NOTE A –ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2011

Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Text Block]

NOTE A –ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Background

The accompanying consolidated financial statements include the accounts of nFinanSe Inc. and those of its wholly owned subsidiary, nFinanSe Payments Inc. (collectively, the “Company,” “we, ” “us, ” or “our”).

The Company is a provider of prepaid access through the sale of General Purpose Reloadable (“GPR”) cards, payroll cards and gift cards (together referred to herein as “Cards”)  across  a wide variety of markets, including grocery stores, convenience stores, general merchandise stores and direct to customer through on-line or direct marketing activities. We believe prepaid access is a fast-growing product segment in the financial services industry.

Basis of Presentation

The consolidated financial statements contained herein have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) for interim financial statements, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  All significant intercompany accounts and balances have been eliminated in consolidation.  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 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 June 30, 2011 and January 1, 2011,  its results of operations for the three and six months ended June 30, 2011  (“2Q2011”and “1st Half 2011”, respectively) and for the three and six months ended July 3, 2010 ( “2Q2010” and “1st Half 2010”, respectively) and its cash flows for the 1st Half 2011 and the 1st Half 2010. Operating results for the 1st Half 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 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 January1, 2011.

In 2Q2010 and 1st Half 2010, the Company was considered to be a development stage company because we were continuing to develop our planned principal operations and because our revenues had been minimal.

Change of Accounting

During our development stage, we accounted for Card packages to be sold in retail stores as inventory and we recorded transactions performed by our retail agents on a net basis. Because the Company was the only “pure play” Securities and Exchange “SEC” reporting company in the industry, we were unable to compare our accounting treatments to our larger, more mature, privately-held competitors. During fiscal 2010, the nation’s two largest prepaid access managers registered with the SEC and filed financial reports.  Our largest competitor and the largest manager of GPR cards in the financial services industry accounts for its packages as a prepaid expense that is amortized over the expected life of the packages and it accounts for its retail transactions on a gross basis under the guidelines promulgated by Emerging Issues Task Force (“EITF”) Issue 99-19, “Reporting Revenue Gross as a Principal versus net as an Agent”.  In connection with management’s determination that nFinanSe Inc. no longer operates as a development stage company as of December 2010 and for future comparability to the industry leader, management determined that the Company should follow the preferable accounting practices of the industry leader and the promulgations of the EITF.  As such, we record Card sales and reload sales at the price charged by our retail agents and the amounts retained by the retail agents and distributing agents are recorded as sales and marketing expense. Maintenance fees are recorded at the amount collected and any sharing percentage with distributing agents is recorded as sales and marketing expense. Interchange is recorded at the amount paid by the relevant network, and any fees and sharing arrangements with banks are charged to selling and marketing expenses   In addition, the Company has modified the presentation and treatment of Card supply from an inventory asset to a prepaid asset in accordance with the appropriate Accounting Standards Codification (“ASC”) and industry treatment.

The following financial statement line items for 2Q2010 and 1st Half 2010 were affected by the change in accounting:

Statement of operations  2Q2010:
	As computed pre change in accounting			As computed under changes			Effect of Change
Total operating revenues	$	110,472		$	226,831		$	116,359
Total operating expenses	$	2,414,076		$	2,530,435		$	116,359
Loss before other expense	$	(2,303,604	)	$	(2,303,604	)	$	-
Statement of operations 1st Half 2010:

	As computed pre change in accounting			As computed under changes			Effect of Change
Total operating revenues	$	165,164		$	379,194		$	214,030
Total operating expenses	$	5,073,118		$	5,287,148		$	214,030
Loss before other expense	$	(4,907,954	)	$	(4,907,954	)	$	-

Statement of cash flows 1st Half 2010:
	As computed pre change in accounting			As computed under changes			Effect of Change
Provision for inventory obsolescence	$	807,513		$	-		$	(807,513	)
Provision for prepaid Card supply obsolescence	$	-		$	807,513		$	807,513
Net cash used in operating activities	$	(3,643,810	)	$	(3,643,810	)	$	-

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 Card supply asset 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 three months or less to be cash equivalents.

