UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period endedOctober 2, 2010





 ̈      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from _____________ to _____________





Commission File Number 000-33389





nFinanSe Inc.





(Exact name of registrant as specified in its charter)





Nevada
65-1071956(State or other jurisdiction of
(IRS Employer Identification No.)incorporation or organization)3923 Coconut Palm Drive, Suite 107Tampa, Florida
33619(Address of principal executive offices)
(Zip Code)Issuer’s telephone number, including area code:
(813) 367-4400





Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.





Yes
X

No





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).





Yes
X

No





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer   £
Accelerated filer   £Non-accelerated filer (Do not check if a smaller reporting company)   £
Smaller reporting company   T





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).





Yes


No
X





State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 26,196,714shares of common stock, $0.001 par value, outstanding as of November 5, 2010.

















nFinanSe Inc.A Development Stage EnterpriseTable of ContentsPage No.NOTE REGARDING FORWARD LOOKING STATEMENTS
1PART I - FINANCIAL INFORMATIONItem 1.     Financial Statements:Consolidated Balance Sheets as of October 2, 2010 (unaudited) and January 2, 2010 (audited)
2Consolidated Statements of Operations (unaudited) for the thirteen and thirty-nine weeks ended October 2, 2010 and October 3, 2009 and  for the period July 10, 2000 (inception) to October 2, 2010
3Consolidated Statements of Cash Flows (unaudited) for the thirty-nine weeks ended October 2, 2010 and October 3, 2009, and for the period July 10, 2000 (inception) to October 2, 2010
4Notes to Consolidated Financial Statements (unaudited)
6Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.
18Item 3.     Quantitative and Qualitative Disclosures About Market Risk.
24Item 4T.   Controls and Procedures.
25PART II - OTHER INFORMATIONItem 2.  Unregistered Sales of Equity Securities and Use of Proceeds.
26Item 6.     Exhibits.
26SIGNATURES
27











-i-




FORWARD-LOOKING STATEMENTS





In this quarterly report, we make a number of statements, referred to as “forward-looking statements,” which are intended to convey our expectations or predictions regarding the occurrence of possible future events or the existence of trends and factors that may impact our future plans and operating results. These forward-looking statements are derived, in part, from various assumptions and analyses we have made in the context of our current business plan and information currently available to us and in light of our experience and perceptions of historical trends, current conditions and expected future developments and other factors we believe to be appropriate in the circumstances. You can generally identify forward-looking statements through words and phrases such as “seek,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “budget,” “project,” “may be,” “may continue,” “may likely result,”and other similar expressions and include statements regarding:





·
the extent to which we continue to experience losses;·
our real property leases and expenses related thereto;·
our ability to fund our future cash needs through public or private equity offerings and debt financings;·
whether our business strategy, expansion plans and hiring needs will significantly escalate our cash needs;·
our need to raise additional capital and, if so, whether our success will depend on raising such capital;·
our expectation of continued and increasing governmental regulation of the stored value card industry;·
our anticipation of future earnings volatility;·
our entrance into additional financings, which can result in a recognition of derivative instrument liabilities; and·
the hiring of a substantial number of additional employees in sales, operations and customer service.





When reading any forward-looking statement you should remain mindful that all such statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of the Company, and that actual results or developments may vary substantially from those expected as expressed in or implied by that statement for a number of reasons or factors, including those relating to:





·
our ability to design and market our products;·
the estimated timing of our product roll-outs;·
our ability to protect our intellectual property rights and operate our business without infringing upon the intellectual property rights of others;·
the changing regulatory environment related to our products;·
whether or not markets for our products develop and, if they do develop, the pace at which they develop;·
our ability to attract the qualified personnel to implement our growth strategies,·
our ability to develop sales and distribution capabilities;·
our ability to work with our distribution partners;·
the accuracy of our estimates and projections;·
our ability to fund our short-term and long-term financing needs;·
changes in our business plan and corporate strategies; and·
other risks and uncertainties discussed in greater detail in this quarterly report, including those risks discussed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”





Each forward-looking statement should be read in context with, and with an understanding of, the various other disclosures concerning the Company, as well as other public reports filed with the United States Securities and Exchange Commission. You should not place undue reliance on any forward-looking statement as a prediction of actual results or developments. We are not obligated to update or revise any forward-looking statement contained in this quarterly report to reflect new events or circumstances unless and to the extent required by applicable law.





As used in this quarterly report, the terms “we,” “us,” “our,” “nFinanSe,” and “the Company” mean nFinanSe Inc. and subsidiaries unless otherwise indicated. All dollar amounts in this quarterly report are in U.S. dollars unless otherwise stated.


-1-





PART I - FINANCIAL INFORMATION





Item 1.   Financial Statements.


nFinanSe Inc.


(A Development Stage Enterprise)


CONSOLIDATED BALANCE SHEETS





October 2,


January 2,2010


2010ASSETS

(unaudited)


(audited)CURRENT ASSETS:Cash and cash equivalents

$
1,937,177


$
3,794,788Restricted cash


339,756



343,075Receivables:Accounts (net of allowance for doubtful accounts of $0 and $0, respectively)


203,184



189,015Other


112,956



13,519Prepaid expenses and other current assets, including prepaid marketing costs of approximately $50,100 and $30,800, respectively


297,389



236,758Inventories


585,486



1,416,890Total current assets


3,475,948



5,994,045PROPERTY AND EQUIPMENT  (net of accumulated depreciation of $1,109,281 and $944,122, respectively)


291,649



405,615OTHER ASSETS


82,516



54,932TOTAL ASSETS

$
3,850,113


$
6,454,592LIABILITIES AND STOCKHOLDERS’ EQUITYCURRENT LIABILITIES:Accounts payable

$
531,507


$
347,936Accrued personnel costs


185,602



88,231Credit facility advances outstanding


500,000



500,000Deferred revenues


50,000



51,667Other accrued liabilities


61,978



44,365Total current liabilities


1,329,087



1,032,199COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS’ EQUITY:Preferred stock - $0.001 par value:  25,000,000 shares authorized; 19,325,993 and 16,869,822 shares issued and outstanding on October 2, 2010 and January 2, 2010, respectively, as follows:Series A Convertible Preferred Stock – 9,330,514 shares authorized; 7,500,484 and 7,500,484 shares  issued and outstanding with a liquidation value of $7,597,066and $7,705,093 (including undeclared and unpaid accumulated dividends in arrears of $96,582 and $204,609) at October 2, 2010 and January 2, 2010, respectively


7,500



7,500Series B Convertible Preferred Stock – 1,000,010 shares authorized; 1,000,000 shares issued and outstanding with a liquidation value of $3,000,000 at October 2, 2010 and January 2, 2010


1,000



1,000Series C Convertible Preferred Stock – 4,100,000 shares authorized; 4,037,500 shares issued and outstanding with a liquidation value of $8,075,000 at October 2, 2010 and January 2, 2010


4,038



4,038Series D Convertible Preferred Stock – 4,666,666 shares authorized;  4,331,838 shares issued and outstanding with a liquidation value of $12,995,514 at October 2, 2010 and January 2, 2010


4,332



4,332Series E  Convertible Preferred Stock – 3,333,334 shares authorized;  2,456,171 shares issued and outstanding with a liquidation value of $11,052,768 at October 2, 2010


2,456



-Common stock - $0.001 par value: 200,000,000 shares authorized; 26,196,714 and  9,542,887 shares issued and outstanding as of October 2, 2010 and January 2, 2010, respectively


26,197



9,543Additional paid-in capital


76,174,393



71,421,315Deficit accumulated during the development stage


(73,698,890
)


(66,025,335
)Total stockholders’ equity


2,521,026



5,422,393TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$
3,850,113


$
6,454,592





See notes to consolidated financial statements.


-2-


nFinanSe Inc.


(A Development Stage Enterprise)





CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)




For the

thirteen weeks

ended

October 2, 2010


For the

thirteen weeks

ended

October 3, 2009


For the

thirty-nine

weeks ended

October 2, 2010


For the

thirty-nine

weeks ended

October 3, 2009


For the period

July 10, 2000

(inception) to

October 2, 2010REVENUES

$
208,708


$
6,706


$
373,872


$
2,826


$
1,629,238OPERATING EXPENSESTransaction and operating expenses


673,627



461,902



2,224,380



1,833,974



10,274,863Selling and marketing expenses


217,599



470,881



967,447



1,401,548



10,815,369General and administrative expenses


1,424,497



1,411,571



4,197,014



4,357,302



40,272,691Total operating expenses


2,315,723



2,344,354



7,388,841



7,592,824



61,362,923Loss before other income (expense)


(2,107,015
)


(2,337,648
)


(7,014,969
)


(7,589,998
)


(59,733,685
)Other income (expense):Interest expense


(51,026
)


(624,083
)


(97,725
)


(2,903,500
)


(5,344,001
)Interest income


47



19



134



113



1,164,559Gain on derivative instruments


-



-



-



-



1,449,230Loss from litigation


-



-



-



-



(105,500
)Loss on debt extinguishment


-



-



-



-



(4,685,518
)Registration rights penalties


-



-



-



-



(98,649
)Other expense


-



800



-



(962
)


(95,510
)Total other income (expense)


(50,979
)


(623,264
)


(97,591
)


(2,904,349
)


(7,715,389
)Loss from continuing operations


(2,157,994
)


(2,960,912
)


(7,112,560
)


(10,494,347
)


(67,449,074
)Loss from discontinued operations


-



-



-



-



(3,861,579
)Net loss


(2,157,994
)


(2,960,912
)


(7,112,560
)


(10,494,347
)


(71,310,653
)Dividends paid on Series A Convertible Preferred Stock


-



-



(185,971
)


(189,054
)


(2,388,237
)Undeclared and unpaid dividends on Series A Convertible Preferred Stock


(93,499
)


(111,110
)


(96,582
)


(290,881
)


(96,582
)Net loss attributable to common stockholders

$
(2,251,493
)

$
(3,072,022
)

$
(7,395,113
)

$
(10,974,282
)

$
(73,795,472
)Net loss per share - basic and diluted

$
(0.09
)

$
(0.32
)

$
(0.40
)

$
(1.14
)Weighted average number of shares outstanding


23,715,164



9,533,436



18,699,142



9,605,996





See notes to consolidated financial statements.


