UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





x            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF


1934 FOR THE QUARTERLY PERIOD ENDED   March 31, 2011







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


1934 FOR THE TRANSITION PERIOD FROM _________________ TO _________________





000-53922


(Commission File No.)





Ideal Financial Solutions, INC.





(Exact name of registrant as specified in its charter)





Nevada

33-0999642(State or other jurisdiction

(IRS Employerof incorporation)

Identification No.)





5940 S. Rainbow Blvd., Suite 3010


Las Vegas, Nevada, 89118


(Address of principal executive offices, including zip code)





Registrant’s telephone number, including area code:  (801) 302-2251








Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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  o.




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  o.





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





Large accelerated filer     [ ]



Non-accelerated filer       [ ]
Accelerated filer                       [  ]



Smaller reporting company      [ X ]




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):   YES [ ] NO [X]


As of May 10, 2011 the registrant had 22,246,661 Common Shares outstanding.











TABLE OF CONTENTS





PagePART I
FINANCIAL INFORMATIONItem 1.
Financial Statements.
1Condensed Consolidated Balance SheetsAs of March 31, 2011 and December 31, 2010 (Unaudited)
2Condensed Consolidated Statements of OperationsFor the Three Months Ended March 31, 2011 and 2010 (Unaudited)
3Condensed Consolidated Statements of Cash FlowsFor the Three Months Ended March 31, 2011 and 2010 (Unaudited)
4Notes to Consolidated Financial Statements
5Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
8Item 3.
Quantitative and Qualitative Disclosures about Market Risk
18Item 4.
Controls and Procedures
18PART II
OTHER INFORMATIONItem 1.
Legal Proceedings
19Item 1A
Risk Factors
19Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
19Item 3.
Defaults Upon Senior Securities
19Item 5.
Other Information
19Item 6.
Exhibits
19Signatures
20Exhibits/Certifications
21










PART I – FINANCIAL INFORMATION





Item 1.   Financial StatementsThe accompanying unaudited condensed consolidated balance sheets, statements of operations, and statements of cash flows and the related notes thereto, have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. The financial statements reflect all adjustments, consisting only of normal, recurring adjustments, which are, in the opinion of management, necessary for a fair presentation for the interim periods.





The accompanying financial statements should be read in conjunction with the notes to the aforementioned financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in our Annual Report on Form 10-K filed with the Securities Exchange Commission on March 28, 2011.





The results of operations for the three-month periods ended March 31, 2011 and March 31, 2010 are not necessarily indicative of the results to be expected for the entire fiscal year or any other period.




1







IDEAL FINANCIAL SOLUTIONS, INC.CONDENSED CONSOLDIATED BALANCE SHEETS(Unaudited)March 31,


December 31,2011


2010ASSETSCurrent AssetsCash and cash equivalents
$
62,119


$
64,727Trade accounts receivable, net

19,254



-Merchant reserves

-



189,721Related party notes receivable - current portion

3,828



5,655Total Current Assets

85,201



260,103Property and Equipment, net of accumulated depreciation of$53,572 and 46,857, respectively

28,902



33,742Total Assets
$
114,103


$
293,845LIABILITIES AND SHAREHOLDERS' DEFICITCurrent LiabilitiesTrade accounts payable
$
221,462


$
238,389Accrued liabilities

1,026,784



1,072,000Deferred revenue

25,540



153,100Notes payable

17,230



17,230Total Current Liabilities

1,291,016



1,480,719Shareholders' DeficitSeries A convertible preferred stock, $0.001 par value; 1,000,000 sharesauthorized and outstanding; liquidation preference $10,053

10,053



10,053Undesignated preferred stock, $0.001 par value; 9,000,000 sharesauthorized; no shares outstanding

-



-Common stock, $0.001 par value; 160,000,000 shares authorized;22,246,661 shares outstanding

22,246



22,246Additional paid-in capital

7,220,840



7,215,173Accumulated deficit

(8,430,052
)


(8,434,346
)Total Shareholders' Deficit

(1,176,913
)


(1,186,874
)Total Liabilities and Shareholders' Deficit
$
114,103


$
293,845





See the accompanying notes to the condensed consolidated financial statements
 2





IDEAL FINANCIAL SOLUTIONS, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)For the Three MonthsEnded March 31,2011


2010Revenue, net of refunds
$
678,359


$
2,650,761ExpensesMarketing and advertising

2,411



2,168,150Customer service

195,340



152,410Salaries

249,048



244,027Professional fees

131,377



189,119General and administrative

96,879



344,035Total Expenses

675,055



3,097,741Income (Loss) from Operations

3,304



(446,980
)Other Income

990



340Net Income (Loss)
$
4,294


$
(446,640
)Basic Earnings (Loss) Per Share
$
0.00


$
(0.02
)Diluted Earnings (Loss) Per Share

0.00



(0.02
)





See the accompanying notes to the condensed consolidated financial statements
 3




IDEAL FINANCIAL SOLUTIONS, INC.CONSENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)For the ThreeMonths EndedMarch 31,2011


2010Cash Flows from Operating ActivitiesNet income (loss)

$
4,294


$
(446,640
)Adjustments to reconcile net income (loss) tonet cash used in operating activities:Share-based compensation


5,667



15,433Depreciation and amortization


6,715



5,261Changes in operating assets and liabilities:Trade receivables


(19,254
)


-Merchant reserves


189,721



(527,711
)Other assets


-



(1,412
)Trade accounts payable


(16,927
)


311,520Accrued liabilities


(45,217
)


107,727Deferred revenue


(127,560
)


488,231Net Cash Used In Operating Activities


(2,561
)


(47,591
)Cash Flows from Investing ActivitiesProceeds from collections of related party notes receivable


1,828



-Purchase of property and equipment


(1,875
)


(10,002
)Net Cash Used in Investing Activities


(47
)


(10,002
)Net Cash Used in Financing Activities


-



-Net Decrease in Cash and Cash Equivalents


(2,608
)


(57,593
)Cash and Cash Equivalents at Beginning of Period


64,727



328,856Cash and Cash Equivalents at End of Period

$
62,119


$
271,263Supplemental Schedule of Noncash Investing and Financing ActivitiesCommon stock surrendered in payment of note receivablefrom related party

$
-


$
12,623




See the accompanying notes to the condensed consolidated financial statements
 4
 IDEAL FINANCIAL SOLUTIONS, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31, 2011 (UNAUDITED)





NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Interim Financial Information–The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Accordingly, they are condensed and do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, all adjustments considered necessary for a fair and comparable presentation have been included and are of a normal recurring nature.  The accompanying financial statements should be read in conjunction with the Company’s most recent annual financial statements included in the Company’s annual report on Form 10-K filed with the SEC on March 28, 2011. Operating results for the three-month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.