Restricted Cash

Funds classified as restricted cash as at June 30, 2011 and January 1, 2011 relate to loan advances on our credit facility, as described in Note C – Credit Facility and amounts received from the card networks to fund cardholder purchase overdrafts.  Restricted cash amounted to approximately $341,000 and $817,000, at June 30, 2011 and January 1, 2011, respectively.

Accounts Receivable and Allowance for Doubtful Accounts

Our credit terms to our distributing agents for the load value of Cards and our portion of the fees collected at retail vary by agreement but are less than two weeks.  Transaction fees are paid daily, one day in arrears by our card networks, Discover, MasterCard and VISA® (“Card Associations”).  Interest income is paid monthly in arrears by the card-issuing bank approximately two weeks into the month following the recognition of such fees or interest income.  Maintenance fees are charged to active GPR cards with balances 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.  The distributing agents of our Cards are typically prepaid card distributors and large multi-unit retailers. We perform ongoing credit evaluations of our distributing agents 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 distributing agents’ ability to pay, 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.

Other Receivables

Cardholder account overdrafts may arise from maintenance fee assessments on our GPR cards or from unauthorized purchase transactions that are posted on GPR or gift cards, in each case in excess of the funds in a cardholder’s account. We are exposed to losses from unrecovered cardholder account overdrafts. Each period, we offset card revenues in the accompanying statement of operations for overdrafts created by the maintenance fee assessments on our Cards.  For overdrafts created by purchase transactions, we record either as (i) a receivable for items we expect to collect through the applicable Card Association or (ii) as bad debt expense for those items we do not deem to be recoverable and this expense is included in other general and administrative expenses in the accompanying statement of operations.

Prepaid Card Supply

The Company records the costs associated with Card packages as prepaid expenses. We recognize the prepaid cost of Card packages over the related sales period, currently twelve months.

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 estimated useful lives.

The estimated useful lives of the respective classes of assets are as follows:

Furniture, fixtures and equipment	3-5 years
Computer software	3 years
Tenant improvements	Shorter of the useful life or the lease term

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 1stHalf 2011 or 1stHalf 2010.

As of June 30, 2011 our estimates indicate that all remaining long-lived assets are recoverable.

Revenue Recognition

Our operating revenues consist of Card revenues, reload revenues and interchange revenues.  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.

Card revenues consist of new Card fees, monthly maintenance fees, Automated Teller Machine (“ATM”) fees and other revenues.  We charge new Card fees when a consumer purchases a new Card in a retail location.  We currently recognize new Card fees at the time the new Card is sold.  We charge maintenance fees on a monthly basis pursuant to the applicable cardholder agreements.  We charge ATM fees when a cardholder performs a withdrawal or other transactions at an ATM.  Other revenues consist of interest revenue on overnight investing of Card balances by our Card issuing bank, bill pay and fees associated with other optional products or services.  We recognize Card revenues when the underlying product or service is completed, which is at the same time our fees are assessed.

We generate reload revenues when cardholders reload their GPR Cards or purchase a “reload” or “top-up” pack at a retail location.  We recognize these revenues when the reloads are purchased.

We earn interchange revenues from the relevant Card Association each time one of our cardholders makes a purchase using one of our Cards. The fees are based upon rates established by each of the Card Associations.

We report our different types of revenue on a gross or net basis based upon whether we act as a principal or agent in the transaction.  To the extent we are the principal in the transaction, we report revenue on a gross basis.  We evaluate whether we are a principal or agent based upon certain accounting industry guidance on gross versus net revenue reporting.  For all of our significant revenue generating arrangements, we record revenue on a gross basis.

On occasion, we enter into incentive agreements with our retailer agents to increase product acceptance and placement.  We recognize incentive payments as a reduction of revenues and recognize them over the related period for which the revenues or services are provided.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of sales fees and commissions paid to or retained by our distributing agents  and retailers, advertising and marketing expenses, and the costs of manufacturing and distributing Card packages and promotional materials to our distributing agents and retailers.

