Systems Corporation, dated as of October 1, 2010, evidencing 1.05 million common stock purchase warrants registered in the name of Nascap Corp. [Incorporated by reference to Exhibit 10.7 of the registrant’s Current Report on Form 8-K (Date of Report: September 30, 2010), filed with the Securities and Exchange Commission on October 4, 2010].
10.99
Warrant Certificate of Compliance Systems Corp., dated December 31, 2011, evidencing 1,500,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to the registrant’s Annual Report on Form 10-K (Date of Report: December 31, 2010), filed with the Securities and Exchange Commission on April 15, 2011].
10.100
Warrant Certificate of Compliance Systems Corp., dated December 31, 2011, evidencing 2,250,000 common stock purchase warrants registered in the name of Spirits Management, Inc. [Incorporated by reference to the registrant’s Annual Report on Form 10-K (Date of Report: December 31, 2010), filed with the Securities and Exchange Commission on April 15, 2011].
10.101
Agreement and Consent to Surrender of Collateral dated December 1, 2010, among Compliance Systems Corporation, Call Compliance Inc., Execuserve Corp. and Agile Opportunity Fund, LLC. [Incorporated by reference to Exhibit 10.8 of the registrant’s Current Report on Form 8-K (Date of Report: December 1, 2010), filed with the Securities and Exchange Commission on March 2, 2011].
10.102
Warrant Certificate of Compliance Systems Corp., dated January 1, 2011, evidencing 6,000,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.2 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.103
Warrant Certificate of Compliance Systems Corp., dated January 1, 2011, evidencing 6,000,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.2 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.104
Warrant Certificate of Compliance Systems Corp., dated January 1, 2011, evidencing 225,000 common stock purchase warrants registered in the name of Barry M. Brookstein. Incorporated by reference to Exhibit 10.3 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.105
Warrant Certificate of Compliance Systems Corp., dated January 1, 2011, evidencing 675,000 common stock purchase warrants registered in the name of Henry A. Ponzio. [Incorporated by reference to Exhibit 10.4 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.106
Warrant Certificate of Compliance Systems Corp., dated January 1, 2011, evidencing 1,050,000 common stock purchase warrants registered in the name of Nascap Corp. [Incorporated by reference to Exhibit 10.5 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.107
Warrant Certificate of Compliance Systems Corp., dated March 31, 2011, evidencing 1,500,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.6 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.108
Warrant Certificate of Compliance Systems Corp., dated March 31, 2011, evidencing 2,250,000 common stock purchase warrants registered in the name of Spirits Management Inc. [Incorporated by reference to Exhibit 10.7 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.109
Warrant Certificate of Compliance Systems Corp., dated April 1, 2011, evidencing 6,000,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.8 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.110
Warrant Certificate of Compliance Systems Corp., dated April 1, 2011, evidencing 225,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.9 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.111
Warrant Certificate of Compliance Systems Corp., dated April 1, 2011, evidencing 675,000 common stock purchase warrants registered in the name of Henry A. Ponzio. [Incorporated by reference to Exhibit 10.10 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.112
Warrant Certificate of Compliance Systems Corp., dated April 1, 2011, evidencing 1,050,000 common stock purchase warrants registered in the name of Nascap Corp. [Incorporated by reference to Exhibit 10.11 of the registrant’s Quarterly Report on Form10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.113
Warrant Certificate of Compliance Systems Corp., dated April 26, 2011, evidencing 50,000,000 common stock purchase warrants registered in the name of Cresta Capital Strategies, LLC. [Incorporated by reference to Exhibit 10.12 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: March 31, 2011), filed with the Securities and Exchange Commission on May 16, 2011].
10.114
Warrant Exchange Agreement, dated May 12, 2011, between Compliance Systems Corp. and Dean Garfinkel, evidencing the exchange of 26,900,000 common stock purchase warrants. [Incorporated by reference to Exhibit 10.13 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: June 30, 2011), filed with the Securities and Exchange Commission on August 22, 2011].
10.115
Warrant Exchange Agreement, dated May 12, 2011, between Compliance Systems Corp. and Barry M. Brookstein, evidencing the exchange of 55,340,000 common stock purchase warrants. [Incorporated by reference to Exhibit 10.14 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: June 30, 2011), filed with the Securities and Exchange Commission on August 22, 2011].
10.116
Warrant Exchange Agreement, dated May 12, 2011, between Compliance Systems Corp. and Spirits Management, Inc., evidencing the exchange of 14,850,000 common stock purchase warrants. [Incorporated by reference to Exhibit 10.15 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: June 30, 2011), filed with the Securities and Exchange Commission on August 22, 2011].
10.117
Warrant Exchange Agreement, dated May 12, 2011, between Compliance Systems Corp. and Henry A. Ponzio, evidencing the exchange of 10,320,000 common stock purchase warrants. [Incorporated by reference to Exhibit 10.16 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: June 30, 2011), filed with the Securities and Exchange Commission on August 22, 2011].
10.118
Warrant Exchange Agreement, dated May 12, 2011, between Compliance Systems Corp. and Nascap Corp., evidencing the exchange of 20,720,000 common stock purchase warrants. [Incorporated by reference to Exhibit 10.17 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: June 30, 2011), filed with the Securities and Exchange Commission on August 22, 2011].
10.119
Warrant Certificate of Compliance Systems Corp., dated June 30, 2011, evidencing 1,500,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.18 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: June 30, 2011), filed with the Securities and Exchange Commission on August 22, 2011].
10.120
Warrant Certificate of Compliance Systems Corp., dated June 30, 2011, evidencing 128,600 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.19 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: June 30, 2011), filed with the Securities and Exchange Commission on August 22, 2011].
10.121
Warrant Certificate of Compliance Systems Corp., dated July 1, 2011, evidencing 6,000,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.20 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: June 30, 2011), filed with the Securities and Exchange Commission on August 22, 2011].
10.122
Warrant Certificate of Compliance Systems Corp., dated July 1, 2011, evidencing 225,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to Exhibit 10.21 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: June 30, 2011), filed with the Securities and Exchange Commission on August 22, 2011].
10.123
Warrant Certificate of Compliance Systems Corp., dated July 1, 2011, evidencing 675,000 common stock purchase warrants registered in the name of Henry A. Ponzio. [Incorporated by reference to Exhibit 10.22 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: June 30, 2011), filed with the Securities and Exchange Commission on August 22, 2011].
10.124
Warrant Certificate of Compliance Systems Corp., dated July 1, 2011, evidencing 1,050,000 common stock purchase warrants registered in the name of Nascap Corp. [Incorporated by reference to Exhibit 10.23 of the registrant’s Quarterly Report on Form 10-Q (Date of Report: June 30, 2011), filed with the Securities and Exchange Commission on August 22, 2011].
10.125
Warrant Certificate of Compliance Systems Corp., dated September 30, 2011, evidencing 1,500,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q (Date of Report: September 30, 2011), filed with the Securities and Exchange Commission on November 21, 2011].
10.126
Warrant Certificate of Compliance Systems Corp., dated September 30, 2011, evidencing 150,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q (Date of Report: September 30, 2011), filed with the Securities and Exchange Commission on November 21, 2011].
10.127
Warrant Certificate of Compliance Systems Corp., dated September 30, 2011, evidencing 2,250,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q (Date of Report: September 30, 2011), filed with the Securities and Exchange Commission on November 21, 2011].
10.128
Warrant Certificate of Compliance Systems Corp., dated October 1, 2011, evidencing 6,000,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q (Date of Report: September 30, 2011), filed with the Securities and Exchange Commission on November 21, 2011].
10.129
Warrant Certificate of Compliance Systems Corp., dated October 1, 2011, evidencing 225,000 common stock purchase warrants registered in the name of Barry M. Brookstein. [Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q (Date of Report: September 30, 2011), filed with the Securities and Exchange Commission on November 21, 2011].
10.130
Warrant Certificate of Compliance Systems Corp., dated October 1, 2011, evidencing 675,000 common stock purchase warrants registered in the name of Henry A. Ponzio. [Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q (Date of Report: September 30, 2011), filed with the Securities and Exchange Commission on November 21, 2011].
10.131
Warrant Certificate of Compliance Systems Corp., dated October 1, 2011, evidencing 1,050,000 common stock purchase warrants registered in the name of Nascap Corp. [Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q (Date of Report: September 30, 2011), filed with the Securities and Exchange Commission on November 21, 2011].
10.132
Warrant Certificate of Compliance Systems Corp., dated December 31, 2011, evidencing 1,500,000 common stock purchase warrants registered in the name of Barry M. Brookstein.
10.133
Warrant Certificate of Compliance Systems Corp., dated December 31, 2011, evidencing 150,000 common stock purchase warrants registered in the name of Barry M. Brookstein.