Organization and Nature of Operations –Ideal Financial Solutions, Inc. is incorporated under the laws of the State of Nevada and has five wholly owned subsidiaries, which, with Ideal Financial Solutions, Inc., are referred to herein as the Company.





The Company markets and sells a suite of online software solutions to individuals and companies for monthly subscription fees that enable the customers to access the Company’s software solutions online and to receive related customer support. The Company’s software includes education, support and automated online tools intended to enable customers to create additional cash resources, to reduce or eliminate non-asset-building debt and to build financial independence. The suite of software solutions is offered through our website and also sold as a “white label” solution to other companies who in turn, offer the services to their customers. The Company initiates charges using electronic check or ACH payments to customers for the monthly subscription fees or invoice corporate clients weekly.





Principles of Consolidation – The accompanying consolidated financial statements include the operations, transactions and balances of Ideal Financial Solutions, Inc. and all of its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.




Business Condition – During the three months ended March 31, 2011, the Company used $2,561 of cash in its operating activities.  At March 31, 2011, the Company has accumulated a deficit of $8,430,052, a stockholders’ deficit of $1,176,913 and its current liabilities exceeded its current assets by $1,205,815. During the second quarter of 2010, the Company incurred a $1,000,000 charge for alleged credit card fines and penalties incurred in excess of the reserves held by a merchant bank. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  Management intends to mitigate these conditions by cutting costs, seeking out new customers and exploring new marketing opportunities.  To reduce the merchant costs of fees and potential fines and penalties, during the latter half of 2010, the Company moved from credit card processing to other platforms.  In addition, the Company has expanded its marketing by selling access to its software to corporate accounts rather than directly to individuals.  Under these corporate accounts, the Company charges a weekly fee to the corporation who would then allow their employees and customers access to the suite of online services offered.  Management believes that this should provide for a more stable and long-term customer base.  Uncertainty as to the outcome of these efforts raises substantial doubt about the Company’s ability to continue as a going concern.  The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.





Revenue Recognition – Subscription fees vary and are based on the services provided to customers including access to the Company’s online software, upgraded access to the software, customer support and training. Online payments for subscription fees for each service are determined individually based on the price each service is charged to the customer and are recognized as revenue over the period the services are provided, less estimated refunds and charge-backs based on historical experience rates.





Subscription fees received in advance of recognition as revenue are deferred until earned. Deferred revenue as of March 31, 2011 and December 31, 2010 were $25,540 and $153,100, respectively.Estimated refunds and charge-backs are estimated and accrued in the same period the revenue is earned. Accrued refunds as of of March 31, 2011 and December 31, 2010 were $12,230 and $47,714, respectively, and are included in accrued liabilities.





In 2011, the Company began to market its software solutions to other companies, who in turn, can offer access to their employees or customers or borrowers. We invoice our clients weekly for consultation for online marketing, online merchant activities, access to our software license and for customer service.





5
 IDEAL FINANCIAL SOLUTIONS, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31, 2011 (UNAUDITED)




Accounts Receivable – During the first quarter of 2011, the Company began selling its online subscription-based services to corporate customers and bills them on a weekly basis after the services have been provided.  The Company generally does not require collateral and periodically reviews accounts receivable for amounts considered uncollectible.  Allowances are provided for uncollectible accounts when deemed necessary.





Earnings (Loss) Per Share –The computations of basic earnings (loss) per share are based on net income (loss) divided by the weighted-average number of common shares outstanding during the period, adjusted for qualified participating securities, using the if-converted method, when the qualified participating securities are dilutive. Diluted earnings (loss) per share are calculated by dividing net income (loss) assuming dilution by the weighted-average number of common shares and potentially dilutive shares of common stock issuable upon conversion of non-participating shares. When dilutive, the potential common shares issuable upon exercise of warrants included in diluted earnings (loss) per share are determined by the treasury stock method.





At March 31, 2011, there were 175,025 warrants that were excluded from the calculation of diluted earnings per share because the exercise price of the warrant was in excess of the average stock price.





At March 31, 2010, there were participating common stock equivalents from convertible preferred stock of 1,000,000 shares that were excluded from the computation of basic and diluted loss per share and there were 1,175,025 warrants that were excluded from the calculation of diluted loss per share because their effects would have been anti-dilutive.





The calculations of basic and diluted earnings (loss) per share were as follows:





For the Three Months EndedMarch 31,2011


2010Net income (loss)

$
4,294


$
(446,640
)Weighted-average common shares outstanding


22,246,661



21,923,418Effect of participating Series A convertible preferred stock


1,000,000



-Basic weighted-average common shares outstanding


23,246,661



21,923,418Dilutive effect of outstanding warrants


857,143



-Diluted weighted-average common shares outstanding


24,103,804



21,923,418Basic earnings (loss) per share

$
0.00


$
(0.02
)Diluted earnings (loss) per share


0.00



(0.02
)







NOTE 2 – SHAREHOLDERS’ EQUITY




Reverse Stock Split – On December 17, 2010, the board of directors approved a 200:1 reverse split of the outstanding common shares and reduced the number of authorized common shares.  The board also reduced the number of authorized preferred shares and approved a 200:1 reverse split of the authorized and the outstanding preferred stock designated as Series A convertible.  The Company has retrospectively applied the reverse split for all periods presented.  Following the reverse split, the Company has 1,000,000 shares of authorized and outstanding series A convertible preferred stock; 9,000,000 shares of authorized undesignated preferred stock; 160,000,000 shares of authorized common stock with 22,246,661 common shares outstanding.





Common Stock – In February, 2010, the Company awarded an officer a total of 50,000 shares of unvested common stock. The common stock awarded vests over a one-year period.  The market value of Company’s common stock on February 28, 2010 was $0.68 per share, or a total of $34,000, and is being recognized as compensation expense over the period the common shares vest. Compensation expense charged against operations for these stock-based awards during the three months ended March 31, 2011 and 2010 was $5,667 and $15,433, respectively, and is included in salary expense in the accompanying consolidated financial statements.





6
 IDEAL FINANCIAL SOLUTIONS, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31, 2011 (UNAUDITED)




In March 2010, 26,300 shares of common stock with a market value of $12,623 or $.048 per share were surrendered in payment of a related party note receivable with a balance of $12,623.





Warrants – In 2005 and 2006, the Company issued warrants to purchase 1,175,025 shares of common stock at exercise prices from $0.02 to $12.00 per share. These warrants were issued to investors with no expiration date and vested at the dates issued. There was no activity in the warrants during the periods ended March 31, 2011 and 2010. Warrants outstanding at March 31, 2011 consisted of the following:





ExerciseWarrants


Price1,000,000


$
0.029,125



1.2025,835



2.00130,265



5.007,300



10.002,500


$
12.001,175,025







NOTE 5 – COMMITMENTS AND CONTINGENCIES




Employment agreement– In July 2003, the Company entered into employment agreements with its chief executive officer, and its executive vice president. In 2010, the Company entered into employment agreements with its chief operating officer and its chief financial officer. The employment agreements have no defined termination date and provide for an annual base compensation with annual reviews and adjustments. Employee agreements exist for other key management positions with varying annual base compensation and a twelve-month duration with an option to extend in perpetuity.





