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RFNN > SEC Filings for RFNN > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for REDFIN NETWORK, INC.


9-Nov-2012

Quarterly Report


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

Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this quarterly report on Form 10-Q constitute "forward-looking statements." Forward-looking statements are statements that are not historical, including statements regarding management's intentions, beliefs, expectations, representations, plans or predictions of the future and are typically identified by words such as "believe," "expect," "anticipate" "intend," "estimate," "may," "will," "should," and "could." These forward-looking statements involve numerous risks and uncertainties that could cause our actual results to be materially different from those set forth in the forward-looking statements including, without limitation, our ability to implement our business plan and generate revenues, our ability to raise sufficient capital to fund our operations and pay our obligations as they become due, economic, political and market conditions and fluctuations, government and industry regulation, U.S. and global competition and the other additional risks and uncertainties that are set forth in the Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission. The risk factors described in our Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we deem immaterial also may materially adversely affect our business, financial condition and/or operating results. We assume no obligation to update any forward-looking statements as a result of new information or future events or developments, except as required by law. The following discussion should also be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this report.

Overview

We are a developer of valued added provider of payment transaction processing solutions marketed to and utilized by traditional "brick and mortar", and Internet e-commerce merchants, with a focus on businesses requiring mobile or wireless payment solutions, point-of-sale software and hardware to conduct business. Our Company website is www.RedFinnet.com .

RFN markets its products and services through the branded name RedFin Network. These products and services today include:

Blue Bamboo? H-50 Wireless all-in-one transaction terminal Blue Bamboo? P-25 printer and printer card reader device Blue Bamboo? Blue Box table pay restaurant solution RedFin PCI Compliant and Visa certified Payment Gateway RedFin PocketPOS for Blackberry?, iphone?, and Android? RedFin Sidebar QuickBooks interface
RedFin Desktop Terminal
HIOPOS? Point-Of-Sale retail and hospitality system Redfin Retail POS
RedFin Hospitality POS

All of the transaction hardware is integrated with the RedFin Payment Gateway, which connects merchants utilizing IP based terminals and wireless devices using Bluetooth, Ethernet, and GPRS to acquiring processors and banks for approval or denial of credit card, debit card, and ACH charges.

The RedFin Payment Gateway, servicing over 14,000 merchants today, is a customized credit/debit card-processing platform serving as the connection between the customers at point-of-sale to the financial networks for the acceptance of card payment by merchants. Third party providers in compliance with financial institutions process most card transactions worldwide. The Payment Gateway processes all credit card types, which include Visa, MasterCard, American Express, Discover, JCB, and EBT through transaction terminals, virtual terminals, and wireless mobile devices. The Blue Bamboo Payment Gateway received its PCI/DSS Compliance in October 2008. The Payment Gateway is now listed under the RedFin Network name on the Visa's approved Payment Gateway list as of March 2011 after RedFin completed its purchase of the gateway from Blue Bamboo in October of 2010. In July of 2011 Hypercom? issued a "Support Discontinuance Notice" relative to their SmartPayments? Savannah products (formerly know as TPI SmartPayments) software under which RedFin's Payment Gateway and many other payment industry gateways operated. As a result of this notice, RedFin decided to move its payment gateway platform to T-Gate, LLC, assets of which were purchased in July of 2012 by Bridge Payment Network, through a managed solution agreement. RedFin continues to engage Trustwave?, a Visa approved PCI Compliance auditing group, to certify the RedFin Payment Gateway. This audit allows RedFin to be listed on Visa approved service providers list (usa.visa.com/.../cisp-list-of-pcidss-compliant-service-providers.pdf).

The PCI/DSS Standard was developed by the major credit card associations as a guideline to help organizations that process card payments prevent credit card fraud as well as "cracking" and various other security vulnerabilities and threats. A company processing, storing, or transmitting payment card data must be PCI compliant or risk losing their ability to process credit card payments and being audited and/or fined. Merchants and payment card service providers must validate their compliance annually.


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. - continued

The Blue Bamboo Products and RedFin Payment Gateway are marketed through 150 non-exclusive reseller agreements with ISO'S (Independent Sales Organizations) and VAR's (Value Added Resellers) selling products and merchant services to end customers throughout the U.S. Revenue is generated through sales of terminal products, by monthly data plans required to operate wireless products, licensing fees for software and per transaction fees charged for each transaction passing through the Payment Gateway to end acquiring processors such as Vital, Global all First Data Networks, Paymentech, Heartland, Valutec and others already integrated with the Payment Gateway. All Internet merchants, certain brick and mortar merchants using IP based transaction terminals, and mobile wireless transaction devices require a gateway to pass transactions from their customer's use of a payment form to the acquiring bank/processor.

The RedFin Payment Gateway is re-branded for other large associations requiring their own name recognition by the ISO/Merchant customer base. Currently we private label the Payment Gateway for our customers CashBack, Blackstone Merchant Services, TX Direct, Ellamate, Charge Card systems, and Diversified Check Solutions to name a few.