10.134
Warrant Certificate of Compliance Systems Corp., dated December 31, 2011, evidencing 2,250,000 common stock purchase warrants registered in the name of Spirits Management, Inc.
10.135
Warrant Certificate of Compliance Systems Corp., dated January 1, 2012, evidencing 6,000,000 common stock purchase warrants registered in the name of Barry M. Brookstein.
10.136
Warrant Certificate of Compliance Systems Corp., dated January 1, 2012, evidencing 225,000 common stock purchase warrants registered in the name of Barry M. Brookstein.
10.137
Warrant Certificate of Compliance Systems Corp., dated January 1, 2012, evidencing 675,000 common stock purchase warrants registered in the name of Henry A. Ponzio.
10.138
Warrant Certificate of Compliance Systems Corp., dated January 1, 2012, evidencing 1,050,000 common stock purchase warrants registered in the name of Nascap Corp.
14.1
Code of Ethics. [Incorporated by reference to Exhibit 14.1 to our Registration Statement on Form SB-2, filed with the SEC on May 12, 2006.]
21.1
Subsidiaries. [Incorporated by reference to Exhibit 21.1 to our Annual Report on Form 10-KSB for the year ended December 31, 2007, filed with the SEC on March 28, 2008.]
31.1
Rule 13a-14(a)/15d-14(a) Certification of Barry M. Brookstein.
32.1
Section 1350 Certification of Barry M. Brookstein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Compliance System Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Compliance System Corporation and Subsidiaries (the "Company") as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ deficiency, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered continued losses from operations since inception, and as of December 31, 2011, had stockholders’ and working capital deficiencies of $3,064,998 and $3,064,733, respectively. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Holtz Rubenstein Reminick LLP
Melville, New York
April 16, 2012
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See Accompanying Notes to Consolidated Financial Statements
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See Accompanying Notes to Consolidated Financial Statements
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIENCY
Years Ended December 31, 2010 and 2009
See Accompanying Notes to Consolidated Financial Statements.
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Accompanying Notes to Consolidated Financial Statements
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization, Business Description and Going Concern
A. Organization and Business Description
Compliance Systems Corporation (the “Company”) was incorporated in Nevada on November 17, 2003 under the name “GSA Publications, Inc.” (“GSA”). On February 10, 2006, the Company’s business predecessor, Compliance Systems Corporation, a corporation incorporated in Delaware on November 7, 2002 (“CSC”) pursuant to a corporate reorganization of several closely related companies that had commenced operations in December 2001, was merged with and into GSA (the “CSC/GSA Merger”). CSC was treated as the surviving corporation of the CSC/GSA Merger for accounting purposes due to the fact that the prior owners of CSC acquired approximately 85% of the surviving corporation’s stock as a result of the CSC/GSA Merger. Following the effectiveness of the CSC/GSA Merger, the surviving corporation changed its name to “Compliance Systems Corporation” and, directly and through the Company’s wholly-owned subsidiaries, began operating the businesses previously conducted by CSC. Unless the context otherwise implies, the term “Company” in these financial statements includes Company and its wholly-owned subsidiaries on a consolidated basis.
On December 1, 2010, the Company entered into and consummated the transactions contemplated by an Agreement and Consent to Surrender of Collateral (“Surrender of collateral”) with Agile Opportunity Fund LLC (“Agile”). As a result, the Company’s operating businesses are reflected as discontinued operations. See Note 6 for a further discussion of the Surrender of Collateral and Note 14 for a further discussion of discontinued operations.
The Company’s current business plan is to attempt to identify and negotiate with business targets for mergers of those entities with and into the Company. No assurance can be given that the Company will be successful in identifying or negotiating with any target company.
Prior to the Surrender of Collateral, the Company operated its principal businesses through two of its subsidiaries, Call Compliance, Inc. (“CCI”) and Execuserve Corp. (“Execuserve”). CCI provided compliance technologies, methodologies and services to the teleservices industry. The business of Execuserve Corp. provided organizations who are hiring employees with tests and other evaluation tools and services to assess and compare job candidates.
B. Liquidity and Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered continued losses from operations since its inception. At December 31, 2011, the Company had stockholders’ and working capital deficiencies of $3,064,998 and $3,064,733, respectively.
Management believes the Company will continue to incur losses and negative cash flows from operating activities for the foreseeable future and will need additional equity or debt financing to sustain its operations until it can achieve profitability and positive cash flows, if ever. Management plans to seek additional debt and/or equity financing for the Company, but cannot assure that such financing will be available on acceptable terms. The Company's continuation as a going concern is dependent upon its ability to ultimately attain profitable operations, generate sufficient cash flow to meet its obligations, and obtain additional financing as may be required. The outcome of this uncertainty cannot be assured.
The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
2. Summary of Significant Accounting Policies
A. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. Summary of Significant Accounting Policies (Continued)
B. Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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.
B. Concentration of Credit Risk
The Company keeps its cash account with one financial institution. The balance is fully insured by the Federal Deposit Insurance Corporation.
C. Accounts Receivable
Accounts receivable are reviewed at the end of each reporting period to determine the collectability based upon the aging of the balances and the history of the customer. Based on management’s evaluation of collectibility, an allowance for doubtful accounts of $71,207 and $69,883 at December 31, 2011 and 2010, respectively, had been provided applicable to certain peripheral service and commission receivables.
D. Property and Equipment
Property and equipment was stated at cost. These assets were depreciated on a straight-line basis over their estimated useful lives (generally two to five years). Leasehold improvements were amortized over 39 to 55 months.
Property and equipment also included the capitalized cost of internal-use software, including software used to upgrade and enhance processes supporting the Company’s business. The Company capitalizes costs incurred during the application development stage related to the development of internal-use software and amortized these costs over the estimated useful life of five years.
Depreciation and amortization expense was $0 and $28,345 for the years ended December 31, 2011 and 2010, respectively, and was included in discontinued operations.
E. Intangible Assets
Intangible assets were amortized on a straight-line basis over the period during which the asset were expected to contribute directly or indirectly to cash flows of the entity (useful lives).
Amortization expense was $0 and $49,946 for the years ended December 31, 2011 and 2010, respectively, and was included in discontinued operations.
F. Amortization of Deferred Loan Costs
Deferred loan costs were amortized over the terms of the respective debt instruments.
G. Fair Value of Financial Instruments
Substantially all of the Company’s financial instruments, consisting primarily of cash, accounts receivable, accounts payable and accrued expenses and all debt, are carried at, or approximate, fair value because of their short-term nature or because they carry market rates of interest.
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. Summary of Significant Accounting Policies (Continued)
H. Stock Based Compensation Arrangements
The Company accounts for stock-based compensation arrangements in accordance with guidance provided by the Financial Accounting Standards Board Accounting Standards Codification (“ASC”). This guidance addresses all forms of share-based payment awards including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights, as well as share grants and other awards issued to employees and non-employees under free-standing arrangements. These awards are recorded at costs that are measured at fair value on the awards’ grant dates, based on the estimated number of awards that are expected to vest and will result in charges to operations.
From time to time, the Company’s shares of common stock and warrants have been issued as payment to employees and non-employees for services. These are non-cash transactions that require management to make judgments related to the fair value of the shares issued, which affects the amounts reported in the Company’s consolidated financial statements for certain of its assets and expenses.
I. Income Taxes
The Company accounts for income taxes under the provisions of Financial Accounting Standards Board's ("FASB") Accounting Standard Codification ("ASC") 740 "Income Tax". ASC 740 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company has adopted the provisions of FASB ASC 740-10-05 “Accounting for Uncertainty in Income Taxes.” The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. At December 31, 2011 and 2010, the Company had no material unrecognized tax benefits.
J. Loss Per Share
Basic loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted loss per share gives effect to dilutive convertible securities, options, warrants and other potential common stock outstanding during the period, only in periods in which such effect is dilutive. The following securities have been excluded from the calculation of net loss per share, as their effect would be anti-dilutive:
K. Subsequent Events
Management has evaluated subsequent events through the date of this filing.
L. Recent Accounting Pronouncements
Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying consolidated financial statements.
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. Merger
The Company entered into an Agreement and Plan of Merger, dated as of February 5, 2010 (the “Merger Agreement”) with Execuserve Corp., a Virginia corporation (“Execuserve”), CSC/Execuserve Acquisition Corp., a Virginia corporation and wholly-owned subsidiary of the Company (“Merger Sub”), W. Thomas Eley (“Eley”), James A. Robinson, Jr. (“Robinson”) and Robin Rennockl (“Rennockl”).