-3-


nFinanSe Inc.


(A Development Stage Enterprise)





CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





For the

thirty-nine

weeks ended

October 2, 2010


For the

thirty-nine

weeks ended

October 3, 2009


For the

period

July 10, 2000

(inception) to

October 2, 2010CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(7,112,560
)

$
(10,494,347
)

$
(71,310,653
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


165,159



185,978



1,657,092Provision for inventory obsolescence


1,022,943



223,186



1,936,379Provision for bad debts


-



-



461,972Amortization of intangible assets


-



-



15,485Stock-based compensation and consulting


533,661



347,300



9,099,657Purchased in process research and development


-



-



153,190Gain on derivative instruments


-



-



(1,449,230
)Loss on debt extinguishments


-



-



4,685,518Loss on disposal of assets


-



809



29,572Loss from impairment of assets


-



594,563



3,319,504Debt forgiveness as a result of litigation settlement


-



-



(50,000
)Non-cash interest expense


46,667



2,459,327



3,668,591Other non-cash expense


-



6,038



15,881Changes in assets and liabilities, net:Restricted cash


3,319



(5,818
)


(339,756
)Receivables


(113,606
)


4,977



(615,849
)Prepaid expenses and other current assets


(67,297
)


449,897



(65,743
)Inventories


(191,540
)


(195,349
)


(3,865,861
)Other assets


(27,584
)


165,073



(31,703
)Assets of discontinued operations


-



-



(229,060
)Accounts payable and accrued  liabilities


333,805



(394,228
)


1,045,429Accrued registration rights penalties


-



-



98,649Deferred revenues


(1,667
)


(24,583
)


50,000NET CASH USED IN OPERATING ACTIVITIES


(5,408,700
)


(6,677,177
)


(51,720,936
)CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment


(51,192
)


(4,195
)


(2,184,505
)Early redemption of short-term investment


-



-



(2,504
)Investment in Product Benefits Systems Corporation


-



-



(15,737
)Cash advanced under note receivable


-



-



(202,000
)Other


-



-



(15,000
)NET CASH USED IN INVESTING ACTIVITIES


(51,192
)


(4,195
)


(2,419,746
)





(Continued)


-4-


nFinanSe Inc.


(A Development Stage Enterprise)





CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)




For the

thirty-nine

weeks ended

October 2, 2010


For the

thirty-nine

weeks ended

October 3, 2009


For the

period

July 10, 2000

(inception) to

October 2, 2010CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of Series A Convertible Preferred Stock


-



-



4,000,000Proceeds from issuance of Series B Convertible Preferred Stock


-



-



3,000,000Proceeds from issuance of Series C Convertible Preferred Stock


-



-



8,075,000Proceeds from issuance of Series D Convertible Preferred Stock


500,000



6,936,199



7,753,199Proceeds from issuance of Series E Convertible Preferred Stock


3,109,000



-



3,109,000Proceeds from borrowings


-



4,700,000



11,265,162Repayments of notes payable


-



-



(147,912
)Collections on note receivable from stockholder


-



-



3,000,000Payment for deferred financing costs


-



-



(459,606
)Payments for stock issuance costs


(23,750
)


(22,548
)


(1,543,039
)Proceeds from the exercise of stock warrants


17,031



-



17,031Proceeds from the exercise of vested stock options


-



-



8,249Proceeds from the issuance of Common Stock


-



-



18,000,775NET CASH PROVIDED BY FINANCING ACTIVITIES


3,602,281



11,613,651



56,077,859





NET CHANGE IN CASH AND CASH EQUIVALENTS


(1,857,611
)


4,932,279



1,937,177CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD


3,794,788



475,608



-CASH AND CASH EQUIVALENTS, END OF PERIOD

$
1,937,177


$
5,407,887


$
1,937,177SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Interest paid

$
51,058


$
446,330


$
1,150,420Income taxes paid

$
-


$
-


$
-SUPPLEMENTAL DISCLOSURE OF NON-CASHINVESTING AND FINANCING ACTIVITIES:Acquisition of assets by issuance of Common Stock

$
-


$
-


$
818,200Reclassification of proceeds from sales of Common Stock to derivative financial instrument liabilities

$
-


$
-


$
4,007,443Issuance of Common Stock for net assets of Pan American Energy Corporation in a recapitalization  - see Note A

$
-


$
-


$
2,969,000Issuance of Common Stock in lieu of cash payment of registration penalties

$
-


$
-


$
652,625Reclassification of long-lived assets to assets of discontinued telecom operations

$
-


$
-


$
100,000Warrants exchanged for Common Stock

$
9,998


$
-


$
9,998Warrants issued to DFS Services, LLC

$
-


$
-


$
535,302Warrants issued to Lenders

$
-


$
1,353,877


$
1,530,381Conversion of Series A Convertible Preferred Stock to Common Stock

$
-


$
-


$
1,828Dividends on Series A Convertible Preferred Stock

$
560,995


$
189,054


$
2,202,266Declared and unpaid dividends on Series A Convertible Preferred Stock

$
-


$
-


$
-Conversion of Senior Secured Convertible Promissory Notes and accrued interest to Series A Convertible Preferred Stock

$
-


$
-


$
5,327,934Exchange of Accommodation and Term Loans and accrued interest to Series D Convertible Preferred Stock

$
-


$
5,693,898


$
5,693,898





See notes to consolidated financial statements.


-5-


nFinanSe Inc.


(A Development Stage Enterprise)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





NOTE A -FORMATION, BACKGROUND AND OPERATIONS OF THE COMPANY





Background





The accompanying consolidated financial statements include the accounts of nFinanSe Inc. and those of its wholly owned subsidiaries, nFinanSe Payments Inc. and MBI Services Group, LLC (currently dormant) (collectively, the “Company,” “we, ” “us, ” or “our”).  All significant inter-company balances and transactions have been eliminated.  We made the decision to abandon MBI Services Group, LLC’s prepaid telephone card business in the fourth quarter of fiscal 2006.  We accounted for this discontinued operation using the component-business approach in accordance with a certain accounting standard as defined in the Accounting Standards Codification (“ASC”). As such, the results of MBI Services Group, LLC have been eliminated from ongoing operations for all periods presented and shown as a single line item on the statements of operations entitled “Loss from discontinued operations” for each period presented.  Because we are continuing to raise funds, and because our revenues have been minimal, we are considered to be a development stage enterprise as defined in the ASC.





nFinanSe Inc. is a provider of stored value cards (“SVCs”), for sale through a wide variety of markets, including grocery stores, convenience stores, general merchandise stores and direct to customer through on-line or direct marketing activities. Our products and services are aimed at capitalizing on the growing demand for stored value and reloadable ATM/prepaid card financial products. We believe SVCs are a fast-growing product segment in the financial services industry.





Basis of Presentation





The consolidated financial statements contained herein have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial statements, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these consolidated financial statements do not include all the information and footnotes required by GAAP for annual financial statements. In addition, certain comparative figures for the prior year and inception to date period may have been reclassified to conform to the current year’s presentation. In the opinion of management, the accompanying consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals and adjustments) to fairly present the financial position of the Company at October 2, 2010 and January 2, 2010, its results of operations for the thirteen and thirty-nine weeks ended October 2, 2010  (“3Q2010”and the “39 Wks 2010”, respectively) and for the thirteen and thirty-nine weeks ended October 3, 2009 ( “3Q2009” and the “39 Wks 2009”, respectively) and its cash flows for the 39 Wks 2010 and the 39 Wks 2009. Operating results for the 39 Wks 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending January 1, 2011. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010.




Revenue Recognition





We generate the following types of revenues:





•
Wholesale fees, charged to our prepaid card distributors when our general purpose reloadable cards are reloaded and our gift cards are sold.•
Transaction fees, paid by the applicable networks and passed through to us by our card issuing banks when our SVCs are used in a purchase or ATM transaction.•
Maintenance fees, charged to an SVC with a cash balance.•
Interest revenue, on overnight investing of SVC balances by our card issuing bank.





We recognize revenue when (1) there is persuasive evidence of an arrangement existing, (2) delivery has occurred, (3) our price to the buyer is fixed or determinable and (4) collectability of the receivables is reasonably assured. We recognize the costs of these revenues, including the cost of printing the cards, packaging and collateral material, at the time revenue is recognized.  Certain periodic card costs are recognized as incurred.




-6-





Accounts Receivable and Allowance for Doubtful Accounts





Our credit terms to our prepaid card distributors for our wholesale fees and the load value of gift cards and of the general purpose reloadable cards vary by customer but are less than a week after the relevant sales period has concluded. Payroll card loads are remitted by the sponsor company directly to the issuing bank, in advance. Transaction fees and interest income are paid monthly in arrears by the card-issuing bank approximately two weeks following the month such fees or interest income was earned.  Maintenance fees are charged to cards upon activation and then on the same day of each month thereafter.





Accounts receivable are determined to be past due if payment is not made in accordance with the terms of our contracts. Receivables are written off when they are determined to be uncollectible.  Our customers are typically prepaid card distributors and large multi-unit retailers. We perform ongoing credit evaluations of our customers and, with the exception of some minimum cash balances, we generally do not require collateral.





We evaluate the allowance for doubtful accounts based upon our review of the collectability of our receivables in light of historical experience, adverse situations that may affect our customers’ ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.  Management believes accounts receivable are fully collectible; therefore, no allowance for doubtful accounts has been established.





Use of Estimates





The preparation of consolidated financial statements in conformity with GAAP requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. The reported amounts of revenues and expenses during the reporting period may be affected by the estimates and assumptions we are required to make. Estimates that are critical to the accompanying consolidated financial statements arise from our belief that (1) we will be able to raise and generate sufficient cash to continue as a going concern (2) all long-lived assets are recoverable, and (3) our inventory is properly valued and deemed recoverable.  In addition, stock-based compensation expense represents a significant estimate.  The markets for our products are characterized by intense competition, rapid technological development, evolving standards and regulations and short product life cycles, all of which could impact the future realization of our assets. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary. It is at least reasonably possible that our estimates could change in the near term with respect to these matters.





Cash and Cash Equivalents





For purposes of the statement of cash flows, we consider all highly liquid investments with an original maturity of thirteen weeks or less to be cash equivalents.