Merchant Claim – During 2009, the Company was notified of a claim from a merchant for alleged credit card fines and penalties incurred in excess of the reserves held by the merchant in the amount of $115,320. The Company has requested substantiation of the fines and penalties; however, the claimant has been unable to substantiate the claim.  The Company is negotiating with the claimant, is currently unable to estimate the outcome or the potential loss that may be incurred, if any, and believes that any loss that may be incurred as a result of this claim is negligible and has not made a provision in the accompanying consolidated financial statements, however, the outcome is uncertain.





During 2010, the Company was notified of a claim from a merchant account processor for fines and penalties incurred in excess of the reserves held by the merchant in the amount of approximately $1,000,000.  The fine was assessed by VISA and collected from the merchant account processor and is allegedly an expense that is to be passed on to the Company.  The Company is negotiating with the merchant account processor as to whether the Company is required to reimburse the merchant account processor and the amount of that reimbursement. Though the Company is negotiating with the claimant, we are currently unable to estimate the outcome or the potential loss that may be incurred, if any, and we believe that any loss that may be incurred as a result of this claim has been adequately provided for by recording an expense and corresponding liability of $707,500 during the second quarter of 2010.





7





Item 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Forward-Looking Statements




This Quarterly Report on Form 10-Q (this “Report”) contains various forward-looking statements. Such statements can be identified by the use of the forward-looking words "anticipate," "estimate," "project," "likely," "believe," "intend," "expect," or similar words.   These statements discuss future expectations, contain projections regarding future developments, operations, or financial conditions, or state other forward-looking information.  When considering such forward-looking statements, you should keep in mind the risk factors noted in the section entitled “Risk Factors” below and other cautionary statements throughout this Report and our other filings with the SEC.  You should also keep in mind that all forward-looking statements are based on management’s existing beliefs about present and future events outside of management’s control and on assumptions that may prove to be incorrect.  If one or more risks identified in this Report or any other applicable filings materializes, or any other underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected, or intended.




Unless the context requires otherwise, all references to “Ideal,” “we,” “Ideal Financial Solutions, Inc.,” or the “Company” in this Report refer to Ideal Financial Solutions, Inc. and all of its consolidated subsidiaries.




Company Overview





We provide a suite of online software solutions used by businesses and individuals for the automated management of cash flows. These solutions include tools to effectively increase cash flow through debt elimination techniques, tax savings and wealth creation. We also provide access to other personal financial solutions such as unsecured debt restructuring, insurance and investment options.





Our principal product offering is our Cashflow Management Tool, which has two components.  The first is a debt management and reduction software tool called iDebtManager.  iDebtManager is a web-based application used by customers to organize a debt payment plan.  The second is called iBillManager, which interfaces with a third-party, electronic bill-payment system called Metavante, which uses electronic debit transactions to automate all bill payments for customers.





We provide Internet-based debt management and wealth building services and personal financial tools.  We plan to continue to build upon our success, strengths, and reputation as a leading and reliable provider of automated finance management software. With the success in our marketing campaigns, we saw a large increase in revenues in 2009 and 2010 , which has allowed us to pay off our interest-bearing debt, expand our management team to further our growth and expand our pursuits to increase stockholder value through greater market penetration, additional services and profitability.





Due to the costs and problems associated with online marketing and credit card processing, we have shifted our focus in 2011 from online marketing directly to individuals to contracting with third-party companies who offer our software to their employees or customers through a licensing agreement, which still includes access to our customer service, coaching and consultation for online marketing, web design, online merchanting and accounting.  Though still in the beginning stages, this new marketing vertical has the potential of being a great growth area for Ideal and one we hope to offer to lenders such as micro-loan companies and credit unions.





This shift in our core marketing is the result of a tumultuous and educational year in 2010.  The process has caused a decrease in total revenue, but we have stream-lined our business and cut costs to the point where we are roughly at the break-even point and have systems in place that will be scalable in several verticals and which we hope and believe will eventually reach and help more people than ever before.





Management believes that we are well positioned in the marketplace as a supplier of cash management services in all fifty states. By leveraging the existing scalability of our system, our strategic marketing partners and world-class customer service partners, we believe that we can continue to grow at a strong rate over the long term.





General Outlook





We have generated a nominal net income during the three months ended March 31, 2011, a change from the net loss generated in the three months ended March 31, 2010.  Revenues from our services have decreased dramatically compared to the three months ended March 31, 2010, as we have migrated our business from an online system marketed directly to individuals to licensing our services to other companies who offer or “white label” our product to their customers or employees.  We also offer customer service and assist client companies with their web presence, online marketing and merchanting solutions.   Our expenses have decreased commensurate to our revenue.





8




We have completed our registration with the SEC under the Securities Exchange Act of 1934 but have temporarily ceased our efforts of trading on the OTC Bulletin Board, as there have been many changes in the OTC Bulletin Board stock exchange and OTC Markets, Pink Sheets, including the creation of a new designation for companies that are  fully reporting with the SEC called OTC.QB which allows for easier, electronic trades, less cost and we hope, better exposure.  Eventually, we anticipate that our stock will be traded on the OTC Bulletin Board after a broker files the required forms with FINRA.  We have also increased our customer service footprint by building an in-house customer service facility to better serve our customers and to assist with servicing the users of our products through licensing agreements with client companies.





Finally, we have begun our new marketing plan of bringing our services to the clients of companies that specialize in offering micro-loans including payday loan companies, credit unions and mortgage companies.   We believe our services are a good match for these lenders, as it will help individuals improve their financial situation, which in turn helps them become better and more responsible borrowers.





Results of Operations – Quarters Ended March 31, 2011 and 2010





The following discussions are based on the consolidated balance sheet at March 31, 2011 and statement of operations for the three months ended March 31, 2011 and 2010 and notes thereto.





Revenues and Cost of Revenues





Revenues are achieved through offering our various online applications for automating debt reduction, cash management and wealth building to companies and individuals. Revenues from sales of our services for the three months ended March 31, 2011 were $678,359 a decrease of $1,972,402 from $2,650,761 for the three months ended March 31, 2010.





As we have shifted our core business from marketing directly to the public to engaging other companies, we have seen a dramatic reduction in revenues and related expenses.  With the challenges of finding new opportunities and income sources, we have streamlined our processes and expenses to the point that we are roughly break-even and are poised to scale our business model to new verticals and realize the benefits of our new system.