In late 2009 RedFin became a preferred vendor of Chase Paymentech for deployment of Blue Bamboo products operating on the RedFin Network, through Chases 300 agent internal network in Dallas and Phoenix and banking agents nationwide.

Through 2011 RedFin delivered over 2000 Blue Bamboo P-25 printer/card readers to Arvato Services, provider of logistic services to Intuit for their Go-Payment mobile transaction platform. In addition, RFN continues to be the provider of the same printer/card reader for Aircharge, a Pipeline Data Company, providing a mobile platform for processing through all major cell phones.

In 2012 RedFin has continued to grow its footprint in the mobile and wireless sectors of the transaction payment industry by focusing and expanding it sales effort through its vendor relationships with Fifth Third banks Vantiv processing division, Elavon a division of U.S. Bank, Aircharge's sales relationship with Sprint?Biz360 program, and with expansion of hardware sales through other large hardware sales groups such as The Phoenix Group and TASQ? a First Data company.

In August 2012 Redfin introduced its RedfinPOS? software developed in partnership with Amber System Technologies at the Retail Now Show in Las Vegas for hospitality and retail. This product along with Redfin PocketPOS? is part of Redfin's business strategy to bring its own proprietary products to market in combination with compatible hardware.

The Company will continue its objective to keep a low cost efficient overhead by outsourcing its hosting requirements as well as the customer and technical support functions, while controlling all product deployment internally. All Level 1 and 2 customer service related questions have also been outsourced to Card Group with a 24/7 resolution of customer trouble tickets in less than 15 minutes. Level 3 technical support is provided after hours by Power-It-Up.

Results of Operation for the Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011 and the Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011

We generate revenues from the sale of the Blue Bamboo wireless terminals, our recurring monthly data plans and sales of our RedFin Gateway transaction platform. Our revenue decreased approximately 24% and approximately 14%, respectively, in the three months and nine months ended September 30, 2012 compared to the same periods in 2011. The Company believes that the reduction in revenue is temporary as sales have begun to recover and that the fourth quarter of 2012 will result in sales levels and sales growth that will be in line with the previous upward trends.

Our cost of goods sold includes the payment processing terminals we sell as well as the recurring expenses to maintain the service to the terminals. Our cost of goods also includes our labor expenses to administer the gateway as well as the monthly licensing fees associated with maintaining and operating our payment gateway. Our cost of goods sold as a percentage of revenues was approximately 62% for both the three months ended September 30, 2012 and 2011, and approximately 64% for the nine months ended September 30, 2012 as compared to approximately 62% for the comparable period in 2011. We expect our gross margins to improve as sales volumes and direct selling to certain end users result in recognition of better gross margins for the Company

Total operating expenses for the three and nine months ended September 30, 2012 decreased approximately 35% and 17% respectively in each period from the comparable periods in 2011, and included the following:

? Administrative expenses, which includes rent, salaries and general overhead costs decreased approximately 29% and approximately 14%, respectively, for the three and nine months ended September 30, 2012 from the comparable periods in 2011 as a result of decreased billing and administrative expenses due to a temporary decrease in sales. We anticipate that administrative expenses may increase as sales return to normal levels however the Company is firmly committed to reduce administrative expenses wherever possible as a result of increased efficiencies in its operation.

? Professional and consulting fees, which include sales and marketing consultants as well as investor relations services, decreased approximately 80% and 34%, respectively, in the three and nine months ended September 30, 2012 from the comparable periods in 2011 as a result of the Company performing more of these services in house. We anticipate that professional and consulting fees should continue to decrease during the balance of 2012.


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. - continued

Results of Operation for the Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011 and the Nine Months Ended September 30, 2012 Compared to the Nine Months Ended June 30, 2011 - continued

? Depreciation and amortization expenses decreased 58% in both the three month and nine months ended September 30, 2012 compared to the same periods in 2011, due to the accelerated amortization of the Blue Bamboo payment gateway in the year earlier period when the Gateway was no longer utilized.

Interest expenses increased 11% and 27% respectively in the three and nine months ended September 30, 2012 when compared to the comparable periods in 2011. These increases were due to borrowing a larger amount of funds during these periods.

Other Income for the three month period ending September 30, 2012 was $22,954 compared to $131 for the year earlier period. This income was primarily due to a settlement on a debt with a supplier and also a freight credit granted to us by one of our product suppliers.

We report non-cash income or expense on derivative and liquidating liabilities each quarter as result of the price changes in our stock each quarter and the impact this stock price change has on our convertible debt. The difference in fair value of the derivative liabilities between the date of their issuance and their measurement date has been recognized as part of other income (expense). These non-cash items can significantly impact our results of operations.

Net loss for the three months ended September 30, 2012 was $209,343 compared to a net loss of $322,676 for the comparable period in 2011, and our net loss for the nine months ended September 30, 2012 decreased approximately 22% from the comparable period in 2011. The decrease in the net loss was attributable to reduced administrative expenses associated with reductions in sales for the quarter.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate adequate amounts of cash to meet the company's needs for cash. At September 30, 2012 we had cash on hand of $3,299 and a working capital deficit of $2,562,748 as compared to cash on hand of $0 and a working capital deficit of $2,236,223 at December 31, 2011.