Restricted Cash





Funds classified as restricted cash at October 2, 2010 and January 2, 2010 relate to loan advances on our credit facility, as described in Note C – Credit Facility.





Inventories





Inventories are charged to operations using the first in, first out method. Our inventory costs generally arise from costs incurred to produce SVCs, including costs for plastic and packaging, embossing fees, printing fees and shipping.    Inventories consist of the following:


October 2, 2010

January 2, 2010Finished cards
$
2,431,808
$
3,359,927Inventory in process

22,975

11,6632,454,783

3,371,590Less reserve for damaged and obsolete inventory

1,869,297

1,954,700Total Inventories
$
585,486
$
1,416,890





We have a policy of reserving the full inventory carrying cost for any cards with six months or less to expiration.  This policy has  resulted in a higher reserve percentage being charged in the period of time beginning twelve months prior to a card’s expiration and continuing until the card is fully reserved at the point six months from expiration.  This policy resulted in an increase in charges of approximately $954,000 for the 39 Wks 2010.  During the fiscal year ended January 2, 2010, we recognized impairment charges of $1,474,200 on certain inventory items printed in 2007 that are scheduled to be destroyed or that have an expiration date of less than six months.




-7-


Property and Equipment





Property and equipment are stated at cost. Major additions are capitalized, but minor additions which do not extend the useful life of an asset, and maintenance and repairs are expensed as incurred. Depreciation and amortization are provided using the straight-line method over the shorter of the lease term, if any, or the assets' estimated useful lives, which range from three to ten years.





Long-Lived Assets





In accordance with ASC 360 “Property, Plant and Equipment”, we evaluate the recoverability of long-lived assets and the related estimated remaining lives when events or circumstances lead us to believe that the carrying value of an asset may not be recoverable.





We did not incur any impairment charges in the 39 Wks 2010.  During the 39 Wks 2009, we recognized impairment charges of $375,212 on an intangible asset related to a marketing incentive agreement.  These impairment charges are included in general and administrative expenses in the accompanying statements of operations.





As of October 2, 2010 our estimates indicate that all remaining long-lived assets are recoverable.





Advertising Costs





Advertising expenses, which were approximately $226,400 and $300,900 during the 39 Wks 2010 and the 39 Wks 2009, respectively, are expensed as incurred. The majority of advertising for both the 39 Wks 2010 and the 39 Wks 2009 was related to attending trade shows and employing media consultants.   At October 2, 2010, we had approximately $50,100 in prepaid marketing of which the majority is related to product placement inducement payments and advertising promotional payments made to a nationwide retailer. The product placement inducement payments are being amortized as a reduction of revenue over the contract period and the promotional payments are expensed when the advertising event occurs.





Research and Development





Research and development costs, which approximated $809,500 and $806,200 during the 39 Wks 2010 and the 39 Wks 2009, respectively, are expensed as incurred.  These costs are primarily related to network software development, security compliance and systems maintenance.





Net Loss Per Share





Basic net loss per share is computed by dividing the net loss attributable to common stockholders for the period after deducting dividends on our Series A Convertible Preferred Stock, par value $.001 per share (“Series A Preferred Stock”) by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the number of common and common equivalent shares outstanding during the period (common stock equivalents arise from options, warrants and convertible preferred stock). Because of our net losses, none of these common stock equivalents have been dilutive at any time since our inception; accordingly basic and diluted net loss per share are identical for each of the periods in the accompanying consolidated statements of operations.


-8-





The following table lists the total of the Company’s common stock, par value $0.001 per share (the “Common Stock”) and our common stock equivalents outstanding at October 2, 2010:


Description

Shares of Common

Stock and Common

Stock Equivalents

OutstandingCommon Stock

26,196,714Series A Convertible Preferred Stock *

7,500,484Series B Convertible Preferred Stock *

1,000,000Series C Convertible Preferred Stock *

4,037,500Series D Convertible Preferred Stock *

43,318,380Series E Convertible Preferred Stock *

24,561,710Stock Options

12,495,855Warrants

44,946,931Total

164,057,574*  as-converted into Common Stock.





Income Taxes





Under certain ASCs, deferred taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Significant temporary differences arise primarily from reserves for inventory obsolescence, impairment charges and accounts payable and accrued liabilities that are not deductible for tax reporting until they are realized and/or paid.





Financial Instruments and Concentrations





Financial instruments, as defined in a certain ASCs, consist of cash, evidence of ownership in an entity and contracts that both (1) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (2) conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Our financial instruments consist primarily of cash and cash equivalents, restricted cash, short-term investment(s), accounts receivable, accounts payable, accrued liabilities and credit facilities.  The carrying values of these financial instruments approximate their respective fair values due to their short-term nature.





Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash and accounts receivable. We frequently maintain cash balances in excess of federally insured limits. However, we believe that cash balances held in non interest bearing accounts are fully insured by the federal government at this time. As such, with interest rates at historical lows, we have made the decision to maintain cash balances at more than one bank to diversify our exposure and to use our non-interest-earning balances to lower any banking fees. Our revenues and accounts receivable balance is and is expected to be primarily composed of amounts generated from our largest distributor, Interactive Communications (“InComm”).  We have not experienced any losses from receivables due from InComm.





Stock-Based Compensation





We account for stock based compensation utilizing the fair value recognition pursuant to ASC 718 “Compensation – Stock Compensation”.  This statement requires us to recognize compensation expense in an amount equal to the grant-date fair value of shared-based payments such as stock options granted to employees.  These options generally vest over a period of time and the related compensation cost is recognized over that vesting period.


-9-




The following table summarizes our stock-based compensation expense:


Stock-based compensation charged to:

3Q2010

3Q2009

39 Wks 2010

39 Wks 2009Transaction and operating expenses
$
1,732
$
753
$
4,110
$
2,346Selling and marketing expenses

29,388

28,893

83,131

87,335General and administrative expenses

155,253

89,048

446,420

257,619Interest expense

-

-

-

9,925Total stock-based compensation
$
186,373
$
118,694
$
533,661
$
357,225





General and administrative expenses include amounts charged to consulting expense for the cost of options issued in conjunction with an internet-based sales development agreement.  These costs were $7,009 for the 39 Wks 2010.  In addition, Bruce E. Terker and Donald A. Harris were issued warrants in lieu of cash compensation for board of director fees for which the cost of options issued was approximately $17,500.  This cost was charged to general and administrative expenses, as further discussed in Note E – Stock Options and Warrants.  The prior year amount charged to interest expense represent the costs of warrants issued as compensation to Mr. Terker, one of the Company’s directors, for supplying the required collateral for bonds issued to support our state money transmitter licenses.





Dividends on Preferred Stock





Our Series A Preferred Stock accrues dividends of 5% per annum, which are paid semiannually and can be satisfied in cash or through the issuance of Common Stock.  Unless and until these dividends are declared and paid in full, the Company is prohibited from declaring any dividends on its Common Stock.  Pursuant to the Company’s Amended and Restated Loan and Security Agreement, dated November 26, 2008 (see Note C – Credit Facility), the Company is limited to paying $500,000 in any fiscal year for cash dividends or other cash distributions to the holders of shares of Series A Preferred Stock.  There are no dividend requirements on our Series B Convertible Preferred Stock, par value $0.001 per share (“Series B Preferred Stock”), on our Series C Convertible Preferred Stock, par value $0.001 per share (“Series C Preferred Stock”), on our Series D Convertible Preferred Stock, par value $0.001 per share (“Series D Preferred Stock”), or on our Series E Convertible Preferred Stock, par value $0.001 per share (“Series E Preferred Stock”).





On April 21, 2010 and July 28, 2010, the Company’s Board of Directors (the “Board”) declared $195,252 and $185,971 in dividends due through December 31, 2009 and due through June 30, 2010, respectively and paid through the issuance of 1,904,021 shares and 2,656,718 shares of our Common Stock, respectively. Dividends owed but not declared on our Series A Preferred Stock were $96,582 as of October 2, 2010.





Fair Value Measurements





At October 2, 2010, the Company did not have any items to be measured at fair value.





Recently Issued Accounting Pronouncements





In January 2010, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. The amendments in this update require, among other things, new disclosures and clarifications of existing disclosures related to transfers in and out of Level 1 and Level 2 fair value measurements, further disaggregation of fair value measurement disclosures for each class of assets and liabilities, and additional details of valuation techniques and inputs utilized. The adoption of this standard is not expected to affect the Company’s consolidated financial statements.





In January 2010, the FASB issued Accounting Standards Update No. 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash. This update requires that dividends declared and payable in a combination of stock and cash, at the shareholders election, be included in earnings per share prospectively and not considered a stock dividend for purposes of computing earnings per share. To date, the Company has not declared dividends in this manner so this update has had no impact on the Company’s computation of earnings per share.





-10-


NOTE B - GOING CONCERN





Our consolidated financial statements are prepared using GAAP as applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business.  Our operations have historically been funded primarily through equity capital.  Because of our operating losses, at October 2, 2010, we have a cash balance of approximately $1,937,200.  From June 2010 though September 2010, in order to fund our operations, we sold 2,456,171 shares of our Series E Preferred Stock for an aggregate cash purchase price of $3,684,256 (See Note D – Series E Preferred Stock Offering).  We expect to raise additional sales of Series E Preferred Stock by the end of 2010 to complete the Series E Preferred Stock sale.  We believe this equity financing should be adequate to fund our operations for the next 12 months; however, we have incurred significant losses and negative cash flows from operations since our inception, and as a result no assurance can be given that we will be successful in attaining profitable operations, especially when one considers the problems, expenses and complications frequently encountered in connection with entrance into established markets and the competitive environment in which we operate.





These factors, among others, indicate that we may be unable to continue as a going concern for a reasonable period of time. Our consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.