The Merger Agreement included, among other matters, the consummation of the following transactions:
(a) merger (the “Merger”) of Merger Sub with and into Execuserve, with Execuserve being the surviving corporation and wholly-owned by the Company;
(b) issuance of an aggregate of 19,915,285 shares (each, a “Merger Share”) of Company Common Stock in exchange for all of the issued and outstanding common and preferred stock of Execuserve (collectively, (the “Execuserve Shares”);
(c) issuance of an additional 28,114,495 shares (each, a “Exchanged Debt Share”) of Company Common Stock in exchange for certain outstanding debt of Execuserve in the aggregate principal amount of $647,000 (the “Execuserve Exchanged Debt”);
(d) issuance of an aggregate 7,970,220 shares (each, a “Retention Share”) of Company Common Stock to certain employees of Execuserve, including Robinson, who is to receive 3,170,220 Retention Shares, and Rennockl, who is to receive 4,000,000 Retention Shares; Robin Rennockl’s position as Vice President of Sales was eliminated as a cost containment measure effective May 31, 2010. In accordance with the termination agreement, Ms Rennockl fully vested into 1,000,000 shares of the Company Common Stock. The remaining 3,000,000 shares that Ms. Rennockl was to receive as retention shares were cancelled.
(e) satisfaction of certain other debt (the “Satisfied Debt”) of Execuserve, including approximately $28,000 owed to Eley relating to charges made on Eley’s personal credit card for Execuserve’s benefit and on a corporate charge card account which Eley had personally guaranteed the payment of all charges on such account;
(f) Execuserve retaining Eley as a consultant pursuant to a written consulting agreement;
(g) Execuserve retaining Robinson as its chief executive officer and president pursuant to a written Employment Agreement;
(h) Execuserve retaining Rennockl as its Vice President of Sales pursuant to a written Employment Agreement; Robin Rennockl’s position as Vice President of Sales was eliminated as a cost containment measure effective May 31, 2010.
(i) Eley being elected to the Company’s Board of Directors. On June 14, 2010, the Company accepted a written resignation of Ely from his position as a director of the Company.
(j) all of the Merger Shares, Exchanged Debt Shares and Retention Shares being subject to lock-up arrangements pursuant to which each of the recipients of such shares would be entitled to sell or otherwise dispose of up to 25% of the shares such recipient received beginning six months following the effective date of the Merger, up to 50% of the shares such recipient received beginning twelve months following the effective date of the Merger, up to 75% of the shares such recipient received beginning eighteen months following the effective date of the Merger and all of the shares such recipient received beginning 24 months following the effective date of the Merger.
The Merger became effective on February 9, 2010. As a result of the Merger’s effectiveness, among other matters, (i) the Company became obligated to issue all of the Merger Shares, Exchanged Debt Shares and Retention Shares, (ii) the Company tendered payment in full against the Satisfied Debt, (iii) Execuserve retained Eley as a consultant, Robinson as its Chief Executive Officer and President and Rennockl as its Vice President of Sales. The Eley consulting agreement was mutually terminated effective May 31, 2010. On June 15, 2010, Execuserve Corp entered into an Independent Sales Representative Agreement with EPC, LLC, a Virginia limited liability company of which Eley is a principal member, (iv) the Execuserve Exchanged Debt was satisfied, and (v) Eley became a member of the Company’s Board of Directors.
The Company calculated the purchase price of the acquisition in accordance with the provisions of ASC 805, “Business Combinations” at an aggregate of $1,099,059, which was derived from two components of the purchase consideration as follows: (1) the value of the debt and equity shares was valued at $259,361 ($0.0054 per share of the Company’s common stock exchanged as quoted on the Over-the-Counter Bulletin Board on the effective date of the transaction); and (2) $839,698 of assumed liabilities.
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. Merger (continued)
The Company recorded the following Execuserve assets at fair value:
The Company recorded the 7,970,220 Retention Shares for retention of key personnel as a prepaid expense in the amount of $43,039 ($0.0054 per share of the Company Common Stock exchanged as quoted on the Over-the-Counter Bulleting Board on the effective date of the transaction). The prepaid share based compensation is being expensed over the 24 month service period. On May 31, 2010, the Company eliminated the position of Vice President - Execuserve Corp. - Sales held by Robin Rennockl. In consideration for the termination of her employment and, in satisfaction of any claims as provided in her employment agreement, the Company immediately vested 1,000,000 of her 4,000,000 Retention Share issuance. The remaining 3,000,000 shares were cancelled.
The Company incurred $182,463 in costs to complete the Execuserve Merger transaction. The Company capitalized $44,376 to deferred loan costs relating to the amendment and restatement of the then outstanding debentures of the Company and Execuserve (See Note 6). The Company recorded $7,388 as stock issuance costs. The Company expensed the remaining $130,699 as incurred; $48,055 was expensed during the year ended December 31, 2009 and $82,644 was expensed during the three months ended March 31, 2010.
In consideration for their agreeing to subordinate their existing security interests to the security interest of Agile, effective as of February 9, 2010, the Company issued 1 million shares of Company Common Stock to Barry Brookstein (“Brookstein”), the Company’s Chief Financial Officer at the time of the Merger (now the Company’s Chairman of the Board, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer), 3 million shares of Company Common Stock to Henry Ponzio (“Ponzio”) and 7 million shares to Nascap Corp. (“Nascap”). Collectively, these security interest holders owned $550,000 of debt of the Company as of the time of the Merger.
In connection with the consummation of the Merger, the Company issued to Summit Trading Limited (“Summit”) 12 million shares of Company Common Stock as consideration for services rendered with respect to the Merger Agreement in addition to shares of Company Common Stock previously issued to Summit.
On December 1, 2010, the Company entered into and consummated the transactions contemplated by an Agreement and Consent to Surrender of Collateral with Agile. As a result, the Company’s operating businesses are reflected as discontinued operations including the operations of Execuserve. See Note 6 for a further discussion of the Surrender of Collateral and Note 14 for a further discussion of discontinued operations. As a result of this transaction, the Company cancelled 2,977,665 Retention Shares issued to certain Execuserve employees.
The following represented the unaudited condensed pro forma financial results of the Company as if the acquisition of Execuserve had occurred as of January 1, 2010. Unaudited condensed pro forma results were based upon accounting estimates and judgments that the Company believed were reasonable. The unaudited condensed pro forma results also included adjustments to interest expense as all existing convertible notes and bridge loans of Execuserve were repaid or converted to Company common stock upon consummation of the Execuserve merger. The condensed pro forma results were not necessarily indicative of the actual results of operations of the Company had the acquisition occurred at January 1, 2010, nor does it purport to represent the results of operations for future periods.
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
Accounts payable includes $21,955 and $287 owed to Brookstein at December 31, 2011 and 2010, respectively.
5. Short-Term and Demand Notes Payable
Short-term and demand notes payable consist of the following:
A. Secured Demand Note - Nascap Corp.
In September 2006, CCI executed a secured $150,000 promissory note and related security agreement with Nascap. Interest at 12% per annum was payable monthly in arrears and the note principal was due on demand. The note was collateralized by the accounts receivable of the principal subsidiary and was unconditionally guaranteed by the Company.
As of March 31, 2009, the Company entered into a Loan Modification Agreement with Nascap. The original Nascap note was amended and restated as a revolving line of credit promissory note (“Nascap Restated Note”) in the principal amount not to exceed $750,000. The Nascap Restated Note contains the same terms and conditions as the original note, except for the revolving line of credit nature of the debt. As consideration for entering into the Loan Modification Agreement, the Company agreed to issue Nascap twenty Class A and twenty Class B warrants for each $1.00 of principal outstanding under the Nascap Restated Note on April 30, 2009. Each Class A and Class B warrant entitles the holder to purchase one share of the Company’s common stock at $0.05 per share. The Class B warrants require the holder to pay the exercise price in the form of cancellation of amounts outstanding under the Nascap Restated Note prior the payment of the exercise price in the form of cash. Accrued and unpaid interest on the Nascap note totaled $94,500 and $52,500 at December 31, 2011 and 2010, respectively. At both December 31, 2011 and 2010, $350,000 was outstanding on this note.
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. Short-Term and Demand Notes Payable (Continued)
B. Promissory Note - John Koehler (“Koehler”)
On October 1, 2003, the predecessor to Execuserve issued a $150,000 non-interest bearing promissory note to Koehler, an investor in the predecessor. The note was amended on October 25, 2004. Upon the acquisition of Execuserve by the Company, Koehler was owed $37,000. The balance owed is being paid in monthly installments of $1,000. The Company is in default as it has not made a payment since September 2010. The balance due to Koehler at both December 31, 2011 and 2010 totaled $30,000.