Expenses





Total operating expenses for the three months ended March 31, 2011 were $675,056, a decrease of $2,422,685 from expenses of $3,097,741 for the three months ended March 31, 2010.  The decrease in operating expenses was due to decreases in all categories of operating expenses commensurate with our revenues for the three months ended March 31, 2011 as compared with the three months ended March 31, 2010 .





Our marketing expenses decreased by $2,165,739, to $2,411, in the three months ended March 31, 2011, from $2,168,150 in the three months ended March 31, 2010.  This decrease in marketing expenses is a result of new efforts of working directly with other companies and relying upon repeat customers, which require little marketing expenditures.  Our customer service expenses increased by $42,930, to $195,340, in the three months ended March 31, 2011 from $152,410 in the three months ended March 31, 2010. The increase in customer service expense is due to a new initiative by the Company to expand and improve our customer service and to do it in-house rather than using a third party exclusively.





Expenses relating to salaries increased by $5,021, to $249,048, in the three months ended March 31, 2011 from $244,027 in the three months ended March 31, 2010, an expected trend as we have roughly the same personnel now as in the first quarter of 2010.  Expenses relating to professional fees decreased by $57,741, to $131,378, in the three months ended March 31, 2011 from $189,119 in the three months ended March 31, 2010 due to a decrease in expenses related to reporting with the SEC from additional accounting staff, audit and attorney fees since we have improved our accounting and reporting.  Our general and administrative expenses decreased by $247,156, to $96,879, in the three months ended March 31, 2011 from $344,035 for the three months ended March 31, 2010. The decrease in general and administrative expenses is due to decreases in overall operations, which lead to a decrease in merchant costs.





Our other income (expenses) increased by $651, to $991, in the three months ended March 31, 2011 from $340 in the three months ended March 31, 2010 due to few expenses and interest income.





9




For three months ended March 31, 2011, we have reported net income of $4,294, which represents a change of $450,934 compared to our net loss of $466,980 for the three months ended March 31, 2010.   The principal driver of this increase in net income is a reduction in most expenses, especially marketing and merchant costs.




Liquidity and Capital Resources





Cash Flow





We used $2,561 in cash for operations during the three months ended March 31, 2011 compared to using $47,591 from operating activities during the three months ended March 31, 2010.





For the three months ended March 31, 2011, our primary source of cash has continued to be from operations.  We used cash to pay down $16,927 in accounts payable, and $45,216 for an increase in accrued liabilities and to fund a decrease in deferred revenue of $127,560, as the revenue came out of deferment. We reduced merchant reserves to $0, providing 189,721 in cash for the three months ended March 31, 2011, compared to $527,711 in cash we used for the merchant reserve receivable for the three months ended March 31, 2010.  We used $16,927 to fund trade receivables and $45,216 for an increase in accrued liabilities.  There were no financing activities in the first quarter of 2011.





There were no financing activities, but investing activities included $1,828 in payments on an employee loan and $1,875 in new computer purchases.





For the three months ended March 31, 2010, our primary source of cash was from operations.  We freed up cash by paying for services with common stock valued at $15,433 and an increase in accounts payable of $311,520.  In 2010, because of our new model for lower cost subscriptions rather than high priced service for a few individuals, we experienced a large increase in revenue and consequently a increase in deferred revenue $488,231.   Similarly, merchant reserves increased as revenues increased, which used $527,711in cash.





Capital Expenditures.





We expect capital expenditures during the next 12 months to include minor computer purchases and upgrades.  Cash from operations should be sufficient to fund any new equipment needs.





Current and Expected Liquidity.





As of March 31, 2011, we had cash and cash equivalents of $62,119 and current assets of $85,201.  As of March 31, 2011, we had current liabilities of $1,291,016, which is made up of $221,463 in accounts payable, $1,026,784 in accrued liabilities, $25,540 in deferred revenue and $17,23 in notes payable, creating a working capital deficit of $1,205,815.





Our $1,026,784 in accrued liabilities as of March 31, 2011 is made up of $170,385 in accrued salaries earned by the CEO, COO and President during the period 2004-2007, $12,230 in accrued refunds, $62,508 is accrued payroll and other miscellaneous liabilities and $707,500 in a fine assessed against the Company for excessive credit card refunds. The Company’s legal counsel is currently evaluating the fine and is in negotiations to resolve the balance and terms of payment, if any; however, payment was deemed “probable” and therefore was accrued.  Management believes the fine is unfounded and plans to vigorously defend the claim and hopes to mitigate the expense in the future.





Our cash resources are not sufficient to meet our operating needs for the next 12 months unless we are able to generate positive cash flow from operations.  Otherwise, we will be required to seek outside capital funding.





We have relied on cash from operations as the sole source of cash for over the past three years.  We have used our positive cash flow from the last two years to pay down external debt and begin paying down accrued salaries and other liabilities, while increasing operations and staff and commencing the process of registering with the SEC.





Due to a streamlined business model and corporate structure, our fixed cash requirements are between $150,000 and $250,000 per month; we currently are able to meet these cash requirements through revenues from our current customers, which generally generates $100,000 to $300,000 in cash per month.  Even with increased expenses associated with being a reporting company, we expect to be able to experience positive cash flow to cover planned operations (but not extraordinary events) if operations continue at current levels.    Because of recent changes in our business activities and the Company’s recent loss of a significant credit card processing relationship, there is a risk that net cash flow will not continue at current levels during the remainder of 2011, and we may be required to seek additional capital and reduce expenditures.





10





Due to recent changes in credit card merchanting rules and regulations, certain online activity has become limited.  As a result, our total online activity in relation to total sales is limited, which may limit our access to cash for operations.  In addition, as previously described, we experienced a high volume of chargebacks on credit card transactions in early 2010, which lead to increased minimum merchant reserve levels in the second quarter of 2010.  We have taken steps to remedy this new limitation by seeking new avenues of electronic payment such as ACH and eCheck options.   We believe that these remedies will permit the Company to offset most of the effect of the changes in merchanting rules and increases in reserve requirements in the short term and create an environment for growth long-term.





We also lost our relationship with this same credit card processor as a result of the chargebacks in 2010, and were notified of a related $707,500 fine. We may pursue relationships with other credit card processors and, since our marketing, customer service and other expenses generally decrease proportionately with revenue, we expect to be able to offset much of the reduction in cash receipts with reductions in cash expenses. However, until we can provide credit card processors with assurance that our transactions will not result in significant chargebacks and can enter into additional processing relationships, these credit card processing limits may harm our cash flow.




To the extent we experience a net reduction in cash flow, or are unable to reduce or negotiate extended payment terms for the $707,500 fine, we may be required to raise additional capital. In the event that we need additional capital, because we do not have traditional assets such as equipment, inventory or trade receivables, our access to traditional institutional financing is limited; however, we believe that any effort to raise additional capital would benefit from our absence of significant external debt, guaranties, off-balance sheet financing or similar long term liabilities. To raise additional capital, we would need to issue debt and/or equity securities, including potentially warrants and convertible securities. We do not have any commitments from any party to provide any such capital but do believe we could raise additional capital if needed.