NOTE C - CREDIT FACILITY





On June 10, 2008, the Company and its wholly owned subsidiary, nFinanSe Payments Inc. (collectively, the “Borrowers”), entered into a Loan and Security Agreement (the “Original Loan Agreement”) and, on November 26, 2008, entered into an Amended and Restated Loan and Security Agreement (the “Amended and Restated Loan Agreement”) with Ballyshannon Partners, L.P., Ballyshannon Family Partnership, L.P., Midsummer  Investment, Ltd. (“Midsummer”), Porter Partners, L.P. and Trellus Partners, L.P. (collectively, the “Lenders”).  The Original Loan Agreement established a revolving credit facility in the maximum aggregate principal amount of $15,500,000 (the “Credit Facility”), with the Borrowers’ obligations secured by a lien on substantially all of the Company’s assets.  Loans under the Original Loan Agreement (each, a “Loan”) may be used solely to make payments to card-issuing banks for credit to SVCs.  The Amended and Restated Loan Agreement modified the Original Loan Agreement by establishing a sub-commitment of $3,400,000, pursuant to which a participating Lender, in its sole discretion, could advance funds (each, an “Accommodation Loan”) that could be used by the Company for general corporate purposes. The Accommodation Loans were advanced by the Lenders and exchanged for Series D Convertible Preferred Stock in 2009.  Loan amounts deposited into a lender-controlled loan account are reflected as Restricted Cash on our balance sheet and bear interest at 6% per annum until withdrawn (for the sole purpose of funding SVCs) from that deposit account, at which time they bear interest at 16% per annum.  Loans may be repaid and re-borrowed in accordance with the provisions of the Original Loan Agreement.





On October 29, 2009, the Lenders approved the extension of maturity for an additional six months, or May 25, 2010, upon the satisfaction of certain conditions set forth in the Amended and Restated Loan Agreement.  On May 26, 2010, the Company entered into that certain Second Amendment to the Amended and RestatedLoan Agreement (the “Second Amendment”) with the Lenders.  The Second Amendment amends the Amended and RestatedLoan Agreement such that the Maturity Date (as such term is defined in the Amended and RestatedLoan Agreement) of the notes issued pursuant to theAmended and Restated Loan Agreement is June 25, 2010.  On June 25, 2010, the Company entered into that certain Third Amendment to the Amended and RestatedLoan Agreement (the “Third Amendment”) with the Lenders.  The Third Amendment amends the Amended and RestatedLoan Agreement such that the Maturity Date of the notes issued pursuant to theAmended and Restated Loan Agreement is July 26, 2010. On July 23, 2010, a Fourth Amendment to the Amended and Restated Loan Agreement (the “Fourth Amendment”)amended the Maturity Date to September 30, 2010 and capped the commitment of Midsummer to $500,000 and issued to Midsummer 26,667 shares of its Series E Preferred Stock. Midsummer’s commitment prior to the Fourth Amendment had been $5,000,000.  Midsummer’s commitment prior to the Fourth Amendment had been $5,000,000.  On September 27, 2010, the Company entered into that certain Fifth Amendment to Amended and Restated Loan and Security Agreement (the “Fifth Amendment”) with the Lenders.  The Fifth Amendment amended the Amended and Restated Loan Agreement such that the Maturity Date of the notes issued pursuant to the Amended and Restated Loan Agreement is October 29, 2010.  On October 29, 2010, the Company entered into that certain Sixth Amendment to Amended and Restated Loan and Security Agreement (the “Sixth Amendment”) with the Lenders.  The Sixth Amendment amended the Amended and Restated Loan Agreement such that the Maturity Date of the notes issued pursuant to the Amended and Restated Loan Agreement is November 30, 2010.  The Company is in discussions with several replacement lenders but does not expect to have a replacement facility prior to the November 30, 2010.  The Company expects to fund the payments to card-issuing banks for credit to SVCs from available cash until a replacement facility can be completed.




The Credit Facility provides for usual and customary events of default, including but not limited to (i) the occurrence of a Material Adverse Change and (ii) the occurrence of a Change of Control (as such terms are defined in the Amended and Restated Loan Agreement).  The Credit Facility contemplates that, with the Lenders’ consent, the maximum commitment may be increased to up to $20,000,000, and additional lenders may be added.




-11-





As of October 2, 2010, the Borrowers had drawn $500,000 in Loans under the Original Loan Agreement.





Mr. Terker, a current member of the Board, has sole voting and dispositive power over the securities held by Ballyshannon Partners, L.P. and its affiliates, two of which were Accommodation Loan Lenders.  Mr. Terker has a financial interest in such entities, and, as such, has a financial interest in the Amended and Restated Loan Agreement.





NOTE D – SERIES E PREFERRED STOCK OFFERING





On June 29, 2010, the Board approved an offering of up to $5,000,000 of Series E Preferred Stock at a purchase price of $1.50 per share.  On July 3, 2010, the Company entered into Securities Purchase Agreements, as amended by addendums to the Securities Purchase Agreements dated as of July 3, 2010 (as amended, the “Purchase Agreements”), with several institutional and accredited investors (collectively, the “Investors”), pursuant to which the Company issued 333,334 shares of its Series D Preferred Stock.  Pursuant to the Purchase Agreements such shares were exchanged for 333,334 shares of Series E Preferred Stock on July 8, 2010 (the date on which the Statement of Designations, Rights and Preferences of the Series E Preferred Stock (the “Series E Certificate”) was filed with the Secretary of State of the State of Nevada for an aggregate cash purchase price of $500,001.  On August 10, 2010 and September 7, 2010 the Company reported that it had entered into Securities Purchase Agreements with certain other institutional and accredited investors, pursuant to which the Company issued 400,000 and 1,116,668 shares of Series E Preferred Stock for aggregate cash purchase prices of $600,000 and $1,675,002, respectively.  On September 30, 2010, the Company entered into Securities Purchase Agreements with certain other institutional and accredited investors, pursuant to which the Company issued 606,167 shares of Series E Preferred Stock for an aggregate cash purchase price of $909,250.





To date, the Company has issued 2,456,171 shares of its Series E Preferred Stock for an aggregate cash purchase price of $3,684,256, of which 333,334 shares were sold for $500,001 during the Company’s second fiscal quarter and 2,122,837 shares were sold for $3,184,255 in the Company’s third fiscal quarter.





Pursuant to the Series E Certificate, the holders of the Series E Preferred Stock shall have full voting rights and powers equal to the voting rights and powers of holders of Common Stock, shall be entitled to notice of any stockholders meeting in accordance with the Bylaws of the Company, as amended, and shall be entitled to vote, with respect to any question upon which holders of Common Stock are entitled to vote, including, without limitation, the right to vote for the election of directors, voting together with the holders of Common Stock as one class.  Each holder of shares of Series E Preferred Stock shall be entitled to vote on an as-converted to Common Stock basis.





In the event of any liquidation, before any distribution of assets of the Company shall be made to or set apart for the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Common Stock, the holders of Series E Preferred Stock shall be entitled to receive payment out of such assets of the Company in an amount equal to the greater of (i) $4.50 per share of Series E Preferred Stock, and (ii) the amount such holder would have received if such holder had converted its shares of Series E Preferred Stock to Common Stock, subject to but immediately prior to such liquidation (the “Series E Liquidation Preference”).  If the assets of the Company available for distribution to the holders of Series E Preferred Stock are insufficient to make in full the above-referenced payment required by the Series E Certificate, then the holders of the Series E Preferred Stock shall share pro rata in the distribution of such assets in proportion to the respective sums which would otherwise be payable upon such distribution related to a Liquidation (as such term is defined in the Series E Certificate) if all sums so payable to the holders of the Series E Preferred Stock were paid in full.





As long as at least 33% of the shares of Series E Preferred Stock issued are outstanding, the consent of the holders of at least a majority of the shares of Series E Preferred Stock at the time outstanding shall be necessary for effecting (i) any amendment, alteration or repeal of any of the provisions of the Series E Certificate in a manner that will adversely affect the rights of the holders of the Series E Preferred Stock, (ii) the authorization or creation by the Company of, or the increase in the number of authorized shares of, any stock of any class, or any security convertible into stock of any class, or the authorization or creation of any new class of preferred stock (or any action which would result in another series of preferred stock), in each case, ranking in terms of liquidation preference, redemption rights or dividend rights, pari passu with or senior to, the Series E Preferred Stock in any manner, and (iii) entrance by the Company into any senior secured financing or funded debt.  These listed actions by the Company will no longer require a vote of the holders of Series E Preferred Stock at such time as the Company first earns an annual earnings before interest, tax, depreciation and amortization (“EBITDA”) of at least $10,000,000 over any trailing 12-month period and Stockholder’s Equity as recorded on the Company’s balance sheet first becomes at least $15,000,000.





Shares of the Series E Preferred Stock are convertible at any time into shares of Common Stock by any holders thereof at the initial conversion price of $0.15 per share, which conversion price is subject to customary adjustments related to stock dividends, subdivisions and combinations.  In addition, if 10% or less of the aggregate shares of Series E Preferred Stock remain outstanding or, in the event of a sale, transfer or other disposition of all or substantially all the Company’s property assets or business to another corporation, in which the aggregate proceeds to the holders of the Series E Preferred Stock would be greater on an as-converted to Common Stock basis, all remaining outstanding shares of Series E Preferred Stock mandatorily convert into Common Stock.





-12-


The number of shares of Series E Preferred Stock that may be converted into Common Stock by any holder, and the number of shares of Series E Preferred Stock that shall be entitled to voting rights, shall be limited to the extent necessary to ensure that, following such conversion (or deemed conversion for voting purposes), the number of shares of Common Stock then beneficially owned by such holder and its affiliates does not exceed 9.99% of the total number of shares of Common Stock then issued and outstanding.





NOTE E - STOCK OPTIONS AND WARRANTS





On March 1, 2007, our stockholders approved the 2007 Omnibus Equity Compensation Plan (the “2007 Plan”) which combined the 709,850 shares that were issued and outstanding under the Company’s 2004 Stock Option Plan with the 2,300,000 shares available for issuance under the 2007 Plan.  On May 8, 2008, and again on June 17, 2010 at the Company’s Annual Stockholders’ Meeting, the Company’s stockholders voted to amend the 2007 Plan by increasing the number of authorized shares available for issuance by 1,000,000 and 9,790,150 shares, respectively, thus providing a total of 13,800,000 shares for issuance under the combined plans.  As of October 2, 2010, we had 12,495,855 total options outstanding under the combined plans, consisting of 12,374,605 options issued to employees and non-employee directors and 121,250 options issued to consultants and 1,304,145 shares available for future option grants. Such outstanding options vest over various periods up to three years and expire on various dates through 2020.