C. Insurance Premium Financing
At December 31, 2010, the Company had an outstanding balance of $9,689 on a loan utilized to fund certain financed insurance premiums. The loan was repaid in 2011. In 2011, the Company received a new loan totaling $27,999 to fund certain insurance premiums. The loan was payable over a nine-month term. At September 30, 2011, the loan balance was $17,422. In October 2011, the policy was cancelled for the non-payment of the loan. At December 31, 2011, the loan balance was $0.
D. Note Payable - Pretect, Inc. (“Pretec”)
The Pretect obligation arose from consulting services provided by Pretect in connection with the Company’s review of its internal control over financial reporting and disclosure controls and procedures. The Pretect Note provided for no interest (except in the event of default) and repayment of the principal amount in twelve equal monthly installments commencing on April 1, 2009. The note was repaid in 2010.
6. Secured Convertible Debentures
A. Agile Original 2008 Debentures -
On May 6, 2008, the Company entered into a Securities Purchase Agreement (the “Agile Purchase Agreement”) with Agile. The Agile Purchase Agreement contemplated the Company’s immediate sale to Agile of a secured convertible debenture of the Company (the “Initial Original Agile Debenture”) in the original principal amount of $300,000 and having a maturity date of November 6, 2009, and a potential sale of a second secured convertible debenture (the “Additional Original Agile Debenture” and, collectively with the Initial Original Agile Debentures, the “Agile Original 2008 Debentures”) in the same original principal amount and having the same maturity date as the Initial Original Agile Debenture. The purchase price of each of the Agile Original 2008 Debentures was $300,000. The Agile Purchase Agreement further provided that, for no further consideration, the Company issue to Agile 3 million shares (each, an “Initial Original Equity Incentive Share”) of Company common stock in connection with the sale and issuance of the Initial Original Agile Debenture and an additional 2 million shares (each, an “Additional Original Equity Incentive Share” and, collectively with the Initial Original Equity Incentive Shares, the “Agile Original Equity Incentive Shares”) of Company common stock in connection with the sale and issuance of the Additional Original Agile Debenture.
The Agile Original 2008 Debentures bore interest at the rate of 15% per annum, payable monthly, although the Agile Original 2008 Debentures further provide that, in addition to interest, Agile was entitled to an additional payment, at maturity or whenever principal is paid, such that Agile’s annualized return on the amount of principal paid equals 30%.
Effective as of January 31, 2009, the Company entered into an Agreement to Amend and Restate with Agile pursuant to which the Agile Original 2008 Debentures were amended to allow the Company, in certain circumstances, a five business day cure period prior to the formal declaration of an “Event of Default.” Prior to this amendment, Agile was not required to formally notify the Company before the declaration of an Event of Default.
Effective as of February 5, 2010, the Agile Original 2008 Debentures were converted as part of the Agile A&R Debenture. See Item D below.
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. Secured Convertible Debentures (Continued)
B. Agile September 2009 Debenture -
On September 21, 2009, the Company sold and issued to Agile a Secured Convertible Debenture (the “Agile September 2009 Debenture”) in the original principal amount of $100,000 pursuant to the Omnibus Amendment and Securities Purchase Agreement, dated as of September 18, 2009 (the “Agile September 2009 Securities Purchase Agreement”), between the Company and Agile. The Agile September 2009 Debenture was rolled into a new note effective February 2010.
The Agile September 2009 Debenture bore interest at the rate of 15% per annum, payable monthly, although the Agile September 2009 Debenture further provided that, in addition to interest, Agile was entitled to an additional payment, at maturity or whenever principal is paid, such that Agile’s annualized return on the amount of principal payment so paid equals 30%.
Effective as of February 5, 2010, the Agile September 2009 Debenture was converted as part of the Agile A&R Debenture. See Item D below.
C. Agile November 2009 Debenture -
On November 23, 2009, the Company sold and issued to a Secured Convertible Debenture (the “Agile November 2009 Debenture”) in the original principal amount of $80,000 pursuant to the Second Omnibus Amendment and Securities Purchase Agreement, dated as of November 23, 2009 (the “Agile November 2009 Securities Purchase Agreement”), between the Company and Agile.
The Agile November 2009 Debenture bore interest at the rate of 15% per annum, payable monthly, although the Agile November 2009 Debenture further provided that, in addition to interest, Agile was entitled to an additional payment, at maturity or whenever principal is paid, such that Agile’s annualized return on the amount of principal payment so paid equals 30%.
Effective as of February 5, 2010, the Agile September 2009 Debenture was converted as part of the Agile A&R Debenture. See Item D below.
The total gross consideration received from Agile in connection with the sale and issuance of the Agile November 2009 Debenture, the extension of the maturity date of the 2008 Debentures and the issuance of the 2.6 million Agile November 2009 Equity Incentive Shares was $80,000.
D. Agile A&R Debenture -
In connection with the consummation of the Execuserve Merger and in order to fund the future operations of the Company and Execuserve, payment of outstanding accounts payable of the Company and Execuserve, including the Satisfied Debt, and to amend and restate the debt currently owed to Agile by the Company and Execuserve, the Company agreed to borrow additional funds from Agile and restructure the outstanding indebtedness owed to Agile by the Company and Execuserve pursuant to an Amended and Restated Securities Purchase Agreement (“Agile A&R Agreement”), dated as of February 5, 2010, among the Company, Execuserve, Spirits Management Inc. (“Spirits”), Brookstein, Dean Garfinkel (“Garfinkel”), our Chief Executive Officer at the time of the Merger and Agile. Spirits is a New York corporation in which Brookstein is an executive officer and the sole stockholder and Garfinkel was the former president, chief executive officer and a director of the Company.
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. Secured Convertible Debentures (Continued)
D. Agile A&R Debenture (Continued) -
The Agile A&R Agreement was an amendment and restatement of the previous agreements between the Company, Spirits, Brookstein, Garfinkel and Agile. These previous agreements were dated as of May 6, 2008, January 31, 2009, September 21, 2009 and November 23, 2009. Under such previous agreements, the Company sold and issued to Agile secured convertible debentures in the aggregate principal amount of $780,000 and 9.6 million shares of Company Common Stock for gross proceeds of $780,000. The Company had granted Agile a security interest in substantially all of the Company’s assets to secure the Company’s obligations under the Existing Company Debentures and Spirits, Brookstein and Garfinkel had pledged their shares of preferred stock of the Company as further security for the payment of amounts due under the Existing Company Debentures.
In addition, between November 16, 2007 and June 8, 2008, Execuserve had sold and issued to Agile secured convertible promissory notes in the aggregate principal amount of $460,000 and warrants to purchase shares of the common stock of Execuserve or Execuserve’s successor by merger. Execuserve had granted Agile a security interest in substantially all of Execuserve’s assets to secured Execuserve’s obligations under the Existing Execuserve Notes.
The following is a summary of the transaction with Agile:
(a)Agile provided the Company with $525,000 in new funds (the “New Agile Funds”);
(b)the obligations of the Company and Execuserve contained in the Existing Company Debentures and Existing Execuserve Notes were amended and restated, and the new obligations arising in connection with the loan of the New Agile Funds were consolidated into one Amended and Restated Secured Convertible Debenture of the Company in the principal amount of $1,765,000 with a maturity date of February 1, 2011 (“Agile A&R Debenture”) and the Company delivered to Agile the Agile A&R Debenture, with the obligations under the Agile A&R Debenture being guaranteed by Call Compliance Inc., another wholly-owned subsidiary of the Company, and Execuserve;
(c)repayment to Agile of $10,000 of accrued and unpaid interest under the Existing Company Debentures and $50,000 of accrued and unpaid interest under the Existing Execuserve Notes, with the remaining portions of the accrued and unpaid interest under both the Existing Company Debentures and Existing Execuserve Notes, totaling $79,244, being acknowledged as a remaining obligation of the Company due and payable on the maturity date of the Agile A&R Debenture;
(d)issuance to Agile of 2.4 million shares of Company Common Stock.
The transactions contemplated by the Agile A&R Agreement were consummated as of February 9, 2010.
The Agile A&R Debenture bore interest at the rate of 20% per annum. The Company further agreed that, in addition to the interest due under the Agile A&R Debenture, Agile shall be entitled to an additional payment, on the A&R Debenture Maturity Date (or whenever the Agile A&R Debenture is paid in full), such that Agile’s annualized rate of return on such principal payment shall be equal to 30%. Payments of interest accruing pursuant to the Agile A&R Debenture were due and payable on a monthly basis beginning on March 1, 2010.
In connection with the 2.4 million share issuance, the Company recorded the value $12,960 ($0.0054 per share as quoted on the Over-the-Counter Bulletin Board on the date of issuance) as a debt discount and was being amortized over the life of the loan.
The Company had not paid the accrued interest and was declared in default. See Item F below regarding the surrender of collateral.