Risk Factors





Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, and all of the other information set forth in this Report before deciding to invest in shares of our common stock.  In addition to historical information, the information in this Report contains forward-looking statements about our future business and performance.  Our actual operating results and financial performance may be different from what we expect as of the date of this Report.  The risks described in this Report represent the risks that management has identified and determined to be material to our company.  Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may also materially harm our business operations and financial condition.





Our accountants have included an explanatory paragraph in our annual audited financial statements regarding our status as a going concern.





Our financial statements included in the Report have been prepared on the assumption that we will continue as a going concern.  Our independent registered public accounting firm has stated that it substantially doubts our ability to continue as a going concern in a report dated as of March 25, 2011. This doubt is based on the fact that, as of December 31, 2010, we had a stockholders’ deficit of $1,186,874, and current liabilities exceeded current assets by $1,220,616. In addition, during the second quarter of 2010, we incurred a charge of approximately $1,000,000 for alleged credit card fines and penalties incurred in excess of the reserves held by a merchant.





Our operating results have fluctuated significantly in the past and will continue to fluctuate in the future, which could cause our stock price to decline.





Our operating results have fluctuated significantly in the past, and we believe that they will continue to fluctuate in the future, due to a number of factors, many of which are beyond our control.  Factors that may affect our operating results include the following:





•
additions and losses of customers;•
additions or losses of marketing and referral partners, or changes in the number or quality of clients referred by continuing marketing and referral partners;


•
our ability to enhance our services and products with new and better functionality;•
costs associated with obtaining new customers, improving our products and expanding our management team and number of advisors;


•
new product announcements or introductions or changes in pricing by our competitors;•
technology and intellectual property issues associated with our products; and


•
general economic trends, including the level of concern by the general public about debt and debt reduction.





If in future periods our operating results do not meet the expectations of investors, our common stock price may fall.




11




We may be unable to raise capital needed to pay current liabilities or for operations going forward or may be required to pay a high price for capital.  Due to our large working capital deficit of $1,205,815, we may not have enough capital to fund operations.





As of March 31, 2011, our current liabilities exceeded our current assets by $1,205,815.  We may need as much as $1.2 million from operations or financing in order to pay obligations and continue operations.  We also expect our general and operating expenses to increase by approximately $150,000 in 2011 as we become subject to the public company reporting requirements, and we expect that amount to increase significantly in late 2011 as we become subject to certain internal control requirements.





If cash generated from operations does not increase, or we experience unexpected increases in expenses, we will likely need to raise additional capital.  We may not be able to raise the additional capital needed or may be required to pay a high price for capital.  Factors affecting the availability and price of capital may include the following:





•
the availability and cost of capital generally;•
our financial results;


•
the experience and reputation of our management team;•
market interest, or lack of interest, in our industry and business plan;


•
the price and trading volume of, and volatility in, the market for our common stock;•
our ongoing success, or failure, in executing our business plan;


•
the amount of our capital needs; and•
the amount of debt, options, warrants and convertible securities we have outstanding.





We may be unable to meet our current or future obligations or to adequately exploit existing or future opportunities if we cannot raise sufficient capital, which in the long run may lead to a contraction of our business and losses.





We are dependent on a concentrated number of referral sources, and a material reduction of new referrals from any of our significant referral sources would harm our financial results.  Our relationship with our most significant lead provider in 2009 was terminated in 2009, and a separate relationship that accounted for over 25% of our revenue in 2010 was terminated in the second quarter of 2010.





Historically, a significant portion of our revenues has been referred through a limited number of lead providers.   In August 2009, our relationship with a lead provider that had referred to us customers accounting for 83% of our new client revenue during the first eight months of 2009 terminated.   In April, 2010, our relationship with a lead provider that had referred to us customers accounting for over 90% of our new client revenue in the first quarter of 2010 (and 25% of overall revenue in 2010) was terminated.   On average, we lose approximately 20% of our new customers per month and retain only about 20% of new customers longer than five months.





We have had agreements with other lead providers upon which we may become substantially dependent upon in the future.  Our relationships with lead providers have historically been unstable and, as a result, our revenue may increase or decrease significantly from period-to-period as a result of the addition or loss of a significant lead provider.  Our dependence on third-party referral sources for new customers creates a risk that the termination of such relationship will lead to a significant reduction in revenues and revenue growth.





In addition, we received a demand letter in November 2010 that we reimburse a credit card processing company for a $1,000,000 fine arising from an excessive number of credit card charge-backs to VISA resulting in part from a failure of a lead provider to utilize terms and conditions in an agreed-upon format.  We have taken subsequent steps to reduce the risk of similar events in the future; nevertheless, there remains a risk that we will again have relationships with lead providers who do not use agreed-upon terms and conditions or otherwise take steps that lead to increases in the number of customers seeking refunds. This would lead to a large number of charge-backs and likely harm our reputation in the market place, relationship with credit card processors and others and lead to substantial write-offs and fines.





We may be required to reimburse credit card processors for fines imposed by VISA and other companies.





Historically, most of our revenues have come from online subscriptions involving monthly credit card payments.   To process these payments, we have been dependent upon a number of credit card processing companies, who in turn, have relationships with VISA, MasterCard and other credit card companies.





Online subscriptions to our services mainly come from potential customers seeing an offer for our services on the websites of third-party vendors, referred to as lead providers. The websites contain a description of our services, the terms and conditions of our agreement with the customer, the customer’s agreement with those terms and conditions by a click on the website and a link to a credit card payment web page.





12




Following the first quarter of 2010, we incurred a high volume of charge-backs on credit card transactions.   We determined that this was caused by one particular lead provider having omitted our customer service contact information and telephone number from the terms and conditions of our agreement on their website.  Without this customer service telephone number, customers, who normally would have contacted us and requested a refund, instead were left with no option other than to contact their bank to request a charge back to their credit card. Upon identifying this problem, we immediately terminated our relationship with this lead provider.





As a result of the high number of chargebacks, a key credit card processor increased its minimum merchant reserve levels in the second quarter of 2010 and eventually terminated its processing relationship with us.  Following the second quarter of 2010, we learned that VISA had charged the credit card processor with a $1,000,000 fine associated with these chargebacks, which fine the credit card processor allegedly paid and for which it is seeking indemnification from us.   Our agreements with this processor and other processors may be read to require us to reimburse the credit card processor for such fines, without any opportunity to intercede with VISA or otherwise defend against the claims.  The $1,000,000 fine claimed already has significantly harmed our profitability and liquidity in the near term.   Additional fines, particularly if substantial in size, would limit our ability to continue as a going concern.





Our capacity to process revenue has been constrained as a result of the loss of a credit card processor relationship and may be subject to additional constraints.