The fair value of each option grant is estimated at the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions for the periods ended October 2, 2010 and October 3, 2009:


39 Wks 2010

39 Wks 2009Expected term in years
5

5Expected stock price volatility
167% - 181%

165% - 191%Risk free interest rate
1.78% - 2.67%

1.50% - 2.31%Dividend yield
0%

0%





Expected stock price volatility is determined using historical volatility of the Company's stock.  The average expected life was estimated based on historical employee exercise behavior.





The following table summarizes our stock option activity during the nine month period ended October 2, 2010:


Number of

Options

Weighted average

exercise

price per share

(price at date of grant)Outstanding at January 2, 2010

3,012,638
$
1.86Granted

9,613,967
$
0.50Cancelled

(130,750)
$
3.16Outstanding at October 2, 2010

12,495,855
$
0.80Options granted at or above market value during the nine month period ended  October 2, 2010

9,613,967





-13-





The following table summarizes information regarding options that are outstanding at October 2, 2010:




Options outstanding

Options exercisableRange of

exercise prices

Number

outstanding

Weighted

average

remaining

contractual

life in years

Weighted

average

exercise

price

Number

exercisable

Weighted

average

exercise

price per

share$0.25-$0.50

11,787,082

8.9
$
0.50

4,327,925
$
0.49$0.75-$2.20

148,500

7.8
$
1.34

136,625
$
1.39$3.20-$9.80

440,773

4.9
$
4.74

437,246
$
4.75$10.20-$32.00

119,500

4.0
$
15.83

119,500
$
15.8312,495,855

8.7
$
0.80

5,021,296
$
1.25





The grant-date fair value of options granted during the 39 Wks 2010 and the 39 Wks 2009 was approximately $873,000 and $309,700, respectively.  The total fair value of shares vested during the nine-month period ended October 2, 2010 was approximately $534,000.  At October 2, 2010, we estimate the aggregate stock-based compensation attributable to unvested options was approximately $692,000, which amount is expected to be recognized over a period of approximately three years.





Officer Stock Options





On January 4, 2010, the Board approved the repricing of all existing officer options, 2,003,615 in the aggregate, to $0.50.  The options were originally issued at exercise prices ranging from $0.75 to $11.00.  The cost of the repricing of these options was valued using the Black-Scholes option pricing model at an aggregate fair value of approximately $9,729.This repricing was approved by stockholders at the Company’s Annual Stockholders’ Meeting held on June 17, 2010.





On January 28, 2010, the Board awarded a total of 8,796,385 stock options to eight officers at an exercise price of $0.50 per share, which were valued using the Black-Scholes option pricing model at an aggregate fair value of approximately $804,893.  The options vest ratably over ten calendar quarters beginning January 2010. These grants were approved by stockholders at the Company’s Annual Stockholders’ Meeting held on June 17, 2010.  The fair value of these options is being recognized as stock-based compensation expense over the vesting period of the options.





On February 23, 2009, the Compensation Committee recommended to the Board and the Board granted to our Chief Executive Officer, Jerry R. Welch, 250,000 stock options at an exercise price of $1.00 per share (subsequently repriced to $0.50), which, using the Black-Scholes option pricing model, were valued an aggregate of $143,840.  Options to purchase 50,000 shares became fully vested on the anniversary date of the grant and 50,000 options will vest ratably over the 12 months beginning March 31, 2010. Of the final 150,000 options, 75,000 were to vest on the first anniversary date of the grant and 75,000 were to vest ratably over the 12 months beginning March, 2010, provided the Company had positive EBITDA in any month prior to September 30, 2009. The Company failed to achieve positive EBITDA and the 150,000 stock options were subsequently forfeited by Mr. Welch.





On February 23, 2009, the Compensation Committee recommended to the Board and the Board granted to our Chief Financial Officer, Raymond P. Springer, 50,000 stock options at an exercise price of $1.00 per share (subsequently repriced to $0.50), which, using the Black-Scholes option pricing model, were valued at an aggregate of $28,768.  The options will become fully vested in two years, with one half vesting on the anniversary date of the grant and 1/12 of the remaining grant vesting monthly thereafter.





On January 29, 2009 , the Compensation Committee recommended to the Board and the Board granted to six officers of the Company an aggregate of 116,000 stock options at an exercise price of $1.02 per share (subsequently repriced to $0.50), which, using the Black-Scholes option pricing model, were valued at an aggregate of $113,555. The options become fully vested in two years, one half vested on the anniversary date of the grant and 1/12 of the remaining grant vests monthly thereafter.


-14-





On December 15, 2008, the Company issued a total of 42,750 stock options (750 stock options to each employee [including seven officers] except our CEO) at an exercise price of $0.75 per share.  The options vest one third at the one-year anniversary of the grants and then ratably for the following 24 months.  The options were valued using the Black-Scholes option pricing model at an aggregate fair value of approximately $30,000, which is being recognized as stock-based compensation expense over the vesting period of the options.





On May 12, 2008, our compliance officer was awarded 20,000 stock options at an exercise price of $2.30 per share (subsequently repriced to $0.50), which were valued using the Black-Scholes option pricing model at an aggregate fair value of approximately $28,900.  The options vest one third at the one-year anniversary of the grants and then ratably for the following 24 months. The fair value of these options is being recognized as stock-based compensation expense over the vesting period of the options.





On January 24, 2008, Messrs. Welch and Springer were awarded 95,000 and 45,000 stock options, respectively, at an exercise price of $4.00 per share (subsequently repriced to $0.50), which were valued using the Black-Scholes option pricing model at aggregate fair values of approximately $234,000 and $111,000, respectively.  These amounts were recognized as stock-based compensation expense as the options vested.   The options were divided into 28 equal installments, with the first seventeen installments vesting on January 28, 2008 and additional installments vesting on the final day of each month through December 31, 2008.  At January 3, 2009, all options have vested and all compensation expense related to these options has been recognized.





On January 24, 2008, the Board also awarded a total of 155,000 stock options to eight other officers at an exercise price of $4.00 per share (subsequently repriced to $0.50), which were valued using the Black-Scholes option pricing model at an aggregate fair value of approximately $381,300.  The options vest one-third at the one-year anniversary of the grants and then ratably for the following 24 months. The fair value of these options is being recognized as stock-based compensation expense over the vesting period of the options.





Non Employee Director Options





In February 2010, 40,000 options were granted to the non-employee members of our Board. The options, which were 100% vested on the date of grant with an exercise price of $0.75, were valued using the Black-Scholes option pricing model at an aggregate fair value of approximately $4,000. This amount was included in employee and director stock-based compensation in the statement of operations for the 39 Wks 2010.





In May 2010, 222,282 options were issued to each of Donald A. Harris and Bruce E. Terker in lieu of cash payments for their compensation as members of the Board.   The options, which were 100% vested on the date of grant with an exercise price of $0.50, were valued using the Black-Scholes option pricing model at an aggregate fair value of approximately $17,500. This amount was included in board of director compensation expense in the statement of operations for the 39 Wks 2010.





In July 2010, 180,000 options were granted to the non-employee members of our Board. The options, which were 100% vested on the date of grant with an exercise price of $0.50, were valued using the Black-Scholes option pricing model at an aggregate fair value of approximately $16,300. This amount was included in employee and director stock-based compensation in the statement of operations for the 39 Wks 2010.


Outstanding Warrants





The following table summarizes our warrant activity during the nine month period ended October 2, 2010:





Number of

Warrants

Weighted average

exercise price

per share

(price at

date of grant)Outstanding at January 2, 2010

57,759,385
$
0.07Exercised

(11,701,523)
$
0.01Forfeited

(1,110,931)
$
0.01Outstanding at October 2, 2010

44,946,931
$
0.09





On March 25, 2010, Mr. Terker, a member of our Board, and entities controlled by Mr. Terker elected the cashless option to exercise 11,109,308 warrants with an exercise price of $0.01 resulting in the issuance of 9,998,377 shares of Common Stock and the forfeiture of 1,110,931 warrants.  On March 29, 2010, Mr. Harris, a member or our Board, paid to the Company $17,031 for the exercise of 1,703,146 warrants with an exercise price of $0.01 for the issuance of 1,703,146 shares of our Common Stock.





-15-





Summary of Warrants outstanding by Exercise Price:





Exercise Price

per Share

Number of

Warrants

Outstanding

Expiration Date$    0.01

43,405,131

Various dates from November 25, 2010 through November 30, 2014$    0.30

256,250

June 29, 2012 and June 12, 2012$    1.20

5,000

November 22, 2011$    2.30

883,475

June 29, 2012 and June 12, 2012$    2.53

54,575

June 12, 2013$    3.00

200,000

November 12, 2012$    5.00

142,500

Various dates from April 1, 2011 through September 30, 2011$   0.09

44,946,931





NOTE F - COMMITMENTS AND CONTINGENCIES





Operating Leases





We are obligated under various operating lease agreements for our facilities.  Future minimum lease payments and anticipated common area maintenance charges under all of our operating leases are approximately as follows at October 2, 2010:


Twelve months ending


AmountsSeptember 2011
$
203,900September 2012

208,400September 2013

-September 2014

-September 2015

-Total
$
412,300





Rent expense included in loss from continuing operations for the 39 Wks 2010 and the 39 Wks 2009, was approximately $171,200 and $194,100, respectively.





Employment Agreements





We are obligated under employment agreements with our Chief Executive Officer, Jerry R. Welch, and our Chief Financial Officer, Raymond P. Springer.  The employment agreements had an initial term from September 5, 2006 to December 31, 2008 and were automatically renewed for two years with a new expiration date of December 31, 2010.  The employment agreements provide to Messrs. Welch and Springer a current annual salary of $275,000 and $200,000, respectively. Each agreement is to be automatically renewed indefinitely for succeeding terms of two years unless otherwise terminated in accordance with the agreement.  Both Mr. Welch and Mr. Springer also receive performance-based bonuses and certain medical and other benefits.  If we terminate Mr. Welch or Mr. Springer without cause, we will be required to pay severance to them in the amount of compensation and benefits they would have otherwise earned in the remaining term of their employment agreements or twelve months, whichever period is shorter.





In addition to the above, Messrs. Welch and Springer received certain stock options as described in Note E – Stock Options and Warrants.