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. Secured Convertible Debentures (Continued)
E. Agile 2010 Debentures
On July 1, 2010, the Company sold and issued to Agile a Secured Convertible Debenture (the “Agile 2010 Debenture”) in the original principal amount of $175,000 pursuant to the Omnibus Amendment and Securities Purchase Agreement, dated as of July 1, 2010 (the “July 2010 Omnibus Amendment and Agreement”), between the Company and Agile.
The Agile July 2010 Debenture was to mature on June 30, 2011 (the “July 2010 Debenture Maturity Date”) and bore interest at the rate of 20% per annum. The Company further agreed that, in addition to the interest due under the Agile July 2010 Debenture, Agile shall be entitled to an additional payment, on the July 2010 Debenture Maturity Date (or whenever the Agile July 2010 Debenture is paid in full), such that Agile’s annualized rate of return on such principal payment shall be equal to 30%. The Company was required to pre-pay all interest on the Agile July 2010 Debenture accruing through September 30, 2010. Payments of interest accruing pursuant to the Agile July 2010 Debenture after September 30, 2010 were due and payable on a monthly basis beginning on October 31, 2010.
In connection with the sale and issuance of the Agile July 2010 Debenture, the Company issued to Agile 6,000,000 shares (each, an “Agile July 2010 Debenture Equity Incentive Share”) of the Company Common Stock. In connection with the 6 million share issuance, the Company recorded the value $21,000 ($0.0035 per share as quoted on the Over-the-Counter Bulletin Board on the date of issuance) as a debt discount and is being amortized over the life of the loan.
The Company’s obligations under the Agile 2010 Debentures were secured by all of the assets of the Company. The Company had not paid the accrued interest and was declared in default. See Item F below regarding the surrender of collateral.
F. Surrender of Collateral
On December 1, 2010, the Company entered into and consummated the transactions contemplated by an Agreement and Consent to Surrender of Collateral (the “Surrender Agreement”) with Agile. At December 1, 2010, the Company owed Agile principal of $1,940,000 and accrued interest of $759,980.
On November 18, 2010, Agile had notified the Company that Agile deemed the Company to be in default under the various Agile Debentures. The default related to the Company’s failure to make interest payments under the Agile Debentures, which totaled $281,939 as of October 31, 2010, the most recent interest payment date under the Agile Debentures. The Company had five business days in which to cure such default. The Company failed to cure the default and, effective November 23, 2010, an Event of Default under the Agile Debentures was deemed to have occurred. The occurrence of an Event of Default resulted in the acceleration of all amounts due under the Agile Debentures. The Company had previously granted Agile a first priority security interest in all of its assets. In addition, each of Call Compliance Inc. (“CCI”) and Execuserve Corp. (“Execuserve”), two of the Company’s subsidiaries when we originally sold and issued the Agile Debentures, guaranteed all of its obligations under the Agile Debentures and granted Agile a first priority security interest in all of their respective assets. Accordingly, upon the occurrence of the Event of Default, Agile was entitled to enforce its rights as a secured lender, including the right to foreclose on all of the assets of the Company, CCI and Execuserve (collectively, the “Collateral”), up to the amount owing under the Agile Debentures. The Surrender Agreement contemplated that Agile accept the Collateral in full satisfaction of the indebtedness evidenced by the Agile Debentures and that the Company, CCI and Execuserve surrender, assign and transfer to Agile the Collateral in full satisfaction of the indebtedness evidenced by the Agile Debentures. The acceptance, surrender, assignment and transfer of the Collateral were deemed effective as of the date of the Surrender Agreement. Accordingly, effective as of December 1, 2010, all of the assets of the Company, CCI and Execuserve were surrendered, assigned and transferred to Agile and our obligations under the Agile Debentures were deemed fully satisfied.
As a result of the surrender, the Company recognized a gain of $1,413,255, which was included in the income from discontinued operations on the statement of operations.
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7. Notes and Loans Payable
Long-term debt at December 31, 2011 and 2010 consists of the following:
(A) Brookstein Promissory Note Exchange Agreement -
As of June 24, 2009, the Company entered in to a Promissory Note Exchange Agreement (the “Brookstein Exchange Agreement”) with Brookstein and simultaneously consummated the transactions contemplated by the Brookstein Exchange Agreement. Under the Brookstein Exchange Agreement, Brookstein delivered and assigned a promissory note of Call Compliance, Inc., one of the Company’s wholly-owned subsidiaries (“CCI”), dated March 3, 2009, in the principal amount of $50,000 and payable to Brookstein (the “Brookstein Original Note”) in exchange for the Company issuing and delivering to Brookstein the Company’s 18% Senior Subordinated Secured Promissory Note, dated June 24, 2009, in the principal amount of $50,000 payable to Brookstein (the “Brookstein New Note”). In connection with such exchange, the Company granted Brookstein a senior subordinated security interest (the “Brookstein Security Interest”) in all of the Company’s assets to secure the Company’s obligations under the Brookstein New Note, as evidenced and subject to the terms and conditions of a Security Agreement, dated June 24, 2009 (the “Brookstein Security Agreement”), between Brookstein and the Company. As further consideration for entering into the Brookstein Exchange Agreement, Brookstein was granted 1 million Class “A” common stock purchase warrants of the Company (each, a “Brookstein Class A Warrant”) and 1 million class “B” common stock purchase warrants of the Company (each, a “Brookstein Class B Warrant”). Each of these warrants entitles its holder to purchase one share of Company common stock at a purchase price of $0.05 per share. The Brookstein Class A Warrants and Brookstein Class B Warrants expire on June 23, 2014. If any amount (principal or interest) is outstanding under the Brookstein New Note, the purchase price upon exercise of any of the Brookstein Class B Warrants must be paid by the reduction of the amount outstanding under the Brookstein New Note.
The Brookstein Original Note was due on demand and bore interest at the rate of 18% per annum, payable monthly in arrears.
The Brookstein New Note had a maturity date of January 1, 2011 and bears interest at the rate of 18% per annum (20%, in the case of a default under the Brookstein New Note), with interest payable monthly in arrears. In March 2011, the maturity date of the Brookstein New Note was extended to July 1, 2011 and was further extended in August 2011 to January 1, 2012. Interest incurred on the note totaled $9,000 for both the years ended December 31, 2011 and 2010. Accrued and unpaid interest totaled $20,250 and $11,250 at December 31, 2011 and 2010, respectively. At both December 31, 2011 and 2010, $50,933 was outstanding on this note.
The principal and accrued interest were not paid on January 1, 2012 and are now due on demand.
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7. Notes and Loans Payable (Continued)
(B) Loans Payable - Brookstein
In 2011, Brookstein loaned the Company monies for working capital purposes. The loans do not bear interest and are due on demand. At December 31, 2011, loans payable - Brookstein was $11,775.
(C) Promissory Notes to Execuserve Officers
On February 9, 2010, concurrent with the acquisition of Execuserve, Execuserve issued promissory notes to two of its officers totaling $140,000 for amounts owed to them prior to the acquisition. The notes bore interest at 6% per annum and were payable in monthly installments inclusive of interest of $2,707 subject to cumulative positive cash flow requirements of Execuserve as provided in the note agreements. As Execuserve was surrendered to Agile, no payments were made under the notes. Interest incurred on the notes totaled $5,303 and $7,700 for the years ended December 31, 2011 and 2010, respectively. At December 31, 2010, accrued and unpaid interest totaled $7,700 and $140,000 was outstanding on these notes. At December 31, 2011, due to the surrender of Execuserve to Agile, the Company wrote off the principal and accrued interest owed to the two officers. The Company recorded a gain of $153,003 in the year ended December 31, 2011 and such gain was reflected as gain on surrender of collateral of discontinued operations in the statement of operations.
(D) Ponzio Promissory Note Exchange Agreement -
The Company had outstanding unsecured demand loans due Henry A Ponzio (“Ponzio”) in the aggregate principal amount of $150,000 at December 31, 2008. This demand loan bore interest at the rate of 18% per annum, payable monthly in arrears.