Historically, most of our revenues came from online subscriptions involving monthly credit card payments. To process these payments, we have been dependent upon a number of credit card processing companies, who in turn, have relationships with VISA, MasterCard and other credit card companies. For reasons described in the previous paragraph, a credit card processor on which we were substantially dependent terminated its relationship with us. As a result of the loss of a major processor, we have experienced a reduction in our capacity to process credit card transactions, which will limit our ability to maintain and expand revenues in the near future. For this and other reasons, we have been forced to use alternative forms of electronic transactions suitable for online business such as eCheck, ACH and Check21. The need to use such methods, which require more effort by customers than credit card transactions, will limit our ability to maintain and expand revenues and meet our obligations.





If we fail to differentiate ourselves in the marketplace and develop our brand recognition or otherwise compete, our revenues and profitability will be impaired.





We are in the business of providing software-based debt management, bill payment and financial management solutions.  We believe that our principal competitors include mint.com, youneedabudget.com and mvelopes.com.   We also compete to some extent with numerous nonprofit or for-profit debt consolidation services as well as financial advisers.  The market for our products and services is highly competitive.  Especially in light of the recent recession, the debt management business is evolving and growing rapidly, and companies are continually introducing new products and services.





We compete with other software-based solutions on the features and effectiveness of our product offerings, price, customer service and the effectiveness of our automatic bill payments system. In general, our primary weakness is our lack of name recognition in the market place.   Many of our existing and potential competitors have longer operating histories, greater financial strength and more recognized brands in the industry. These competitors may be able to attract customers more easily because of their financial resources and awareness in the market. Our larger competitors can also devote substantially more resources to business development and may adopt more aggressive pricing policies.  The profitability of our business depends upon our continuing to attract new customers, while retaining existing subscribers.  If we are unable to strengthen our brand, differentiate ourselves in the marketplace and otherwise compete with the numerous competitors in our market place, we may contract and experiencing net losses.





Our business has benefitted from the recent economic downturn and may be harmed by a recovery.





The recent recession, together with the tightening of lending standards, caused many consumers to experience cash flow difficulties and become more aware of the risks of significant borrowing.  These negative economic experiences, and a general interest in debt reduction and conservative cash flow management, led to significant growth in our business.  As the U.S. economy recovers, consumers may lose interest in cash management and reduction of debt, which could lead to slower growth in customers and even an overall net loss in the number of customers.  If this occurs, we will likely experience decreasing revenues and increasing net losses.





13




Even if the U.S. economy does not recover in the short-term, we may experience a loss in customer base because people who are unemployed or initiate bankruptcy protection typically do not use our services.   This would also result in decreasing revenues and increasing net losses.





We are dependent on a third party to provide certain software that is integral to our iBillManager offering.





The iBillManager component of our Cashflow Management Tool interfaces with a third-party, electronic bill-payment system licensed from Metavante (acquired by Fidelity in 2009). The services agreement pursuant to which we offer iBillManager is subject to termination by either party upon 90 days advanced notice at the end of each annual renewal of the agreement. Without such services, we may not be able to continue to offer the iBillManager portion of our Cash Management Tool, which may disrupt our service, lead to the loss of customers and harm our business.





Our operations are subject to potential disruption from system failure and security risks that could lead to a loss of customers and harm our business.





Our Cash Management Tool runs on our Internet website, rather than customers’ computers, and is utilized by our customers through the Internet.   Our ability to operate is dependent upon our ability to protect our website and network against interruptions, damages and other events that may harm our ability to provide services to our customers on a short-term or long-term basis and may lead to lawsuits, customer losses, liabilities and harm to our reputation. We may not have adequate quality assurance procedures in place or may fail to detect inadequacies until problems arise. If we are unable to identify problems on a timely basis, we could experience a loss of revenues and market share, damage to our reputation, increased expenses and legal actions by our customers.





Interruptions in service, transmissions of viruses and other problems arising from one of, or a combination of, a natural disaster, power outage, unauthorized access, computer virus, equipment, software or system failure or other disruption could result in, among other things, significant repair and recovery expenses and extensive customer losses and otherwise lead to a decrease of revenues, increase in expenses or adverse affect on our business, financial condition and results of operations.





In addition, financial and other personal information of our customers resides on servers we control.  Despite precautions, unauthorized third parties may gain access to our customers’ personal and financial information as a result of lapses in security measures implemented by our Internet provider or by our company, or as a result of an intentional wrongdoing by employees of our company.  If such unauthorized access occurs, the consequences to us and our business would be severe.  These may include, for example, lawsuits by customers, expenses associated with required and recommended remedial action, legal or other action by governments and loss of reputation and customers, any of which would harm our business and financial condition.





We intend to expand our operations and increase our expenditures in an effort to grow our business. If we are unable to achieve or manage significant growth and expansion, operating results will suffer.





In order to successfully implement our business strategy, we must achieve substantial growth in our customer base through additional sales.  We may not achieve such growth, despite significant expenditures for marketing. If achieved, significant growth would place increased demands on our management, accounting systems, infrastructure and systems of financial and internal controls.  Rapid growth would also require an increase in the capacity, efficiency and accuracy of our billing and customer support systems. This would require an increase in the number of our personnel, particularly within customer service and technical support. Because of competition for employees and difficulties inherent in hiring, retaining and training large numbers of service and support personnel in a short period of time, we may be short staffed at times or be staffed with relatively inexperienced personnel. Our labor, administrative, professional fees and other costs may also increase. Any failure to expand our technical and personnel infrastructure with our business could lead to a decline in the quality of our sales, marketing, service, or other aspects of our business and lead to a long-term decline in revenue and an increase in losses.





If we are unable to keep up with evolving industry standards and changing user needs, our business is likely to suffer, and we may need to deploy significant company resources to keep up with evolving industry standards and changing user needs.





The products in our cash flow management, debt payment and other markets are continuously evolving as technology and customer expectations evolve.  As our customers’ expectations and industry standards continue to evolve, our success will depend, in part, on our ability to timely and accurately identify emerging trends and to modify our offerings accordingly. We may be unable to modify our proprietary technology, obtain licenses for key third-party technologies or integrate technologies rapidly and efficiently enough to keep pace with emerging trends. We may fail to identify and invest in technologies that subsequently dominate the industry, and we may build our offerings around, and invest in, technologies that fail to achieve a substantial foothold in the industry. In addition, new industry standards or technologies could render our services obsolete and unmarketable or require substantial reduction in the fees we charge. Any failure on our part to properly identify, invest in and adopt new technologies that subsequently achieve market acceptance in a timely and cost effective manner could lead to a substantial reduction in our market share, a reduction in our revenue and an increase in our operating costs. Any such decrease in revenues, or increase in costs, would harm our business, financial condition and results of operations.





14




Third party claims that we infringe upon their intellectual property rights could be costly to defend or settle and could harm our business and reputation.