We generally establish the sales fees and commissions in agreements with our distributing agents and we pay our distributing agents based on sales of our Cards and any reload services performed by their retail partners.  Sales fees and commissions were $1,033,947 and $230,383 for 1st Half 2011 and 1st Half 2010, respectively.

We incur advertising and marketing expenses for our products through retailer-based print promotions and in-store displays. We expense costs for the production of advertising when incurred.  Advertising and marketing expenses are recognized when the advertising event occurs. Advertising and marketing expenses were approximately $67,400 and $213,900 during 1st Half 2011 and 1st Half 2010, respectively.  At June 30, 2011 and January 1, 2011, we had approximately $87,100 and $177,600, respectively, in prepaid marketing of which the majority is related to product placement payments and advertising promotional payments made to a nation-wide retailer. The product placement payments are being amortized as a reduction of revenue over the contract period.

We record the costs associated with Card packages as prepaid expenses. We recognize the prepaid cost of Card packages over the related sales period, currently twelve months. Our manufacturing and distributing costs were $512,853 and $881,179 for 1st Half 2011 and 1st Half 2010, respectively. Included in our manufacturing and distributing costs were shipping and handling costs of $3,026 and $2,974 for 1st Half 2011 and 1st Half 2010, respectively. Also included in our manufacturing and distributing costs was the liability for use tax to various states related to use of materials for which no sales tax was paid.

Research and Development

Research and development costs, which approximated $592,908 and $571,300 during 1st Half 2011 and 1st Half 2010, 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 $0.001 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.  Weighted average number of shares outstanding for 2Q2010  and 1st Half 2010 has been adjusted in accordance with ASC 260 “Earnings per Share,” for the 6,437,774 shares of the Company’s common stock, par value$0.001 per share (the “Common Stock”) issued as payment of the Series A Preferred Stock dividends.

The following table lists the total of the Company’s Common Stock and our common stock equivalents outstanding at June 30, 2011:

Description	Shares of Common Stock and Common Stock Equivalents Outstanding
Common Stock	31,877,770
Series A Convertible Preferred Stock *	7,500,484
Series B Convertible Preferred Stock *	1,000,000
Series C Convertible Preferred Stock *	4,037,500
Series D Convertible Preferred Stock *	43,318,380
Series E Convertible Preferred Stock *	61,321,750
Stock Options	19,331,408
Warrants	42,824,431
Total	211,211,723
*  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 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 and we believe that cash balances held in non-interest bearing accounts are fully insured by the federal government. The Company has not experienced any such losses. 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 International, Inc. (“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.

The following table summarizes our stock-based compensation expense:

Stock-based compensation charged to:		2Q2011		2Q2010	1st Half 2011		1st Half 2010
Compensation and benefits expense	$	208,423	$	211,282	$	341,282	$	322,765
Other general and administrative expenses		-		20,184		-		24,523
Total stock-based compensation	$	208,423	$	231,466	$	314,282	$	347,288

For 2Q2010 and the 1stHalf2010, other general and administrative expenses include charges of $2,670 and $7,009, respectively, to consulting expense for the cost of options issued in conjunction with an internet-based sales development agreement.  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 warrants issued was approximately $17,500.

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 January 27, 2011 the Company’s Board of Directors (the “Board”) declared $189,054 in dividends due through December 31, 2010 and paid through the issuance of 3,781,056 shares of Common Stock.  Dividends owed but not declared on our Series A Preferred Stock were approximately $185,971 as of June 30, 2011.

Fair Value Measurements

Our financial instruments, including unrestricted cash and cash equivalents, restricted cash, accounts receivable, prepaid Card supply, certain other assets, accounts payable, and other accrued liabilities, are short-term, and, accordingly, we believe their carrying amounts approximate their respective fair values. 

At June 30, 2011, the Company did not have any other items to be measured at fair value.