As of June 24, 2009, the Company entered into a Promissory Note Exchange Agreement (the “Ponzio Exchange Agreement”) with Ponzio and simultaneously consummated the transactions contemplated by the Ponzio Exchange Agreement. Under the Ponzio Exchange Agreement, Ponzio delivered and assigned to the Company a promissory note of CCI, dated April 27, 2006, in the principal amount of $150,000 and payable to Ponzio (the “Ponzio Original Note”) in exchange for the Company’s issuing and delivering to Ponzio the Company’s 18% Senior Subordinated Secured Promissory Note, dated June 24, 2009, in the principal amount of $150,000 and payable to Ponzio (the “Ponzio New Note”). In connection with such exchange, the Company granted Ponzio a senior subordinated security interest (the “Ponzio Security Interest”) in all of the Company’s assets to secure the Company’s obligations under the Ponzio New Note, as evidenced and subject to the terms and conditions of a Security Agreement, dated June 24, 2009 (the “Ponzio Security Agreement”), between Ponzio and the Company. As further consideration for entering into the Ponzio Exchange Agreement, Ponzio was granted 3 million Class A warrants (each, a “Ponzio Class A Warrant”) and 3 million Class B warrants (each, a “Ponzio Class B Warrant”). Each of these warrants entitles its holder to purchase one share of common stock (each, a “Warrant Share”) at a purchase price of $0.05 per Warrant Share. The Ponzio Class A Warrants and Ponzio Class B Warrants expire on June 23, 2014. If any amount (principal or interest) is outstanding under the Ponzio New Note, the purchase price upon exercise of any of the Ponzio Class B Warrants must be paid by the reduction of such amounts outstanding under the Ponzio New Note.
The Ponzio Original Note was due on demand and bore interest at the rate of 18% per annum, payable monthly in arrears.
The Ponzio New Note had a maturity date of January 1, 2011 and bears interest at the rate of 18% per annum (20%, in the case of a default under the Ponzio New Note), with interest payable monthly in arrears. In March 2011, the maturity date of the Ponzio New Note was extended to July 1, 2011 and was further extended in August 2011 to January 1, 2012. Accrued and unpaid interest as of December 31, 2011 and 2010 totaled $60,750 and $33,750, respectively. At both December 31, 2011 and 2010, $150,000 was outstanding on this note.
The principal and accrued interest were not paid on January 1, 2012 and are now due on demand.
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. Income Taxes
The Company has identified its federal tax return and its state tax return in New York as "major" tax jurisdictions. Based on the Company's evaluation, it has concluded that there are no significant uncertain tax positions requiring recognition in the Company's financial statements. The Company's evaluation was performed for the 2008 through 2011 tax years. The Company believes that its income tax positions and deductions would be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position.
The Company's policy for recording interest and penalties associated with audits is to record such items as a component of income before income taxes. Penalties are recorded in other expense and interest paid or received is recorded in interest expense or interest income, respectively, in the statement of operations. There were no amounts accrued for penalties or interest as of or during the years ended December 31, 2011 and 2010. The Company does not expect its unrecognized tax benefit position to change during the next twelve months. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.
Net operating losses (“NOLs”) may be utilized under certain conditions as a deduction against future income to offset against future taxes. Internal Revenue Code (“IRC”) Section 382 and the regulations promulgated under IRC Section 382 limit the utilization of NOLs due to ownership changes. If it is determined that a change in control has taken place, utilization of the Company’s NOLs will be subject to severe limitations in future periods, which would have an effect of eliminating the future tax benefits of the NOLs. Income tax benefits resulting from net losses incurred for the years ended December 31, 2011 and 2010 were not recognized as the Company’s annual effective tax rate for both periods was estimated to be 0%.
The Company sustained tax losses in 2011 and 2010. Accordingly, there were no provisions for current or deferred federal or state income taxes for these years. The income tax benefit for these years differs from the amount of income tax determined by applying the statutory federal income tax rate to continuing operations before income taxes as a result of the following:
The Company has provided a valuation allowance against the total of the net deferred tax assets due to the uncertainty of future realization. The increase in this valuation allowance for the year ended December 31, 2011 was $299,472 and the increase in this allowance for the year ended December 31, 2010 was $562,598.
At December 31, 2011, the Company has net operating loss carry forwards of approximately $5,250,000 which expire in 2023 through 2031 and capital loss carry forwards of approximately $60,000 which expire in 2016.
The Company files its federal and state income tax returns in jurisdictions with varying statutes of limitations. The 2008 through 2011 tax years generally remain subject to examination by federal and state tax authorities.
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. Income Taxes (Continued)
The components of deferred tax assets at December 31, 2011 and 2010 are as follows:
9. Commitments
A. Minimum Operating Lease Commitments
The Company leased its former office space in Glen Cove, New York. The lease required minimum annual rentals plus operating expenses through July 31, 2011. On April 13, 2010, the Company and the lessor of the space mutually terminated the office space agreement between the two parties effective January 1, 2010. The agreed upon terms of the lease termination were as follows:
·The Company would pay $1,000 a month for 10.5 months starting April 15, 2010,
·The Company would grant the lessor 1.675 million five-year warrants with an exercise price of $0.02 a share,
·The Company would be relieved of $39,000 in common area maintenance expenses and real estate taxes owed to the lessor,
·The Company forfeited the $10,600 security deposit held with the lessor, and
·The Company would be relieved of future lease obligations effective January 1, 2010 through July 31, 2011, the former maturity date of the lease.
Rent expense amounted to $0 and $28,514 for the years ended December 31, 2011 and 2010.
B. Employment Agreements
The Company had employment agreements with Brookstein and Garfinkel through November 30, 2011. Garfinkel resigned in November 2010. These officers deferred receiving the payments of their salaries in 2010 and Brookstein deferred receiving the payment of his salary in 2011. The payment of accrued salaries owing to Garfinkel in the amount of $380,000 is currently under negotiations.
The employment contract with Brookstein expired in November 2011 and the agreement is now on a month-to-month basis. See Note 11.
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. Related Party Transactions
A. Garfinkel
The Company had a verbal management agreement with an entity wholly-owned by Garfinkel. Under the terms of this verbal agreement, the Company received customer service support, content updates and promotional and growth support for the Regulatory Guide line of business. The Company was responsible for accounting, software upgrades, web changes, and hardware and internet costs. In consideration, the Company was committed to pay 50% of the Company’s net revenues from this line of business and 75% of the Company’s net above the 2009 base year. For the year ended December 31, 2010, the Company paid approximately $21,000. This Management Agreement ended on June 30, 2010.
B. Eley
Concurrent with the acquisition of Execuserve, the Company signed a consulting agreement with Eley. The Company also paid consulting fees to a company Mr Eley controlled. For the year ended December 31, 2010, fees totaled $23,650. Mr Eley left the Company effective June 14, 2010.
11. Capital Transactions
A. Issuance of Common Shares/Warrants for Prior and Current Services
(1) Issuance of Shares to Atlantic Capital Partners, LLC.
The Company entered into a one year services agreement with Atlanta Capital Partners, LLC effective February 15, 2010. In consideration for services provided by Atlanta Capital Partners, LLC, the Company agreed to issue 3.0 million shares of the Company Common Stock, valued at $13,500 ($0.0045 per share as quoted on the Over-the-Counter Bulletin Board on the effective date of the agreement). These shares are non-forfeitable and are fully vested upon issuance.
(2) Issuance of Warrants for Legal Services
The aggregate 7.5 million warrants issued to the Company’s outside legal advisor as of February 9, 2010 were deemed to have minimal value using the Black-Scholes option pricing model with the following additional inputs: share price: $0.005; strike price: $0.01; expected volatility: 27%; risk free interest rate: 2.32%; term: 5 years. The volatility rate used was based upon an average volatility rate for two entities providing telecommunications services and who are customers of the Company. The Company did not use the volatility rate for Company Common Stock as the Company Common Stock had not been trading for the sufficient length of time to accurately compute its volatility when these warrants were issued.
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. Capital Transactions (Continued)
B. Issuance of Common Shares/Warrants in Connection with the Acquisition of Software -
On April 7, 2010, the Company entered into an agreement with the owner and developer (the “Seller”) of certain software and intellectual property rights. In exchange for the transfer of the software and intellectual property, the Company compensated the Seller with the following:
·2.75 million shares of the Company Common Stock (valued at $0.0065 per share as quoted on the Over-the-Counter Bulletin Board or $17,875 in aggregate , and
·warrants to purchase 500,000 shares of the Company Common Stock with a per warrant share exercise price of $0.05. These issuances were deemed to have minimal value using the Black-Scholes option pricing model with the following additional inputs: share price: $0.0065; strike price: $0.05; expected volatility: 27%; risk free interest rate: 2.84%; term: 5 years. The volatility rate used was based upon an average volatility rate for two entities providing telecommunications services and who are customers of the Company. The Company did not use the volatility rate for Company Common Stock as the Company Common Stock had not been trading for the sufficient length of time to accurately compute its volatility when these warrants were issued.
The Company expensed the value of the shares and warrants on the date of acquisition as the total purchase price of the acquisition was deemed to be not material.
C. Issuance of Warrants to Terminate Lease Agreement -
As discussed in Note 9, the Company and the lessor of its former office space in Glen Cove, New York mutually terminated the office space agreement between the two parties effective January 1, 2010. The agreed upon terms of the lease termination included the issuance of 1,675,000 five-year warrants with an exercise price of $0.02 per share.