Litigation regarding intellectual property rights is common in the software industry. Cash flow and debt management software products and services may be increasingly subject to third-party infringement claims as the number of competitors in our industry segment grows and the functionality of products in different industry segments overlaps. We may from time to time encounter disputes over rights and obligations concerning intellectual property that we developed ourselves or that we license from third parties. Third parties may bring claims of infringement against us, or against others from whom we license intellectual property, which may be with or without merit. We could be required, as a result of an intellectual property dispute, to do one or more of the following:





•
cease making, selling, incorporating or using products or services that rely upon the disputed intellectual property;•
obtain from the holder of the intellectual property right a license to make, sell or use the disputed intellectual property, which license may not be available on reasonable terms, or at all;


•
redesign products or services that incorporate disputed intellectual property;•
pay monetary damages to the holder of the intellectual property right; and


•
spend significant amounts of time and money defending such a dispute.





The occurrence of any of these events could result in substantial costs and diversion of resources or could severely limit the products and services we can offer, or delay the delivery of products and services, which could seriously harm our business, operating results, reputation and financial condition.





If our protection of our intellectual property is inadequate, our competitors may gain access to our technology, our competitive position could be harmed, we could be required to incur expenses to enforce our rights, and our business may suffer.





We depend on our ability to develop and maintain the proprietary aspects of our technology.  We do not own any patents, copyrights, trademarks or other intellectual property registrations.  We seek to protect our trade secrets and other proprietary information through a combination of contractual provisions, confidentiality procedures, and common law copyright and trademark principles, but these actions may be inadequate. Protection of our intellectual property is subject to many risks, including the following:





•
we have not applied for copyright registrations with respect to our proprietary rights in our core Cashflow Management Tool or related methods or ideas, and common law rights associated with copyrights and trade secrets afford only limited protection;•
our claims of proprietary ownership (and related common law copyright assertions) may be challenged or otherwise fail to provide us with the ability to prevent others from copying our technology;


•
despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information we regard as proprietary;•
confidentiality may be compromised intentionally or accidentally by contractors, customers, other third parties or our employees; and


•
others may develop independently equivalent or superior technology or intellectual property rights.





We are dependent upon key personnel who may leave at any time and may be unable to attract qualified personnel in the future, which could harm our anticipated growth, implementation of current business plans and may impair our financial performance.





We are highly dependent upon the continued services of our senior management team. We are constantly evaluating our executive and management resources. To the extent our executive officers and managers are parties to employment agreements, such agreements are terminable at will by such employees. If one or more of our executives or senior managers were to leave, particularly if several were to leave within a short period of time, we may experience a significant disruption in our ability to attract and retain customers, maintain and update our product offerings, and complete significant transactions in a timely and competent manner. In addition, we may be unable to recruit competent replacement personnel on a timely basis. The loss of the services of key executive or management personnel could harm our ability to execute our business plan and may impair our financial performance.





15




Compliance with corporate governance and public disclosure requirements may result in additional expenses.





We are subject to the reporting and other requirements of the Securities Exchange Act of 1934, as amended.  The requirements include, without limitation, the obligation to file annual, quarterly and current reports with the SEC, to have in place certain controls and procedures and other obligations.   Compliance with our disclosure and other obligations may consume a large amount of management attention and require significantly increased expenditures on legal, accounting and other services.  This may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.  Registration under the Exchange Act also makes us subject to certain liability provisions, which may create additional avenues for shareholders and regulators to make claims against the company.





Our directors, executive officers and principal stockholders have effective control of the company, preventing non-affiliate stockholders from significantly influencing our direction and future.





Our directors, officers, and 5% stockholders and their affiliates control approximately 65% of our outstanding shares of voting stock and are expected to continue to control a majority of our outstanding voting stock following any financing transactions projected for the foreseeable future.  These directors, officers and affiliates effectively control all matters requiring approval by the stockholders, including any determination with respect to the acquisition or disposition of assets, future issuances of securities, declarations of dividends and the election of directors.  This concentration of ownership may also delay, defer or prevent a change in control and otherwise prevent stockholders other than our affiliates from influencing our direction and future.





There is a public market for our stock, but it is thin and subject to manipulation.





The volume of trading in our common stock is limited and can be dominated by a few individuals.  In addition, many brokerages are refusing to trade in, or implement substantial restrictions on trading in, stock reported on the Pink Sheets.  The limited volume, and trading restrictions, can make the price of our common stock subject to manipulation by one or more stockholders and will significantly limit the number of shares that one can purchase or sell in a short period of time.  An investor may find it difficult to dispose of shares of our common stock or obtain a fair price for our Common Stock in the market.





The market price of our common stock may be harmed by our need to raise capital.





We need to raise additional capital in the near future and expect to raise such capital through the issuance of common stock and other rights with respect to common stock.  Because securities in private placements and other transactions by a company are often sold at a discount to market prices, this need to raise additional capital may harm the market price of our common stock.   In addition, the re-sale of securities issued in such capital-raising transactions, whether under Rule 144 or otherwise, may harm the market price of our common stock.





The market price for our common stock is volatile and may change dramatically at any time.





The market price of our common stock, like that of the securities of other smaller companies, is highly volatile.  Our stock price may change dramatically as the result of announcements of our quarterly results, the rate of our expansion, significant litigation or other factors or events that would be expected to affect our business or financial condition, results of operations and other factors specific to our business and future prospects.  In addition, the market price for our common stock may be affected by various factors not directly related to our business, including the following:





•
intentional manipulation of our stock price by existing or future stockholders;•
short selling of our common stock or related derivative securities;


•
a single acquisition or disposition, or several related acquisitions or dispositions, of a large number of our shares;•
the interest, or lack of interest, of the market in our business sector, without regard to our financial condition or results of operations;


•
the adoption of governmental regulations and similar developments in the United States or abroad that may affect our ability to offer our products and services or affect our cost structure; and•
economic and other external market factors, such as a general decline in market prices due to poor economic indicators or investor distrust.




16




Our ability to issue Preferred Stock and common stock may significantly dilute ownership and voting power, negatively affect the price of our common stock and inhibit hostile takeovers.





Under our Articles of Incorporation, we are authorized to issue up to 10 million shares of Preferred Stock and 160 million shares of common stock without seeking stockholder approval. Any issuance of such Preferred Stock or Common Stock would dilute the ownership and voting power of existing holders of our Common stock and may have a negative effect on the price of our Common stock. The issuance of Preferred Stock without stockholder approval may also be used by management to stop or delay a change of control, or might discourage third parties from seeking a change of control of our company, even though some stockholders or potential investors may view possible takeover attempts as potentially beneficial to our stockholders.





We are unlikely to pay dividends on our Common stock in the foreseeable future.