Service and Purchase Agreements





We have entered into renewable contracts with DFS Services LLC (“DFS”) and VISA® U.S.A. Inc. (“VISA®”), our card networks, Palm Desert National Bank (“PDNB”), The Bancorp, Inc. (“Bancorp”) and First Bank & Trust (“FB&T”), our card-issuing banks, Metavante Corporation (“Metavante”), our processor, and American Express® Travel Related Services Company, Inc., a gift card program, that have initial expiration dates from March 17, 2011 through September 16, 2015.    Because the majority of the fees to be paid are contingent primarily on card volume, it is not possible to calculate the amount of the future commitment on these contracts. The Metavante, PDNB, Bancorp and FB&T agreements also require a minimum payment of $5,000, $3,000, $10,000 (in months 7-60) and $7,500 per month, respectively.  During the 39 Wks 2010 and the 39 Wks 2009, we made aggregate payments of approximately $197,400 and $737,700 respectively, to Metavante, $42,100 and $4,700, respectively, to PDNB, $83,600 and $113,700, respectively, to FB&T and none to Bancorp under these agreements.





-16-








Our agreements with PDNB, FB&T and Bancorp require us to maintain certain reserve balances for our card programs.  As of January 2, 2010 and October 2, 2010, the reserve balances held at PDNB, FB&T and Bancorp were $10,000, $25,000 and $0, respectively.  These amounts are included in “Other assets” on the Company’s balance sheets as of January 2, 2010 and October 2, 2010.





Pending or Threatened Litigation





We may become involved in certain litigation from time to time in the ordinary course of business. To the best of our knowledge, no material litigation exists or is threatened.





Bond Collateral





On February 1, 2009, we completed a partial funding of collateral amounting to approximately $500,000 for performance bonds issued in connection with our state money transmitter licenses..  The collateral, in the form of a letter of credit arranged by Mr. Jeffrey Porter, was issued by a bank and was placed with the insurance company that issued the various bonds which at the end of the current quarter aggregated approximately $12,000,000.  Mr. Porter entered into a Guarantee and Indemnification Agreement with the Company dated February 1, 2009. Accordingly, we are currently contingently liable for the face amount of the letter of credit. Mr. Porter was to be compensated in cash at 2% of the average outstanding amount of the letter of credit per quarter paid in arrears, however, he chose to take the compensation in the form of Series D Preferred Stock during the August 2009 equity raise. The Guarantee and Indemnification Agreement can be cancelled by the Company upon receiving a more favorable arrangement from another party. Upon demand, the Company will be required to increase the collateral up to 10% of the face amount of bonds issued by the insurance company. On February 1, 2010, both the letter of credit and the Guarantee and Indemnification Agreement were renewed for another twelve months.








End of Financial Statements.













































-17-





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




Overview.nFinanSe Inc. is a provider of SVCs, for sale through a wide variety of markets, including grocery stores, convenience stores and general merchandise stores. Our products and services are aimed at capitalizing on the growing demand for stored value and reloadable ATM/prepaid card financial products. We believe SVCs are a fast-growing product segment in the financial services industry.





Discontinued Operations.In September 2006, we discontinued the operations of our wholesale long distance and prepaid phone card business.  All financial information pertaining to this discontinued business has been eliminated from ongoing operations for all periods presented in our financial statements included in this report and is shown as a single line item entitled “Discontinued Operations.”





Results of Operations. Our principal operations commenced in 2001.  However, to date, we have had limited revenues.  Financial accounting standards set forth guidelines for identifying an enterprise in the development stage and the standards of financial accounting and reporting applicable to such an enterprise. In the opinion of management, our activities from our inception through October 2, 2010 fall within the referenced guidelines. Accordingly, we report our activities in this report in accordance with these guidelines.





Lack of Profitability of Business Operations since 2001.During the years leading up to fiscal 2006, we were primarily focused on acting as an Independent Sales Organization (“ISO”) and selling Visa® and MasterCard® SVCs issued by sponsoring banks through various non-retail channels.   We experienced significant difficulties and interruptions with our third-party card issuers due to administrative errors, defective cards and poor service.  It also became apparent to management that there was a flaw in focusing solely on the sale of SVC products that did not include a convenient load solution for consumers. Consequently, management made the decision to expand our focus to include the development of a process, which became known as the nFinanSe Network TM, to allow the consumer to perform value loads  at non traditional locations. While we worked on this process, we were able to enhance our load center footprint, in fiscal 2006 by entering into value load agreements with MoneyGram Payments Systems, Inc. (“MoneyGram®”) and Western Union Financial Services, Inc. (“Western Union®”).





In 2006, and as amended in June 2007, we signed an agreement with DFS  that permits us to provide Discover® Network-branded SVCs directly or through a card-issuing bank. Consequently, we focused on implementing the agreement with DFS in lieu of pursuing SVC sales through our existing  ISO arrangements. Accordingly, our sales efforts were interrupted while we developed our new Discover® Network programs and abandoned our then-existing programs by disposing of the associated SVC inventory. The time and money lost due to the difficulties and interruptions we experienced hindered our progress and ability to make a profit.





In late 2006, we developed a new go-to-market strategy centered on marketing bank-issued Discover® Network-branded SVCs through well-established prepaid card distributors combined with the load performing ability of the nFinanSe NetworkTM.  In 2007, we secured agreements with several prepaid card distributors including InComm, which distributes prepaid card products to retailers with more than 100,000 locations throughout the United States.  We had to source a new bank to issue cards for InComm’s retailers and we began the task of integrating our network with InComm’s.  Additionally, the issuing bank required that we immediately begin making applications for licenses in those states claiming jurisdiction over SVCs. The general purpose reloadable card is a relatively new product for most distributors and it has taken time to integrate with distributors and to market to their retail partners. During the fourth quarter of 2008, several large InComm retailers began marketing our cards.  In July 2009, we executed a Card Distribution and Agency Agreement with Coinstar E-Payment Services Inc. (“Coinstar”) who distributes nFinanSe SVCs to more than 4,500 retail locations.  Coinstar was subsequently acquired by InComm in the spring of 2010.  During fiscal 2009, we made the decision to expand our card offerings and executed an agreement with American Express, Inc. (“American Express”) to offer American Express-branded gift cards and an agreement with Visa® along with PDNB that permits us to offer Visa-branded general purpose reloadable SVCs.





At October 2, 2010, there were over 84,000 locations where our SVCs could be loaded (mostly Western Union® and Moneygram® locations) and approximately 14,000 retail locations currently offering our SVCs for sale and for reload services.


-18-


Revenues. We produce revenues through four general types of transactions:





•
Wholesale fees, charged to our prepaid card distributors when our general purpose reloadable cards are reloaded and our gift cards are sold.•
Transaction fees, paid by the applicable networks and passed through by our card issuing banks when our SVCs are used in a purchase or ATM transaction.•
Maintenance fees, charged each month to an SVC with a cash balance.•
Interest revenue, on overnight investing of SVC balances by our card issuing bank.








Revenues for 3Q2010 and 3Q2009 were $208,708 and $6,706, respectively.  Revenues for the 39 Wks 2010 and the 39 Wks 2009 were $373,872 and $2,826, respectively. The increase in revenue for the current year over the prior year is due primarily to increased sales and reloads resulting primarily from the increased distribution of our VISA® branded SVC cards.  Gross revenues for 3Q2010 were $238,707, compared with $36,706 for 3Q2009 and gross revenues for the 39 Wks 2010 were $463,872 compared with $92,826 for the 39 Wks 2009.





Operating Expenses.Operating expenses for 3Q2010 decreased $28,631 to $2,315,723 compared with $2,344,354 for 3Q2009, a 1.2% decrease.  Operating expenses for the 39 Wks 2010 decreased $203,983 to $7,388,841 compared with $7,592,824 for the 39 Wks 2009, a 2.7% decrease. These changes in our operating expenses are attributable to the following:





Transaction and operating expenses.Transaction and operating expenses for 3Q2010 and 39 Wks 2010 were up 45.8%, and 21.3%, respectively over the comparable periods one year ago.   The components of expense are:


Description


3Q2010



3Q2009


39 Wks 2010


39 Wks 2009SVC card cost, program and transaction expenses

$
218,237


$
251,003


$
569,849


$
852,307Inventory reserves


215,430



51,825



995,456



223,186Inventory impairment


-



-



-



219,851Stock-based compensation


1,732



753



4,110



2,346Customer service expenses


238,228



158,321



654,965



536,284Total Transaction and Operating Expenses

$
673,627


$
461,902


$
2,224,380


$
1,833,974


SVC card cost, program and transaction expenses for 3Q2010 and 39 Wks 2010 decreased $33,766 or 13.1% and $282,458 or 33.1% from 3Q 2009 and 39 Wks 2009.  These decreases in 2010 are primarily due to the elimination of the costs charged by our processor to maintain our increased card inventory on their system.    We implemented a process to reduce the costs charged by our processor to maintain card inventory that was partially reflected in our results for the third quarter of 2009.  In addition, we are purchasing card inventory when retailer commitments or sales warrant the purchase versus maintaining large card inventories on hand for expected future orders or commitments.





Inventory reserves increased $163,605 and $772,270 when comparing 3Q2010 with 3Q2009 and the 39 Wks 2010 with the 39 Wks 2009, respectively.  This is due primarily to our policy of increasing monthly inventory obsolescence reserves beginning twelve months prior to card expiration date until six months before the expiration date when the inventory cost for those cards is fully reserved.  We recorded an inventory impairment charge of $219,851 for inventory in the 39 Wks 2009, due to the delays in implementation of card programs.





Customer service expenses increased by $79,907 and $118,681 to $238,228 and to $654,965 when comparing 3Q2010 with 3Q2009 and the 39 Wks 2010 and the 39 Wks 2009, respectively.  This was primarily due to additional staffing for increased call volume


-19-


Selling and marketing expenses. Selling and marketing expenses decreased $253,282 to $217,599 when comparing 3Q2010 with 3Q2009, a 53.8% decrease, and decreased $434,101 to $967,447 when comparing the 39 Wks 2010 with the 39 Wks 2009, a 31.0% decrease.  The components of expense are:


Description


3Q2010



3Q2009


39 Wks 2010


39 Wks 2009Advertising and marketing expenses

$
69,746


$
204,978


$
432,323


$
508,708Sales force expenses


118,465



237,010



451,993



805,505Stock-based compensation


29,388



28,893



83,131



87,335Total Selling and Marketing Expenses

$
217,599


$
470,881


$
967,447


$
1,401,548





Advertising and marketing expenses decreased 66.0%, or $135,232, to $69,746 when comparing 3Q2010 with 3Q2009.  For the 39 Wks 2010 compared to the 39 Wks 2009, advertising and marketing expenses decreased 15.0%, or $76,385 to $432,323.  This decrease is primarily attributable to lower trade shows and promotional advertising.