The Company determined that the issuance of the warrants had minimal value utilizing a Black-Scholes option pricing model. The Company utilized the following management assumptions: Share Price of $0.006; Exercise Price of $0.02; Expected Volatility of 27%; and Risk-Free Rate of 2.58%. The volatility rate used was based upon an average volatility rate for two entities providing telecommunications. The Company did not use the volatility rate for Company Common Stock as the Company Common Stock had not been trading for the sufficient length of time to accurately compute its volatility when these warrants were issued
D. Merger with Execuserve and Cancellation of Retention Shares -
On February 5, 2010, the Company issued 48,029,780 shares of Common Stock as part of the Agreement and Plan of Merger with Execuserve. In addition, the Company issued an aggregate 7,970,220 Retention Shares of Company Common Stock to certain employees of Execuserve,
Robin Rennockl’s position as Vice President of Sales was eliminated as a cost containment measure effective May 31, 2010. In accordance with the termination agreement, Ms Rennockl fully vested into 1,000,000 shares of the Company Common Stock. The remaining 3,000,000 shares that Ms. Rennockl was to receive as retention shares were cancelled. In addition, as a result of the Agreement and Consent to Surrender of Collateral with Agile, the Company cancelled 2,977,665 Retention Shares issued to certain Execuserve employees.
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. Capital Transactions (Continued)
E. Issuance of Warrants to a Vendor -
On April 21, 2010, the Company entered into a Letter Agreement with a vendor. In consideration for services rendered, valued at $10,650, the Company issued 532,500 five-year warrants with an exercise price of $0.02 per share. The warrant issuance was accepted by the vendor as full satisfaction of the Company’s $10,650 obligation to such vendor.
F. Issuance of Deferred Salary Warrants -
Brookstein and Garfinkel have been deferring all or a portion of their salaries since January 1, 2009.
The amount of salaries deferred by Brookstein and Garfinkel for the six months June 30, 2010 totaled $120,000 each. As compensation, the Company granted to each of them 12 million Deferred Salary Warrants to purchase 12 million shares (each, a “Deferred Salary Warrant Share”) of Common Stock at $0.01 per Deferred Salary Warrant Share at the rate of 100 Deferred Salary Warrants for each $1.00 of deferred salary. The Deferred Salary Warrants were issued as of January 1, 2010. The Company valued these issuances at $49,560 utilizing a Black-Scholes option pricing model. The Company utilized the following management assumptions: Share Price of $0.007; Exercise Price of $0.01; Expected Volatility of 27%; and Risk-Free Rate of 2.93%.
Effective October 1, 2010, Brookstein agreed to continue deferring his full salary while Garfinkel agreed to defer a portion of his salary. The amount of such deferred salaries for the three months ending December 31, 2010 will total $60,000 for Brookstein and $30,000 for Garfinkel as Garfinkel resigned in November 2010. As compensation, the Company granted to Brookstein and Garfinkel Deferred Salary Warrants to purchase an aggregate of 9.0 million shares (each, a “Fourth Quarter 2010 Deferred Salary Warrant Share”) of Company Common Stock at $0.01 per Deferred Salary Warrant Share at the rate of 100 Deferred Salary Warrants for each $1.00 of deferred salary. The Deferred Salary Warrants were issued as of October 4, 2010. The Company determined that these issuances had minimal value utilizing a Black-Scholes option pricing model. The Company utilized the following management assumptions: Share Price of $0.0035; Exercise Price of $0.01; Expected Volatility of 27%; and Risk-Free Rate of 1.26%.
Effective January 1, 2011, Brookstein agreed to continue deferring his full salary. The amount of such deferred salaries for the year ended December 31, 2011 totaled $240,000. As compensation, the Company granted to Brookstein Deferred Salary Warrants to purchase 18.0 million shares (each a “2011 Deferred Salary Warrant Share”) of Company Common Stock at $0.001 per 2011 Deferred Salary Warrant Share at the rate of 100 Deferred Salary Warrants for each $1 of deferred salary for a term of five years. The Company valued these issuances utilizing a Black-Scholes option pricing model with the following assumptions: share price: $0.0004 - $0.0011; exercise price: $0.001; expected volatility: 27%; risk-free rate: 0.96% - 2.24%; term: 5 years.
The volatility rate used was based upon an average volatility rate for two entities providing telecommunications. The Company did not use the volatility rate for Company Common Stock as the Company Common Stock had not been trading for the sufficient length of time to accurately compute its volatility when these warrants were issued.
Effective January 1, 2012, Brookstein agreed to continue deferring his full salary. The amount of such deferred salaries for the three months ending March 31, 2012 will total $60,000. As compensation, the Company granted to Brookstein Deferred Salary Warrants to purchase 6.0 million shares of Company Common Stock at $0.001 per Deferred Salary Warrant Share at the rate of 100 Deferred Salary Warrants for each $1 of deferred salary for a term of five years.
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. Capital Transactions (Continued)
G. Issuance of Dividend Accrual Warrants - Series B Senior Subordinated Convertible Voting Preferred Stock (the “Series B Preferred Stock”)
The Company has failed to pay dividends on the 1.25 million outstanding shares of its Series B Preferred Stock that were payable on the last day of each month during 2011 and 2010. Dividends on the Series B Preferred Stock may only be paid out of funds legally available for such purpose. Under Nevada law, generally, a corporation’s distribution to stockholders may only be made if, after giving effect to such distribution, (i) the corporation would be able to pay its debts as they become due in the usual course of action and (ii) the corporation’s total assets equal or exceed the sum of the corporation’s liabilities plus the amount that would be needed, if the corporation was to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of stockholders whose rights are superior to those receiving the distribution.
All of the outstanding shares of Series B Preferred Stock are held by Brookstein and Spirits. Although the Company has been and currently is unable to pay the Series B Preferred Stock dividends when due, the dividends have been and are continuing to be accrued until such time as the monthly dividends can lawfully be paid under Nevada law.
The Company deferred dividends totaling $150,000 for the year ended December 31, 2010: $60,000 due to Brookstein, and $90,000 due to Spirits. To compensate Brookstein and Spirits, the Company agreed to grant five-year warrants (each, a “Dividend Accrual Warrant”) to purchase shares (each, a “Dividend Accrual Warrant Share”) of Company Common Stock to such holders at $0.001 per Dividend Accrual Warrant Share at a rate of 100 Dividend Accrual Warrants for every $1 of dividend accrued during fiscal 2010. The Company issued Dividend Accrual Warrants totaling 6.0 million to Brookstein and 9.0 million to Spirits for the year ended December 31, 2010. The issuance of the warrants were deemed to have minimal value using the Black-Scholes option pricing model with the following additional inputs: share price: $0.0011 - $0.008; strike price $0.01; expected volatility: 27%; risk free interest rate: 1.27% - 2.55%; term: 5 years.
The Company deferred dividends totaling $150,000 for the year ended December 31, 2011, $60,000 due to Brookstein, and $90,000 due to Spirits. To compensate Brookstein and Spirits for the failure to pay dividends when due, the Company issued Dividend Accrual Warrants totaling 6.0 million to Brookstein and 9.0 million to Spirits for the year ended December 31, 2011, respectively. The Company valued these issuances using the Black-Scholes option pricing model with the following assumptions: share price: $0.0003 - $0.001; strike price: $0.001; expected volatility: 27%; risk free interest rate: 0.83% - 2.24%; term: 5 years.
The volatility rate used was based upon an average volatility rate for two entities providing telecommunications services and who are customers of the Company. The Company did not use the volatility rate for common stock as the common stock had not been trading for the sufficient length of time to accurately compute its volatility when these warrants were issued.
For each of the years ended December 31, 2011 and 2010, dividends related to the Series B Preferred Stock totaled $150,000. Accrued dividends related to the Series B Preferred Stock totaled $450,000 and $300,000 at December 31, 2011 and 2010, respectively, and are included in accounts payable and accrued expenses on the consolidated balance sheet
The Company deferred dividends totaling $37,500 for the three months ended March 31, 2012, $15,000 due to Brookstein, and $22,500 due to Spirits. To compensate Brookstein and Spirits for the failure to pay dividends when due, the Company issued Dividend Accrual Warrants totaling 1.5 million to Brookstein and 2.25 million to Spirits, respectively, on March 31, 2012.
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. Capital Transactions (Continued)
H. Issuance of Deferred Interest Payment Warrants -
In 2010 and 2011, the Company failed to pay interest on the promissory notes that were previously issued to Brookstein, Ponzio and Nascap (the “Note Holders”). To compensate the Note Holders for the failure to pay interest on their promissory notes, the Company granted to such Note Holders warrants (each, a “Deferred Interest Payment Warrant”) to purchase shares of Common Stock at the rate of 100 Deferred Interest Payment Warrants for every $1 of interest not paid.