We had total assets of $297,671 at September 30, 2012 as compared to $344,125 at December 31, 2011. This overall decrease in total assets is primarily due to an approximate $40,000 reduction in accounts receivable as well as an approximate $6,000 reduction in employee advances. We had total liabilities of $2,860,883 at September 30, 2012 as compared to $2,552,079 at December 31, 2011 which is primarily due to increases in notes payable as well as an approximate $50,000 increase in derivative and liquidating liabilities.

At September 30, 2012 our total current assets remained approximately the same from December 31, 2011.

As described in Note 4 of this report to the unaudited financial statements appearing elsewhere herein, we lent $50,000 to a third party, who is also a customer, under a note which matured in August 2012. This note was repaid on July 9, 2012. In addition to the interest we received, we also received approximately $2,300 as of September 30, 2012, representing 3% of their "residual" income due to us through April 30, 2012 as additional consideration which was recorded as ordinary income.

Our customary terms offered our customers are payment prior to shipment. Most of our sales transactions are pre-paid by credit card or ACH. We anticipate inventory levels to remain steady through the end of the year. At September 30, 2012 we had employee advances of $9,729 which have been advanced for travel and operational expenses. We expect this balance to be significantly reduced over the next few quarters as a result of the filing of expense reports.

At September 30, 2012 our current liabilities increased $328,304 from December 31, 2011, and consisted primarily of increases in notes payable representing borrowings during the third quarter of 2012, the proceeds of which were used to both fund out operations and to make the third party loan described elsewhere herein. At September 30, 2012, we had $450,384 of notes payable (inclusive of long-term debt), $1,387,500 due under credit lines and $178,000 of convertible notes, $97,500 which becomes due during 2012 and $80,500 becomes due in 2013.

We do not have any commitments for capital expenditures. At September 30, 2012, total availability under the then existing lines was $157,000.

We do not have sufficient working capital to fund our ongoing operations and satisfy our debt obligations absent a significant increase in our revenues.

Included in those obligations at September 30, 2012 is $1,387,500 due under credit lines which matures on December 31, 2012. Our failure to pay the interest or principal when due under the line of credit will result in an event of default, or if any other events should occur which would otherwise result in an event of default under the agreement, the amounts due under the credit line would become immediately due and payable. If we were unable to pay these amounts, the lender could seek to foreclose on the assets of our subsidiary which represents substantially all of our operations.


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. - continued

Liquidity and Capital Resources - continued

On October 26, 2012, The Company closed Senior Secured Revolving Credit Facility Agreement in the amount of $3,000,000 with TCA Global Credit Master Fund, LP. The Company has initially drawn down $350,000 which has primarily been used for the purchase of product with our suppliers.

We continue to rely on short terms loans to fund our daily operations and to meet payroll. We are continuously reviewing and adjusting our monthly expenses so as to better self-fund our operations based on the level of current sales. We continue to work with a number of potential lenders to provide funding for both operations and product inventory. There is no assurance that we will be able to obtain funds at favorable terms to us, if at all. In addition, under the terms of the four Asher Enterprises, Inc. $178,000 total principal amount notes, we have granted the lender a right of first refusal for future offerings as well as anti-dilution rights which could adversely impact our results of operations in future periods if triggered. As described elsewhere herein, we do not have sufficient funds to pay our outstanding debt obligations which are approximately $2,860,883 at September 30, 2012. We will need to raise capital to satisfy our debt obligations. We do not have any commitments from any third parties to provide these additional funds to us and there are no assurances we will be able to raise the necessary capital. If we are unable to raise the necessary capital, we could be forced to curtail some or all of our operations and it is likely that investors would lose their entire investment in our company.

During the third quarter of 2012, the Company negotiated an extension agreement relating to its line of credit with Commercial Holding AG. The maturity date of this credit line has been extended from December 31, 2012 to December 31, 2014.

During the third quarter of 2012, the Company has used short-term borrowings from its officers and related parties to fund purchase of additional product from its suppliers.

Going Concern

Our financial statements have been prepared on the basis that we will operate as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have incurred net losses from operations each year since inception and have relied on the sale of our securities from time to time and loans from third parties to fund our operations. These recurring operating losses have led our predecessor independent registered public accounting firm Sherb & Co, LLP to include a statement in its audit report relating to our audited consolidated financial statements for the years ended December 31, 2011 and 2010 expressing substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain the necessary financing to meet our obligations and repay our liabilities when they become due and to generate profitable operations in the future. We plan to continue to provide for our capital requirements through the sale of equity securities and short-term debt, however, we have no firm commitments from any third party to provide this financing and we cannot assure you we will be successful in raising working capital as needed. There are no assurances that we will have sufficient funds to execute our business plan, pay our obligations as they become due or generate positive operating results.

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