Sales force expenses decreased $118,545 to $118,465, a 50.0% decrease for 3Q2010 when compared with 3Q2009.  For the 39 Wks 2010, sales force expenses were $451,993.  This represents a 43.9% decrease from the 39 Wks 2009.  The principal components of this decrease are employee compensation and benefits expense, travel and entertainment expense, and rent expense.  The decrease in sales force compensation and travel and entertainment expenses can be attributed to reductions in the sales force to two employees at the end of the 3Q2010 from a total of seven employees at the end of the 3Q2009.  In addition, rent expense decreased due to the elimination of our Dallas sales office in 2009.





Stock-based compensation increased in 3Q2010 due to the repricing of officer options and the granting of new options.





General and administrative expenses.General and administrative expenses increased 0.9%, or $12,926, to $1,424,497 during 3Q2010 when compared with 3Q2009.  For the 39 Wks 2010, general and administrative expenses decreased 3.7%, or $160,288 to $4,197,014 when compared with the 39 Wks 2009.  The components of expense are:




Description


3Q2010



3Q2009


39 Wks 2010


39 Wks 2009Payroll, benefits and taxes

$
692,975


$
670,049


$
2,095,473


$
2,116,801Stock-based compensation


155,253



89,048



421,897



257,619Professional, legal and licensing expense


246,000



211,165



716,412



660,473Office and occupancy expenses


215,097



193,362



618,565



603,613Impairment expense


-



144,974



-



375,212Other administrative expense


115,172



102,973



344,667



343,584Total General and Administrative Expenses

$
1,424,497


$
1,411,571


$
4,197,014


$
4,357,302





When comparing 3Q2010 with 3Q2009, changes in the expense categories are primarily attributable to:





▪
increased payroll, benefits and taxes expenses of $22,926, in 3Q2010 from 3Q2009 due primarily to compensation increases and to a transfer of two associates from sales and marketing ;▪
increased stock-based compensation expense of $66,205, which is primarily attributable to officers’ option grants and option re-pricings;▪
increased professional, legal and licensing expense of $34,835 due to higher licensing fees and expenses for our state money transmission licenses;▪
increased office and occupancy expenses of  $21,735 due primarily to higher data and voice telecommunication charges resulting from increased cardholder activity;▪
increased other administrative expenses of $12,199 due primarily to higher executive business travel expenses; and▪
no impairment of asset charge in 3Q2010 compared to an impairment of asset charge of $144,974 to write-down the expected value of a marketing incentive agreement in 3Q2009.




-20-


When comparing the 39 Wks 2010 with the 39 Wks 2009, changes in the expense categories are primarily attributable to:





▪
decreased payroll, benefits and taxes expenses of $21,328, due primarily to a temporary reduction of one IT position, slightly offset by compensation increases from the prior year and a transfer of two associates from sales and marketing;▪
increased stock-based compensation expense of $164,278, which is primarily attributable to expensing the January though June 2010 expense for officer’s option grants and option re-pricings that were approved at the Company’s Annual Shareholder’s Meeting on June 17, 2010;▪
increased professional, legal and licensing expense of  $55,939 due primarily to higher state licensing fees;▪
increased office and occupancy expenses of  $14,952 due primarily to higher data and voice telecommunication charges the result of increased cardholder activity; and▪
no impairment of asset charge in the 39 Wks 2010 compared to impairment of asset charges of $375,212 in the 39 Wks 2009 to write-down the recorded value of a marketing incentive agreement.





Loss Before Other Income (Expense).  As a result of the above, loss before other income (expense) for 3Q2010 and 3Q2009 was $2,107,015 and $2,337,648, respectively and for the 39 Wks 2010 and the 39 Wks 2009 was $7,014,969 and $7,589,998, respectively.





Other Income (Expense):





Interest expense.Interest expense was $51,026 and $624,083 for 3Q2010 and 3Q2009, respectively, and $97,725 and $2,903,500 for the 39 Wks 2010 and the 39 Wks 2009, respectively.





Cash interest expense in 3Q2010 was $14,359 and consisted of:


Ÿ
$762 paid to finance our D&O insurance policy; andŸ
$13,597 interest accrued for funds advanced under the Amended and Restated Loan Agreement.





In 3Q2010, non-cash interest expense was $36,667 and primarily consisted of:


Ÿ
$26,667 for the amortization of the cost of 26,667 shares of our Series E Preferred Stock that were granted to Midsummer Investments in consideration for the extension of the maturity date of the Amended and Restated Loan Agreement;  andŸ
$10,000 for payment to Mr. Jeffrey Porter under his agreement to provide the required collateral for bonds issued to states in connection with money transmitter licensing.  Mr. Porter chose to receive 13,333 shares of our Series E Preferred Stock in lieu of cash compensation due him for 2Q2010 and 3Q2010.





In 3Q2009, cash interest expense was $122,820 and primarily consisted of:


Ÿ
$7,093 was paid to the lenders for funds advanced under the terms of the Amended and Restated Loan Agreement; andŸ
$114,902 for the amortization of placement fees and legal fees incurred in connection with the Amended and Restated Loan Agreement.





In 3Q2009, non-cash interest expense was $501,263 and consisted of amortization of the cost of the warrants issued under the Amended and Restated Loan Agreement.


Ÿ
$386,881 for the amortization of the cost of the warrants issued under the Amended and Restated Loan Agreement;   andŸ
$114,382 for interest accrued for funds advanced under the Amended and Restated Loan Agreement that was converted into shares of our Series D Convertible Preferred Stock.





Cash interest expense for the 39 Wks 2010 was $51,058 and consisted of:


Ÿ
$1,382 paid to finance our D&O insurance policy; andŸ
$10,000 for payment to Mr. Jeffrey Porter under his agreement to provide the required collateral for bonds issued to states in connection with licensing; andŸ
$39,676 interest accrued for funds advanced under the Amended and Restated Loan Agreement.






-21-





In 39 Wks 2010, non-cash interest expense was $46,667 and primarily consisted of:


Ÿ
$26,667 for the amortization of the cost of 26,667 shares of our Series E Convertible Preferred Stock that were granted to Midsummer Investments in consideration for the extension of the maturity date of the Amended and Restated Loan Agreement;  andŸ
$20,000 for payment to Mr. Jeffrey Porter under his agreement to provide the required collateral for bonds issued to states in connection with licensing.  Mr. Porter chose to receive 13,333 shares of our Series E Convertible Preferred Stock in lieu of cash compensation due him for 2Q2010 and 3Q2010.





In 39 Wks 2009, cash interest expense was $446,330 and primarily consisted of:


Ÿ
$97,372 was paid to the lenders for funds advanced under the terms of the Amended and Restated Loan Agreement;  andŸ
$344,705 for the amortization of placement fees and legal fees incurred in connection with the Amended and Restated Loan.





In 39 Wks 2009, non-cash interest expense was $2,457,170 and consisted of:


Ÿ
$2,153,347  for the amortization of the cost of the warrants issued under the Amended and Restated Loan Agreement ;  andŸ
$293,898 for interest accrued for funds advanced under the Amended and Restated Loan Agreement that was converted into shares of our Series D Preferred Stock; andŸ
$9,925 for the fair value of warrants earned during the period under the Guaranty and Indemnification Agreement between the Company and Mr. Bruce Terker.





Loss from Continuing Operations. Loss from continuing operations was $2,157,994 and $7,112,560 for 3Q2010 and the 39 Wks 2010, respectively or $802,918 and $3,381,787 lower than the loss from continuing operations of $2,960,912 and $10,494,347 for 3Q2009 and the 39 Wks 2009, respectively.





Liquidity and Capital Resources.From inception to October 2, 2010, we have raised net proceeds of approximately $56.1 million from financing activities. We used these proceeds to fund operating and investing activities. We had a cash balance of approximately $1.9 million as of October 2, 2010.





By the 4th quarter of this year, we expect additional sales of Series E Preferred Stock to complete the Series E Preferred Stock sale.  As such, we believe these amounts in connection with our expectations concerning internally generated funds will be adequate to fund our operations for the next 12 months.





Net cash used in operating activities was approximately $5.4 million and $6.7 million for the 39 Wks 2010 and the 39 Wks 2009 respectively.  The decrease in cash used in operations was primarily due to lower operating losses during the current thirteen weeks compared with the same period of the prior year.  This was primarily due to lower selling and marketing expenses, lower general and administrative expenses, increased revenues and lower cash interest expense.





Net cash used in investment activities for the 39 Wks 2010 was approximately $51,200 consisting of purchases of property and equipment, primarily for additional computer hardware to improve the capacity of the nFinanSe NetworkTM.  We recorded minimal investment activity for the 39 Wks 2009.





As described in Note C to our consolidated financial statements, on June 10, 2008, we entered into the Original Loan Agreement.  Loans under the Credit Facility established by the Original Loan Agreement are to be used solely to make payments to card issuing banks for credit to SVCs.  On November 26, 2008, the Original Loan Agreement was subsequently amended to establish a sub-commitment of $3,400,000, pursuant to which each Lender in its sole discretion, may make Accommodation Loans that may be used by the Company for working capital expenditures, working capital needs and other general corporate purposes.  Loans and Accommodation Loans may be repaid and re-borrowed.  The maturity date of the notes issued pursuant to the Amended and Restated Loan Agreement was November 25, 2009, one year after the initial borrowing and on October 29, 2009, the Lenders approved the extension of maturity for an additional six months upon the satisfaction of certain conditions set forth in the Amended and Restated Loan Agreement.  The Amended and Restated Loan Agreement has subsequently been amended to extend the maturity to November 30, 2010 and to cap the commitment of Midsummer to $500,000 and issued to Midsummer 26,667 shares of its Series E Preferred Stock. The Company is in discussions with several replacement lenders but does not expect to have a replacement facility prior to the November 30, 2010.  The Company expects to fund the payments to card-issuing banks for credit to SVCs from available cash until a replacement facility can be completed.