The Company failed to pay interest to the Note Holders in 2010. The Company issued a total of 7,800,000 Deferred Interest Payment Warrants during the year ended December 31, 2010. The Deferred Interest Payment Warrants have terms substantially identical to the Deferred Salary Warrants and Dividend Accrual Warrants. The issuance of the Deferred Interest Payment Warrants were deemed to have minimal value using the Black-Scholes option pricing model with the following additional inputs: share price: $0.0035 - $0.007; strike price $0.01; expected volatility: 27%; risk free interest rate: 1.26% - 2.93%; term: 5 years. The volatility rate used was based upon an average volatility rate for two entities providing telecommunications services and who are customers of the Company. The Company did not use the volatility rate for Company Common Stock as the Company Common Stock had not been trading for the sufficient length of time to accurately compute its volatility when these warrants were issued.
The Company continued to fail to pay interest on the promissory notes in 2011. The Company issued to such Note Holders 7,800,000 Deferred Interest Payment Warrants. The Company valued these issuances using the Black-Scholes option pricing model with the following assumptions: share price: $0.0004 - $0.0011; strike price: $0.001; expected volatility: 27%; risk free interest rate: 0.96% - 2.24 %; term: 5 years
The Company did not pay interest to the Note Holders in the fourth quarter of 2011 or the first quarter of 2012. To compensate them, the Company issued 1,950,000 Deferred Interest Payment Warrants on each of January 1, 2012 and April 1, 2012.
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. Capital Transactions (Continued)
I. Issuance of Series D Senior Convertible Voting Redeemable Preferred Stock (“Series D Preferred Stock”) and Issuance of Dividend Accrual Warrants -
During 2011, Mr. Brookstein purchased 50,000 shares of Series D Preferred Stock for capital contributions of $50,000.
Terms of the Series D Preferred include the following:
1. Each holder of any shares of Series D Preferred (each, a “Series D Holder”) shall be entitled, effective as of the date of issuance of such shares, to receive, and shall be paid quarterly in arrears, on the last day of each of June, September, December and March of every calendar year, commencing June 30, 2011, dividends, accruing quarterly, in an amount equal to $0.12 per annum per share (as appropriately adjusted for any stock splits, stock dividends, combinations, and the like with respect to the Series D Preferred Stock), with respect to each outstanding share of Series D Preferred Stock owned of record by such Series D Holder.
2. Each share of Series D Preferred Stock has a liquidation preference of $1 per share.
3. Each share of Series D Preferred Stock shall entitle its holder to 10,000 votes on all matters submitted to the vote of stockholders of the Company.
4. Prior to December 31, 2020, the Company has the right, but not the obligation, to redeem the then outstanding shares of Series D Preferred Stock at a rate of $1 per share.
5. Each share of Series D Preferred Stock is convertible into 1,000 shares of Company Common Stock.
The Company has failed to pay dividends on the 50,000 outstanding shares of its Series D Preferred Stock. As with the Series B Preferred Stock Discussed above, dividends may only be paid out of funds legally available for such purpose.
For the year ended December 31, 2011, dividends related to the Series D Preferred Stock totaled $4,286. Accrued dividends totaled $4,286 at December 31, 2011 and are included in accounts payable and accrued expenses on the consolidated balance sheet.
The Company deferred dividends totaling $4,286 for the year ended December 31, 2011. To compensate Brookstein for the failure to pay dividends when due, the Company agreed to grant five-year warrants (each, a “Dividend Accrual Warrant”) to purchase shares (each, a “Dividend Accrual Warrant Share”) of Company Common Stock to such holders at $0.001 per Dividend Accrual Warrant Share at a rate of 100 Dividend Accrual Warrants for every $1 of dividend accrued during the prior three month period. The Company issued Dividend Accrual Warrants totaling 428,600 for the year ended December 31, 2011. The Company valued these issuances using the Black-Scholes option pricing model with the following assumptions: share price: $0.0003 - $0.0006; strike price: $0.001; expected volatility: 27%; risk free interest rate: 0.83 - 1.76%; term: 5 years.
The Company deferred dividends to Brookstein totaling $1,500 for the three months ended March 31, 2012. To compensate Brookstein for the failure to pay dividends when due, the Company issued 150,000 Dividend Accrual Warrants to Brookstein on March 31, 2012
J. Issuance of Warrants for Extension of Investment Banking Agreement -
On April 26, 2011, the Company extended its investment banking agreement with Cresta Capital Strategies, LLC to April 26, 2012. As a retainer, the Company issued a five-year warrant to purchase 50 million shares of the Company’s Common Stock at an exercise price of $0.001 per share. The Company valued these warrants using the Black-Scholes option pricing model with the following assumptions: share price: $0.0008; strike price: $0.001; expected volatility: 27%; risk free interest rate: 2.05%; term: 5 years.
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. Capital Transactions (Continued)
K. Warrant Exchange Agreements -
The Company entered into separate warrant exchange agreements with Brookstein, Spirits, Garfinkel, Ponzio and Nascap to purchase an aggregate of 128.13 million shares of Company Common Stock. The warrant holders included the Company’s chairman of the board, chief executive officer and chief financial officer and a company in which such officer is the sole equity owner, as well as the Company’s former president and chief executive officer. Each of the warrant exchange agreements were dated as of May 12, 2011 and provided for the exchange of the warrants then held by such warrant holders (the “Old Warrants”) for new warrants (the “New Warrants”). The number of shares of Common Stock issuable upon exercise of the New Warrants is equal to the number of shares of Common Stock that were issuable upon exercise of the Old Warrants. The Old Warrants had exercise prices ranging from $0.05 to $0.001 per share (a weighted average exercise price of $0.022 per share) and had exercise periods expiring from June 23, 2014 through March 31, 2016 (typically, five years after the date of issuance of the subject warrants). However, the Old Warrants contained certain anti-dilution provisions which caused the effective exercise prices to be reduced to less than $0.001 per share. The New Warrants all have an exercise price of $0.001 per share and expire on May 11, 2016. The New Warrants contain cashless exercise provisions. The anti-dilution provisions of the New Warrants are primarily limited to stock splits and corporate transactions involving mergers and consolidations while the Old Warrants contained anti-dilution provisions that caused the reduction in the exercise prices of the Old Warrants whenever the Company issued stock or derivative securities with an effective purchase price less than the then exercise price of the subject Old Warrants. The Company had issued the Old Warrants in connection with the (x) accrual of dividends due on preferred stock of the Company owned by certain of the warrant holders, (y) deferral of the payment of interest due on promissory notes of the Company owned by certain of the warrant holders and (z) deferral of salary due certain of the warrant holders in their capacities as executive officers of the Company.
As a result of the exchanges, the Company recognized a charge of $11,797 for the year ended December 31, 2011, which is classified as part of interest expense.
As the New Warrants contain “cashless exercise” provisions, the value of the New Warrants were recognized as liabilities and not as part of stockholders’ deficiency. In addition, the Company is required to revalue the New Warrants at the end of each reporting period with the change in value reported on the statement of operations. The Company valued these issuances using the Black-Scholes option pricing model with the following assumptions at May 12, 2011, September 30, 2011 and December 31, 2011: share price: $0.0003 - $0.0006; strike price: $0.001; expected volatility: 27%; risk free interest rate: 0.83% - 1.76%; term: 5 years. The Company recognized a gain on the value of the New Warrants of $12,945 for the year ended December 31, 2011.
12. Warrants
A summary of the warrants outstanding at December 31, 2011 is as follows:
COMPLIANCE SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. Stock Options
A summary of the stock options outstanding is as follows:
The exercise price for all stock options is $0.026. All of the stock options outstanding at December 31, 2011 are fully vested and exercisable. The average remaining contractual life is 1 year. The aggregate intrinsic value is $0 and was calculated based on the positive difference between the closing market price of the Company’s Common Stock and the exercise price of the underlying options.
14. Discontinued Operations
As discussed above in Notes 1 and 6, the Company entered into and consummated the transactions contemplated by an Agreement and Consent to Surrender of Collateral with Agile. As a result, the Company’s operating businesses are reflected as discontinued operations. Revenues and net loss for the operating businesses for the year ended December 31, 2010 is as follows:
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature and Name
Capacities
Date
/s/ Barry M. Brookstein
Chief Executive Officer, President, Chief Financial Officer
April 16, 2012
Barry M. Brookstein
and Director
(Principal Executive Officer, Principal Financial Officer
And Principal Accounting Officer)