We have never declared or paid dividends on our stock.  We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business.  We do not anticipate paying any cash dividends in the foreseeable future, and it is unlikely that investors will derive any current income from ownership of our stock.  This means that your potential for economic gain from ownership of our stock depends on appreciation of our stock price and will only be realized by a sale of the stock at a price higher than your purchase price.





Our Common stock is a “low-priced stock” and subject to regulations that limits or restricts the potential market for our stock.





Shares of our Common stock are “low-priced” or “penny stock,” resulting in increased risks to our investors and certain requirements being imposed on some brokers who execute transactions in our Common stock.  In general, a low-priced stock is an equity security that:





•
Is priced under five dollars;•
Is not traded on a national stock exchange, such as NASDAQ or the NYSE;


•
Is issued by a company that has less than $5 million in net tangible assets (if it has been in business less than three years) or has less than $2 million in net tangible assets (if it has been in business for at least three years); and•
Is issued by a company that has average revenues of less than $6 million for the past three years.





We believe that our Common stock is presently a “penny stock.” At any time the Common stock qualifies as a penny stock, the following requirements, among others, will generally apply:





•
Certain broker-dealers who recommend penny stock to persons other than established customers and accredited investors must make a special written suitability determination for the purchaser and receive the purchaser’s written agreement to a transaction prior to sale.•
Prior to executing any transaction involving a penny stock, certain broker-dealers must deliver to certain purchasers a disclosure schedule explaining the risks involved in owning penny stock, the broker-dealer’s duties to the customer, a toll-free telephone number for inquiries about the broker-dealer’s disciplinary history and the customer’s rights and remedies in case of fraud or abuse in the sale.


•
In connection with the execution of any transaction involving a penny stock, certain broker-dealers must deliver to certain purchasers the following:•
bid and offer price quotes and volume information;


•
the broker-dealer’s compensation for the trade;•
the compensation received by certain salespersons for the trade;


•
monthly accounts statements; and•
a written statement of the customer’s financial situation and investment goals.





Off-Balance Sheet Arrangements





There were no off-balance sheet arrangements at March 31, 2011.





Critical Accounting Policies and Estimates





Principles of Consolidation – The accompanying consolidated financial statements include the operations, transactions and balances of Ideal Financial Solutions, Inc. and all of its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.





17





Business Condition – During the three months ended March 31, 2011, the Company suffered a loss of $936,685 and used $248,841 of cash in its operating activities.  At March 31, 2011, the Company has accumulated a deficit of $8,406,664, a stockholders’ deficit of $1,159,192 and its current liabilities exceeded its current assets by $1,188,094. During the second quarter of 2010, the Company incurred a $1,000,000 charge for alleged credit card fines and penalties incurred in excess of the reserves held by a merchant bank. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  Management intends to mitigate these conditions by cutting costs, seeking out new customers and exploring new marketing opportunities.  To reduce the merchant costs of fees and potential fines and penalties, during the latter half of 2010, the Company moved from credit card processing to other platforms.  In addition, the Company has expanded its marketing to new verticals, including selling access to its software to corporate accounts rather than directly to individuals.  Under these corporate accounts, the Company charges a weekly fee to the corporation who would then allow their employees and customers access to the suite of online services offered.  This should provide for a more stable and long-term customer base.  Uncertainty as to the outcome of these efforts raises substantial doubt about the Company’s ability to continue as a going concern.  The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.





Revenue Recognition – Monthly subscription fees vary and are based on the services provided to customers including access to the Company’s online software, upgraded access to the software, customer support and training. Online payments for subscription fees for each service are determined individually based on the price each service is charged to the customer and are recognized as revenue over the period the services are provided, less estimated refunds and charge-backs based on historical experience rates.





Subscription fees received in advance of recognition as revenue are deferred until earned. Deferred revenue as of March 31, 2011 and December 31, 2010 were $25,540 and $153,100, respectively.Estimated refunds and charge-backs are estimated and accrued in the same period the revenue is earned. Accrued refunds as of March 31, 2011 and December 31, 2010 were $12,230 and $47,714, respectively and are included in accrued liabilities.





In 2011, the Company began to market its software solutions to other companies, who in turn, can offer access to their employees or customers or borrowers.    We invoice our clients weekly for consultation for online marketing, online merchanting, access to our software license and for customer service.  Under these agreements, deferred revenue will be minimal, if not completely eliminated and we will no longer have merchant reserves.





Earnings (Loss) Per Share –The computations of basic earnings (loss) per share are based on net income (loss) divided by the weighted-average number of common shares outstanding during the period, adjusted for qualified participating securities, using the if-converted method, when the qualified participating securities are dilutive. Diluted earnings (loss) per share are calculated by dividing net income (loss) assuming dilution by the weighted-average number of common shares and potentially dilutive shares of common stock issuable upon conversion of non-participating shares. When dilutive, the potential common shares issuable upon exercise of warrants included in diluted earnings (loss) per share are determined by the treasury stock method.





At March 31, 2011, there were participating common stock equivalents from convertible preferred stock of 10,000,000 shares that were excluded from the computation of basic loss per share and there were 972,152 warrants that were excluded from the calculation of diluted loss per share because their effects would have been anti-dilutive.





Item 3.    Quantitative and Qualitative Disclosures about Market Risk





As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.





Item 4.    Controls and Procedures





(a)    Based on the evaluation of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) required by paragraph (b) of Rules 13a-15 or 15d-15, our chief executive officer and our chief financial officer have concluded that, as of March 31, 2011, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods required by governing rules and forms.




(b)    There have been no changes in our internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




18




PART II – OTHER INFORMATION




Item 1.    Legal Proceedings.





There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.





Item 1A. Risk Factors





As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item; however, certain risk factors are identified in a section entitled “Risk Factors” in Item 2 of Part I of this Report.





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




None.





Item 3.    Defaults Upon Senior Securities.




None.





Item 5.    Other Information





None





Item 6.    Exhibits





a)  See Exhibit Index attached hereto following the signature page.





19




SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.








Ideal Financial Solutions, Inc.May 16, 2011

By:  /s/  Steven L. SunyichDate

Steven L. Sunyich,Chief Executive OfficerMay 16, 2011

By:  /s/  Benjamin M. LarsenDate

Benjamin M. LarsenChief Financial Officer










20




EXHIBIT INDEXExhibit No.

Exhibit

Incorporated by Reference/ Filed Herewith3.1

Articles of Incorporation

Incorporated by reference to the Registration Statement on Form 10 filed with the SEC on August 18, 2010, File No. 000-539223.2

Bylaws

Incorporated by reference to the Registration Statement on Form 10 filed with the SEC on August 18, 2010, File No. 000-5392231.1

Section 302 Certification of Chief Executive Officer

Filed herewith31.2

Section 302 Certification of Chief Financial Officer

Filed herewith32.1

Section 906 Certification of Chief Executive Officer

Filed herewith32.2

Section 906 Certification of Chief Financial Officer

Filed herewith




21