During the 39 Wks 2010, cash provided by financing activities was $3,602,281 from the cash exercise of 1,703,146 warrants at an exercise price of $0.01 per share, the sale of 333,334 shares of Series D Preferred Stock, and the sale of 2,122,837 shares of Series E Preferred Stock.  The 333,334 shares of Series D Preferred Stock were subsequently converted into a like number of Series E Preferred Stock shares.  In addition, we paid $23,750 to Emerging Growth Equities for their efforts in raising funds for the Series E Preferred Stock offering.  During the 39 Wks 2009, the cash provided by financing activities was $4.7 million in borrowings under the Amended and Restated Loan Agreement, and $6.9 million from the sale of 4,331,838 shares of Series D Preferred Stock.  As of October 2, 2010, we had drawn $500,000 under the Amended and Restated Loan Agreement.





-22-


Changes in Number of Employees and Location.We anticipate that the development of our business will require the hiring of a substantial number of additional employees in sales, administration, operations and customer service.





Off-Balance Sheet Arrangements:





Operating Leases





We are obligated under various operating lease agreements for our facilities.  Future minimum lease payments and anticipated common area maintenance charges under all of our operating leases are approximately as follows at October 2, 2010:





Twelve months ending


AmountsSeptember 2011
$
203,900September 2012

208,400September 2013

-September 2014

-September 2015

-Total
$
412,300





Employment Agreements





We are obligated under employment agreements with our Chief Executive Officer, Jerry R. Welch, and our Chief Financial Officer, Raymond P. Springer.  The employment agreements had an initial term from September 5, 2006 to December 31, 2008 and were automatically renewed for two years with a new expiration date of December 31, 2010.  The employment agreements provide to Messrs. Welch and Springer a current annual salary of $275,000 and $200,000, respectively. Each agreement is to be automatically renewed indefinitely for succeeding terms of two years unless otherwise terminated in accordance with the agreement.  Both Mr. Welch and Mr. Springer also receive performance-based bonuses and certain medical and other benefits.  If we terminate Mr. Welch or Mr. Springer without cause, we will be required to pay severance to them in the amount of compensation and benefits they would have otherwise earned in the remaining term of their employment agreements or twelve months, whichever period is shorter.





In addition to the above, Messrs. Welch and Springer received certain stock options as described in Note E – Stock Options and Warrants.





Service and Purchase Agreements





We have entered into renewable contracts with DFS Services LLC (“DFS”) and VISA® U.S.A. Inc. (“VISA®”), our card networks, Palm Desert National Bank (“PDNB”), The Bancorp, Inc. (“Bancorp”) and First Bank & Trust (“FB&T”), our card-issuing banks, Metavante Corporation (“Metavante”), our processor, and American Express® Travel Related Services Company, Inc., a gift card program, that have initial expiration dates from March 17, 2011 through September 16, 2015.    Because the majority of the fees to be paid are contingent primarily on card volume, it is not possible to calculate the amount of the future commitment on these contracts. The Metavante, PDNB, Bancorp and FB&T agreements also require a minimum payment of $5,000, $3,000, $10,000(in months 7-60) and $7,500 per month, respectively.  During the 39 Wks 2010 and the 39 Wks 2009, we made aggregate payments of approximately $197,400 and $737,700 respectively, to Metavante, $42,100 and $4,700, respectively, to PDNB, $83,600 and $113,700, respectively, to FB&T and none to Bancorp under these agreements.





Our agreements with PDNB, FB&T and Bancorp require us to maintain certain reserve balances for our card programs.  As of January 2, 2010 and October 2, 2010, the reserve balances held at PDNB, FB&T and Bancorp were $10,000, $25,000 and $0, respectively.  These amounts are included in “Other assets” on the Company’s balance sheets as of January 2, 2010 and October 2, 2010.





-23-


Pending or Threatened Litigation





We may become involved in certain litigation from time to time in the ordinary course of business. To the best of our knowledge, no material litigation exists or is threatened.





Bond Collateral





On February 1, 2009, we completed a partial funding of collateral amounting to approximately $500,000 for performance bonds issued in connection with our state money transmitter licenses..  The collateral, in the form of a letter of credit arranged by Mr. Jeffrey Porter, was issued by a bank and was placed with the insurance company that issued the various bonds which at the end of the current quarter aggregated approximately $12,000,000.  Mr. Porter entered into a Guarantee and Indemnification Agreement with the Company dated February 1, 2009. Accordingly, we are currently contingently liable for the face amount of the letter of credit. Mr. Porter was to be compensated in cash at 2% of the average outstanding amount of the letter of credit per quarter paid in arrears, however, he chose to take the compensation in the form of Series D Preferred Stock during the August 2009 equity raise. The Guarantee and Indemnification Agreement can be cancelled by the Company upon receiving a more favorable arrangement from another party. Upon demand, the Company will be required to increase the collateral up to 10% of the face amount of bonds issued by the insurance company. On February 1, 2010, both the letter of credit and the Guarantee and Indemnification Agreement were renewed for another twelve months.





Critical Accounting Estimates





The preparation of consolidated financial statements in conformity with GAAP in the United States of America requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. The reported amounts of revenues and expenses during the reporting period may be affected by the estimates and assumptions we are required to make. Estimates that are critical to the accompanying consolidated financial statements arise from our belief that we will generate adequate cash to continue as a going concern and that all long-lived assets are recoverable.  In addition, stock-based compensation expense represents a significant estimate.  The markets for our products are characterized by intense competition, rapid technological development, evolving standards, short product life cycles and price competition, all of which could impact the future realization of our assets. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary. It is at least reasonably possible that our estimates could change in the near term with respect to these matters.





See Note A - “Formation, Background and Operations of the Company” to the consolidated financial statements, regarding the effect of certain recent accounting pronouncements on our consolidated financial statements.





Item 3.   Quantitative and Qualitative Disclosures About Market Risk.





Not applicable.


-24-





Item 4T.  Controls and Procedures.





Evaluation of Disclosure Controls and Procedures





An evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Securities Exchange Act”), as of October 2, 2010 was carried out by us under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are effective.





Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.





Change in Internal Control over Financial Reporting





There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.








































-25-


PART II - OTHER INFORMATION





Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.








Series E Preferred Stock Sale





On June 29, 2010, the Board approved an offering of up to $5,000,000 of Series E Preferred Stock at a purchase price of $1.50 per share.  On July 3, 2010, the Company entered into the Purchase Agreements with several institutional and accredited investors, pursuant to which the Company issued 333,334 shares of its Series D Preferred Stock for an aggregate cash purchase price of $500,001. Pursuant to the Purchase Agreements, the Series D Preferred Stock was exchanged for 333,334 shares of Series E Preferred Stock on July 8, 2010, which was the date on which the Series E Certificate was filed with the Secretary of State of the State of Nevada.





On August 10, 2010 and September 7, 2010 the Company reported that it had entered into Securities Purchase Agreements with certain other institutional and accredited investors, pursuant to which the Company issued 400,000 and 1,116,668 shares of Series E Preferred Stock for aggregate cash purchase prices of $600,000 and $1,675,002, respectively.





On September 30, 2010, the Company entered into Securities Purchase Agreements with certain other institutional and accredited investors, pursuant to which the Company issued 606,167 shares of Series E Preferred Stock for an aggregate cash purchase price of $909,250.





To date, the Company has issued 2,456,171 shares of its Series E Preferred Stock for an aggregate cash purchase price of $3,684,256 of which 333,334 shares were sold for $500,001 during the Company’s second fiscal quarter and 2,122,837 shares were sold for $3,184,255 in the Company’s third fiscal quarter.





The Series E Preferred Stock is not convertible into shares of the Company’s Common Stock, by the Investors to the extent that, if converted, they or any of their affiliates would beneficially own in excess of 9.99% of the then issued and outstanding shares of Common Stock.





Item 6.   Exhibits.




ExhibitNumber

Description of Exhibit3.1

Certificate of Designation of Series E Convertible Preferred Stock (attached as Exhibit 3.1 to that certain Form 8-K, filed by the Company with the Securities and Exchange Commission on July 9, 2010).3.2

Amendment to Certificate of Designation of Series A Convertible Preferred Stock (attached as Exhibit 3.2 to that certain Form 8-K, filed by the Company with the Securities and Exchange Commission on July 9, 2010).3.3

Amendment to Certificate of Designation of Series B Convertible Preferred Stock (attached as Exhibit 3.3 to that certain Form 8-K, filed by the Company with the Securities and Exchange Commission on July 9, 2010).3.4

Amendment to Certificate of Designation of Series C Convertible Preferred Stock (attached as Exhibit 3.4 to that certain Form 8-K, filed by the Company with the Securities and Exchange Commission on July 9, 2010).3.5

Amendment to Certificate of Designation of Series D Convertible Preferred Stock (attached as Exhibit 3.5 to that certain Form 8-K, filed by the Company with the Securities and Exchange Commission on July 9, 2010).10.1

Fourth Amendment to Amended and Restated Loan and Security Agreement (attached as Exhibit 99.1 to that certain Form 8-K, filed by the Company with the Securities and Exchange Commission on July 28, 2010).10.2

Fifth Amendment to Amended and Restated Loan and Security Agreement(attached as Exhibit 99.1 to that certain Form 8-K, filed by the Company with the Securities and Exchange Commission on September 30, 2010).*31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





* filed herewith.


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SIGNATURES





In accordance with the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





NFINANSE INC.Date: November 12, 2010
By:
/s/ Jerry R. WelchJerry R. Welch

Chief Executive Officer andChairman of the Board of Directors

(Principal Executive Officer)





NFINANSE INC.Date:  November 12, 2010
By:
/s/ Raymond P. SpringerRaymond P. Springer

Chief Financial Officer

(Principal Financial Officer)





NFINANSE INC.Date:  November 12, 2010
By:
/s/ Jerome A. KollarJerome A. Kollar

Vice President Finance and Controller

(Principal Accounting Officer)











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